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 2021 third quarter results by WH Group. We have online broadcast. And allow me to introduce to you members of the management. We have our Chairman and CEO, Mr. Wan Long; CEO, Mr. Guo Lijun; and our CFO, [ Madam Kam Yin Yan ]. From Shuanghui, we have Mr. Ma Xiangjie and Mr. Liu Songtao. And from Smithfield, we have Shane Smith, who is our CEO; and CFO, Mr. Glenn Nunziata. For European business, Mr. Luis Chein. And our host is Mr. Wan Hongwei.
Mr. Guo, please take us through the financial summary and business review of the first 3 quarters, and then we will move on to Q&A.
[Interpreted] Dear investors and analysts, good evening. I'm going to take you through the financial summary and business review of the group for the first 3 quarters. Packaged meat sold 2.43 million tonnes, up by 2.1%. Pork sold 3.2 million tonnes, up by 10%.
Revenue realized $20.06 billion, up by 6.9%. EBITDA realized, $1.817 billion, a drop of 7%. Operating profit, $1.314 billion, a drop of 11%. Profit attributable to owners of the company $785 million, down by 11.8%. Basic earnings per share, $0.0539. And all these figures are before biological asset fair value adjustments.
For the first 3 quarters, if you look at the segment revenue operating profit, you can see increases across the board, while profit has dropped. If you look at the business segments, we have about half of the revenue coming from packaged meats. For pork business, the contribution is 45% in terms of revenue because for the first 3 quarters this year, there's been some changes in the market trends, and we've seen some losses for pork. So we are talking about 1.4% contribution from the pork segment. Others, 4.8% contribution.
If you look at revenue by region, China business contribution is about 40% of our revenue and 51% of our profit. U.S. contribution 50% to revenue, 40% to our profit. And Europe contribution is 9.7% to our revenue and 8% to our operating profit.
In the first 3 quarters of 2021, the average hog price in China dropped as hog supplies recovered from African swine flu. In the U.S., both the average hog price and pork cut-out value increased significantly due to strong demand and tight supplies. In Europe, the average carcass price of the member states of the EU also showed a decrease as pork trays were limited due to African swine fever.
The number of slaughtered hogs in China increased by 35.9% to 492 million heads in the first 3 quarters of the year. This is according to the National Bureau of Statistics of China. And according to USDA, number of slaughtered hogs in the U.S. decreased by 0.4% to 95.477 million heads in the first 3 quarters of the year.
Hog prices in China in the first 3 quarters, according to the Ministry of Agriculture, it was CNY 22.24 per kilo, a decrease of 36%. According to Chicago Mercantile Exchange, average hog price in the U.S. in the same period was up by 73.4% at USD 1.63 per kilo.
As for our results in China, operating profit $681 million, drop of 22%. For packaged meat, an increase of 2% to $663 million. Pork at loss of $55 million, a drop of $246 million. Our U.S. performance, operating profit up by 13.8% to $528 million. Packaged meats, $524 million, up by 32%. Pork business, $23 million, a drop of $149 million. Our performance in Europe, $105 million realized. Operating profit, down by 22%. Packaged meats $83 million, up by 28%. While Pork segment, $13 million, a drop of 40 -- 84%.
So for China, U.S. and Europe, our pork business, the profit level has been dropping, while packaged meat business continued to grow. We will further enhance our vertically-integrated business model and global platform, optimize our product mix, adopt an innovative marketing approach and improve the level of automation, information technology and business intelligence to expand our market scale, improve production efficiency coupled with various risks, maintaining our leading position in industry and sure the sustainable development of the group.
For our business in China, we are committed to our strategy of launching new products, optimizing product portfolios, expanding market network and promoting marketing innovation to achieve volume growth. We will actively develop foodservice channels and household consumption, cultivate new businesses and expand into new streams. Pork business, we will grasp market trends, leverage competitiveness and expand production volume. We will further enhance our integrated business model by developing the whole production business and expanding the poultry business to enhance overall competitiveness.
