WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] We'll get started now. Dear analysts and investors, good afternoon. Welcome to 2023 annual announcement of our results by WH Group. We will talk about financial summary, business review, strategies and outlook. We have with us from the management, Mr. Wan Long, Chairman of the Board and Executive Director; Mr. Guo Lijun, Executive Director and CEO; Executive Director and President of Shuanghui, Mr. Ma Xiangjie; Executive Director and President and CEO of Smithfield Foods, Mr. Charles Shane Smith; CFO and Vice President; Ms. Yan Kam Yin; Vice President, Mr. Zhou Xiaoming. I am Wan Hongwei, Deputy Chairman of the Board and Executive Director and also today's moderator. Mr. Guo will take us through the financial summary.

[Interpreted] Dear investors and analysts, good afternoon. I'm going to report to you the performance highlights of 2023. Packaged meat sold 3.2 billion (sic) [ million ] tons, a drop of 4.4%. Pork sold 3.9 million tons, down by 1.5%. Revenue, $26 billion, down 6.8%. EBITDA $1.9 billion, down by 37%. Operating profit $1.47 billion, down 29%. Profit before tax $1.024 billion, down 53%. Profit attributable to owners of the company $606 million, down 56%. All such profit figures are before biological asset fair value adjustments. Basic earnings per share, USD 4.72 down by 56.8%. Based on the operation and financial performance, we are proposing interim dividend per share, HKD 0.05, and proposed final dividend, HKD 0.25. So the combined dividend is HKD 0.3, which is the same as last year. It will be issued after the conclusion of the shareholders' meeting. We will share the incentive of $490 million in total. Packaged meat contributes 51.1% (sic) [ 51.5% ] of revenue and 139.4% of profit. For the pork and others business, 41.2% contribution in terms of revenue and a loss of $480 million. For Others segment, 7.3% contribution and loss of $99 million. Revenue by region. China contribution, 1/3 of revenue and 64% of profit. U.S. and Mexico, 54% contribution for revenue and 22% for profit. Europe, 12.7% contribution in terms of revenue and 13.2% in terms of profit. So the contribution mainly comes from China in terms of profit. Cash flow and capital structure. During the period, we have robust operating cash flow of USD 1.6 billion, a drop of $186 million. CapEx dropped by $160 million at $812 million. Dividend payout is the same as the previous year, $490 million payout. Interest-bearing borrowing, $3.228 billion, a drop of $140 million. Total debt-to-equity ratio, 30.5%, a drop of 2 percentage points. So our debt-to-equity structure is optimizing. And we have very strong cash flow. Reviewing the macro global economic recovery, it was rather slow due to the impact of the pandemic, geopolitical tension and high inflation. Uncertain economic outlook and tight monetary policies in Europe and the U.S. impacted consumer confidence and purchasing power resulting in sluggish demand. Hog prices in China hovered at low levels because of sufficient hog supplies. U.S. hog raising costs remain high. Oversupply of meat protein caused low hog and pork prices, resulting in operating difficulties for the pork industry. Hog supply declined due to high costs and African swine fever in Europe driving a sharp increase in hog prices. WH Group leveraged its global platform and vertically integrated business model, promoted efficiency improvement and cost control, optimized our business structure to mitigate the impact of unfavorable market dynamics and strengthen long-term competitiveness. Number of slaughtered hogs in China increased by 3.8% to 727 million heads in 2023. By the end of the year, hog inventory reached 434 million heads, a decrease of 4.1% over the end of '22. Number of slaughtered hogs in the U.S. increased by 2.1% to 127 million heads. In 2023, the average hop price was RMB 15.4 per kilo, a decrease of 19%. In the U.S., average hog price, USD 1.36 per kilo, down by 17%. In Europe, the average hog price was EUR 1.73 per kilo, up 22%. For China and U.S., main pork producers and consumer countries. Last year, slaughtered hogs number went up and hog prices went down. In Europe, the trends were reversed driving up the hog price. Average pork cutout value in the U.S. was USD 1.98 per kilo in '23, a decrease of 13.5% from '22. Hog price decline outpaced declines in mid value. Market spread rebounded from lower levels and that is beneficial to our fresh meat business. In 2023, there was a depreciation of renminbi against the U.S. dollar by 5.3%, affecting our Chinese business performance. Operating profit and margin in China, $948 million, a drop of 8.8%. Packaged meat, $879 million, a drop of 3.4%. Pork, $54 million, down by 42% because of operational related factors and also depreciation factors driving down the level. China business review. We adhered to the principle of adjust price, improve mix and control cost. We're adapted to changes in the consumer landscape, expanded market through innovation, maintained stable performance. Packaged meat business continued to optimize the product mix, realized brand value with unit profitability hitting record highs. Pork business proactively participated in competition achieved a double-digit increase in slaughtering volume, yet segment profit decreased due to low hog and meat prices. The scale of poultry business expanded as we continue to diversify our business. We raised 200 million poultry, an increase of 68%; processed 170 million poultry, increased by 61%. U.S. operating profit dropped by 64% to $330 million. Packaged meats, $1.072 billion, up 1.3%. Pork, a loss of $624 million, an increase of $580 million in terms of losses. So we have been seriously affected by the performance in the U.S. Hog production business booked severe loss due to unfavorable market dynamics. We actively optimized business structure. Operating results recovered from the trough in second half of '23. Packaged meat business continued to adjust price, improve mix and control cost. We fulfilled its role as our core business with profitability hitting a record high. Operating profit of fresh meat business increased significantly because of sales channel and product mix optimization. We continue to reform how production, cut production volume and enhance long-term competitiveness. We have reduced the size of hog production with hog price going up in the future. There will be much obvious improvement to hog production business. Operating profit in Europe, $193 million, up 70%, Packaged meat $99 million, up 2.1%. Pork $90 million, an increase of $110 million. In Europe, we ceased favorable market conditions and implemented cost-cutting and efficiency enhancing measures. Revenues and profits achieved record highs. Earnings of pork business increased significantly, as the segment benefited from substantial increase in hog and meat prices. Packaged meat proactively adjusted to prices to absorb cost inflation, profits remained stable. We strengthened business footprint through M&As. We completed acquisition of 100% equity interest of Romanian packaged meat producer, Goodies. And we entered into an agreement to purchase 50.1% equity interest of Spanish packaged meat producer Argal. In the next few days, we will complete the approval procedure and complete the transaction. Now looking into 2024, we believe the external operating environment will carry more opportunities than challenges. Global economy will stabilize, but growth prospects diverge across regions. Inflation will fall substantially relieving cost pressures for corporates and laying foundation for easing monetary policy. Geopolitical situation remains complex and volatile, impacting the landscape of global industrial and supply chain. Animal protein industry is gradually rebalancing supply and demand. We will continue to consolidate our global resources, adhere to the adjust price, improve mix and control cost business philosophy. Leverage our strength in industrialization, scale and diversification. We'll upgrade intelligent manufacturing, automation and digitalization and maximize internal synergies to maintain our leading market position and achieve sustainable development. Fresh business will leverage on its strength and we will expand the volume. We will improve management capability of hog production and poultry business, laying solid foundation for meat diversification. We will adapt to structural changes in consumption behavior channels, accelerate doubling sales network initiative, expand the market network and achieve breakthrough in sales volume. In the U.S., we will optimize business structure, reduce hog production capacity and improve hog production performance, focus on developing packaged meats business, further optimize product mix, drive volume growth, maintain strong profit. We will improve profit of fresh meat business through sales channels and product mix optimization. We will optimize supply chain management, continuously enhance automation, cut cost and increase efficiency. In Europe, we will strengthen price management for packaged meat business, optimize product mix and promote channel innovation to enhance profitability. Fresh pork business will optimize capacity increased byproduct yield and value. We'll leverage integrated business model, accelerate the development of poultry business. We will also integrate newly acquired businesses and identify investment opportunities to further strengthen our business footprint. That's the end of my report. Thank you. [Foreign Language]

