Earnings Call: H1 2021

Aug 12, 2021

First of all, allow me to introduce to you who are present. We have our Chairman, Mr. Wan Long our newly assigned CEO, Mr. Guo and then from Shanghui Development, we have Mr. Ma Shuang Jie and Mr. Liusong Tao. From Smithfield, our CEO, James Smith and CFO, Mr. Glenn Nung Sieta and Madam Zeng, CFO and I am the host. I'm Robert Wang. Mr. Kuo is going to present to us the financial summary for the first half and business review. We will then proceed to Q and A. Mr. Kuo, please. The investors and analysts, friends, good evening. I'm going to report to you 2021 first half results and also some business review for the first half. Packaged meat sold 1,600,000 tons, up 12.5%. Pork sold 2,100,000 tons, up by 10 percent. Revenue, USD 13,300,000,000 up by 6.8%. EBITDA, USD 1,230,000,000 yen down by 0.7 percent. Operating profit, dollars 920,000,000 down by 0.5%. Profit before tax, $828,000,000 down by 2.4%. Profit attributable to owners of the company $539,000,000 down by 2%. Basic earnings per share, USD 3.66 down by 1.9%. According to the financial situation and cash flow, the Board has decided this morning that an interim dividend to be released HKD0.05, which is a flat trend compared to last year. $95,000,000 of interim dividend will be released in September. For the first half of the year, for our core business packaged meat contribution to our revenue 48.5 percent and profit contribution 88.7 percent. Pork contribution of 46% to revenue and 8.4% to our profit. By region, China business contribution 40.9 percent to revenue and 57% to our profit. For U. S. Business, 50% contribution to revenue and 35% to our profit. Europe, 9.5% contribution to revenue and 8.5 percent to our profit. In the first half of the year, because of higher cost and higher level of inventory, our cash flow $270,000,000 a drop of $950,000,000 CapEx $221,000,000 an increase of $87,000,000 mainly due to Zhonghui Development new project investments. Since IPO together with our interim dividend, we have accumulated US2.63 billion dollars in terms of dividend payout. Interest bearing liabilities, total equity remained stable. The former stood at 2,800,000,000 yen, the latter 25 times. In the first half, global grain and food prices rose rapidly due to many factors, including the COVID-nineteen pandemic, weather and international trade. Number of slaughterhogs in China increased by 34.7 to 337,000,000 heads. Number of slaughterhogs in the U. S. Up by 1.7% to 64,700,000 heads. Supply in China has returned to pre African swine flu period. Average hog price in China, 25.94 per kilo, decrease of 23.6 percent. In the U. S, average hog price per kilo, 1.58 U. S. Dollars, up by 66.3%. So we see a major drop in China, major increase in the U. S. In the first half, for China operations, we have seen substantial increase for slaughtering. Total meat sales also reached a new height. In the first half, processed togs, dollars 5,037,000, up 53.8 percent. Total meat sales, 1,600,000 tons, up 7%. For packaged meat, we have expanded new channels. Some of the leading new products have shown very good growth momentum. Emerging channels such as new leisure, e commerce, nutritional meals increased sales by more than double digits. Our 3 main new products, spicy sausage, no starch, king of the king sausage and Ho Chiengfeng sausage reached an annualized sales volume of more than 10,000 tons. For emerging business, it's been growing rapidly, demonstrating good potential for increased sales volume of catering ingredients increased by 103%. Self operated e commerce business increased by 2 45%. We continue to enhance our competitiveness by improving vertically integrated pork value chain and expanding our poultry business. 3 new pig production projects in Fuxin, Nanning and Shanxi as well as poultry projects in Xuhua and Fuxin are advancing rapidly. In the first half, we realized operating profit of $524,000,000 a drop of $26,000,000 packaged meat, dollars 408,000,000 realized, a drop of $9,000,000 pork, 68,000,000 a drop of 32,000,000. For U. S. And European operations in the first half, COVID related costs substantially decreased. For packaged meat business, the impact from the COVID situation diminished with segments results rebounding significantly. U. S. Pork business faced challenges as the spread between meat and hot prices narrowed. European business effectively leveraged the vertically integrated value chain to ease operating pressure caused by market dynamics. In the first half, U. S. Operating profit, dollars 317,000 up 14.9 percent Packaged meat, US358,000,000 dollars up by 47%. Pork, a loss of $17,000,000 down by $110,000,000 For our European operations, dollars 79,000,000 operating profit, down by $20,000,000 packaged meat, dollars 50,000,000 dollars an increase of 16,000,000 pork, 26,000,000 down by 44,000,000. For our next step, 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, IT and business intelligence to expand our market scale. We will improve product efficiency and cope with various risks, maintain our leading position in the industry and ensure sustainable development. For our China business, we are committed to launching new products, optimizing product portfolio, expanding market network and promoting market innovation to achieve volume growth. We will actively develop foodservice channels and household consumption, nurture new business and expand into new streams. For pulp business to grasp market trends, we need to reduce inventory expand production volume, further enhance integrated business model by developing pulp production business and expand poultry business to enhance overall competitiveness. In the