As for our business in the U.S. and Europe, we'll leverage the advantages of our integrated business model to achieve greater economies of scale. We will reduce cost and improve our production efficiency through science-based feeding and improved management. We'll optimize product mix and channels of the pork business to increase market share in the U.S. domestic market. Increased byproduct recovery rate to expand export volume and profitability further increase the volume and profits of packaged meats by giving full plate to market advantages, utilize potential production capacity and optimize our product mix.
We will continue our effort in pandemic prevention and control, reducing losses and ensuring the stable development of the group. European business will continue to effectively prevent animal diseases. We'll focus on local markets and increased sales volume of packaged meats.
So for the first 3 quarters, that is my report. Thank you.
[Interpreted] So I will focus my questions in relation to the operations in China. My first question is in relation to the packaged meat business. I understand that according to my calculation, the volume for Q3 showed a declining trend. Can you please show some -- tell us why that is the case? And what is your expectation in relation to the volume in Q4? Do you think we can realize the full year volume? And what about the profit per tonne situation? I understand that it was CNY 4,000 per tonne in Q3, and I believe that was a historical high. So what is your expectation for the same figure in Q4?
My second question is in relation to the slaughtering business. And I understand that during Q3, there were some huge losses due to the decline in the pork prices in the market. Can you tell us how much the loss was actually and what is the currency situation for our core business? And I saw some price rebound that took place in October. So what is your expectation for the slaughtering business in Q4 as a whole?
[Interpreted] So I will respond to the questions in relation to the volume trend in Q3 and also our expectation level for Q4. We have seen a decline in the volume in Q3. As for Q4, we expect to turn the decline around and turn it into a positive trend. So for the full year figure, we are expecting a positive figure.
As for the per tonne profit level, we have reached a historical high in Q3, and that is mainly because of our cost advantages. As for Q4 expectation, we believe we will be able to maintain the same level as Q3 with some mild increases. So for the full year, our profit per tonne level should exceed that from last year.
[Interpreted] I am Liu Songtao. I'm going to take the other question from you. You have mentioned that there were some losses in Q3, and that is mainly because of some related sales losses and also depreciation in relation to the products comparing the domestically produced meat and imported meat. So if we actually brush those factors aside, then in terms of the profit level, it is $160 million, and the per head figure should be CNY 50.
Towards the end of September, we have seen some rebound of the hog prices in the market, and we have already done necessary preparation work in relation to our inventory. And we have also analyzed the market situation and done the provisions accordingly. We expect there will be a rather strong rebound in the fourth quarter in relation to hog prices. And we believe there will be some return for our provisions. And we expect the volume and profit level for our fresh produce and also frozen products in the fourth quarter to improve. Thank you for the question.
[Interpreted] I have a follow-up question in relation to the packaged meat business. Can you explain why despite all your efforts and investments, in Q3, the volume of this segment actually declined? And what about the performance in Q4? Do you think there will be a positive growth trend? And what will be the reasons behind that?
[Interpreted] Allow me to answer your question. We have seen a drop in the sales volume for packaged meat in the third quarter. It was mainly due to the pandemic bringing us a lot of impact, and there were also shortages at the terminals. So we had to do replenishment in the third quarter. And now we believe the performance will improve.
As for the situation in the fourth quarter, as I mentioned earlier, we believe the sales volume will be turning around to a positive level. And that is based on the following considerations. First of all, we are going to rely on new products to drive our sales performance. Secondly, we will rely on various new channels to drive our sales, including the e-commerce platform and other food businesses.
Thirdly, we are going to use promotional activities and innovation to drive our sales performance. Number four, we will rely on professional sales methodologies by setting up dedicated departments and business segments and also dedicated clients. Number five, we are going to enhance the sales management for our various terminals. And we will invest more heavily into the market. And finally, we will use IT management to drive our market management methods.
[Interpreted] So I have 2 questions. The first one is in relation to your business in China. You just mentioned that in Q4, you are hoping to see improvements for both packaged meat business and also for the pork business. So do you need to adjust your full year guidance accordingly? And what do you think will happen in 2022 in terms of improvements or growth? And what is your expectation for the hog prices? I will ask the second question in relation to the U.S. business in a moment.
