WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] [indiscernible] Good evening, everyone. So I will first report the performance of the company in the first half. In the first half 2024, our total package meats sold was 1.5 million metric tons, 6% lower than last year. Pork sold volume is 1.8 million metric tons, 10% lower than last year. The total revenue was $12.29 billion, 6.3% lower than last year. EBITDA was $1.47 billion, 37.8% higher than last year. Operating profit, $1.14 billion, 78% higher than last year. Profit before tax, $1.04 billion, which is 70% higher than last year. Profit for the year, $796 million, $58.6 million higher than last year. Profit attributable to the owners of the company, $694 million, 81% higher than last year. EPS USD $0.0541, 81% higher than last year. And based on the company's performance as well as the liquidity, the Board proposed to declare a dividend of HKD 0.10 per share, which is twice the amount of last year. The packaged meat business is our core business, contributed to 52.8% of revenue and 99.7% of operating profit. Pork business contributed 40.1% of revenue and 8.3% of operating profit. Other business contributed 7.1% of revenue and a negative 8% of operating profit. In terms of regions, China contributed 31.7% of revenue and a 39.2% of operating profit. U.S., Mexico was 54.3% revenue and 47.7% of operating profit. Europe business, 14% of revenue and 13.1% of operating profit. In the first half of this year, the global economy continue to recovery, but was uneven, and the persistence of geopolitical tensions and economic policy uncertainty, consumer confidence and the demand have remained subdued. A significant moderation in inflation has alleviated cost pressure for corporates and heightened expectations for relaxed monetary policy. Hog prices in China increased due to lower hog prices. Hog supplies affected demand for consumer goods was insufficient. The market environment for the pork business in the U.S. improved as feed prices fell, hog prices rebounded and market spreads widened. In Europe, the feed cost decreased, and hog prices fell slightly from high levels. WH Group leveraged its global platform and a vertically integrated business model, promoted efficiency improvement and cost control, optimized the business structure and led to significant improvement in operating results. Based on the National Bureau of -- based on information from NBS of China and USDA, the number of slaughterhouse in China decreased by 3.1% to 364 million heads in the first half of 2024. In the first half, the average hog price in China was CNY 15.59 per kilogram, an increase of 3.1% year-over-year. The number of slaughtered hogs in the U.S. increased by 1% to 63.77 million heads. In the U.S., the average hog price was USD 1.38 per kilogram, up 7% year-over-year. In Europe, the average hog price was EUR 1.64 per kilogram, decrease by 6.1% year-over-year. The average corn price in the U.S. was USD 4.47 per bushel in the first half of 2024, down 32.6% year-over-year. On the other hand, the average pork cutout value in the U.S. was USD 2.08 per kilogram, an increase of 13.7%. So the industry market spread has widened as the pork values outpaced the hog price. In China, the operating profit in the first half was USD 447 million, 14% lower than last year. Packaged meats profit was $460 million, 1.5% higher than last year. The pork business profit, $28 million, 33% lower than last year. In China, we continue to adjust the price, improve mix and control costs and enhance internal management, maintain stable operations amidst challenging market environment. For packaged meats, the sales volume declined due to sluggish demand, but profitability hit a record high through effective cost control and innovative market management. We actively develop new channels. Sales volumes in 3 new channels, including membership-based warehouse stores, snack shops and convenience stores increased by 45% year-over-year. E-commerce sales volume increased by 18% year-over-year. Volume and profit of pork business was under pressure due to sluggish meat consumption and intensified market competition. Frozen meat reserve drove a quarter-over-quarter improvement in profits in Q2 as hog prices and meat prices increased. Volume and KPIs of poultry business improved year-over-year, but unfavorable market conditions posted challenges to profitability. In U.S. and Mexico, in the first half, the operating profit was $544 million. It's a substantial improvement compared with $36 million of last year. Packaged meats profit was $614 million, 6.2% higher than last year. Pork loss was $4 million, substantially narrowed compared to $495 million last year. In the U.S., we continuously cut costs and enhance efficiency, optimize the business structure, profit rebounded remarkably. Packaged meats business continued to adjust price, improve mix and control costs and sustained its steady growth with profits hitting record high. Operating results of pork business increased significantly due to improved market dynamics, hog production reform and efficiency improvement measures. We continue to reform hog production to reduce the volume and lower cost to enhance long-term competitiveness. In Europe, the operating profit was $149 million. The packaged meat business profit $63 million, 70% higher than last year. Pork profit $71 million, 61% higher than last year. The Europe business leveraged its vertically integrated model, took measures to cut costs and improve efficiency with revenue and profits both hitting record highs. Earnings of pork business increased significantly as the segment benefit from lower feed costs and cost-saving initiatives. Package meats effectively managed prices and optimized product mix with profitability increasing substantially. We also expanded value-added packaged meat business through M&As. We completed the acquisition of 50.1% equity interest of Spain packaged meat producer, Argal, in March 2024. In the future, WH Group 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 the diversification and maintain our market-leading positions. In China, the packaged meat business will adapt to changes in consumption behavior and to take advantage of the channel transformation and accelerate industrialized production of Chinese-style products. For fresh pork business, we'll leverage the advantages in branding and nationwide presence, vertical-integrated model and scale -- sales network to consolidate our resources in fresh meat and frozen reserve domestic production imports. And we will improve the management capability and profitability of hog production and poultry business and accelerate the -- force to accelerate the double sales network initiative, promote channel innovation and transformation. In U.S. and Mexico, we will continue to optimize the business structure, reduce the hog production capacity and lower production costs. For packaged meats, we'll focus the development, optimize its product mix, drive volume growth while maintaining strong profitability. We will also improve profitability of fresh pork business through efficiency improvement, sales channels optimization and value-added product portfolio. We will also accelerate scientific and technology innovation, optimize supply chain management and continuously enhanced automation to cut costs and increase efficiency. In Europe, the packaged meat business will strengthen price management, optimize product mix and promote channel innovation to enhance profitability. Fresh pork business will optimize capacity, increase by product yield and value. We'll leverage integrated business model, accelerate the development of poultry business and also integrate newly acquired business and identify investment opportunities to further strengthen business strengths. So that's all for the briefing. And now we'll move on to Q&A.

