WH Group Ltd
HKEX:288
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WH Group Ltd
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[Audio Gap] Mr. Dennis Organ from Smithfield; Mr. Glenn Nunziata, also from Smithfield, CFO; from Shuanghui, we have Mr. Ma Xiangjie; and Mr. Liu Songtao; as well as Mr. Zhang Liwen, who is the Board Secretary; and Madam [indiscernible], the CFO of the company.
We are going to invite Mr. Guo to review the situation for Q1 in 2021 to be followed by Q&A.
[Interpreted] Dear, analysts and investors, good evening. I'm going to report Q1 of 2021 in relation to the performance of WH Group. For the first quarter, packaged meats sold 838 million, up 7.3%. hog sold, 1.012 billion tonnes, up 7.2%. And revenue realized USD 6.610 billion, up 5.2%. EBITDA realized $672 million, a drop of 5.5%. Operating profit, $501 million, down 8.9%. Profit attributable to owners of the company, $293 million, down 17%.
I would like to offer some additional information. The information I disclosed does not include biological asset fair value adjustments. And these are figures before such adjustments.
Review of the operating environment. The number of slaughtered hogs in China increased by 30.6% year-on-year to 171 million heads in the first quarter of 2021. By the end of March, hog inventory in China reached 216 million heads an increase of 31.9% year-on-year.
The number of slaughtered hogs increased greatly compared to last year in China. For the first quarter, in China, average hog price, CNY 31.67 per kilo, a decrease of 12.6% year-on-year. First quarter number of slaughtered hogs in the U.S. decreased by 0.9% year-on-year to 33.9 million heads.
In the U.S., average hog price during the first quarter was USD 1.31 per kilo, an increase of 32.3% year-on-year, achieved growth in volume and profits and proactively explores new products and channels, integration of global resources to leverage synergies.
For Q1, in China, operating profit, 291 million, up by 7.7%, among which packaged meat 220 million, up by 15.8%. Hog, 15 million, a drop of 19.4%. In the first quarter in relation to U.S. operations, we saw a recovery with significant drop in COVID-19 related costs, packaged meat records, that's performance since the start of the pandemic.
For Q1, operating profit realized in the U.S. business, 181 million, a drop of 19.9%. Among which, packaged meats USD 194 million, up by 24.4%. Pork, USD 7 million, a drop of 93.4%. Profit of packaged meats business in Europe increased remarkably, while overall profitability decreased year-on-year due to the impact of animal diseases.
For Q1 in Europe, operating profit, USD 29 million, a drop of 46.2%. Among which, packaged meats USD 28 million, up 96.5%. Pork, USD 5 million, down 87.8%.
Strategies and outlook. WH Group will fully utilize its vertically integrated business model and global platform to cope with various risks, seize industry opportunities, enhance the scale of operations, maintain leading position in the industry and ensure sustainable development of the group.
Concerning our China business, we're committed to our strategy of launching new products, optimizing product portfolios, expanding market network, promoting marketing innovation to achieve volume growth. Secondly, we will maximize synergies by expanding meat imports and value-adding processes. We will actively develop food service channels and household consumption, cultivate new businesses and expand into new streams.
We will further enhance our integrated business order by developing the hog production business and expanding the poultry business to enhance its overall competitiveness. As for our U.S. and Europe business, we'll leverage the advantages of integrated business model to achieve greater economies of scale. We will improve management purchases and tap into internal potential, will reduce costs and improve hog production efficiency through science-based feeding and improved management.
We will accelerate the transformation of pork business, optimize product mix and channels, improve the output ratio and increase variety and scale of exports. We will further increase the volume and profits of packaged meats by giving full play to market advantages utilizing potential production capacity and optimizing product mix.
We will continue our effort in pandemic prevention and control, reducing losses and ensuring the stable environment and development of the group. Our European business will continue to effectively prevent animal diseases and focus on local markets and increase sales volume of packaged meats.
So everyone, this is the major highlights for Q1 for WH Group. Thank you.
