WH Group Limited (288) Earnings Call Transcript & Summary

Dear investors and analysts, good evening. Our friends from the U.S. and Europe, welcome for our interim results announcement for 2020. We are going to broadcast this online and allow me to introduce to you members of the management present. We have Mr. Wan Long, Executive Director, Chairman and CEO of this group; and then we have Mr. Guo Lijun, Executive Director, Executive VP and CFO; Mr. Ma Xiangjie, Executive Director and President of Shuanghui Development; and then Executive Director and CEO of Smithfield, Kenneth Sullivan. We also have with us Mr. Liu Songtao from Shuanghui Development and Mr. [indiscernible] and Mr. Glenn Nunziata and Ms. [indiscernible]. My name is [indiscernible]. I'm going to hand the time over to Mr. Guo Lijun to take you through the interim performance of WH Group, which will be followed by Q&A. Mr. Guo?

Investors and analysts, good evening. I'm going to report to you the first half performance of wH Group and Business review. In the first half, consolidated hogs produced 10.4 million, a drop of 1.7%; hogs processed 22.4 million, a drop of 20.6%; packaged meats sold 1.575 million tons, a drop of 2.2%. We realized revenue $12.481 billion, an increase of 12%. EBITDA realized $1.236 billion, up 19.8%. Operating profit, $925 million, up 20.9%. Profit before tax, $848 million, up 23.8%. Profit for the period, $675 million, up 19.6%. Profit attributable to owners of the company, $550 million, up 18.8%. Basic earnings per share USD 3.73. The Board has decided to keep interim dividend per share at HKD 0.05. The total payout is about $94 million, which will be allocated in October. If you look at our segment revenue. Packaged meat is still the core of our business, contribution at 46.8% to our revenue and 75% of our profit. Fresh pork, contribution 44% of our revenue, 23.8% of our profit. Hog production; 5.1% contribution to revenue, 5% contribution to profit. Revenue by region. China contribution, 41.8% of our revenue and 59.5% of profit. U.S. contribution 49% in revenue, 29.8% in profit. Europe contribution, 9.2% to revenue and 10.7% to profit. In the first half, we realized operating cash flow, $1.219 billion, which is an increase of $820 million, 200%, because of higher level of profit. CapEx, $234 million, a drop of $38 million or 14%. Interest-bearing liabilities, $3.1 billion. Leverage percentage 0.318, which is continuously dropping. In the first half, COVID-19 pandemic heavily impacted the global economy. In China as the epidemic was kept under control in the second quarter, our business operations quickly resumed and continued to improve with results improving substantially year-on-year. In the U.S., the virus spread rapidly in the second quarter, leading to labor shortages, production restrictions, increased costs and drops in sales, which put pressure on operations and caused a significant decline in our performance. In the first half, number of slaughtered hogs in China fell 19.9% to 251 million heads. Average hog prices were CNY 33.95 per kilo, an increase of 137%. Number of slaughtered hogs in the U.S. increased by 0.5% to 63.18 million heads in the first half. Average hog price during the first half of USD 0.95 per kilo, a decrease of 17.4%. So if you look at the situation in the first half, the trends between the 2 countries are very different. Slaughtered hogs sell in China while hog prices decrease in the U.S. We resumed operations and production in a timely manner in China. Revenue and profit hit record highs. We proactively responded to COVID-19 by adopting effective measures to protect the safety of our employees and maintain stable operations. Our profitability of packaged meat increased significantly thanks to price adjustments, remarkable results from product mix optimization and new product launches. We reduced frozen pork inventories to improve profits, increased imports to fill the supply gap in the domestic market. We have considered opportunities in the breeding sector to enhance competitiveness of our core package meats business segment. In the first half, we realized operating profit $550 million, an increase of $125 million, 29.4%. Packaged meat USD 417 million, an increase of 44.8%. Fresh pork, $102 million, a drop of $23 million. Hog production was at $2 million, a drop of $5 million. For U.S. operations, we set up efforts to prevent COVID-19. European operations are showing strong momentum. As the health and safety of our employees remain our top priority, we stepped up efforts to prevent COVID-19, recording approximately USD 400 million in costs and charges. We adopted effective hedging strategies to ease the impact of low hog prices on profitability. U.S. hog prices have dropped substantially year-on-year, and hog production business has relied on effective hedging, leading to higher levels of profit. We proactively relaunched product mix and business strategy to improve the profitability of fresh pork business. Our European operations benefited from favorable market conditions and improved management. Profits of hog production business increased significantly, fresh pork business continued to improve, profits of packaged meat business continues to grow. In the first half of the year, for U.S. business, we realized $276 million for operating profit, a drop of 6.1%. Packaged meat $243 million, a drop of 45%. Fresh meat, $116 million, an increase of $130 million. Hog production, $20 million [indiscernible] a top of $42 million. European business operating profit, $99 million, an increase of 115%. Packaged meat $34 million, 26% increase. Fresh pork, $2 million, an increase of $9 million. Hog production, $68 million, an increase of 183%. In the European side, everything is growing, including the overall profitability level. Looking ahead, the situations surrounding COVID-19 remains grim. There are still many uncertainties ahead in terms of the global economic trends, geopolitical conflicts, trade tensions and ASF, which will heavily impact 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 global competitive advantages, seizing opportunities that result from global changes and industry integration, which will enable us to prevent risk, consolidate our leading position in the industry and maintain a good 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. Viewing the integration of the meat industry as an opportunity to increase market share for fresh pork business, we'll further expect meat imports to enhance market competitiveness. We'll further enhance our integrated business model, move towards the upstream of the value chain by developing the hog production business and expanding our poultry business. For U.S. and Europe, we adapt to changes in the business environment and proactively adjust strategies. We leverage the advantages of the integrated business model. We realign product mix in the packaged meats business according to changes in sales channels to improve profitability. We promote technical transformation of the fresh pork business to improve operational efficiency. We stabilize profitability of the hog production business and improve the ability to mitigate the impact of market volatilities through hedging. We enhance scale and profitability of the European business through integration, utilization of production capacity of the newly acquired business. That's the end of my report. Thank you.