U. S. And Europe, we'll leverage our advantage of integrated business model to achieve greater economies of scale. We'll reduce costs and improve hog production efficiency through science based feeding and improved management, optimize product mix and channels of the pork business to increase market share in the U. S. Domestic market, increase byproduct recovery rate to expand export volume and profitability. We will further increase the volume and profits of packaged meats by giving full plate to market advantages. We will utilize potential production capacity and optimize product mix. We will continue our effort in pandemic prevention and control, reduce losses and ensure stable development of the group. Finally, the European business will continue to effectively prevent animal diseases, focus on local markets and increase sales volume of packaged meats. Thank you very much. That is the end of my report. The first question from Lincoln from Goldman Sachs among the three questions. The first one concerns the business in China because we can see that for the Q2 in terms of packaged meat business, we can see declining trend for both the sales figures and also the unit price bringing impact on the per ton profit level. So can you provide some guidance in terms of your whole year per ton profit performance? Mr. Ma has responded to your question as follows. We have seen a drop in terms of the volume in the Q2 for packaged meat and we have seen some growth for Q1. So for the first half of the year, overall speaking, it is a balanced trend. And the major reason is because for Q1 last year, the pandemic situation was very serious. And for the Q2, we have seen replenishment of our products in the market. And relatively speaking, the sales volume for Q2 was bigger. But looking at this year's trend, it's actually rather on the contrary. For the Q1, the sales figures were quite high. And for the Q2, there was very good consumption of the inventory from the The second part of the question is in relation to the unit price. Actually, there are two factors affecting the unit price level, the first being the product structure. Last year, the demand was rather big in the second quarter and there were high price levels and high profit levels for our products. But the structure for the Q2 this year is not as good compared to last year. The second reason is this year we have actually invested more heavily into the market leading to a drop of our sales prices. And then the final part of your question is in relation to per ton profit. We have seen a drop in hog prices in the Q2 of this year and also a decline in the cost in relation to pork raw materials. But during the same period, we have seen higher prices for other types of protein such as chicken meat. And we have seen a rising trend for manpower or staffing cost and we have seen a poorer product structure. At the same time, we have increased the level of market investment and there are higher levels of fees and expenses. So our projection for the entire year according to the current situation and also changes in the market, we believe that there will be conducive factors leading to a rise in per ton profit for Q3 and Q4. And also there will be beneficial drives for the quarters in terms of our scale and also our cost. So we believe that compared to last year, the whole year average per ton profit level will show a stable growing trend. So the question is about the U. S. Business. So we also see the Q2 for the package ER segment, we see a decline or dip in the profit margin. Could we elaborate a bit more on the reason behind it? And how are we seeing for the second half in terms of the outlook? Are we still confident for the second half to reach 2019 level or for the full year to reach 2019 level? And since I think we have Mr. Shane Smith here, I also want just ask Mr. Smith, I think you have a very good experience in leading the European business before and also as a Chief Strategist. So given that now you are in a row of CEO, so in terms of Smithfield business, is there anything or any aspects you think the business can improve or any major strategy shift you want to implement for the business? How do you think about it? So thank you for the question. I'll start with the second question first. As you noted, I have been in part of Smithfield for nearly 2 decades and most recently running the European operations. One of the things that have driven success for us in Europe is learning to maximize the value in the vertically integrated model. And so when I think about the U. S. Business, I see that as well. I think our vertically integrated model really gives us a competitive advantage over our competitors and can create a consistency in earnings to our shareholders. And so as we move forward in the U. S. Operations, the things we'll be focused on is cost control and raising cost improvements in our high production operations. That will come from various health improvement and genetic transitions that will allow us to achieve a best in class raising cost. It will carry forward into the fresh pork operations where we'll be focused on cost control and getting our cost structures to where they need to be. And that will lead us into the packaged meats business where one of our key initiatives will be to add value to the fresh pork side by creating more value added products on the packaged meat side. That model has worked well for us in Europe and I believe it will work well for us in the United States operations. So as we move forward, those are the things we'll be focused on. Really to sum it up is how do we unlock the power of the vertically integrated model, both for our shareholders, our