WH Group Ltd
HKEX:288
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WH Group Ltd
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Good evening, our friends from the investment sector. First of all, I'd like to welcome all of you to our results announcement for the first quarter. I would like to introduce members of the management here. First of all, our CFO, Mr. Guo Lijun; Executive Director, Mr. Kenneth Sullivan, who is also responsible for Smithfield. He is responsible for our business in U.S. and Europe. And then, we have Mr. Ma Xiangjie, who leads Shuanghui Development. On our conference call, we also have from Shuanghui, CFO Mr. [indiscernible]; Mr. [indiscernible]; Mr. [indiscernible]. And also from Smithfield, Mr. Glenn Nunziata.
So I'll now hand over the time to Mr. Guo to talk about our performance in the first quarter, which will be followed by Q&A session. Mr. Guo, please.
Thank you, analysts and investors. I will now report to you the performance of the group in the first quarter of 2018.
In the first quarter, we have leveraged on the advantages of global presence in industrial value chain and continue to increase business scope, which resulted in steady profit growth during the quarter.
We continued decline in average hog prices benefiting the operating performance of China's business. The increase of costs for the improved production and sales volume in China, this led to a substantial increase in operating profit in China's business. In the U.S., profit in the fresh pork business has fallen sharply due to the increase in market supply, while the packaged meat business improved steadily with increased sales and profit. Continued to expand presence in the Europe through our M&A assets, where the business scope and profitability in the quarter were significant [indiscernible] fresh pork and packaged meats business.
During the first quarter, hogs produced 5.117 billion. We have simultaneous interpretation at the moment. Hogs produced -- Our hogs produced 13.9 million, up by 7%. Packaged meat external sales volume increased by 4.1%. We realized $5.62 billion in revenue, up by 5.7%. EBITDA $516 million, down by 4.1%. Operating profit $379 million, down by 9.3%, mainly affected by the fresh pork operation in the U.S. I will offer more details in a moment. Profit attributable to owners of the company $249 million, up by 22.1%. Basic earnings per share was USD .007, up by 14.1%.
For the China business, we realized operating profit and margins of $214 million and 11.4%. Packaged meat $169 million, up by 20%. Fresh pork $39 million, up by 3 -- up to 3.5% for our margins, because after lowering hog prices, the hog production, segment performance is down to a lower level at 10.3% for margins. So profitability improved greatly for the China business.
And then for U.S. business, operating profit $141 million, down by 39.6%. Packaged meat $180 million, up by 2%. Fresh pork USD 11 million, down by 89%. Hog production, the loss is $21 million, $4.5 million increase of the loss because of more supply in the market for fresh pork leading to the prices declining and hog prices, the momentum of decrease also creates a certain impact on our performance.
Europe business, $24 million operating profit, flat trend. Packaged meat USD 13 million, a slight increase. Fresh pork $6 million, an increase of $7.4 million. Hog production $6 million, down by $15 million.
So for our core business, packaged meat, in the first quarter. We have stable growth for U.S. and Europe.
Next, our strategy. We need to strengthen global business operation and synergy of global companies.
Secondly, we need to adhere to globalization strategy, strengthen global business platform and expand business scale and scope.
Thirdly, we need to limit hog production, sensibly develop fresh pork business, focus on the expansion of packaged meat business to enhance the brand value.
Fourthly, we need to leverage complementary advantages and realize synergies by integrating global resources, realize further development through expansion of trading business, sales and distribution network. We need to continue to grow the scale of the business with focus on our core business and gradually expand the non-core business. We need to continue to develop sales network of fresh pork business in China to further increase sales volume. We need to continue to realign our production portfolio in packaged meat, achieve stable growth for high-temperature products and aggressive growth for low-temp products.
For U.S. and Europe, we need to continue our operational excellence and large operational scales through M&A and organic growth, seize improvement potential and reduce cost. We need to roll out Earnings Improvement & Growth Plan to further enhance profitability.
So that is the situation for Q1. We will now take questions from you.