[Foreign Language] [Operator Instructions] [Foreign Language]
[Interpreted] So the first question was from Bank of America. And it is about the possibility of the management to provide some sort of concrete guidance for the businesses in China and also in U.S. and Europe in relation to the operating capability. For example, we see some sort of stable growth for the packaged meat business in China. So compared to last year, do you expect another level of moderate growth this year? And what about the situation in the United States? We do see some decreases in Q1, but year-on-year comparison, do you expect some sort of improvement? And what about comparing this year with 2019 for both U.S. and China? What level do you think you can recover to compared to 2019? And Mr. Guo said that he's going to offer some comments in relation to the general situation and some information about the outlook for this year. And that will be followed by detailed answers offered by Mr. Ma for the China business and Dennis for the U.S. business.
[Interpreted] First of all, I would like to talk about the general operation situation for the group. I can tell you 3 characteristics so far for the first quarter. First of all, the scale of our operation is increasing compared to last year. And there is rather substantial decline in relation to our profit level. And thirdly, we can see positive trends, bringing our performance to a better place months-on-months.
First of all, in relation to our operation situation, it reflects that on the WH Group level and also for Shuanghui and Smithfield, the overall management capability has been improving. And we are also enhancing our operations, creating better level of synergies.
So all these positive factors are reflected in our results for Q1 performance. We can see that last year was a rather special year with some special factors. For example, in Q1 last year in China, the pandemic started to affect our business. While this year, Q1 is no longer affected by COVID-19.
While in the U.S., we can see the performance of Smithfield last year was very strong in Q1 because there was no COVID impact, COVID only broke out in the end of March last year. While this year, the impact from the pandemic has been weakening. But of course, we cannot bear to neglect any residual impacts.
So looking into the next 9 months of operations, the management continues to feel very confident about our future performance. For example, in the U.S. market, the impact from COVID-19 will continue to weaken. So the overall situation in the market will continue to improve, causing our operating improvement to take place. For our China business, with pork prices continue to decrease, while we continue to expand our operational scale, and we enjoy new channels and new products for our packaged meat business. So we believe that the contribution from this part will be very substantial.
At each group level, while the price differences for pork in U.S. and China continue to be smaller, we believe such price spread will continue to be beneficial to other initiatives. For example, in terms of pork export from U.S. to China, and we will also continue to improve internal management and optimize our trade activities in various places around the world.
So looking ahead, we will continue to see many different challenges. If we look at the macro and external environment. First of all, COVID will continue to affect all walks of life. So it depends on the control measures in various places. Secondly, we see multiple outbreaks of African swine flu in China, while the overall hog supply is still reliable and stable. It continues to create some sort of negative impact on our operations. Thirdly, for our European business, avian flu and ASF will continue to affect the operations because they are quite serious at the moment.
So our export activities and other operating activities may also be hindered. Mostly, overall commodity prices have been going up and the overall inflation trend will lead to cost pressure for our operations. And finally, we continue to see uncertainties surrounding geopolitical and economic situations around the world. So the group is planning to adopt appropriate measures and avoid all these relevant risks so that we can maintain stable operations.
Now I'm going to invite Mr. Ma to talk about Shuanghui's development and also invite Dennis to follow to talk about the U.S. business.
[Interpreted] So concerning the year 2021, we are feeling very positively about the overall operations for Shuanghui. For example, the hog production volume for Mainland China will continue to rise. And together with the dropping trend for hog prices, we believe this is beneficial to improving both the level of sales and also the profit level for the slaughtering activities.
And this is also going to create greater profit for our packaged meat business. On top of that, we also implement improvement measures to market management, and this is also going to be beneficial to our long-term operations and development.
But I would like to state one point. There are 2 factors which may drive down our profit level this year. First of all, we are seeing greater increases offered to the salary levels of our employees. And the second factor is, we have seen very good profit in relation to the inventory of frozen meat last year. For this year, such frozen products or inventory has already been fully utilized at this point.
So these 2 factors will lead to a reduction of the overall profit level. While the whole year profit level will continue to be very stable.