[Interpreted] so my first question is regarding for Smithfield. So the management has mentioned about that 2024. We can see the decent improvement for the profit, especially for the hog production. So can you give us some of the color? How much we can expect it from the unit profit? And how -- is there any strategy you can just try to smooth out the U.S. business because the last 2 to 3 years is very volatile? So that's the first one. [Interpreted] The second question relates to Shuanghui asking about the people talking about consumption downgrade and how will that impact your volume and profit per ton?

Okay. So I'll start with the first question. And that question relates to volatility that we've seen in the last 2 to 3 years. The reality is that volatility has really been generated from our hog production operations. We are in a cycle, Smithfield and the industry are in a cycle that actually began back in 2022 when we saw elevated raw material inputs and inputs such as corn and soybean mill. And through 2023, that was coupled with a fall in price. And so that led to one of the worst years in hog production that we've had in the history of Smithfield. So as we look forward, I think to the second part of your question, about 2024. Both Smithfield and the industry, we are expecting this cycle that we've been in to come to the end of the first quarter. We do see in the modeling that we'll -- we will see a return of profitability as we get to the midpoint and back half of the year. So we are seeing that prices are coming up while grain costs are now coming down. So we do expect that to help with some of the volatility. Do you want to translate and then I'll...

[Foreign Language]

So if you contrast that to our packaged meats business, we've seen some real -- really strong, stable business in our packaged meats. We hit over $1 billion of profit in 2022, again, hit over $1 billion of profit in 2023, and our expectation is that business will remain stable as we go forward. And so that goes back to your question of volatility. In the 2024, again, what we expect is to see a return of profitability in hog production. But some of the things we've been doing since 2022 is reducing our exposure. And so we -- in 2022, we killed or we grew about 17.5 million pigs. This year, 2023, that number was about 15.8 million, and we expect to be below 15 million as we finish 2024. We've done that by removing poor performing farms and poor geographic areas to grow farms, places like Arizona and Utah, some parts taking sales out of our operations in Missouri and reforming our East Coast operations. I'll let you translate and I'll...

