WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] Dear investors and analyst friends, good evening, welcome to our 2021 results announcement. We are using a telephone conference and also voice live streaming online. And we have our representatives, including our Chairman, Mr. Wan, Long; our CEO, Mr. Guo, Lijun; Executive Director, Mr. Ma, Xiangjie. From Shuanghui, we have Mr. Liu, Songtao; Executive Director from -- and also from Smithfield, Shane Smith; from Smithfield, CFO, Mr. Glenn Nunziata; our CFO, Madam Kam Yin Yan. I'm Wan, Hongwei, and I will pass the time to Mr. Guo to take us through the performance highlights and business review, and then we will proceed to Q&A. Mr. Guo, please.

[Interpreted] Good evening, everyone. I'm going to report to you some key operating data. For 2021, packaged meats sold, 3.32 million tonnes, up 1.3%. Pork sold, 4.36 million, up 10.5%. Revenue realized, $27.293 billion, up 6.7%. EBITDA realized, $2.476 billion, up by 8.6%. Operating profit, $1.96 billion, up 13.7%. Profit before tax, $1.658 billion, up 10.5%. Profit attributable to owners of the company, $1.043 billion, up 7.2%. Basic earnings per share, USD 0.0737, up 11.7%. All figures are before biological asset fair value adjustments. After considering our operational details, debt level and some external factors, including opportunities and challenges, the Board has decided to issue a final dividend of HKD 0.14. Together with the interim dividend, total payout is HKD 0.19, which represents 13.4% of attributable profit. If this proposal is endorsed, on the 13th of June, we will register the shares. On the 7th of July, we will do the payout. If you look at segment revenue and operating profit, our core is packaged meat and also the main contributor to our profit. For 2021, contribution from the segment in terms of revenue is 50.6%, pork segment 43.9%, profit contribution 0.2%. Others, revenue contribution 5.6% and profit contribution 3.4%. Revenue by region, 52% from U.S. and 46.7% of profit from the U.S. For China, revenue contribution 38.5%, operating profit contribution 47.3%. For Europe, the figures are 9.5% and 6%, respectively. Our operating cash flow, $1.8 billion, a drop of $530 million, mainly because in 2020, there were certain changes to our inventory, leading to a bigger contribution to cash flow and also because of the rise in the sales price in the U.S., driving up the receivables. CapEx, $933 million. The increase is mainly driven by the investment in the pork value chain and also poultry business investments. Dividend payout, $325 million because last year, we have done some buyback in the capital market. Interest-bearing liabilities grew to $4 billion and the leverage ratio is 0.41. In terms of the operating environment, stimulated by widespread vaccination and loose monetary policies in various countries, the global economy recovered strongly and commodity prices rose rapidly, which resulted in increasing inflationary pressures. The recovery of China's hog production capacity caused a sharp decline in hog prices, leading to lower costs for the pork and packaged meats business. Regulation and integration accelerated in the slaughtering sector and market competition intensified. The food service channel recovered and market demand increased as the impact of the COVID pandemic in the U.S. gradually receded. And coupled with the reduced supply of hog and rising grain prices, hog prices remained high. Due to ASF, exports to European market were restricted and hog prices remained low, negatively impacting the hog protection business. The number of slaughtered hogs in China increased by 27.4% year-on-year to 671 million heads in 2021. By the end of the year, hog inventory in China reached 449 million heads, up 10.5% over the end of 2020. The hog price was CNY 20.68 per kilo, a decrease of 39% year-on-year. So you can see more hog production and lower hog prices in general. But for the U.S., number of slaughtered hogs decreased by 3% to 128 million heads. The hog price averaged at USD 1.55 per kilo, an increase of 55%. Operating results for China, we realized $930 million operating profit, down by 18.4%, an increase of $66 million for packaged meat and reduction of $53 million for the pork segment. Operating performance was below expectation due to multiple internal and external factors. Production volume and sales continue to grow, but profits declined. Profit per tonne of meat products reached approximately CNY 370 for the year and exceeded CNY 4,000 in Q4, which were record highs. Major new products and new categories grew significantly. Sales of the 10 major new products accounted for 89,000 tonnes. Sales of Huoxuanfeng sausage increased by 51% and spicy sausage increased by 40%. We also promoted meat industrialization and diversification. Operating profit in the U.S. increased by 121% to $919 million. Packaged meats increased by 55% to $885 million, and pork $64 million. U.S. business strongly recovered. Production and sales volume remained stable. Revenue and profits grew substantially. Food services channel recovered as COVID impact waned, COVID-related costs also fell. Revenue of packaged meats food service business increased by 52% over 2020 and 6% over 2019. Profits of packaged meats increased significantly per tonne profit hit record high. For Europe, operating profit $117 million, a drop of 32.8%. $108 million for packaged meat, up 17%. And pork, a negative figure of $8 million. Pork business experienced higher costs and lower selling prices due to the impact of ASF and rising feed prices resulting in a significant drop in profits. Sales volume and profitability of packaged meat business reached record highs by leveraging our vertically integrated business model. So for packaged meat business in all segments, all geographies are very outstanding. We have reached a number of record highs. Significant operating performance of newly acquired business to inject new driver for our future growth. Last year, we acquired this factory in Slovakia, which made very good contributions. Looking into the new year, we face opportunities and challenges. For opportunities, the impact of COVID has tapered off, consumer demand rebounded, supply chain issues eased, and global economic and social activities gradually resumed to the normal level. Hog prices in the U.S. and China have decreased, which will facilitate the company's network expansion, and sales increased and reduced the cost of packaged meats. At the same time, we are facing some challenges. Global energy and grain prices remain high and labor costs continue to rise, causing cost pressures. Geopolitical conflicts have intensified, resulting in complex and volatile international political and economic conditions. The group will continue to consolidate its global resources, it will play to the advantages of industrialization, scalization and diversification, improve the level of industrial intelligence, automation and IT to enhance our comprehensive strength and achieve stable development, maintain our leading position in the industry and ensure sustainable development. For our China operations, we will develop catering channel and target family consumption, adjust product mix and launch more products for consuming on dining tables, develop more diversified food products, including meat, eggs, milk, vegetables and grains. Fresh pork segment will improve product mix and maximize product value based on market dynamics. We will expand upstream business to improve vertically integrated business model and promote meat diversification. We will also increase investment in technologies to further expand our scale and enhance the level of information technology and business intelligence to increase the quality and efficiency of our operations. For our U.S. operations, we'll continue to implement genetic improvement plan, improve hog production process indicators, carefully manage risk and steadily increase the profitability of hog production business. For our pork business, we'll carefully manage procurement costs and selling prices and optimize product mix to improve profitability. Packaged meat business will further optimize product mix to increase market share and competitiveness while maintaining our profitability at a high level. We will increase investment in technologies and optimize process flow to mitigate the impact of labor shortage and control production costs. For European operations, we'll leverage its integrated business model to hedge market risk and achieve synergistic development of upstream and downstream businesses. We'll continue to strictly control ASF and other animal diseases to reduce losses. We will promote integration of the newly acquired businesses and ensure smooth operations to achieve more synergies. We seek investment opportunities to accumulate growth potentials. So that's the performance highlights for the group in 2021. Thank you very much.