[Foreign Language]
[Foreign Language]
[Foreign Language]
The question is from UBS. I would like to ask about the profit decline for fresh pork business in U.S. How much of this decline is caused by prices and how much is caused by volume? And can you further share some figures in relation to hog prices and hog volume? And what will be the overall margin for the entire year? The second part of my question, in relation to the hog prices, both in China and U.S., we see some declining trends. So this is not really reflected in the downstream margin for packaged meat business. So my question is, what do you think will be the margin level for packaged meat segment?
Okay, so for the first question, Ken, can you take the question about the decline in the U.S. fresh pork business?
Yes, Luis, I can. The biggest decrease in the fresh pork margins in the first quarter were related to prices, specifically meat prices. And so, if you look at the Smithfield results, of the segments that we have, our International segment is ahead of last year, our packaged meats is ahead of last year, but fresh pork was a big limits behind last year, again, mostly related to price levels of meat. I think...
Sorry, can you speak up a little bit?
Yes, do you need me to repeat that?
Yes, maybe repeat what you have just said, because the voice is a little bit small.
Okay. The question was, what is the reason for the decrease in fresh pork profitability in the first quarter? And the point I made was that it was, in fact, related to lower meat prices. That is the biggest single contributing factor to the drop in profitability in Q1. It is not related to something -- other fundamentals. It's related to the drop in meat values. But I also pointed out that our segments, we've got essentially 3 operating segments -- sorry, 4 operating segments. The International group is ahead of last year, the packaged meats is ahead of last year, but in the hog production, the live side is about even, I think, it's $5 million less than last year. The big difference in our results is that fresh pork in Q1, and it is mostly related to price levels of meat.
[Foreign Language]
To provide a little bit more explanation or color on that. The single biggest contributing factor to the lower meat values were bellies. Our bacon demand in the U.S. was down and therefore -- and we added more supply of bellies. And so, belly prices were down significantly year-over-year. And that single complex contributed about $67 million to that drop in the overall meat values.
[Foreign Language]
I think there was a second part of the question, Luis, about packaged meat, is that correct?
I think -- Ken, this is Christine.
I think, it's mainly in the fresh pork. But I think, you can maybe briefly go through some key points about the packaged meat business.
Okay. Well, the point in packaged meat is, I do expect packaged meats to have a very strong year. As we move through the balance of the year, I expect our bacon sales are going to come back strong. I think that overall lower meat values in the U.S. will contribute to a good packaged meats year. And so, I think what you're going to see this year is what we've seen in the last couple of years with Smithfield. In that, the vertically integrated model will have some pluses and minuses in each segment. But overall, we remain optimistic about the kind of year we can have.
[Foreign Language]
Okay. [Foreign Language]
[Foreign Language]
[Foreign Language] Thank you for your question for Shuanghui. My answer is that, in quarter 1, the overall prices reduction has led to a lower level of profit. And the overall prices for hogs have gone down leading to a lower level for the prices of meat, in general. And this is also reflected in the impact on domestic sales in the first quarter. [Foreign Language] So in quarter 1, while hog prices have come down, the prices for other raw materials have actually increased. [Foreign Language] And the third reason is because of the continuous price decline for hog in domestic market. In the first quarter, we had to make some adjustments to the implication levels. [Foreign Language] And also fourthly, in the first quarter, we have improved our performance in relation to high-quality products. [Foreign Language] So these are the 4 major factors driven by the lowering of the hog prices leading to a lower level of our gross margin level in Q1.
I think, there's just one -- for the translator, there's just one minor clarification about the hog price and the meat price. The hog price that declined in the later part of the first quarter, but, however, the meat price is comparatively strong. But, however, the packaged meat margin did not actually fully reflect the decline of the hog price and also decline of the meat price. We believe the packaged meat business margin will enjoy a better margin in the second quarter. [Foreign Language]
[Foreign Language] Morgan Stanley [Foreign Language] Lillian [Foreign Language]
[Foreign Language] And third question also is a follow-up question for Ken on the U.S. business. I still wanted to have a little more explanation about fresh pork profitability for the rest of the year, because I think the job was quite significant in first quarter. How do we see the operating profit in terms of the total size for the following quarters from our fresh pork business? And last question is our International business. In first quarter, I think, there was acquisition of Romanian packaged meat facilities. Any idea of the possible contribution to International business in the following quarters?
