WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] Dear friends, the investors, welcome to our 2022 interim results announcement. Our management is going to take you through financial summary, business review and strategies and outlook. Allow me to introduce members of the management. They include Mr. Wan, Long, our Chairman; Mr. Guo, Lijun, our CEO; and from Shuanghui, Mr. Ma, Xiangjie; Mr. Liu, Songtao, our CFO; and from Smithfield, CEO; Mr. Shane Smith; and Mr. Glenn Nunziata, our CFO; and Madam Kam Yin Yan, our CFO. I'm Wan Hongwei, I'm the host for tonight. Now I'll pass the floor to our management to talk about our financial performance and then proceed to Q&A. Mr. Guo?

[Interpreted] Good evening, everyone. I will report to you the financial overview for the first half of the year. In the first half, packaged meat sold 1.612 million tons, a drop of 0.1%. Pork sold 2.031 million tons, a drop of 5%. Revenue realized CNY 13.4 billion, up by 0.5%. EBITDA realized CNY 1.54 billion, up 25.6%. Operating profit CNY 1.211 billion, up 31%. Profit before tax CNY 1.088 billion, up 31%. Profit for the period CNY 837 million, up 27%. Profit attributable to owners of the company CNY 701 million, up 30.1%. Basic earnings per share, USD 5.46, up 49.2%. Based on the decision of the Board, interim dividend per share HKD 0.05. Registration date, 2nd of September, dividend payout date 30th of September. If you look at segment revenue and operating profit, packaged meat is still our core, in the first half, contribution to revenue is 52.8% and more than 89% of profit. Pork business contribution to revenue 41.4% and 10.2% to our profit. Others, 5.8% contribution to revenue and 0.5% to profit. China's contribution 32.6% to revenue, 44.3% to profit. U.S. contribution 57.2% to revenue and 51.1% to profit. Europe 10.2% contribution to revenue is 4.6% to profit. If you look at the operating environment in the first half. Due to the pandemic and geopolitical events, commodity prices fluctuated at high levels, inflationary pressures intensified. Concerns about global recession emerged and consumer confidence weakened. COVID-19 continued to impact China's economy and household consumption. Hog prices bottomed out as supply and demand return to normal. Integration of hog production and slaughtering sectors accelerated and market competition intensified. U.S. hog prices remained at a high level due to increased hog production costs and reduced supply. Supply chain disruptions and labor shortages eased, but still posed challenges. Hog prices in Europe increased as supply reduced. Geopolitical tensions, soaring grain and energy prices and currency depreciation created challenges for business operations. WH Group proactively adjusted its business strategy, gradually reduced the impact of the ASF and COVID-19, promoted structural adjustments, efficiency improvement and cost control and absorbed extreme inflationary pressure. The group's earnings significantly increased in the first half, reaching a historical high. In the first half, number of slaughter hogs in China increased by 8.4% to 366 million heads in the first half. Number of slaughter hogs in the U.S. decreased by 3.7% to 62.38 million heads. Average hog price in China was CNY 14.5 per kilo, a drop of 43%. In the U.S., average hog price was USD 1.62 per kilo, up 2.5%. In Europe, average hog price was EUR 1.3 per kilo, up 11.3%. Compared to the same period last year hog prices, there's sufficient supply in China, leading to a fall in the prices, while there were shortages in the U.S. and Europe, driving up the price level. For our China operations, operating profit $537 million, up 2.5%. Packaged meats, $496 million, up 21.6%. Pork $36 million. Because of imported pork declining in international trade, there was a drop of 47.1%. Looking back at the first half of the year and the situation in China, we took various measures to mitigate the impact of epidemics, actively participated in market competition, maintained stable production and sales volume and achieve a steady earnings recovery. Packaged Meats business continued to optimize product mix and control costs. We professionally expanded into new categories. Profitability hit a record high. Especially Chinese products and convenience products, they grew rapidly. Fresh pork business gradually returned to normal operations. Profits of pork segment decreased due to decline in contribution from imported meat. We promoted meat industrialization and diversification. Scale of poultry business grew rapidly as new projects commenced production. Hog production construction projects gradually reached completion. In the U.S., we achieved $619 million, up 95.3%. Packaged meat $539 million, up 50%. Pork, $102 million compared to a loss of $17 million last year. We improved by $119 million. We leveraged our vertically integrated business model, actively adjusted product mix and controlled costs to absorb inflationary pressure, resulting in revenue growth and significant improvement in profits. We continuously promoted process optimization to increase operational efficiency, safe cost and ease the impact of labor shortage. Profits of packaged meats segment increased significantly reaching a record high. Operating results improved remarkably on the back of continued optimization of product mix and path to market. In Europe, putting profit, $55 million, a fall of 30% and Packaged meat $46 million, a drop of 8%. Pork, a loss of $14 million -- a drop of $14 million. In Europe, the revenue achieved growth, but profits declined sharply due to energy shortage caused by the Russian-Ukraine war, high commodity prices rising input cost and continued impact of ASF. We proactively adjusted our business strategy, implemented cost control and efficiency improvement measures to overcome operational difficulties. Q2 results improved significantly. Going back to the normal track. Sales volume of packaged meat grew steadily, but segment profit declined. Sales volume of pork declined and segment incurred a cost -- loss. Poultry business achieved significant growth in both volume and profit. Our business strategy, we will continue to consolidate our global resources, accelerate industrialization, scalization and diversification, improved level of industrial intelligence, automation and information technology, enhance our comprehensive strength, maintain our leading position in the industry to show a sustainable development. That is the end of my report. Thank you very much.