[Interpreted] I'm Liu Songtao. Allow me to answer your first question. Because of our expectations for the final quarter of the year, we believe that there will be substantial growth for the full year performance in relation to the volume of slaughtering and also the sales of domestic meat. As for imported meat, I believe there will be a year-on-year volume decrease.
As for the volume of our packaged meat business, as we already expected a growth in the fourth quarter, so it is hopeful that there will be a positive growth for the entire year. So overall speaking, in terms of the sales volume, the scale will continue to expand while the profit level will decline.
[Interpreted] I'm Mr. Wan and I would like to offer some supplementation towards just being said. Up until September this year, we have seen some substantial decline for Shuanghui's performance, and the major cause is because of the slaughtering business. And while the hog-raising business did not perform so well, it did not create as huge an impact.
So for the fourth quarter, for Shuanghui, it is very important to grasp the good opportunities presented in the peak season to drive our sales of frozen and chilled products. And also, we need to increase the profit level for chilled and frozen products, which are sold domestically and also add value to the products being imported so that we can turn things around for the slaughtering business. That is the objective we are fighting for.
Secondly, I think what we need to do in the fourth quarter is to maximize the profit from packaged meat business. Up to September this year, we have seen a rapid decline in hog prices and also the meat prices at very low levels with the cost level being driven down. Therefore, if Shuanghui is to leverage on the advantages of the industry chain, we must ensure there is low cost and high profit for our packaged meat products so that we can realize strong and positive operating results for this segment.
After a lot of hard efforts made by Shuanghui in the 4 quarters, we have actually seen very good results. And I think the year 2021 is for us to set a very strong and solid foundation to resolve various issues in relation to the pandemic, the African swine flu situation and also the trade war between China and the U.S., all these adverse incidents. We should be well prepared for the coming year so that in 2022, we are all equipped to start a new round of battle and create a new era for us.
In relation to hog prices, we have seen a drop of 36% in Q3. As for next year's hog prices, we believe it will start off from a low level and then gradually increase. As for how low it's going to be or how high it's going to reach, actually, we have some sort of consensus. We think that the lower range will be around CNY 14 and the higher level will be around CNY 18. Thank you.
[Interpreted] So the second question is on the U.S. business. First is to verify the trend for fresh pork and the hog production profit in third quarter, whether fresh pork has achieved profit in third quarter? And what about the hog production profit level in third quarter? And meanwhile, what's the outlook for fourth quarter?
Thanks for the question. This is Glenn Nunziata speaking. So we -- with respect to Q3, the profitability actually was driven by the hog side of that North American pork business. The seasonality for hog production this year went back to "normal". What I mean by that is we have historically seen in the U.S. where Q1 and Q4 are our most pressured quarters. We always target trying to perform at a breakeven level for those quarters.
This year, we saw pretty significant losses in Q1. But in Q2 and Q3, those rebounded and we saw some profitability there. From a fresh pork perspective, the problem was meat prices did not elevate as quickly as hog prices. So for Q3, the USDA market meat values increased 60% year-over-year, 57%, whereas the hog price increased 87%. So that put a ton of pressure on our North American fresh pork business. We did have certain affiliated businesses within that segment that performed well, including our bioscience business and some of our rendering and pet food businesses. But as a general proposition, Q3 was a difficult quarter for U.S. fresh pork.
With respect to Q4, we see those trends, like I said, coming back to more normal trend line. So we would expect to see some mild losses, small losses in our hog business in Q4, which again is getting back to historically normal cyclicality in that business. But we do expect to see profitability in our core U.S. fresh pork business. And that is also going to be compared against a pretty weak Q4 2020. And so you should expect to see and we are hopeful to generate a pretty sizable variance in profitability in Q4 of '21 as we compare it to 2020.
