WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] Dear analysts and investors, dear friends, good evening. Welcome to the 2024 results announcement by WH Group. Today, we have with us from the management, our Group Chairman and Executive Director, Mr. Wan Long; Executive Director, CEO, Mr. Guo Lijun; Vice President for WH Group, Chairman of Shuanghui, Mr. Wan Hongwei; Executive Director and President of Shuanghui, Mr. Ma Xiangjie; CFO, Madam Kam Yin Yan; Executive VP and CFO for Shuanghui, Mr. Liu Songtao; I am, Vice President, Zhou Xiaoming. We've also with us online representatives from Smithfield and Morliny. We have Mr. Shane Smith, CEO; and Mr. Mark Hall, CFO; and Mr. Luis Cerdan, our CEO for Morliny. We are going to divide this briefing into 2 parts. We will hear the financial summary and business review, and then we are going to answer your questions. First, I will pass the time to Mr. Guo to take us through the performance highlights. Mr. Guo?

[Interpreted] Investors, analysts, good evening. I'm going to report to you the financial summary of WH Group in 2024. In 2024, packaged meat sold, 3.1 million tonnes, a drop of 3%. Pork sold, 3.765 million tonnes, a drop of 4.9%. Revenue, USD 25.941 billion, down by 1.1%. These data are before biological asset fair value adjustments. EBITDA realized USD 3.078 billion, an increase of 56.1%. Operating profit, USD 2.4 billion, up 63%. Profit before tax, USD 2.208 billion, up 115%. Profit attributable to owners of the company, USD 1.471 billion, up 142%. Basic earnings per share, USD 0.1147. Our sales volume dropped slightly and profit grew very substantially. Based on our cash flow situation and operations, the Board decided that there will be a final dividend per share, HKD 0.4, together with HKD 0.1 as interim dividend, the whole year will be HKD 0.5, which is USD 825 million in total and 51% of attributable profit. After endorsement by the Board on the 9th of May, it will be distributed to our shareholders. In 2024, packaged meat contributed 52.6% of our revenue. It is still our core. For our pork business, 40% contribution of our revenue and 14.8% of our profit. For others, 7.5% contribution to revenue. Total loss, USD 186 million. So that includes our headquarters. Revenue by segment. China contribution, 32.5% towards revenue and 39% towards profit. North America, 53% contribution of revenue and 49% of profit contribution. Europe, 14.5% contribution towards revenue and 11.4% towards profit. Cash flow and capital structure. We continue to optimize both of them. In 2024, we had strong operating cash flow. We realized operating cash flow at USD 2.519 billion, up 55.8%. Our capital expenditure, USD 707 million, down by 12.9%. This year, we believe dividend payout will be about USD 825 million, enhancing greatly return for our shareholders. Our leverage continues to stay at a rather low level towards the end of 2024, interest-bearing debt. The leverage ratio 0.29, which is continuously at a rather low level. Now let's move on to our business review. The global economic recovery was slow and uneven, further strained by ongoing geopolitical tensions. Inflation steadily moderated, alleviating cost pressure on businesses and central banks began gradually easing monetary policies. Hog prices in China increased due to reduced hog supplies. Effective demand from customers is not very strong. In North America, market environment for the pork business improved as feed prices declined, hog prices rebounded and market spreads widened. In Europe, feed costs decreased and hog prices fell from high levels as hog supply recovered. WH Group leveraged its global platform and vertically integrated business model, promoted efficiency improvement and cost control, and optimized its business structure, leading to a significant improvement in its operating performance and record high profits. The number of slaughtered hogs in China decreased by 3.3% to 703 million heads in 2024. At the end of the year, hog inventory in China was 427 million heads, down 1.6% over the end of '23. Lower inventory, less slaughtered and the average hog price was CNY 17.04 per kilo, up by 10.6%. Number of slaughtered hogs in the U.S. increased by 0.6% to 128 million heads. The average hog price, USD 1.42 per kilo, up 4.5%. In Europe, the average hog price was EUR 1.59 per kilo, down by 7.9%, also because of higher supply, and therefore, driving down the hog prices. Corn prices in U.S., the average level was USD 4.27 per bushel, down 23.3%. Average pork value in the U.S., USD 2.11 per kilo, an increase of 6.5% from 2023. Industry market spread widened as pork values