[Foreign Language]

[Interpreted] First of all, I would like to congratulate you for the very outstanding results for the first half of the year. Basically, I have 2 questions. The first one concerns Shuanghui. I understand that there is more investment going into ready-to-eat products. So I would like to ask about your overall strategy and the way forward for this type of products? And then the second question is about per ton profit level. I understand that it has been growing and it has reached this range of USD 400 to USD 500 per ton. So what will happen in the next 3 to 5 years? Do you believe that there is still room for the profit per ton level to continue to rise? And what do you think will be the ultimate level that you can reach?

[Interpreted] Thank you for your question. Actually, concerning these ready-to-eat meals. It is a new trend in Mainland China and various enterprises are making their plans and preparations to follow this trend. Shuanghui has done some research work. We have looked into different types of products and relevant technologies. Actually, we feel very positively about future development of this industry and believe that it is an important direction for the overall structure of our future business. We've actually set up a new business unit in July, and we have a dedicated team to look into the development of this trend. And they have looked into more than 30 types of products already, including some very popular dishes such as beef dishes and pork dishes with traditional Chinese sauces. So we will follow this trend by working on 8 major series, and they will fit into different taste preferences of Chinese people in different regions in China. So I think that we are going to offer something very diversified into the market in the near future. And while we are setting the groundwork, we are focusing on the central portion of China and also Northern China, we will do some trial for people to gradually adapt to this new trend, and then we will move toward to every corner of entire nation. So concerning the new plant, we are planning to set up in the third quarter, we have already received a lot of support from the local government. And we believe all the operations will be commissioned according to our plan. And we will also have dedicated machineries for this line of business. And in the future, we are going to establish our capability covering all 18 provinces. And at the moment, there are many companies trying to move into this area as well. But because we have accumulated a lot of experience in relation to processing meat and also we have this long-standing brand, we have very good logistical support and also advantages in relation to execution and quality management. So I believe our plan is to become the industry leader for this type of product.

[Foreign Language]

[Interpreted] Yes. My question was in relation to the U.S. market. I want to know about the projection for the medium to longer term for per ton profit level for packaged meat business. What kind of strategies do you have?

Shane or Glenn, can you take this question, please?

