WH Group Limited (288) Earnings Call Transcript & Summary

Good evening, everyone. Welcome to the results announcement for the first quarter of 2024. The management will walk you through the performance of the first quarter of this year and our future strategies. Today, we have Chairman and Executive Director of the company, Mr. Wan Long; Executive Director and CEO of the company, Mr. Guo Lijun; Executive Director of the Company and the CEO of Shuanghui Development, Mr. Ma Xiangjie; and CFO of Shuanghui Development, Liu, Songtao; Shane Smith, CEO of Smithfield; CFO of Smithfield, Mark Hall; CFO, Joanna Yan. And this is Robert Wan, Executive Director and host of today's briefing session. So Mr. Guo will start with an overview of the first quarter performance.

Good evening, everyone. Now I'm going to walk you through our performance in the first quarter of 2024. In the first quarter of 2024, total packaged meats sold is 786,000 metric tons year-over-year drop of 4.1%. Total pork sold is 941,000 metric tons, year-over-year drop of 7.8%. Revenue was $6.2 billion, year-over-year decline of 8.3%. EBITDA, we had achieved $674 million, 27% higher than last year. Operating profit, $501 million, which is 37% higher than last year. Profit attributable to the owners of the company is $301 million, which is 73% higher than last year. So overall, the volume has dropped, but the profitability has improved substantially. In the first quarter of '24, hog prices in China and the U.S. continued to remain at low levels due to sufficient hog supplies. The hog prices in the Europe were at historical high levels as hog supplies remained tight. In the first quarter of '24, the number of slaughtered hogs in China decreased by 2.2% to 195 million heads. Hog inventory in China decreased by 5.2% to 409 million heads. The number of slaughtered hogs in the U.S. increased by 0.4% to 32.7 million heads. The average hog price in China was CNY 14.9 per kilogram, a decrease of 5.1% year-over-year. In the U.S., the average hog price during the first quarter was USD 1.26 per kilogram, a decrease 0.8%. In Europe, the average hog price was EUR 1.6 per kilogram, decreased by 3.2% year-over-year. The average pork cutout value in the U.S. was USD 1.97 per kilogram in the first quarter of 2024, an increase of 8.7%. So the industry market spread, which is the USDA Cutout minus CME hog prices recovered significantly from the first quarter of last year. In China, the profit of our packaged meat business increased significantly. Earnings of the pork business declined due to the weak demand. The operating profit in China -- the profit for China in the packaged meat was -- for the pork business was $251 million, dropped by 10%. The packaged meat business had a profit of $262 million, an increase of 10%. In the U.S., the profitability of packaged meats remained high. Loss of pork business narrowly -- narrowed substantially, thanks to lower raising cost and operational improvements. The operating profit in the U.S. in the first quarter was $191 million. The packaged meat business has a profit -- operating profit of $288 million, whereas for the pork business, the loss was $62 million, which is $151 million (sic) [ $156 million ] less -- loss compared to last year. In Europe, the operating profit achieved record highs as it captured the favorable market conditions. The operating profit in the first quarter of '24 was USD 59 million. The packaged meats business had operating profit of $30 million, increased by 100%. The pork business had operating profit of $26 million, which is increased by 189%. So from an outlook perspective, we believe the opportunities continue to outweigh the challenges. We see global economy stabilizes, but growth prospects, diverse across regions, inflation has moderated, which is laying the foundation for easy monitory policy. The geopolitical situations remain complex and volatile impacting the landscape of global industrial supply chain. Animal protein industry is gradually rebalancing the supply and demand. For WH Group, we'll continue to consolidate our global resources adhere to the adjust price, improve mix and control costs. The philosophy, leverage our strength in industrialization, scale and the diversification, upgrade intelligent manufacturing, automation and digitalization and continue to contain our leading market positions.

