WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] First of all, allow me to introduce to you who are present. We have our Chairman, Mr. Wan Long; our newly assigned CEO, Mr. Guo. And then from Shuanghui Development, we have Mr. Ma Xiangjie; and Mr. Liu Songtao. From Smithfield, our CEO, Shane Smith; and CFO, Mr. Glenn Nunziata. And [ Madam Zheng ], CFO. And I am the host. I'm Robert Wan. Mr. Guo is going to present to us the financial summary for the first half and business review. We will then proceed to Q&A. Mr. Guo, please?

[Interpreted] The investors and analyst friends, good evening. I'm going to report to you 2021 first half results and also some business review for the first half. Packaged meat sold 1.6 million tonnes, up 2.5%. Pork sold 2.1 million tonnes, up by 10%. Revenue, USD 13.3 billion, up by 6.8%. EBITDA, $1.23 billion, down by 0.7%. Operating profit, $920 million, down by 0.5%. Profit before tax, $828 million, down by 2.4%. Profit attributable to owners of the company, USD 539 million, down by 2%. Basic earnings per share, USD 0.0366, down by 1.9%. According to the financial situation and cash flow, the Board has decided this morning that an interim dividend to be released HKD 0.05, which is a flat trend compared to last year. 95 million of interim dividend will be released in September. For the first half of the year, for our core business, packaged meat, contribution to our revenue, 48.5%; and profit contribution, 88.7%. Pork, contribution of 46% to revenue and 8.4% to our profit. By region, China business contribution, 40.9% to revenue and 57% to our profit. For U.S. business, 50% contribution to revenue and 35% to our profit. Europe, 9.5% contribution to revenue and 8.5% to our profit. In the first half of the year, because of higher cost and higher level of inventory, our cash flow, USD 270 million, a drop of $950 million. CapEx, $321 million, an increase of $87 million, mainly due to Shuanghui Development new project investments. Since IPO, together with our interim dividend, we have accumulated USD 2.63 billion in terms of dividend payout. Interest-bearing liabilities, total equity remained stable. The former stood at $2.8 billion, the latter 25x. In the first half, global grain and food prices rose rapidly due to many factors, including the COVID-19 pandemic, weather and international trade. Number of slaughtered hogs in China increased by 34% to 337 million heads. Number of slaughtered hogs in the U.S. up by 1.7% to 64.7 million heads. Supply in China has returned to pre-African swine flu period. Average hog price in China, CNY 25.94 per kilo, a decrease of 23.6%. In the U.S., average hog price per kilo, USD 1.58, up by 66.3%. So we see a major drop in China, a major increase in the U.S. In the first half, for China operations, we have seen substantial increase for slaughtering. Total meat sales also reached a new height. In the first half, processed hogs, 5.037 million, up 53.8%. Total meat sales, 1.6 million tonnes, up 7%. For packaged meat, we have expanded new channels. Some of the leading new products have shown very good growth momentum. Emerging channels such as new leisure, e-commerce, nutritional meals increased sales by more than double digits. Our 3 main new products, Spicy sausage, No starch King of the Kings sausage and Huoxuanfeng sausage reached an annualized sales volume of more than 10,000 tonnes. For emerging business, it's been growing rapidly, demonstrating good potential for increased. Sales volume of catering ingredients increased by 103%. Self-operated e-commerce business increased by 245%. We continued to enhance our competitiveness by improving vertically integrated pork value chain and expanding our poultry business. Three new pig production projects in Fuxin, Nanning and Shaanxi as well as poultry projects in Xihua and Fuxin are advancing rapidly. In the first half, we realized operating profit of $524 million, a drop of $26 million. Packaged meat, $408 million realized, a drop of $9 million. Pork, $68 million, a drop of $32 million. For U.S. and European operations in the first half, COVID-related costs substantially decreased. For packaged meat business, it -- the impact from the COVID situation diminished with segment results rebounding significantly. U.S. pork business faced challenges as the spread between meat and hog prices narrowed. European business effectively leveraged the vertically integrated value chain to ease operating pressure caused by market dynamics. In the first half, U.S. operating profit $317 million, up 14.9%. Packaged meat USD 358 million, up by 47%. Pork, a loss of $17 million, down by 110 million. For our European operations, $79 million operating profit, down by $20 million. Packaged meat, $50 million, an increase of $16 million. Pork, $26 million, down by $44 million. For our next step, 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, IT and business intelligence to expand our market scale. We'll improve product efficiency and cope with various risks, maintain our leading position in the industry and ensure sustainable development. For our China business, we are committed to launching new products, optimizing product portfolio, expanding market network and promoting market innovation to achieve volume growth. We will actively develop food service channels and household consumption, nurture new business and expand into new streams. For pork business to grasp market trends, we need to reduce inventory, expand production volume; further enhance integrated business model by developing hog production business and expand poultry business to enhance overall competitiveness. In the U.S. and Europe, we'll leverage our advantage of integrated business model to achieve greater economies of scale. We will reduce costs and improve hog production efficiency through science-based feeding and improved management; optimize product mix and channels of the pork business to increase market share in the U.S. domestic market; increase byproduct recovery rate to expand export volume and profitability. We will further increase volume and profits of packaged meats by giving full play to market advantages. We'll utilize potential production capacity and optimize product mix. We will continue our effort in pandemic prevention and control, reduce losses and ensure stable development of the group. Finally, the European business will continue to effectively prevent animal diseases, focus on local markets and increase sales volume of packaged meat. Thank you very much. That is the end of my report.

