Analysts and investors, good evening. Welcome to 2021 Third Quarter results by WH Group. We have online broadcast. Allow me to introduce to you members of the management. We have our Chairman and CEO, Mr. Wan Long, CEO, Mr. Guo Lijun, and our CFO, Madam Yan Kam Yin. From Shuanghui, we have Mr. Ma Xiangjie and Mr. Liu Songtao. From Smithfield, we have Shane Smith, who is our CEO, and CFO, Mr. Glenn Nunziata. For European business, Mr. Luis Cerdan. Our host is Mr. Wan Hongwei. Mr. Guo, please take us through the financial summary and business review of the first three quarters, and then we will move on to Q&A.
Dear investors and analysts, good evening. I'm going to take you through the financial summary and business review of the group for the first three quarters. Packaged meats sold 2.43 million tons, up by 2.1%. Pork sold 3.2 million tons, up by 10%. Revenue realized $20.06 billion, up by 6.9%. EBITDA realized $1.817 billion, a drop of 7%. Operating profit $1.314 billion, a drop of 11%. Profit attributable to owners of the company, $785 million, down by 11.8%. Basic earnings per share, $0.0539. All these figures are before biological asset fair value adjustments.
For the first three quarters, if you look at the segment revenue and operating profit, you can see increases across the board, while profit has dropped. If you look at the business segments, we have about half of the revenue coming from packaged meats. For pork business, the contribution is 45% in terms of revenue. Because for the first three quarters this year, there's been some changes in the market trends, and we've seen some losses for pork. We are talking about 0.14% contribution from the pork segment.
Others, 4.8% contribution. If you look at revenue by region, China business contribution is about 40% of our revenue and 51% of our profit. U.S. contribution, 50% to revenue, 40% to our profit. Europe contribution is 9.7% to our revenue and 8% to our operating profit. In the first three quarters of 2021, the average hog price in China dropped as hog supplies recovered from African swine fever. In the U.S., both the average hog price and pork cutout value increased significantly due to strong demand and tight supplies.
In Europe, the average carcass price of the member states of the EU also showed a decrease as pork trades were limited due to African swine fever. The number of slaughtered hogs in China increased by 35.9% to 492 million heads in the first three quarters of the year. This is according to the National Bureau of Statistics of China. According to the USDA, the number of slaughtered hogs in the U.S. decreased by 0.4% to 95.477 million heads in the first three quarters of the year. Hog prices in China in the first three quarters, according to the Ministry of Agriculture, it was 22.24 RMB per kilo, a decrease of 36%.
According to Chicago Mercantile Exchange, average hog price in the U.S. in the same period was up by 73.4% at $1.63 per kilo. As for our results in China, operating profit RMB 681 million, drop of 22% for packaged meat. An increase of 2% to RMB 663 million pork. A loss of RMB 55 million. A drop of RMB 246 million. Our U.S. performance, operating profit up by 13.8% to RMB 528 million. Packaged meats, RMB 524 million, up by 32%. Pork business, RMB 23 million, a drop of RMB 149 million. Our performance in Europe, $105 million realized. Operating profit down by 22%.
Packaged meats, $83 million, up by 28%, while pork segment, $13 million. A drop of 48%-84%. For China, U.S. and Europe, our pork business, the profit level has been dropping while packaged meat business continue to grow. We will further enhance our vertically integrated business model and global platform, optimize our product mix, adopt an innovative marketing approach, and improve the level of automation, information technology and business intelligence to expand our market scale, improve product-production efficiency, cope with various risks, maintain our leading position in industry, and ensure the sustainable development of the group.
For our business in China, we are committed to our strategy of launching new products, optimizing product portfolios, expanding market network, and promoting marketing innovation to achieve volume growth. We will actively develop food service channels and household consumption, cultivate new businesses and expand into new streams. Pork business, we will grasp market trends, leverage competitiveness, and expand production volume. We will further enhance our integrated business model by developing the hog production business and expanding the poultry business to enhance overall competitiveness.
