WH Group Ltd
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WH Group Ltd
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[Interpreted] Investors, first of all, welcome to our 2020 first quarter results announcement. Together with us today, we have Chairman and CEO, Mr. Wan Long.
Hello, everyone.
And then we also have other members of the management, but I won't introduce them one by one. I will hand over to Mr. Guo Lijun, our Executive Director, to take you through the performance of the company and that will be followed by Q&A session.
[Interpreted] Dear investors and analysts, good evening. Allow me to take you through the performance highlights of our group in the first quarter of 2020.
Hogs produced, 5.619 million, up by 2.9%. Hogs processed, 12.333 million, a drop of 16.9%. Packaged meat sold, 781,000 tons, a drop of 1.1%.
Revenue realized, $6.282 billion, up 18.9%. EBITDA $711 million, up by 51%. Operating profit, $550 million, up 61.3%. Profit for the period, $414 million, a growth of 65.8%. Profit attributable to owners of the company, $353 million, up by 80.1%. Basic earnings per share, $2.40.
So these are all before biological asset fair value adjustments.
For our China business, Q1 operating profit increased by $47 million to $270 million. Packaged meat, growth of 31.1% to $190 million, an increase of $45 million. Fresh pork, $63 million realized, a drop of $17 million. Hog production, $4 million reduction in deficit.
U.S. business, Q1 operating profit realized $226 million, an increase of $106 million. Packaged meat, realized $156 million, a drop of $81 million. Fresh pork, $89 million realized, an increase of $21 million. Hog production realized $17 million, an increase of $134 million.
Europe business, operating profit, $54 million, an increase of $46 million. Packaged meat realized $14 million, a drop of $1 million. Fresh pork, $2 million, an increase of $2 million. Hog production, $39 million, an increase of $45 million compared to last year.
During the first quarter of 2020, facing a number of unfavorable factors, including the spread of COVID-19 around the world, ongoing trade disputes, African swine fever in China and Europe as well as increase in meat supply in the U.S., our group leveraged advantages of our vertically-integrated business model and diversified geographic presence and -- further boosted synergies achieving satisfactory operating results.
Looking forward, we will take effective measures to tackle COVID-19 for ensuring health of our employees and safety. We will leverage our global competitive advantages to prevent various uncertainties and risks, seize opportunities that result from global changes and industry integration, consolidate our leading position in the industry and ensure a sustainable development of the group.
Thank you very much. That's the end of my report.
Thank you. We'll now proceed to Q&A.
[Foreign Language] [Operator Instructions]
[Interpreted] The first question is about China business. I can see the sales volume dropping by about 16%. And the volume for hog processed has been dropping by about 60%. Does it mean that your inventory is almost fully used. And is your plan to use imported pork to cover the shortfall?
[Interpreted] We have a seen a drop, a lot of big drop in terms of the volume of hogs processed. But the drop corresponding to that in terms of sales, it wasn't more, so that is because of the contribution from imported pork, and part of the contribution also comes from the inventory. So it is true that the inventory level is now dwindling slowly.
[Interpreted] So there are 2 questions in relation to the U.S. business. First of all, you have closed down 5 plants. And one of them, which has a bigger scale, is in South Dakota. So I understand that these plants take up a rather big percent of the overall supply level in the United States. Is that going to create any impact on the hog prices? The second question concerns the drop in operating profit in the packaged meat business. I have heard something in relation to a provision for this. So can you explain further?
[Interpreted] So allow me to first take your second question in relation to packaged meat business concerning the provision for [indiscernible], which mainly focuses on the dining and restaurant channel and a loss of provision of USD 40 million. So there has been closure of 5 plants. And 2 of the plants have a daily capacity of processing hog at 90,500 hogs. As for the plant in Illinois, the annual capacity is around 4 million. So 2 of the plants, they also produce packaged meat products, and the level is about 150,0000 tons. And we also have another 3 closures, and the respective capacities are 80,000, 70,000 and 60,000. So the overall impact per year is about 360,000. So I'm just taking you through the progress in relation to packaged goods in processed for this year. But how is it going to impact our performance for this current year, it really depends on what is going to be in the next [ facilities ]. So I was talking about the 2 plants in relation to pork being processed, number of hogs processed per year would be 5 million and 4 million, and for the packaged meat side, I'm talking about capacity per year at 350,000 tons.
[Interpreted] So a follow-up question, in relation to the plant in South Dakota, because I understand the volume is quite high or the percentage in relation to overall supply in the U.S. is quite big. Is it going to affect the U.S. hog prices, driving it up, leading to certain changes in your business? And the answer was, it really depends on how many factories or plants are to be closed and the timing of such closure.
