WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] Good evening, and welcome to attend the earnings release for the 9 months of 2023. The management will walk you through financial summary, business review as well as strategies and outlook. So attending today's meeting, we have Chairman Wan Long of WH Group; Executive Director and President, Mr. Guo Lijun; Executive Director as well as President of Shuanghui, Mr. Ma; CFO of Shuanghui, Mr. Liu; Shane Smith, CEO of Smithfield; Mark Hall, CFO of Smithfield; Joanna Yan, CFO of WH Group. This is Robert Wan. CEO, Mr. Guo, will walk you through the financial as well as business overview.

[Interpreted] Good evening. Now I will walk you through the performance of the first 9 months of 2023. So we have faced a very complex macro market environment, including geopolitical risks, slowing down economy, which has put a lot of pressure on our operations. And we have achieved -- we have not achieved desirable results, and we have been put under a lot of challenges. In the first 9 months, our package meat sold was 2.38 million metric tons. Pork sold volume was 2.96 million metric tons. Revenue was $19.5 billion. EBITDA was $1.6 billion. Operating profit, $1.047 billion, which is 36.4% year-over-year decline; profit attributable to the owners of the company was $569 million, declined by 37.7%; basic earnings per share was USD 4.43. In the packaged meat business, package meat business is our core operation and the major source of our profits. In first 9 months of 2023, packaged meat contributed to 51% of our revenue and 146% of our operating profits. Our pork business has incurred some losses, which contributed to 41% of our revenue and lost $430 million. Now from a geographic breakdown prospective, China contributed to 34.6% of revenue and 75% of our operating profits. US operation contributed to 53% of revenue and 11.7% of our operating profit project; European operation was 12.7% of revenue and 13% of operating profit. China business was very stable and continued to achieve growth. In the U.S. operation, we had underperformance primarily due to our pork production business. European business has achieved a meaningful growth in the first 9 months. In the first 3 quarters of 2023, hog prices in China were at low levels because of sufficient hog supplies. In the U.S., the demand, there is weak demand and oversupply of meat protein caused low hog prices. In Europe, hog supply declined due to sharp costs and ASF, driving a sharp increase in hog prices. The number of slaughtered hogs in China increased about 3.3% year-over-year to 537 million hogs in the first 3 quarters of 2023. The number of slaughtered hogs in the U.S. increased by 1.4% to 94.1 hogs million in the first 3 quarters of 2023. Average hog price in China in the first 3 quarters was CNY 15.42 per kilogram. In the U.S., the hog price was $1.4 per kilogram. In Europe, the average hog price was EUR 1.77 per kilogram. In the first 9 months, China operation achieved operating profit of $788 million. Packaged meats achieved $695 million. Pork input -- it resulted in profit of $59 million. One point to note that renminbi depreciated by 6% in the first 9 months, so our profits actually all increased in renminbi terms, but there was some decline after we translated into U.S. dollars. In the U.S., the operating profit was $122 million, decreased by 84%. The packaged meat increased by 2.7% to $765 million. In pork, the loss was $551 million. It's a significant decrease in the profit or a significant increase in loss. In Europe, the operating profit was $137 million. Packaged meat contributed $70 million, decreased by 5%. Pork has a profit of $61 million, which is a $79 million increase compared to same period last year. In the future, WH Group will continue to consolidate our global resources; adhere to the "adjust price, improve mix, and control costs" business philosophy; leveraging our strengths in industrialization, scale and diversification; upgrade intelligent manufacturing, automation and digitalization; and maximize internal synergies to maintain our leading market position and achieve sustainable development. So that's all for the first 9 months. [Foreign Language]

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So there are 2 questions from Luo Chen of Bank of America. The first question is about the China's packaged meat business. Apparently, the outlook for the hog prices was lower than we had previously expected. And given the depressed hog prices, how will that impact the outlook for the packaged meat profit in the fourth quarter? And also, what's the management outlook for hog prices in the fourth quarter? And second question relates to Smithfield. There's a lot of media reports about the potential spin-off IPO of Smithfield. Does -- Can management of WH Group make some comments with respect to these media reports? And if there are any news or information that could be shared with investors.

[Interpreted] So with respect to the outlook of hog prices in China, because there's a large amount of capital invested into this industry recently in China as well as the continuous industrialization of hog production in China, there is a lot of supply for the hogs. So the hog prices was lower than we had expected. For the fourth quarter, we expect the hog prices may slightly rebound, but will not increase significantly. This is primarily driven by holidays. And also given the current status of the sow inventory, we do not believe the hog prices will jump significantly in 2024. With respect to the outlook of packaged meat profits, in the third quarter, we have achieved a profit of CNY 4,300 per ton, and we expect the profit will continue to maintain about CNY 4,000 per ton in the fourth quarter. That's because at the beginning of the year, we had expected the hog prices may increase in China. So we have adopted measures to hedge against the potential price increase of hog raw materials. So that's why we can maintain good profitability. And also because -- and our packaged meat profitability will not -- and even the potential increase in the fourth quarter of the hog prices may not necessarily immediately translate to a decrease of our packaged meat profits because our inventories and because of the raw materials we use are not necessarily the hogs in the same quarter. So we have taken measures to hedge against the increase in hog prices. [Foreign Language]

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[Interpreted] We have received a lot of -- with respect to your second question on the potential spin-off of IPO of Smithfield, we have recently received a lot of pressures from the investment banks. We have received a lot of good ideas, but we do not have a detailed plan or a timetable. We are still evaluating and deliberating. And once we have a good and concrete plan for the IPO, we will make a proper announcement to the public.

