WH Group Limited (288) Earnings Call Transcript & Summary

[Interpreted] Good evening, dear analysts and investors. Thank you for joining the earning release for the first half of 2025 for WH Group. Attending today's earnings release includes the management of WH Group, Shuanghui Development, Smithfield Foods and Morliny Foods, including Chairman and Executive Director of WH Group, Mr. Wan Long; Vice Chairman of Double Group, Chairman of Shuanghui Development, Mr. Wan Hongwei; Executive Director of WH Group and the CEO of Shuanghui Development, Mr. Ma Xiangjie; Executive Vice President and CFO of Shuanghui Development, Mr. Liu Songtao; Chief Executive Officer of Smithfield Foods, Shane Smith; and CFO of Smithfield Foods, Mark; CEO of Morliny Foods, Luis; CFO of WH Group, Ms. Joanna Yan; Zhou Xiaoming of WH Group, Vice President. And speak this Gordon Guo, CEO and Executive Director of WH Group. So we will have 2 parts in today's call. Firstly, I will walk you through the company's performance in the first half, and then we'll take your questions. In the first half of 2025, our packaged meats sold was 1.45 million metric tons, declined by 3.3% year-over-year. Total pork sold was 1.96 million metric tons, 7.5% higher year-over-year. Total meat sold externally was 3.77 million metric tons, 3.5% higher year-over-year. Total revenue was USD 13.387 billion, 8.3% higher year-over-year. All the numbers reported will be before biological asset fair value adjustments. EBITDA for the first half $1.585 billion, 7.9% higher year-over-year. Operating profit USD 1.259 billion, 10.4% higher. Profit before tax $1.15 billion, 10.5% higher. Profit for the period $857 million, 7.7% higher. Profit attributable to the company $725 million, 4.5% higher. Basic earnings per share USD 0.0565. Based on the company's operation performance and cash flow in the first half, the Board decided to declare an interim dividend of HKD 0.2 per share, which is in aggregate HKD 2.566 billion. If we look at our business by segment, Packaged Meats is our core business, representing 49.6% of our total revenue and 83.2% of our operating profit. Pork business is 42% of our revenue and 20.3% of our operating profits. Other business is 8.4% of revenue and a loss of $43 million. If we look at our business by region, North America is 55.2% of total revenue and 53.6% of operating profit. China business is 30% of the revenue and 34.6% of the operating profit. Europe business is 14.8% of the revenue and 11.8% of the operating profit. In the first half of 2025, slow and uneven economic growth across different regions is compounded by continuing trade tensions and policy uncertainties. Hog supply in China was stable and hog prices remained at a low level. Effective demand for consumer goods was insufficient. North America hog production recovered as feed prices continued to fall, while hog prices rebounded. Market spreads narrowed slightly. Fresh meat and packaged meats business faced a cost pressure. The European market was impacted by animal diseases and temporary export disruptions. Hog prices initially fell and then recovered, but on average, was lower year-over-year. WH Group leveraged its global platform and a vertically integrated business model, promoted efficiency improvement and cost control and optimized this business structure, leading to steady improvement in operating results. In the first half, the number of harvested hog in China increased by 0.6% to 366 million heads. The average hog price was RMB 15.5 per kilogram, 0.8% lower year-over-year. In the U.S., the total number of hogs harvested was 63.3 million heads, 0.6% lower compared to last year. The average hog price was USD 1.5 per kilogram, up 8.7%. In Europe, the average hog price was EUR 1.5 per kilogram, down 8.3% year-over-year. The hog prices performance in different regions are different. In China and Europe, the price was lower. But in the U.S., it was higher compared to last year. The average pork cutout value in the U.S. was USD 2.17 per kilogram in the first half '25, up 4.5% year-over-year. Industry market spreads narrowed as hog prices increased more than pork value. In China, the operating profit was USD 435 million, 2.7% lower year-over-year. Packaged Meats operating profit was $411 million, 10.7% lower. Pork business operating profit was $28 million, flat year-over-year. We implemented a range of measures to compete in a challenging market environment. Q2 results improved significantly supporting stable performance in the first half of 2025. In Packaged Meats business accelerated shift towards specialized