Okay. First, let me address...
Ken, can you hold a little bit? We will go for the China question. The first 2 questions were for Shuanghui business.
Okay.
So the translation for the first part of the question in relation to the China business. The -- in Q1, we see the volume increasing by about 6 percentage points for packaged meat. What is the expectation level for the volume for the entire year? And we see only a 5-point increase for fresh meat sales, and I know that the slaughtering volume is quite big. So do you believe that the situation will improve in the following quarter? With a large amount of slaughtering, do you think the benefits will be reflected in Q3 of the year? So mainly for the China business, I'm asking about the volume and also the margin.
[Foreign Language]
[Foreign Language]
[Foreign Language]
So to answer your question. For the first part, we have seen some increases for the volume of packaged meat, and we remain the same level of confidence throughout the year. We believe the performance will be positive for packaged meat. Second question is in relation to the fastest speed of growth for slaughtering numbers compared to the growth in sales. Well, there are number of reasons behind this. First of all, in the first quarter, there's a decline in the level of imported meat. And also, there's the persistent factor of domestic hog prices, because the low hog prices in Q1, this is reflected in the performance of the sales of packaged meat products. [Foreign Language] And just now, I was also talking about the domestic sales of raw materials being another factor driving the faster growth in the slaughtering numbers. As for the second part of question in relation to gross margin, for the following quarters and actually for the entire year, we expect a very stable development for this segment, because we have previously made some adjustments to our portfolio. So overall speaking, the margin level will increase.
Just to clarify that, that is for the margin of the packaged meat business will gradually improve in the next few quarters. Okay, Ken, you can take the question about U.S. and International business.
Okay. First on fresh pork. I think, it's important to note that coming into the year, we had forecast fresh pork to be lower. That's not to say we forecast the entire business to be lower. In fact, we don't. We have a higher budget, a growth budget for 2018 and -- but it reflects the power of the vertically integrated model, meaning we did expect fresh pork to be lower, but packaged meats to be higher and even hogs to be better than last year. That last piece is a question that remains up in the air. We've seen great volatility in pig prices this year so far, including the last couple of weeks with some significant swings up and down. I'm going to pause here for a minute for translation.
[Foreign Language]
So the same thing has happened in fresh meat. We've seen some big swings just within the first quarter, some of that precipitated by the tariff discussion and some of the wild swings -- what I would call, wild swings in the market precipitated by the tariff discussions. So we've seen the spread between hog prices and meat values gap out significantly and then come back tightly in the quarter. And so, for the balance of the year though, I still think that we'll be on plan to make our budget for 2018. And I know what -- we don't share what that budget number is, but I would just tell you that in total, for the integrated model, it's a growth budget for 2018. Again, I'll stop here for translation. And then, I'll address the International segment.
[Foreign Language]
The second question related to our acquisition in Romania of Elit. Let me just say that about that acquisition, which we closed in January 2018, that we're extremely excited about that acquisition. It completes the vertically integrated model in Romania. Previously, we grew hogs there, we have fresh meat there, but did not have any mechanism to convert those raw materials into packaged products. We now have that with the Elit acquisition. And so, we're extremely excited about that. Again, I'll pause there for translation for a moment.
