Dear analysts and investors, good evening. Welcome to Q1 results announcement for 2023 by WH Group. Our management will take you through the financial performance, strategies, and outlook. We have with us today our Chairman, Mr. Wan Long, and our CEO, Mr. Guo Lijun. From Shuanghui, Mr. Ma Shuangjie and Mr. Liu Songtao. From Smithfield, our CEO, Shane Smith, CFO, Mark Hall, CFO, Madam Zhang, and myself, Wan Hongwei. Mr. Guo will report to you our Q1 results. We will proceed to Q&A. Mr. Guo, please.
Dear analysts and investors, good evening. I'd like to report to you Q1 results for 2023. In Q1 of 2023, packaged meat sold 820,000 tonnes, a drop of 1%. Pork sold 1 million tonnes, drop of 1.2%. Revenue, $6.743 billion, up 2.9%.
EBITDA, $528 million, a drop of 37%. Operating profit, $365 million, a drop of 43%. Profit attributable to owners of the company, $174 million, a drop of 55.9%. Basic earnings per share, $0.0136, a drop of 56%. In the Q1, hog prices... Well, we have seen some drops in terms of revenue, mainly for the slaughtering business or hog production business in the U.S. In the Q1 of 2023, hog prices in China remained at low levels due to sufficient hog supplies. In the U.S., oversupply and weak market demand caused a significant drop in hog prices. Hog prices in the EU increased substantially as hog supplies reduced because of high costs.
In the Q1 of 2023, number of slaughtered hogs in China increased by 1.7% year-on-year to 199 million heads. The corresponding figures in the U.S. was 32.52 million heads, up by 1.7%. Such increases for both places were more than 1%. In the Q1, average hog price in China was RMB 15.7 per kilogram, an increase of 12%. In the U.S., average hog price was $1.27 per kilogram, a decrease of 16%. Average hog price in the EU, EUR 1.65 per kilogram, up 46%. Increasing trend for China and EU, and decreasing trend for the U.S. Average pork cutout value in the U.S. was $1.82 per kilogram, a decrease of 18.1%.
Due to excess pork supply in the U.S. and softer consumer demand, meat value dropped more than hog prices, further compressed industry market spread. If you look at our segments, because of higher cost and exchange rates not being favorable, packaged meat show a dropping trend, while pork improved. For the Q1, operating profit $280 million, a drop of 7.6%. Packaged meat, $238 million, a drop of 13.8%. Fresh pork, $39 million, up by 85.7%. The profit in China mainly was affected by exchange rate. If you look at renminbi operations, the profit improved by 2.1%. Because of unfavorable exchange rates, if you calculate the profit level in U.S. dollars, there's a drop. Packaged meat remain high in the U.S. in terms of profitability.
Pork business suffers significant losses due to unfavorable market dynamics. In the Q1, operating profit $62 million, a drop of 81.8%. Packaged meat, $301 million, a flat trend, while fresh pork suffer from losses of $218 million. For our business in Europe, pork business achieved a turnaround due to rising meat prices. Increasing costs put pressure on our profitability of packaged meat business. For Q1 operating profit, it turned around to a profit of $23 million, an increase of $25 million. Packaged meat, $15 million realized, a drop of 16%. Pork business, $9 million. A great improvement of $35 million. That is the summary for our performance in Q1.
[Foreign language] 。Xiaopo Wei
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My first question is in relation to the hog prices being rather low in Q1 in China. What is your judgment in relation to hog prices in China for the entire year? What is the projection in relation to per ton profit level for packaged meat business?
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Thank you for your questions. Actually you are asking about three different aspects. First, allow me to address the issue of hog prices this year. We have come to three conclusions in relation to this. We believe the average price this year compared to last year will be lower. The first half of this year, the hog prices will be lower compared to the second half. The major trend is that we start from a lower point and things will get higher over time. As for the average price, we believe it will be at around 17 RMB. The second issue is about the packaged meat business and the per ton level. We believe it will maintain at a level around 4,000 RMB. This year the hog prices are lower compared to last year. In terms of consumption side, the hog prices will actually be higher. We believe that this year, we have this projection of around 4,000 RMB as the per ton profit for packaged meat business.
