WH Group Ltd
HKEX:288
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WH Group Ltd
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[Interpreted] Dear analysts and investors, good evening. Welcome to first quarter results announcement for 2023 by WH Group. Our management will take you through the financial performance, strategies and outlook. We have with us today, our Chairman, Mr. Wan Long; and our CEO, Mr. Guo Lijun; from Shuanghui, Mr. Ma Xiangjie; and Mr. Liu Songtao; from Smithfield, our CEO, Shane Smith; CFO, Mark Hall; CFO, Madam Zhang; and myself, Wan Hongwei. Mr. Guo will report to you our Q1 results. We will then proceed to Q&A. Mr. Guo, please?
[Interpreted] Dear analysts and investors, good evening. I would like to report to you Q1 results for 2023. In Q1 of 2023, packaged meat sold 820,000 tons, a drop of 1%. Pork sold 1 million tons, a drop of 1.2%. Revenue, $6.743 billion, up 2.9%. EBITDA, $528 million, a drop of 37%. Operating profit, $365 million, a drop of 43%. Profit attributable to owners of the company, $174 million, a drop of 55.9%. Basic earnings per share, USD 1.36, a drop of 56%.
In the first quarter, hog prices -- well, we have seen some drops in terms of revenue, mainly for the slaughtering business or hog production business in the U.S. In the first quarter of '23, hog prices in China remained at low levels due to sufficient hog supplies. In the U.S., oversupply and weak market demand caused a significant drop in hog prices. Hog prices in the EU increased substantially as hog supplies reduced because of high costs.
In the first quarter of '23, number of slaughtered hogs in China increased by 1.7% year-on-year to 199 million heads. The corresponding figures in the U.S. was 32.52 million heads, up by 1.7%. So such increases for both places were more than 1 percentage. In the first quarter, average hog price in China was CNY 15.7 per kilogram, an increase of 12%. In the U.S., average hog price was USD 1.27 per kilogram, a decrease of 16%. Average hog price in the EU, EUR 1.65 per kilogram, up 46%. So increasing trend for China and EU and decreasing trend for the U.S. Average pork cutout value in the U.S. was USD 1.82 per kilogram, a decrease of 18.1%. Due to excess pork supply in the U.S. and softer consumer demand, meat value dropped more than hog prices, further compressed industry market spread.
If you look at our segments, because of higher cost and exchange rates not being favorable, packaged meat show a dropping trend while pork improved. For the first quarter, operating profit $280 million, a drop of 7.6%; packaged meat, USD 238 million, a drop of 13.8%; fresh pork, $39 million, up by 85.7%.
The profit in China mainly was affected by exchange rate. If you look at renminbi operations, the profit improved by 2.1%. But because of unfavorable exchange rates, if you calculate the profit level in U.S. dollars, there's a drop. Packaged meat remained high in the U.S. In terms of profitability, pork business suffers significant losses due to unfavorable market dynamics. In the first quarter, operating profit, USD 62 million, a drop of 81.8%; packaged meat, $301 million, a flat trend, while fresh pork suffered from losses of $218 million.
For our business in Europe, pork business achieved a turnaround due to rising meat prices, increasing costs, pressure on our profitability of packaged meat business. For Q1, operating profit in turnaround to a profit of USD 23 million, an increase of $25 million; packaged meat, $15 million realized, a drop of 16%; pork business, $9 million, a great improvement of $35 million. So that is the summary for our performance in Q1.
[Interpreted] My first question is in relation to the hog prices being rather low in Q1 in China. So what is your judgment in relation to hog prices in China for the entire year? And what is the projection in relation to per-ton profit level for packaged meat business?
[Interpreted] Thank you for your questions. Actually, you are asking about 3 different aspects. First, allow me to address the issue of hog prices this year. We have come to 3 conclusions in relation to this. We believe the average price this year compared to last year will be lower. And also the first half of this year, the hog prices will be lower compared to the second half. So the major trend is that we start from a lower point and things will get higher over time. As for the average price, we believe it will be at around CNY 17.
And then the second issue is about the packaged meat business and the per-ton level. We believe it will maintain at a level around CNY 4,000, although this year, the hog prices are lower compared to last year. But in terms of consumption side, the hog prices will actually be higher. So we believe that this year, we have this projection of around CNY 4,000 as the per-ton profit for packaged meat business.
