WH Group Ltd
HKEX:288
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WH Group Ltd
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[Interpreted] The telephone conference for the first quarter results of WH Group. Let me introduce you to the management of the company. First of all, the WH International, Mr. Wan Long, Chairman and Executive Board of Director; Mr. Guo Lijun; and thirdly is Ken, [ third way ]. He is also the Smithfield CEO and President. He's responsible for the U.S. business; and Mr. Ma Xiangjie is the Shuanghui's President, and he's also the -- there's Mr. Liu of -- who's the CFO of Shuanghui. And I'm the attorney.
And let me hand over to Mr. Guo Lijun. He's going to talk about the first quarter of the WH Group. And we will have a Q&A session.
[Interpreted] Ladies and gentlemen, investors, good evening. Let me talk to you about the first quarter results of the WH International. With the trade conflict and the swine flu in Europe and China and there are many adverse factors, but we face a lot of pressure in the Chinese business. And the -- in the Chinese business, take -- taking advantage of the low hog price and the increased demand, and we are reaching -- we have reached historic heights in the first quarter in the Chinese market with the overall increase. And in the year, the market is affected by the trade conflict, and we have been taking pressure. But in the fresh pork business, it's increased in the U.S. market as well. And the U.S. -- European market, as the spread of ASF affecting the hog production and fresh pork business, this has led to a decrease in overall profit in the European market.
In the first quarter, the hog produced 5,459, and we produced 14,843, which is up -- increase of 6.4%. We reached a total of $5.2 billion revenue in the first quarter, benefited from the increased hog production and high increase of demand. And also, the EBITDA decreased by 8.7%. And the operating profit decreased year-on-year, 10%. WH International, the profit of the earning per share decreased 21.2%, and the profit attributable to owners of the company decreased by 21.3%.
In the Chinese market, in the first quarter, it reached 20 -- USD 223 million. Among which the packaged pork reached historic -- actually, there's a loss of 15 point -- 150,000. And in the U.S. market, the pork and the packaged meat business increased significantly. And in the hog production, we lost USD 160 million. In the European operation, we reached a total of -- and the fresh pork remained the same as last year. And the hog production recorded a loss of 1.6 -- USD 16 million.
[Interpreted] Thank you, Mr. Guo. Now we have a question-and-answer session. [Operator Instructions]
[Interpreted] So my first question is that the profitability, the margin in the Chinese market dropped by 17% in the first quarter. And my question is what is our strategies to counter this decrease in margin? And what are we going to do better in the next quarters?
[Interpreted] So there are 3 factors to this decrease of margin: one is the increased investment; and the second is the increased salaries or wages for the employees; and then there's the increased raw material prices as well. These are the 3 main factors contributing to the decrease in the packaged meat margin.
[Interpreted] So there are 2 more reasons that will affect margin going forward. The first one is the development of ASF, which will cause the hog -- the shortage of hog in the second half of this year and next year and contribute to the rally of the hog prices. The other factor is because of the increase in hog prices may also contribute to the increase in the prices of alternative proteins such as chicken and beef.
We have a couple of measures to maintain or to improve our margins. First of all is to base on the demand to increase our selling price. We have increased our selling price for the first time in the first quarter, and we did the second time in April. And we are planning to have the third [ time ] increase for the rest of the year.
The second measure is to make use of the imported meats that is -- that's within the inventory in our -- that were in our inventory such that we can lower the average cost of our raw materials. The third measure is to benefit from the tax policy of the government.
And the last one is the continuous modifications of our product mix such that we can fill up the space in the high-end product categories and also to improve ourselves in the [ mass ] products. And the last one is for the internal innovation to improve our process to -- and lower our manufacturing costs.
We will make use of the 5 measures that I have mentioned to [ hatch ] against the price pressure from the higher hog costs. We are hopeful that we can maintain the margin for the whole year won't be lower than the first quarter, but it is difficult for us to achieve a margin as high as the previous years.
[Foreign Language] So my second question is for Ken. So we noticed in Q1, hog production has incurred pretty hefty loss. But over the recent few weeks, actually, we have seen pretty dramatic increase of hog price and future price in the U.S. So let's forget about Q1, focus on the coming few quarters. So what's our projections for the unit profitability or, i.e., [ OP ] perhaps for the hog production business in the U.S.? And what is our [ defined ] underlying hog price assumption for that unit profitability projection?
