Earnings Call: Q1 2021

Apr 27, 2021

Mr. Dennis Organ from SMITSIL Mr. Glenn Lonsiata, also from SMITSIL, CFO. From Shanghai, we have Mr. Mark Xiang Jie and Mr. Liu Feng Cao as well as Mr. Zhang Liwen, who is the Board Secretary and Madam Xinjin Yan, the CFO of the company. We are going to invite Mr. Koh Kuo to review the situation for Q1 in 2021 to be followed by Q and A. The analysts and investors, good evening. I am going to report Q1 of 2021 in relation to the performance of Devilish Group. For the Q1, packaged meat sold 838,000,000, up 7.3 percent. Pork sold 1,012,000,000 tons, up 7.2%. Revenue realized US6.610 billion dollars up 5.2 percent. EBITDA realized US672 million dollars a drop of 5.5 percent. Operating profit, RMB 501,000,000, down 8.9%. Profit attributable to owners of the company, RMB 293,000,000, down 17%. I would like to offer some additional information. The information I disclosed does not include biological asset fair value adjustments to these efforts before such adjustments. Review of the operating environment. The number of slaughtered hogs in China increased by 30.6% year on year to 171,000,000 heads in the Q1 of 2021. By the end of March, hog inventory in China reached 216,000,000 heads, an increase of 31.9% year on year. The number of slaughtered hogs increased greatly compared to last year in China. For the Q1, in China, average hog price RMB 31.67 kilos, a decrease of 12.6 percent year on year. 1st quarter number of slaughter hops in the U. S. Decreased by 0.9% year on year to 33,900,000 heads. In the U. S, average hog price during the Q1 was US1.31 dollars per kilo, an increase of 32.3 percent year on year. Paimit's achieved growth in volume and profits and proactively explores new products and channels integration of global resources to leverage synergies. For Q1, in China, operating profit, RMB291 1,000,000, up by 7.7%, among which packaged meats, 220,000,000, up by 15.8 percent bulk, 15,000,000, a drop of 19.4%. In the Q1 in relation to U. S. Operations, we saw a recovery with significant drop in COVID-nineteen related costs, packaged meats records, but performance since the start of the pandemic. For Q1, operating profit realized in the U. S. Business, dollars 181,000,000, a drop of 19.9%, among which packaged meat, US194 million dollars up by 24.4 percent pork, US7 million dollars a drop of 93.4 percent. Profit of packaged meats business in Europe increased remarkably, while overall profitability decreased year on year due to the impact of animal diseases. For Q1 in Europe, operating profit US29 $1,000,000 a drop of 46.2 percent, among which packaged meat US28 $1,000,000 up 96.5 percent pork US5 $1,000,000 down 87.8%. Strategies and outlook. WH Group will fully utilize its vertically integrated business model and global platform to cope with various risks, seize industry opportunities, enhance the scale of operations, maintain leading position in the industry and ensure sustainable development of the group. Concerning our China business, we are committed to our strategy of launching new products, optimizing product portfolios, expanding market network, promoting marketing innovation to achieve volume growth. Secondly, we will maximize synergies by expanding meat imports and value adding processes. We will actively develop food service channels and household consumption, cultivate new businesses and expand into new streams. We will further enhance our integrated business model by developing the hot production business and expanding the poultry business to enhance its overall competitiveness. As for our U. S. And Europe business, we'll leverage the advantages of integrated business model to achieve greater economies of scale. We will improve management practices and tap into internal potential. We'll reduce costs and improve hog production efficiency through science based feeding and improved management. We will accelerate the transformation of the pork business, optimize product mix and channels, improve the output ratio and increase variety and scale of exports. We will further increase the volume and profits of packaged meats by giving full play to market advantages, utilizing potential production capacity and optimizing product mix. We will continue our effort in pandemic prevention and control, reducing losses and ensuring the stable environment and development of the group. Our European business will continue to effectively prevent animal diseases and focus on local markets and increase sales volume of packaged meats. So everyone, this is the major highlights for Q1 for WRH Group. Thank you. So the first question was from Bank of America and it is about the possibility of the management to provide some sort of concrete guidance for the businesses in China and also in U. S. And Europe in relation to the operating capability. For example, we see some sort of stable growth for the packaged meat business in China. So compared to last year, do you expect another level of moderate growth this year? And what about the situation in the United States? We do see some decreases in Q1, but year on year comparison, do you expect some sort of improvement? And what about comparing this year with 2019 for both U. S. And China? What level do you think you can recover to compared to 2019? And Mr. Guo said that he is going to offer some comments in relation to the general situation and some information about the outlook for this year and that will be followed by detailed answers offered by Mr. Ma for the China business and Dennis for the U. S. Business. First of all, I would like to talk about the general operation situation for the group. I can tell you three characteristics so far for Q1. First of all, the scale of our operation is increasing compared to last year and there is rather substantial decline in relation to our profit level. And thirdly, we can see positive trends bringing our performance to a better place month on month. First of all, in relation to our operation situation, it reflects that on the WH Group level and also for Shanghai