[Foreign Language] [Operator Instructions] [Foreign Language]

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[Interpreted] Actually, there are 2 questions. The first question relates to situation in China. For the first half or the second quarter, the group's performance was very positive, as we can see increases in the level of profits and quantities in relation to packaged meat business per ton. So do you believe that you can continue on with such a rising trend in the second half of the year? And in relation to fresh meat business, what is your projection for the second half of in relation to profit per ton? And also in the second quarter, we have seen some clear trends in relation to packaged meat and also fresh meat business. So do you think that you can share what you think will happen in the second half, and also what you see is the increase -- level of increase year-on-year?

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[Interpreted] In relation to the first question, it is about the per ton profit level for packaged meat segment in the second half. We believe in the second half of the year, there will be a drop in trend for pork prices. And we also believe that while the prices of our chicken meat may be stable, but there could be some slight decline as well. So our expectation is that there will be a stable trend in relation to per ton performance of packaged meat, and there shall not be any serious declines.

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[Interpreted] And in relation to the sales volume of packaged meat product, there is a decline of 4.3%. And at the same time, for fresh products, the sales figure has decreased by 0.4%. So for the second half, in relation to our inventory for frozen products, it is at a rather low level, and there is also a drop in relation to imported levels. Therefore, the [ consolidated ] level should show a declining trend for fresh meat products. But because the packaged meat profit is still rising, that should act as a very good offset.

So my -- the following question is for U.S. Maybe I'll ask in English and I'll translate in Chinese as well. So we understood that in second quarter, the packaged meat was very much affected by COVID, the virus situation. So what was the development -- recent development in the U.S. market? Are we seeing some recovery, i.e., what's the trend for the packaging meat in the second half of the quarter as we are observing the market development. And also similarly for upstream hog production and the fresh pork business because what we see from the market price, hog production -- the implied production in terms of the profit in the market is still negative and it's still trending down for third quarter and the fourth quarter. So how is the impact to the U.S. operation, i.e., even considering the hedging? And similarly, for fresh pork, we are seeing the spread of pork price versus hog price starting to come down, i.e. implying a narrowing margin for fresh pork in third quarter. So what was the trend that we're seeing for fresh pork as well?

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Ken and Wan, you can take the question.

Yes. This is Ken Sullivan. I think the first question was about packaged meats. Let me just say this about the U.S. business. 2020 obviously has been a great challenge for the U.S. business. I'm going to pause there. I don't know what the translation is going to be. So should I continue or pause periodically for translation?

