WH Group Ltd
HKEX:288
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WH Group Ltd
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Investors, analysts from North America, good afternoon. First of all, welcome to WH Group's 2018 Third Quarter Results Announcement Teleconference. I am from WH Group. I would like to introduce to you our members of the management in attendance. First, we have Mr. Lijun Guo, Executive Director, Executive Vice President and CFO; and then, we have Mr. Kenneth Sullivan, Executive Director, President and CEO of Smithfield. He is mainly responsible for our North America, the USA and European business; and then, we also have Mr. Glenn Nunziata. So for our China business we have Mr. Ma Xiangjie, Executive Director and President of Shuanghui Development. And then, we also have Mr. Liu Songtao, CFO of Shuanghui Development. Now I'll now pass the floor to Mr. Guo to go through WH Group's third quarter results. And then, we will have a Q&A session. Mr. Guo, please.
Analysts, investors, good evening. Now I would like to report to you our 2018 third quarter operating results. Because of global trade friction and also the changes in the American market, and also ASF impacts in China, in the first 3 quarters, our production and sales scale is on the rise. And our profitability on a year-on-year basis has come down. In the first 3 quarters, for hogs produced there are 15 million, up 0.8%, hogs processed 40.969 million, up 4.3% year-on-year. Packaged meat sold 2.43 million tons, up 2.4% year-on-year.
Operating profit or operating revenue, $16.585 million, a 1.8% increase. EBITDA $1.583 million, down 9.6% year-on-year. Operating profit USD 12.08 million, down 12.4%. Profit attributable to owners of companies, $7.56 million, down 3% year-on-year. Basic earnings per share, USD 0.0515, down 9.6% year-on-year. This is because of change in biological asset fair value.
Concerning the market condition in China, U.S. and Europe. In the first 3 quarters in China, hog prices on average was RMB 12.6 per kilogram, and in the last month comparing with that, it's down by 19.2%. And then, for the U.S. hog price, USD 1.11 per kilogram comparing with September last year of USD 1.23 per kilogram, it's down 10%. In the first 3 quarters, for EU hog price, USD 1.02 per kilogram. And last year, it's USD 1.18, so down 13.3% year-on-year.
If you look at the global hog market situation, hog price to a different extent came down. So as a result this year, for U.S. hog production, and also China and European hog production industry compared with the same period of last year, profitability came down significantly. This is the major reason. If you look at the breakdown or distribution. Now, for our packaged meat, it is our main business, contributing 53% of revenue and 96% of profit. For hog production or for fresh meat, 41% of the total and 11.4% of profit. For hog production, it accounts for 3.1% of the total and 3.6% of profitability. So that affected our overall completion of our profit.
Now if you look at a regional breakdown, China accounted for 33.5% of revenue and 59.1% of operating profit. U.S. accounted for 57.9% of revenue and 33.6% of total profit. Europe accounted for 8.6% of revenue and 7.3% of total profit.
From January to December, for our cash flow. Well, it is stable. In first half, operating cash flow USD 609 million, down 7.3% as compared to the same period of last year. The reason was because of an increase in inventory.
Secondly, CapEx. In the first 3 quarters, CapEx was USD 480 million, up $100 million or 28.3% year-on-year. And for China, CapEx was USD 65 million, U.S. $355 million and Europe, $60 million. Europe included some newly acquired expansion of production capacity and revamp as well.
And if you look at dividend payout, in the past few years, dividend payout was on a steady rise. For 2017, dividend in total was USD 505 million, 45% of our total profit this year. Interim dividend was USD 94 million, 18% of our interim profit. And then, our interest-bearing debt and also debt level are coming down steadily. As of the end of 2018, total was USD 3.37 billion that is interest-bearing debt, and gearing ratio of 41.1%. So that's all in our overall operating results. Thank you.
Thank you, Mr. Guo. Now it's time for Q&A. So can you follow the instruction of the operator to proceed?