[Interpreted] So looking at what's happening today, the U.S. hog price is still [indiscernible].
[Interpreted] And the meat prices would be gradually going up.
[Interpreted] So in relation to processing hogs...
[Interpreted] So actually, if you refer to information online in relation to closure under our competitors.
[Interpreted] So I also have questions in relation to the China business and the U.S. segment. First, in relation to China, we can see that the hog prices have maintain a low level in the United States, while in China, it is around CNY 36. So compared to last year, what is the import-related margin? Is it higher than last year? And for the packaged meat business, do you think the trend will be continuing in the second quarter compared to the first quarter?
And for the U.S. business, I can see that the hog production or hog processing margin has been recovering, and at the same time, meat prices have been going up as well. So what do you think will be the profit level for upstream and downstream activities in the United States? I believe that in the first quarter, hog production will create some sort of offsetting. What will be the trend for the following 2 quarters? And what about after the use of the provision for packaged meat business in Q1 [indiscernible] for provision for Q2?
[Interpreted] So thank you for your questions. We do see a rather big spread between the hog prices in the United States and China, and therefore, the import-related margin is obviously higher compared to last year. And some of the imported pork has been sold directly. Some of it has entered our inventory. Some have been used as raw materials for packaged meat products. And at this moment, we do not have any projections in relation to the profit level. For the first quarter, the higher level of profit in relation to packaged meat was mainly driven by the adjustment of the pricing. And we don't believe there will be a big difference in relation to the per ton profit at the later stage of the year.
[Interpreted] Thank you for your question. In relation to the hog prices, the level has been rather low in the United States while the meat prices have been growing gradually. And the hog prices in China is around CNY 32 to CNY 33 per kilo. And the pricing in the United States is around CNY 4 to CNY 5 per kilo. So yes, indeed, there is a very big difference. We believe that the level of international trade business [indiscernible] compared to last year, and it will create benefits to our U.S. business, our China business and also Hong Kong.
As for your third question, in relation to the hog's production profit in Q2 and also the packaged meat business profit situation, for the hog production price, it really depends on the development of the pandemic and how we are doing in terms of hedging in the market. For Q2, we expect satisfactory performance. On the packaged meat side, we have used up the provision for the first quarter, which impacted on our profit level. And what is going to happen for the rest of the year, really dependent on further development of the COVID-19 situation and how fast the U.S. market is able to recover.
In Q2, we expect some changes to happen to our U.S. enterprise. So the level of hog production and also processing will be affected because of the COVID-19 outbreak and also factory closures. Hog prices will, of course, be affected by the drop in the supply of pork. And that trend has already been reflected. So when fresh pork prices go up, the impact is limited in relation to our hog production and hog processing business. But the cost, in general, will go up for our packaged meat business. So it all depends on how the outbreak situation is going to change in the United States. So far, we have not seen any positive trends. So if the recovery or improvement in the United States is faster, the impact on our business will be smaller and then vice versa. So in Q2, our U.S. enterprise carries a very tough mission, which is to offer sufficient protection to our companies and all the employees and ensure their safety.
[Interpreted] So we also have questions for China business and U.S. business. First, a question on China business. In the first quarter, I see a drop of 7% in relation to the sales volume of packaged meat products, mainly because of the spring break and also the pandemic. So do you see any signs of recovery in the recent months? Do you think there will be a positive growth for the entire year? And also, I can see a rather fast drop in terms of slaughtering volume in Q1. Is this trend being narrowed in March to April? What is the level of drop in the volume?
[Foreign Language]
[Interpreted] So my question is in relation to the U.S. business. I can see that the slaughtering volume has been dropping while the hog prices have been increasing. So I suppose that means a better profit margin, right? So can you share with us what is going to be the trend? Is it going to be positive or negative for the margin for the slaughtering business in Q2? And I understand that hog production will also decline. And my understanding is the entire industry is facing more or less a similar problem. So does it depend on what will happen in the second half or even beyond the second half? Do you think that there will be any kind of recovery or improvement in terms of hog prices in the United States?
[Interpreted] So allow me to take the question in relation to the China business. We do see a single-digit drop in terms of the volume of sales for packaged meat products in Q1. Mainly, that was due to the impact from COVID-19. Some outlets were simply not opened, and there were many obstacles for our logistical arrangements, and we were not able to have enough time to replenish some of the products that were sold out. So we see that for the second and third quarters. February and March, things have already started recovering. So we don't believe there will be any major problems in relation to overall growth for the year.
