WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] Investors and analysts, welcome to our 2020 WH Group Annual Results Announcement. We are over the telephone and also through online streaming. I would like to introduce to you members of the management from WH Group, Smithfield and Shuanghui. They include Mr. Wan Long, Chairman, Executive Director and CEO for WH Group; Mr. Guo Lijun, Executive Director and CFO; Vice Chair -- our President and CEO for Smithfield, Mr. Dennis Organ; and also CFO and VP, Mr. Glenn Nunziata; President of Shuanghui, Mr. Ma Xiangjie; VP of Shuanghui, Mr. Liu Songtao; Board Secretary for Shuanghui, Mr. Zhang Li Wen; Company CFO, [indiscernible]. I am Robert. I will invite Mr. Guo to report to you the operations and business review for 2020, and we'll proceed to the Q&A session. Mr. Guo, please.

[Interpreted] investors, good evening. I'm going to take you through the financial summary and business review for the group. 2020 consolidated financials overview. Packaged meats sold, 3.276 million tonnes; pork sold, 3.946 million tonnes, a drop of 6.6%; revenue, $25.589 billion, up 6.2%; EBITDA realized, $2.278 billion, a drop of 14.7%; operating profit, USD 1.729 billion, a drop of 14.9%; profit before tax, USD 1.5 billion, a drop of 22.9%; profit attributable to owners of the company before biological asset fair value adjustment, $973 million, a drop of 29.4%; basic earnings per share, a drop of 43.5% at $828 million. For 2020 net profit attributable to owners of the company, $828 million. So the Board proposed that final dividend per share should be HKD 0.125, whilst the already allocated interim dividend per share is HKD 0.05 in October. For the whole year, per share should be HKD 0.175, which takes up attributable net profit after fair value adjustment 40.2%. According to this proposal which will be submitted to the Board, once approved, final dividend payout will be 238 million. It will be issued around 7th of July this year. As a leading consumer product company, the packaged meat segment is our core business. For 2020, contribution from packaged meats, 47.5% in of revenue; pork business, 48.1% contribution to revenue and 19.7% contribution to profit. China segment, 42.3% revenue contribution and 66% contribution to profit; U.S. segment, 48% and 24%, respectively; Europe business, 9.4% contribution to revenue and 10% to profit. We have faced challenges from COVID and African swine fever. Our U.S. business report the loss of new expenditure, leading to a drop of profit level. But we maintain sound financial position with ample cash flow. In 2020, operating cash flow, USD 2.357 billion, up 61%; our CapEx, $572 million, a drop of 18.6%. If you look at the payout of $3.33 billion, it is about 40.2% of earnings during the year. Interest-bearing liabilities dropped to $2.682 billion. Leverage ratio dropped to 0.24x. In 2020, WH Group faced the challenges brought by COVID-19 pandemic and African swine fever. COVID-19 pandemic ravaged the world, severely impacting business operations. In China, as the epidemic was brought under control quickly, Shuanghui immediately resumed operations with both revenue and profit reaching record highs. U.S. operations were heavily affected by the ongoing COVID-19 pandemic, which resulted in market disruptions, lower production volume, higher expenses and significant drop in profits. Continuous ASF caused a supply shortage in China. Hog prices reached record high, and meat imports set new records. Although European operations faced the overlapping effects of COVID-19 and ASF, its operating performance was again the best in history due to effective prevention and control measures. The management team of WH Group took extensive measures to prevent the pandemic, ensure safety, control costs, promote operations, mitigated the risks and responded effectively to challenges. As a result, we maintained sound fundamentals and laid the foundation for recovery of our production and operation. According to the National Bureau of Statistics of China and USDA in China, number of slaughtered hogs in China fell 3.2% year-on-year to 527 million heads. At the end of the year, hog inventory in China reached 407 million, an increase of 31%. Hog price in China continued to hit historical high. Average hog price was CNY 33.91 per kilo, a significant increase of 60%. According to USDA and Chicago Mercantile Exchange in the U.S., 2020 number of hogs slaughtered increased by 2.5% to 132 million heads. Average hog price, USD 1 per kilo, decrease of 10.7%. Because of ASF impact, lower slaughtering rate, hog prices continue to climb to historical high. But for the U.S., because of high level of slaughtering, the COVID pandemic affected the consumption level, so hog prices dropped by 10% year-on-year. We responded to market changes in China, integrated global resources, adjusted our product mix and prices while controlling cost. Revenue and profit both hit record highs. We have remarkable results seen from new product launches