WH Group Ltd
HKEX:288
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WH Group Ltd
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[Interpreted] Good evening, and good morning to those from other time zones. First of all, we would like to welcome to our telephone conference for the third quarter results. So I will first take you through the management present tonight. We have our Chairman and CEO, Mr. Wan Long; and CFO, Mr. Guo Lijun. We have Mr. Ma Xiangjie, Mr. President from Shuanghui; and Mr. Ken Sullivan, CEO of Smithfield; and COO, Mr. Dennis Organ is also here from Smithfield. We also have other members of the management, including Mr. [ Li Sung Tao ] from Shuanghui; and Mr. [ Johnny Wei ] from Smithfield; CFO, Mr. Glenn Nunziata; Member of the Group, Madam [indiscernible].
I'm going to ask Mr. Guo Lijun to take us through the financial performance for the first 3 quarters of the year. Mr. Guo, please?
Good evening, dear investors. I'm going to introduce to you the performance highlights for the first 3 quarters. Hog produced 15.324 million, a drop of 4.1%. Hog processed 33.165 million, a drop of 19.1%. Packaged meat sold 2.383 million tons, a drop of 2.3%.
Revenue $18.767 billion, up 9.2%. EBITDA $1.953 billion, up 12.8%. Operating profit, $1.467 billion (sic) [ $1.476 billion ], up 14%. Profit attributable to owners of the company $890 million, up 8.5%. Earnings per share $0.0604. Because of the African swine flu and COVID-19, for the first 3 quarters of the year, our sales scaled with -- decreased because of the higher prices in China for fresh pork and products. Revenue, operating profits have significantly improved. Net profit increased by 8.5%.
Since the beginning of 2020, COVID-19 has heavily impacted the global economy. In China, the pandemic was brought under control in the second quarter. Our business operations quickly resumed. Company achieved remarkable results in product mix optimization, new product launches, price adjustments made in last year and synergies between China and U.S. operations with operating performance for the first 2 quarters improving substantially.
In the U.S., the virus spread rapidly in the second quarter, leading to production restrictions, increased costs and drops in sales, which put pressure on our operations. However, our performance improved in the third quarter. In Europe, all 3 segments continued to improve, leading to a significant increase in profitability.
Number of slaughtered hogs in China fell 11.7% to 362 million heads in the first 3 quarters, [ that year ] increased by 15.1% to 110 million heads in the third quarter. It shows that with the African swine flu under control, we are now resuming many operations and things are improving. So in the third quarter, things have already shown a momentum of growth.
Number of slaughtered hogs in the U.S. increased by 1. 7% to 95 million heads in the first 3 quarters of 2020. Hog prices in the first 3 quarters of 2020 -- hog prices in China remained high. Average hog price was in the RMB 34.7 per kilo, an increase of 105.3% year-on-year. In the U.S., the average CME hog price during the first 3 quarters was USD 0.94 per kilo, a decrease of 19% year-on-year. So increases in China. And due to the pandemic, hog prices have dropped in the United States.
For the first 3 quarters, operating profit, USD 877 million, up by 3.7%. Packaged meats, 650 million, up 30.8%. Fresh pork, 194 million, a flat trend. Hog production a loss of USD 3 million, USD 7 million less compared to previous period. So packaged meat business has improved a lot, reaching new heights, especially in China.
U.S. business stepped up efforts to prevent COVID-19 to ensure employee safety and stable operations. We proactively adjusted product structure and business strategies.
For the first 3 quarters, operating profit $464 million, a drop of 7.4%; packaged meats, $397 million, a drop of 33.9%; fresh pork, $208 million, and increased [ up $228 ]million. Hog production, a loss of $36 million.
The pandemic has caused some impact on our U.S. business. Less output and also the sales was under a little bit of pressure. Europe, profits of packaged meats and hog production business continued to grow. Fresh pork business improved significantly. Operating profit USD 135 million, up 58%. Packaged meat, $65 million, up 41%. Fresh pork operating profit $10 million, an increase of $28 million. Hog production, $72 million, up 33%. So fresh pork business in Europe has shown significant improvement.