outpaced hog prices in the market, and that is beneficial to our operations. China. We realized operating profit USD 943 million, down by 0.5%, mainly because of depreciation of renminbi and exchange losses. Margin, 11.2%. Among which, packaged meat, USD 924 million operating profit; margin, 27.1%. Pork, USD 55 million, up by 1.9%, margin standing at 1.3%. We adhered to the principle of improved mix, adjust pricing and control costs amid a market environment of insufficient demand and increased competition. Second half results improved despite the headwinds, and we maintained stable performance for the full year. Packaged meat. We achieved record profits due to effective control of our cost, number of point of sales and sales volume in new channels grew rapidly. For pork business, we stepped up efforts to develop new customers and sales network. Sales volume improved significantly in the second half and profit remained stable, thanks to reserve strategy and core channels. As for poultry business, we continue to enhance operations, and our quarterly results improved sequentially. North America. We realized USD 1.187 billion operating profit, an increase of 259%. Margins standing at 8.6%. Packaged meat, USD 1.174 billion achieved as operating profit, up 9.5%. Margin standing at 14.1%. Pork, USD 170 million operating profit. Margin was 2%, turning things greatly around. North America, we had continuous cost saving and efficiency measures to optimize our business structure. Our earnings rebounded strongly to record high. For packaged meat, we continued to effectively manage pricing, optimize product mix and control operating costs, sustained a steady profit growth. For our pork business, we achieved a turnaround due to improved market dynamics, hog production reformation and improvement in operating efficiency. In relation to hog production reformation, we further reduced volume, lowered costs and enhanced performance. Concerning our next step, we are going to vigorously develop core business packaged meats, improve fresh meat business and maintain appropriate levels of hog production. Our annual hog production level has come down from the peak at 17.6 million heads in 2019 to 14.7 million heads in 2024. It will continuously drop to ultimately less than 10 million heads. After such adjustments and reform, we will reduce capital investment in hog production, we will reduce exposure to commodity volatility, improve hog production performance and focus on growing value-added packaged meat business. Our Europe business, we realized USD 274 million in operating profit and margin at 7.3%. Among which, packaged meat, USD 136 million operating profit and margin was 6.9%. Pork business, USD 131 million, up 45%, margin at 7.9%. European business leveraged its vertically integrated business model. We continue to improve mix, adjust price and control costs, with both revenue and profits hitting record highs. For packaged meat, we effectively managed prices, optimized product mix. Profitability increased substantially. For pork, profits increased significantly as the segment benefited from lower feed cost, strong hog production KPIs and improved market spread. We have pursued M&A channels to stay close to any news about any opportunities. And we have completed in March the acquisition of this Spanish packaged meat producer, Argal, and further expanded our high-end packaged meat business. Looking forward, we'll continue to consolidate our global resources, leverage synergies, adhere to the business philosophy of improved mix, adjust price and control cost, and the strategy of industrialization, diversification, internationalization and digitalization to enhance our leading position in the global meat industry. We'll focus on the next phase of work, continue to improve operation of pork business, grow the volume and strengthen market competitiveness to ensure continuous growth of our results. We will adhere to the two adjustments and one control strategy for packaged meat business, expand market network, adapt to market changes, strengthen competitive edges, drive steady environment -- drive steady improvement in sales volume and results. We will optimize our business portfolio, steadily push forward diversification, strengthen our global business footprint, mitigate risk, improve quality and enhance efficiency, promote sustainable development and value creation. With a joint effort of the entire management team, we will strive to continue the positive business momentum in 2025 and lay a solid foundation for the steady development of the group in the future. That's the end of my report. Thank you.