I think you can pause a little bit throughout, and we can translate.

Okay.

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We have established an extremely strong foundation in the U.S. business. And coming into the year, we were poised for a great year for growth. In fact, in the first quarter, we had a wonderful first quarter.

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The worldwide pandemic, obviously, that impact started with us in the second quarter, and it's been a real challenge. Our commitment here in the U.S. has been to our employees to keep them safe and to also continue to operate our facilities to maintain the food supply.

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To do that, we committed substantial cost, substantial funds to protect our employees. We committed over $350 million in the second quarter to protect our employees and incurred other costs associated with COVID.

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We're proud of doing that. We think it was the right thing to do from a corporate responsibility standpoint. We're grateful to Chairman Wan for his unwavering support of Smithfield and our employees.

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So for us, 2020 has been, again, a tale of 2 quarters, meaning the first quarter was a blowout, wonderful quarter, in which we substantially increased profits. The second quarter was not that way. We had to incur a lot of COVID costs and absorb all those costs in the second quarter.

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The second quarter, of course, is April, May and June. These are the months that have been the hardest hit for COVID in the United States, and our business was under extreme pressure during those months.

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We have begun to recover from that. I would think that the second quarter would be our low. We have begun to build back capacities. We have begun to -- we've moved past a lot of onetime expenses that we had to incur.

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But the United States economy is moving again -- beginning to move again. And I think the third quarter, we certainly will face some continued pressure. It won't be as much as the second quarter. And I would expect we'll build momentum into the fourth quarter, which is typically our best quarter of the year, at least it has been historically.

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The point I would like to make is that the foundation of the U.S. and European businesses are very strong. And if you look at what we did in 2019, we were planning to have an even bigger year in 2020. But this worldwide pandemic has caused a temporary stop in that momentum.

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But that does not change the strong foundation that we've established. And if you look at our business over the back half of this year and into next year and certainly going forward, we're very optimistic about the foundation that we have and our possibilities in the future.

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COVID will represent a temporary event in the long history and trajectory of this company. And as I said, we're proud of the actions that we've taken, even proud of the cost that we've incurred to keep our employees safe.

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That's said, you asked some specific questions. Let me first address the hog production question that you asked.

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If you look at what the cash markets would indicate or the futures markets indicate for pig prices in the United States. Clearly, they are very low and much lower than last year.

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And if you do the math, you would see some very substantial losses in the live production side if you did not have any hedge protection.

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Fortunately, have hedge production. We, in 2019, began to layer in a very substantial hedge position for 2020.

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As a result, that hedge position will absorb most of the losses that we would otherwise have had in the first 6 months and certainly in Q3.

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Q4, the fourth quarter, is always the lowest point for pig prices in the United States. We do have some hedge protection there. But we still have some open position that if there's a rebound in the pig price, we're hoping to capture that.

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In totality for 2020, if we didn't have any hedge position, our losses would have been more than $40 a head in the live production side. But because we have hedges, we'll have a small loss, but it will be measured in -- most likely be measured in a single-digit per head.

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I think the second question was about packaged meats.

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And I don't remember exactly what the question was. But just in general terms, obviously, packaged meats margins are below what they were last year. A lot of that has to do with our manufacturing cost. As you know, COVID has presented a real challenge for our plants in the United States, and we've absorbed a lot of incremental additional costs related to COVID.

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In addition, volumes have been impacted by a number of factors, including the raw material availability, slaughter capacity in the United States got down to close to 50%, and so there were fewer raw materials available.

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But also, there was tremendous disruption in our various sales channels. Specifically, our food service business, with all the restaurants in the United States effectively temporarily shut down or reduced to just takeout business, the food service business was off. We have a pretty good-sized food service business. And obviously, the demand shock there was felt in the second quarter.

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We're obviously building back in the third quarter, and we'll continue that momentum into the fourth quarter. But that's about all I'd say on that. We really don't know how COVID will end here in the United States yet. I would just repeat what I said at the beginning, which is, the foundation we have in our U.S. and European businesses is very strong, these -- second quarter and third, maybe even third quarter, I think, will be anomalies in the long run of Smithfield and are not at all indicative of some underlying issue or trend.

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Okay. Thank you, Ken. [Foreign Language]