Actually compared to last year's per ton profit level, which was rather satisfactory, we will continue the positive trend and we will continue to make two adjustments and exercise one control measure to continuously adjust the price level, so as to maximize our profit per ton level. The final part is in relation to our fresh pork business, I would say that our projection for this segment is also rather positive. I would like to address the fact that in relation to fresh pork, we do not have a lot of opportunities for storage of frozen products. For frozen products, the profit level will actually be lower compared to last year. Because of the lower hog prices this year, we believe that fresh pork profit will perform much better compared to last year.
I would say that the profit level for our slaughtering business overall will fall within normal ranges.
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Thank you very much for this opportunity to ask my questions. I would like to ask about the China business. I was suffering from some background noise, so I didn't hear quite clearly. I'm not sure if you have already covered this point. I want to ask about the projection on the packaged meat volume. I understand that there is improvement in Q1 probably because of the early Chinese New Year. What is the expectation for the whole year performance? Do you think there will be a single digit but medium level single digit growth? What about the per ton profit level for packaged meat business? I think I heard a figure around RMB 4,000. Is that the correct figure for this year?
In the first half of the year because the cost overall speaking is lower, so does that mean the per ton profit is actually higher in the first half and then it will proceed to become lower towards the second half?
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Thank you very much for your questions. Concerning your first question, which is in relation to packaged meat business and the sales volume and the main drivers, I can tell you that we expect the whole year performance to achieve medium to high level of growth. There are three major drivers behind this. First of all, the pandemic is slowly leaving us. Domestically speaking, the demand is improving very strongly, especially for tourism-related businesses, some restaurants, and also schools are returning to the normal channels.
Also, the second point is about development and increase in terms of our online shops or outlets, or actually inside our sales network, we have been developing more points of sales. For example, last year we have constructed many new shops and that will continue to drive our sales volume forward. The third driver comes from our recently developed new products, and they have been developed in recent years, and they have been performing very well. Actually, in Q1 this year, they performed very outstandingly. For the whole year, we expect medium to high level of growth, or a medium level of single-digit growth. As for per ton profit level for packaged meat business, as I mentioned earlier, the level will be close to RMB 4,000. I understand that we have certain challenges in relation to the cost of some raw materials.
Because this year the whole price trend will start from a lower point and then proceed to a higher point towards the second half, I can tell you there will be some changes or fluctuations in terms of our per ton profit level between the two halves, but such fluctuations would be quite limited, and continuously they will be very close to this central figure of RMB 4,000.
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[Foreign language] Robert。 [Foreign language] ？
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[Foreign language] 。 The question is about the U.S. operation. We know first Q was challenging for the upstream business. Could management give us a bit update on how the situation trends into Q2 and any changes on the outlook for the full year in terms of the U.S. operation, namely the upstream and also downstream business. Thank you. [Foreign language] 。
Thank you for the question. As you mentioned, that it really was a tough Q1, both on the live and the fresh side of our business. We saw hog prices down 16%.
[Foreign language] Robert [Foreign language] ...
Meat prices down 800.
Hold on a second.
Yeah，sure。
Shin, can you retry again?
Yeah, Robert, am I having a co-connection problem?
now it's fine. you go ahead, please.
Okay, let me try again. Thank you for the question. As you mentioned, we did have a tough Q1, both on the live and the fresh side of our business. We saw hog prices down 16%, while raising costs were up 15%, coupled with meat prices that were down 18%, and that led to a $218 million loss in our operating profit. In our hog production operations, we've been on an effort to reform that side of our business, as we look at 2023, what we're focused on is really limiting the amount of losses that we see coming into that segment. Some of the things we're doing there, we began earlier in 2022, where we started taking out hogs in places like Arizona, Utah and California, which were among our highest cost animals that we had in our system.
We've taken our hog production numbers down from 17.5 million hogs that we harvested in 2021 to an expectation in 2023 that'll be sub 16 million. So about a 9.5% decrease in the number of hogs that we're raising internally. I'll let you translate and then I'll continue.
Okay.
Higher cost regions, to limit our overall exposure. But we're also coupling that with other things that are, what I would call on the farm management techniques. Some of those things include, you know, taking a fresh look at all of our contracts that we have with our growers to make sure they have the right incentive from a performance-based metric. We've talked about some of the health improvements and genetic changeovers, that we've been working on, as part of our overall plan to really transform that part of our business.