[Operator Instructions] [Foreign Language]
[Foreign Language]
The first question is, in the third quarter I would like to know more about the RMB depreciation or appreciation. So was there actually depreciation and appreciation in RMB? And how much, how big a degree is that? The second question is concerning the overseas business, in particular, the U.S. business. So, I would like to know about the upstream hog production and also the midstream operations. So what will be the situation like in Q4 as compared to the third quarter? The third question is about Europe. So 1 year ago, there was the announcement of plan to acquire business in Romania as well as Poland of up to 66.6%. -- 66.5%. So I note that you need approval from the regulator and the authority in order to do that. So, so far, what is the progress and latest status of this?
[Foreign Language]
May I know the specific situation in the third quarter, please?
Concerning January to September on average, RMB against USD exchange rates on average was 6.529 and last year in the same period, it's 6.804, so there is an appreciation of 4.05%. And there was an impact on our profit. For our overall profitability, well, there is 2.25 -- USD 225 million of impact. And also, for operating profit, there is an impact of USD 29 million. Net profit, the impact was USD 23.8 million. And also, profit attributable to shareholders, the impact was USD 17 million. Now the next question was about the specific situation for the third quarter.
[Foreign Language]
Now I'm trying to look up from my computer for data in relation to the third quarter. So perhaps my colleague responsible for the U.S. business can take your question about U.S. business first. And later on, I will get back to you.
Ken, can you to take the 2 questions. One is about the upstream midstream business outlook in the fourth quarter. And another question is about our acquisition in Poland. I think it's specifically relating to the acquisition of the fresh pork business in Poland.
Okay. First, I would acknowledge that the third quarter was a tough quarter for us here in the U.S. as it relates to the live production business, meaning the farms as well as the fresh meat business. In addition to the trade tensions that have really disrupted the market, we have also been dealing with oversupply issues in the U.S. So there's a lot of factors, externalities that are impacting us in the third quarter. So the third quarter was tough in both fresh meat and the farms. The fourth quarter was slightly better in both segments. And the fourth quarter, historically, that's been a good quarter for us, for fresh meat. I don't expect it to be as good as last year. But I do expect it to be better than the third quarter. In terms of live production, same thing I think, and this is a little bit counter-seasonal. Ordinarily you would expect the fourth quarter to be your worst quarter from a live production standpoint, meaning hog prices are at their lowest point, and therefore, you typically see the lowest point of profits or the highest point of losses depending on what the situation is in the fourth quarter. I would expect that this year in 2018, the third quarter may actually end up being our worst quarter for live production and the fourth quarter being better. In terms of switching gears...
Ken, can we stop for a little bit for a translation first?
I apologize. Yes.
[Foreign Language]
Ken, you can continue.
I apologize.
No problem.
For the Romanian or -- yes for the -- sorry the acquisition, the Polish acquisition. Unfortunately, the regulatory process has taken longer than we would like. With that said, it is going in our favor, I believe. And we expect good news on that front in the next 30 days. But it is a governmental process. And so, there is uncertainty to it. But I'm fairly confident that, that acquisition will finally get closed prior to the end of the year.
[Foreign Language]
[Foreign Language] In Q3 of 2018, the exchange rate was 6.7856. In Q3 of 2017, the exchange rate was 6.6776. And because of this depreciation in RMB as a result, our revenue was reduced by $192 million and our net profit was reduced by $19 million. Profit attributable to shareholders was reduced by $14 million.
[Foreign Language]
[Foreign Language] Ken, there's a follow-up question about hog production processing fourth quarter because we can see from the market future price that the implied return continued to deteriorate in fourth quarter. But you mentioned that fourth quarter should be better than third quarter. Does it mean that, actually, we already implement hygiene practice to protect the profit? And are we going to expecting less live in fourth quarter for fresh pork -- for pork production? This is my first question. Maybe he can answer first, I can -- and then I ask the second question about China.
[Foreign Language]
Ken, you can take the question.