As for the whole year volume, we will see some remarkable growth. For example, there will be substantial improvement in relation to fresh items, and we expect single-digit growth for packaged meats business and relatively stable development for importation of meat. So overall sales volume will show significant growth.
In relation to our revenue, we believe that the remarkable growth in sales volume, together with the drop in hog prices and overall meat prices they will affect the level of growth in relation to revenue on the sales front. So our overall revenue increase should be lower compared to the momentum of growth for our sales volume. So the overall profit level will maintain stable.
Okay. So Dennis, could you please take the question about the U.S. operations?
Sure. The first comment I would make is that if you consider all the challenges that Gordon laid out at the beginning of the call, we are confident in our ability to still make our financial plans by the end of the year.
Dennis, your voice sounds very -- is not loud enough. Could you please try to speak louder or move closer to the microphone?
Okay. Is this better?
Not much.
Is this better?
Okay. Yes, slightly.
I said that considering the challenges that Gordon laid out at the beginning of the call, the Smithfield team, although there's multiple challenges, is confident in our ability to make the financial plan.
[Foreign Language]
As discussed, the primary issue that we're returning from is the impact of COVID. And across the United States on a daily basis, the country is returning more towards a normal state.
[Foreign Language]
The food service business is returning to 2019 levels faster than we had expected, slightly faster than we expected. That, coupled with continued strength in the retail channel, and Smithfield has a strategy across our fresh and packaged business continue to grow market share.
[Foreign Language]
In our European business, we continue to grow our packaged meats volume. We're working on the acquisition, second quarter acquisition of Mecom and continuing to work to control costs and combat disease impact in our Europe operations.
[Foreign Language]
And across all our businesses, we're using operational excellence initiatives to increase our capacity with minimal capital investment, combat inflationary pressures and creating strategies to minimize the impact of higher input costs.
[Foreign Language]
So again, recognizing all of the challenges that we mentioned at the beginning of the call, we feel that they will put pressure on our business, but we have -- management has a strategy to deliver our financial plan by year-end.
[Foreign Language]
So I've got a -- 4 questions on the U.S. business for Dennis and Ma, if I may. So it seems that the hog production business was a key drag for the U.S. business in Q1. But judging from the hog rally over the past few weeks in the U.S., do we have any below single-digit U.S. dollar perhaps? Can we actually return to roughly that level for the entire 2021?
[Foreign Language]
So I'll answer that. At the beginning of the year, we are working through a backup caused by COVID and some of the slowdowns of the plant. We think Q2 and 3 will return to more normalized profitability. We're working very hard to create strategies to mitigate the pressures caused by input costs in grain and meal. And so we're working hard to build the plan for the fourth quarter to have a good fourth quarter and improved versus prior -- versus the prior year.
[Foreign Language]
[Foreign Language] [Operator Instructions]
[Interpreted] I just have a follow-up on the U.S. business. Dennis, I think you are talking about our normalized profit and is on track to deliver our trends. What exactly -- can you give us some more detail in terms of plans? I mean because during our post result NDR meeting, I think we're talking about we are confident for the U.S. business in 2021, the full year. We are able to achieve at least the same level of profit versus 2019.
I just want to ask, is that still the case despite the slowdown in the first quarter, and how are we thinking for the 3 different segments and how production of fresh pork and the packaged meats, which segment are we more confident and which ones do you think we actually have some synergies there?
Yes. Okay. So the first answer is, yes, that's still true. We believe as this year progresses and after the completion of the first quarter, that we're still in a good position to deliver our financial plan.
I think I just sort of entered the hog production. We think normalized profits in Q2 and 3 and some opportunities to do some things that will deliver maybe slightly better than expected in Q4.
The higher hog markets flow pressure, our fresh pork business, so again, we're working on market share and value-added growth and fresh pork to combat that as well as obviously some export opportunities. And then the higher meat prices will pressure our packaged meats business, but we have better-than-expected return of the food service business, coupled with continued strength and -- continuing strength in the retail. So we're very bullish on packaged meats volume, which will allow us to overcome some of the input cost pressures. And I mentioned some things in Europe where hog market is improving there. We have acquisition and integration and packaged meats market share will continue to grow.
