WH Group Ltd
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[Interpreted] Investors and analysts, dear friends, good evening. Thank you very much for your attendance at our conference, and we are going to conduct it online with video conferencing. Allow me to introduce to you members of the management, including our Chairman and CEO, Mr. Wan Long. And then Mr. Guo Lijun, Executive Director; Mr. Ma Xiangjie. For Shuanghui -- Mr. Liu Songtao from Shuanghui; and from Smithfield, Mr. Shane Smith; and CFO, Mr. Glenn Nunziata.
And also we have [indiscernible] representing our Europe operations. We also have [indiscernible] and I am Wan Hong. Mr. Guo is going to present QA financial results. [Operator Instructions]
[Interpreted] Good evening, everyone. I will report to you Q1 results for 2022. In Q1, packaged meat sold 108 million tonnes. Pork sold 1 million tonnes, up by 2.1%. Revenue has dropped by 0.8% year-on-year while the volume has grown slightly because of the forces driving down the overall industry, we have a slight drop in revenue. Our EBITDA grew by 26.2%, operating profit $642 million, up by 28.1%. Profit attributable to owners of the company, $395 million, up 34.8%. Basic earnings per share, USD 0.0308, up 54.8%.
All of the figures are before biological asset fair value adjustments. The growth in basic earnings per share is driven by the growth in net profit. If you look at our operations in the first quarter of the year, our prices in China and in the U.S. showed very different paths. Our prices in China remained at low levels due to sufficient hog supplies in the U.S. Both hog prices and pork cutout value increased significantly, driven by tight supplies, strong demand and inflationary pressure. The average carcass price in the EU rebounded from low levels as hog producers reduced supplies given high costs and sluggish exports.
In the first quarter, number of slaughtered hogs in China increased by 14.1% to $196 million. Average hog price, 14.02 per kilo Renminbi, a decrease of 56%. Number of slaughtered hogs in the U.S. decreased by 5.7% year-on-year to 31.98 million heads. Average hog price during the first quarter USD 1.51 per kilo, an increase of 15.3%. Higher supply in China lower hog prices and reserve trends in the U.S.
Profitability of China packaged meats increased further. Fresh pork business gradually returns to normal operations. In Q1, in China, operating profit, $303 million, up by 4.1%, among which packaged meat, $276 million, up 25%. Pork, 21 million or [ 4.58 ]%. U.S. business achieved strong growth with unit profit of packaged meat hitting another record high, profits of pork business improving significantly. In Q1, operating profit, $341 million, up 88.4%. Packaged meat, $302 million, up 55.7%, pork, $50 million, up 600%.
European business recorded an operating loss due to rising costs and sluggish demand. Q1 operating profit in Europe, negative $2 million, a drop of $31 million. Packaged meat, $80 million, a drop of 35%. Pork, loss of $26 million, a drop of $31 million.
So these are major figures and performance highlights for Q1. Thank you.
[Interpreted] Now you can raise questions.
[Foreign Language] UBS, Mark Yuan.
[Interpreted] I have 2 questions. The first one is in relation to the China operations. In Q1, we are looking at a rather high level of per tonne profit for packaged meat while we are expecting hog prices to increase towards the end of the year. Can you share some insights in relation to your expectation of per tonne profit level for this year? And also, what is your expectation for next year?
My second question is in relation to the U.S. operations. It is also about the per tonne profit level for packaged meat business. We have seen a historical record in Q1 this year. So what about the rest of this year, and what is your expectation moving into next year?
[Interpreted] Thank you for your questions. I will answer your questions accordingly. Actually, we have seen a new height in terms of per tonne profit of the packaged meat products in Q1. There are several reasons behind this trend. First of all, during Q1, we saw the Chinese Spring Festival and the sales volume was very well-supported. And we also have very good product structure, leading to good sales performance.