[Interpreted] So question from Jefferies. The first 2 relates to the U.S. business. The first is around the hog production reformation. Are there any progress that we could share with the analysts and investors? And any other targets around the hog reformations we could share? And secondly, related to the recent acquisition of a packaged meats business in Tennessee. So does this mean that we will continue to grow our business through more M&As in the U.S. in the packaged meats? And the third question is around the WH Group. So apparently, we have announced the potential spin-off IPO of Smithfield. So after the IPO of Smithfield, WH Group will essentially become a holding company. So how will WH attract the interest from investors? Are we going to have a more generous dividend policy? Or are we going to have more long-term share repurchase programs?

Yes. Our production operations, we have continued to perform that business over this past year. As you have followed us, you know we reached a high point in hog production of 17.5 million hogs back in 2019. Since then, we have systematically reduced that number through different parts of our organization, especially where we had high production assets that were geographically displaced, down to the run rate this year. We expect to be a little below 15 million hogs. And I would tell you that reformation is continuing. We're still looking at ways to take underperforming power production assets out of the system. As it relates to further progress, we continue to look for ways to remove ops. As we've stated on previous calls, ultimately, our goal is to be below 10 million market animals per year. And I would just say as an update, that we're working toward that number, and we expect to be able to report more progress to you against that number in the coming quarters. [Foreign Language] And as it relates to the acquisition we recently completed in Nashville, that was a strategic acquisition from the standpoint that it gave us additional capacity in the dry category in our business. We're very excited about the capability and the capacity the national plan brings to us as well as the team members that are now part of Smithfield. I would tell you from a future M&A strategy, we'll continue to be opportunistic. We'll also be very disciplined in our approach to M&A. We will look for bolt-on acquisitions or things that give us capabilities in areas that we don't currently have. So we don't have anything to report for the future from the U.S. standpoint, other than to tell you, again, we'll remain very disciplined and very opportunistic as those opportunities present themselves. [Foreign Language] Thank you. [ Xiaoming ], the third question was for WH Group? [The interpreter answers, sure.]

[Interpreted] So in terms of the U.S. IPO, we have of Smithfield, we have made announcement in July 14. And all the details, please refer to that announcement. Given the restrictions of U.S. securities regulations, we're not able to share any further details beyond that at this point. And in the future, WH will continue to be the controlling shareholder of Smithfield, U.S. and the Mexico business, and it will continue to be a platform with operations across China, Europe and U.S. And we believe that we'll continue to improve our operating efficiency. We'll continue to generate returns for the shareholders. [Interpreted] So in terms of dividends, we -- our policy is not -- of a payout ratio not less than 30%. And we -- as we -- our cash flow, our profitability continue to improve, we will try to provide more returns to our shareholders. For example, last year, despite the significant losses in our U.S. hog production business, we maintained our dividend to the shareholders.