[Foreign Language]
Just continuing on a little bit about Elit was the big synergies that we'll have with this is the conversion of our raw materials, but we also have significant sales synergies. The Elit business, the strong sales channel for them is the traditional sales channel. These are the traditional meat outlets, the smaller stores, and most of their volume was sold through that channel. In contrast, our meat business -- our fresh meat business in Romania, the major channel for that is more the modern retail channel. And so, we now have an opportunity to cross-sell across those channels and improve both our fresh meat as well as the packaged meats business that we just acquired. And so, it's again
[Audio Gap]
[Foreign Language]
In terms of the impact on the business, I would not like to comment specifically on the impact of Elit; let me put it in a little bit broader terms. Both the Elit acquisition and the Polish acquisitions that we've made within the last 12 months form our European business. I expect that significant profit contributions from these acquisitions and the structuring that we're doing of that business, I will give you some general guidance that I think that we can triple the profitability of that business over a 4- or 5-year period coming off a 2016 base. So that should give you some understanding of the order of magnitude of the growth, I think, that we can experience there and the synergy that we can wring out of it. I think, again, it -- we can triple the profits off of the 2016 year base.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language] HSBC [Foreign Language] Chris [Foreign Language].
[Foreign Language]
[Foreign Language]
There are 2 questions concerning -- first of all, the China business -- sorry, first of all, in relation to the U.S. fresh pork business, we do see the movement in terms of the margin in the first quarter. So what will be the overall margin for 2018? I do see some decline in the prices, but the level is not as serious as the decline in margin. Is it because, comparing to last year, you are exporting less? The second question is about International business. The sales number for Q1 has gone up, but the operating profit has come down. Can you explain the reason behind this?
So Ken, can you take the question?
Yes. So again, the question is about fresh pork margins, which is the theme of the call, I think. I did explain already that fresh meat values are lower year-over-year. And that is a $65 million plus type of decline relative to the meat values. There are some other factors. We had some mark-to-market adjustments for some procurement contracts. We've had some reduced production related to our SAP implementation. And so, there are a handful of other things, including our distribution cost in the United States has spiked up in the first quarter. So there are a handful of other factors. That said, I would tell you that there's nothing that's fundamentally changed about the underlying business. This is -- in particular, in the first quarter, this is mostly about that hog meat spread. And as anybody who's followed this industry knows, that spread will shift from time to time, and we just happen to be in a quarter -- in the first quarter in which we've experienced that. And so it's kind of the nature of the business in fresh pork. Again, I'd go back to my comments about the vertically integrated model. I think, over the long -- over the course of the year, that we'll be able to compensate or make up for that. And there -- that delta, if you will, or that difference will pop out in other segments of the business. That said, we're sitting here in April and it's tough to forecast the balance of the year. So these are my comments.
Okay. Got you. I don't know, and also the International business, sorry.
Chris, can you hold -- can you just hold on for translation.
[Foreign Language]
Okay, Ken, you can continue with the question on International business.
I think, the second question related to the International business. And I think, the observation was that sales are up and profits, I think the comment, were flat. I would correct that. I think, sales certainly are up. There's 2 components to that. There's the acquisitions that we made that contributed to the increase in sales. But also, remember, we keep the books -- these businesses are in Poland and Romania, and we keep those books in local currency. When that -- when those sales get translated into US dollars, that has resulted in a positive impact of about, call it, $60 million for the quarter. So I think the new acquisitions contributed about, call it, $50 million to the increase in sales and the translation contributed about $60 million. Of course, some of these acquisitions are brand new. And the profitability from those transactions has not fully manifested in the P&L. And so, again, I think the good news here is that our base business profits are up, the sales are coming to us via the acquisition. And I expect the margins and profits will follow.
[Foreign Language]
[Foreign Language]
[Foreign Language] Goldman Sachs [Foreign Language] Lincoln [Foreign Language]
[Foreign Language] So Ken, well, first of all, you're talking about the fresh pork profit decline was due to the value price decline, but we haven't seen any meaningful improvement in the packaged meat margin, as we think belly cost should be a major cost component of the packaged meat, but we didn't see the margin improvement. So could you explain a bit more on the first quarter the flat packaged meat margin? So that's one. And second question is, so what's the effective tax rate for U.S. in Q1? And when you talk about you're still maintaining the gross -- positive growth plan of guidance for the whole group for a full year, do you include the tax rate benefits or you're talking about operating profit level we still expect positive growth for U.S.? So that's the 2 questions for U.S. [Foreign Language]
[Foreign Language] And then, the third question was for the China business. There's a 6 percentage point improvement for volume. And I heard from the management's explanation due to some contribution from high-end products or high-quality products. So what is the overall increase or momentum of increase for Q1? And what do you think the overall trend will be for the entire year?
