WH Group Ltd
HKEX:288
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WH Group Ltd
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[Interpreted] Good evening. Welcome to dialing the interim results announcement for WH Group. The management team will walk you through the updates of the first half of WH Group. So I will first introduce the attendees for today's meeting, Chairman, Wan Long; Mr. Guo Lijun, CEO; Mr. Ma Xiangjie, CEO of Shuanghui Development; Executive Vice President, Shuanghui Development, Liu Songtao; Executive President, Shane Smith of Smithfield; CFO of Smithfield, Mark Hall; CFO of WH Group, Joanna Yan. This is Mr. Wan Hongwei, Vice Chairman of the company.
So Mr. Guo Lijun will provide you a briefing of the first half 2023 financial performance.
[Interpreted] Good evening, everyone. So I'll walk you through the major metrics and the performance of WH Group in the first half of 2023. In the first half of 2023, the packaged meats sold is 1.59 million metric tons year-over-year change of 0.9%. Pork sold is 2.02 million metric tons, it's relatively stable.
In terms of revenue, we achieved $13 billion, it's a 2.1% year-over-year decline. The EBITDA, we achieved $1.07 billion. In terms of operating profit, $639 million year-over-year decline of 47%. Profit before tax is USD 610 million decreased by 44%. Profit for the period is $500 million. Profit attributable to the owners of the company is $383 million, it's a year-over-year decline of 45%. Basic EPS is USD 2.99. And based on the operation of the company and the Board resolution, we have -- we're declaring an interim dividend per share of HKD 0.05 per share. And the record day is September 1.
So in the first half of 2023, the operational scale of WH Group is relatively stable. The revenue slightly declined, the profit has declined around 40%. It's natural than the first quarter of 2023, which was 56%. In terms of the business segments, packaged meats contributed to 50.7% of total revenue and 167% of operating profit. The higher than 100% contribution is because of the loss in the pork business because pork business contributed 42% of revenue more than $400 million of operating loss.
In terms of geography, China contributed to 34% of revenue and 81% of operating profit. U.S. and Mexico is 53% of revenue and 5% of operating profit. Europe is 12% of revenue and 13% of operating profit. So if you look at different markets, the China operation is relatively stable and continue to achieve growth. Europe has achieved a very strong growth compared to last year. The U.S. and Mexico business has recorded a significant decline in profitability compared to last year, primarily because of loss in the pork business.
If we look at the first half of 2023, we faced the challenges due to the slow recovery of the global economy, ongoing Russia and Ukraine conflict, persistently high grain prices and increased the volatility of hog prices and meat prices. In China, the hog prices are at a low level because of sufficient hog supplies. In the U.S., [ fixed ] cost remained high, while an oversupply of meat protein caused the low hog prices and poor prices, resulting in operating difficulties for the pork industry.
In Europe, hog supply declined due to high cost and African swine fever driving a sharp increase in hog prices. WH Group leveraged this global platform and a vertically integrated business model promoted, efficiency improvement and cost control to mitigate the impact of unfavorable market dynamics and strengthen our long-term competitiveness.
In the first half of 2023, the China market, the total number of slaughtered hog is 375 million, and the price increased by 4% year-over-year. In the U.S. the total hog slaughtered is 63 million, and the price is down 20.4%. In Europe, the average hog price is up by 34.3% year-over-year.
In China, the hog prices in China has increased slightly. In Europe, it's a significant increase. And in the U.S., it's a significant drop. So this data from Ministry of Agriculture in China, USDA and Chicago Mercantile Exchange.
So in the first half of 2023, the meat value and the market spread is relatively low, has negatively impacted our port business. In China, the operating profit, we achieved USD 520 million year-over-year decline of 3%. Packaged meats, we achieved $453 million operating profit and the pork contributed $42 million of operating profit.