[Foreign Language]

[Interpreted] Two questions, both related to the U.S. business. The first is about the Smithfield packaged meat business. In the second quarter, the profit per ton of packaged meat business has improved quite significantly and made a lot of contributions to the overall profitability. So how -- with that in mind, how are we going to look at the mid- to long-term target of profit for packaged meat business? And can you also talk about the reasons or the drivers behind the second quarter profitability improvement of Smithfield packaged meats? And the second question relates to the hog production. So Shane have discussed the targets, long-term target of 10 million heads per year of production target. So what's the timing of this target? Is it 1- to 2-year target, 2- to 3-year target? And if we can achieve 10 million heads per year of production volume target, what would be the profit of hog production business look like? [The interpreter asks company executive Shane if he can hear them.]

Okay, sorry. So I'll start with the hog production question. So again, our long-term goal -- or our goal is to reduce our exposure to hog production to around 10 million head, and that would still leave us about 32% to 33% vertically integrated. We'll continue to execute against that strategy as we have been. Again, we're down from a high of 17.5 million to this year, we'll be at a run rate of down below 15 million. We're looking at this in ways, first, from a geographic area and from an underperforming asset area. And we've kind of worked through those, both in our -- the things we took -- that took place in places like Arizona and Utah. And so we've been reducing systematically throughout the process. What we have to be aware of and what we're balancing is the need, as we reduce this hog production, to do it in a way that protects our downstream businesses, so our fresh pork business and, ultimately, our packaged meats business. And so we're taking a very geographic strategy or geographical approach in our strategy to how we do that. So I think over a time period, we're looking at this over the next, I would say, 2 to 3 years is our target to be down below 10 million. Now that could be expedited as we found ways to change the format, I would say, of some of our larger producers, and we're showing some success in doing that today. But ultimately, I would say, over the next 2 years, we would like to see that number down below 10 million. Yes. As it relates to profitability, again, many of the assets or the farms that we have removed have been either geographically displaced, meaning they have a high cost because of their geographic location or, in some cases, just underperforming assets. And so as we remove those assets, the impact on our profitability is immediate. As for range of profitability, obviously, that depends on the markets. It depends on the corn and soybean mill markets for the input side and the hog pricing market on the output side. So it's hard to give you a level of profitability other than to tell you that we do believe these moves will improve our continued improvement and, ultimately, profitability in the hog production segment. [Foreign Language] To your second question on the packaged meats business, the packaged meat business continues to perform incredibly for us. In the second half -- or in the first half, second quarter, we saw segment profit per ton above $900 and a margin approaching 17%. So we're very excited and very happy with the way that business is performing. We've done a lot of work on the cost side of that business, on the SKU or business simplification side. And this is to your question about what the drivers have been. And again, it goes back to the 3 main areas when we think about our business, and that's cost control, price adjustment and our mix. And we're constantly looking at ways to improve all 3 of those to keep enhancing our packaged meats business ability to continue to provide the level of profitability that we've seen over really the last 3 years in that business. Now let's translate that. [Foreign Language] We do expect as we move through the second half of this year to see some of that profit per ton and margin to seasonally go down as we have seen that in the past few years in the back half of each year. And that's really being driven by the timing of the holiday seasons coming to the U.S., which are typically higher volume but slightly less margin. But we do, on an overall basis, continue to be very bullish on our packaged meats business and very happy about where that business is moving and how it's continuing to provide stability in earnings to the Smithfield business. [Foreign Language] Thank you. Mark, do you have anything you add to the packaged meats discussion?