Yes, the first thing I would say is -- reiterate that the fourth quarter, seasonally is always the worst quarter for live production. But as I said, I do actually expect it to be better than the third quarter. So to be clear, the fourth quarter has losses. You can look at the futures prices and the live hog prices, so far, in the fourth quarter and understand that there are losses. We have been hedging and we do have hedged positions, I think, that would -- we've got favorable positions to the tune of about $4 or $5 a head in the fourth quarter. And so, our performance relative to the market prices that you see would be better by about $5 a head in the fourth quarter. 2019, you didn't ask that question, but 2019 at this point looks to be a fair bit better, meaning considerably better than 2018 has been, so far. But the only caveat I would throw to that is that it still doesn't show big profits, it shows a sort of marginal loss, a couple of dollars a head in 2019, at this point. But those numbers have moved around quite a bit. The threat of African swine fever is real and that could have a potential impact here on our live production business and hog prices next year.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
So the question is about the China business. First question is about the third quarter. So can you let us know the volume of fresh meat, frozen meat as well as packaged meat? And then, I would also like to know with packaged meat in China, I would like to know why there is a decline in the operating profit margin? And then, everybody is very concerned about the impact of ASF in China. So do you think that in the fourth quarter, in terms of volume that, there can be a recovery?
[Foreign Language]
So let me give you the details about sales volume. In the third quarter, if you look at Shuanghui, sales volume for packaged meat. Well, altogether the volume was 430,000 tons, up 0.81% year-on-year. For fresh and frozen meat, total sales volume was 380,000 tons, down 4%. The decline was caused by trade friction as well as decline in imported meat. And then, concerning packaged meat, in the third quarter, as such is now, gross profit margin came down. Firstly, there is a decline in the cost of pork, but for other cost, there is an increase. Besides in the third quarter, we have increased our marketing effort and also our support to the market by means of lowering wholesale price. So this, again, affected the gross profit margin. Besides, we made an effort to improve the quality of the meat. And then, in the third quarter on a year-on-year basis, there was also an increase in wages. So because of all these reasons, the GP margin of packaged meat in the third quarter came down on a year-on-year basis.
[Foreign Language]
[Foreign Language]
[Foreign Language] Concerning impact of ASF in China, we can see that the impact on volume is actually bigger than the impact on profitability because of some sort of restriction, volume restriction policy being implemented. And also, as far as the end of August, in the whole of China, we have already found 48 cases happened in 13 provinces according to the record of Agricultural Department of China.
[Foreign Language]
There was one case happened in our Zhengzhou plant, which reflect -- which impact -- our business stopped for 6 weeks and have already got impact of RMB 6.6 million lost.
[Foreign Language]
If you look at the trend of ASF right now in China, actually, the impact, and also, more and more cases are still being discovered and there are more and more cases found. So we believe that there's still a negative impact. And in terms of the degree of negative impact in the fourth quarter, it will be more or less the same in the third quarter.
[Foreign Language]
As regards the future outlook, of course, there will be impact on hog price, this is because of the possible reduction in the supply of hog. So we believe that the hog price will rise in the future periods.
[Foreign Language]
The overall impact of ASF in terms of hog price in 2019 will be -- the first run of hog price in 2019 will be over -- higher than 2018. And the difference among different regions will be larger, and the different regions have different prices and the overall impact of 2019 will be bigger than 2018.
[Foreign Language]
And on the forecast of ASF we have measured as below and we have reported to all of you.
[Foreign Language]
With regarding to our food safety in 2019, and we will purchase the -- raw materials in the region have no ASF impact. And these came away from the regions already have the cases happened.
[Foreign Language]
Also we will take the measure of the testing. We will extend our testing process into the farm and stop the disease from the transportation onto the farm.
[Foreign Language]
Also we will purchase our raw material locally to escape away from the transportation and the spread out of the ASF impact among different regions.
[Foreign Language]
And also, we will purchase our raw materials and industrialize the plants in a scaled level and escape away from the purchase from the individual farms.
[Foreign Language]
Also we will do the testing before the raw materials came into our plants.
[Foreign Language]
And also, we will do the cleaning and safety measures in our plants according to the requirement of Agricultural Department of China.