The numbers presented in U.S. dollars is negatively impacted by the depreciation of renminbi in the first half, if we look at the numbers in renminbi terms, operating profit in China actually increased by 3.5%. In China, we effectively manage the market dynamics, improved efficiency and lowered costs. Sales volume and revenue grew steadily and profits remain stable.
Packaged meat business continued to adjust price improved mix and control costs and develop new channels and new product categories achieved volume growth and maintain high profitability.
In fresh meat business, we proactively expanded sales network adjusted product mix and channels and continue to implement frozen meats reserve strategy with sales volume and profit rising significantly year-over-year. We also promoted meat diversification. The scale of poultry business increased rapidly.
In U.S. and Mexico, the operating profit is only $36 million, dropped by 94%. The packaged meat business achieved $578 million of operating profit increased by 7% and but the pork business has dropped substantially. The loss was $495 million. So we have achieved a very substantial decline in profitability U.S. Mexico operation. That's primarily driven by the pork business. But the profitability in packaged meats is very strong. We have achieved a record per metric ton profitability in this segment.
The pork business in this market suffered significant losses due to high hog production costs and low hog and meat, prices leading to a significant decline over operating results. Packaged meat business continued to adjust the improved mix and control costs, leveraged vertically [ integrated ] model. In the hog production, we're focused on reforming the hog production business by cutting low efficiency capacity and improving cost structure.
In Europe, we achieved operating profit of $83 million, packaged meats contributed $37 million, and the pork contributed $44 million. In Europe, the performance of pork business improved and the overall increased significantly as we benefit from the substantial increase in hog and meat prices.
Packaged meat business achieved a steady growth in sales volume and proactively adjusted prices. However, the price adjustment did not fully offset the inflation of costs. We also strengthened business footprints through M&As. We completed the acquisition of 100% equity interest of Romanian packaged meat company Goodies.
If we look at the strategies, WH Group will continue to consolidate our global resources adhere to the adjusted price improved mix and control cost business philosophy, leverage our strength in industrialization, scale and diversification, upgrading intelligent manufacturing, automation and digitalization and maximize internal synergies to maintain our leading market positions and achieve sustainable development.
In China, we'll continue to optimize our product mix, actively implement the doubling net sales network initiative improved the vertically integrated business model. Promote meat diversification and Chief Industrial upgrading. In the U.S., we will optimize the business structure, cut low-efficiency hog production capacity and fully utilize the advantages of industrialization and scale. To enhance competitiveness, maximize synergies and steadily grow the sales volume and profitability.
In Europe, we will actively adjust the product mix and selling prices, control costs and improve efficiency to absorb cost inflation, promote meat diversification, expand business scale increase profitability and enhance competitiveness through selective M&As. Now we will go through the Q&A, please follow the -- follow the instructions in the Zoom.
[Foreign Language]
[Interpreted] So the first question, the question from UBS. The first question is about the China markets, the pork prices, the hog prices. So what's the management's outlook for the hog prices in the second half of the year. Based on previous discussions, it seems like the hog prices will be in the upward trend for the second half.
So how will that impact the packaged meat business profit? Will that put some pressures on the packaged meat business profitability?
[Foreign Language]
[Interpreted] So the -- this is answer from Mr. Ma. So in the first 7 months of this year, the hog prices in China is very low. It's lower than the raising cost, which means the hog farmers have been losing money for 7 consecutive months. This is unprecedented in China market, but this is also consistent or in line with our expectations at the beginning of the year. Given the substantial losses for the hog farmers, we believe some of the smaller scale hog producers will cut back capacities, which will result in lower production volumes in the second half of the year.
On the other hand, the second half of the year is typically strong season for pork consumption in China. So with these supply and demand dynamics, we believe there is an opportunity for hog prices to rebound by 10% to 20% versus the first half of the year.
So our expectation is that the average hog prices will be around CNY 16 per kilogram for the entire year or CNY 17 for the second half of this year. And to answer your second question on the profitability impact to packaged meat business, despite the increase of packaged meats -- of hog prices in the second half of the year, the rebound is relatively moderate, only 10% to 20% compared to last year.