and Smithfield, the overall management capability has been improving and we are also enhancing our operations creating better level of synergies. So all these positive factors are reflected in our results for Q1 performance. We can see that last year was a rather special year with some special factors. For example, in Q1 last year in China, the pandemic started to affect our business. While this year Q1 is no longer affected by COVID-nineteen, while in the U. S. We can see the performance of midyear last year was very strong in Q1 because there was no COVID impact. COVID only broke out in the end of March last year. While this year, the impact from the pandemic has been weakening, but of course, we cannot bear to neglect any residual impact. So looking into the next 9 months of operations, the management continues to feel very confident about our future performance. For example, in the U. S. Market, the impact from COVID-nineteen will continue to weaken. So the overall situation in the market will continue to improve, causing our operating improvement to take place. For our China business, with pork prices continue to decrease, while we continue to expand our operational scale and we enjoy new channels and new products for our packaged meat business. So we believe that the contribution from this part will be very substantial. At this group level, while the price differences for pork in U. S. And China continue to be smaller, we believe such price spread will continue to be beneficial to other initiatives. For example, in terms of pork exports from US to China And we will also continue to improve internal management and optimize our trade activities in various places around the world. So looking ahead, we will continue to see many different challenges if we look at the macro and external environment. First of all, COVID will continue to affect all walks of life. So it depends on the control measures in various places. Secondly, we see multiple outbreaks of African swine flu in China. While the overall hog supply is still reliable and stable, it continues to create some sort of negative impact on our operations. Thirdly, for our European business, avian flu and ASF will continue to affect the operations because they are quite serious at the moment. So our export activities and other operating activities may also be hindered. Firstly, overall commodity prices have been going up and the overall inflation trend will lead to cost pressure for our operations. And finally, we continue to see uncertainties surrounding geopolitical and economic situations around the world. So the group is planning to adopt appropriate measures and avoid all these relevant risks so that we can maintain stable operation. Now I'm going to invite Mr. Ma to talk about Shanghui's development and also invite Dennis to follow to talk about the U. S. Business. So concerning the year 2021, we are feeling very positively about the overall operations for Shanghui. For example, the hog production volume for Mainland China will continue to rise and together with the dropping trend for hot prices, we believe this is beneficial to improving both the level of sales and also the profit level for the slaughtering activities. And this is also going to create greater profit for our packaged meat business. On top of that, we also implement improvement measures to market management and this is also going to be beneficial to our long term operations and development. But I would like to state one point. There are two factors which may drive down our profit level this year. First of all, we are seeing greater increases offered to the salary levels of our employees. And the second factor is we have seen very good profit in relation to the inventory of frozen meat last year. For this year, such frozen products or inventory has already been fully utilized at this point. So these two factors will lead to a reduction of the overall profit level, while the whole year profit level will continue to be very stable. As for the whole year volume, we will see some remarkable growth. For example, there will be substantial improvement in relation to fresh items and we expect single digit growth for packaged meat business and relatively stable development for importation of meat. So overall sales volume will show significant growth. In relation to our revenue, we believe that the remarkable growth in sales volume together with the drop in pork prices and overall meat prices, they will affect the level of growth in relation to revenue on the sales front. So our overall revenue increase should be lower compared to the momentum of growth for our sales volumes. So the overall profit level will maintain stable. Okay. So Dennis, could you please take the question about the U. S. Operations? Sure. The first comment I would make is that if you consider all the challenges that Gordon laid out at the beginning of the call, we are confident in our ability to still make our financial plans by the end of the year. Hi, Dennis. Your voice sounds very loud enough. Could you please try to speak louder or move closer to the microphone? Okay. Is this better? Is this better? Okay. Yes, slightly. I said that considering the challenges that Gordon laid out at the beginning of the call, the Smithfield team, although there's multiple challenges, is confident in our ability to make the financial plan. As discussed, the primary issue that we're returning from is the impact of COVID. And across the United States on a daily basis, the country is returning more towards a normal state. The foodservice business is returning to 2019 levels faster than we had expected, slightly faster than we expected. That coupled with continued strength in the retail channel and Smithfield has a strategy across our fresh and packaged business to continue to grow market share. In our European business, we continue to grow our packaged meats volume. We're working on the acquisition in the acquisition 2nd quarter acquisition of Macom and continuing to work to control costs and