Looking ahead, the situation surrounding COVID-19 remains grim. There are still many uncertainties ahead in terms of global economic trends, geopolitical conflicts, trade tensions and ASF, which will affect global economy and the industry. WH Group will take effective measures to protect the health and safety of our employees and maintain stable operations. The group is committed to giving full play to our global competitive advantages, seize the opportunities that we saw from global changes and industry integration, which will enable it to prevent risk, consolidate its leading position in the industry and maintain the group's sustainable development.
In China, we're committed to our strategy of launching new products, optimizing our product portfolio, increasing sales and improving sales management to consolidate our market position.
We continue to see opportunities brought on by increasing hog supply and decrease in hog prices. We will further expand meat and pork channels to enhance market competitiveness, will further enhance our integrated business model, move towards the upstream of the value chain by developing hog production business and expanding the poultry business.
In U.S. and Europe, we adopted changes in the business format and proactively adjust our strategies. We leverage our strategies of integrated business model and further tap the potential to achieve steady growth, where just product structure in the packaged meats business according to changes in sales channels to increase profitability. We promote technical transformation of fresh pork business, stabilized profitability of hog production business and improved ability to mitigate an impact of market fluctuations. We enhance scale and profitability of European business through integration and utilization of product capacity of newly acquired business. That's all for my introduction for Q3. Thank you.
[Operator Instructions]
[Foreign Language]
[Foreign Language]
[Interpreted]
So there is the first question in relation to the China business. At the moment, we see the drop in prices for fresh pork and also chickens. And at the last meeting, Mr. Ma mentioned that some of our profit will go into structural upgrade of your business, and the level will not exceed $4,000 per ton. So what is the plan or growth momentum for packaged meat in the next year? What measures are you planning to implement? And what will happen? Or how are you going to deal with the situation, if the volume does not increase next year?
And according to Mr. Ma's answer, we would not say that the fluctuations of the hog trade fresh pork prices or chicken prices are fluctuating. Actually, at the moment, chicken prices are rather stable, and we have seen a small margin of decrease for fresh pork prices. We expect there will be more room for further decrease for fresh pork prices next year. And the profit, therefore, created will go into improvement of our products and enhancing overall quality of our products so that we can increase the level of sales in the market, and also, at the same time, increase the volume of sales.
For the third quarter, we are going to increase our investment in the market. But since the fresh pork prices are not decreasing significantly, this is the reason why the year-on-year per ton performance seems to be lower and quarter-to-quarter performance seems to be dropping. And for next year, when pork prices are decreasing more significantly and our marketing spend is already well positioned, we expect that there will be a growth trend for the per ton profit next year. [Foreign Language]
[Foreign Language]
[Interpreted] In relation to the growth of volumes of sales for packaged meats, we are actually very confident, and we expect very good momentum of growth next year. So in terms of relevant measures we are going to implement, I can divide them up into 6 areas. First of all, we are going to focus on promoting existing single items and also products under the brand of [ Wang Zhong Wang ] and also barbecue sausages, et cetera.
Secondly, we are going to continue to promote some major or leading single items that have been launched this year. And these new products would include those under the brands of [indiscernible] and also cooking sausage.
The third area of measures will include promoting channels, new channels to sell our products. We are going to develop some standard shops to promote our meat ball items, and we will also construct some cooked food stores and also promote Chinese-style cooked items. At the same time, we are going to identify new catering and restaurant channels to promote our products.
The fourth area of our measures would include more investment into the markets, and at the same time, improving our overall product quality and also enhancing the overall experience in doing business with us so as to push ahead sales figures.
The fifth point is about enhancing market management and focus on informatization, standardization and also professionalism for our channels. And finally, we are going to launch measures in relation to optimization of our team management for the rearing business. And we are also going to provide incentives to our staff members, and we will do appraisal accordingly so that they will have higher level of awareness to further their developments in the business.