and product mix optimization for packaged meat business with profitability seeing significant increase. We deepened synergies by increasing meat imports and value-added processing to lower costs. Formation of Food Services Division drove the takeoff of new businesses. We completed fundraising with an aim to improve vertically integrated pork value chain, expand poultry business and enhance comprehensive competitiveness. In 2020, our China business realized operating profit of $1.14 billion, up 19%; for packaged meats, $836 million realized, up 24%; for pork segment, $271 million realized, up 8.8%. Our U.S. operations recorded high cost and charges with a sharp decline in profit due to COVID-19. We ensured the health of our employees and stable operations, recording approximately USD 820 million in costs and charges related to COVID. We proactively expanded retail channels to compensate for the decreased demand for food services. We leveraged synergies to expand exports, effectively supporting pork business performance. We adopted effective hedging strategies to ease the impact of COVID-19. In 2020, U.S. operations recorded operating profit of $415 million, down by 55%; packaged meat business, $571 million, a drop of 32%; Pork, a loss of USD 33 million, a drop of 2.66 -- $266 million. European operations prevented epidemics effectively, and we leveraged the vertically integrated value chain, achieving record operating results. We increased our investment and accelerated integration to expand business scale. We expanded sales volume and increased prices for packaged meats by leveraging market and channel advantages. Segment profit increased significantly. We expanded the scale of pork business and increased profits considerably with the integration of newly acquired capacity. We -- our exports business for European business were restricted due to animal pandemics. In 2020, operations in Europe -- operating profit reached $174 million, up by 22%; packaged meat segment, $92 million, up by 70%; pork, $103 million, up 17%. Looking into 2021, COVID and African swine fever continued, and there are still many uncertainties ahead which may impact the development of the group, such as global economic trends, geopolitical relations and trade tensions. Considering the challenges in 2021 and opportunities, the first challenge is the ongoing pandemic in the United States. It will take a long time for the economy to fully recover. Animal pandemics in Europe have not eased, affecting exports and operations. Loose monetary policy is pushing up asset prices and commodity prices globally, raising inflation expectations, which will result in higher business operating costs. In terms of opportunities. First of all, if the vaccine rollout goes well, global economic activity will pick up sharply, and consumption demand will recover. Secondly, China economy is expected to continue strong growth momentum with continued improvement in consumption. Thirdly, the rapid growth in hog production capacity in China will lead to increased supply and lower hog prices, which is favorable for the pork business. The price difference between U.S. and China hogs remain large, creating favorable conditions for achieving higher synergies and expanding international trade business. WH Group will fully utilize its vertically integrated business model and global platform to cope with various risks, seize opportunities, enhance scale of operations, maintain leading position in the industry and ensure the sustainable development of the group. In China, we're committed to strategy of launching new products, optimizing product portfolios, expanding market network and promoting marketing innovation to achieve volume growth. We will maximize synergies by expanding meat imports and value-added processing. We actively develop food service channels and household consumption, cultivate new business and expand into new streams. We will further enhance integrated business model by developing hog production business and expanding poultry business to enhance overall competitiveness. As for U.S. and Europe, we will leverage the advantages of our integrated business model to achieve greater economies of scale. We will improve management practices and tap into internal potential. We will reduce costs and improve hog production efficiencies through science-based feeding and improved management. We will accelerate transformation of pork business, optimize product mix and channels, improve output ratio and increase variety and scale of exports. We will further increase the volume and profit of packaged meats by giving full play to market advantages, utilizing potential production capacity and optimizing product mix. We will continue our effort in epidemic prevention and control, reduce losses and ensure stable development of the group. European business will continue to effectively prevent animal diseases, will focus on local markets and increase sales volume of packaged meats. That's the end of my report. Thank you.