So it might come in a little bit different areas. I think strength in hogs, strength in packaged meats, will probably offset our compression in profitability, but deliver our plan by the end of the year.
[Foreign Language]
And just to clarify, I mean, how much the COVID-related expenses in the first quarter? Is that still true for the full year, we are going to a, say, 600 million to 700 million production.
This is Glenn answering. We incurred approximately $40 million or so of COVID costs for the first quarter to be completely transparent better than we thought we'd be. So from this -- from here on out, we are expecting that cost to decline each quarter as we progress through 2021.
And for the sake of some clarity, the majority of that cost is associated with testing and vaccine administration. So we're moving away from labor-related expenses and managing the COVID testing and vaccine-related costs here in 2021.
[Foreign Language]
[Foreign Language]
[Interpreted] The question to the China business is in relation to per tonne profit level for packaged meats business and also for hog production business -- hogs slaughtering business. So do you think that we can continue the current trend seen in Q1 and spread it throughout the year, especially for packaged meat business and also with all the new product launches?
[Foreign Language]
[Interpreted] Thank you for your question. Concerning the situation about the average profit level for fresh meat is actually rather complicated because it involves various factors, including frozen products and also imported meat. So this year, for fresh meat, we believe that the slaughtering profit compared to last year, it will be a positive growing trend. But it is rather difficult to be reflected on our accounts because there is a reducing level of contribution from frozen items and also because of the contribution from imported meat will also be subject to different changes.
So the per tonne profit for packaged meat this year, the situation is going to be affected by various factors, including the increasing level of salary for our staff and also adjustments to our methods used in the plant. And also, that may also affect the quality of our products. So we expect that with the improvement to the quality of our products, we expect that the per tonne profit level for packaged meat for this year will be stable with some moderate growth.
[Foreign Language]
[Foreign Language]
[Interpreted] I have 2 questions. The first one is in relation to the China business. If we look at the profit level for slaughtering activities this year, if we look at the data for Q1, how can we compare this with the situation over the same period last year?
[Foreign Language]
[Interpreted] During the first quarter, the imported meat sales volume is about 110,000 tonnes, which represents over 10% growth compared to last year. With the diminishing price spread between U.S. and China, we continue to have growing level of profit. And this is because we have very strong performance for our fresh items, and they create very positive contribution to our overall profit level.
[Foreign Language]
[Interpreted] As for our domestic slaughtering volume, we have realized a double-digit growth. But the contribution from frozen meat last year was rather substantial. So this year, despite a growth in our profit for slaughtering business, the 2 factors have sort of offset themselves, leading to a drop for our fresh meat profits.
[Foreign Language] The other question is for U.S. operations because we see the hog price has increased significantly, but the spread between hog and pork has narrowed. So could you please give us some colors about the U.S. hog price looking forward and the outlook for fresh pork segment profitability?
[Foreign Language]
So Dennis had mentioned earlier some of the macroeconomic factors impacting hog production in the U.S., but you raised a good point. The hog prices have rallied in the U.S. significantly. And what we're seeing in 2021 is a return to pretty normal seasonality. And what I mean by that is Q1 and Q4 are typically lower hog prices, where Q2 and Q3, the summer months, bring with it some higher selling prices.
And what we see, if we look at the futures strips on both the sales side and the input side, is that seasonality has returned to 2021. That will put some pressure on fresh pork, but Dennis also mentioned that we've seen very strong demand in the U.S. and so retail has helped. We're seeing very, very high USDA meat prices this year. In some cuts of the animal, that could be almost 100% higher than a year ago. But for the majority of the cutout, you're 30% to 40% higher than a year ago. So meat prices are helping. The spread is still there, but we expect that spread to compress in the summer months. And so you'll see that profitability shift, if you will, from fresh pork to hog production, like it had in pre-COVID times.