I would tell you to the first part of your question, in hog production, as we look specifically at 2023, it's really about the speed to which we can limit some of those, really high losses we see that are really a function of, a decreased hog price and an increased raising cost. When we go to fresh pork, fresh pork, had a okay Q1. We finished a quarter at about $55 million of profit. That is down compared to last year.
I would tell you last year in the Q1, we had an incredible mix opportunity with our margin to bone that really added a piece to the puzzle in the Q1 of last year that we didn't have this year. That was really a function last year of having labor when our industry competitors did not. We had a real opportunity we took advantage of last year. I'll let you translate that.
Sure.
As we take fresh pork and hog production and look at the rest of the year, I would tell you that I'm optimistic where I see the back half of the year. I think in hog production, we'll see some contraction in the industry, which will have a positive impact on hog prices. In fresh pork, I think that hog prices and meat prices globally are up. China's up 12%, EU's up 46%. You couple that with a weakening US dollar, that becomes very favorable to exports coming out of the US. I would tell you, it gives us an advantage as we look to markets like China, Japan and Korea.
export will help with the overall balance in not only the fresh pork business, but the hog production business. As you know, the U.S. has oversupplied fresh pork. And so to any degree that the industry and Smithfield can tap into those export markets with favorable global fundamentals, I think that's going to help tremendously in the second half of the year. So I'll let you translate that.
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In our packaged meats business, our packaged meats business continues to perform extremely well, in the Q1, we printed profits of $900 per metric ton. As we look through the rest of the year, we expect that profit level while it will drop a little bit, will still stay in the mid to upper $700 per metric ton profitability range.
Yeah, as you know, we have a tremendous portfolio in our packaged meats business, between branded and private label and really, with a reach that touches the consumer, wherever they are on the buying scale. Even though we expect to see some softening demand and we're already beginning to see some softening demand, I think our volumes will stay flat to last year. I think our profitability will stay at a high level. I'm very pleased with where the packaged meats business is and what the future looks like for that business. We're also in Europe and in Mexico, seeing tremendous improvement in those businesses as the underlying market fundamentals have continued to improve. I think we'll see a great performance coming out of both of those regions as well. When you added all of those things up, you know, when I look at 2023, from a profitability standpoint, you know, I look at it being relatively stable to 2022. We have a lot of things to overcome, but I believe we're doing the right things to execute and continue to deliver that level of profitability.
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Thank you for the question.
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Thanks a lot, Mr. Smith.
Thank you.
[Foreign language] China Renaissance, Charlie Chen. Charlie [Foreign language]
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[Foreign language] 。I got a follow up questions on the US market. As management just introduced, commented that you believe the hog price in the second half probably will be strengthening because the supply is going down and as that WH Group is reducing the number of hog harvest every year. Do you see this as an industry-wide trend, or is a specific apply to WH Group? That's the first question. The second question, it seems that the profitability of the hog farming business is more dependent on the price - the hog price in the US. Apart from the measures that you have taken, in the expensive, in those states where the feeding expenses is high, do you see any other chances that you can lower the feeding expenses in other areas in the US? For example, the feed cost, labor cost, any other things that we can save to basically defend your profitability in the live hog business? Thank you.
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Okay, thank you for the question. To your first question about prices, we do expect prices to continue to follow the seasonal trends that we see every year, where we see that spike or that increase that goes up through the summer months and down in the Q1 and the Q4 . The futures curves show that today. Now the difference this year is we're substantially, that futures curve is substantially lower than both 2022 and 2021. We're seeing a tremendous amount of pressure on that price, even though it continues to follow that seasonal trend. I do think looking at the futures curve that the pricing that is shown today will be a little bit stronger as we get there, as we continue to see some contraction in the industry.
You know, I think one of your questions was to taking out some of the hogs, is that specific to Smithfield or to the industry? I will tell you that the entire industry is in a loss-making position right now, not only from a PNL standpoint, but from a cash flow standpoint. Producers are printing negative cash flow per head. I will tell you in my opinion that that's going to force the industry to adjust, and it'll be specific to regions, but we will see that adjustment take place. We're already seeing some pressure on packers with some of the closures that have been announced in North America, we're seeing it impact in the industry.