[Interpreted] Thank you, Mr. Guo. We will proceed to Q&A.

[Interpreted] [Operator Instructions]

[Foreign Language] Morgan Stanley, Lillian Lou.

[Interpreted] The first question related to the China business. So in 2024, the packaged meat business achieved a record profit per metric tons. And given the challenges in the market, as Mr. Guo mentioned, how are we going to continue to achieve very high profitability per metric ton in 2025? Are we going to benefit from lower cost inventories that will be carried over to 2025? And secondly, relates to the packaged meats volume and given the demand situation, and we are seeing declines in the packaged meats volumes. And are we expecting a turnaround of the -- when are we expecting turnaround of the volumes?

[Foreign Language]

[Interpreted] So the first question relates to the profit per tonne in packaged meats. In 2024, we did benefit from low raw material costs. So despite the relatively weak demand, we achieved CNY 4,700 per tonne of profit in packaged meats, which is higher than our target of CNY 4,000. In 2025, we expect the raw material cost will continue to be low, but we are also meeting the challenges of weak demand. And on the other hand, we are also proactively adjust our product mix. We will be launching more value-for-money products, which carries lower average per profit per metric tons. We believe this value for money products will help us to capture some of the market shares in some of the markets we lost in the last few years. Overall, we believe, in 2025, the packaged meat profit per tonne will be lower than 2024, but will still be relatively high, probably will only be lower than 2024 if we look at from a historical standpoint. For the volume increase in 2025, we will be taking 8 measures because we were facing a relatively challenging market environment. So we will have a lot of measures to try to achieve growth in the packaged meats volumes. So first is to reform our sales team. In the past, all the sales efforts are led by the same team. But in the future, we'll have more specialized sales force in our packaged meat segment. We will have 4 different dedicated teams, each dedicated to high-temperature products, low-temperature products, frozen products and snack products. And we will also hire professional salespeople with relevant experience to lead these sales efforts. So secondly is to have a matrix sales force. So in the past, our sales is organized by different geographies, which will inevitably lead to some blind spots in the sales coverage. But in the future, we'll add more dimensions to the sales network to include dedicated sales for the products in addition to the geographies. So we believe that would help us to enhance our penetration. And number three relates to the doubling network strategy. So we have been launching this doubling network strategy. And based on our stats for the customers who have adopted our version 1.0, their sales growth is 1.8 percentage points higher than those who didn't. And for those who have adopted version 2.0, their sales growth is 3.7 percentage points higher than those who didn't. So we believe this doubling network is a very effective strategy. So in 2025, we'll continue to promote the strategy and the target to increase point of sales by 200,000. And fourth strategy is to enhance our market research activities to better understand the changes in the market dynamics to better serve the customer needs. And number five is to enhance the granularity of the sales network management. Specifically, we're going to increase the number of salespeople in our packaged meat business by 50%, so that we have more resources who can manage the frontline point of sales because in the past, a lot of this retail point of sales are managed by the staff of our distributors, but we are increasing the management by our own salespeople. And the sixth is to grow our marketing investment into the market to support our distributors. This also relates to the comments earlier about potentially lower packaged meat profit per metric tons because we will return some of the profit to -- as marketing -- to support the marketing and advertising. And number seven is to increase the adoption of digitalizations, to use technologies to empower marketing. And number eight is to enhance the incentives to the sales professionals. And also, we're not only increasing the incentive, but also we will be more precise when we incentivize the staff based on their performance. So for these 8 initiatives, some of them have already started in the second half of '24, and we believe the effects of these strategies will be reflected in 2025 to help us achieve positive growth in packaged meats volumes. And we are also expecting strong growth -- meaningful growth from our poultry products as well as the fresh pork business. So overall, the volume should achieve a stable growth.

[Foreign Language]

[Interpreted] The second question relates to WH. So after the Smithfield IPO, will there be any changes in the strategies? Will the IPO allow the company to have different strategies to have the ability to explore more opportunities? And number three relates to the U.S. business, given the demand in the U.S. market, will that have pressures on our performance?

[Foreign Language]

[Interpreted] So in terms of our strategies in the future, I think the philosophy is the same, that we focus on what we are strong at and we'll continue to expand and strength where we are good at. In China, we have the strategy of industrialization, diversification, internationalization and digitalization. And these are strategies we believe can help us enhance our competitiveness in the market. And secondly, we are -- our strategy will be to expand the fresh pork business and continue to strengthen our packaged meat business. For the hog production, we'll continue to rationalize its capacity to have a proper level of vertical integration to support the downstream business. We believe appropriate vertical integration is around 1/3, but it may vary depending on the regions. It may be higher in Europe, but should be lower in China and U.S. So we will see some areas of growth and also in some areas of reductions. And we will also continue to promote innovations in management and in technologies and leverage the resources we have in China, U.S. and Europe to achieve synergies. And we may also consider diversification into other proteins such as poultry and beef if there are appropriate opportunities. And in terms of digitalization, we will try to use advanced technologies such as artificial intelligence to help improve our traditional business. So this is our strategy. Shane, do you want to take the third question related to the U.S. business, Shane or Mark?

Yes. We'll answer the question. And I think the question was really about how is pork positioned in 2025 against other proteins. I'm really bullish on the outlook of pork for 2025 for a number of reasons. First, I would tell you that the beef market continues to be elevated. And the recovery period for beef has really been moved out from what was thought to be an end of 2025 recovery to really now looking to 2027. So the expectation is that beef will remain elevated in the medium term. When you think about the context of chicken, another protein, year-over-year, chicken breast is up about 50%. And when you look at that on a wholesale price perspective, chicken breast is up about -- up to about $2.30 a pound. You compare that to a pork loin, which is about $1.65. And so the value proposition for pork is really in a fantastic position right now, especially as U.S. consumers move into more pricing pressure and their ability to spend. I also think when you think about pork as a protein, it's really a very versatile protein. And so you can do a lot with pork and a wide variety of uses, both across use occasions, meaning the different dayparts, so breakfast, lunch and dinner. And also as to the versatility from -- they can either be center of plate or an ingredient. So I'm really bullish on the outlook of pork as we think about it into 2025 or through 2025. I think the dynamics are setting up well for pork to being really supported as a protein across the industry. Xiaoming, I'll let you translate, and I think Mark may add to that a little bit.