As for our business in the U.S. and Europe, we'll leverage the advantages of our integrated business model to achieve greater economies of scale. We will reduce costs and improve hog production efficiency through science-based feeding and improved management. We'll optimize product mix and channels of the pork business to increase market share in the U.S. domestic market. Increase by-product recovery rate to expand export volume and product profitability.
We'll further increase the volume and profits of packaged meats by giving full play to market advantages, utilize potential production capacity, and optimize our product mix. We will continue our effort in pandemic prevention and control, reducing losses and ensuring the stable development of the group. European business will continue to effectively prevent animal diseases. We'll focus on local markets and increase sales volume of packaged meats. For the first three quarters, that is my report. Thank you.
[Non-English content]
I will focus my questions in relation to the operations in China. My first question is in relation to the packaged meat business. I understand that according to my calculation, the volume for Q3 showed a declining trend. Can you please tell us why that is the case and what is your expectation in relation to the volume in Q4? Do you think we can realize the full year volume? What about the profit per ton situation? I understand that it was RMB 4,000 per ton in Q3, and I believe that was a historical high. What is your expectation for the same figure in Q4?
My second question is in relation to the slaughtering business, and I understand that during Q3 there were some huge losses due to the decline in the pork prices in the market. Can you tell us how much the loss was actually and what is the current situation for our core business? I saw some price rebound that took place in October. What is your expectation for the slaughtering business in Q4 as a whole?
[Non-English content]
I will respond to the questions in relation to the volume trend in Q3 and also our expectation level for Q4. We have seen a decline in the volume in Q3. As for Q4, we expect to turn the decline around and turn it into a positive trend. For the full year figure, we are expecting a positive figure.
[Non-English content]
As for the per ton profit level, we have reached a historical high in Q3, and that is mainly because of our cost advantages. As for Q4 expectation, we believe we will be able to maintain the same level as Q3 with some mild increases. For the full year, our profit per ton level should exceed that from last year.
[Non-English content]
I am Liu Songtao, I'm going to take the other question from you. You have mentioned that there were some losses in Q3, and that is mainly because of some related sales losses and also depreciation in relation to the products comparing the domestically produced meat and imported meat.
[Non-English content]
If we actually brush those factors aside, then in terms of the profit level, it is RMB 160 million and the per head figure should be RMB 50.
[Non-English content]
Towards the end of September, we have seen some rebound of the hog prices in the market, and we have already done necessary preparation work in relation to our inventory. We have also analyzed the market situation and done the provisions accordingly. We expect there will be a rather strong rebound in the fourth quarter in relation to hog prices. We believe there will be some return for our provisions. We expect the volume and profit level for our fresh produce and also frozen products in the fourth quarter to improve.
[Non-English content]
Thank you for the question.
[Non-English content]
I have a follow-up question in relation to the packaged meat business. Can you explain why despite all your effort and investment, in Q3 the volume of this segment actually declined? What about the performance in Q4? Do you think there will be a positive growth trend and what will be the reasons behind that?
[Non-English content]
Allow me to answer your question. We have seen a drop in the sales volume for packaged meat in the third quarter. It was mainly due to the pandemic, bringing us a lot of impact, and there were also shortages at the terminals. We had to do replenishment in the third quarter and now we believe the performance will improve.
[Non-English content]
As for the situation in the fourth quarter, as I mentioned earlier, we believe the sales volume will be turning around to a positive level. That is based on the following considerations. First of all, we are going to rely on new products to drive our sales performance. Secondly, we will rely on various new channels to drive our sales, including the e-commerce platform and other food businesses. Thirdly, we are going to use promotional activities and innovation to drive our sales performance.
Number four, we will rely on professional sales methodologies by setting up dedicated departments and business segments and also dedicated clients. Number five, we are going to enhance the sales management for our various terminals, and we will invest more heavily into the market. Finally, we will use IT management to drive our market management methods.
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
[Non-English content]
I have two questions. The first one is in relation to your business in China. You just mentioned that in Q4, you are hoping to see improvements for both packaged meat business and also for the pork business. Do you need to adjust your full year guidance accordingly? What do you think will happen in 2022 in terms of improvements or growth? What is your expectation for the hog prices? I will ask the second question in relation to the U.S. business in a moment.