No, I don't think this will just be a Smithfield or WH Group program to remove hogs. I think that'll be more industry-wide. I'll let you translate that and then I'll answer the second question.
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I think to your second question about feed cost, you know, raising hogs feed cost in this environment, feed cost is about 70% of the cost to raise an animal. We're very focused on how we find ways to remove cost in all parts of our operation, but specifically to feed. Some of the things we do there, for example, we've invested in the last two to three years in bakery byproducts, where we have plants that buy well byproducts from bakeries and grind those products up into feed that we're able to mix in, and that usually is at a fraction of the cost of what a bushel of corn would be. Some of the other things we've doing, we've invested in elevators and other types of grain storage around the United States, close to our operations, that allow us to buy more grain at harvest, where it's typically cheaper. We've had some success in that, and it's also allowed us to buy and sell to use our network of grain originators and buyers, to buy and sell grain on markets. We've implemented a number of processes and functions to help alleviate some of that pressure.
At the end of the day, you know, one of the biggest things and what this genetic changeover will do is bring to us a better feed conversion, that's the number of pounds that we have to feed to an animal, number of pounds of feed to create a pound of meat. We've really been focused on how to lower that and how to improve that overall feed conversion, to make sure that we're efficiently feeding our animals in a way that is really having an impact on that overall feed cost. As you can imagine, as big of a component as feed cost is to the overall raising cost complex, our teams are extremely focused on every opportunity to take cost out of that side of the equation.
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Thank you for the question.
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[Foreign language] 。Next question is from Wei Xiaopo from Citibank. [Foreign language] 。
[Foreign language] , Rob?
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OK， [Foreign language] 。Thank you for the color for 1Q. We understand the 1Q actually is pretty tough for US. My point that, since IPO of WH Group, we still remember that why the company keep Smithfield is older to upstream. We know that is for the quality of the meat. We also understand that if the market is tough, you can use export to stabilizing the US business. The world has been changing so much since COVID with more geopolitical risk, more FX changes and et cetera. Have you guys ever think about strategic review the business model in US, i.e., reducing exposure to upstream, especially for hog production?
I know I'm not saying that you guys are totally divest the whole upstream business, but have you ever think about reduce exposure to upstream? I'm not so sure whether the question should be answered by you guys in Smithfield or Mr. Wan or Mr. Guo at the WH Group to separately this strategic question. Thank you.
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Our United States slaughterhouse, first, we need to supplement staff. Secondly, we need to speed up technological transformation, realize labor savings and efficiency, increase labor efficiency, increase slaughterhouse income. One is to increase its output, increase its income, increase its profit making ability. Another is to expand exports, realize profits. Our meat products, I think we have done a pretty good job. Next, we will continue to expand the meat product business. This is to improve our own capabilities. We have a chance to acquire and merge externally. We still have to expand. This time, we focus on Europe to increase new meat products. The United States, next, we will continue to expand. Xiao Po, in general, I have this idea.
This question, during the time of IPO, I understand that many people wished that we would spin off the hog production segment and simply go to IPO with the packaged meat business. We have considered the fact that we are meat processing enterprise. We are also the biggest enterprise in the U.S. If we can do well, all segments, including upstream, mainstream and downstream, it will be a good thing to not just the enterprise, but also to our investors. We have put things into practice for a number of years, and I must admit that the hog production side is indeed a burden to us, and it has been dragging us down.
In the Q1 of this year, we did not have a very positive or strong beginning for the enterprise, and we have seen a drop of attributable profit of 56%. What is missing is in the United States, because we have seen strong growth or stable growth for Shuanghui's business in renminbi calculation in China. We have also turned things around in Europe, but the operating profit for the U.S. segment continued to drop. The decline was 90%, and the difference is mainly in relation to the hog production side, which suffered a loss of $271 million. At the same time, the slaughtering business made a profit of more than $50 million. We can see a year-on-year drop in relation to the entire pork segment.
The packaged meat business, however, performed very well, and we see strong year-on-year growth in terms of our operating profit, or it show a flat trend. Also the unit profit level reached $900, which is a historical high. The major difference is the hog production side for Q1, because the packaged meat business continued to make very good profit. We need to have some rethinking in relation to what we shall do in the future. We have to do some research and seriously consider how we want to deal with the entire chain of business. Our next step should be focusing on sorting out the hog production business. We must pay very close attention to what changes are happening around the globe. For example, in Q1, the hog prices in China increased by 12%.