And in relation to other part of the question, we will continue to develop and improve market management. Therefore, we are fully confident in relation to our sales figures in the next year. Next year, we expect the hog prices to fall, and there will be more room for our cost to be lowered. So there is no need for us to sacrifice the growth in our profit in exchange for the growth in sales.
[Interpreted] The follow-up question for Mr. Ma. Just now you talked about how optimistic you feel about the volumes for the coming year. So can you actually provide some breakdowns or quantify such optimism? Can you really achieve growth of more than 5%? And I understand that there will be further room for improvement for packaged meat per ton profit. In the past 3 quarters, the average figure is $3,100 per ton. What level do you expect to reach next year?
[Foreign Language]
[Interpreted]
So while it is the fact that for our packaged meat products, we have not seen growth in the past 2 years, but that does not mean there will not be growth in the future. Actually, while we have enhanced our promotional efforts and also market management initiatives, we have already seen some trends of growth.
We expect that in the next year, as I already mentioned, we are going to focus on certain major single items. And it's rather difficult for me to quantify things at this meeting. But overall speaking, it is not an issue to achieve medium- to high-single-digit growth.
In relation to the profit situation next year, part of our cost is going to be spent on improving our product qualities, and the other part will go into enhancing market initiatives. So overall speaking, per ton profit can grow in a stable manner, but it is hard to say whether we can actually go beyond $4,000 per ton or not.
[Foreign Language] My next question is for Glenn, on the U.S. packaged meat. Surprisingly, in Q3, the U.S. packaged meat actually saw margin expansion on a [ year-on-year ] basis, despite a volume decline. What was the reason behind the margin expansion? And going forward, heading into fourth quarter, what's our outlook for the volume and margin trend, especially considering the high base of Q4 last year in terms of margins?
[Foreign Language]
Ken or Glenn, can you take the question?
Sure. Luis, this is Glenn. I can take it. I think you -- the question was a little fuzzy on the phone. I believe he was asking about the margin for Q3 packaged meats. Is that correct?
Yes, that's right. Yes, that's right.
Okay. So we still are dealing with the headwind of COVID as it relates to food service demand in the U.S. And so although the nation and most of the states are opening up and we saw that in Q3, there is still quite a bit of headwind as you compare that volume to normalized periods in the prior year.
The contributor to margin in Q3, we experienced some lower raw material cost values related to the fresh pork value chain, but we were able to hold on to pricing. So our average unit sale price was up slightly, let's call it, just above flat. So we took advantage of the lower raw material values, and as a result, we saw some margin expansion. But our volume was down quite a bit if you compare it to the previous Q3 period.
And how about the outlook for Q4 in terms of volume and margins?
[Foreign Language] We will wait for translation.
[Foreign Language]
This is Ken Sullivan. If I could address the broader picture in the U.S. I'm going to talk for a few minutes, and I'll pause for translation a couple of times.
[Foreign Language]
The pandemic in the U.S. has obviously presented historic challenges for the U.S. business in 2020.
[Foreign Language]
We had a record first quarter, very strong first quarter and then the pandemic hit.
[Foreign Language]
So the biggest impacts have been from: Number one, demand destruction in particular in the food service sector.
[Foreign Language]
The shutdown orders in the United States have had the most significant impact on our food service and restaurant industry.
[Foreign Language]
We've gone for many months with restaurants not being allowed to serve customers in the restaurants.
[Foreign Language]
That has opened up in recent months, but they are still nowhere near the capacity that they've been in prior years.
[Foreign Language]
We have a tremendous food service business in the U.S., in particular, in packaged meat, and that has been -- our challenge is the downturn in the industry.
[Foreign Language]
In addition, the pandemic has also presented significant cost headwinds.
[Foreign Language]
These cost headwinds have been wide ranging from responsibility pay, meaning increased pay to our production employees.