[Operator Instructions] [Foreign Language]

[Interpreted] I would like to ask a question about the China business. Recently, we have heard that ASF is really ravaging the world. And we have heard news about some illegal vaccines in the market being circulated. So what is your preventive measure on this front this year? Do you think that the hog production volume will be affected, leading to a drop? What about the whole year hog price prediction? And what about the trend for the level of prices of packaged meats per ton? Last year it was around 3,600 to 3,700 per ton. Can you share some guidance in terms of the indicator for this year?

[Interpreted] So allow me to address your first question on ASF first. We have seen some signs of rebound of the pandemic. And since the fourth quarter from last year, we can see that this rebound was caused by the use of certain unsophisticated or illegal vaccines at some of the pig farms. This is not a widespread issue. It is just that the level of stock may be affected in the shorter term. And the Q4 hog prices also went beyond the level of our expectations. We do not believe that there will be an outbreak this year because the rebound of the situation was simply caused by such illegal use of vaccines. It is not on a large-scale level. Currently, most pig farming business is led by major or large-scale enterprises. So once the vaccines are available, there will be certain measures taken to address the issue and also to stop any widespread outbreak. Talking about the projections of hog prices in Mainland China. This year, the overall hog prices will be affected in a limited way by the ASF situation, but the average price for the entire year should not be changed. It will still be lower compared to last year's level. So the overall declining trend for hog prices is that the second half hog price will be lower compared to the first half. And the whole year average price projection should be around CNY 28 per kilo. And for your last question in relation to some projections of per-ton profit concerning packaged meats in 2020, well, the previous 3 quarters, we saw a rather high level of per-ton profit, and there was a drop in the fourth quarter for the following reasons. Number one, we have seen some rebound of the ASF pandemic in certain regions and areas, and the hog prices was driven to a higher level compared to our expectation. Our cost also went up. Secondly, the misplacement of the Spring Festival. The Spring Festival was actually rather late for 2020, and there was a lack of preparation on our suppliers' side, leading to higher promotional expenses. The third reason is in relation to a provision for management bonus, which is a growth-related reward. So for this year, the overall cost is going to decline, and we will, at the same time, increase the level of market investment. And we will enhance the overall quality and offer more attractive salary packages. And different factors will offset one another so that the per-ton profit level should remain stable.

[Foreign Language] So the next question is on Smithfield. For this result, we did not offer breakdown between U.S. fresh pork and hog production business. So can management from Smithfield give an indication as to the new capability of hog production business in the U.S. last year or say how much loss do we incur on a per-head basis last year? And we also observed pretty good rally of hog prices and hog future price in the U.S. most recently. So based on the current price trend, what's our projection for the new capability for U.S. hog production in 2021? Can we actually start to see the level to return to the 2019 level? [Foreign Language]

Dennis and Glenn, can you take the question, please?

Yes, I'll -- this is Dennis. I'll take it. So the comments I would make about our fresh pork operation is that -- maybe I'll answer the first one -- or the second question first, is that we're paying close attention to the rise in the hog markets and feel like that gives us some good opportunities for the back half of this year. But as far as head profitability, there are still impacts to our raising costs caused by COVID. We're still dealing with some hog backups because of the reduced slaughter last year because of COVID shutdowns at plants. And we're also working through increased input costs because of obviously some of the imports from China and some things going on in South America. So we're looking for pressured input costs on the farms but favorability in the back half of this year. [Foreign Language]

[indiscernible], do you have anything to ask or finished?