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[Interpreted] The first question from Lincoln from Goldman Sachs, among the 3 questions. The first one concerns the business in China because we can see that for the second quarter in terms of packaged meat business, we can see declining trend for both the sales figures and also the unit price, bringing impact on the per-tonne profit level. So can you provide some guidance in terms of your whole year per-tonne profit performance?

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[Interpreted] Thank you very much for your question. Mr. Ma has responded to your question as follows. We have seen a drop in terms of the volume in the second quarter for packaged meat, and we have seen some growth for Q1. So for the first half of the year, overall speaking, it is a balanced trend. And the major reason is because for Q1 last year, the pandemic situation was very serious. And for the second quarter, we have seen replenishment of our products in the market. And relatively speaking, the sales volume for Q2 was bigger. But looking at this year's trend, it's actually rather on the contrary. For the first quarter, the sales figures were quite high. And for the second quarter, there was very good consumption of the inventory from the first quarter.

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[Interpreted] The second part of the question is in relation to the unit price. Actually, there are 2 factors affecting the unit price level, the first being the product structure. Last year, the demand was rather big in the second quarter. And there were high price levels and high profit levels for our products. But the structure for the second quarter this year is not as good compared to last year. The second reason is, this year, we have actually invested more heavily into the market, leading to a drop of our sales prices.

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[Interpreted] And then the final part of your question is in relation to per-tonne profit. We have seen a drop in hog prices in the second quarter of this year and also a decline in the cost in relation to pork raw materials. But during the same period, we have seen higher prices for other types of proteins such as chicken meat. And we have seen a rising trend for manpower or staffing costs, and we have seen a poorer product structure. At the same time, we have increased the level of market investments, and there are higher levels of fees and expenses.

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So our projection for the entire year, according to the current situation and also changes in the market, we believe that there will be conducive factors leading to a rise in per-tonne profit for Q3 and Q4. And also, there will be beneficial drives for the quarters in terms of our scale and also our cost. So we believe that compared to last year, the whole year average per-tonne profit level will show a stable growing trend.

[Foreign Language] So the question is about the U.S. business. So we also see the second quarter for the packaged meat segment, we see a decline or dip in the profit margin. Could we elaborate a bit more on the reason behind it? And how are we seeing for the second half in terms of the outlook? Are we still confident for the second half to reach 2019 level, for the full year to reach 2019 level? And since, I think, we have Mr. Shane Smith here, I also want to actually just ask Mr. Smith, I think you have a very good experience in leading the European business before and also as a Chief Strategist. So given that now you are in a role of CEO, so in terms of Smithfield business, is there anything or any aspects you think the business can improve or any major strategy shift you want to implement for the business? How do you think about it?

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So thank you for the question. I'll start with the second question first. As you noted, I have been a part of Smithfield for nearly 2 decades and most recently run in the European operations.

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One of the things that have driven success for us in Europe is learning to maximize the value in a vertically integrated model.

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And so when I think about the U.S. business, I see that as well. I think our vertically integrated model really gives us a competitive advantage over our competitors and can create a consistency in earnings to our shareholders.

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And so as we move forward in the U.S. operations, the things we'll be focused on is cost control and raising cost improvements in our hog production operations.

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That will come from various health improvement and genetic transitions that will allow us to achieve a best-in-class raising cost.

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It will carry forward into fresh pork operations, where we'll be focused on cost control and getting our cost structures to where they need to be.

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And that will lead us into the packaged meat business, where one of our key initiatives will be to add value to the fresh pork side by creating more value-added products on the packaged meat side.

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That model has worked well for us in Europe, and I believe it will work well for us in the United States operations.

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So as we move forward, those are the things we'll be focused on. Really, to sum it up, is how do we unlock the power of the vertically integrated model, both for our shareholders, our employees and all of our stakeholders.

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And to the first question, I apologize, if I can have you repeat that. We were having a little bit of audio difficulty in the first part.

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Just quickly in terms of the packaged meat, I think, in the second quarter, the margin having some pressure on a year-on-year basis or sequential basis. So what's the reason behind it? And how do we think of the second half outlook for the packaged meat business?

Well, we're seeing pressure in margins across the business, and that's really as we look at packaged meat specifically as we return to pre-COVID levels. Like all other industries, we're having difficulties with labor and the continuing effects of food service not reopening as quickly as we would have liked.

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The second thing I would point out is the increase in raw material costs from extremely high hog prices as well as other inflationary pressures that we're seeing in the U.S. market.

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I can tell you that our sales teams are focused on passing along those inflationary cost increase to our customers. And as we look forward to the second half, we're seeing some bright spots. We've seen food service increase back to nearly 85% of 2019 levels. So that's very encouraging for us. So as we look at the back half of the year, there's a lot of optimism in our packaged meat business.