[Foreign Language]
There are also 5 measures that we'll take to guarantee our operations. One is to purchase the raw materials hogs from the -- not from the adult plants with low price and make sure that to guarantee the orders that existing and also the scales to meet our requirement and our testing standards.
[Foreign Language]
And as you take measures in different regions, in the regions have the impact of the ASF and also, the regions have no impact of ASF, when we take the different measures in different regions to guarantee the food safety and our operations -- daily operations. [Foreign Language]
All the answers that were to the question of ASF.
[Foreign Language] My question is concerning...
[Foreign Language]
We believe that, there would be a positive growth, but the growth -- the extent of growth will be better than the third quarter, but lower than the first half of the year.
[Foreign Language]
[Foreign Language]
So first question is on the U.S. packaged meat business. I think the packaged meat margin is improving year-on-year in the third quarter. But given the recent belly and ham cost trend, how do we think of the fourth quarter packaged meat margin? Do we see any downside risks on a year-on-year basis? Or are we sure we are pretty comfortable with that?
[Foreign Language]
Ken, you can take the question about the packaged meat outlook for -- in fourth quarter? Ken?
Yes. Sorry, what was the question?
The question is about the packaged meat business outlook in fourth quarter.
Okay. Well, as you can tell from the results, our packaged meat business has had a pretty good year. Our basic business, in particular, has been very strong and our sausage business has been good this year, too. If you're asking what the outlook is for the fourth quarter, I think that we're going to have -- finish the year strong in packaged meat. I'm a little reluctant to give any particular, specific guidance, only that to say that our packaged meat business continues its strategy, which is to continue to change the sales mix. And again, if you look at where our volume gains and losses are, we're selling less hams and less cheap hotdogs, and we're selling more bacon products and smoked sausage and dry sausage products. And that's been the driver behind the profitability increase.
[Foreign Language]
[Foreign Language]
So the question is about the packaged meat business. Packaged meat business in the third quarter suffered from a declining profit margin because of other costs. However, pork cost has been coming down. In the fourth quarter, how much low-priced or low-cost pork inventory do you still have? And is pork cost going to rise in the fourth quarter? And if you look towards next year, what will happen to the hog price? And also, what would be the outlook of profit margin for packaged meat next year?
[Foreign Language]
[Foreign Language]
I think the question of the op margin of packaged meat. Well, one of the reasons that Mr. Long just mentioned of the op margin of packaged meat was about the quality of the packaged meat, that we will increase our pork percentage in ingredients, and this will impact our costs in the pork of the packaged meats in the following months, and the inventory and the price of the packaged meat will impact our cost. And the cost of our packaged -- of the pork in the packaged meat will keep flat. But, overall speaking, the volume and revenue of the package of the meat will keep single-digit growth in the next few months.
[Foreign Language]
The overall op margin of 2019 will be as follows: Hog price next year will be higher than this year; and the cost of our hog, we see the cost of our hog will increase but we will have our measures to keep our cost. One is to continue our strategy of product mix and we'll be measured and improve our product mix. And also, we will increase our pricing. So according to these 2 measures that we'll take, product mix improvement and the pricing strategy will be hedged the impact of cost. And overall speaking, our op margins for next year will continue to increase.
[Foreign Language]
[Foreign Language]
This question is about packaged meat business in China. So next year, profit margins in China of this business segment will go up. So I would like to know whether this refers -- I mean, the increase in profit margin refers to the packaged meat business in specific? Or it is referring to the overall business, including slaughtering? Besides next year, we're going to see an increase in pork cost. So I know that you're going to improve your business by ordering your sales mix as well as increasing price in order to offset or counteract the risk. So -- but anyway, pork cost will go up next year, so how much will be this increase?
[Foreign Language]
[Foreign Language]
In 2019, the cost of hog -- cost of pork will increase but other materials will keep flat. So overall speaking, the cost of packaged meat will increase slightly. And -- but we will have our strategy of product mix and also our ASP strategy. We will keep our operation profit -- operating profit of packaged meat keep flat. And also, for the slaughtering business, the hog price will increase, op margin will drop. But we will keep -- but overall speaking, the offset of the hog price and our operating profit of the hog -- of the packaged meat, the operating profit of these 2 businesses will keep flat for the overall next year.
