WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] Good evening. Dear investors and analysts, good evening. Thank you for your participation at the '22 annual results announcement. We are very happy to be here to meet with you face to face again after 3 years. Allow me to introduce members of the management. We have Chairman of the Board and Executive Director, Mr. Wan Long; Mr. Guo Lijun, Executive Director and CEO; Mr. Ma Xiangjie, Executive Director and President, Shuanghui Development; Mr. Shane Smith, Executive Director and President and CEO of Smithfield Foods; Mr. Liu Songtao, Executive Vice President and CFO of Shuanghui; our newly appointed CFO of Smithfield Foods, Mr. Mark Hall; our CFO, Ms. Yan Kam Yin, and I am the host, Deputy Chairman of the Board, Mr. Wan Hongwei. Now Mr. Guo is going to report the performance and business review, and then we will proceed to Q&A.

[Interpreted] Dear, investors and analysts, good evening. Allow me to report to you the situation for WH Group in 2022. Packaged meat sold 3.344 million tonnes, up by 0.7%. Pork sold 4.01 million tonnes, a drop of 7.9%. Revenue 28.1 billion, up 3.1%. EBITDA, $3.157 billion, up 27.5%. Operating profit, $2.09 billion, up 6.5%. Profit before tax, $2.186 billion, up 31.8%. Profit attributable to owners of the company, $1.4 billion, up 34.3%. Basic earnings per share, USD 0.1092, up 48.2%. Proposed final dividend per share, HKD 0.25. Total dividend payout, HKD 0.3, an increase of 58% compared to last year. Segment revenue and operating profit. Packaged meat is still the core business, contributing 51% to our revenue and 98% of our profit. Pork business contribution, 41% and 1.4%, respectively. Revenue by region. China contribution, 34% to revenue and 50% to profit. U.S. figures, 56% and 45%, respectively. Europe contributions, 10% and 5.4%, respectively. In 2022, operating cash flow, $1.8 billion, a drop of $150 million, mainly because of the increase in our inventory. CapEx $975 million, up by 4.5%, mainly because in our U.S. business, there are some investment in improvement of the flow. $491 million in payout. Interest-bearing liabilities dropped from $4 billion to $3.366 billion. Total equity reaching 32.3%, a drop of 9.1 percentage points. Operating environment. Business operations faced challenges as the macro situation was complicated, global inflation remained high, European and American Central banks continue to raise interest rates and consumer confidence was weakening. Animal diseases were also recurring and the volatility of hog and meat prices increased. Integration of hog production and slaughtering sectors accelerated in China, market competition intensified. Hog prices bottomed out at the beginning of the year as supply returned to normal. Costs and expenses in the U.S. rose sharply due to increase in commodity prices and labor shortages, while prices of animal protein fluctuated dramatically, leading to operational difficulties for the pork industry. Intensified geopolitical tensions, soaring grain and energy prices, currency depreciation and frequent outbreaks of animal diseases created tremendous challenges for business operations in Europe. WH Group proactively adjusted our business strategy, promoted structural adjustment, efficiency improvement and cost control, absorbed inflationary pressure and achieved steady earnings growth. The number of slaughtered hogs in China increased by 4.3% to 700 million heads in 2022. By the end of the year, hog inventory in China reached 453 million, an increase of 0.7% over the end of '21. Average hog price was CNY 19.01 per kilo, a decrease of 8.1%. In the U.S., number of slaughtered hogs decreased by 2.6% to 125 million heads. Hog price, USD 1.63 per kilo, up 5.2%. More slaughter hogs in China, lower hog price and reverse trend in the U.S. In Europe, average hog price, EUR 1.41 per kilo, up 26.4%. So hog prices increase in Europe is highest in the world. You see corn prices and also the market spread. Average corn price in the U.S., USD 6.76 per bushel, up 25.2% from '21. Average pork value in the U.S., $2.29 per kilogram, a decrease of 0.5%. Despite the increase in hog costs, excess meat in U.S., limited meat value and further compressed industry market spread -- Especially the drop of 0.5% compared to 2021. So despite the increase in hog cost, the market spread continue to be narrowed. In recent years, the company overcame multiple operational challenges, including COVID-19, ASF, geopolitical conflicts and rising inflation, by leveraging its vertically integrated business model and global platform and maintaining stable operations and development. The core business maintained relatively fast-growing and made outstanding conditions. Since we were listed, revenue increased by a CAGR of 3%. Operating profit increased by [ $480 ] million, CAGR growth of 3.3%. The CAGR growth for packaged meat is 7.1%. Profit for the period increased by $700 million, CAGR growth of 7.5%. Profit attributable to owners of the Group, CAGR growth at 8.4%. So since we got