The second reason was the drop in hog prices, creating greater room for profitability. We expect that in the second, third and fourth quarters, the profit level would not be too low. Actually, they should be comparable to the level seen in fourth quarter last year. We expect the level for the whole year should be around RMB 4,000 per tonne. And actually, the RMB 4,500 level we saw in Q1 this year should be the highest level compared to the rest of the year.
Later on, when hog prices increase, the impacts on us will be quite limited because we have already stocked up on frozen meat when the hog prices are lower. So over the past months, we have already accumulated -- over the recent years, we have already accumulated certain technical methods and also innovative management methods so that we can effectively hedge part of the rising hog price.
Finally, the per tonne profit will be affected. But again, the level of impact will be limited.
Shane or Glenn, can you take the question regarding the U.S. packing meat, please?
Yes, thank you, Robert. So in the United States, the packaged meats for the quarter was our second best quarter since 2010 when we saw very strong demand, very strong supply -- or supply and demand side economics. As we look forward going through this last three quarters of the year, we do expect to see some increase in pressure, as we continue to see escalating raw material costs going into the packaged meats business. And so to the question of where do we expect the end -- while we think it's still going to remain extremely strong through the next 3 quarters of the year, we do expect that pressure will push profitability back down to slightly above our historic levels.
[Foreign Language] Morgan Stanley, Lillian Lou [Foreign Language].
[Interpreted] I have 2 questions. The first question is in relation to China operations. The management just mentioned that the hog prices this year will show a higher level at the beginning and then it will gradually be lowered. And I believe you also mentioned that there will be better performance for the fresh pork business. So does it mean that the fresh pork business will start to become much stronger in the second half of the year?
My second question is for the U.S. management. We saw a very fast growth in terms of your sales figures last year. And that also provided very good operating profit at the end. So what is going to be your strategy looking forward? How are you going to achieve more savings? Or how are you planning to increase efficiency because we do know that hog prices will come up very soon? So that is going to add pressure to your operations. How are you going to save more cost?
[Foreign Language] the half and half will be higher in the China hog price. I probably made a mistake.
[Interpreted] So our team from Shuanghui will answer your question. Actually, it involved a rather complicated matter. You did point out the fact that the hog prices are lower in the first half of the year and it goes up in the second half, but that does not represent the whole picture. It is not as simple as simply saying in the first half we'll focus on packaged meat and the second half, we'll shift our focus to fresh meat.
Actually, we are talking about 2 rather different industries with their own ways of operations. We have seen a rather high level of per tonne profit, but it does not necessarily mean that the profit level for the slaughtering business will be equally satisfactory. Actually, we have seen in the slaughtering business very good growth in the first quarter, which was almost 10x higher compared to the same period last year. But in the first quarter of this year, the profit level of slaughtering business actually dropped year-on-year because of several reasons.
First of all, last year, locally produced frozen products reserve created very strong contributions, but we do not have the same factor this year. The second reason is for the packaged meat segment, there are some stock involving frozen products. So when we do accounting, everything is consolidated. So some of the losses actually reflected in Q1 this year.
And towards the second half, we expect hog prices to rise. And we will see a weakening of the profit level for fresh products. And therefore, we expect better performance from frozen products. And we believe we will continue to spare no effort in the slaughtering business. This is regarding how high -- or how low the hog prices are this year.
[Interpreted] Concerning the issues surrounding packaged meat, we have seen a very high level of profit for Q1, which is because of product structure and also lower cost level. For the following seasons or quarters, the cost will actually go up, and we will rely on our frozen inventory and innovative management to drive up the per tonne level for these 3 following quarters. We will maintain the per tonne profit level at around RMB 4,000, and the whole year level will also be around RMB 4,000.
Shane, can you provide a response to the cost saving and operation efficiency question regarding Smithfield?
Yes. Thank you, Robert. And I'll make a few comments, [ I will ] have a translation, and Glenn will make a few comments. So we did carry a lot of momentum from Q4 into Q1. And we've seen really, really great levels of both top and bottom line growth. And I would attribute that to a few things. And this ties into our strategy going forward.