[Foreign Language]

[Interpreted] The first question is from the research analyst of Bank of America, Luo Chen. The first question relates to the China's business. The profit in the fourth quarter and the first quarter of this year dropped in China strongly. And in the first quarter this year, the packaged meat business continued to perform well, but the overall profitability has been negatively impacted by the slaughtering and the hog production business. So based on the -- so the question is what's the management's outlook for the hog prices in the second quarter and third quarter of this year? And are there any opportunities to see some recovery in hog production and the slaughtering business in China?

[Foreign Language]

[Interpreted] So the answer is from a CEO of Shuanghui. Mr. Ma. For the result of the fourth quarter last year, we had discussed in the previous briefing, so we'll not discuss further in this meeting. For the performance in the first quarter of this year, our -- the profit drop is primarily due to our slaughtering business or fresh pork business, whereas the packaged meat business has actually improved the profit. And in the hog production, we also saw improvements in terms of the raising cost in terms of the KPIs, and we're seeing fewer -- lower losses. So the reason for the relative -- for the drop in the profit in the slaughtering or the fresh pork business is because in 2023 the price for the frozen meat was relatively high, thanks to the release of the COVID-related controls. So at that time, we have achieved good profit from the frozen products. But in '24, the price of the frozen meats is lower. And -- but on the other hand, the margins or profit from our fresh meat continued to be very good. In terms of the outlook for the rest of the year, our judgment or view on the pork -- hog price is that it will be relatively lower in the first half and will gradually increase in the second half. But overall, the average price in 2024 would be largely same as '23 or slightly improve and will be below CNY 16 per kilogram. And we think that pork prices will -- hog prices will improve a little bit in the second quarter and the profitability on the frozen meat products will improve. And the profit from the fresh meat will remain stable. Overall, we think this year for the fresh pork business the scale will expand and we will see some pressures in the profitability from the -- in the fresh pork business.

[Foreign Language]

[Interpreted] Question from Morgan Stanley research analyst, Lillian. The first question relates to China business. Mr. Ma has already talked about the upstream business. Now she wants to ask about the downstream business. As Mr. Ma mentioned earlier, we are facing weak demand from the market. And we have noted the volume decrease in packaged meat business in the first quarter. What's the management's outlook for the full year packaged meat volume, given the performance in the first quarter? In the previous briefing, management had a positive outlook for the volume for the entire year, will this change? Second question relates to the U.S. business. We are seeing good improvement in the hog production in the U.S., the narrowing of the losses, will this trend continue? And if the pork prices increases in the U.S., will that have any negative impact to our packaged meat business in the U.S.?

[Foreign Language]

[Interpreted] So the answer from Mr. Ma on the packaged meat business in China. We did have the slight decrease in the volume in the packaged meat business in China for the first quarter, partly because of the lower season after the major holidays and also because we had a higher base in 2023 because the first quarter of 2023 was the first quarter where the COVID-related control on the social movement has been released in China. So there have been a lot of pent-up demand from the market. So the sales volume in the first quarter of '23 was very strong, even in the historical context is a relatively high level in Shuanghui's history. So with that in mind, we think that in the second quarter, the volume of packaged meat business will stable and will stabilize in terms of growth. And in the third quarter, we will see growth and in the fourth quarter, we will see more significant growth. And we do want to highlight that the year-over-year comparison in the first quarter and the fourth quarter of '24 are both impacted by the basis of last year. Shane, Mark, do you want to take the second question?

We'll take the second question. So as you noted, the U.S. hog production business has narrowed losses. And as we move forward, we do think that will continue. That's been a combination of both improvement in pricing from the hog index, underlying transformational changes that have been [indiscernible] cost structure and coupled with fall in raising costs [indiscernible] down about 29% year-over-year and soybean meal is down about 6%. And so we're seeing continued improvement in the underlying raising cost of hogs. So we do expect that to continue. We expect that we are beginning to come back to normal seasonal patterns and profitability of our production. We see losses in the first and fourth quarter and profit in the second and third quarter. We do believe that we are back in that cycle and we will begin to see profitability in hog production as we go through the second and third quarters. As to the impact of our packaged meats business, you're correct that as meat prices change, that does put pressure on packaged meats. However, what I will tell you is we have a very resilient packaged meat business. We continue to remain focused on pricing discipline, controlling our mix and ultimately controlling our costs. And so we feel very encouraged about what we see in packaged meat and then the outlook for the remainder of the year.