listed, it's been 9 years. Our revenue maintained steady growth and great improvement in the profit level. In 2022, operating profit $1.04 billion, up 11.8%. Packaged meat, $910 million, up 0.9%. Pork, $94 million, an increase of $147 million. We adhere to the principle of adjust price, improved mix and control cost in China. We maintained stable production, sales volume, achieved a significant increase in profit. Packaged meat business continued to optimize product mix and with both segment profit and unit profitability hitting record highs. Fresh meat business implemented an effective frozen meat reserve strategy by successfully forecasting market dynamics, improving profitability substantially. We pushed forward meet industrialization and diversification, and the scale poultry business increased rapidly. Operating profit and margin, $940 million in the U.S., up 2.3%. Packaged meat, $1.05 billion, up 19.5%. Pork, a loss of $43 million, a drop of $107 million. In the U.S., we leveraged vertically integrated business model to actively adjust mix and control cost to absorb inflation pressure and maintain stable operations. Profits of packaged meats maintained solid growth momentum, hitting a record high, exceeding USD 1 billion for the first time. Profits of pork business declined due to rapid rise in hog raising costs and narrowed spread of meat prices and hog prices. We optimized labor allocation and enhanced information technology and automation to increase efficiency, safe cost and ease impact of labor shortages. We optimized our business portfolio to focus on core business. We completed the sale of noncore. Our condiment business, realizing USD 263 million. In the European market, we have seen many negative impacts coming from the war, et cetera. So we faced great pressure. In '22, for U.S. (sic) [ Europe ] business, operating profit, $113 million, a drop of $4 million, because of depreciation of the currency, there is a USD 20 million losses. For packaged meats, $97 million, a drop of 10.2%; Pork business, a loss of $21 million, an increase of losses by $13 million. Europe operations implemented cost saving and efficiency improvement measures and leveraged multi-protein advantages to overcome operational difficulties. Operating profit increased by 12.8% using the same currency as the foundation. Packaged meats business actively absorbed cost pressure through price adjustment, with stable sales volume growth, but profits declined year-on-year due to currency impact. Slaughtering volume decreased due to reduced supply and sharp rise of raw material production costs, leading to a widening loss in pork business. Poultry business grew significantly in volume and profitability. Looking ahead to '23. As the world enters the post-pandemic era, economic and social activities are gradually recovering, which is conducive to the recovery of consumer demand. Commodity prices are receding but remain high in short term. Cost pressure is still high. Geopolitical conflicts are complex and volatile, bringing uncertainties to the market. The narrowing price gap between Chinese and foreign pork will limit the expansion of international trade and affect synergy. The Group will continue to consolidate our global resources, facing new challenges and opportunities brought by such impacts. We adhere to a strategy to adjust price, improve mix and control cost, give full play to the advantages of industrialization, scale, diversification, and improve the level of industrial intelligence, automation and IT to maintain our leading position in the industry and ensure sustainable development. In China, we will develop hog production business to improve vertically integrated business model. Continue to expand the scale of poultry business. Implement industrialized production of Chinese-style products, and adjust mix by shifting to products served on dining tables. Improve management level. Focus on quality to ensure food safety. Recruit talents and cultivate excellent management team in the industry. In our U.S. operations, we'll continue to implement genetic improvement plan and improve herd health and enhance hog production process indicators and reduce cost. Pork business will carefully manage procurement costs and selling prices to optimize our mix and profitability. Packaged meat business will further optimize product mix and increase investment to drive volume growth, maintain profit at a high level. Optimize process flow to increase production efficiency, save costs and mitigate the impact of labor shortage. Europe operations will adjust product mix and price, implement cost saving and efficiency improvement measures to ease pressures of inflation and rising labor costs. We'll leverage integrated business model and expand poultry business to hedge market risks. We'll promote integration of the newly acquired business and ensure smooth operations to achieve more synergies and seek investment opportunities to accumulate growth potentials. So that is the performance of the company in 2022. Thank you very much.