First, I would tell you that we continue to focus on our cost structures. In each of our plants, we have cost saving plans that we're executing against. We've taken a close look at our product mix. As you know, labor shortages have created some issues for us. But what that has allowed us to do is take a fresh look at where utilizing labor in the most efficient manner to increase our bottom line growth makes the most sense.
Third, product mix. We've taken, again, a fresh look at our product mix and what we're taking to the market, making sure those are the right products to return the most profit to the company. As a part of doing that, we've built in a number of things, including flexibility, standardization across all of our plants and really the franchising of best practices to allow us to execute against our cost-saving initiatives.
We are vertically integrated. And so what we're building is a system here that as markets change, whether that's hog prices, meat prices, we're able to capture that profit somewhere in our chain, in our vertically integrated model. And so we're very pleased with what we've seen in the last two quarters, and we expect to see that trend continue as we move forward through the year. So Robert, I'll allow for translation, and then Glenn will add a few things.
[Foreign Language]
What I would add to Shane's comments is the largest inflationary pressures we're feeling are really on the labor side and then on infrastructure. So what I would call utilities, energy, et cetera. So from a labor perspective, I would also add to Shane's list we're working on SKU rationalization. Through the pandemic, what we learned is when supplies are tight that customers need the most important product for their shelves. And so we worked with our customers and co-developed what we thought were the optimal SKUs at retail and in food service.
That rationalization helps us remove complexity in the plant. Complexity in the plant requires more labor. So as we remove complexity, we can again reduce our reliance on labor. We continue to work on our distribution and logistics network and optimizing that with automation, with geography, with finding the best location to mix our products or our customers, and we continue to work on that through 2022.
Through the pandemic given the shortage of supply and a real, real strong demand, we've been able to really clean and filter out trade programs and marketing program that were redundant, and we continue to work with our customers just as we are on SKUs to find the most appropriate trade programs that they can use with their consumers on-site. And so a lot of 0-based budgeting going on within marketing and trade to make sure that we're using every dollar wisely.
And with respect to energy, we continue to find ways to mitigate risk and volatility by using hedging. It's an important tool for us. We've used it for years within our hog production and fresh pork businesses. And now we continue to use that in our energy and utility space as well. And so we have to get ahead of some of this volatility and the best way to do that is with hedging.
And then my final comment would be everything that Shane just talked about and I talked about with respect to segment profit can be easily muted if we have -- if we continue to have large legal and other nonrecurring costs. So Q1, we were able to really reduce and negate the amount of noise that occurred below the segment profit line, which again allows for that profit to flow down through net income.
That continues to be a main focus for us. As we assess our risks and judgments and estimates, we try to capture as much as we can in those moments in those years, like last year, as much as the accounting model will allow us to. And so we will continue to focus on making sure we can avoid charges that mute and offset some of the great things our team is doing to generate segment profit.
[Foreign Language]
[Foreign Language] Charlie Chen [Foreign Language].
[Foreign Language] Two questions regarding China and the U.S. On the China side, can you give us more color on the COVID control measures impact on your daily operations, either manufacturing, slaughtering, transportation or any cost increase related to this more stringent -- COVID control in China? For U.S. side, I would like to understand more on the modern expansion on packaged meat business. Is that mainly from the price spread between the hog price and retail packaged meat price? Or it's largely because the product mix changed because of the recovery in our consumer activities as well as to be [indiscernible]. And also, do you feel any marginally improvement or deterioration on the labor shortage side?
[Interpreted] Thank you for your question. I will answer your first question in relation to China. Well, we have presented our figures, which represented the situation while we were facing certain negative control and preventive measures in the pandemic. First of all, we got affected in terms of logistics and transportation because it was impossible for some of the delivery to be completed because we could not enter certain cities. Or once we have done the delivery of our products, the vehicles could not return because many drivers have to be quarantined.