[Interpreted] I will first ask the question in relation to the Chinese business since Mr. Wan is with here at the venue today. And the question is in relation to fresh pork business. We have never seen such a huge loss for this segment, historically speaking. And is it because there was a lack of anticipation in relation to market risk leading to a larger risk exposure and created some sort of shorter-term fluctuations in your performance? So from now on, would you say that we should reduce that risk exposure to commodity type of products? And perhaps from now on, you should place the focus more towards the downstream and learn from our lesson.
[Interpreted] Thank you very much for your question. We have been affected in relation to our fresh pork business by various factors. And they would include the African swine flu situation, the trade conflicts between China and the United States and also the general pandemic. And in terms of operations and management, we have actually done some value adding to bring some more benefits. But this year, we did face a rather serious loss. And with the big fluctuations of hog prices in the market back in 2019, the slaughtering business contribution was more than $2 billion, but this year, it's been turned into a loss, and that is unfortunately a fact.
The losses for our slaughtering business this year has been caused by misjudgment in relation to the market trends and situations. At the beginning of the year and also towards the end of last year, we thought the hog prices in China would continue to rise. But in reality, what happened was just the opposite. It started off from a higher level and then it declined. So it declined from CNY 38 last year to CNY 11 in September this year, showing a very significant decrease. Especially the dropping trend was very obvious in Q3.
And that is the loss created due to misjudgment of the market situation this year. Another thing that I would like to mention is that considering the rising trend for hog prices this year and also our early inventory preparation for chilled and frozen products, we have greater expectations towards the second half of the year. And that also created certain depreciation of the frozen products.
So you actually put forth a very timely question because of the huge risk in the market in relation to fluctuations perhaps from now on, we will do less business or just give up the business in relation to frozen products and just focus on what we can produce and sell very quickly. So things come in quickly and leave us quickly to reduce the risk exposure.
So from now on, we must learn from our lesson from the slaughtering business. And from now on, we need to research more deeply into the market trends and situations so that we can well position our operations and management.
So we shall never gamble with the market situation in the future, and we should focus on quick production and quick sales for our fresh produce, and that will be the most important guiding principle for our future operations. And also in China, we do have pork future products. And from now on, we will use such future products as a kind of insurance.
Okay. So I will have a very quick one for the U.S. business. Can you hear me?
We can.
Okay. Good. So if we look at third quarter, we are seeing the packaged meat quite good growth of 8%. And we are seeing the pork business despite some decline, but it's a positive figure for EBIT. So looking into 4Q, we appreciate color just shared earlier, shall we say in the U.S. continued reopening, we are seeing the packaged meat able to continue to be on a positive year-on-year trend in fourth quarter?
And also, if we look at the hog -- pork business EBIT, it was a very significant loss last year, printing $200 million-plus loss in U.S. dollar. Shall we say that we will make it much less or even like a profit -- in a manner of profit in the 4Q this year? These are 2 directional questions.
So with respect to packaged meats and the trend, you're correct. We had a pretty strong Q3 sales for the first 3 quarters of 2021 increased by 19.5% and 6% of that was volume-driven and almost 13% of that was increases in sales price. And so we took many good price corrections to manage the inflationary pressures on that side of the business.
You got to remember, I mentioned earlier the USDA carcass cut-out increased 45% year-to-date through September. And so we needed to, and that's our #1 input into our packaged meats business. And so we needed to make sure that we offset some of that inflationary pressure.
The other good news was in Q3, we were able to get to just shy of 90% of 2019 foodservice levels. So our weekly order level for our packaged meat foodservice channel is starting to approach and encroach on 90% of pre-pandemic levels. To be fair, I'm not sure what post pandemic will look like. I mean there are some questions here in the U.S. as to whether we get bright to 100% or if we've lost permanently some of the smaller restaurants and food establishments here in the U.S., but only time will tell. But we do expect that trend to continue into Q4.
Q4 is typically our most profitable quarter for packaged meats. We're experiencing some relief from input prices as fresh pork prices come down a little bit in Q4. So between good price action taken throughout the summer and fall months and lower fresh pork input prices, we expect a pretty strong Q4.