And actually, compared to last year's per-ton profit level, which was rather satisfactory, we will continue the positive trend, and we will continue to make 2 adjustments and exercise one control measure to continuously adjust the price level so as to maximize our profit per-ton level.
And the final part is in relation to our fresh pork business. And I would say that our projection for this segment is also rather positive. And I would like to address the fact that in relation to fresh pork, we do not have a lot of opportunities for storage of frozen products. So for frozen products, the profit level will actually be lower compared to last year. But because of the lower hog prices this year, we believe that fresh pork profit will perform much better compared to last year. So I would say that the profit level for our slaughtering business overall will fall within normal ranges.
[Interpreted] Thank you very much for this opportunity to ask my questions. I would like to ask about the China business. I was suffering from some background noise, so I didn't hear quite clearly. I'm not sure if you have already covered this point. I heard about -- I want to ask about the projection on the packaged meat volume. I understand that there is improvement in Q1 probably because of the early Chinese New Year. So what is the expectation for the whole year performance? Do you think there will be a single digit but medium level single-digit growth?
And what about the per-ton profit level for packaged meat business? I think I heard a figure around CNY 4,000. Is that the correct figure for this year? And in the first half of the year, because the cost, overall speaking, is lower. So does that mean the per-ton profit is actually higher in the first half, and then it will proceed to become lower towards the second half?
[Interpreted] Thank you very much for your questions. Concerning your first question, which is in relation to packaged meat business and the sales volume and the main drivers, I can tell you that we expect the whole year performance to achieve medium-to-high level of growth. And there are 3 major drivers behind this. First of all, the pandemic is slowly leaving us. So domestically speaking, the demand is improving very strongly, especially for tourism-related businesses, some restaurants and also schools are returning to the normal channels.
And also the second point is about development and increase in terms of our online shops or outlets. Or actually, inside our sales network, we have been developing more point of sales. For example, last year, we have constructed many new shops, and that will continue to drive our sales volume forward.
The third driver comes from our recently developed new products, and they have been developed in recent years, and they have been performing very well. Actually, in Q1 this year, they performed very outstandingly. So for the whole year, we expect medium-to-high level of growth or a medium level of single-digit growth. As for per-ton profit level for packaged meat business, as I mentioned earlier, the level will be close to CNY 4,000.
I understand that we have certain challenges in relation to the cost of some raw materials. But because this year, the whole price trend will start from a lower point and then proceed to a higher point towards the second half, I can tell you there will be some changes or fluctuations in terms of our per-ton profit level between the 2 halves. But such fluctuations would be quite limited. And continuously, they will be very close to this central figure of CNY 4,000.
[Interpreted] The question is about the U.S. operation. We know first Q was challenging for the upstream business. Could management give us a bit of update on how the situation trends into second quarter? And any changes on the outlook for the full year in terms of the U.S. operation, namely the upstream and also downstream business?
[Interpreted] So thank you for the question. As you mentioned, it really was a tough first quarter, both on the live and the fresh side of our business. We saw hog prices down 16%.
Can we try again?
Robert, I have a connection problem.
No, it's fine. You go ahead, please.
Okay. Let me try again. So thank you for the question. As you mentioned, we did have a tough first quarter, both on the live and the fresh side of our business. We saw hog prices down 16%, while raising costs were up 15%, coupled with meat prices that were down 18%. And that led to a $218 million loss in our operating profit.
In our hog production operations, we've been on an effort to reform that side of our business. And so as we look at 2023, what we're focused on is really limiting the amount of losses that we see coming into that segment. And some of the things we're doing there, we began earlier in 2022 where we started taking out hogs in places like Arizona, Utah and California, which were among our highest cost animals that we had in our system.
And so we've taken our hog production numbers down from 17.5 million hogs that we harvested in '21 -- 2021 to an expectation in 2023 that will be sub 16 million. So about a 9.5% decrease in the number of hogs that we're raising internally. I'll let you translate, and then I'll continue.