I'm finished. [Foreign Language]

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[Foreign Language] So the question is about the U.S. business especially for the packaged meat business. Well, first of all is I think we comment that the COVID-19-related expenses in 2020 was around like $800 million. So how are we thinking the cost provision for 2021? Will we see a significant decrease? And what will be the magnitude of that? And in terms of the packaged meats, so far, are we seeing the downstream, the food service demand recovery? So to what point -- under your packaged meat business, to what point should we expect a more normalized demand backdrop for the packaged meat business? Is it more in the second half of the year or we should start to see more actually starting from first quarter of the year? [Foreign Language]

Okay. This is Dennis. I'll answer that. The first on COVID costs, the only way I could describe our response to COVID was -- would be aggressive. In the face of a pandemic, we really leaned into our response and put worker safety first. And as you mentioned, our costs exceeded $800 million. But for 2021, just as aggressively as our costs went up, we anticipate them to come down. And we're forecasting close to $700 million, $675 million reduction in COVID cost year-over-year. And as we sit here today, towards the end of the first quarter, we're actually exceeding our budget, so slightly better than we thought. You can watch the news and see multiple states opening up, in general, COVID restrictions lifting, which as a company, we sort of -- we move and follow that. So feeling really good about the cost and restrictions in the U.S. continuing to -- the country continuing to open up. And the second part, obviously, that had some segment impact to our packaged meats business, and we had unprecedented high levels of demand in retail, paired with unprecedented low levels of demand in food service, which is obvious by the restaurant shutdown in the U.S. The good news is that the record demand in retail is continuing. We actually have demand for some of our product categories that far exceeds our production capabilities on the retail side. But the food service business is actually coming back much faster than we thought. And you can imagine the difficulties that cause -- that can cause with the supply chain that is essentially empty. So our customers and their warehouses and our production lines, as we get them started back up, there's a lot of pressure on us to get that business turned back on and going. And I would -- I guess, I could only describe it as sooner and more of a quick turn back on than we anticipated, which is good. As far as normalized levels, I do think that will be late this year to get back to what I -- back to maybe a 2019 number. But we are seeing a relatively quick spike. And like I said, in general, I would say both COVID costs and food service recoveries are better than we had anticipated. [Foreign Language]

[Foreign Language] Just to clarify, are we talking about $650 million in expenses reduction in 2021? And if that's the case, will that more [ affect ] the packaging business or it will be like more -- some exposure in the fresh pork business as well?

Yes. The answer is yes, $675 million -- I'm sorry. [Foreign Language] The answer is yes. That $675 million is a reduction in COVID costs year-over-year. And we did experience those spread out across all business units, so it isn't focused on packaged or fresh. It was across all units. [Foreign Language]

[Interpreted] My second question is in relation to the use of cash at the WH Group level. I understand that the net profit level dropped for 2020. And in terms of absolute value, the dividend payout ratio or the amount also dropped. And at the same time, you maintain a very healthy debt situation. So how should we consider the payout ratio moving forward? Do you have any plan on M&A activities? Is there one direction you can provide in terms of using your cash?

[Interpreted] In terms of our dividend payout policy, we have maintained the same direction since IPO, which is to pay out no less than 30% of the current year's net profit. This year, despite the fact that our profit level has declined rather substantially, we are still keeping the payout ratio at 40% because we would like to stick to our usual practice and policy and also because we believe this is a matter of providing good return to our shareholders. In relation to the use of the cash of WH Group, it mainly comes from the dividend from our subsidiary entities. For example, if our U.S. entity has a lower level of profit, then the level of dividend payout will also be lower. And for the use of our cash, well, at the moment, we are accumulating a rather high level of cash at Shuanghui, and this is because of high level of operating cash balance and also because of some newly added financing facility that occurred last year. So in terms of the usage, we are thinking about internal investments, for example, towards upstream business, including pig farming and also some chicken business. And we will also upgrade our facilities in Mainland China and also in the United States so that we can enhance our overall capacity. In relation to M&A plans, we continue to pay close attention to any new development in the industry. And we will try to identify suitable opportunities at the right time with the right conditions. At the moment, other than those potential targets that we have already announced, we do not have any new targets.

[Foreign Language]

[Interpreted] I only have one question. Previously, during your results announcement, you told us that you have done some restructuring of your packaged meats business in Mainland China so as to enhance the level of revenue. And you also shared that, that could be double-digit growth. So what is the current situation and development? Can you share some insights in relation to revenue level and profit level for packaged meats business for Shuanghui?