I commented on Fresh pork earlier for the outlook. And you're right, we had pretty sizable losses in Q4 of 2020. That's very unusual. So Q4 historically has been our strongest quarter in U.S. fresh pork. Last year, there were a list of external factors and headwinds that put a lot of pressure on that business, not -- the most important of which was just the shutdown of plants throughout the year, both Smithfield and others, the backup of pigs on a farm, the inability to convert meat -- commodity meat into more value-added cuts. And so all sorts of pressure faced our U.S. fresh pork business last year, and therefore, we incurred a loss.
What I said earlier and I'll repeat is Q4 this year, we expect COGS to generate a small loss and go back to sort of normal historical patterns with respect to profitability, where Q1 and Q4, difficult quarters, Q2 and Q3 typically are a profitable quarter. So Q4, we're expecting a small loss in hog production, but that should be offset by some decent profitability or returning profitability for our core fresh pork business. So when you combine those into the North American pork segment, we do expect to see a pretty sizable positive variance against 2020's Q4 because of those dynamics.
[Interpreted] I have 2 questions in relation to your China business. First of all, in relation to your slaughtering segment in the third quarter, you mentioned just now, the profit per head is about CNY 50. So can you share the profit level per head in the past? And what about the future trends? The second question is in relation to the packaged meat segment. We do see some very low hog price levels. So what is your expectation for the profit level in this segment next year? And I'm asking the per tonne profit level?
[Interpreted] Thank you for the questions. I am Liu Songtao from Shuanghui. Allow me to answer your questions in relation to our fresh pork products and also chilled and frozen products. Considering the level for Q3, the profit was CNY 50, which reflected a fundamental and normal level of profit. We do not simply pursue blindly to have higher level of profit because we also need our scale to expand continuously, and we will continuously suppress our expenses.
So we want to achieve dual growth in our scale and our profit. As for next year's expectation, for the fresh pork business, the scale will continue to expand. And therefore, we believe that the per tonne profit level will be stable with some mild increases. As for the profit level for the packaged meat products, we have seen very good performance per tonne in Q3. And next year, we believe the overall cost level will be stable with some minor declines. And we also see some minor pressure from packaging materials. So overall speaking, the cost will decline while we will continue to expand our scale and keep a stable trend for our expenses. So at the end, we believe there will be a positive trend for our profit.
[Interpreted] Okay. I do have one follow-up question in relation to your slaughtering per head profit level. If the hog prices increase sooner than expected, then -- or later than expected, is that going to affect your overall judgment in relation to per head profit level?
[Interpreted] Thank you for the question. In relation to hog prices next year, even if it does increase, it is going to be within the range of 14 to 18, which means it's not going to be very substantial. Since the company is insisting on the principle of speedy production and fast sales despite such increases, there will not be much impact on the per head performance.
[Interpreted] I am the Chairman, Mr. Wan. I would like to supplement a few words. In relation to the per head profit at CNY 50, this is actually our fundamental expectation. We would like to drive that to a higher level. But at the end of the day, whether that is possible or not depends on our scale and what is the market situation and also the fluctuations of prices. So sometimes, we expect the per head performance to be a bit higher. Sometimes, we'll focus our attention on expanding our overall scale instead. So either one may happen.
If the hog prices increase slightly for Q4, there are actually advantages to our business. For example, we can add value to our frozen products. We can add value to our imported meat so as to reduce the overall loss level. If the hog prices drop, then there are advantages to our fresh products at the time. Under normal circumstances, when hog prices are lower, it makes our life easier. And we can focus on carcasses, we can focus on cut-out products and both will bring us profit.
We are very different from other enterprises. We can focus on carcasses or cut-out products. Together with our processing conditions for packaged meat business, we have this advantage along the entire industry chain combining both the upstream and the downstream. So basically, it doesn't matter what the hog prices may be, low or high, we can utilize such advantages along the industry chain as long as there are no huge fluctuations with hog prices, which, of course, is very difficult for us to control. Otherwise, we are not too concerned about certain increases or decreases of hog prices. In relation to next year, we have to be prepared at the current time and deal with the current situations so that we are fully equipped to create a new era for the company.