Yes, Robert, this is Shane and I have Glenn here with me. So for the medium and long term, we'll first let's start with the first half results. We've seen incredible first half results in our packaged meats business. We expect to see that, as we move through this year, lessen slightly, but still be in a very high range. As we move forward, there's a few things to factor in. First is food service is really coming back. So we're back to probably about 87% -- 86%, 87% of 2019 or pre-COVID levels. Second, the labor impact that we've had over these past couple of years is returning to normal. So we're beginning to see our ability to manufacture back at the level we expect to be at. Pricing discipline, I would tell you that's been number 3. So we've really focused on staying ahead of or even with inflationary pressure. We'll expect to see that continue. And fourth, we've had a real focus on cost control and process improvement. And so we've seen the impact of both of those, which should carry us forward in both the medium and the long term. So I would tell you the outlook for our packaged meats business, again, over the medium and long term is very promising. It looks very good. Glenn, do you want to add anything there?

No, Shane answered that well. And I do think the results we have experienced over the last 6 months or even 12 months -- trailing 12 months have been extremely strong, and I would say, sort of unusually strong. And so I think we need to be cautious going forward that margins above $700 a metric ton is probably unlikely. The way we forecast out and look at our business in the mid- to long term is we'd like to return to our historical norms, but from a growth perspective. So if we went into the pandemic at $580 or so a metric ton, we'd like to see us that come back to $600-plus metric ton going forward. But again, that depends on seasonality, inflationary inputs, pressures on packaging on meats, et cetera. But overall, Shane is spot on. We are very, very bullish with respect to our packaged meat business going forward. We think they've done all the right things from a product mix, a go-to-market strategy and a customer focus on price investment as well. So we are bullish.

[Interpreted] I have 2 questions. The first question is about China operations. I see that in the second quarter, the sales volume for fresh pork dropped rather quickly. I do understand that it is pretty much driven by the higher price level and also because of the pandemic. So what is your plan for your sales volume in the second half? I'm asking about both fresh pork and packaged meat business. I also saw from some reports saying that the inventory level for packaged meat towards the end of June has gone up quite substantially because you do have some sort of expectations the third quarter. So what do you think will be the overall demand level for the second half of the year? And what about the profit level?

[Interpreted] Thank you very much for your question. Allow me to take your question in relation to fresh pork and also packaged meat business. In the first half of the year, in relation to fresh pork, some reports have shown that there has been some slight decreases in relation to the sales volume. Actually, the sales volume for domestically produced pork has gone up very substantially. But because of the narrowing of the price spread between China and the U.S. That led to a fall in terms of imported volume of pork. As for the second half of the year, we believe that there will be continuously some sort of a single-digit growth for the fresh pork. And for the whole year, there will also be a positive growth. As for packaged meat business, in the second half, we expect some growth in terms of the sales volume which will offset to a certain extent the falling trend that we witnessed in the first half of the year. So if we consider the entire year, packaged meat business should enjoy a mild growth. As for the second part of your question, which is in relation to the inventory level, actually, it is a very small fluctuation, which totally falls into the normal range. Every time we are talking about different volume in relation to delivery and also settlement amount. So it is totally normal to see certain changes or fluctuations.

[Foreign Language] So my second question is on U.S. -- is on the upstream business. I understand if we look at the markets, the future and the spot market trend, correct me if I'm wrong, I suppose, in the second quarter, the fresh pork, I'm talking about the slaughtering business should be loss-making in the U.S. and how production should turn profitable? Is it the right direction for the second Q? And what kind of trend in the third quarter? Because I think in the third quarter, again, from the market price, it indicates continuous improvement in the hog production return. So can we have some idea about the direction for the third quarter and also overall for the second half? I understand that hog production may be turn negative profit again in the fourth quarter because of the seasonality. So trying to understand the trends better for the upstream. [Foreign Language]

Glenn or Shane, go ahead, please.