[Interpreted] This is Mark from UBS. I have 2 questions. The first question concerns the slaughtering business. We have seen a rather fast increase in terms of slaughtering volume last year. So what is your expectation for the slaughtering volume this year? And while the volume has been increasing rather rapidly, can you also share some information in relation to the per head profit level? My second question is in relation to the packaged meat business. In Q1, we have had some news about the factory in Nanchang, so 2 weeks have already passed. Can you share some information in relation to the incident and how it has affected the image of our products?

[Interpreted] Thank you very much for your questions. Allow me to share my views on your first question, which is the way forward for the fresh pork business this year. If we look at the pork prices in 2022, we believe we will see a clear drop compared to the year 2021. And that will be beneficial to raising the profit level for our fresh pork business. We believe that we'll enjoy a better performance this year compared to last year. As for the overall price trends, for the first half of this year, the level will be rather low, and then it will reach a higher level in the second half of this year. So that creates very good opportunities to our frozen meat operations. And we will grasp the opportunities to enhance the profit level for our frozen products. Basically, we have already consumed all the inventory of frozen meat from last year. So this year, we can start with less assets around us. This year, the total slaughtering scale will realize substantial growth. And we also believe that the level of profitability will resume back to a normal level, and we believe there will be increases both in volume and profit. Now allow me to respond to your second question, which is about the incident in relation to Shuanghui that took place in Nanchang. I can tell you this is not a serious problem because our company has always been very open, and we always welcome and we are grateful to all the concerns expressed by the media and also the supervision continuously coming from various sectors of the community. On that day, we have actually done some investigation in relation to the situation on site, and we have also done some sampling for testing at the factory, and we have submitted the samples to the local government authorities and all our products have been proven to be of good quality and our operations are well standardized. And at that time, actually, there was no real impact on our production lines. And I believe the whole matter was actually triggered by some unground stories made up by the media. And the impact was only on individual supermarkets who have temporarily removed our products from their shelves. After the coordination work was completed, our products have been put back on the shelves and everything has gone back to normal. Thank you.