[Interpreted] So my question is still about your Chinese business in relation to fresh meat. I would like to confirm with you in relation to the calculation of such a huge depreciation level for Q3, is it calculated based on the hog prices towards the end of June and then end of September?
So moving forward, in the fourth quarter or in the next year, are we going to come to our judgment based on the hog prices at different points of time to decide on depreciation or some adding back based on depreciation? And what about your inventory situation? I do not see a declining trend for inventory level comparing Q3 and Q2. So how much inventory do you have in relation to frozen products and what is your plan to deal with such inventory?
[Interpreted] I'm Liu Songtao from Shuanghui. Allow me to answer your questions. In relation to the Q3 depreciation, we use it as a testing method or some sort of experimental method. And it was calculated based on CNY 11, which was the going market price towards the end of September. So looking at Q4, both hog prices and meat prices will increase. And therefore, part of that depreciation will be turned around and therefore added to the profit level for Q4.
As for your other question about our inventory level, it is true that for our frozen products for Q3, the inventory level is more or less the same compared to Q2. And with the lower hog prices in Q3 and rising hog and meat prices in Q4, we will speed up the momentum of our products leaving the warehouse. So towards the year-end, we believe the inventory level will be at a normal or slightly low level.
[Interpreted] Now I would like to ask about imported meat. I understand that the price spread between China and the U.S. is not very positive for your business. And since Q3, the -- have you done any adjustment to your strategies in relation to your import business? Are you still doing importation? And do we expect there will continuously be some losses? And what about our connected transactions? Are there any changes to your trading strategies in relation to SFD?
[Interpreted] Allow me to answer your question. I am Guo Lijun. And since Q2, we have seen substantial decreases in relation to hog prices in China. And since then, we have already reduced rather significantly the volume of imported meat. But during the same period, we are still importing the byproducts from the United States.
As for our strategies in the future, at the moment, judging from the current hog prices, we have come to certain expectations for the market next year. We don't see much opportunity for importation of pork, but we will continue to do so if the opportunities present themselves. So for our next step forward, the focus will be on byproducts, and we are planning to increase the volume of international trade in this area.
For our business in the United States in relation to internal organs and byproducts for the hogs, we believe there is great potential for us to enhance our business in this area. So this is going to be our rather long-term operational strategy. And through this strategy, we believe we can effectively enhance the profit level for both China and the U.S.
[Interpreted] So a quick follow-up question in relation to next year. Are you saying that there will be no importation of pork? Is that going to affect in any way the exportation of Smithfield products?
[Interpreted] And the answer coming from Mr. Wan. There will always, under normal circumstances, certain price spreads between the pulp and meat prices of China and the United States. So in the normal time, we enjoy absolute advantages in relation to the importation of byproducts. But when it comes to pork, it really depends on the current situation. In relation to the importation of pork and our control over the price spread, it's normally between 5,000 and 10,000.
If there is any pandemic or disasters, then of course, we'll have to give special considerations. So during unusual times, there could be extra fluctuations to the prices of pork, to meat and also other food items, then we will need to reconsider. At the moment, for cut-out carcasses, perhaps the market situation is not very positive. But for other products, wherever the opportunities are, we will move in and grasp such opportunities. So as long as there are opportunities, we will not stop.
In relation to the importation of byproducts and pork from the United States and Europe into China, this is going to be our -- one of our important strategies for the longer operations because the raw materials for Europe and the U.S. will always be lower. And secondly, it is because the Chinese market is huge with higher prices and also foreseeable profit to be earned. So this is going to be one of our long-term operational strategies.
So if we do well, the trading in relation to importation and exportation of meat products among China, the United States and Europe, this is going to help us achieve greater synergy and achieve higher level of competitiveness, and it is conducive to our long-term development. Of course, we will insist on doing importation and exportation when the conditions are right. And we don't have to do it when there is no profit to gain.
So based on the current judgment and expectation and also based on the trading situation for import and export in recent years, in the longer time, looking ahead, we will consider this to be our long-term strategy and we will spare no effort.
Thank you for your participation. We'll see you next time.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]