Good evening. This is Ken Sullivan. Two things. One, you referenced a dramatic turnaround in hog markets. I would agree with that characterization. It has been extremely dramatic over the last 45 days. I've never seen anything like it in my career how quickly and strongly the price levels have turned [ the ] pigs in the U.S.
Second, you said that let's forget about Q1. I would like to forget about Q1 also. I look into the future, and I see nothing but strong profits in the live production side in the U.S. Typically, we have not given guidance, but I recognize that there's been such a dramatic turn in the markets that perhaps something within range is appropriate here. We did lose a fair amount of money, roughly $60 million in the first quarter. But as I look in the second quarter, the third quarter, the fourth quarter, the first quarter of next year and beyond, it all looks like strong profits. That's unusual, by the way, because typically, we have a seasonal business, and there's typically losses in the fourth quarter. But that's not the case, does not look to be the case this year. I would tell you that from here on out, I see nothing but profits over $25 a head and as high as into the $40-plus a head range. And so very strong profits.
[Interpreted] So there are 3 questions from Morgan Stanley. The first 2 are related to the -- our China business. The first one is for our fresh pork business, the per unit profit in the first quarter has been equivalent to 100 -- $1,500 per ton, which has been the highest, even higher than the year of 2014 and 2015 when the hog prices are relatively low. So the question is to ask the management about the forecast for the rest of the year. The second question is about the packaging meat business. We have -- the company has achieved 2% volume growth in the first quarter, and the guidance before was the -- mid- to high single-digit growth for the whole year. So what will be the volume growth for the rest of the year?
[Interpreted] For the first questions regarding fresh pork, we have achieved good profitability because we take the advantage of the low hog prices in the first quarter to expand our volume and to make good use of our industrial establishments. But the ASF control measures have been tightened in the last few -- last few months. And the development of ASF is going to be certain, and this will affect volumes later. We expect the hog prices will increase in the third quarter to the fourth quarter, and that will also hurt the profitability of the fresh pork business. Our forecast is the unit profits in the later half of this year will be lower than the first quarter.
For the volume of the packaged meat business, we have developed some new products in the fourth quarter, which has good feedback from the market. However, because of the ASF, we increased our selling price for the packaged meat, and that will negatively affect our volume as well. Therefore, we are -- the 2 factors offset each other, and we will foresee [ there with ] the continued growth for this year.
[Foreign Language] So the third question is about the U.S. fresh pork business with the rally of hog price. We've noticed a huge shrink in the spread of fresh pork versus hog price in the U.S. So how does [ Benjamin ] look at their future [ veteran ] of unit profit of fresh pork business?
This is Ken Sullivan. You're correct that the spread between hog prices and fresh meat has compressed early in the second quarter, and that does reflect the rapid run up in live hog prices. We had a good first quarter in fresh pork year-over-year. Second quarter, as I said, has started out with that margin compression and even had some [ breading ] in the cutout. But I would tell you this that long term or over the balance of the year, the thing that drives fresh pork is demand. And to the extent that the ASF issue in China is going to drive that demand, meat prices are going to come along. And the fresh pork business is fundamentally a spread business. When that spread narrows, packers typically react. They cut back [ fills ] that has an impact on prices. And so I think what's happened is we'll just have a violent movement in the markets. And so you're seeing that compression of that spread. But over the balance of the year, as we -- as the entire U.S. industry and the rest of the world, for that matter, starts to ship more product to China, that's going to have a positive impact on the spread and on the meat values. And so I think we should have a reasonably good year in fresh pork, although, again, it won't be -- there will be some pressure from the hog prices until the markets can adjust here. But I'm certainly looking for a rebound in that spread because the great driver is demand, and the demand is going to be there.
[Interpreted] So the first question is about the imports of pork into China, as mentioned by Mr. Ma and Ken. So the question is about given the current weight of tariff, what is the trend of imports for this year? If there is a reduction in the tariff, how much we will increase the volume of imports?
[Interpreted] The company has started to [ plan about ] the import volumes since last year. At this moment, other than the U.S., we have been importing from the other countries in North America and also in Europe. We have built up some inventory of imported meat already. We will be pretty optimistic that we can further increase our import volume if the tariff is going to be reduced, and the volume could be at historical high in that case.
[Foreign Language] So the first question is still about the hog production business in U.S. Ken, I think you mentioned a figure, $25 to $40 perhaps of profitability. I just want to confirm. So are you referring to the full year or the rest of the year or the coming quarters? What are these figures referring to? And so that's the first question. My second question is on the packaged meat. I think in the first quarter, the packaged meat have a very decent margin expansion. Could you elaborate a bit more on how do we achieve that? Is it more cost-driven? Or is there continued efficiency optimization in the first quarter? And given that the hog or the pork price are likely to rally for the rest of the year, so should we think that the packaged meat market for the coming quarters will under be -- under pressure?