And secondly, you asked about the slaughtering volume. That was affected mainly by the African swine flu. And we have accumulated more reserve for Q1 and Q2, and we have also increased the slaughtering volume. And last year, first 2 quarters, we had bigger reserves and expanded the slaughtering volume. So the base figure is rather high compared to this year. For the second to the fourth quarter, we see increases for hog production, and that means slaughtering volume will gradually recover. And we have already seen recovery in the second quarter, but the extent is quite limited because of the rather high base figure from last year, and we believe this drop will slow down in the second half.
In terms of the U.S. side, we have seen some adjustments made to the slaughtering segment or industry, and therefore, we have seen changes in the market or business.
So the situation is not too bad if you look at the first quarter of this year in terms of the operations of slaughtering business. But in Q2, because of development of the virus outbreak and also plant closures, later on, we will see a bigger impact. It all depends on the development of the outbreak and the changes in the situation before we can decide how big the impact is and how long the impact will last. Of course, our enterprises will have to do well preventive measures to ensure the safety and health of all our staff members. And if it turns out to be a lot of small impact caused by the outbreak, we will be able to recover faster. And similarly, if we are not able to quickly resolve this outbreak situation, later on, the impact will be bigger.
And in relation to our hog production business, we will continue to pay attention to leverage our advantages in the supply chain. So in relation to this development, we have made some adjustments to the CEO leading the hog production business line, and our new CEO will continue to pay attention to improving our management. Especially in relation to our hog production business in the past 2 years, we have been enhancing all our indicators and our costs have been dropping continuously.
So in relation to our hog production business, we have been doing a lot of hedging in the market. So when the hog prices have been low, we have been using hedging measures to successfully reduce our losses and increase our revenue.
So what changes should we expect later on in the year? The key issue is what changes will present themselves in the United States in terms of the control of the virus. If the virus is controlled or managed very quickly, then we can resolve the issue very quickly, and we will see gradual improvement for our slaughtering business and hog production business. Our hog production business will certainly be affected if the outbreak is not quickly under -- placed under control and resolved.
[Foreign Language]
[Interpreted] So I also have questions on 2 fronts. First of all, what is your expectation in relation to the margin for packaged meat business in the second half? Due to less pressure on the cost front, is it going to mean we will do some pricing adjustments? And what about the channels for the U.S. market in relation to packaged meat business? How many will go into catering or restaurants? And how much of that is actually retail? And what are their performance?
[Interpreted] Thank you for your questions. First of all, we have seen rather positive margin for Q1. And the per ton profit level was also very positive and strong. That is mainly because of pricing adjustment and also very good response to our high-end product during the spring break. And looking towards the second half of the year, we believe that this segment will maintain a high level of profitability. After the drop of our costs, we are not planning to adjust downwards the pricing for our packaged meat products. Actually, we will focus on enhancing the quality of our products, do well our promotional efforts instead of downward adjustment of our prices. We will maintain a rather high level of profit, but we believe this profit will not be too high. Because if profit level is too high, it is actually not conducive to long-term competition.
[Interpreted] Allow me to take your question in relation to packaged meat business in the United States. You asked about our channels and the proportions. I can tell you, 60% of our sales goes into retail and 30% goes into restaurants. And because of the outbreak of the virus, many restaurants have not been performing very well, and that directly slowed down the operating profit of Q1. So for the first quarter, we do see a slight increase for the sales volume of packaged meat products in the United States, but the operating profit has dropped by over 30%. This is basically because of the reduction of value in the restaurant channel. So for Q2, we are still seeing continuous impact from the outbreak. And how far this is going to go? It really depends on how quickly the problem can be put under control.
[Foreign Language]
[Interpreted] So I have a number of questions in relation to the China business for the longer term. I understand that the restaurant supply chain is an issue. And I wonder if your company has any plans to expand this channel in relation to your packaged meat business. And secondly, the high-end products of Shuanghui have been performing rather well and a lot has been done in terms of Coobi and Shuanghui cooking. So can you share some figures in relation to the actual volume? Or what is your future target for this segment? And the third question is about CapEx. I understand that you have set up some new projects in relation to hog production and also meat chicken. I understand that the CapEx level is CNY 2.7 billion. Are you going to spread that out for a number of years?
[Interpreted] Let me take the first question which relates to the restaurant channel in the China business. We are actually considering exactly the same issue. In the United States business, this channel takes up a bigger proportion. But in our China business, the proportion is rather small. So we are actually considering expanding this channel in the future.
[Interpreted] And the second question relates to some high-end products under Shuanghui that performed very well in the market. Actually, last year, we have seen a number of so-called Star products, which were particularly popular in the market, including Shuanghui cooking and also [indiscernible] products. And we believe that the overall sales volume for the year will exceed 50,000 tons.