The rebound is moderate compared to last year, only 10% to 20% versus the first half. We have actually already reserved some raw materials for the packaged meat business at a relatively low cost in the first half because the price movement is generally in line with our expectation at the beginning of the year. So we have taken measures to manage the cost proactively. And we believe these measures will come into effect will bring fruits in the second half. And we expect the per ton profit for the packaged meat will be around CNY 4,000 or even higher.
[Foreign Language]
[Interpreted] The second question relates to the hog production in the U.S. In the second quarter, the hog production continued to lose money and has extended the trend in the -- versus the first quarter.
So the question for the management is has been there any improvement in July and August? Particularly in the raising cost side. Are the results getting any better? And also noticed that we have -- Smithfield has closed some hog farms in Missouri, how much percentage of capacity does these hog farms represent? Are there any more hog production related capacity adjustments in the fourth quarter?
Okay. Thank you. Mark, for the question. And maybe to begin with, I'll talk about the state of the U.S. industry. The U.S. hog production industry as well as other proteins, we've all experienced significant headwinds throughout the first half of this year. Modeling indicates that as an industry, we're losing upwards of $40 to $70 ahead in the first half. I would tell you that I do believe the low watermark is behind us. I do think the second half of the year is going to be much better than the first half of the year.
When we think specifically about Smithfield, this was the worst half that we've had in more than a decade, and it was really driven by lower hog prices and still, historically, how raising cost. I would tell you that from a reform standpoint, we really have two ways that we talk about when we talk about improving the operations.
The first is the cost improvement plan, and we've talked about that on previous calls from a genetic changeover and health improvement and procurement initiatives that we have taken place through the organization. The second, and I think this is what you refer to when you refer to Missouri is our reformation plan.
And so going back to 2022, we've actively been looking at ways to reduce our exposure to overall hog production. The first step of that was we closed Utah, we sold Utah -- closed our Utah company-owned operations. We sold our Arizona operations which made a big impact in the number of heads we were bringing to market. As we've going forward this year, we've continued that process by closing low-performing high cost or geographically displaced assets.
And so what we took out in Missouri was sow farms, and we have been trying to grow sows in Missouri, but the disease risk there really made it a high cost proposition for us. So we did take those sows out, we've changed the flow of the [ wing ] pigs as they move around our organization. So we're [ bad-filling ] those [ wing ] pigs out of other parts of the organization.
This year, I would tell you, we've closed throughout the system upwards of nearly a 100 farms and that consists of company-owned finishing farms, some contract finishing farms, nursery farms and sow farms. Our overall goal as a company is to continue to reform that part of our business. Taking high-cost, low-performing farms, no matter where they are out of the system and, in some cases, replacing some of that internal production with external production where it's available.
So it will be a continuous process as we go through the back half of 2023 and even into 2024. But you will continue to see a lessening of our reliance on internally grown hogs. So it has been a tough first half of the year. We do expect the second half of the year to be better. We are seeing in July and August, some real improvements in the profitability of high production as we see the seasonal increase in hog prices. And I think as we go into 2024, we'll continue to see that as the industry continues to consolidate I think that will help pricing as we go forward.
And I think as we finish the cost improvement plan and the reformation plan, we'll be a much stronger company and be rightsized in our hog production assets.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Interpreted] The first question is on the -- also a follow-up on the U.S. hog production. So Shane just mentioned that we have closed around 100 -- around 100 hog farms. How much percentage of capacity does this close the farm represent of the total hog production capacity?
I think in the first quarter of briefing Chairman has mentioned a target to cut down 10% of hog production capacity. Is that target still in progress? And are there any further plans for hog production -- capacity reduction for 2024.
Okay. So yes, to your point, the 100 farms we've closed and the things that we've done to reform our production is taken, I would say, 6.5% to 7% -- of where we started. Historically, Smithfield has killed 17 million, 17.5 million -- or not killed raise 17 million to 17.5 million hogs.