This is Ken. Relative to the hog prices in the U.S., again, the easiest thing to do would be to look at the CME futures prices. That gives you a very good sense of what selling prices are likely to be. And by the way, I think that, that market has moved up very strongly. But if we get a trade deal, there could be even more behind that. I have referenced $25 to $40-plus because it's not just $40. I see numbers higher than $40, certainly. And I was referring to over the balance of this year, when you look into 2020, you see the same thing. Again, the best reference is to look at the CME live hog futures or lean hog futures.
I think the second question was about packaged meats. We had a very good first quarter. You mentioned the margin. We did have very strong margins. Packaged meats just continues to be the driver of our business, and we're proud of the result that we have in the first quarter. I think what you're seeing in terms of the strong move-up in the margin was we did [ get ] a little bit of a push from raw materials. Know originally we had some lower raw materials costs. But in general terms, that packaged meats business, the reason why the profile keeps moving up is we've had very good success continuing to all of our product mix, continuing to introduce new products, and we've been really focused on improving our margin per pound. And that's what you're seeing, I think, a focus on particular categories. Just by way of example, hot dogs typically are a category where we've not made great momentum. And so we've begun to focus more on things like dry sausage. So -- but the CapEx that you've seen invested in packaged meats business over the past 2 years has been in things like dry sausage where we have a much higher margin profile. So I think the product has a lot to do with it.
[Interpreter] Ken, can you repeat the latter part of your first -- the answer to the first questions about the forecast?
Yes. Yes. The -- you mean about the live hogs?
[Interpreted] Yes. You mentioned that we should make reference to the CME futures. But -- and then you elaborate on the -- and your expectations on the price and also the profitabilities in...
Yes. I think if you look at the CME, the Chicago Mercantile Exchange, the live hog futures, what you would see is very strong profits that are being [ suggested ] all the way through 2020. These are futures markets, but they're the best indication we have. And of course, people are trading in those markets and selling in [ these ] markets. And so I will just say quite simply, relative to live production, the profit forecast is strong.
One other thing I wanted to clarify about packaged meats is a lot of our packaged meats business is formula-based. So a question was asked about if we see a spike in raw material cost, could that impact our packaged meats business. It certainly could. But I would also tell you that there's a built-in protection in that a lot of our bacon business, bellies, a lot of our ham business, those are formula-based businesses, and so the prices fluctuate with the underlying raw material. And so there's some insulation from spikes in raw materials.
[Interpreted] The first question is with the expected increase in the hog price, so how much percentage of the increase in the selling price of packaged meat can compensate this increase in the raw material cost? The second question is she noted the increase in the inventory level of Shuanghui. How that inventory can work with the requirement of production in the coming periods? The third question is what is the expectation of the management on the hog prices going forward?
[Interpreted] So these 3 questions are, indeed, difficult to answer. For the first question, this is complicated because it depends on our forecast or expected hog prices, but we cannot predict the exact hog prices, just the trend. And the increase in hog cost is not the only source of pressures on raw materials but also [ there are ] others. And we have already mentioned we have a couple of measures to mitigate the pressure of this raw material cost increase. And any single measure may not be able to mitigate this pressure in full.
So the second question is also difficult to give a precise answer because how long could this inventory could be used to fulfill the requirement of our production? It depends on our expected hog price going forward. And right now, we expect that the hog price is relatively low. We will use the fresh pork for the production of packaged meat for the moment and keep the inventory for later periods, vice versa.
According -- In regards of your third question, according to the Agriculture Department of China, it said that at the end of March, the inventory level of sow has been decreased by 21% year-on-year, and we expect that number will enlarge in later periods. That will keep an -- that will -- that would cause the hog cost to increase for over 70%. With reference to the current market situation, we believe that it is a fair estimation.
And because of these ASF issues, the hog price may increase to more than CNY 20 per kilo, and this will also trigger the increase of the price of other proteins.
And because of this increase in raw material cost, we expect the pressures on our margins in the later periods is high.
[Interpreted] There are 2 questions from Deutsche Bank. The first question is about the effective tax rate of our China business. He is asking about the reason for the decrease of the effective tax rate. And the second question is about the swing in the biological fair value adjustments. So he's asking the management, will this fair value adjustment be turned into real profits in the second quarter?