[Foreign Language]

Our goal for the future, as it relates to hog production, is to continue to decrease that exposure. Ideally, we would get to 10 million hogs or possibly lower. And that will be done through a number of mechanisms, whether that's sales, divestitures, partnerships, a number of different vehicles that we can use to continue to decrease that exposure. And I think what you'll find as that exposure decreases, the level of volatility we see in our earnings will decrease with it.

[Interpreted] So for the question relates to Shuanghui's profit per ton -- packaged meat profit per ton, when people talk about consumption downgrades, what we saw in 2023 is more sort of divergence of the consumption behavior. We see consumption upgrade. There are some high income consumers who continue to purchase high-end products. And obviously, there are also downgrades where lower end or less affluent consumers make purchasing lower-end products. We don't think this will have a significant impact to our business. Obviously, it will make our life more difficult when we try to expand the scale of our packaged meat business, but the impact should not be significant. In relation to profit per metric ton, we think -- in 2023, it achieved good growth and we think in '24, we'll continue to achieve stable growth. Profit per ton is primarily driven by the cost as well as the mix. In terms of mix, we are doing a lot of work with new products, new channels to continue to optimize and improve the mix. And in terms of the cost, we don't see significant increase in pork prices this year. And the poultry, which is also important raw material for us remains at a low level. So we think the profit per ton for packaged meat will continue to grow in '24 and will continue to be higher than RMB 4,000 per metric ton.

[Interpreted] So the 2 questions. First is for Mr. Chairman, Wan, about the company's global strategy. Chairman has mentioned before that we will continue to downsize the hog production business in the U.S. And in 2023, we noticed a pretty good results from Europe, and we have been active in M&A in Europe as well. So does that mean we will be allocating more capital into Europe business to get more growth from Europe? And how about the capital expenditures or investment in the U.S.? And the second question relates to China's 4Q packaged meat volume, which seems to be declining. Probably that's because of timing of Chinese New Year. So she wants to understand the -- how is the Chinese New Year holiday sales in 2024 and the outlook for 2024?

[Interpreted] We have learned a very unforgettable lessening hog production this year. In China, we had very poor performance in hog production. In the U.S., we had even worse performance. In Europe, the performance in hog production is relatively strong. But overall, the hog production has been the driver of the significant drop in profit for WH Group. So in the future, we will continue to be rebalancing our business mix. So our strategy in the future is really to downsize the hog production, particularly in the U.S., where we'll be downsizing from 18 million to less than 15 million in 2024, and we'll continue to find opportunities to downsize another 3 million to 4 million and with the target to have a production volume of less than 10 million eventually. Given the market environment, the conditions is not mature for a complete exit. In that case, we will have a very significant loss, which is not good for the company. So it's -- the conditions are not mature for complete exits, but we will continue to look for opportunities to continue to downsize the hog production in the U.S. And we will need to continue to monitor the market and various external factors to have a definitive time line of when we will completely exit from hog production. But the strategy is very clear. As you can see, our volume this year has already dropped. In China, the hog production business is much smaller. The production volume is only 300,000 heads per year. So in China, the strategy is also very clear. We cannot grow -- we are not going to grow the hog production in China, and we will only consider expanding that business when the performance has improved meaningfully. The hog production business in Europe performs very well and achieved $100 million of operating profit. On a per head basis, it's more than $30. In comparison, in the U.S., the per head loss is around $40. But we do not plan to aggressively expand the hog production in the Europe. We will reasonably support the growth of hog production in Europe. Our growth focus or priority in the future is fresh pork in China, U.S. and Europe as well as packaged meats and the packaged meats, we will continue to expand and grow the packaged meat. We had a pretty good year in 2023 for the packaged meat in China as well as in U.S. In U.S., we delivered record profit -- operating profit of $1.70 billion. And in China, the per unit per ton profit also hit record high and China delivered $870 million of profit. In Europe, the profit from packaged meat is around $100 million. On a per ton basis, it's relatively low. So we will -- so we are working to improve the per unit profitability in Europe. For fresh pork and the packaged meat, we will both adhere to the -- our business strategy of optimizing the price, improving the mix as well as control the cost. And in packaged meat, we will further expand the consumption scenarios to promote more consumption in the household and in the dining tables. As you can see from the display outside, in China, Shuanghui products are diversifying into a combination of meat, [ egg ], dairy, vegetables and grains so that we can provide a holistic solution meals -- holistic meals to the consumers' daily needs. And in the future, we'll continue to promote the exchange of products, the management as well as technologies in packaged meats for China, U.S. and Europe so that we can aggregate great ideas for packaged meat products to further expand this business. For fresh pork business, we'll continue to expand the scale. For the packaged meat, business will continue to improve the mix. And by doing that, we hope to continue to strengthen our competitiveness. So in summary, our strategy in the future is to resolutely downsize the hog production and expand and grow the fresh pork and the packaged meat.