Okay, Ken, can you take the first 2 questions about U.S.? First, for the -- about the packaged meat margin and the second is about the effective tax rate in the U.S.?
Yes. So the first question about packaged meat margins, the short answer is, I'm not worried at all about our packaged meats margins this year. I think it will benefit -- they will benefit from lower raw materials. There is a lag that typically is involved here. There's a lot of formula pricing in the packaged meats business. And I expect that the segment will ultimately benefit from these lower raw material that we're seeing and, in fact, I'm seeing it already in the month of April. And so I would just, sort of, give you the guidance that I suggested earlier, which is, again, we continue to believe that we can achieve our targets for 2018 on a consolidated or a vertically integrated model. I would point out, just for reference, I think, it's important perhaps for context, the first quarter seems like a disappointment certainly in the fresh meat business. But again, we're ahead of last year on the International segment and in the packaged meat segment, a little bit ahead. And I'm bullish about the packaged meat segment for the balance of the year. The point I'd make about the first quarter is, it's actually our third best first quarter ever. I think, people should understand and appreciate that the first quarter of last year was extraordinary in fresh pork. And that was a -- so we're lapping an extraordinary quarter. Again, directionally, in terms of the vertically integrated results for the year, I remain cautiously optimistic, let's say, that we can achieve our targets. Now again, the last thing I'd say is, we're living in some volatile times, and we'll have to see what the next couple of months bring. But at this point, certainly, no one's pushing the panic button.
I'll let translation occur and then I'll answer the question on taxes.
[Foreign Language].
Okay, I believe the second and third question related specifically to taxes and tax rate in the U.S. To answer the first question, the effective tax rate for Smithfield approximates 22%, 23%. That is in line with what we expected and -- for 2018 post tax reform and very consistent with what Ken and I spoke about after year-end in all the calls. And then finally, with respect to the guidance or the directional guidance and statement regarding growth in 2018 in his cautiously optimistic comment, all of that is made on a pretax basis. So said another way, we're not taking credit for tax reform when we talk about growth. We're talking about it prior to tax.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
My next question is about the performance of low-temperature products versus high-temperature products in Q1. And what is your expectation level for the entire year for these 2 types of products?
[Foreign Language]
So allow me to point to the earlier question about packaged meat products. We have done some structural adjustments to our portfolio to achieve overall growth for both high-temperature and low-temperature products. And we have achieved single-digit improvement.
[Foreign Language]
So there are 4 major reasons for the very positive performance for packaged meat segment. First of all, we have done some reform measures to our structure. And we have also started a lot of intensified collaboration in relation to our different products and different channels. And this -- all these measures have promoted very positive development for our products and the overall segment.
[Foreign Language]
Secondly, we have made some adjustments to our sales policies. So we are going to promote high-quality, high-end products which carry higher price levels and will also contribute higher levels of margins.
[Foreign Language]
And thirdly, we have done some reforms to our product mix to better cater to the market demands. And we can realize better mix between high-temperature and low-temperature products.
[Foreign Language].
And for our higher-temperature products, we have launched a number of new products and also, we have relied on our best seller products as well.
[Foreign Language].
And for the lower-temperature products, we have enjoyed double-digit growth in relation to our Chinese products.
[Foreign Language].
And for western-style products, we have also performed very well. And we achieved double-digit growth.
[Foreign Language].
And we also gained extra momentum in terms of sales because of the Chinese New Year.
[Foreign Language].
And also because of [indiscernible].
[Foreign Language]
And then there was another question for Shuanghui, in relation to increase of the fees in relation to sales. The first reason is, in the first quarter, we have invested more heavily into promotional activities and advertisements. And the second reason is caused by the lowering hog prices, which has driven down our revenue.
[Foreign Language]
[Foreign Language]
[Foreign Language]
That's the end of today's telephone conference. Thank you very much for your participation.