WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] I will first introduce the management to you. They include Mr. Wan Long, Mr. Guo, Lijun , our CEO; Executive Director; Mr. Ma, Xiangjie, Mr. Lui, Songtao; from Smithfield, CEO Shane Smith; from Smithfield, Vice CFO, Mr. Glenn Nunziata; CFO, Madam Yan. I'm Wan, Hongwei the MC. Mr. Guo will first take us through the third quarter performance and then we will proceed to Q&A.

The investors and analysts, good evening. I will take you through the first 3 quarters' financial summary and also a review. We have achieved our packaged meats sold, 2,433,000 metric tons and pork sold represented a drop of 7%. Revenue grew by 1.7%. EBITDA realized CNY 2.134 billion, up 17.4%. Operating profit USD 1.645 billion, up 25.2%. Profit attributable to owners CNY 914 million, up 14.6%. Basic earnings per share, USD 7.12, up 32%. If you look at our segment revenue and operating profit, packaged meat is still our main contributor, standing at 52.1%, 42% comes from pork, 5.9% from others. First 3 quarters operating profit CNY 1.645 billion, among which CNY 1.53 billion comes from packaged meats, CNY 126 million from pork and a loss of CNY 12 million from others. If you look at revenue by region, China's contribution 33.5%, 47% of operating profit. U.S. contribution of revenue, 56.3% and operating profit contribution 47.6%. Europe, 10.2% contribution to revenue and 5.3% to operating profit. For the first 3 quarters, how prices in China bottomed out and rebounded. In the U.S. market, both our prices and pork cutout value remained at high levels due to inflationary pressure and decreased hog supplies. Average carcass price in the EU increased substantially as hog producers reduced supplies, given the impacts of ASF and high costs. For the first 3 quarters, number of slaughtered hogs in China increased by 5.8% to 520 million heads. Average hog price in China per kilo CNY 17.24, a drop of 22.5%. And in the U.S., number of slaughtered hogs in first 3 quarters dropped by 2.8% to 92.8 million heads. Average hog price, USD 1.7 per kilo, up 3.8%. In EU, the average hog price, EUR 1.37 per kilo, up 18.3%. For our performance in China, we achieved CNY 775 million in terms of operating profit margin up by 13.8%. Packaged meat grew by 7.4% to CNY 712 million, pork CNY 59 million, an increase of CNY 114 million. In the U.S. market, CNY 783 million in terms of operating profit, up by 48%, packaged meat CNY 745 million, up by 42%, pork, CNY 85 million, an increase of 2.6x. In Europe, operating profit CNY 87 million, a drop of 17%, packaged meats CNY 74 million, a drop of 10.8%, pork, a loss of CNY 15 million, CNY 31 million less compared to last period. We will continue to consolidate global resources, accelerate industrialization, socialization, and diversification, improved level of industrial intelligence, automation and information technology, enhance our competitive strength, maintain our leading position. So that is my report. Thank you.

[Foreign Language]

[Interpreted] I have 2 questions. One concerns China and the second one concerns the U.S. I will first ask the question in relation to the China business. I can see that in Q3, the packaged meat per ton profit level has more or less returned to the normal level. Now that we see a rising trend for the hog prices and that represents a high base figure, so can you provide some sort of projection in relation to the future hog prices and also the per ton profit level? Do you have any strategies in relation to the rising cost? I do remember, in the past, you have readjusted upward your product prices to tackle this issue. So what is your current strategy? I will ask my second question later in relation to the U.S. business.

[Foreign Language]

[Interpreted] Thank you for your question in relation to the China business. When we look at the trends for hog prices, very often, we see that the year will normally start from a low point and then it will get higher as time passes. But when we look at the per ton profit level trend, it is a reverse trend. In other words, it will show higher levels at the beginning and then it will drop gradually. In the first quarter, we have seen high level of per ton profit and then it began to drop in the second quarter, and it normalized in Q3. So when we look forward to the fourth quarter, we believe that the per ton or the average prices in the fourth quarter will be higher than Q3. And therefore, the cost will be higher compared to Q3. And therefore, the per ton level in Q4 compared to Q3, we believe there is still room for further reduction, but the reduction extent will be quite limited.