combat disease impact in our Europe operations. And across all our businesses, we're using operational excellence initiatives to increase our capacity with minimal capital investment, combat inflationary pressures and creating strategies to minimize the impact of higher input costs. So again, recognizing all of the challenges that we mentioned at the beginning of the call, we feel that they will put pressure on our business, but we have managed has a strategy to deliver our financial plan by year end. Thank you. So I've got a couple of questions on the U. S. Business for Panasonic, if I may. So it seems that the hot production business was a key drag for the U. S. Business in Q1. But judging from the SKU's core product rally over the past few weeks in the U. S, do we have any below single digit U. S. Dollar topic ahead? Can we actually return to roughly that level for the entire 2021? Thank you. Okay. So I'll answer that. At the beginning of the year, we were working through a backup caused by COVID and some of the slowdowns of the plant. We think Q2 and Q3 will return to more normalized profitability. We're working very hard to create strategies to mitigate the pressures caused by input costs in grain and meal. And so we're working hard to build a plan for the Q4 to have a good 4th quarter and improve versus the prior year. I just have a follow-up on the U. S. Business. Dennis, I think you are talking about our normalized profit and is on track to deliver our plans. But what exactly can you give us some more detail in terms of plans? I mean, because during our post results NDR meeting, I think we're talking about we are confident for the U. S. Business in 2021, the full year. We are able to achieve at least the same level of profit versus 2019. I just want to ask, if that's still the case, despite the slowdown in the Q1? And how are we thinking for the 3 different segments, how production, first of all, and package mix, which segment are we more confident and which one you think we actually have some synergy there? Yes. Okay. So the first answer is yes, that's still true. We believe as this year progresses and after the completion of the Q1 that we're still in a good position to deliver our financial plan. I think I just sort of answered the hog production. We think normalized profits in Q2 and Q3 and opportunities to do some things that will deliver maybe slightly better than expected Q4. The higher hog markets have low pressure, our fresh pork business. So again, we're working on market share and value added growth in fresh pork to combat that as well as obviously some export opportunities. And then the higher meat prices will pressure our packaged meats business, but we have better than expected return of the foodservice business coupled with continual strength in the continuing strength in the retail. So we're very bullish on packaged meats volume, which will allow us to overcome some of the input cost pressures. And I mentioned some things in Europe where hog market's improving there. We have acquisition integration and packaged meats market share will continue to grow. So it might come in a little bit different areas. I think strength in hogs, strength in packaged meats will probably offset our some fresh meat profitability but deliver our plan by the end of the year. And just to clarify, how much the COVID related expenses in the Q1, is that still true for the full year, we are going to actually say $600,000,000 to $700,000,000 reduction? This is Glenn answering. We incurred approximately $40,000,000 or so of COVID costs for the Q1. To be completely transparent, it's better than we thought we'd be. So from this from here on out, we are expecting the net loss to decline each quarter as we progress through 2021. And for the sake of some clarity, the majority of that net cost is associated with testing and vaccine administration. So we're moving away from labor related expenses and managing the direct COVID testing and vaccine related costs here in 2021. The question for the China business is in relation to per ton profit level for packaged meat business and also for hog production business, hog slaughtering business. So do you think that we can continue the current trend seen in Q1 and spread it throughout the year, especially for packaged meat business and also with all the new product launches. Thank you for your question. Concerning the situation about the average profit level for fresh meat is actually rather complicated because it involves various factors including frozen products and also imported meat. So this year for fresh meat, we believe that the slaughtering profit compared to last year, it will be a positive growing trend. But it is rather difficult to be reflected on our accounts because there is a reducing level of contribution from frozen items and also because of the contribution from imported meat will also be subject to different changes. So the per ton profit for packaged meat this year, the situation is going to be affected by various factors including the increasing level of salary for our staff and also adjustments to our methods used in the plants and also that may also affect the quality of our products. So we expect that with the improvement to the quality of our products, we expect that the per ton profit level for packaged meat for this year will be stable with some moderate growth. I have two questions. The first one is in relation to the China business. If we look at the profit level for slaughtering activities this year, if we look at the data for Q1, how can we compare this with the situation over the same period last year? In the first quarter, the imported meat sales volume is about 110,000 tons, which represents over 10% growth compared to last year. With the diminishing price spread between U. S. And China, we continue to have growing level of profit. And this is because we have very strong performance for our fresh items and they create very positive contribution to our overall profit level. As for domestic slaughtering volume, we