With the closures that we did in 2022 in Arizona and the company-owned side of Utah in relation to closing the Vernon plant, that takes us down to just under 16 million hogs. So we've gone from just call it, 17.5 million to about 16 million. The reforms we're going through now taking out the farms that are underperforming high-cost or geographically displaced.
My expectation is that, that will take us down by the time we get to the end of '23, we'll be at a run rate of under 15 million hogs. And so we'll continue to take hogs out where we can replace hogs with externally grown hogs or where there is external markets to supply those hogs. Historically, Smithfield has operated under the philosophy of we needed to grow about 50% of our own production.
And I would tell you that over this last 18 months in the conversations with Chairman and WH Group, we've changed that philosophy. And so we want to be down much below that 50% level. But we do have plants, and what makes this a little bit complicated is we do have plants where we rely 85% or more on our own internally raised hogs. And so it is a process of trading internal for external and making sure we can continue to supply those hogs to our plants.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Interpreted] So the question is about the China business. As Mr. Ma mentioned earlier, we expect the price of hog to rebound by 10% to 20% in the second half versus the first half. So how will that impact sales volume of our fresh pork and packaged meat business. And what's the split of chilled versus frozen pork in the -- our fresh pork business? And what's the outlook per metric ton profitability for the fresh pork business.
[Foreign Language]
[Interpreted] So the hog prices is expected to, as mentioned, is expected to increase by CNY 2 per kilogram in the second half versus the first half. But we believe this would not have a meaningful impact on the fresh pork sales because what drives the fresh pork sales is more about our sales network versus the -- versus the prices. And we are working hard to expand our network, which is expanding.
So this will not have any meaningful impact on the fresh pork. And in terms of the split between chilled and frozen pork in the first half because of the low prices, it's -- it's relatively easier to sell the chilled pork, and we have strategically taken some inventory of the Frozen pork.
So in the second half, we expect there would be some changes. In the mix we'll see more sales from the Frozen pork, which were -- which we reserved in the -- during the low cost period. But in terms of per unit profitability, we expect to maintain normal level. And in the packaged meat business because the second half is typically a stronger season, we do not see the CNY 2 per kilogram increase to have any meaningful impact to the packaged meat business.
And in terms of the per metric ton profitability because we have taken some inventories in the first half at low costs. So -- and we also taken other measures to mitigate the changes in the pork prices. So we believe we will be able to maintain the targeted CNY 4,000 per metric ton profitability, and we may even be able to improve the profitability compared to the first half.
[Foreign Language]
[Foreign Language]
[Interpreted] A question on the U.S. pork market. The management has mentioned earlier that there is an imbalance of supply and demand in the U.S. pork market. There is an oversupply of pork and hog. But on the other hand, the inflation may have impacted consumers' consumption. So what's the management's outlook on the trend of the supply-demand balance? And when do we expect to see some recovery or a normalization to a more balanced supply-demand relationship.
Thanks for the question. Yes. So the U.S. consumer has definitely been challenged over the recent past in terms of high inflation and uncertainty in the financial market. So we see this continuing through the second half of the year. Our packaged meats business, volume normalizing for the Saratoga divestiture was down about 3% year-over-year, but we continued to offer our customers a nice variety of products across a tiered portfolio.
So consumers can trade down and stay within this Smithfield franchise, and we don't lose that customer externally as some of our customers do because they don't provide private label offerings to the extent that Smithfield does. Our branded share is about 60% of our business at retail with about 40% being private label.
And we've been able to, over the recent past, really modify our pricing structure on our private label side of the business so that the profitability degradation as consumers trade down from branded to private label isn't as material as it has been in the past.
So again, the packaged meats business really our value-added side of the equation has driven record results through the first half of the year, and we expect strong performance out of the back half of the year for packaged meats as well.
