WH Group Ltd
HKEX:288
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WH Group Ltd
Earnings Call Analysis
Q3-2024 Analysis
WH Group Ltd
In the first nine months of 2024, WH Group reported total revenue of $18.8 billion, reflecting a 3.2% year-over-year decline. However, profit attributable to owners surged by 90% to $1.0 billion, with earnings per share (EPS) rising to $8.43. This contrast highlights the company's ability to enhance profitability even amid decreasing sales volumes, a significant factor for investors to note.
WH Group's packaged meats segment accounted for 52.5% of total revenue and a remarkable 93.8% of operating profit. This segment showcased resilience with a near 4.2% profit increase year-over-year, despite a slight volume decline of 4.4%. The pork business contributed 40.1% to revenue but only 12.3% to operating profit, indicating a need for strategic focus to improve margins here.
Geographically, North America emerged as the primary profit driver, contributing 52.5% of total revenue and 46.9% of operating profit. In contrast, China's contribution was 33% in revenue but a higher 40.6% in operating profit, reflecting mixed performance. For investors, North America's robust contribution suggests it remains a core area for growth.
Hog prices witnessed fluctuations across regions. In China, prices rose by 9.7% to an average of CNY 16.91 per kilogram, while U.S. prices slighted rose by 1.3% to USD 1.41 per kilogram. These changes are vital indicators for future profitability, as lower hog supplies contributed positively to processing margins.
Looking ahead, WH Group anticipates single-digit growth in packaged meats volume for 2025, while maintaining a high profit per metric ton, despite some anticipated decline compared to the third quarter of 2024. The company's focus on improving its product mix and cost control will be critical in sustaining margins amidst market challenges.
WH Group plans to leverage its strengths in industrialization and diversification to achieve sustainable development. Efforts to enhance management capabilities, optimize operations, and accelerate digital networks are outlined. These initiatives are particularly pertinent for investors seeking clarity on the company's future direction and potential for value creation.
The company maintained its dividend amidst challenging conditions in 2023 and has already increased the interim dividend in 2024 due to improved business performance. This commitment to shareholder returns is a positive indication for investors valuing consistent dividends as a key part of their investment strategy.
In summary, WH Group's current performance reflects a mixed bag of slight revenue decline alongside significant profit growth. The company's strategic focus on its strong packaged meats segment combined with initiatives aimed at operational efficiency positions it favorably for future growth. Investors must keep an eye on market trends in hog prices and consumer demand as they navigate investment decisions in this evolving landscape.
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Good evening, dear friends. This is Guo Lijun, CEO and Executive Director of WH Group. Welcome to attend today's earnings release for WH Group of the first 9 months of 2024. Attending today's meeting, we have representatives senior management from WH Group, Smithfield Foods as well as Morliny Foods.
Today, we have Vice Chairman of the company as well as Chairman of Shuanghui Development, Mr. Wan Hongwei; Executive Director of the Company and CEO of Shuanghui, Mr.
Xiangjie Ma; Executive Vice President and CFO of Shuanghui, Mr. Liu Songtao; Executive Director and CEO of Smithfield, Shane Smith; CFO of Smithfield, Mark Hall; CEO of Morliny Foods, Luis Cerdan; CFO of the company, Joanna Yan; Vice President of the company, Zhou Xiaoming.
This is CEO as well as Executive Director of WH Group. So I will firstly walk you through the performance of the company in the first 9 months, and then we will open the line for Q&A. So dear friends, let me walk you through the consolidated financials of the first 9 months of 2024.
In the first 9 months, the total packaged meats sold was 2.28 million metric tons, year-over-year decline of 4.4%. Pork sold volume was 2.7 million metric tons, year-over-year decrease of 7.6%. Total revenue was USD 18.8 billion year-over-year, decrease of 3.2%.
EBITDA of $2.25 billion year-over-year, increase of 38.9%. Operating profit, $1.79 billion, year-over-year increase 71%. Profit attributable to owners of the company, $1.0 billion, 90% increase compared to last year. Basic EPS $8.43, 90% increase compared to last year.
So in the first 9 months of the year, our revenue declined slightly compared to last year, but our profit has improved substantially. In terms of the different segments, packaged meats contributed to 52.5% of our revenue, and 93.8% of our operating profit is our core business and the main contributor of our revenue and profit.
Pork business represents 40.1% of revenue, 12.3% of operating profit. Others contributed 7.4% of revenue and a negative 6.1% of operating profit. If we look at the profits and revenue by region, China represents 33% of revenue and 40.6% of operating profit. U.S. and Mexico contributed to 52.5% of revenue and 46.9% of operating profit. Europe business is 14.5% of revenue and 12.5% of operating profit.