[Foreign Language]
The higher cost regions to limit our overall exposure. But we're also coupling that with other things that are -- what I would call on the farm management techniques. And some of those things that include taking a fresh look at all of our contracts that we have with our growers to make sure they have the right incentive from a performance-based metric. We've talked about some of the health improvements and genetic changeovers that we've been working on as part of our overall plan to really transform that part of our business.
But I would tell you, to the first part of your question, in hog production, as we look specifically at 2023, it's really about the speed to which we can limit some of those really high losses we see that are really a function of a decreased hog price and an increased raising cost.
When we go to fresh pork, fresh pork had an okay first quarter. We were -- we finished the quarter at about $55 million of profit. That is down compared to last year. But I would tell you, last year, in the first quarter, we had an incredible mix opportunity with our margin to burn that really added a piece to the puzzle in the first quarter of last year that we didn't have this year. And that was really a function last year of having labor when our industry competitors did not. So we had a real opportunity we took advantage of last year. So I'll let you translate that.
[Foreign Language]
So as we take fresh pork and hog production and look at the rest of the year, I would tell you that I'm optimistic where I see the back half of the year. I think in hog production, we'll see some contraction in the industry, which will have a positive impact on hog prices in fresh pork, I think the hog prices and meat prices globally are up. China is up 12%. EU is up 46%. And you couple that with a weakening U.S. dollar, that becomes very favorable to exports coming out of the U.S. And I would tell you, it gives us an advantage as we look to markets like China, Japan and Korea.
And so I think the export will help with the overall balance in not only the fresh pork business with the hog production business. As you know, the U.S. is oversupplied in fresh pork. And so to any degree, the industry and Smithfield can tap into those export markets with favorable global fundamentals. I think that's going to help tremendously in the second half of the year. I'll let you translate that.
[Foreign Language]
In our packaged meats business, our packaged meats business continues to perform extremely well. In the first quarter, we printed profits of $900 per metric ton. As we look through the rest of the year, we expect that, that profit level, while it will drop a little bit, will still stay in the mid- to upper $700 per metric ton profitability range. As you know, we have a tremendous portfolio in our packaged meats business between branded and private label and really, with a reach that touches the consumer wherever they are on the buying scale.
And so even though we expect to see some softening demand and we're already beginning to see some softening demand, I think our volumes will stay flat to last year, and I think our profitability will stay at a high level. And so I'm very pleased with where the packaged meats business is and where the -- what the future looks like for that business. And we're also in Europe and in Mexico, seeing tremendous improvement in those businesses as the underlying market fundamentals have continued to improve. And so I think we'll see a great performance coming out of both of those regions as well.
And so when you add all of those things up, when I look at 2023 from a profitability standpoint, yes, I look at it being relatively stable to 2022. And we have a lot of things to overcome, but I believe we're doing the right things to execute and continue to deliver that level of profitability.
[Foreign Language]
Thank you for the question.
[Interpreted] So I got a follow-up question on the U.S. market. The management just introduced comments that we believe the hog price in the second half probably will be strengthening because the supply is going down and that WH Group is reducing the number of harvest year-over-year. Do you see this as a trend as an industry-wide trend? Or is specific apply to you, WH Group? That's the first question.
And also, the second question, it seems that the profitability of the hog refarming business is more dependent on the price, the hog price in the U.S. So apart from the measures that you have taken in the expenses, I mean, in those states where the trading expenses is high, do you see any other chances that you can lower the feeding expenses in other areas in U.S., for example, feed costs, the labor costs, any other things that we can save to basically defend your profitability in the live hog business?
[Foreign Language]
[Interpreted] Okay. Thank you for the questions. So to your first question about prices, we do expect prices to continue to follow the seasonal trends that we see every year where we see that spike or that increase that goes up through the summer months and down in the first quarter and the fourth quarter and when the futures curves show that today. Now the difference this year is we're substantially -- that future curve is substantially lower than both 2022 and 2021. So we're seeing a tremendous amount of pressure on that price, even though it continues to follow that seasonal trend.
I do think looking at the futures curve that the pricing that is shown today will be a little bit stronger as we get there, as we continue to see some contraction in the industry. I think one of your questions was to -- taking out some of the hogs, is that specific to Smithfield or to the industry. And I would tell you that the entire industry is in a loss-making position right now, not only from a P&L standpoint but from a cash flow standpoint. So producers are printing negative cash flow per head.