[Non-English content]
I'm Liu Songtao. Allow me to answer your first question. Because of our expectations for the final quarter of the year, we believe that there will be substantial growth for the full year performance in relation to the volume of slaughtering and also the sales of domestic meat. As for imported meat, I believe there will be a year-on-year volume decrease. As for the volume of our packaged meat business, as we already expected a growth in the fourth quarter, so it is hopeful that there will be a positive growth for the entire year. Overall speaking, in terms of the sales volume, the scale will continue to expand while the profit level will decline.
[Non-English content]
I'm Mr. Wang and I would like to offer some supplement to what was just said. Up to September this year, we have seen some substantial decline for Shuanghui's performance and the major cause is because of the slaughtering business. While the hog raising business did not perform so well, it did not create as huge an impact.
For the fourth quarter for Shuanghui, it is very important to grasp the good opportunities presented in the peak season to drive our sales of frozen and chilled products. Also we need to increase the profit level for chilled and frozen products which are sold domestically and also add value to the products being imported so that we can turn things around for the slaughtering business. That is the objective we are fighting for.
[Non-English content]
Secondly, I think what we need to do in the fourth quarter is to maximize the profit from packaged meat business. Up to September this year, we have seen a rapid decline in hog prices and also the meat prices at very low levels with the cost level being driven down. Therefore, if Shuanghui is to leverage on the advantages of the industry chain, we must ensure there is low cost and high profit for our packaged meat products so that we can realize strong and positive operating results for this segment.
[Non-English content]
After a lot of hard efforts made by Shuanghui in the four quarters, we have actually seen very good results. I think the year 2021 is for us to set a very strong and solid foundation to resolve various issues in relation to the pandemic, the African swine fever situation, and also the trade war between China and the U.S. All these adverse incidents, we should be well prepared for the coming year, so that in 2022, we are all equipped to start a new round of battle and create a new era for us.
[Non-English content]
In relation to hog prices, we've seen a drop of 36% in Q3. As for next year's hog prices, we believe it will start off from a low level and then gradually increase.
[Non-English content]
As for how low is going to be or how high is going to reach, actually we have some sort of consensus. We think that the lower range will be around RMB 14 and the higher level will be around RMB 18 .
[Non-English content]
Thank you.
[Non-English content]
So the second question is on the U.S. business. First is to verify the trend for fresh pork and the hog production profit in third quarter, whether fresh pork has achieved profit in third quarter, and what about the hog production's profit level in third quarter? Meanwhile, what's the outlook for fourth quarter? Thank you.
Thanks for the question. This is Glenn Nunziata speaking. So we with respect to Q3, the profitability actually was driven by the hog side of that North American pork business. The seasonality for hog production this year went back to quote unquote normal. What I mean by that is, we have historically seen in the U.S. where Q1 and Q4 are our most pressured quarters. We always target trying to perform at a breakeven level for those quarters. This year we saw pretty significant losses in Q1, but in Q2 and Q3 those rebounded and we saw some profitability there.
From a fresh pork perspective, the problem was meat prices did not elevate as quickly as hog prices. So for Q3, the USDA market meat values increased 60% year-over-year, 57%, whereas the hog price increased 87%. So that put a ton of pressure on our North American fresh pork business. We did have certain affiliated businesses within that segment that performed well, including our bioscience business and some of our rendering and pet food businesses. But as a general proposition, Q3 was a difficult quarter for U.S. fresh pork.
[Non-English content]
With respect to Q4, we see those trends, like I said, coming back to more normal trend line. We would expect to see some mild, small losses in our hog business in Q4, which again is getting back to historically normal cyclicality in that business. We do expect to see profitability in our core U.S. fresh pork business. That is also going to be compared against a pretty weak Q4 2020. You should expect to see, and we are hopeful to generate, a pretty sizable variance in profitability in Q4 of 2021 as we compare it to 2020.
[Non-English content]
Thanks very much. That's all my questions.
You're welcome.