[Foreign Language] So the questions are one is on China, one is on U.S. So on China, the question was on packaged meat, whether the unit profit will have significant upside this year given the downward trend of hog prices in China. And similarly, if unit profit for slaughtering going to normalize, adding all together, does it mean that 2022, we're going to expect quite a good profit growth for China operation? And the second question on U.S. is mainly on the packaged meat profit because in the fourth quarter, we did see a very good recovery on the segment profit for packaged meat. Given the recovery of demand and also the meat or hog price trend, are we going to expecting continued improvement in the packaged meat profit for 2022 on top of a very good level last year? Similarly, we are seeing recovery of how production profit implied by the future price in the market right now. So what kind of outlook for the hog production profit for 2022 as well?

[Interpreted] Thank you. For your first question, allow me to respond to that. This year, we are seeing some very good support in relation to the operations of Shuanghui in Mainland China. Concerning the slaughtering business, we see a very clear falling trend for the hog prices, which is good news for increasing our profit level. So together with the expansion of our scale, we'll be able to enjoy even greater profits. For our packaged meat business, the decreasing trend for the price will mean a rising trend for our profit. So in terms of our profit margin, because of the fall in the hog prices, our overall revenue will drop, but that is also good news and beneficial to greater expansion in terms of our profitability. Shane and Glenn, can you take the question regarding Smithfield, please?

Yes, we will, Rob. In Smithfield, we finished very strong in the year with a nice recovery toward the end of the year, specifically in our packaged meats business. We are seeing the further recovery of food service as we begin 2022. We are seeing some increase in hogs, especially summer hogs in $1.20 to $1.25 and the cutout holdings. So we do expect to see some pressure on packaged meats as we move through specifically the middle part of the year. But we do believe that our packaged meats for 2022 will remain strong and continue to grow, and we'll see profit levels within our realm of expectation.

[Interpreted] I have 2 questions. The first one is in relation to the rising cost of raw materials. We have heard news about rising prices for soy and corn. So what kind of measures do you have to prepare for this situation? And what about slaughtering business in China and the U.S.? Do you think there will be any impact on your profit margin or on your cost in relation to your slaughtering business and also your fresh meat business? The second question is about the pig farming business in China. I have heard that the government stated that there should be around 840 million pigs in China per year, so the supply sounds very sufficient. Does that mean the company will not make much profit out of pig farming business? Do you have any plans to exit this business? Or do you feel that there are only a number of leading companies in the market, securing your profit, and therefore, you will not exit this business? Can you share some insight in terms of your long-term thinking?

[Interpreted] Thank you very much for your questions. I am Guo, Lijun, and I will take your first question, and I will leave the second question in relation to pork production to my colleague, Mr. Ma. Your observation is very correct. The prices of various raw materials have been on the rise, and that has created huge impacts on our operations. For example, the rising trend of the prices for grains have affected our cost on the feeds. And energy prices going up also means we have more expenses and the rising labor cost means we have to pay more in terms of salary. So these factors do create pressure in terms of cost to our operations, and they do create certain challenges. So moving into 2022, in terms of our operations, we have a number of focuses. We will focus on reduction of our cost keeping a flat trend for our expenses and our fees, maintaining growth and increasing profit. And we will adopt 6 measures to ensure that our performance will be meeting our overall objectives. First of all, we are going to rely on hedging and sustaining a good level of reserve. And secondly, we are going to move upward on the value chain to consume the increase in cost. Thirdly, we will continue to leverage on our global footprint to achieve synergy. Fourthly, we will rely on innovation in terms of our processes so as to enhance overall efficiency. Fifthly, we will continue to enhance our overall structure and also expand our scale. And finally, we will stay very close to the market and make timely adjustments to our prices.