category management, sales force reformation measures started to yield positive results. Packaged meat sales volume stabilized year-over-year in Q2. Profit per tonne maintained at high levels as effective cost control continues. In Pork business, we stepped up efforts to expand the customer base and optimize the product mix, resulting in a substantial increase in harvesting volume. Intensified market competition continued to weigh on fresh meat margins, while hog production segment delivered a notable improvement in KPIs and significantly narrowed loss year-over-year. In poultry, volume of chicken produced and process continue to increase. Operating performance improved significantly driven by continuous enhancement in KPIs. Digitalization was actively deployed across R&D, manufacturing, sales and hog production, leading to marked improvements in business management capabilities and operational efficiency. In North America, the operating profit in the first half was $675 million, 24% higher year-over-year. In Packaged Meats business, the operating profit was $569 million, 7.3% lower year-over-year, largely because last year, we recorded a significant amount of employee retention tax credit. In Pork business, the operating profit increased substantially to $163 million. In North America, we capitalized on favorable market conditions, optimized the business structure and implemented cost-saving and efficiency-enhancing measures resulting in a substantial increase in profits and record high earnings. In Packaged Meats, with a diversified product portfolio and channel mix, total sales volume remained stable while sales volume of high-margin products continued to grow. We continued to improve mix, adjust price and control costs to absorb the pressure of rising raw material costs and maintained profitability at high levels. Profitability of pork business increased significantly as the hog production business delivered strong improvement by capitalizing on favorable market dynamics and reformation initiatives while the fresh meat business maintained stable profits by proactively implementing measures to mitigate the impact of unfavorable market conditions and tariffs. We also reduced the scale of hog production, continue to enhance efficiency and results. In Europe, the operating profit in the first half was USD 149 million. The Packaged Meats operating profit is USD 67 million, 6.3% higher year-over-year. Pork business, the operating profit was $64 million, 9.9% lower. In Europe, we leveraged the vertically integrated business model to ease the impact of animal diseases and continued to make acquisitions. Sales volume continued to grow and profits remained stable. Newly acquired business continued to -- contributed to continuous growth in sales volume. Improve mix, adjusted and control cost efforts mitigate the pressure of rising operating expenses, driving steady growth in operating profits. In Pork, we leveraged the strength of the vertical integrated business model. Profits of fresh meat segment improved significantly although profit of hog production decreased due to lower hog prices. We also further expanded business footprint and enriched product offerings. In terms of business strategies, WH will continue to consolidate global resources, leverage synergies, adhere to the business philosophy of improve mix, adjust price and cost -- control costs and the strategy of industrialization, diversification, internalization and the digitalization to enhance our leading position in the global meat industry. In terms of business priorities, we'll continue to improve pork business, optimize cost structure, improve hog production KPI, grow the fresh meat sales volume and strengthen market competitiveness. We will adhere to the 2 adjustments and one control strategy for Packaged Meats business, expand market network, optimize sales channels and strengthen competitive advantage to drive steady improvement in sales volume and profits. We'll continue to optimize our business portfolio, steadily achieve diversification, further strengthen our global business footprint, mitigate risks, improve quality and enhance efficiency. We'll continue to deploy automation and digitalization upgrades in production, sales and business management to reduce costs and enhance efficiency. We will maintain the momentum of steady growth, build a solid foundation for the long-term sustainable development of the company. So that's all the review of first half performance of 2025. Thank you. And I'll move on to the Q&A. Please follow the instructions of the operator.