[Non-English content]
I will first ask the question in relation to the Chinese business since Mr. Wan is with here at the venue today, and the question is in relation to fresh pork business. We have never seen such a huge loss for this segment historically speaking. Is it because there was a lack of anticipation in relation to market risk leading to a larger risk exposure and created some sort of shorter term fluctuations in your performance? From now on, would you say that we should reduce that risk exposure to commodity type of products? Perhaps from now on you should place the focus more towards the downstream and learn from our lesson.
[Non-English content]
Thank you very much for your question. We have been affected in relation to our fresh pork business by various factors, and they would include the African swine fever situation, the trade conflicts between China and the United States, and also the general pandemic. In terms of operations and management, we have actually done some value adding to bring some more benefits. This year we did face a rather serious loss. With the big fluctuations of hog prices in the market back in 2019, the slaughtering business contribution was more than RMB 2 billion, but this year it's been turned into a loss and that is unfortunately a fact.
[Non-English content]
The losses for our slaughtering business this year has been caused by misjudgment in relation to the market trends and situations.
[Non-English content]
At the beginning of the year and also towards the end of last year, we thought the hog prices in China would continue to rise. In reality, what happened was just the opposite. It started off from a higher level, and then it declined.
[Non-English content]
It declined from RMB 38 last year to RMB 11 in September this year, showing a very significant decrease.
[Non-English content]
Especially the dropping trend was very obvious in Q3.
[Non-English content]
That is the loss created due to misjudgment of the market situation this year. Another thing that I would like to mention is that considering the rising trend for hog prices this year, and also our early inventory preparation for chilled and frozen products, we have greater expectations towards the second half of the year, and that also created certain depreciation of the frozen products.
[Non-English content]
You actually put forth a very timely question. Because of the huge risk in the market in relation to fluctuations, perhaps from now on, we will do less business or just give up the business in relation to frozen products and just focus on what we can produce and sell very quickly. Things come in quickly and leave us quickly to reduce the risk exposure.
[Non-English content]
From now on, we must learn from our lesson from the slaughtering business. From now on, we need to research more deeply into the market trends and situations so that we can well position our operations and management.
[Non-English content]
We shall never gamble with the market situation in the future, and we should focus on quick production and quick sales for our fresh produce. That will be the most important guiding principle for our future operations.
[Non-English content]
Also in China, we do have pork futures products. From now on, we will use such futures products as a kind of insurance.
[Non-English content]
Thank you. That's all the questions from me for now.
Okay, I will have a very quick one for the U.S. business. Can you hear me?
We can.
Okay, good. If we look at third quarter, we are seeing the packaged meat business achieved good growth, like 8%, and we are seeing the pork business, despite some decline, but it's a positive figure for EBIT. Looking into Q4, we appreciate the color you just shared earlier. Shall we say with the U.S. continued reopening, we are seeing the packaged meat EBIT to be continually on a positive year-on-year trend in fourth quarter. Also, if we look at the whole pork business EBIT, it was a very significant loss last year, printing a $200+ million loss. Shall we say that we will make it a much less or even make a profit, even if a minor profit in the Q4 this year? This is two directional questions. Thank you.
[Non-English content]
With respect to packaged meats and the trend, you're correct. We had a pretty strong Q3. Sales for the first three quarters of 2021 increased by 19.5%, and 6% of that was volume driven and almost 13% of that was increases in sales price. We took many good price corrections to manage the inflationary pressures on that side of the business. You gotta remember I mentioned earlier the USDA carcass cutout increased 45% year to date through September. We needed to...
That's our number one input into our packaged meats business. We needed to make sure that we offset some of that inflationary pressure. The other good news was in Q3 we were able to get to just shy of 90% of 2019 food service levels. Our weekly order level for our packaged meats food service channel is starting to approach and encroach on 90% of pre-pandemic levels. To be fair, I'm not sure what post-pandemic will look like. I mean, there's some questions here in the U.S.
As to whether we get back to 100% or if we've lost permanently some of the smaller restaurants and food establishments here in the U.S., time, only time will tell. We do expect that trend to continue into Q4. Q4 is typically our most profitable quarter for packaged meats. We're experiencing some relief from input prices as fresh pork prices come down a little bit in Q4. Between good price action taken throughout the summer and fall months and lower fresh pork input prices, we expect a pretty strong Q4.