The second issue that we faced is about difficulty of some of our staff members coming to work in the office because they could not leave their own community, and that created certain impacts on our operations. The third factor is the fact that there is poor liquidity of the flow of people in the community. As you all know, our products are very much inclined towards [ luxury ] type products and very much consumed during traveling or trips. And when people are not moving around, of course, that will drive down our sales performance.
But overall speaking, the level of impact on our staffing arrangement was only 4%. So that had very limited impact on the big picture. As for logistical arrangements, the central government has launched a number of supporting policies. So at the moment, the impact will go to fundamental consumptions.
And finally, the poor liquidity of people in the community is still an ongoing matter. And travel type consumption will still be affected.
Shane, can you take the question regarding the U.S. packing meat business?
Yes, Robert, this is Glenn. I'll take it. So yes, we have experienced a pretty healthy margin expansion within packaged meats in the U.S. That really started in Q4. Again, we had to really challenge our go-to-market strategy with respect to packaging pricing when we saw the incredible inflationary headwinds that hit us during Q2 and Q3. So we were able to really reap the rewards of managing product mix, optimizing SKUs, working with our customers and consumers on pricing in Q4 that really carried into Q1.
There are -- Shane mentioned a handful of items that are strategic for 2022 and beyond with respect to margin expansion. And that's really what was at play here in Q1, we had really specific savings goals at the plant level. We track those goals each and every week. We've had to make shifts or pivots and remain flexible with perspective those plans as certain product demand would force that. In other words, if we had to pivot from one plant to another for production we would.
I mentioned trade, I mentioned marketing, but also just managing overall G&A, we have been on a mission here at Smithfield in North America to really control G&A. And as wage inflation hits us head on this year, and we need to get more and more people into our plants, and I'll cover that labor question in a minute, it's important that we manage wage inflation as it relates to our office workers and administrative workers as well.
And so we've become very, very diligent. We've come up with innovative compensation plans that allow for people to feel rewarded in times where people are working more hours than they ever have worked. We are labor-constrained. You asked how we're doing compared to last quarter. We're slightly better than Q4, but we're still in a pretty tough position out in the plants and in our farms. We are working with HR and our human resource partners, outside partners to find temporary labor to find innovative ways to improve retention.
But [ wontedly ] wage inflation has been something we've had to deal with. And so whether it's unionized or non-union plants, we continue to be responsive to employees and find ways to assist our plant leadership teams to get people into those plants so that we can continue to ramp up volume. Volume has been an issue mainly because of labor. And although it's still in a pretty tough position with respect to shortfall in our direct workforce, we are a little bit better than we were at the end of Q4.
[Foreign Language].
[Foreign Language] Morgan Stanley, Lou Lillian [Foreign Language].
[Interpreted] I have 2 questions. The first part of my question is in relation to the China business. In the second half, we are expecting better profit for the frozen products compared to the fresh pork business. So how are you comparing this? Are you drawing a comparison based on the second half performance of last year before or after your one-off provision because you told us that the overall trend this year will be a positive one?
And what about the impact coming from the pandemic? You did mention that they will be quite limited, and they will not affect the big picture. But now we are seeing certain impacts or factors coming from logistics, pandemic prevention, and also rising oil prices. Are you telling us that you expect the trend to be a rising cost trend for transportation overall? What will happen in the next 3 quarters, can you provide some insights?
My second question is in relation to the fresh pork business in the United States. You mentioned that the profit level for first half is about USD 50 million, which is quite similar to the level last year. But we are seeing some changes or new trends in the market. For example, for raising pigs, the profit level seems to be dropping. And for the slaughtering business, it is showing a positive trends.
Should I expect a reversed dynamic in the second half, meaning that the profit level for slaughtering business will come down and the profit level will improve for the funding side? So can you provide some insights and share your views concerning the overall trend in the second half?