So the North America is our major revenue and profit contributor followed by China. In the first 3 quarters of 2024, hog prices in China increased due to lower hog supply. In the U.S., performance of hog production business improved significantly as hog prices rebounded slightly and the feed prices fell substantially.
In Europe, hog prices fell from high levels as hog supplies began to recover. The number of slaughtered hogs in China decreased by 3.2% to 520 million heads in the first 9 months of 2024. The average hog price in China was CNY 16.91 per kilogram, an increase of 9.7% year-over-year. The number of processed hogs in the U.S. increased by 1.2% to 95.2 million heads in the first 9 months of 2024. The average hog price was USD 1.41 per kilogram, up 1.3% year-over-year.
In Europe, the average hog price was EUR 1.62 per kilogram, down by 8.1% year-over-year. In the first 9 months of 2024, the average pork cutout value in the U.S. was USD 2.11 per kilogram. So the pork prices -- the meat prices increased faster than the hog prices. The market spread has widened, which is beneficial to our fresh pork business.
In China, the first 9 months operating profit was $729 million, year-over-year declined by 7.5%. The packaged meats profit was $724 million, increased by 4.2% compared to last year. The pork business operating profit was $41 million, year-over-year declined by 30.5%.
In China, our packaged meat business maintained a steady growth. In North America, the operating profit was $841 million, which is 589% increase compared to last year. Package meats profit was $854 million, increased by 11.6%. Pork profit was $80 million and it turned profit from a substantial loss last year, so the delta was $600 million.
So in U.S., our packaged meats maintained steady profit growth and the pork business has turned from a substantial loss to a profit. In Europe, the operating profit was $225 million, increased by 64.2%. Packaged meats' operating profit of $105 million, 50% increase compared to last year. Pork business, $100 million profit, 64% increase compared to last year. So all the businesses in Europe have exhibited strong growth.
So in the future, WH will continue to consolidate our global resources adhere to the adjust price, improve mix and control cost philosophy; leverage our strengths in industrialization, scale and diversification and continuing to maintain our leading market positions to achieve sustainable development. In China, we will continue to seize the channel transformation, manage markets in innovative manner, accelerate industrialization products of Chinese-style products.
Fresh meat products will leverage its advantage in brand, nationwide presence, vertically integrated business model and sales network, optimize operations by considering fresh meat and frozen reserve, domestic production and imports, transfer fresh meat across different regions based on market dynamics, actively participate in market competition.
We will also improve the management capability and the profitability of hog production and poultry business. We will also accelerate the doubling sales network initiative to promote channel innovation and transformation, upgrade the digital management of stores, to facilitate channel transformation and achieve a breakthrough in sales volume.
In the U.S., we'll continue to optimize the business structure, reduce hog production capacity and reduce production costs. Focus on developing packaged meat business, optimize the product mix, drive volume growth while maintaining strong profitability.
In fresh meat, pork will improve profitability through efficiency improvement, sales channel optimization and adding value to product portfolio. We will also accelerate scientific and technology innovation, optimize supply chain management, continuously enhance automation to cut costs and increase efficiency. In Europe, the packaged meat business will strengthen price management, optimize product mix and promote channel innovation to enhance profitability.
Fresh pork business will optimize capacity, increase the byproduct yield and value. We will leverage integrated business model, accelerate the development of poultry business. We will also integrate newly acquired business and identify investment opportunities to further strengthen its business footprint. So that's all for the first 9 months results. Thank you. We'll now move on to Q&A.
[Interpreted] So three questions from the analysts from Citigroup. The first question related to the U.S. hog production business. So as we have seen the substantial improvement in the results in the first 9 months for U.S. hog production, how much of this is driven by market by the cycles? And how much is driven by the benefits from the structural reformations of -- or the various reformation measures that the management has taken on hog production business?
The second question relates to the U.S. packaged meats business. We have also seen improvement in per metric ton profit. What are the reasons behind these improvements? And how much room potential do we have for further improvement? And thirdly, what is the progress of the Smithfield spin-off IPO? Have you obtained approval from the Hong Kong Stock Exchange? Is there a timetable or any latest progress?
[Interpreted] So maybe we will suggest to have Shane and Mark to take the first two questions.
Yes. I'll address hog production question. So yes, our hog production business has really improved over 2023. For the third quarter of this year, we were profitable actually at a level of about $11 a head.