[Foreign Language]

[Interpreted] Three questions from CICC. The first question relates to the U.S. hog production business. We have noticed the increase in the hog prices in the U.S. What's the management's view on the hog price cycles in the U.S.? Where are we on the -- in the cycle? And do we see changes in the supply-demand dynamics? And do we believe we have the opportunity to have a higher expectation on the hog production profitability for 2024? The second question also relates to the U.S. In the U.S. packaged meat business, we noticed a 4% decrease in profit in the first quarter. What's the reasons of this drop in profitability? And what's the management's view on the current consumer demand in the U.S. retail market? And what's the management's outlook for the packaged meat business? And third question relates to China's network doubling efforts and what's the latest progress and any data that the management can share with the group?

To the first question. In hog production, again, we're seeing improvements coming out of this incredibly bad cycle that we've been in really since the fourth quarter of 2022. As I said a while ago, as we come into the second quarter, we are seeing strengthening in pricing, a reduction in raising cost both driven by the reduction in corn and soybean meal on the input side as well as transformational things that we have done as a company to remove unprofitable parts of that business, unprofitable or underperforming farms. And so we do expect, as we go forward, that as we go through the second and third quarter, we'll see a return to the seasonal profitability, as I mentioned earlier. Fourth quarter is a quarter that remains historically under pressure from a profitability standpoint. But we do believe we'll come out of this cycle that we've been in and returning to the more normal cycle of losses in the first and fourth quarter profitability in the second and third. So that's the way we look at 2024. That's what the markets would indicate to us to date is our expectation. And so I believe we're in a much better place today in our hog production business than we were as we went into the cycle in the back half of 2022.

[Foreign Language]

[Interpreted] To the second part of the hog production question you asked about supply-demand. We are continuing to see some contraction in the U.S. herd. We see an increase in sales, slaughter as well as other indicative information that there's an overall reduction or contraction in the U.S. industry. However, I would temper that a little bit with we are seeing increases in productivity. And so I think the USDA has held down about 1% or call it over 1%. We think that may actually be flat to down as these are offset by productivity gains. So we don't see a significant change in the supply-demand economics in the U.S.

[Foreign Language]

[Interpreted] I'll take the second question on packaged meats. As Shane stated at the outset, our packaged meats business continues to perform exceptionally well. And this first quarter results was actually the third best in our company's history. So you referenced some softness as compared to the prior year. I would say that last year's first quarter was a record first quarter. So it's a difficult comp for us, and is really -- our first quarter results are heavily dependent on the holiday ham season. So I would say marginally holiday ham business was a little bit softer than last year. But again, the business continues to perform exceptionally well. Our profitability per metric ton was over $880 during the quarter. So again, just outstanding results from packaged meats. The question as to the health of the consumer. I would say the consumer continues to confine with high prices with -- driven by inflation and reduced government support programs. It's especially prevalent on the food service side of the business where food inflation, inflation on food away from home was over 4% during the last reporting cycle. So the consumer is still very cautious, but as we've stated before, Smithfield is uniquely positioned across price tiers, across brands and also providing a fair amount of private label business so that we're able to capture that consumer trade down across the Smithfield franchise and not lose that customer outside of the Smithfield business.

[Foreign Language]

[Interpreted] With respect to the doubling network initiative in China, it is an important initiative we launched last year to hopefully achieve 2 objectives. One, is to double the number of point of sales or the network coverage of fresh pork and packaged meat business in the next 3 to 5 years. And the second is to strengthen the quality and the operating capability of the point of sales of our distribution network. Last year, it was a -- the project last year was in the experimental stage where we have launched the initiative in selected markets. This year, we expect to roll out this initiative into more cities in China. For the packaged meat business, we hope to add 250,000 new networks and by the end of the year to have 1.74 million point of sales. In the fresh pork business, we hope to add 15,000 new point of sales and to reach 65,000 point of sales by the end of the year.