[Foreign Language]

[Interpreted] To answer your question, I would like to say that in recent years, Shuanghui has been going through restructuring and also repricing practices. And on top of the foundation of a slight decrease of sales volume last year, we believe that there will be a single-digit growth in terms of our revenue, and there would be double-digit growth for our profit level. So this year, we will continue our efforts in terms of restructuring. And we believe that we can achieve medium-level single-digit growth in terms of our sales volume, and there will be very positive momentum and growth potential for revenue and profit.

[Foreign Language] Morgan Stanley, Lillian Lou [Foreign Language].

[Foreign Language] So just to translate my question regarding the upstream possibility in the U.S., just as a follow-up, could management kind of give us a little bit color on the per-head loss for hog production in fourth quarter 2020 and also the trend of the unit return for hog production in 2021, similarly for fresh pork business in the U.S.?

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So the first question is in relation to order to the upstream business for both Mainland China and the U.S. business. Because we can see that this year, the slaughtering utilization rate is only 30% from last year, it's only 30% or so, so is it going to increase this year? Because last year, I think you've got some help from importation and also from your inventory. And also, the lady already translated the part for U.S. business. And the second question is for WH Group. In 2020, I can see other expenses amounting to over USD 100 million, and there was another $69 million-odd allocation. Can you explain the reason behind such allocation. The total amount for such other expenses was USD 180 million.

[Foreign Language]

[Interpreted] Concerning our China business, yes, you are correct that because of the ASF impact from last year, hog prices were rather high. And there was a sluggish consumption trend. And also, there was a marked drop in terms of our slaughtering volume. As for the projection for this year, while pig production will resume and return to normal levels very soon, we believe that there will be a substantial increase in terms of production volume and slaughtering volume. And the utilization rate for slaughtering capacity will also greatly improve. Alongside this trend, our cost will be reduced. And when the slaughtering business profit level continues to improve over time, at the same time, we are seeing a narrowing of the price spread between the importation business for China and also the U.S., therefore leading to a drop in contribution to our profit level. So the -- our profit level for the entire slaughtering business should show a downward trend.

[Foreign Language] Dennis and Glenn, can you take the question for Smithfield?

Robert, was it the question regarding the outlook for hog production in 2021?

Lillian, [Foreign Language]?

Yes, the question was about hog production loss in fourth quarter and outlook of 2021 and similarly for first quarter -- in fourth quarter and outlook in 2021.

Right. So with respect to the fourth quarter of 2021, it was a pretty interesting dynamic where the -- fourth quarter '20 rather, where the majority of 2020 we saw extremely low hog prices, that were really driven by the slowdown in fresh pork production because of plant closures. We saw that price ramp-up in Q4. But at the same time, the COVID impact on raising costs, on our growing costs were really significant in Q4. And so therefore, we incurred a very sizable loss in the fourth quarter of 2020. As Dennis indicated earlier, the lag or drag of COVID on our growing costs continue into 2021. That has everything to do with just biology. To grow our period for a hog, the amount of time it takes to get a hog from farrow to market is 6 months. And so it just -- it's going to take us a few quarters to normalize our raising cost. And so the trend for 2021, from a seasonality perspective, we're going back to what I would indicate as normal, where Q1 and Q4 are our tougher profitability quarters and Q2 and Q3 are periods of higher performance, higher profitability on farms. And so we do expect to see a pretty significant jump in profitability in Q2 and Q3 as compared to the prior period just given the dynamics of strong hog prices and some of our raising costs beginning to improve as we go throughout the year. With respect to fresh pork, with respect to -- in 2021, we're seeing really strong demand here in Q1. The meat prices in the U.S. continue to rally. And even though hog prices are up, the prices have kept up, and so we've experienced profitability in fresh pork. We are hopeful that we'll see continued demand as we get into the summer growing season on fresh pork. But typically, we don't forecast what we think meat is going to do, but we're hopeful to see a continued spread where the meat prices exceed the hog prices as we get into Q2 and early Q3. [Foreign Language]