[Foreign Language]
[Foreign Language]
[Interpreted] The first question relates to our China operation. [ Martin ] explained earlier that have taken some low-cost inventories in the first half, which can help us in the second half as we expect the price of hogs to recover, which makes sense. But we also remember that in the third quarter 2021, there is apparently a misjudgment on the price trend in the market. So the question is what -- because there's a lot of uncertainties in the China market.
So what if the management expectation on the price trend for the second half is not correct? Do we have any measures? Have we taken any lessons from the -- from what happened in the third quarter of 2021.
[Foreign Language]
[Interpreted] So in 2021, that was the first year after the outbreak of ASF in China. So the whole industry was too confident about the recovery of hog prices. And -- but there was because of the policy support and a lot of various other reasons. The markets, the supply has expanded faster than expected.
But this year is different, it's completely different than 2021. Because, first of all, there is no meaningful impact from ASF in China. And secondly, the current low hog prices is -- for such an extended period of time is unprecedented. A lot of the hog production companies are losing money. And we are seeing people exiting the business, people are cutting down their capacities.
So at this point, it is almost impossible for the hog prices to continue to be at such -- at a very low level to be below the raising cost. And for Shuanghui, we have taken inventory when the hog price is very low, when the price were lower than the raising cost. So at this point, in August, when we sell our frozen inventories, it's already profitable.
So even if there are uncertainties about hog prices in the second half of the year, we are pretty confident about being able to be profit in the frozen inventories. It's more of a question of the magnitude of the profitability.
[Foreign Language]
[Interpreted] The second question is for the U.S. management. We all know the hog production has lost a lot of money in the first half and it's really an industry-wide issue. And as a leader in the industry, we are taking out some of our own capacities. Can the management talk about more about the industrialized capacity reduction.
So there's a concern that if given the magnitude of the loss, if all the players or the major players are cutting down their capacities. Will there be a sharp increase in the hog prices after these capacities were taken out? Will there be -- essentially will there be a very sharp increase in the hog prices in the next hog cycle? Given Smithfield has very high exposure in the downstream fresh pork packaged meat business, will this create risks for the Smithfield operations.
Okay. Let me address your last question maybe first. The things we're doing in our business from the hog production side, we do not believe we'll have an adverse impact on our downstream businesses. Right now, in most of our categories, were surplus. So the items that we use in our packaged meats business, we end up selling more in the outside market than we use internally.
So the reduction of our -- whether that's [ kill ] capacity or the number of [ cans ] were taken through our plant should not have a material adverse effect on our downstream business.
To your second -- your first point, I guess, as it relates to U.S. herd size, there's a number of different opinions out there. And the USDA, if you look at their report, they really expect the size of the grow-out operations to be relatively unchanged. But I would tell you that others in the industry, including ourselves, we expect the U.S. herbs to really decrease. And we see that in reports that are published like sow slaughter reports and [ farming ] intention reports.
So we see not only through public data, but through our own reconnaissance we do believe there's a sizable shift taking place in the market and there will be reduced hogs being produced in the U.S. Now that would be supportive of higher market prices in the coming years. It's a question of how long it takes for that to flow through the system, but those changes would be conducive to seeing higher prices.
Now I would caveat that with saying that the U.S. is in an oversupply condition right now. So we do export about 30% -- 30% of our production externally, and that's really to countries like China, Mexico, Japan, Korea. So we're very reliant on that. And that introduces its own risk through currency volatility and trade regulations and those things.
But I would tell you that the industry is seeing a scenario today that it hasn't seen at least in my 20 years of Smithfield. And I think that is going to cause, and is already causing a contraction in the industry. And I do believe that over the back half of this year and really 2024 and beyond to the extent that contraction materializes the way we think it will, we do believe that there will be -- will be supportive of higher prices in the U.S. markets.
[Foreign Language]
[Foreign Language]
[Interpreted] Two questions for the U.S. business. First is on the packaged meat. The management has provided per metric-ton profitability guidance of $700 per ton for the full year earlier. But looking at the first half numbers, it's already $900. So does the company management still maintain a $700 guidance? Or are there any adjustments?