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[Interpreted] I'm from Citibank. I have 2 questions in Chinese and 1 question to follow in English. The first question is for Mr. Wan, the Chairman. Thank you very much for arranging this video conference call with every party, and I'm happy to see all of you on the screen. I can see there are 3 participants from the Hong Kong side, including Mr. Guo and Joanna, and I have just heard about the new appointments. So congratulations. My question for Mr. Wan is, can you elaborate a little bit more concerning the transitional arrangements for the new management. And also, can you provide further explanation behind the rationale? My second question concerns the operations of Shuanghui. We all understand that back in July, it was very unfortunate that we have seen some serious flooding tragedies in Zhengzhou and Henan area in general. So I'm just wondering, does that bring any adverse impact on your new product launch schedule.

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[Interpreted] So first of all, I want to thank you because both your questions concern the situation in Henan.

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[Interpreted] So I'm going to take your first question in relation to the adjustments made to the management team. And also, I will talk about the transition -- transitional arrangement. And I will then pass the floor to Mr. Ma to talk about the flooding situation.

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[Interpreted] Concerning the recent adjustments made to the team of management staff, it belongs to a kind of normal adjustment.

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[Interpreted] So the newly appointed CEO is Mr. Guo and the newly appointed VP is Mr. Wan Hongwei. For both candidates, I'm very happy with the appointment. I believe they are the most suitable candidates for the positions, and I feel very confident in their management capabilities.

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[Interpreted] I believe Mr. Guo is a very suitable candidate to be the CEO of the company because of his over 10 years of experience at Shuanghui and also WH Group. And in the past, he has made very important contributions to the group. He has always shown excellent performance.

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[Interpreted] As for Mr. Wan Hongwei, he has very high educational qualifications, and he has also accumulated many years of experience working for the group. So he has proven to be an important asset to the company.

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[Interpreted] And I also believe that this current round of arrangements is going to be very suitable for future development of the company.

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[Interpreted] As for the support team, I'm also very confident in their capabilities. That will include Joanna for finance, and Mr. Zhou Feng for international trade and also Mr. Wang Dengfeng will also make very important contribution. I believe that they will all discharge their duties very well.

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[Interpreted] And there are 2 reasons for this round of adjustment to the management team.

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[Interpreted] The first one being the fact that I am going to make preparations for my own retirement.

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[Interpreted] The second reason being I need to identify suitable candidates to take over.

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[Interpreted] And in recent years, I have actually been thinking about this succession issue for quite some time. And the reason why I have not retired sooner is because the timing was not yet mature.

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[Interpreted] If you look at the history of myself and my team from Shuanghui era to WH Group, we're talking about a history of 4 decades.

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[Interpreted] And in this process, I have seen many changes at the company level.

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[Interpreted] For example, we transformed from a private company to become a listed company.

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[Interpreted] And we have seen the transformation of being a domestic Chinese company.

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[Interpreted] And we have become this international company with an international footprint. And we have also seen the development of the company to become top 500, both in China and also globally.

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[Interpreted] So having gone through decades of development and reform, when I look at Shuanghui and WH Group, I see beyond the fact that they have become listed entities. They are also 2 inseparable parts.

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[Interpreted] So by looking at our history and experience, I think, it's the most important thing for us to be compliant with all the listing rules, and my retirement plan also needs to be compliant.

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[Interpreted] So if you look at Shuanghui and also WH Group in general, what we do is processing for agricultural products. So both domestically and internationally speaking, we have been adhering to the highest standards, and we have been following the principles of doing well our business to continue to expand our scale.

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[Interpreted] And because of our strategy to stay strong and continue to expand our footprint, me and my team have been able to bring the entities to the top 500 level. We have actually changed the footprint of the pork business around the world, and we have become, globally speaking, the largest pork processing enterprise.

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[Interpreted] So the reason why I think it is now time for me to retire is because for both Shuanghui and WH Group, I have already completed my historical mission.

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But before I do retire, I do have a few ideas that I would like to share with our shareholders and investors.

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[Interpreted] I have set a rule for myself before my retirement.

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[Interpreted] First of all, when I do retire, I need to make sure I'm leaving behind this huge enterprise. And I think I have accomplished that very well.

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[Interpreted] And according to what was reported by Mr. Guo, you should share my positive thinking for Shuanghui, Smithfield and also WH Group. In the past, we have realized industrialization and expansion in scale. And now it is time to move towards the use of new technologies and smart technologies so as to enhance our overall competitiveness in the market. And I'm fully confident with the current team of management to accomplish that.

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[Interpreted] And I'm confident that putting together such talent, including our new CEO, Mr. Guo, and Mr. Ma from Shuanghui, and the excellent team operating the U.S. business, your future achievements will even be greater.

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[Interpreted] So in the past, I have been focusing on this entity plus -- or practicality plus capital approach. And in the future, I think the new team will combine these 2 with finance and also new technologies. So I think they will overachieve compared to what I have done in the past.

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