I commented on fresh pork earlier for the outlook, and you're right, we had pretty sizable losses in Q4 of 2020. That's very unusual. Q4 historically has been our strongest quarter in the U.S. Fresh pork. Last year there were a list of external factors and headwinds that put a lot of pressure on that business. Not you know the most important of which was just the shutdown of plants throughout the year both Smithfield and others. The backlog of pigs on a farm, the inability to convert commodity meat into more value added cuts.
All sorts of pressure faced our U.S. fresh pork business last year, and therefore we incurred a loss. What I said earlier, and I'll repeat, is Q4 this year, we expect hogs to generate a small loss and go back to sort of normal historical patterns with respect to profitability, where Q1 and Q4 are difficult quarters. Q2 and Q3 typically are profitable quarters, so Q4 we're expecting a small loss in hog production, but that should be offset by some decent profitability or returning profitability for our core fresh pork business. When you combine those into the North American pork segment, we do expect to see a pretty sizable positive variance against 2020's Q4, because of those dynamics.
[Non-English content]
Thank you so much. [Non-English content]
[Non-English content] Thank you very much. I have two questions in relation to your China business. First of all, in relation to your slaughtering segment in the third quarter, you mentioned just now the profit per head is about RMB 50. Can you share the profit level per head in the past? And what about the future trend? The second question is in relation to the packaged meat segment. We do see some very low price levels. What is your expectation for the profit level in this segment next year? And I'm asking the per ton profit level.
[Non-English content]
Thank you for the questions. I'm Liu Songtao from Shuanghui. Allow me to answer your questions in relation to our fresh pork products and also chilled and frozen products. Considering the level for Q3, the profit was RMB 50, which reflected a fundamental and normal level of profit. We do not simply pursue blindly to have higher level of profit, because we also need our scale to expand continuously, and we will continuously suppress our expenses. We want to achieve dual growth in our scale and our profit. As for next year's expectation for the fresh pork business, the scale will continue to expand and therefore we believe that the per ton profit level will be stable with some mild increases.
As for the profit level for the packaged meat products, we have seen very good performance per ton in Q3. Next year, we believe the overall cost level will be stable with some minor declines. We also see some minor pressure from packaging materials. Overall speaking, the cost will decline while we will continue to expand our scale and keep a stable trend for our expenses. At the end, we believe there will be a positive trend for our profit.
[Non-English content]
Okay, I do have one follow-up question in relation to your slaughtering per head profit level. If the hog prices increase sooner than expected, then or later than expected, is that going to affect your overall judgment in relation to per head profit level?
[Non-English content]
[Non-English content] I am the Chairman, Mr. Wan Long. I would like to supplement a few words in relation to the per head profit at RMB 50. This is actually our fundamental expectation. We would like to drive that to a higher level, but at the end of the day, whether that is possible or not depends on our scale and what is the market situation and also the fluctuations of prices. So sometimes we expect the per head performance to be a bit higher. Sometimes we'll focus our attention on expanding our overall scale instead. So either one may happen. If the hog prices increase slightly for Q4, there are actually advantages to our business.
For example, we can add value to our frozen products. We can add value to our imported meat so as to reduce the overall loss level. If the hog prices drop, There are advantages to our fresh products at the time. Under normal circumstances, when hog prices are lower, it makes our life easier and we can focus on carcasses, we can focus on cut out products, and both will bring us profit. We are very different from other enterprises. We can focus on carcasses or cut out products together with our processing conditions for packaged meat business.
We have this advantage along the entire industry chain, combining both the upstream and the downstream. Basically, it doesn't matter what the hog prices may be, low or high. We can utilize such advantages along the industry chain as long as there are no huge fluctuations with hog prices, which of course is very difficult for us to control. Otherwise, we are not too concerned about certain increases or decreases of hog prices. In relation to next year, we have to be prepared at the current time and deal with the current situations so that we are fully equipped to create a new era for the company.