[Foreign Language]
So Dennis mentioned earlier, our focus now for the upstream side of our business is cost management. Grains are skyrocketing, as global trade and demand has picked up, and a lot of our grains from the U.S. are being exported. And so we're having to manage higher input costs. And the best way to do that is to find cost savings and initiatives in both our hog production and fresh pork segments, and we will continue to execute under our operational excellence strategies there to offset some of these grains. And then, again, as Dennis mentioned, we have to go find market share. And so both fresh pork and packaged meats, we have to manage pricing. We got to pass on as much of that cost increase as we can. That's feasible in the U.S. And we have to continue to improve volumes to offset some of those rising costs.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Interpreted] I have 2 questions in relation to the China business, especially for packaged meats business. In Q1, I understand that a new department has been formed or a new business unit in relation to foodservices. So can you share any details about your future plans for this [Audio Gap] or some sort of pressures caused by other factors?
[Foreign Language]
[Interpreted] First of all, allow me to take your first question in relation to the establishment of the foodservice department. Actually, we have singled out this portion of our business because we believe we want to strive for a high level of professionalism and professional operations because compared to the channel of traditional meats -- packaged meats products, the sales methods and also the products themselves are rather different. So we need a separate unit to operate.
[Foreign Language]
[Interpreted] And our work in the first quarter is to, first of all, put together a team and also have some broader outline and planning. And also we can trigger the marketing activities. At the moment, I can share with you, the sales volume is in line with our expectations.
[Foreign Language]
[Interpreted] As for the channel for this department or unit and also future product planning, I can share some details with you. First of all, we are going to supply food materials to support the domestic foodservices terminals. Secondly, we are planning to set up various points of sales in China. And we are also going to sell products in relation to condiments and also some Chinese-style condiments. Thirdly, with our sales channels, we are going to enter into various families by offering on the payable products.
[Foreign Language]
[Interpreted] And concerning our business for our operations under this new department, we believe we have just started operation. So at the moment, we are going to focus on expanding our scale gradually and also the price setting is a bit lower compared to other packaged meats products.
[Foreign Language]
[Interpreted] Now I would like to take the second question, and that is in relation to the drop of unit prices for packaged meats products in the first quarter this year. There are 2 major reasons. First of all, there is poor structure for Q1 this year. Last year, we have seen impacts caused by the pandemic. And we have shifted our priority last year to high-margin products.
Secondly, because we are investing more heavily into the market this year and we are offering more attractive concessions to the agents, so that means lower price -- lower pricing at the end.
[Foreign Language]
[Interpreted] At the moment, per tonne profit level for Q1 is at a normalized level. In the future, when hog prices decline, that will mean substantial improvement for per tonne profit in relation to packaged meat products. We are now considering investing more heavily into the market, improve our production methods, enhance product quality and offer more concessions to the operators, so as to expand our sales volume. And at the same time, our overall profit level will also improve.
[Foreign Language] [Operator Instructions] [Foreign Language]
[Foreign Language]
[Interpreted] The first question is about importation volume. It was just mentioned that in Q1, importation volume was 110,000 tonnes, and I seem to remember, last year, full year importation volume was 700,000 tonnes. So considering the level you have provided for Q1, do you think the whole year level this year will be the same as last year? Or is it going to be lower compared to last year? And can you also share some insight in relation to seasonality of importation volume?
[Foreign Language]
[Interpreted] So first of all, I need to explain to you. I just mentioned the importation volume for Q1 was 110,000 tonnes. That is actually for external sales purposes. It does not include the volume for internal use. So the actual importation or total importation volume was 180,000 tonnes, which is in line with the level of last year.
[Foreign Language]
[Interpreted] Allow me to supplement the previous answer. Concerning importation of meat last year, the total volume was 700,000, and that included certain amount procured from the source, for example, from Smithfield and also other players in the market. And on the sales end, we're talking about selling to both the Chinese market and also to the rest of the Asian market.
[Foreign Language]
[Interpreted] And I also want to add that concerning the situation this year, we have seen rising hog prices in the markets in the United States and also Europe, while there's a decreasing trend for hog prices in the Chinese market. And in some countries in Europe, ASF is still affecting many people. And that means that will also affect the volume of exportation to China. So the overall trend this year may not be as positive as last year, both in terms of volume and profit.