Yes, this is Glenn, Robert. Thank you. So you're spot on in your question with respect to the Q2 results, you're right. We are seeing -- we're sort of back to normal seasonal trends in our farm production, our hog production business here in North America, where you typically see losses or raising costs exceeding market prices in Q1 and Q4 and pretty decent profitability in Q2 and Q3. I would tell you, we're not satisfied with that result overall. We -- for the year, the futures curves would indicate that hog production will have a difficult time even breaking even this year. It's just been an incredible headwind with respect to inflationary cost inputs -- inflationary pressure on cost inputs like feed, labor, transportation, moving feed around and hogs around the country, it's just all of those have been just an incredible headwind for that business. But despite that, historically, we are still performing well compared to historical results. But we do see that you're spot on that Q3 will -- the curve indicates that we'll be profitable in Q4 as we look out ahead, it looks like there may be some losses on the farms. The opposite is true for fresh pork and you hit that one too. Fresh pork in Q2 had a lot of pressure. The USDA data would indicate that the summer months have been very difficult for fresh pork. And at the end of the day, the driving factor there is just to heighten the hog prices. It's just difficult to maintain a spread between meat and hog prices that yield profitability when the hog prices are at such historical highs. We are performing well in our fresh pork business. We are -- for all the metrics that we do measure here internally, we're proud of what the team has been able to do. They're going out and working on the right mix in product and making sure that given the labor we do have on hand and some of the shortfalls we've experienced, we're deploying that labor in the right part of our plants that yield the best returns. And so as a result, Smithfield has performed very well against USDA benchmarks with respect to fresh pork spreads. But all that said, the market is just too much for us to bear. And so in Q2, generate small loss in our fresh pork business, that will probably continue through the summer. But then in the back quarter, back 4 months or so, we do expect to see a return to profitability. All in, our North American pork business will be profitable this year. It's got some opportunities. We'll continue to focus on everything we've said in the past on our farms and then our fresh pork plants but we're a vertically integrated business. And we've said to you before, I can't tell you exactly where the profit is going to come from. We focus on our total vertically integrated model. And in this case, a lot of that profitability has resulted in the packaged meat segment and we're proud of that result in general.

[Interpreted] There are 2 questions. The first one is in relation to the rising hog prices in China. In the past 2 months, I've seen quite significant increase to the hog prices, so what do you think will happen in Q3 and Q4? We have heard from some reports saying that it is not likely to stay at a very high level in the second half. So what is your projection? My second question is rather technical in nature. In the first half, I do not see much short-term investment. But I see that there is a drop of USD 590 million in the cash level. As for financial cash flow, there is a minus USD 400 million figure. So can you explain to me why there is such a significant drop in the cash level for the company? And what is your future strategy or management method? And what is the expected cash reserve?

[Interpreted] Thank you for your questions. Allow me to take the first question in relation to hog prices in China. Since the beginning of this year, we have seen a very low or falling trend of hog prices until April when it began to rise. Our projection for the second half of the year, which will include Q3 and Q4, will be -- that would be some minor fluctuations along higher levels. And I think that will be around RMB 20. We have similar thinking when it comes to projections for the second half compared to what was announced by the state. We do not believe there is much room for further surges. And we believe that projection for hog production figures will be adjusted. And I believe there will be a higher level of supply in the fourth quarter. So compared to the third quarter, the hog prices, it is more likely that it will be a downward adjustment trend.

[Interpreted] Thank You for your second question in relation to cash flow. Actually, this year, our operating cash flow showed a drop of USD 240 million. The major reason behind this drop does not come from Shuanghui because the cash level for Shuanghui compared to last year is more or less the same. The major changes have come from Smithfield. Last year, it was a positive figure of about USD 120 million. But this year, that has turned into a negative figure. So that is the true impact on the drop in relation to our overall operating cash level. So in relation to the drop in the cash level for Smithfield, I believe it is twofold. First of all, there is a higher level of inventory and the second reason is because of the flow of funds in the current accounts. When there is a higher level of inventory due to the inflationary pressure, that means the cost behind the higher level of inventory will also go up. So for the second half of the year, when we continue to sell our inventory, there will be less stock, and we will continue to enhance the level of operation. So the whole year performance is that we believe we will return back to normal cash level. We will also use our own strong cash flow to reduce the level of debt.

[Interpreted] I have 2 questions. The first question concerns China operations. At the beginning of the year, I understand that you have put forth a projection or target for packaged meat business profit level should reach per ton CNY 4,000. So in the second half of the year, considering the fact that hog prices will continue to rise, are you maintaining the same projection, which is CNY 4,000 per ton profit?