Yes. I would just -- to further what Shane said, it's really about pricing discipline, our mix improvements and really about the operational efficiencies that we've been able to generate within our facilities. So our plant operation's really focusing on yield, labor and overhead improvements as well as in our supply chain operations, so our transportation warehousing. We've been able to really streamline our operations and drive some significant efficiencies with our goal or our culture of offsetting any sort of inflationary impact through these cost savings. So the team within the facilities and within supply chain have just done a tremendous job year-over-year of helping to offset inflation and keep those margins high. [Foreign Language]

[Foreign Language]

[Interpreted] So 3 questions from Linda of Macquarie, all related to the U.S. hog production. The first question is what's the management's view of the hog production supply-demand dynamics in the U.S. industry. So are all the hog producers downsizing their capacities? And if people are all trying to balance the supply and demand, when can we see the balanced -- a more balanced markets or more healthy supply/demand dynamics? And the second question is around the hog reformation. As Shane mentioned, there's a target to achieve 10 million heads per year of hog production volume. So to achieve that, do we expect any sort of one-off costs or impairments or other losses? So how should we estimate those kind of expenses? And the third question relates to the Prop 12 of California. So how will that impact the cost of our hog production business?

Okay. So I'll start with the reformation. Again, the goal of 10 million head -- and I think the question was specific to should we expect more impairments. I would tell you from a material basis, I think we have taken many of the cleanup costs, meaning the asset write-downs or asset write-offs in 2023. With the closures of Utah, the sale of Arizona, some of the major reformational changes we did in Missouri, for example, where we took 60,000 sows out and wrote off many of those assets. So I would tell you from a materiality standpoint, the majority of those impairments have already taken place. Now as we go forward in this next step, we'll -- there is -- it's a multi-pronged strategy to continue to reduce that. Some of that will be farm closures. Some of that will be in the context of not renewing contracts. Many of our hogs come from contract farms. So as those contracts move to expiration, just not renewing those contracts and replacing that internal supply with open market supply. But the third piece of this is inventory. And so the value of the inventory that we have on hand as we sell that inventory at a fair value to a further processor or someone who's going to become an independent grower for us, there could be some potential impairment charges related to that inventory to the extent that we have inherent losses embedded in that inventory value. And so if we -- from a future impairment standpoint, that's where I would expect to see any impairments if we have them, depending on the timing and where the markets are when we were entering to either a sale or a conversion. But I would tell you, from a fixed asset standpoint, that, materially, all of those assets that we would expect to be written down or written off, that has already taken place. From a Prop 12 standpoint, Prop 12 became effective in 2023. We have and continue to see some impacts of that in our business. We converted some of our sows to Prop 12 to support some of our customers that requested it. It is an additional cost. Where we really see the impact of our business is really on our packaged meats business, and that's in the bacon category, where we were selling bacon into the California market, ready-to-cook bacon. So we are seeing some impact on some of our volumes from that standpoint. But I would tell you, it's -- there's becoming more availability in the market, which is what we expected to see, where we're able to, one, either buy more Prop 12 pigs externally; or two, buy a Prop 12 raw material to help us bring back some of that volume. And so from a Prop 12 standpoint, for our question 3 in Massachusetts, I think we're in a good position. We have a good strategy to continue to support our customers in the California and Massachusetts market without going out and investing a tremendous amount of capital in converting some of our internal farms. As to the supply dynamic, you're right, that the U.S. is still in an oversupply. We have seen this year across the industry, there's been better health. So we're seeing more pigs come to market. We're seeing more weights on the market than we would expect to see this time of the year. And so I do think that there will be maybe a little bit more downsizing, but I wouldn't expect that to be rapid. The underlying dynamics in our production, if you look at the raising cost side of the equation, when you look year-over-year, corn prices are down about 31% and soybean mill is down about 11%. And so we're seeing some real benefit in raising costs across the industry compared to 2023. I think that will keep people from downsizing too quickly. But we are in an oversupply scenario. And so we -- that is something that we stay focused on or keep apprised of and adjust our strategies accordingly. [Foreign Language]

[Foreign Language]

[Interpreted] So 3 questions from Tiffany of Citi.The first 2 questions relate to U.S. business and third question related to the Shuanghui business. The first one,is about the U.S. package meat's profitability. So we already achieved $900 per ton of profit in packaged meat business. So in the next 2 to 3 years, how much room do we have for further improvement in the profit per ton for packaged meat? So as mentioned, there are a few drivers of our profitability improvement, including cost, including mix, as well as pricing. Which one of these could be the main driver or source of further profitability improvement? The second question is what's the competition dynamics in the different price ranges of packaged meat products in the U.S. market. And the third question is the second quarter performance of Shuanghui is lower than the first quarter. It's not as good as the first quarter. Obviously, we understand the consumer market in China is not very strong, but we still wanted to understand what happened exactly. And is it because of competition or because of the company's own strategic shift? And what's the outlook for the second half?