[Foreign Language]
[Interpreted] In relation to the import and export trade of meat, we have adopted a number of measures to alleviate the pressure caused by the factors I just mentioned. For example, for the Chinese side, we are increasing the utilization of imported meat in relation to processing, sales and also internal use. For example, for our packaged meat items, we are now relying more heavily on imported meat products. And the new department that was recently established is also using a lot of raw materials, which is also imported meat.
[Foreign Language]
[Interpreted] Secondly, in relation to exportation from the United States into China, we are now exploring more types of products and also greater volume of products, especially in relation to byproducts. In the past, because of a lack of technologies or know-how in terms of processing and also insufficient labor, we were not able to recover certain byproducts for exportation to China. And nowadays, we are -- our technical people are working very hard, both in China and Hong Kong and also other places so that we can add more value to such byproducts.
[Foreign Language]
[Interpreted] Thirdly, in relation to synergies, we will continue to expand our procurement possibilities. So we are going to buy from more different places and markets. And we're talking about both pork and also other meat products.
And finally, in relation to the Asian market outside of China, we have actually established multiple offices throughout Southeast Asia so that we can enjoy more sales channels and also expand the scale of our trade in relation to imported meat. So looking into the future, we believe that imported meat will be very important business to the group, both in terms of scale of business, profit level and also as a growth driver for China, U.S. and Europe's business.
[Foreign Language]
[Interpreted] As for your question in relation to seasonality, in China, pork is one major consumption item for Chinese people. So we don't really see much limitation in relation to different seasons. So basically, for both imported meat and also domestically produced meat, all seasons are good seasons, particularly days surrounding important festivals and holidays.
[Foreign Language]
[Interpreted] As for our external suppliers, overseas suppliers, including those in the United States and Europe, traditionally speaking, it is a rather low season for hog prices in Q1 and Q4. And therefore, our order volume will increase. And when they reach Q2 and Q3, the domestic consumption would improve, and that means the hog prices will become higher. And therefore, our order level will decrease.
[Foreign Language]
[Interpreted] As for the Chinese market, we enjoy a very balanced picture throughout the entire year, covering all seasons when it comes to pork consumption. And we have also built very good capability level for inventory. So in other words, we don't have any peak season or low season except days surrounding important festivals and holidays.
[Foreign Language] And I have a follow-up question for the U.S. side. You have mentioned that we have incurred USD 38 million COVID-related expense in the first quarter. May I know the allocations between pork and packaged meats, that segment. And I just want to know if we exclude the COVID-related expense, was the recurring EBIT level as of pork segment and is there any chance that we can see the full year COVID-related expense less than USD 100 million?
[Foreign Language]
So this is Glenn with Smithfield. So with respect to your question on allocating that first quarter COVID number, it was split fairly evenly between fresh, packaged and hog production, plus or minus a couple of million dollars. So it was spread pretty evenly there with $12 million or so going to fresh pork, $14 million to $15 million going to packaged and about $11 million going to hog production, with the remaining going to Europe and the corporate segments.
Our plan or budget for -- coming into 2021 was that we planned for $150 million or so of COVID expenses in 2021. But because of our run rate that we experienced in Q1 and the fact that we were better than our plan, we're forecasting something south of that number. It's difficult for me to tell you that we feel certain that we'll hit something sub-$100 million. A lot of that depends on help from the state health departments, the federal government, et cetera, with respect to vaccines, state laws and shutdown laws and that sort of thing. But we are doing everything in our power to control those costs.
I think it was last quarter that Dennis said as aggressively as we leaned into COVID with respect to preventative measures. That's how aggressive we're trying to lean out of it. And so we're trying to manage those costs the best we can. We were successful in Q1. And like I said, we are confident that we'll be able to beat the full year budget plan of $150 million or so. I just can't tell you with specificity that we'll end up below $100 million.
[Foreign Language]
[Foreign Language] Due to time constraints, we will conclude today's presentation and Q&A session. Thank you for your participation.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]