Namyang Dairy Products, Decreased School Deliveries Due to School Opening Delay Leads to Lower Performance and Increased Inventory

1.58 Billion KRW Operating Loss at Year-End
Financial Asset Investments Also Negatively Impact Performance

[Asia Economy Reporter Jang Hyowon] It has been analyzed that Namyang Dairy Products' defamatory comment campaign against its competitor backfired. Last year, the competitor Maeil Dairies saw an increase in performance, while Namyang Dairy Products recorded a loss. With this year's first-quarter performance worsening unprecedentedly, a red flag is expected to be raised regarding inventory management.

◆Performance↓... Impact of Boycott Movement?

It is known that Namyang Dairy Products posted numerous defamatory comments on various internet communities through a PR agency last year, such as "There is a nuclear power plant near Maeil Dairies' raw milk factory, posing a radiation risk" and "Maeil Dairies' milk tastes metallic."

In response, the Jongno Police Station in Seoul booked Namyang Dairy Products Chairman Hong Won-sik and six other executives on charges including defamation. Previously, in 2009 and 2013, Namyang Dairy Products had also posted defamatory articles against competitors.

However, actual performance was poorer for Namyang Dairy Products compared to Maeil Dairies. Namyang Dairy Products recorded an operating loss of 158 million KRW on a separate basis at the end of last year. This marked a return to operating losses for the first time in five years since 2014. Meanwhile, Maeil Dairies' operating profit increased by about 16% during the same period.

Namyang Dairy Products is a company that produces and sells dairy products such as milk, infant formula, fermented milk, and cheese, as well as coffee mixes and beverage products. Their milk products include 'Masisseun Milk GT' and 'Einstein GT,' and their infant formula products include 'XO World Class.'

As of last year, sales amounted to 1.0182 trillion KRW, a 4.9% decrease compared to the previous year.

The sales composition ratio shows milk products accounting for 52.1%, the highest proportion, with infant formula products making up 22.3%. Other beverage products such as 'French Cafe' and 'Momiga Byeogyeowojineun Sigan 17cha' account for 25.6%. There has been little change in sales composition over recent years, as sales have decreased evenly across all sectors.

The decline in Namyang Dairy Products' performance is analyzed to be significantly influenced by damage to its brand image. From past 'agency power abuse' incidents to drug scandals involving the founding family, Namyang Dairy Products has been at the center of controversies. This has led to boycott movements and worsened consumer sentiment.

Stock prices have also been on a downward trend. Namyang Dairy Products' stock price, which reached 965,000 KRW in May 2017, fell to 318,000 KRW as of the closing price on the 15th. This represents a reduction to one-third over three years. With market capitalization dropping to the 200 billion KRW range, it is expected to be excluded from the KOSPI 200 index in June. Exclusion from the KOSPI 200 index could reduce foreign and institutional investor demand, raising concerns about further stock price declines.

◆Sales Decline and Inventory Increase

This year's first-quarter performance is also unusually poor. It is analyzed that the delay in school openings due to the COVID-19 pandemic caused a sharp drop in milk sales supplied to schools.

Namyang Dairy Products announced on the 15th that it recorded an operating loss of 20.2 billion KRW on a separate basis in the first quarter, returning to a loss compared to the same period last year.

Sales amounted to 228.1 billion KRW, down 8.2% from the same period last year, and net loss also turned to 14.2 billion KRW.

The cause of the loss is analyzed as sales decreasing while costs and selling and administrative expenses remained at the same level as last year. Cost of sales and selling and administrative expenses in the first quarter increased by 0.44% year-on-year to 248.3 billion KRW.

Moreover, on a consolidated basis, losses from financial assets invested in derivatives also negatively affected performance. As of the end of the first quarter, Namyang Dairy Products held about 55.1 billion KRW in financial assets such as derivative-linked securities (DLS). They incurred a loss of about 16.4 billion KRW by partially disposing of these products.

Notably, inventory assets increased by 19.2 billion KRW (12.4%) in just the first quarter, reaching 173.7 billion KRW.

Inventory turnover also continuously declined from 6.84 times in 2017 to 6.09 times in 2018, 5.40 times last year, and 4.57 times in the first quarter this year. This indicates that the frequency of product sales is gradually decreasing, leading to a buildup of inventory in warehouses. In fact, Namyang Dairy Products lowered the proportion of raw materials and increased semi-finished products by over 50 billion KRW in 2018 to extend inventory storage periods.

A Namyang Dairy Products official explained, "The contracted volume of raw milk purchases remains constant, but sales have not matched that, so inventory is stored in semi-finished product forms such as skimmed milk powder and fresh cream."

An accountant pointed out, "Food companies have product expiration dates, so if inventory accumulates beyond a certain level, the amount of waste can rapidly increase. Without proper management, there could be a situation where large provisions need to be set in the future."

This content was produced with the assistance of AI translation services.