Thank you, Mr. Guo. We'll now proceed to Q&A. [Operator Instructions].

[Interpreted] The second question is about the U.S. business. We know that last year was pretty difficult for the upstream business. And this year, if we look at the first quarter, it continue to be a little bit challenging, especially if you look at the future market implied return for hog production is pretty -- in terms of market, returns very huge loss. So wanted to understand how we deal with this situation? And what kind of outlook in terms of the profitably of our upstream business? And also, for the downstream business, we have very good return on margin last year and what kind of margin outlook for this year for downstream?

[Interpreted] Thank you very much. I'm Lillian from Morgan Stanley. My first question is simulation to the China business. I understand that things are seemingly better after COVID has left out. But it seems that actual operations are not that easy. For example, do we see a real and strong recovery in terms of consumption power? And I understand that what you are selling is some sort of necessity product. But I would like to ask about your packaged meat business. What do you think about the performance this year in this market situation? And what about the hog price trends? Can you share some insight into that? Because I understand that some provinces have faced the issue of ASF in January and February this year. So the third effect in any way your inventory -- your meat inventory upstream. [Foreign Language]

[Interpreted] Thank you very much for your questions. Actually, you've asked quite a number of questions, so I will try to address them one by one. First of all, about the recovery in the consumption power. I must say our team have also looked into that in great details. In this new era, after the pandemic, in China, we have this term called suppressed consumption. And now we see that suppressed consumption has been released. And this trend is rather obvious in the first quarter of this year. We do see some recovery, but I have to admit the level of recovery was not quite as strong as we expected. And we have identified 2 trends. One is to upgrade. The other is to downgrade and allow me to explain. For those who are more wealthy, they were not seriously affected by the pandemic in any way, so they will move towards the upgrading side. And for the common people, in general, they, after the pandemic, tend to downgrade their consumption. So we have also adopted a number of measures to make adjustments so that we can launch more high-end products through high-end channels to reach the high-end consumption power. As for the consumption products for the common people, we will also use the wholesale channel. And then you also talked about the packaged meat business and also the measures we have adopted. We believe that for this segment, we will achieve a medium single-digit growth for 2023. And this is because of our network of sales online and also the launch of a number of new products. Now I will take you through some specific measures. We have increased the number of selling points in our network. Despite the rather serious pandemic situation in the past year, there has been growth in the number of selling points in our network. In 2023, we are going to engage this international consultancy team to launch project to enhance further our network. We will carry out certain screening and upgrading work for registered and nonregistered selling points to improve the level of services. We will also continue to expand our overall network and set up new selling points to support the growth of the packaged meat segment. And then you also asked about the -- concerning the management methods and how management will be improved overall. Actually, we have set up dedicated teams to manage different products and different channels. For example, for the restaurant business and also processing plants, we have also set up dedicated management teams. We also continue to do a lot of new product launch, and our new batch of products are performing better compared to last year. And we will focus on the good performing products in the future. And we will improve our overall design. And we used to promote or advertise many types of products. But now every year, we will instead choose about 10 types of new products to launch so that we can be more focused in our efforts. And we will also have special promotional channels to promote certain specialty products such as spicy food. We will also use a cloud-based e-commerce system to check the operation situation of our various selling points. And we will see if we are moving into certain areas with great potential, relying on the support of our dedicated staff. We will also do a number of management innovative measures to better provide incentives to our staff members, and we [ vote ] more heavily to those who are making real contributions to the company. This is a new round of innovation in our company so that we are very confident about the growth of our team. And I believe that we are also very confident in terms of our future sales figures for the packaged meat segment. And then you also asked about the hog prices. We have a number of conclusions. For example, the first conclusion is the average annual hog price for 2023 will be lower compared to '22. And the first half of '23 will be lower than the second half of '23. So we will first see a lower level and then it will gradually rise. And this trend is actually the same as last year. The only difference is that the lowest point last year was even lower, and the highest point was even higher. So in other words, the fluctuation level of hog prices this year will be more narrow. And allow me to also talk about the hog production side. The ASF situation at the moment is rather stable, and we have observed the situation in the second half last year. We did see certain rebound in some restricted areas or regions. But nationwide, the situation was rather stable. And also, the impact from this virus is actually receding. The situation is quite similar to COVID and how it has impacted human beings. Actually, the ASF pandemic started in 2018, and it has been around for more than 5 years. And now the level of impact is rather limited. And we now really hear about deaths of pigs and also less number of infections. So for the hog production business, we believe that the slaughtering number will be about 400,000 to 500,000 head. And actually, the volume is very small. And we have engaged a very professional team, who is fully equipped to provide assistance to us, so that we can improve our ASF preventive measures. And we will also restrict access of our staff to reduce the chances of cross infection. And in case of flu infections, we will also quarantine those affected people. So basically, I can tell you the overall feeling is that the management team is very confident looking into 2023. Thank you.