[Foreign Language]
So the second question is on the U.S. side. So can management share a comment on the potential implications from the new NAFTA deal, which has been recently signed. What's the implication to our -- the future of hog pricing -- the pork price -- hog price in the U.S. and the relative margins for the business? And also, fresh pork is under a lot of pressure this year. Going forward, what's the outlook for the fresh pork margin in 2019? In particular, we know that 2017 and '16, actually there was high base, but can we compare the 2019 with 2016 -- 2015? Are you comfortable that our profitability for the fresh pork business can actually go back to the level that we've seen in 2015?
For your first question, you asked for the potential implication of what? Can you repeat? Your first question...
The new NAFTA deal.
Yes, I understand it. I understand the question.
[Foreign Language]
Okay. This is Ken, I will answer the question about NAFTA and the fresh pork capital. Obviously, resolving the trade issues with Mexico was important and will be favorable to the outlook going forward. Mexico being one of our largest trade partners in a huge market for hams, in particular, which -- you've got 50 pounds of ham coming off of every hog. I will pause here for a minute just for translation.
[Foreign Language]
Overall, the trade tension issues in 2018 have had a significant psychological impact on the markets, and that has translated into our P&L. So I repeat that resolving the issues with Mexico are important. And hopefully, we can get issues resolved -- or the U.S. government and the Chinese government can resolve the trade issues that exist there. I think that will be very helpful to 2019.
[Foreign Language]
In terms of the outlook for fresh pork. You're right, 2016 and 2017 were very good years in fresh pork. The gap between live hog prices and meat values widened out, wider than it had been historically. And so those were good years. We have got to, though, lower our cost in our fresh meat plant. And that will allow us to get back to those levels. What we're doing is, we're investing in our fresh meat plants. We're going to invest $200 million this year in our fresh meat plants, and that is all capital designed to automate and simplify our fresh meat operations. That spending, by the way, will continue into 2019. We've got several major projects. We have 9 fresh meat plants here in the U.S., 10, I guess, including a tenth, fresh meat plants. And we're targeting some of our largest plants with that spending, all with the view of reducing our processing costs.
[Foreign Language]
So I think we may be at the bad end of the cycle right now, but I do expect that it is just that. It is a cycle. And between the turning of the cycle and the investments we're making in our fresh pork plants, that, yes we will get back to those profitability levels that we've seen the last couple of years, eventually. And I suspect our capital that we've deployed, to start to take effect about midyear 2019, and should be almost at a full rate by the end of '19.
[Foreign Language]
One other factor I should mention that has had an impact on both the fresh meat business and the packaged meats business in 2018 is increased transportation cost. We have had capacity issues in the United States, freight capacity issues that have really driven up our rates, and therefore, our overall cost, and it's very meaningful for the year. And I expect the industry is reacting and adding capacity. And hopefully, we'll see a reduction in our freight rates coming -- going forward.
[Foreign Language]
Thank you, Ken. Before we close the meeting today, I would like to recap on some of the question about the China business. I think some of the English-speaking investors might have some confusion about the outlook for the packaged meat business. So let me do a short recap here.
So about 2019, we do expect the hog price, overall, hog price will be slightly higher than 2018. But however, our packaged meat business, we -- our plan is to continue to improve the product mix, which means we are going to roll out more high end, which also means higher margin products. At the same time, we will also adjust our selling price accordingly, to capture the increase of the hog price. So overall speaking, we do expect our profit margin in the packaged meat business will continue to improve, given the expectation that the hog price next year will go slightly higher. And then, for the slaughtering business, we do expect the slaughtering profit perhaps might slightly come down a little bit in 2019. But however, we do believe the packaged meat business in 2019, with the improved profitability, will be able to offset the downside of the slaughtering business in 2019.
[Foreign Language]
[Foreign Language]