[Foreign Language]
We increased our pay by as much as 25%, which is a significant cost to the business.
[Foreign Language]
We did that for 2 reasons.
[Foreign Language]
The first is, we were having significant absenteeism as fear gripped the United States and employees were afraid of the virus.
[Foreign Language]
But the second reason we did it was, it was the responsible thing to do. We -- America was closed down, and we asked our food and agriculture workers to continue to report to work, and it was simply the right thing to do.
[Foreign Language]
I'm sorry that it has impacted our profits in such a significant way.
[Foreign Language]
But I do not regret paying the responsibility bonuses.
[Foreign Language]
I hope our shareholders appreciate that sometimes, in corporate world, you have to do the right thing without regard to cost, and we've had faced that extraordinary situation this year in the U.S.
[Foreign Language]
In addition, we've had significant unabsorbed overhead as our plants slowdown in processed less animals because of the pandemic. Our overhead absorption was decreased significantly, and that is -- leads to inefficiencies.
[Foreign Language]
We've also had to absorb significant cost increases on our farms because the processing plants, the harvest plants in the United States could not process all the pigs, and they backed up on the farms and that has caused great cost inefficiency and cost increase on the farms.
[Foreign Language]
Ultimately, our integrated business model has worked as expected in 2020.
[Foreign Language]
The big difference between 2020 and last year is on the farms, our live production and low hog prices.
[Foreign Language]
We have significantly mitigated the damage from low hog prices by our hedging program, which has contributed over $500 million year-to-date.
[Foreign Language]
The pandemic, as I said, has presented us with historic challenges, but I do think that we have turned a corner.
[Foreign Language]
I think we will continue to see headwinds for the next 6 months, but things are improving.
[Foreign Language]
We are obviously hopeful in the U.S. that vaccines and therapeutics will be changing the situation in 2021.
[Foreign Language]
So I will just tell you that if you have some patience with the U.S. business, our foundation is very strong.
[Foreign Language]
The next 6 months, as I said, we'll bring some further headwinds, but the foundation remains strong.
[Foreign Language]
If you look at our balance sheet, I think we have actually strengthened our balance sheet.
[Foreign Language]
We would expect rebounding demand in 2021.
[Foreign Language]
And we have a management team led by Dennis Organ that I think is very strong and very capable, and with a -- as we get into -- past the first quarter and into 2021, things will be improving, and I expect that we will get back to the type of performance that we saw in the record first quarter in 2020.
[Foreign Language]
Before I end my comments, I would like to acknowledge the WH Group and Chairman Wan for their steadfast support throughout this pandemic in the United States.
[Foreign Language]
Okay. Thanks a lot for the useful information, Ken, there. And we also appreciate all the great efforts made by management team. So therefore my question.
[Foreign Language]
[Operator Instructions]
[Foreign Language]
[Interpreted] Lincoln from Goldman Sachs. The first question is in relation to the China business. According to your sharing earlier, you said that for Q3, your packaged meats and also fresh pork business, the sales volume has been showing some momentum of growth. So I want to focus more on the packaged meat business.
And as Mr. Ma has mentioned earlier, in Q3, you have launched some new products, and you have also concentrated some efforts on exploring channels. So you talked about the profit per ton being lower in Q3, and you have some plans or measures for -- to tackle this issue. Will these measures continue in the future? And what will happen to your investment into improving product quality?
[Interpreted] Allow me to take the part of your question in relation to the figures. For Shuanghui packaged meat products for Q3, we have seen a year-on-year growth of sales by 2.3%. And for fresh pork sales volume, we have seen a drop of 6%. As for some poultry, in other words, chicken meat products, the growth is 17.3%.
[Foreign Language]
[Interpreted] I will answer your question in relation to our channels. On top of authorization of our traditional channels, we are going to mobilize our teams and also make some changes in relation to our clients and develop some dedicated products. For one of the channels, we have a growth of 300 clients, and we have established 8,000-odd standard shops, and the accumulated sales growth is 117%.