[Foreign Language]

[Interpreted] As for our projection for the coming year, first of all, basically, the average price for the entire year will be at a comparable level compared to 2022. As for the trends next year, we will expect higher levels at first, and then it will go down gradually, which will be the opposite of the trends this year.

[Foreign Language]

[Interpreted] So while the hog prices are comparable between the 2 years, we have a very good reserve of low-cost raw materials this year. So in other words, next year's packaged meat product cost will definitely be higher.

[Foreign Language]

[Interpreted] Our target for per ton profit will continue to remain at the level of 4,000 or around 4,000 and since the beginning of the fourth quarter, we have already adopted a number of hedging policies or measures so as to tackle the issue of rising cost so that we can ensure the per ton profit level will continue to be very stable with some increase for this year.

[Foreign Language]

[Interpreted] So in relation to such hedging measures, I can take you through 5 major areas. First of all, we will carry out innovation in terms of production management so that we can continuously suppress the production cost.

[Foreign Language]

[Interpreted] So we are going to have a concentrated production. We will also merge different teams wherever necessary so that we can enhance the overall level of productivity and efficiency and at the same time suppress wages increases.

[Foreign Language]

[Interpreted] The second area of measures would include innovation in terms of the technologies we use and also optimization of our technologies so that we can reduce the per ton cost.

[Foreign Language]

[Interpreted] The third area of our strategy will be in relation to market innovation. In other words, we are going to gradually phase out products that have less potential for sales and also with a lower level of profitability. And therefore, we can free up resources for better products that will bring us more revenue and profit.

[Foreign Language]

[Interpreted] The fourth area will be in relation to our plan to increase the points of sales in our network. We will continuously enhance our services to the market so that we can expand the scale of sales and realize more profit.

[Foreign Language]

[Interpreted] All these measures that I have just mentioned have already been implemented, and we will report the most updated situation to all of you when we have a better understanding of the data we collect for the first half of next year, and we will consider if we need to make upward adjustment to our product prices.

[Foreign Language]

[Interpreted] So this is basically in response to your question about whether we are planning to adjust the product prices upward next year. So whether that is going to happen or not, depends on the actual situation in relation to the cost and also the progress and effect of the 4 measures I have just mentioned. If we can't maintain the per ton profit level at 4,000, we would then consider reducing the prices of our products.

[Foreign Language] My second question is in relation to the unit profitability of our U.S. packaged meat business. We understand that the OP per ton for packaged meats was above normal in the previous quarters. And I do believe that our long-term target is to maintain our OP per ton at a level of about USD 700 per ton. But given the current rising cost pressure and potential economic weakness in the U.S., are we seeing any downside risk to our long-term target in the near term? and what kind of measures are we taking to mitigate this kind of pressure?

Shane Smith, can you take this question?

Yes. Thank you, Robert. So our Q3 packaged meats continued to demonstrate our strong profitability when you look at our performance in Q3, it's really the continuation of the previous 4 quarters as we continue to experience growth. We've seen strong growth in both branded and private label, and I would tell you that we're really nicely positioned to take advantage of changing consumption patterns. To the level of profitability you were talking about, we are projecting Q4 to be really our second-best quarter in packaged meats only behind last year's Q4 launch. We do expect to see some pressure, some downward pressure on profitability per ton due to the current economic environment. But I would tell you, we still have profit expectations in Q4 of the range of about $600 a ton. The second -- I'll let you translate. I'm sorry.

[Foreign Language]

This level will be closer to our historic performance, in the first half of 2022 we really saw the store levels of profitability where we were in a situation where demand exceeded supply in the industry, and that was a result of different labor challenges. And this dynamic allowed us to really pull back on some promotional activity and set the stage for the record earnings we saw in the first half of the year. As we move into the second half and into the fourth quarter, our product mix really shifts more toward our holiday ham business and that business historically has a much lower bar margin than the products we sold in the first half.