[Interpreted] The reason for the lower effective rates -- effective tax rates in the first quarter was mainly due to the fact that there was a decrease in the taxable profits, the increase in nontaxable profits related to hog productions and fresh pork business. We expect, because of the change in the mix in the later quarters, the effective tax rate will be higher than Q1. Another point Mr. Liu mentioned is about the [ impact ] from the VAT. Because the government has been lowering the VAT as to stimulate the economic growth of the country, we will try our best to maintain our selling price in our downstream business and to make good use of our bargaining power in the upstream business to benefit from this decrease in the VAT.
The answer to the second question is about biological fair value adjustments. This adjustment is an accounting adjustment which we plot the expected future hog prices and the estimated cost of production and also the live status of biological assets owned by the company. Will this turn into real profit in the second quarter? It all depends on how the hog price will be worth at the end. But it is a good indication that the hog prices are trending upward.
[Interpreted] The first question is about the OP margins has been decreased by 10% year-on-year, and the net profits has -- sorry, it's not OP margin, it's operating profit in absolute dollar, has been decreased by 10% year-on-year, and the net profits decreased for 2% year-on-year. So the question is asking about why the degree of decrease has a difference?
[Interpreted] As in renminbi terms, indeed, the OP has been increased by 10.6%, but net profit have increase by 17.5% because of the decrease in effective tax rate as explained by the CFO of Shuanghui. For the U.S. business, the change is mainly contributed by the investment income and finance costs.
And Ken, would you like to elaborate that part?
I'm sorry, I don't understand the question.
So Ken, I will repeat the question. Because my question is asking why the decline in WH Group in the first quarter, the net profit declined more than the OP. And Mr. Guo explained that there was a USD 40 million interest expenses impacted from U.S. side. So my question is in the rest of the year, in the next 3 quarters, whether this negative impact of this interest expense in the U.S. side will continue. So i.e., is the 1Q interest expenses $40 million impact is a one-off or it will be recurring the rest of year, assuming that U.S. business is recovering, as you discussed? That's the question, the logic.
Yes. There should not be a recurring $40 million quarterly increase. I think what he may have been referring to is the overall annual.
Okay. So $40 million is annual impact year-on-year.
Yes. I don't have the advantage of hearing what Mr. Guo said. It obviously didn't -- don't have the translation exactly, but we're not expecting a quarterly $40 million year-over-year or quarter-over-quarter increases going forward. That is not the case.
Okay. Ken, the second question is operation for U.S. I will -- I'll ask it directly in English. So in the optimistic scenario where the hog price in U.S. and the pork price in U.S. are going to go up a lot driven by the external demand, i.e., especially China. So if you are seeing that your [ prospect ] of supplying domestic U.S. retailer is lower than export, serving the China export demand, will you make a decision that it diverts a lot of supply to the -- your U.S. customer to China market, i.e., pursuing better profitability?
Yes. So that's a question, I think, that we receive that people are curious about. Well, somehow, we stopped servicing our domestic customers. And of course, the answer is fortunately or unfortunately, depending on how you want to look at it, we have excess pork supplies in the U.S. just as an exporting country exporting 25% to 30% of our -- all our production. We have ample supplies to service our U.S. customers, and that will not be an issue particularly for our big customers. You always have a book of business that is more bid than ask or just day-to-day type of business, and that typically is a lower-margin type of profile. And you would obviously arbitrage to whatever the best market is, whether that's Mexico or Japan or China. And so I don't expect that we'll have any issues servicing our U.S. customers. And I also, at the same time, expect that we will be exporting significantly more volumes to China. And those 2 things can happen in concert because we do sell to over 40 countries around the world, and it's a global market, and what will end up happening is that for those who generally migrate towards China.
So Ken, a follow-up on that. So at this point of time, you do not expect that a China-driven demand will result in a short supply in the U.S. domestic market as a result. Is that correct understanding?
Well, I think like any market, what will happen is prices will rise. In other words, as demand increases, prices rise. And I'm not suggesting that won't happen. I think it will. And it's not just Smithfield, by the way. It's every U.S. pork processor will be shipping more product to China. And the demand side is just expected to be strong going forward, certainly into 2020. So -- but this is not a situation where you all of a sudden have to start allocating or rationalizing because of the strong export position that we're in. There's plenty of countries. There's plenty of product. It just gets rotated to a better market. And in this case, China will be a better market than many other destinations.
[Foreign Language] So thank you for attending the earnings call tonight. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]