To your point, we have seen commodity markets come down. Fee costs are down about 30%. But I would tell you, a bigger part of that as well as also the inside the farm improvements we've done. So we are in the middle of year 4 of the 5-year genetic changeover, which has had a dramatic effect on our cost structure. We've also improved our health. And so our health across the business is much better today than it has been historically.
And finally, as it relates to feed costs, we've done a number of things to mitigate our exposure in the feed cost side of our business. So 3 of those things, coupled with overall raising cost improvement, primarily from the normalization of corn and soybean mill have had a dramatic impact on the results this year.
I'll take the packaged meats.
Do you need to translate?
[Foreign Language]
On the packaged meats question, as you noted, the packaged meats business continues to perform exceptionally well, and it's really a function of our strategy and executing on Chairman Juan's management techniques of 2 adjustments and 1 control. So it's really about price mix and really continuing to improve our structure.
So on a year-to-date basis, our average selling price is up about 3% as we continue take price as necessary in terms of offsetting inflation. We've also been able to continue to improve our mix and so shifting our product mix to the higher value-added spectrum of our categories. So things like dry sausage and smoked sauces [indiscernible] hot dogs, which have a higher index. And it's also about improving our operating efficiencies within the 4 walls of our plants and also in our supply chain. So working to more than offset inflationary pressures, whether they be wage inflation or supplies inflation, with cost savings programs through automation and repositioning employees within the plants to focus on higher yielding higher-value products. So it's really been successful for us in these inflationary times.
[Foreign Language]
[Foreign Language]
So with respect to the third question related to the progress of Smithfield IPO. Due to the restrictions of U.S. securities regulation and certain restrictions in the Hong Kong regulations, we are not able to provide further updates beyond the announcement we have made in July about the Smithfield spin-off IPO. And we'll certainly update the investors in the due course.
[Interpreted] So two questions from UBS analyst. The first question is about the outlook of hog prices in both China and U.S. So what's the management outlook of hog prices in the fourth quarter of '24 as well as '25 in both China and the U.S.?
The second question relates to China's packaged meat business. So we have seen the performance of packaged meats business in China stabilize in the third quarter versus the second quarter. So what's the latest observations in the October volume? And what's the outlook for fourth quarter volume and profit per metric ton?
[Interpreted] So to answer your three questions related to China, the first on the outlook for the fourth quarter, hog prices in China. We think the fourth quarter hog price will be significantly lower than in the third quarter based on our observations in the current herd size and the market. And we also think that the hog prices will be trending down in each of the 3 months of the fourth quarter.
With respect to 2025 outlook, we have 3 views. The first is the full year hog price will be lower than that in 2024. Secondly, it will fluctuate, but overall, trending down, which means the hog prices will be relatively higher in the first half and lower in the second half.
And the third view is that we think the overall volatility would be lower than this year. In terms of the packaged meats volume, based on our observations in October as well as the fact that last year we have a low base, we think the fourth quarter packaged meats volume in China will have a significant increase year-over-year.
So Shane, maybe you take the question related to outlook of hog price in fourth quarter and 2025.
Yes. Unfortunately, we can't give specific guidance at this point on where we think the markets will be, but we can point to the futures market. And what I would tell you is we're seeing the normal seasonal trends where we see lower prices in Q1 and Q4 and higher prices in Q2 and Q3.
But you can look to the futures market. It's really a great indication of where we think prices will be, not only in the fourth quarter of 2024, but as we look across 2025 as well. So a return to more normalized markets with that same seasonal aspect that we anticipate seeing or expect to see as we move throughout the year.
[Interpreted] two questions from analysts from CITIC Securities. First relates to China's packaged meats business. We have seen steady profit improvement in the packaged meat business. But we also noticed that the volume of the business is decreasing, which means the improvement in profit is driven by per metric ton profitability. And we understand the volume decrease, to a certain extent, is driven by the weak consumer demand. And we want to know from a company perspective, other than waiting for the market's consumer demand to recover, any measures were taken to drive the sales volume growth? And given we already have a relatively high per metric ton profit, what are the potentials in further increase in the profit per metric ton?
Second question relates to the U.S. hog production. We have noticed a good profitability in U.S. hog production in the third quarter of 2024. What's the company's outlook for U.S. hog production profit in the fourth quarter and 2025?
On the first question, I also wanted to ask the U.S. management the same question because it's a similar trend where the volume has decreased even though the overall profit has improved.
[Interpreted] So on the packaged meat business in China for the fourth quarter, we think, as already explained earlier, we think that given our observations in the market, given the relatively low base in '23 as well as various measures we have taken, we are expecting good growth in the packaged meats volume in the fourth quarter.