[Foreign Language]

But you are correct. We do expect to continue to see some pricing pressure in the U.S. market with labor really coming back throughout the U.S. We see our key competitors really promoting with a lot more frequency and a lot more depth and our reaction to that is really investing in price so that we can maintain velocities, use our own raw material and really protect our market share. So this will be an ongoing concern for us as we transition into next year. But I would tell you that we really do remain optimistic both in the near term and through next year on segment profit and gaining some ground back on year-to-date volume.

[Foreign Language]

[Foreign Language]

[Interpreted] Thank you very much for giving me this opportunity to ask my questions. I have 3 questions in relation to the China business. And later on, I also have 1 question in relation to the U.S. business. First of all, in relation to the fresh meat department, I have some figures showing that your investment return or the unit profit was actually quite high compared to the previous record, standing at USD 11 per ton. So my question is, what is the contribution coming from the frozen meat segment?

[Foreign Language]

[Interpreted] Thank you very much for your question. In relation to the profit level for the third quarter I can share with you it is standing at about RMB 90 or so. This is mainly because in the third quarter, hog prices have been rather high, and that creates a rising trend for the profit for frozen meat products. And the contribution from the frozen meat segment is about 80%, while fresh products takes up about 20%.

[Foreign Language]

[Interpreted] As for the trend of hog prices next year, it will be the opposite compared to this year. In other words, we will first see higher hog prices and then gradually the price level will go down. So there is less opportunity or no opportunity for us to do much work in relation to frozen meat. So I think next year, our fresh pork business basically will have to rely on fresh products.

[Foreign Language]

[Foreign Language]

[Interpreted] So my follow-up question after hearing your answer is, how do you compare the profit level next year compared to this year because you mentioned that you can't really rely on frozen products anymore. So does that mean there will be some extra pressure on the profit level? Well, the answer is, we will have to rely on fresh pork and fresh products to increase our profit level. So we will expand the scale of slaughtering business. And we do believe that the level of pressure on our profit overall will be higher compared to this year.

[Foreign Language]

[Interpreted] My second question is in relation to the packaged meat business in relation to the volume. We see that Q3 actually showed a flat trend compared to the same period last year, which was not easy to achieve due to some macro elements and pressure. So what is the way forward in relation to Q4?

[Foreign Language]

[Interpreted] To answer your question, you pointed out that there was quite a bit of pressure for Q3. Actually, I want to tell you also faced quite a substantial level of pressure even in Q2 for packaged meat business. At the beginning of the year, we originally expected that there will be some growth in relation to the sales volume of packaged meat but since there was an outbreak of the pandemic in Q2, we saw a reduction in labor. And also, there were quite hard hit on the food business and the flow of people was also reducing because of various restriction measures. So we actually faced a lot of pressure in relation to the packaged meat business.

[Foreign Language]

[Interpreted] So at the moment, if we are to project what will happen in the fourth quarter, I can share with you that we expect a single-digit growth in relation to the sales volume which will partially offset the downward trend reflected in the first 3 quarters. In other words, there will be some growth in terms of the volume for the entire year.

[Foreign Language]

[Interpreted] We expect that in the coming year in terms of pandemic prevention and control measures, there will be different types of relaxation. In other words, this will be good news in relation to growing the volume of our packaged meat business.

[Foreign Language]

[Interpreted] So overall speaking, we do expect a medium to high level of growth for the entire year next year because we can see that in terms of the launch and promotion of new products into the market in the second half of this year and also our implementation of our plan to increase the number of points of sales.

[Foreign Language]

[Interpreted] That is very clear. Now I would like to move on to my third question, which is about new products or new business. I understand that you have launched some pre-cooked meals or products. I want to ask about the volume for this year and also the level of growth this year. Can you also share your strategies in relation to your condiment business?

[Foreign Language]

[Interpreted] You are correct. We do have this new segment of business focusing on precooked products or precooked meals. For the entire year, the sales volume stands at 3,200 -- 32,000 tons, which represents a mild growth compared to last year.

[Foreign Language]

[Interpreted] And based on the current situation in the market, we expect there will be quite substantial growth for precooked products next year. We believe the growth will be more than 50%.

[Foreign Language]