Sorry, a bit of correction in the translation. In terms of the fresh pork profit, what I meant was it's a USD 50 million profit in first Q from the result release, which is a similar level as fourth quarter last year, which is above USD 40 million. So I just want to -- trying to get some sense, given the reverse trend between fresh pork and the slaughtering business entering into April, what kind of profit level we can benchmark with just from a broader kind of concept basis?
Yes, we [ have ] it, thank you. We'll answer that one [indiscernible].
[Interpreted]. Thank you. For your first question, which is actually 2 questions in one. The first is in relation to the profitability in the second half for the frozen products. And the second part is actually about transportation cost. In the second half of the year, hog prices will come back up. And the lower-priced frozen products will have good sales situation. So at that time, the profit level will be driven up.
The profit level for frozen products compared to the same period last year will show a rising trend. And actually, compared to the reported profit level last year overall, it's going to show a very good increase. And for the second part of your question, which concerns transportation expenses, previously because of obstacles for logistical arrangements, now things are returning gradually back to normal because of supporting policies being issued by the government.
So basically we are talking about a few dozen renminbi per tonne as the increased level for transportation. So if we consider the profit foundation for our packaged meat segment, this amount is actually very small.
Okay. Glenn, over to you.
[indiscernible]
Okay. So from our fresh pork business, as you know, our pork segment is our fresh pork at our hog production operations. We do expect to see seasonality -- the natural occurring seasonality that exists in that business with fresh pork strongest in the first and fourth quarters and hog production stronger in the second and third quarters. Our biggest -- our big initiative, our strategic direction for that part of our business is really surrounding consistency.
As I said earlier, one of our strategies is to keep profit within the company. One of the things that we have seen and we'll continue to see is the huge input in grain costs, the real pressure the raising costs out of our business. With grain costs right now we're up 27% on a per head basis.
I think to your question, as we continue to find ways to make this part of our business more consistent, and that's what we're seeing now as we move through Q2 and Q3, we'll continue to see increasing profitability coming out of the pork segment.
[Foreign Language]
That consistency -- just to add on to what Shane just said, that consistency really comes from what we can control. So with respect to the rising grain costs that Shane mentioned, we derivative -- financial derivative instruments that we can use to help mitigate some of the price volatility in our inputs on hog production. We had genetics and biosecurity programs in place to help manage and reduce the overall cost to grow. Those are multiyear initiatives. However, the biology of animal husbandry is such that it takes time. And we've talked to you all about that in the prior year, but we continue to execute against our genetic and health initiatives to again along with price mitigating tools around grain, that we can lower our overall cost to raise.
And then finally, the consistency really comes from selling meat. What products do we sell? What products that we turn from a commodity to a value-added fresh pork item that are at yield better pricing and better profitability at the customer and consumer level? And so those are the types of initiatives we're talking about specifically, push all the inflation aside, there are certain operating efficiencies and techniques that we can put in place here to optimize what we sell. And accordingly, that would come with better profitability.
But again, our initiative with North American pork is to find profitability throughout the year, regardless of seasonality. Where that comes from, whether it's hog production or fresh pork, is yet to be seen and is subject to a lot of market forces outside of our control. Our control is total profitability for the company and how do we optimize that.
[Foreign Language]
[Foreign Language] Jefferies, Kerith Chen. [Foreign Language]
[Interpreted] The first question is in relation to the China business. You talked about short-term impacts on the sales of packaged meat due to the pandemic. So can you tell us how are the sales volumes impacted upon in the month of March and April? And what about the hog prices in the second half? How far do you think the increase of the hog prices will go during this period?
And for the second question, it is about the U.S. business. If you put aside your Mexican business and tell us what is the actual level of growth and also the increase of your sales volume involving the fresh pork business, if we don't consider Mexico? And year-on-year, we are looking at some price increases for packaged meat products. So do you think that will, in the longer run, affect our sales performance?
Sorry, I need to clarify the part for the U.S. question. So I mean, in the first quarter, we see there are some ASP increase for the pork and the hog price. How much increase will you do on the price hike for the pork and the hog price? And do we think there will be any impact on the production volume if we raise the price of the hog and the pork price products?