[Foreign Language]

Xiaoming, I would just add that, again, everything Shane said and the fact that our outlook for 2025 really reflects our best view of the business as we see it today, and we provide that range of estimates to account for variables, such as a dynamic and fluid consumer and geopolitical environment. So that is all factored into our guidance for the year.

[Foreign Language]

[Foreign Language]

[Interpreted] So 3 questions from the Tiffany of Citi. The first relates to the outlook for the first quarter, both for China and U.S. She's asking for comments on the China first quarter outlook given all the measures taken as explained by Mr. Ma, and also the outlook for first quarter in the U.S. given the bullish view as expressed by the U.S. management team. And also on the U.S. pork business, primarily related to hog production. Last year, there's a very substantial improvement in profit compared to '23. How much of that is driven by commodity favorability and how much of that is driven by improvement in the management? And thirdly relates to the dividend policy. This year's payout ratio for the annual dividend is 50%. Will the company consider higher payout in the future?

[Foreign Language]

[Interpreted] So for China outlook for the first quarter, because of the compliance and regulatory restrictions, we're not able to provide very specific colors. There's 3 comments to make. First -- that's the first comment. And secondly, the effect of the 8 measures as outlined earlier, will be gradually impacting our performance. And thirdly, based on everything we have seen so far, the fresh pork outlook is good and the packaged meats outlook is not so optimistic. Shane and Mark, do you want to give a quick response to the first quarter outlook? Yes.

Yes. In summary, our outlook for 2025, again, reflects continued operating profit growth with a range of outcomes that really reflect the dynamic consumer spending and tariff environment. But specifically with regards to the first quarter, I want to point out some market-related trends. There has been strength in hog prices as well as meat prices in the first quarter. And since we play across all the verticals, it really benefits Smithfield as a whole. With respect to each segment, though, in our Packaged Meat segment, raw material prices are up. And Easter is later this year than last year, so that's going to dampen Q1 profitability versus the prior year. And for fresh pork last year, Q1, we saw an unusually strong spread between the cutout in hog prices and the spread this year reflects a more normalized level. While in hog production, we're seeing higher hog prices and lower grain prices this year versus last. So I think those are kind of the highlights. But as a reminder, with the new external hog production ventures that we commenced in the first quarter, we'll see higher external grain sales in hog production this year, and these sales are at a more neutral margin. But in summary, these are kind of the key trends to think about when comparing the first quarter of 2025 versus 2024.

[Foreign Language]

To the second question, Xiaoming, in U.S. hog production, the changes we've experienced in that business between 2023 and 2024 have really been a combination of both market factors and some of our own internal reformation changes. As a part of this reformation, to move our production levels down to the 11.5 million we expect in 2025, we did remove a number of underperforming or high-cost farms and also some geographically displaced farms. So you can think about farms in places like Utah that were just too far from the grain belt and too far from the plants. And so that's been a big focus of ours in bringing down our overall cost structures. On the market side, we have seen a big recovery in the price of corn. So through -- beginning in the fourth quarter of 2022, we began to experience those really high corn and soybean meal prices and through 2023, and really working our way out of that by the time we got to the end of the first quarter of 2024. So that has had a big impact on our comparability when we think about '24 to '23. And looking at the future strip going forward in 2025, we do see -- if you look at corn and soybean meal prices compared to hog prices, we do see an industry return to profitability in 2025. And so when we think about the improvement, it's been market-based, it's been reformation-based. And it's also been some of the things we've been doing from a genetic standpoint, from a feed efficiency standpoint and from an overall health and livability standpoint. So it's been a combination of a number of things that we've really been able to see this quick rebound from 2023, and we expect to see that continue as we move through 2024 -- 2025, I'm sorry.

[Foreign Language]

And Xiaoming, I would just add to finish it up. In hog production, we're not done yet. We still think there's plenty of opportunity in front of us. We've changed our management team in hog production, and we still see areas where we can improve as we benchmark our KPIs, both internally and externally. So as we think about the improvement we saw between 2023 and 2024, we're still working every day to continue to improve those underlying cost structures.

[Foreign Language]