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Three questions from Lillian of Morgan Stanley. The first question is on China's fresh pork business. So apparently, the third quarter sales volume of fresh pork has decreased. Is it because of our strategy or due to other reasons? And as mentioned previously, we expect a moderate or slight increase in hog prices in China in the fourth quarter, so how will that impact the slaughtering volume as well as the profits for the fourth quarter because the fourth quarter profit of slaughtering of fresh pork in 2022 was fairly high? The second question pertains to the U.S. business. The packaged meat business in the U.S., the profitability apparently has decreased over months. It's quite significant. There, it also decreased year-over-year. Is it because of seasonality or other reasons? So what's the outlook for fourth quarter packaged meat profitability in the U.S.? And thirdly, as Chairman has commented earlier on the -- that on the Smithfield news, there's no timetable for Smithfield IPO yet. But what is the company's or WH Group's overall and long-term view of Smithfields in the overall group? What's the position of Smithfields in the company's long-term strategy?

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So this is Mr. Ma of Shuanghui. On the first question on China's fresh pork business, Mr. Ma wanted to clarify that the fresh pork sales volume in the third quarter actually increased by 6.1%. When you say declined, you are probably referring to the revenue. That's because of the decline in the hog prices -- in the pork prices because last year, at the peak, the pork prices was CNY 29 per kg, but this year, it's only CNY 16 on average.

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[Interpreted] In the first 9 months, our slaughtering volume increased by 14%. We expect in the fourth quarter, we'll continue to have double-digit growth in the slaughtering volume and may potentially even be higher than the growth in the first 9 months. So in terms of profitability for fresh pork business, in the last -- in the fourth quarter of last year, because we had some low-cost inventory in the frozen products, in the frozen pork products and the prices of our selling products are relatively high, so we had pretty good profits on the frozen products. And also because last year, the overall trend of the pork price was declining, it's favorable to our fresh products or chilled product sales. So that's why in the fourth quarter of 2022, the profit for both our frozen and chilled products has been pretty good. But this year, because the pork prices, it has been consistently low and depressed, so it up on both the frozen product as well as fresh pork products. So we expect the profit in fresh pork for the fourth quarter will decline compared to the same period last year.

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Just to clarify that the third quarter fresh pork volume increased by 6.1%.

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So Chairman wanted to respond to your questions about our U.S. business. In the first 9 months of this year, the overall performance of WH Group is not ideal. And we have a decline in profits, which has been quite -- the decline has been quite significant.

[Interpreted] And the main reason was the driver of the decrease in profitability in our U.S. operation. Our China business has a fairly stable and healthy growth and the European operation performed even better. In China, the profit increased by 6% in renminbi terms and 1.7% in U.S. dollar. The operating profit in U.S. decreased by more than 80%. If we look at net profit, it could be even worse. But there's a huge divergence in the performance of our -- within our U.S. operation. The package meat business has performed very well. The hog production performed very poorly. The fresh pork business performed -- had sort of an average performance. So we'll continue to reform and improve our U.S. operation. We will expand and continue to invest in the packaged meat. We have invested a significant amount of capital in hog production over the past few years, but it has been consistently high -- a consistent high cost and poor performance. So we will -- we are determined to reform the hog production business, reduce capacity, or even considering potential exit. So we will hope to relieve from ourselves from the burden of hog production. The fresh pork business is reasonably okay and put the -- that achieved meaningful improvement after we made changes in the management team. We will continue to upgrade the business, continue to increase the level of automation and industrialization and hope to continue to improve its performance. Our fresh pork business remains the largest in the world, and we will strengthen the business through continuous optimization. With respect to the IPO news reports of Smithfield, as mentioned earlier, we do not have concrete plans or timetables yet. Once we have a good structure, a good plan, we will make announcements accordingly. [Foreign Language]

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So I'll go back --

I'm sorry. Go ahead. Shane, go ahead.

Yes, I'll go back to the second question was about -- which was about the U.S. packaged meats business volume and margins. So our sales volume was down about 25 million kilograms, which is about 8%, but you have to keep in mind, that takes it -- that includes Saratoga, which was the spice company that we had that we sold last year. Excluding Saratoga, our sales volume was only down about 4% from the prior year third quarter. And for the quarter-to-date period, our branded retail deli sales volume for industry categories was down 2%, and this outperformed the broader U.S. packaged meats industry, which fell 3% during the quarter. And if you look at those same metrics on a year-to-date period, our branded retail deli sales volume was down about 4%, which is really in line with the broader U.S. packaged meats industry, and that's really driven by changes in [indiscernible].

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When you think about the margins that we were able to generate in Q3, we saw profit again of about $650 a ton and that's on par with Q3 of last year. On a year-to-date period, about $830 a metric ton, which is about 10% higher than we saw in Q3 of last year. But a significant portion of our bacon business is on a lag in pricing formula and that's actually priced weeks in advance of the production window. And so we said we did see belly prices spike by about 96% from $85 a hundredweight in the second period and our pricing on the formula just didn't keep pace with the sharpness. And so we saw a point in time where we saw a decrease in profitability. But that has since begun to recover as those prices have declined from the summer surge. And we do expect to see healthy margins in this category for the rest of the year.

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So overall, I would tell you, we're extremely pleased with the results from our packaged meats business and the performance of our packaged meats business. We feel that our portfolio allows the consumer to move up and down between branded and private label. It keeps them in our overall offering. We're really excited about the fourth quarter and the future growth of that business.

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