And I would tell you, in my opinion that, that's going to force the industry to adjust, and it will be specific to regions, but we will see that adjustment take place. We're already seeing some pressure on packers with some of the closures that have been announced in North America. So we're seeing an impact in the industry. So no, I don't think this will just be a Smithfield or WH Group program to remove hogs. I think that will be more industry-wide. I'll let you translate. And then I'll answer the second question.
[Foreign Language]
And I think to your second question about feed costs, raising hogs feed costs in this environment, feed cost is about 70% of the cost to raise an animal. And so we're very focused on how we find ways to remove cost in all parts of our operations, but specifically to feed. And so some of the things we do there, for example, we invested in the last 2 to 3 years in bakery byproducts where we have plants that buy -- well byproducts from bakeries and ground those products up into feed that we're able to mix in. And that usually is at a fraction of the cost of what a bushel of corn would be.
Some of the other things we're doing, we've invested in elevators and in other types of grain storage around the United States, close to our operations that allow us to buy more grain at harvest where it's typically cheaper and so we've had some success in that.
And this also allowed us to buy and sell, to use our network of grain originators and buyers to buy and sell grain on markets. And so we've implemented a number of processes and functions to help alleviate some of that pressure. But at the end of the day, one of the biggest things in what this genetic change of whatever we do is bring to us a better feed conversion. That's the number of pounds that we have to feed to an animal, number of pounds of feed to create a pound of meat. And so we've really been focused on how to lower that and how to improve that overall feed conversion to make sure that we're efficiently feeding our animals in a way that is really having an impact on that overall feed cost. But as you can imagine, as big of a component as feed cost is to the overall raising cost complex, our teams are extremely focused on every opportunity to take costs out of that side of the equation.
[Foreign Language]
Thank you for the question.
[Foreign Language]
[Interpreted] The next question is from Xiaopo from Citibank.
[Foreign Language] Thank you for the color for 1Q. We understand that 1Q actually is pretty tough for U.S. But I'll point that since the IPO of WH Group, we still remember that why the company kept Smithfield in order to upstream. We know that it's for the quality of the meat. We also understand that if the market is tough, you can use export to stabilize in the U.S. business. But the world has been changing so much, it just can't wait with more geopolitical risk, more FX changes, et cetera.
Have you guys ever think about the strategic review of the business model in the U.S., i.e., reducing the order to upstream, especially for hog production? I know -- I'm not saying that you guys are totally divest the whole upstream business. But have you ever think about reduce exposure to upstream? I'm not so sure whether the question should be answered by you guys in Smithfield or Mr. Wan or Mr. Guo of the WH Group as it is a strategic question.
[Interpreted] I will take this question. During the time of IPO, I understand that many people wished that we would spin off the hog production segment and simply go to IPO with the packaged meat business. But we have considered the fact that we are a meat processing enterprise. We are also the biggest enterprise in the U.S. So if we can do well, all segments, including upstream, mainstream and downstream, it will be a good thing to not just the enterprise but also to our investors.
So we have put things into practice for a number of years. And I must admit that the hog production side is indeed a burden to us, and it has been dragging us down. In the first quarter of this year, we did not have a very positive or strong beginning for the enterprise. And we have seen a drop of attributable profit of 56%. And what is missing is in the United States because we have seen a strong growth or stable growth for Shuanghui's business in renminbi calculation in China. We have also turned things around in Europe.
But the operating profit for the U.S. segment continued to drop. The decline was 90%. And the difference is mainly in relation to the hog production side, which suffered a loss of $271 million. And at the same time, the slaughtering business made a profit of more than $50 million. So we can see a year-on-year drop in relation to the entire pork segment.
The packaged meat business, however, performed very well. And we see strong year-on-year growth in terms of our operating profit or show a flat trend. And also the unit profit level reached USD 900, which is a historical high. So the major difference is the hog production side for Q1 because the packaged meat business continued to make very good profit. So we need to have some rethinking in relation to what we shall do in the future. And we have to do some research and serious consider -- seriously consider how we want to deal with the entire chain of business.