In terms of the profit per ton, we think it will continue to maintain at a high level because the cost structure is still favorable. But it may be lower than third quarter because third quarter is a very good season for packaged meat business and we have very good product mix. We think in the fourth quarter, the profit per ton will be lower than third quarter, but will improve compared to last year.
For 2025, we expect a single-digit growth in volume. And given the cost is expected to continue to decrease, we think the profit per metric ton will continue to be at a very high level from a historical standpoint.
And Shane, maybe you take the next question -- our next two questions. One is similar to Shuanghui, which is the packaged meats, what measures were taken to mitigate the decrease in packaged meats volumes? And also, what's the outlook of hog production profit in the fourth quarter and 2025?
Yes. And I'll start with the hog production question. And again, unfortunately, we're not in a position where we can give guidance. But again, I'll point to the seasonal trends that we typically see in Q1 and Q4 versus Q2 and Q3.
You're right, our third quarter, we were $38 million of profit, which is about $11 a head. On a year-to-date basis, our per head was a loss of about $12 versus [ 52 ] in the prior year. And so using the future scripts, looking at what we expect for the fourth quarter off of the futures market, both from a raising cost perspective and from a pricing standpoint, I would tell you that the fourth quarter, our raising costs look better than the fourth quarter of last year and sales prices look better in the fourth quarter of this year versus the fourth quarter of last year. And both of those point to better profitability in Q4 this year than we saw last year.
[Foreign Language]
[indiscernible] relative to the packaged meats industry in the U.S., it's really been driven -- the volume slowdown has been driven by 2 primary forces. One is high food inflation and the other is the reduction in certain government support programs or assistance programs for pork consumers. So in the most recent reporting period, food-away-from-home inflation, so the food service channel for us, was up about 3.9% year-over-year, while the retail prices were up about 1.3%, 1.4%.
So a definite slowdown across the industry in terms of food service and dining away from home. And we expect that to continue into the fourth quarter. But again, we've been able to maintain margins through a very disciplined approach to price mix and cost management. We are coming up with a number of innovative new products to meet that consumer wherever they're at within their price portfolio, whether it's a value proposition of a more mid-tier or a value-added product. So Again, we expect to see a turnaround, but it's going to be, I would say, sluggish through the fourth quarter.
[Interpreted] So three questions from analysts from Macquarie. First relates to the company's dividend. Last year, despite the relatively weak results, the company still maintained good dividends. And this year, the profit has improved quite significantly compared to last year. So what is the company's dividend outlook. Because we understand historically, the dividend payout ratio based on net profit has fluctuated, sometimes 30%, sometimes higher. So we wanted to ask a bit more about the outlook of dividend.
The second and third question relates to the European business. In Europe, we noticed the packaged meats business profit per metric ton is much lower compared to the U.S. and China. What measures were taken to try to narrow that profit per metric ton gap versus the U.S. and China business?
And thirdly, we understand the management discussed earlier that in Europe, we'll be looking to identify acquisition opportunities. Are there any specific opportunities or the company has any directions?
[Interpreted] In terms of the dividend, as you know, WH Group very much focuses on shareholder returns. In 2023, even though our U.S. business has been heavily impacted by the difficult market, we still maintained our dividend to the shareholders.
This year, the market has recovered and our business performance has also improved. We already increased our interim dividend. So we believe as we continue to improve our business performance this year from the company's perspective, we're willing to and also have the capability to potentially increase the dividend to the shareholders because we are very much focused on the shareholder returns.
And maybe we'll have our CEO of European business, Luis, to take the next two questions related to the package mix as well as acquisitions.
Good morning, everybody. Related to the packaged meat profitability per ton, if you see the results already of this year, our profitability per ton improved by 43%. This is the work done in the same direction of the company working with the mix, especially our meat products, the categories and the channels that we are working, the focus in the price management, cost saving initiatives that we are developing. This already improved the profitability this year, and we have a plan for the next year to close the gap with U.S.A. and China. Can you translate [indiscernible]?
Yes. So in terms of the packaged meat business in Europe, as you can see, we already has made improvements in terms of profit -- packaged meats per ton in the first 9 months of this year compared to last year as a result of our improvement in the product mix in the channels M&A...
[Foreign Language]
Related to the M&As, our focus is in packaged meat companies and poultry -- to increase our poultry business. This is the main key areas that we are looking for opportunities to grow our business in Europe.
[Foreign Language]
[Foreign Language]
[Operator Instructions] So if no further questions, we'll conclude today's briefing. Thank you for your attendance, and thank you for your questions.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]