employees and all of our stakeholders. And to the first question, I apologize if I can have you repeat that. We were having a little bit of audio difficulty in the first part. Just quickly in terms of the packaging, I think the Q2, the margin having some pressure on a year on year basis or sequential basis. So what's the reason behind it? And how do we think the second half outlook for the packaged meat business? Well, we're seeing pressure in margins across the business and that's really as we look at packaged meat specifically as we return to pre COVID levels, like all other industries, we're having difficulties with labor and the continuing effects of food service not reopening as quickly as we would have liked. The second thing I would point out is the increase in raw material costs from extremely high hog prices, as well as other inflationary pressures that we're seeing in the U. S. Market. I can tell you that our sales teams are focused on passing along those inflationary cost increase to our customers. And as we look forward to the second half, we're seeing some bright spots. We've seen foodservice increase back to nearly 85% of 2019 levels. So that's very encouraging for us. So as we look at the back half of the year, there's a lot of optimism in our packaged meats business. Thank you. Thank you very much. I'm from Citibank. I have two questions in Chinese and one question to follow in English. The first question is for Mr. Wang, the Chairman. Thank you very much for arranging this video conference call with every party. And I'm happy to see all of you on the screen. I can see there are 3 participants from the Hong Kong side, including Mr. Guo and Joanna, and I have just heard about their new appointments. So congratulations. My question for Mr. Wang is, can you elaborate a little bit more concerning the transitional arrangements for the new management? And also can you provide further explanation behind the rationale? My second question concerns the operations of Shanghui. We all understand that back in July, it was very unfortunate that we have seen some serious flooding tragedies in Zhengzhou and Henan area in general. So I'm just wondering does that bring any adverse impact on your new product launch schedule? So first of all, I want to thank you because both your questions concern the situation in Henan. So I'm going to take your first question in relation to the adjustments made to the management team. And also I will talk about the transition transitional arrangement. And I will then pass the floor to Mr. Ma to talk about the flooding situation. Concerning the recent adjustments made to the team of management staff, it belongs to a kind of normal adjustment. So the newly appointed CEO is Mr. Guo and the newly appointed VP is Mr. Wang Heng Wei. For both candidates, I'm very happy with the appointment. I believe they are the most suitable candidates for the positions. And I feel very confident in their management capabilities. I believe Mr. Guo is a very suitable candidate to be the CEO of the company because of his over 10 years of experience at Zhonghui and also WH Group. And in the past, he has made very important contributions to the group. He has always shown excellent performance. As for Mr. Wang Heng Wei, he has very high educational qualifications and he has also accumulated many years of experience working for the group. So he has proven to be an important asset to the company. And I also believe that this current round of arrangements is going to be very suitable for future development of the company. As for the support team, I'm also very confident in their capabilities that will include Joanna for finance and Mr. Zhoufeng for international trade and also Mr. Wang Dingfeng will also make very important contribution. I believe that they will all discharge their duties very well. And there are two reasons for this round of adjustment to the management team. The first one being the fact that I am going to make preparations for my own retirement. The second reason being I need to identify suitable candidates to take over. And in recent years, I have actually been thinking about this succession issue for quite some time. And the reason why I have not retired sooner is because the timing was not yet mature. If you look at the history of myself and my team from Shanghui era to WH Group, we're talking about a history of 4 decades. And in this process, I have seen many changes at the company level. For example, we transformed from a private company to become a listed company. And we have seen the transformation of being a domestic Chinese company. And we have become this international company with an international footprint and we have also seen the development of the company to become top 500 both in China and also globally. So having gone through decades of development and reform, when I look at Zhonghui and WH Group, I see beyond the fact that they have become listed entities. They are also 2 inseparable parts. So by looking at our history and experience, I think it's the most important thing for us to be compliant with all the listing rules and my retirement plan also needs to be compliant. So if you look at Shanghui and also WH Group in general, what we do is processing for agricultural products. So both domestically and internationally speaking, we have been adhering to the highest standards and we have been following the principles of doing well our business to continue to expand our scale. And because of our strategy to stay strong and continue to expand our footprint, me and my team have been able to bring the entities to the top 500 level. We have actually changed the footprint of the