And secondly, about the hog production, we noticed that there are some one-off charges, impairment charges related to or restructuring costs related to the hog production in the first half, including those related to Missouri related to the Western facilities. So the management earlier mentioned that we expect the hog production profitability to improve in second half.
But will there be any other additional one-off related restructuring cost and how does the company manage these restructuring costs.
In terms of packaged meats, yes, we closed the first half with segment profit of about $918 a metric ton. So significantly in excess of the $700 per ton threshold that we had discussed previously. We do see that with increased competition in terms of pricing in the back half of the year, we do see that drifting seasonally lower as we go through Q3 and Q4, but we will finish the full year above the $700 a metric ton, we're looking to be on a blended basis, somewhere in that $800 a metric ton rate for the full year is our expectation.
In terms of the hog production write-offs, yes, we did have some write-offs in the first half associated with the closure of the Missouri farms. We do expect to have some charges as we go through the second half of the year that as we close farms in sequence, we'll hit the books in the Q3 and Q4, but they won't be significantly different than the charges in the first half.
[Foreign Language]
[Foreign Language]
[Interpreted] The -- two questions on the China business. First is that Mr. Ma has mentioned earlier, some of the mid small-scale hog production companies are exiting or cutting down capacities. So overall, what's the scale of this capacity reduction? And what's the impact to the overall industry? Are we seeing any capacity adjustments or reduction by the larger scale industrialized hog production, hog producing companies? And secondly, on the hog-raising cost, I think we heard Mr. Ma mentioned CNY 14.5 per kilogram. So what's the management's outlook for the second half of the year.
[Foreign Language]
[Interpreted] So the first question -- the first question about the industry-wide capacity reduction, it's very difficult to assess or to give an accurate estimate because such statistics are very, very difficult to measure. We based on our industry research, we believe some of the meat small-scale hog producing companies are cutting down capacities, but some of the larger industrialized hog producing companies are actually increasing capacities.
But we believe the increase will not be able to offset the cumulative effect of those decreases. Overall we believe there might be a single-digit decrease in the capacity for the entire industry, but it's very difficult to give you an accurate assessment that with high confidence.
About the hog raising cost, we believe the driver for the raising cost is primarily the grain cost. There is a slight increase in grain cost in the second half, but it's not significant. It will not have a significant impact to the hog raising cost. And we believe the hog prices will be higher than the hog raising costs in the second half. So the profitability for the hog production will be improving in the second half.
[Foreign Language]
[Interpreted] So a question on China's packaged meat business. We have an expectation that the packaged meat business, the sales volume will continue to increase. But given the weak consumption environment in China. Does the company have any measures to improve the relationship with the distributors, the incentive mechanism with the distributors or customers.
[Foreign Language]
[Interpreted] So we are continuously optimizing our distribution system. In the past, traditionally, we operate a multilayered distribution model. But over time, we are continuing to flatten the distribution base to enhance our penetration into the end market.
In the first half, we have increased 86 traditional distributors. So the total number is now around 5,000. But on the other hand, we also expand our distribution access in the new channels, and we have increased the distributors or customers in the new channels by 223 in the first half. So the total number has reached 2,183 distributors in these new and modern channels.
[Foreign Language]
[Interpreted] So the question is that is also -- is the company also improving the incentives to the sales team. The answer is that we believe our incentive mechanism for the sales team is very good. We have taken measures to improve on these -- on the mechanism.
First is -- first, we have improved and adjusted the compensation system for the key management people of the sales team. And for the -- secondly for the sales people, we have enhanced the performance-based compensation. So the variance of compensation between different individuals could vary quite substantially based on their performance, which is completely different than in the past, when people have more similar level of compensations.
So based on the effect of these changes, we have seen that the team is very active, very energetic, and the morale is also very good. So we are happy with the current incentive system.
[Foreign Language]
[Interpreted] So that's all for today's analyst briefing. Thank you all for your time today.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]