Our next step should be focusing on sorting out the hog production business. We must pay very close attention to what changes are happening around the globe. And for example, in Q1, the hog prices in China increased by 12%. And then in EU, the performance was up by 46%. And in Brazil, it was up by 33%. At the moment, hog prices in the United States per kilogram is USD 1.2. And in Europe and Brazil, it is closer to $2. We believe there will be changes happening to the hog prices in the U.S., and we need to make necessary adjustments to our global pork resources.
In the next step forward, we plan to expand our exports and change the status quo for hog production in the U.S. We need to gain deep understanding of the industry and try our best to turn things around and enjoy better performance in the following quarters and try to minimize our losses.
Secondly, we must consolidate the overall hog production business. And we need to carefully review what is happening to our own farms and also external farms. For those without improvement or good performance, we need to chop off things that are not performing well. We need to take use of the time, which is quite limited, to carry out reform and adjustments, keep what is doing well and then spin off what is not performing well and also reduce the overall supply level.
We also need to consolidate the overall slaughtering business. This year, our focus is to expand our exports. In recent years, we have seen shortages in terms of labor, which has already turned around this year. And we will also continue with our technical upgrade so that we can enhance overall efficiency, enhance recovery and also continue to add value to the value chain.
The packaged meat business is performing better. So our next step is to continuously expand this segment and expand our own production capability and also continue to identify M&A opportunities in the market. In recent years, we have carried out some M&A activities in Europe. And the next step forward will include some attention shifting to the United States or Italy. We will identify certain suitable opportunities in the United States. Thank you.
[Interpreted] I would like to follow up on what you just said. I have witnessed how Shuanghui had gone through your reform measures, and I have witnessed the acquisition of Smithfield. And I must say that, Chairman, you have been very visionary in all these actions. This year, I am looking at some big changes in terms of the market condition, and also, some major trends have shifted in the industry. And I am certain that all these elements will affect your future thinking, including how you are going to reshape your business model. So I sincerely hope that, Chairman, you and your team will continue to be visionary and very much decisive in taking such actions.
[Interpreted] Thank you very much, Xiaopo.
Just now, you have made some suggestions and given us some advice in terms of corporate strategy and also we need to be very decisive in terms of our future business development. Everything you said is very to the point, and they are also matters of concern to all of us.
Concerning our enterprises in China, in the United States and also inside EU, all these years, we have never stopped making adjustments and consolidations. But I think the level of strength involved is not sufficient. In recent years, we have come across very complicated situations. We have encountered problems and issues that were faced by other industries. And what has not happened in other industries has also happened to us.
For example, we have all gone through the pandemic, inflation, interest hike and also the trade war between U.S. and China. In our industry, what is also a unique challenge is the African swine flu issue, which is not a problem to many other industries. So I can tell you, we have really encountered many, many challenges, and they have affected our development.
I believe our next step forward is to consolidate the hog production business in the United States because in the U.S., the pork supply is in excess together with changes to geopolitical situations. And I'm sure U.S. pork will be continuously affected. So our next step forward is to consolidate or handle the U.S. hog production business.
First of all, because the pork supply in the United States is in excess, we have to reduce the size of the pork industry, especially targeting the hog production segment.
Secondly, the export of U.S. pork is now facing many, many challenges and limitations. And therefore, we need to rethink our position in terms of pork exports from the U.S.
Thirdly, the hog production business in the U.S. is indeed a burden to us as an enterprise. So we must be decisive and be determined to do something about this burden.
Actually, we already have a plan, and we will communicate with our various teams about the plan. And later on, you will be able to see the details of such a plan. This year, we are going to consolidate our capacity for hog production at around 10%. So what needs to go will be chopped off.
So we will consider to look at the actual situation in the market, and we will continuously reform and make adjustments where it's necessary next year. At the moment, the ratio between hog production and slaughtering capacity is about 2:1. So our next step forward is to adjust that to about 30%.
So through such reform or adjustment measures and also the necessary reduction in the hog production volume, we will be able to expand external procurement volume. So that is our current thinking, and we are now making all necessary preparations.
Today's meeting has concluded. Thank you for your participation, and you may get off the line.
Thank you, Robert. Thank you, everyone.