In EU, the performance was up by 46%. In Brazil, it was up by 33%. At the moment, hog prices in the U.S. per kilogram is $1.2. In Europe and Brazil, it is closer to $2. We believe there will be changes happening to the hog prices in the U.S., and we need to make necessary adjustments to our global pork resources. In the next step forward, we plan to expand our export and change the status quo for hog production in the U.S. We need to gain deep understanding of the industry and try our best to turn things around and enjoy better performance in the following quarters and try to minimize our losses.
Secondly, we must consolidate the overall hog production business. We need to carefully review what is happening to our own farms and also external farms. For those without improvement or good performance, we need to chop off things that are not performing well. We need to take use of the time, which is quite limited, to carry out reform and adjustment, keep what is doing well, and then spin off what is not performing well, and also reduce the overall supply level. We also need to consolidate the overall slaughtering business. This year, our focus is to expand our export. In recent years, we have seen shortages in terms of labor, which has already turned around this year. We will also continue with our technical upgrade. So that we can enhance overall efficiency, enhance recovery, and also continue to add value to the value chain.
The packaged meat business is performing better, so our next step is to continuously expand this segment and expand our own production capability, and also continue to identify M&A opportunities in the market. In recent years, we have carried out some M&A activities in Europe, and the next step forward will include some attention shifting to the United States or Italy. We will identify certain suitable opportunities in the United States. Thank you. I think I would like to follow up on what you just said. I have witnessed how Shuanghui gone through your reform measures, and I have witnessed the acquisition of Smithfield, and I must say that, Chairman, you have been very visionary in all these actions.
This year, I am looking at some big changes in terms of the market condition and also some major trends have shifted in the industry. I am certain that all these elements will affect your future thinking, including how you are going to reshape your business model. I sincerely hope that, Chairman, you and your team will continue to be visionary and very much decisive in taking such actions. Thank you very much, Xiao Po. Just now you have made some suggestions and given us some advice in terms of corporate strategy and also we need to be very decisive in terms of our future business development. Everything you said is very to the point, and they are also matters of concern to all of us.
Concerning our enterprises in China, in the United States, and also inside EU, all these years, we have never stopped making adjustments and consolidations. I think the level of strength involved is not sufficient. In recent years, we have come across very complicated situations. We have encountered problems and issues that were faced by other industries, and what has not happened in other industries has also happened to us. For example, we have all gone through the pandemic, inflation, interest hike, and also the trade war between U.S. and China. In our industry, what is also a unique challenge is the African swine fever issue, which is not a problem to many other industries. I can tell you, we have really encountered many, many challenges, and they have affected our development.
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I believe our next step forward is to consolidate the hog production business in the U.S. Because in the U.S., the pork supply is in excess, together with changes to geopolitical situations. I'm sure U.S. pork will be continuously affected. Our next step forward is to consolidate or handle the U.S. hog production business.
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Because the pork supply in the United States is in excess, we have to reduce the size of the pork industry, especially targeting the hog production segment.
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Secondly, the export of U.S. pork is now facing many, many challenges and limitations. Therefore we need to rethink our position in terms of pork export from the U.S.
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Thirdly, the hog production business in the U.S. is indeed a burden to us as an enterprise. We must be decisive and be determined to do something about this burden.
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Actually, we already have a plan. We will communicate with our various teams about the plan. Later on, you will be able to see the details of such a plan. This year, we are going to consolidate our capacity for hog production at around 10%. What needs to go will be chopped off.
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We will consider to look at the actual situation in the market and we will continuously reform and make adjustments wherever necessary next year.
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At the moment, the ratio between hog production and slaughtering capacity is about 2 to 1. Our next step forward is to adjust that to about 30%.
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Through such reform or adjustment measures, and also the necessary reduction in the hog production volume, we will be able to expand external procurement volume.
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That is our current thinking and we are now making all necessary preparations.
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Thank you.
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[Foreign language] Xin and Mark, today's meeting has concluded. Thank you for your participation and you may get off the line.
Thank you, Robert. Thank you, everyone.
Thank you.