[Non-English content]
My question is still about your Chinese business in relation to fresh meat. I would like to confirm with you in relation to the calculation of such a huge depreciation level for Q3. Is it calculated based on the hog prices towards the end of June and then end of September? Moving forward in the fourth quarter or in the next year, are we going to come to our judgment based on the hog prices at different points of time to decide on depreciation or some adding back based on depreciation? What about your inventory situation? I do not see a declining trend for inventory level comparing Q3 and Q2. How much inventory do you have in relation to frozen products? What is your plan to deal with such inventory?
[Non-English content]
I'm Liu Songtao from Shuanghui. Allow me to answer your questions. In relation to the Q3 depreciation, we use it as a testing method or some sort of experimental method, and it was calculated based on RMB 11, which was the going market price towards the end of September. Looking at Q4, both hog prices and meat prices will increase and therefore part of that depreciation will be turned around and therefore added to the profit level for Q4.
As for your other question about our inventory level, it is true that for our frozen products for Q3, the inventory level is more or less the same compared to Q2. With a lower hog prices in Q3 and rising hog and meat prices in Q4, we will speed up the momentum of our products leaving the warehouse. Towards the year-end, we believe the inventory level will be at a normal or slightly low level.
[Non-English content]
Thank you. Now I would like to ask about imported meat. I understand that the price spread between China and U.S. is not very positive for your business. Since Q3, have you done any adjustment to your strategies in relation to your import business? Are you still doing importation? Do we expect there will continuously be some losses? What about our connected transactions? Are there any changes to your trading strategies in relation to SFD?
[Non-English content]
Allow me to answer your question. I am Guo Lijun. Since Q2, we have seen substantial decreases in relation to hog prices in China. Since then, we have already reduced rather significantly the volume of imported meat. During the same period, we are still importing the byproducts from the United States.
[Non-English content]
As for our strategies in the future, at the moment, judging from the current hog prices, we have come to certain expectations for the market next year. We don't see much opportunity for importation of pork, but we will continue to do so if the opportunities present themselves. For our next step forward, the focus will be on byproducts. We are planning to increase the volume of international trade in this area.
[Non-English content]
For our business in the United States in relation to internal organs and byproducts for the hogs, we believe there is great potential for us to enhance our business in this area. This is going to be our rather long term operational strategy. Through this strategy, we believe we can effectively enhance the profit level for both China and the U.S.
[Non-English content]
Thank you.
[Non-English content]
[Non-English content]
A quick follow up question in relation to next year, are you saying that there will be no importation of pork? Is that going to affect in any way the exportation of Smithfield products?
The answer coming from Mr. Wan. There will always, under normal circumstances, certain price spreads between the pork and meat prices of China and the United States.
[Non-English content]
In the normal time, we enjoy absolute advantages in relation to the importation of byproducts. When it comes to pork, it really depends on the current situation.
[Non-English content]
In relation to the importation of pork and our control over the price spread, is normally between RMB 5,000 and RMB 10,000.
[Non-English content]
If there is any pandemic or disasters, then of course we will have to give special considerations. During unusual times, there could be extra fluctuations to the prices of pork to meat and also other food items. We will need to reconsider.
[Non-English content]
At the moment, for cut up carcasses, perhaps the market situation is not very positive, but for other products, wherever the opportunities are, we will move in and grasp such opportunities. As long as there are opportunities, we will not stop.
[Non-English content]
In relation to the importation of byproducts and pork from the United States and Europe into China, this is going to be one of our important strategies for the long-term operations. Because the raw materials for Europe and the U.S. will always be lower. Secondly, it is because the Chinese market is huge with higher prices and also foreseeable profit to be earned. This is going to be one of our long-term operational strategies.
[Non-English content]
If we do well, the trading in relation to importation and exportation of meat products among China, the United States and Europe, this is going to help us achieve greater synergy and achieve higher level of competitiveness. It is conducive to our long term development. Of course, we will insist on doing importation and exportation when the conditions are right. We don't have to do it when there is no profit to gain.
[Non-English content]
Based on the current judgment and expectation, and also based on the trading situation for import and export in recent years, in the longer time looking ahead, we will consider this to be our long term strategy and we will spare no effort.
[Non-English content]
Thank you.
[Non-English content] Thank you for your participation. We'll see you next time. [Non-English content]