[Interpreted] I will take the second question in relation to the pig farming industry in China in the recent 2 years. First of all, I would like to state that with supporting national policies during the early part, beginning from the year 2019, some of the animal farming enterprises have made new plans for new production capacity. So there was an era of rapid expansion in this business. And then because of what happened in the market, beginning from the second half of last year, we have seen a rather low level of hog prices, and we have seen some cancellation of planned capacity. Thirdly, some pig farming enterprises for their own reasons have decided to exit the industry and shrink their capacity level. And fourthly, some smaller enterprises have also left the market, and we have seen a rising trend in terms of concentration in the industry. And finally, we believe the overall capacity of this industry is still growing.

[Interpreted] I have 2 questions. The first one is about the fresh pork capacity in China. When do you think your full capacity will be commissioned? And how is that going to affect your profit level? My second question is about the U.S. operations. How would the rise in the prices of raw materials create pressure to your operations? And how is that going to affect the business overall?

[Interpreted] Thank you for your question. Allow me to tell you that China Shuanghui overall slaughtering scale is on the smaller side. In relation to our new capacity, they will, by phases, be commissioned around August this year, and the growth pace is actually not very fast. With our slaughtering volume or hog production volume, I believe that is helpful in terms of enhancing our negotiation power when we do procurement work. So I believe, overall speaking, it is beneficial to Shuanghui's slaughtering business profit. Shane, can you talk about the business in the United States, please?

Sure, Robert. Actually, this is Glenn. I'll cover this question. So it's -- as Gordon mentioned, there is a lot of inflationary pressure on the pork business right now specifically in the U.S. in -- for 2021. While we did see meat prices increase 35% throughout the year, hog prices were up 54%. Corn was up 64%. Soybean meal was up 21%. So an unprecedented inflationary pressure on our business. So it's a good question. There's a few things, a few levers, if you will, that we can press on just to help mitigate the risk associated with inflation. One, we are vertically integrated. That business model is a competitive advantage. In 2021, our company-owned assets in hogs were actually cheaper than external hogs for several months throughout the year. So it allows for us to provide for a lower cost supply chain. It also allows us to be a little bit flexible. So in market dynamics make it difficult to make money in that fresh pork business, we can adjust a little bit and manage volume to mitigate the risk of inflation. We have several operational improvement projects in effect that will help us mitigate and lower our overall cost in manufacturing. Those include SKU rationalizations, formulas, simplifications and most importantly, redeployment of labor to the products with the highest revenue opportunity for the company. And so we've been very careful to analyze constantly where our labor ought to be deployed to optimize our profitability. There is the ability to adjust price. It's not as easy as someone indicate or hope. But we -- with these types of cost pressure and increases that we're feeling today and we felt last year, we are being induced to have to change our pricing to accommodate some of that. We -- pork in grocery, specifically in retail, is fairly price sensitive, and so we have to work with our customers carefully to make sure that we don't price ourselves out of the market. But again, we did find ourselves in a position where we were induced to adjust pricing last year to cover some of the inflation. And finally, our financial position. We do have incredibly strong financial policies, and we've created a very, very strong balance sheet that allows us to tolerate inflationary headwinds like we saw last year to manage the increase in working capital needed to buy and source these raw materials and that balance sheet remains strong through today.

[Interpreted] I have 2 questions. The first one is in relation to Smithfield. We understand that cost is rising and raw material prices are also going up in the United States. And at the same time, we see a rising trend for hog prices. So does that mean you are still looking at a very good profit level for per unit hog production? All along, many analysts feel that we are not very certain or clear about the details of the business for Smithfield. Our general feeling is that perhaps it is more related to the upstream because you mainly do large-scale hog production. So in the future, if hog prices continue to rise, does that mean you will see a rising overall profit level at the same time? My second question is about buyback. Last year, there was a large-scale buyback of the shares, and our stock performance -- stock price performance was not satisfactory. But at the end, it did reflect the level of confidence coming from the management because major shareholders did not participate in this buyback exercise. So do you have any plan to buy back the shares this year? And what is the actual operation? Are you going to consider buying back from the secondary market?

Shane and Glenn, please take the first question regarding Smithfield.