[Interpreted]. Thank you for your questions. The first part is in relation to the impact brought on the packaged meat sales volume by the pandemic. Beginning from March, we have been seeing rather substantial impact on Shuanghui's business because of the pandemic in Mainland China, especially those cities where there were outbreaks, including Shenzhen, Shanghai, Changchun, Taiyuan, Jilin, et cetera. We have seen certain surges in the level of demand.
As for cities without serious outbreaks because those governments were worried about the spread of the pandemic or the spread of the outbreaks to their cities, they immediately took certain preventive and control measures. We have seen rises and also decreases in relation to our sales figures. The overall impact is a negative one, mainly because of the impact on logistical arrangements and also because of the poor liquidity of people in certain communities.
Overall speaking, the pandemic, at the moment, is creating a small single-digit level impact on our sales volume. But we believe that the confidence level will rebound very soon after the pandemic eases. As for our expectation for the hog prices in the second half of this year, I can tell you, it is -- the average for this year will be obviously lower compared to the overall average last year. And then the level in the second half will be obviously higher compared to the first half. And I'm talking about a difference of about RMB 3 per kilo.
Shane and Glenn, can you take the question for the U.S.?
Sure, Robert. And I heard the clarification earlier. So I just want to remind you that with respect to the pork business in the U.S., the pork industry in the U.S. is a little unique globally in that it's subject to a 100% price discovery. So every day, the cost of grains and the cost of hogs are printed and every day, twice a day, the USDA meat, carcass and key primals, or components of that carcass, are printed.
So with respect to ASP, it's a fair question, but it's almost a number you can get by looking at the Internet. And so the hog price moved 16% year-over-year, Q1 to Q1, and it moved 15% Q4 to Q1. And so the ASP increase in hogs is going to be somewhere in that 15% mark. With respect to the fresh pork meat prices or the cutout, the USDA cut out, that moved 11% year-over-year. And from Q4 to Q1 it moved to 8%. So obviously, hog prices moved more than fresh pork meat prices. And typically, that means a condensed [indiscernible] spread within our fresh pork business, which would put some pressure on our profitability.
However, the key to fresh pork and this is really the response to your question is, what can we do to that commodity fresh pork, that USDA meat price? What can we do to that piece of meat to yield better pricing and ultimately better profitability? And so our fresh pork management team has very detailed analyses and margin optimization tools whereby it determines each and every day what piece of meat would be optimal to that plant, what would produce the most amount of profitability for Smithfield Foods, and it would be that product that we make.
It might be selling a bone-in ham in New Mexico or it might be converting that ham, taking the bone out, trimming it and turning it into a packaged meat. So every day, every week, every season, that answer is different. The outcome or the result of that exercise is finding a price and obtaining a price in the marketplace that's higher than the USDA printed meat price, the commodity price. And that's the strategy. And that's what Shane was talking about earlier, that's what I reiterated after I spoke as well, is the key to fresh pork is finding value-added components, value-added processes that ultimately yield a better price at market, which should result in a higher profitability.
So overall, our fresh pork ASP was up greater than USDA, and that's the key, we want our Smithfield meat spread to be higher than the market spread because that means we are doing the right thing to that component of the meat, and that means we are obtaining better pricing at market. And so we will continue to do that. You asked about sensitivity. There is absolutely sensitivity. At some point, pork will become too expensive and a consumer might look for an alternative protein.
The one factor that is in play right now in North America is that the competitive meat set is all very, very high. So chicken and turkey are both very high right now and beef is extremely high. So pork as it sits in a meat case today, is an affordable alternative for meat protein and that has been one of the factors that has bolstered demand here in 2022.
[Foreign Language]
Our U.S. [Foreign Language] our investor briefing is over now. Shane and Glenn, thank you for your participation and your very good input. See you next time.
Thank you very much.
Thank you, Robert.
Thank you, everybody.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]