In relation to the third question that is about CapEx, we have made announcement this year in relation to an investment project in the western region and also another project involving 100 million heads of meat chicken in full swing and hog production project involving about 500,000 heads of hog. So in relation to the investment amount, it is going to be settled in a number of phases. In relation to CapEx level this year, the actual number is going to be rather close or similar to the amount that we have already announced, perhaps slightly higher.
[Interpreted] I have a quick follow-up question in relation to export volume for Q2 in the United States, because you have mentioned that there has been some negative impact due to the spread of COVID-19. So what do you think will happen to the export level in Q2?
[Interpreted] When it comes to the importation and exportation business between China and the United States in relation to the hog prices and meat prices, so I think the key here is the spread for the meat prices. So it really depends on the speed of recovery of production -- of hog production in China and also how far the hog prices or meat prices in China is going to drop. So importation on the U.S. front is going to be affected by the changes in the industry in China and also the market situation in China.
And when it comes to the development of the outbreak in the United States, if the outbreak continues to spread, definitely, there will be impact on the hog production level and slaughtering volume in the U.S. It will also drive up the hog prices and pork prices in the United States.
So overall speaking, if there is a drop in the hog prices and meat prices in China and because of the outbreak in the United States, those trends will be going upwards, and definitely importation and exportation. If the hog production is recovering fast in China, so the pork prices will drop. And in the United States, if because of the outbreak situation spreading any further, that will drive up the pork prices and also hog prices. And then eventually, when the price spread is smaller, importation business will be affected. So this reversed price strategy is going to affect the overall situation in relation to hog prices and meat prices. So it is actually very difficult for us to decide how the importation situation or the trading situation between the countries will develop further due to the multiple factors in Q2.
[Interpreted] A quick follow-up question. Other than the price differences, are you seeing that the factors in relation to the COVID-19 outbreak leading to closure of certain outlets or costs? And also, the logistical arrangements being affected. These are not the main factors?
[Interpreted] Well, the answer was, I would not say these are very important factors because our country expresses great support to products in relation to [ ration ] demand. And therefore, the supply of such food items have not been affected by the logistical flow.
[Foreign Language]
[Interpreted] So basically, there are 4 questions. The first 2 relates to the China business. In relation to your judgment on hog prices in China, the general direction is that probably there is going to be a downward movement. Do you have any quantifiable guidelines in relation to this? Secondly, Mr. Ma mentioned that he is very optimistic in relation to the profit margin for packaged meat products. And for Q1, the per ton profit is about CNY 3,700, which has reached a historical high. I wonder if we are able to maintain this trend in the future. What do you think the sustainable level for the longer-term will be? The third question is about the closure of the 5 factories in the United States. When do you expect resumption of production? And how is the export volume affected by the closure of 2 of those plants which focus on slaughtering? And the final question. I have done my math in relation to the closure of the 5 plants, and the annualized capacity of slaughtering from these 5 plants is about 26%. If these plants continue to be closed, what will be the drop of the volume in relation to slaughtered and packaged meat business? Is it going to be the same level of decline? Or are you going to rely on other factories to make up for the shortfall?
[Interpreted] Allow me to take the 2 questions in relation to China business. We have already talked about the issue of hog prices in China. The level of hog prices this year is obviously higher compared to last year. And the second half of the year shows a clear trend of dropping compared to the first half. It's very difficult for us to talk about the exact figures. But at the lowest point compared to highest point, there is a difference of about 20%. Your second question, in relation to the adjustment of pricing for packaged meat products. It is actually a very good start. And we are not planning to continue on with such downward adjustment in the future and we have no change of plan for our development of high-end products. So we believe that the performance of this segment will continue on at a rather high level.
[Interpreted] I will take the 2 questions in relation to our U.S. business. Concerning the 5 factories that have been closed, the total annualized volume for hog slaughtering is about 9 million heads and packaged meat is about 360,000 tons, and that is around 25% of the annual product. So generally speaking, when a factory or a plant is closed, it is closed for about 2 weeks, and it is going to create some impact on the by-product, but not so much on the meat product.
[Interpreted] So a quick follow-up. You talked about closure for about 2 weeks. I know the biggest plant has already been closed for 2 weeks. So should I expect a very quick resumption of production?
[Interpreted] Generally speaking, the closure lasts for about 2 weeks. The one you are talking about, I don't think the closure has been 2 weeks yet.
[Interpreted] So my other question is about the overall capacity. Are you going to rely on other factories to make up for the shortfall? Or are you saying that the drop of volume in relation to slaughtering and packaged meat business is going to be around the same level?
[Interpreted] So there will be impact on the overall capacity level. And at the same time, we do have some compensation from other plants.
[Foreign Language]
[Audio Gap]
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]