[Foreign Language]

[Interpreted] So the question is from Lillian Lou of Morgan Stanley. The first question relates to the company's strategic priorities in the future. As Mr. Guo has explained, there are a couple of strategic initiatives for the company in the future. And currently, the company also have a very clear strategic footprints across different regions, what would be the company's strategic focus and priorities in the future? Secondly, the company increased the interim dividend to HKD 0.20 per share, which is an increase compared to last year. Does that suggest the company also plans to increase the full year dividend? And thirdly, in China, the Packaged Meats business volume stabilized in the second quarter and stopped the declining trend in the previous quarters. So what measures did the company take to achieve this stabilization of the volumes and what would be the full year guidance? And fourthly, what would be the company's outlook of hog price in the second half of 2025? And lastly, a question related to the U.S. So based on the current data in the futures markets, in the third quarter, the hog price and corn prices continue to be favorable to the U.S. hog production. So what would be the company's guidance for the third quarter or second half hog production results?

[Foreign Language]

[Interpreted] So this is from Chairman, Wan, responding to the first question on the company's strategic priorities. Firstly, in the first half of this year because of the different dynamics, the company's various business segments had different impacts. Our pork and poultry business had both growth in volume and profitability, whereas in packaged meats, we had lower volume and also lower profitability. In the second half, we will continue to try to improve the volume and profit of our packaged meats business, in particular, in China. We will continue to work on the product mix and the various initiatives to try to achieve a better second half compared to the first half. And number two, in our business portfolio, there are still a number of areas that require improvement. For example, in China, the poultry business in U.S., the hog production business, they have made significant improvements in the last few quarters through our efforts, but we need to continue to accelerate their improvement to achieve our expectations. And thirdly, we will continue to consolidate our global resources to achieve synergies through different business segments and strengthen our competitiveness. And fourthly, we will adhere to the "two adjustments and one control" strategy, which is to optimize the product mix, adjust the price and control the cost to improve our overall profitability. And fifthly, we will focus on innovation we will deploy artificial intelligence and automation to try to transform and upgrade the traditional meat industry. So this is the response to the first question.

[Foreign Language]

[Interpreted] So this is Mr. Ma from Shuanghui Development. He will address the question related to China's Packaged Meat business, which, in summary, pertains to the measures the companies have taken to stabilize the packaged meats volume, the full year guidance as well as the guidance for the second half hog price.

[Foreign Language]

[Interpreted] So to answer your first question, in the second half, the packaged meats volume has stabilized year-over-year, whereas in the first half, it was a decrease. So this is a result of a series of efforts the company have made. In summary, there are 3 areas. In first area, we have started to specialize the category management. So we separated our packaged meat business into 4 main categories: the high temperature products, low temperature products, frozen products and snack products. For each of the category, we have specialized distributors and sales forces. So in the second quarter, we have developed a lot of new specialized distributors and also recruited talent to join our specialized sales forces. And secondly, we also recruited new sales -- new talent in our sales team with experience and expertise in new channels such as club-based -- membership-based club stores, the CVS, O2O channels and the social media e-commerce channels. And thirdly, we have also intensified our efforts to penetrate into some previously underpenetrated markets, such as in Sichuan, Jiangsu and Northeast China. So we have specialized teams helping us develop these underpenetrated markets. Secondly, on the guidance for the packaged meats business for second half based on the results of our strategic initiatives as well as the market conditions, we believe in the second half, the packaged meat volume will achieve significant year-over-year increase, which will help us offset some of the declines in the first half. So that on the full year, we can achieve stable or a small increase in the full year volumes. In terms of the outlook for hog price, we believe in the second half, the hog prices will continue to fluctuate with a declining trend line. We believe in July and August, there may be some recoveries of hog prices but will not be higher than RMB 16 per kilogram at the peak. In September, the hog prices may start to decrease, but will hit the bottom at around RMB 14 per kilogram. On average, the hog price in the second half will be below RMB 15 per kilogram. For next year, we believe the hog prices will be stable and will be lower than the average of 2025.

[Foreign Language]

[Interpreted] Shane and Mark, over to you on the U.S. hog production question.

So yes, you're correct. When you look at third quarter hog prices. When you look at the futures market, we do see hog prices remaining elevated, and you're right, corn prices and soyabean prices coming down. So combined, we call that the crush. We do see profitability in the back half of the year as an industry. While we don't give quarter-over-quarter guidance, you will note in this morning's release, we did raise our full year guidance based on our visibility really into the hog production segment in the back half of this year. So we feel really confident in our hog production operations, enough confidence that we were able to raise our overall guidance.

[Foreign Language]

[Foreign Language]

[Interpreted] From Mr. Guo. In terms of dividends in the -- for the interim dividend, we declared HKD 0.20 per share, which shows continuous increase of our dividends in the last 3 years. So the decision of this dividend is paid -- the Board made this decision based on the company's performance in the first half as well as the cash flows. The company's dividend policy is no less than 50% of the full year net profit. We believe as the company's business -- 50% of the net profit attributable to the owners of the company. So as the company's business performance continue to improve, we believe our shareholder return will also continue to be enhanced.