Secondly, we have established this Chinese-style cooked items channel. We have developed new clients, 350 of them, and we have established 1,670 points of sales or shops, and the overall sales have been growing by 28%.
The third channel is the food or catering channel. The number of clients is about 430, and a growth of 430 clients in total, and the sales volume has been growing by 35.6%. So moving forward, based on this foundation, we are planning to expand our professional teams and also agencies and develop more dedicated products to realize growth in sales.
As for your third part of the question, this is not exactly a new question. Since the prices surged, beginning from last year, next year, we believe that the profit created by lowering the hog prices will be going into 3 major streams: First of all, enhancing our product quality; secondly, investment into the market; and thirdly, it is about the profit level. At the moment, we have already started our work in relation to the first 2 items. And once we have reached the targets for our future sales volume, we will continue to place more focus or emphasis on enhancing our profit level.
This is my answer. Thank you.
[Foreign Language]
[Interpreted] The follow-up question was in relation to the 6% of external sales. Whether that refer to all the fresh pork, included the imported products? The answer was, our imported meat was also included and we are seeing quarter-to-quarter growth of the level of imported meat. But last year, in the second half, imported meat was also growing rather quickly. So the year-on-year comparison base figure was rather high.
[Foreign Language]
Actually, the second question, specifically for Ken. I guess this would be your last briefing call in this role. So Ken, if you look in the past few years, in this capacity, how would you rate the special performance, say, putting aside the pandemic, what do you think has really improved or changed in the past few years for Smithfield? And because I think the capital market really underappreciate the value of Smithfield, so where do you think could be the further improvement or in the future that help extract the value of Smithfield in your mind?
[Foreign Language]
Ken, can you answer the question?
Yes. Thank you for the question. And I would just say that I agree with your assertion that the market severely under values, not only the WH Group stock, but by extension, our Smithfield business. Certainly, the growth of our packaged meat business over the years and the growth of the margins in the packaged meat business over the years has been the big story for Smithfield. And it's a severely underappreciated one. I'm sure if you do the sum of the parts on the WH Group stock, you'll see just how severely undervalued it is. I'm going to pause there for a second for translation.
[Foreign Language]
I mentioned at the outset, our first quarter performance in Smithfield. If you look at our first quarter performance and indeed, the second half of 2019, you get some sense for the momentum and strength that we have built in Smithfield.
[Foreign Language]
That includes our European business, by the way.
[Foreign Language]
So the previous 4 years saw the highest record or the highest profits in Smithfield's history in the previous -- to 2020.
[Foreign Language]
What we achieved really was a big cultural change. I think you know that Smithfield was a collection of companies, and over the last 4 years, we transformed the culture to be one company, One Smithfield. You've all heard a lot about One Smithfield.
[Foreign Language]
The significance of One Smithfield is that now our operations or sales or marketing, all of which are aligned, and we're selling all our brands, and that's been a very powerful profit engine for us for the last few years.
[Foreign Language]
Dennis Organ has been a major part of that consolidation. He's an excellent operator. He knows the business very well, and he's going to do a great job continuing the progress.
[Foreign Language]
His focus will be on converting more and more raw materials.
[Foreign Language]
As well as improving the underlying fundamentals in our fresh meat and our hog -- our live production business.
[Foreign Language]
The bottom line is, the pandemic clearly has had material impact, significant impact on the business. You have to look past that. You have to look beyond the really historically large cost impacts that we've had to absorb, the destruction of our foodservice business. When that rebounds, we will be rebounding very strongly, and I'm very confident, very bullish about Dennis and the management team.
[Foreign Language]
Chairman Wan has big growth plans. We're working on them right now for the next several years. And I think it's going to be an exciting time for Smithfield as part of the WH Group.
[Foreign Language]
Okay. Thank you, Ken, for the answer. In the interest of time, I think we'll conclude the meeting now. Thank you all for attending the meeting today.
[Foreign Language]
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]