To your second question, I'll answer this kind of in reverse order. I'll talk about the downstream business first. And so our packaged meats business performed exceptionally well in 2022. And for those of you who have been following us for a while, you've seen that part of the business continue to grow -- to this year, for the first time, we had over $1 billion in segment profit.

[ Foreign Language ]

We finished this year at a profit level of about $750 a metric ton compared to about 617 million -- $617 per metric ton last year. We were consistently above the $700 threshold in 3 out of the 4 quarters.

[Foreign Language]

But maintaining that level of profitability consistently does require a focus on several key items, and I'll go through a few of those now. So first, it's about our pricing strategies, where we -- our pricing is keeping us ahead of the inflationary impacts that we've seen in the American market.

[Foreign Language]

And we were successful in doing that for the entirety of the years, we were able to keep our pricing above the inflationary cost increases that we were seeing in the segment.

[Foreign Language]

Second, we've really focused on cost control in that part of our business with improvements year-over-year of about a little over $70 million in cost improvements.

[Foreign Language]

And those improvements are coming from areas where we see labor yields and overhead improvements. We've rationalized some of our low and in some cases, even negative margin SKUs, and that has allowed us to shift labor that we had available to us to production capacity that better aligns the business and improves our overall mix.

[Foreign Language]

And the third item that relates to our packaged meats business is, we have a very balanced portfolio between our branded business, our private label business and our foodservice business, and that allows us to really take advantage of changing consumption patterns that we see in the United States.

[Foreign Language]

And so while our overall volume in packaged meats was flat to the prior year, we did see some movement and some shifts inside of the categories. Volume in our retail branded business was down about 4%, but our private label business was up about 6%. And in foodservice, our volumes were up about 2% compared to 2021, and we finished the year at about 87% of pre-COVID volume levels.

[Foreign Language]

And so while we have seen that shift in consumer behavior, I would tell you that our portfolio of products are very well positioned to navigate that change and that we can continue at a profit level that's in line with our expectations.

[Foreign Language]

So you asked about 2023. And while we don't give specific guidance, we do see a highly inflationary environment, and that is driving some shifts in consumption and in consumer behavior. We are seeing some trade downs, as I mentioned, from branded to private label. There are some consumption -- contractions in different parts of the portfolio. We will work to maintain velocities and transition and move again through that portfolio of offerings to match that consumer pattern that we're seeing.

[Foreign Language]

And so as we continue to see pressure on our profit per ton basis, we are focusing on increasing our volumes to ensure the total segment profitability stays at a high level.

[Foreign Language]

We'll continue to work with our customers to help them speed up and see velocities through their stores. We'll continue to -- many of the actions that we're doing today, such as rationalizing low-margin SKUs and replacing that with higher-margin products.

[Foreign Language]