[Foreign Language]

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[Interpreted] Two questions from Luo Chen of Bank of America. The first question relates to the Chinese packaged meats business. Chairman Wan and Mr. Ma both commented that in the second half, we have a high degree of confidence on the performance of packaged meats business. The growth may offset most of the declines in the first half. So we did notice the company's second quarter packaged meats volumes stabilized year-over-year, but that's on a relatively low base as the -- due to the destocking last year. So objectively speaking, it is normal to be able to stabilize the second quarter packaged meat volumes. So what are the companies -- what factors make the company feel confident about the second half performance for packaged meats volumes, any data that could be shared with us? In the U.S., the question also relates to the packaged meats. So the profit per unit or profit per metric ton has remained at a very high level for quite an extended period of time. So what would be the company's guidance for profit per metric ton and volume in packaged meats business in the second half in U.S.

[Foreign Language]

[Foreign Language]

[Interpreted] There are a few observations that give us confidence. First of all, the -- first, to address your comment that the second quarter last year has a low base but the packaged meats business actually has seasonality. So the first and the third quarter are usually the high season, whereas the second quarter tends to be a low season. So it is not comparable to compare season across season, so we have to make year-over-year comparisons. So on a year-over-year basis, the volume in the first quarter decreased significantly, whereas we achieved the stabilization in the second quarter. So these are the results of the measures we taken. In terms of the data, firstly, packaged meats specialized category management, we planned to increase 3,000 specialized distributors this year and 1,000 specialized salespeople this year. By the end of the second quarter, we already had achieved a net increase of 1,602 specialized distributors, which is already on track or even faster at the -- the progress is already faster than the plan. And so this brings us to the total specialized customers to 8,000. And also, we -- in the first half, we recruited 490 new salespeople. And in second quarter, we also observed very significant increase in the new channels. So this also gives a lot of confidence for the continuous growth in these new channels. And thirdly, in some of the privately underpenetrated regions, as mentioned earlier, such as Sichuan, through our efforts, we have achieved a double-digit growth. So with all these observations, and we believe we will have good growth in the second half. And on the year-over-year growth basis the fourth quarter growth will be faster than the third quarter growth. Shane or Mark, do you want to take the second question on U.S. packaged meats?

So we attribute the high level of profitability in the U.S. packaged meats business really to our pricing strategies, the improvements we've been able to make in mix and then also our cost control. So more than offsetting inflationary forces with cost savings in our plants, supply chains and SG&A. In the quarter, volume was up 4.5% versus the prior year quarter, and that was really driven by the later Easter holiday this year. But putting the holiday ham business side, our overall packaged meats business, excluding holiday hams was still up 1% year-over-year. And that's really comparable to our full year guidance for the packaged meats business. We expect volume to grow by about 1%. In terms of profitability, we're really facing a more cautious consumer in the U.S. in terms of inflationary pressures, certainly on food away from home and food at home. So we're facing higher raw material costs. So year-over-year, bellies and trimmings are up significantly. So that consumer is cautious and it's delaying, I would say, a little bit of the margin appreciation that we've seen historically. So overall, we're guiding to packaged meats segment profit for the year at $1.05 billion to $1.15 billion. And that's really reflective of that more cautious consumer and higher raw material costs.

[Foreign Language]

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[Interpreted] The follow-up question on the China packaged meats business, does the data we have seen so far in the third quarter support the view that there will be better performance in the third quarter. And also the company mentioned earlier that fourth quarter volume growth will be better than the third quarter. However, the spring festival in '26 is relatively late. So some of the seasonal products stocking will take place later compared to 2025. So has the company factored in the timing difference of Spring Festival when suggesting that the fourth quarter growth will be higher than the third quarter?

[Foreign Language]

[Interpreted] Response from Mr. Ma that the data we have seen so far is generally consistent with our view of the third quarter performance. And our forecast certainly has factored in the timing of the spring festival.

[Foreign Language]

[Foreign Language]

[Interpreted] Three questions from Veronica of UBS. The first question related to the U.S. hog production. So what's the latest progress of the hog production capacity rationalization. Given the industry seems to be profitable and will continue to be profitable in the near future, is the company still sticking to the 10 million heads midterm capacity target? Second question relates to the European business. The European business contributes to a relatively small portion of the company's overall revenue and profit, but it is growing. So in European packaged meats business, what is the company's outlook and expectations. Is the company explaining more -- expecting more organic growth or more M&As? Any -- if M&A, what kind of -- what are the areas of focus? In China, the management mentioned earlier about our efforts in the new channels and also the growth in the new channels such as CVS, the e-commerce. So what would be -- what is the percentage of revenue or volume contribution of these new channels? And what is the full year outlook of this -- of their contribution?

[Foreign Language]