pork business around the world and we have become, globally speaking, the largest pork processing enterprise. So the reason why I think it is now time for me to retire is because for both Shanghai and WH Group, I have already completed my historical mission. But before I do retire, I do have a few ideas that I would like to share with our shareholders and investors. I have set a rule for myself before my retirement. First of all, when I do retire, I need to make sure I'm leaving behind this huge enterprise. And I think I have accomplished that very well. And according to what was reported by Mr. Guo, you should share my positive thinking for Shanghui Smithfield and also WH Group. In the past, we have realized industrialization and expansion in scale and now it is time to move towards the use of new technologies and smart technologies so as to enhance our overall competitiveness in the market. And I'm fully confident with the current team of management to accomplish that. And I'm confident that putting together such talents, including our new CEO, Mr. Guo and Mr. Ma from Shanghui and the excellent team operating the U. S. Business, your future achievements will even be greater. So in the past, I have been focusing on this entity plus or practicality plus capital approach. And in the future, I think the new team will combine these 2 with finance and also new technologies. So I think they will overachieve compared to what I have done in the past. The second point is when I do retire, I hope that I am leaving behind a set of very efficient and outstanding mechanisms. And I think I have also done that very well. I think we have been able to uphold this culture of integrity and honesty because of the various mechanisms and systems I have put in place and they would include those covering items such as internal control, fair competition in the market, budgeting and also staff appraisal. We are not just implementing these systems in China. We have actually expanded them into our operations in the United States and Europe. And thirdly, I'm talking about leaving behind a very excellent team and that will include the CEO and also a number of directors. So the leaders, including Mr. Guo, Mr. Ma and Shane, they are all very outstanding talents. And that is why I'm fully confident that they will achieve even greater heights compared to what I have done. As for the position of the Chairman, we are still continuing our work. And once that has been confirmed, it will be the time for me to step down. So for the upcoming Chairman, I'm going to wait and see if that person is fully ready for the upcoming challenges. And when the time is ripe, I will be ready to step down. So figuratively speaking, concerning the recent round of adjustment of the management team, it is like that I have provided assistance for them to get on board on the horse spec and then I'm going to ride with them for some distance before waving goodbye. So I will continue to offer some guidance before they fully become mature for their positions. Because I want my retirement not to be anything of a disappointment to the enterprise or our shareholders. Looking back at my life, I have done 3 things that were very much correct. The first one is to turn Shanghui into 1 of the top 500 in China. The second one is to bring WH Group to the level of global top 500. And the 3rd achievement would be the adjustment of the management team, and I fully trust that they will be very successful as well. As for some members of the press, out of different motivations, they have spread certain rumors or even insulting remarks about me. Well, honestly, I do not care. And the reason why I don't care because in the past, I have already done a lot for the enterprise and I believe that I have achieved very great successes. So that is more or less all that I want to say today. So thank you very much for your reply, Mr. Wang. I can see that you are being very forthcoming and honest in your answer and I can feel your high level of expectation for the new team of management. And I also want to congratulate for your personal successes. Let's move on to the second question. Well, concerning your second question, first of all, I want to express my sincere thanks for your concern over the situation in Henan area. As we all know, since 20 July, we have seen some serious flooding incidents leading to injuries, deaths and the loss in property in Zhengzhou area and that has actually attracted national and international attention. And based on the advice of the members of the Board, we have done a lot to help the victims in the affected areas. For example, our enterprise has made a lot of donations for the victims and we have also given out many of our packaged meat products resolving some daily needs of those people affected by the disaster. Because we can keep our packaged meat products for quite a long time without affecting the quality of the products and the duration of the flooding incidents were not that long, Overall speaking, the sales situation for the enterprise was not affected by the flooding. In addition, we have seen some new COVID cases in the Zhengzhou area, but because of the very timely and suitable measures implemented by the government, our productions and also our operations have not been affected. So thank you again. That's the end of my reply. So I have another question for U. S. Side very short. First of all, my congratulations to Mr. Smith for the new post of Smithfield as CEO. And for the U. S. Operation, as we know that is the COVID-nineteen delta virus is hitting everywhere. I know that is the back and forth of the recovery everywhere. So what's your strategy of monetizing the recovery in U. S. Business will avoid risk operation, especially for your staff and also the supply chain safety? So thank you for your congratulations. I appreciate that. From a COVID-nineteen standpoint, you're right, the delta variant has continued to grow and spread in the United States. We're doing a number of things in our operations from expanding or reinstituting PPE to doing more on-site testing. This month, we're also running a number of vaccine events at each of our facilities, both for our employees, direct employees and for their families. But this is a very real concern for us as we look at the back half of the year. So as it relates to the business, we're doing a number of things, including working with our customers to find out the SKUs, SKUs that we can run the most efficiently for them. We're moving our labor pools around to the lines and the products that have the highest net realizable value. We're looking to different technologies and automation to help us in some of the areas that are the softest. And as we I think I mentioned earlier, as we look back at the as we look at the back half of the year, as things reopen, normalize, foodservice comes back, we have a lot of optimism in the business in the second half of the year. Thank you. Mr. Shaoai's follow-up, you are saying you are optimistic, It's not a cautiously optimistic. Is that right? We're always cautious. But as we do, we do see some things coming by that give us some real optimism. When you look at foodservice and what's happened there in the past, just from Q1 to Q2, we do feel the country opening back up, but we are cautiously optimistic. I think that's a fair I have a few questions. The first one is in relation to the fresh pork business. For both the China market and the U. S. Market, for the Q2, I can see that the profit margin has been declining and that is probably due to the hog price level in general. But since July, we see stabilization of the hog prices. So what is your projection for the rest of the year? Do you think the second half will outperform the first half? This is the response from Mr. Ma. Thank you for your question. In relation to the fresh pork business in China, I can tell you that we have seen a momentum of more speedy slaughtering for Chinese market this year, but because of the depreciation of the inventory that has led to a poor performance of our profit margin. So looking forward into the second half of the year, we believe that hog prices will be substantially lower compared to the first half and we expect that we will continue to maintain large scale increase in relation to our production scale in the second half and the profit level will outperform compared to the Q2. Thank you. Okay. Shin or Glenn can provide a comment on the U. S. Side? Yes. I'll say a few things, Robert. So as you know, the U. S. Business is a spread business, meaning the difference between the U. S. Market price for meat and hogs. Traditionally in the U. S, the 3rd and 4th quarters are the best quarters for fresh pork. We have already seen that spread begin to widen in July, and we expect to see that continue through the back half of the year. So we're seeing favorable conditions in Q3 and we'll see a more significant return in Q4. And so I would tell you, our expectation for the full year is probably a $5 to $6 a head profit in Freshboard. I'm sorry, can you repeat the figure again? I said the which part, all The figure. The figure? Yes, the expectation for this year is I feel like we'll be somewhere in that $5 to $6 head profit range for the year. My second question concerns the packaged meat business in China. First of all, a very simple question. You have set certain growth targets at the beginning of the year, but we have seen the performance of the first half, which is perhaps slightly weaker than expected. So do you think you can catch up and meet the original whole year targets in the second half of the year? And in the past year or so, your company has launched many new products, including vegetarian products and family oriented products. Can you tell us what is the update for these new products? Thank you for the question. Concerning our targets that have been set at the beginning of the year, Well, actually, at the beginning of the year, we expected packaged meat product to realize a single digit volume growth in terms of sales. When it comes to actual operations, we have seen some difficulties and lack of preparation or budgeting. So with intensified competition in the market, unfortunately, we were not able to realize our original target. The sales growth in the Q1 was 10%, while there was a drop in the Q2. So overall speaking the first half was a balanced trend. We expect that there will be a small range of growth for packaged meat business in the second half. And for the entire year, we believe there will be a low single digit growth. As for our newly launched products, they have all performed very well and some new products have gained a really strong momentum. The first example is 69% growth for our spicy sausage and another example is for our Hoaxuan Feng sausage, the growth was 123%. And for our food business and ingredient business, you may look at a rather small scale at this moment, but the development momentum is actually very positive, very strong. So in the second half and also leading us into the next year, we have a very good source of confidence in terms of growth for this segment. Thank you. Sorry, I didn't mean to ask the question. Sorry. Do we have any questions from all the investors, please? Thank you for your participation at this historical meeting, and let's all send our best wishes to Mr. Wang.