have realized a double digit growth, but the contribution from frozen meat last year was rather substantial. So this year, despite a growth in our profit for slaughtering business, the two factors have sort of offset themselves, leading to a drop for our fresh meat profit. The other question is for the U. S. Operations, because we see the hog price has increased significantly, but the spread between hog and the hog also narrowed. So could you please give us some colors about the U. S. Hog price looking forward and the outlook for Freshworks segment profitability? Thank you. So Dennis had mentioned earlier, some of the macroeconomic factors impacting hog production in the U. S, but you raised a good point. The hog prices have rallied in the U. S. Significantly. And what we're seeing in 2021 is a return to pretty normal seasonality. And what I mean by that is Q1 and Q4 are typically lower hot prices, where Q2 and Q3, the summer months, bring with it some higher selling prices. And what we see if we look at the futures strips on both the sales side and the input side is that seasonality has returned to 2021. That will put some pressure on fresh pork, but Dennis also mentioned that we've seen very strong demand in the U. S. And so retail has helped. We're seeing very, very high USDA meat prices this year. In some cuts of the animal, that could be almost 100% higher than a year ago. But for the majority of the cutout, you're just 30% to 40% higher than a year ago. So meat prices are helping. The spread is still there, but we expect the spread to compress in the summer months. And so you'll see that profitability shift, if you will, from fresh pork to hot production, like it had in pre COVID times. So as Dennis mentioned earlier, our focus now for the upstream side of our business is cost management. Grains are skyrocketing as global trade and demand has picked up and a lot of our grains from the U. S. Are being exported. And so we're having to manage higher input costs. And the best way to do that is to find cost savings and initiatives in both our hog production and fresh pork segments, and we will continue to execute under our excellent strategies there to offset some of these grains. And then again, as Dennis mentioned, we have to go find market share. And so, both fresh pork and packaged meats, we have to manage pricing. We've got to pass on as much of that cost increase as we can. That's feasible in the U. S. And we have to continue to improve volumes to offset some of those rising costs. I have two questions in relation to China business, especially for packaged meat business. In Q1, I understand that a new department has been formed or a new business unit in relation to food services. So can you share any details about your future plans? Or some sort of pressure caused by other factors? In relation to the establishment of the food service department, actually we have singled out this portion of our business because we believe we want to strive for high level of professionalism and professional operations because compared to the channel of traditional packaged meat products, the sales methods and also the products themselves are rather different. So we need a separate unit to operate. And our work in the Q1 is to, first of all, put together a team and also have some product outline and planning. And also, we can trigger the marketing activities. At the moment, I can share with you the sales volume is in line with our As for the channel for this department or unit and also future product planning, I can share some details with you. First of all, we are going to provide food materials to support the domestic food services terminals. Secondly, we are planning to set up various points of sales in China and we are also going to sell products in relation to condiments and also some Chinese style condiments. Thirdly, with our sales channels, we are going to enter into various families by offering on the table products. And concerning our business for our operations under this new department, We believe we have just started operation. So at the moment, we are going to focus on expanding our scale gradually and also the price setting is a bit lower compared to other packaged meat Now I would like to take the second question and that is in relation to the drop of unit prices for packaged meat products in the Q1 this year. There are two major reasons. First of all, there is poor structure for Q1 this year. Last year, we have seen impacts caused by the pandemic and we have shifted our priority last year to high margin products. Secondly, because we are investing more heavily into the market this year and we are offering more attractive concessions to the agents, so that means lower price lower pricing at the end. At the moment, per ton profit level for Q1 is at a normalized level. In the future, when hot prices decline, that will mean substantial improvement for per ton profit in relation to packaged meat products. We are now considering investing more heavily into the market, improve our production methods, enhance product quality and offer more concessions to the operators so as to expand our sales volume. And at the same time, our overall profit level will also improve. The first question is about importation volume. It was just mentioned that in Q1, importation volume was 110,000 tons. And I seem to remember, last year, full year importation volume was 700,000 tons. So considering the level you have provided for Q1, do you think the whole year level this year will be the same as last year? Or is it going to be lower compared to last year? And can you also share some insight in relation to seasonality of importation volume? So, first of all, I need to explain to you, I just mentioned the importation volume for Q1 was 110,000 tons. That is actually for external sales purposes. It does not include the volume for internal use. So the actual importation or total importation volume was 180,000 tons, which is in line with the level of last year. Allow me to supplement the previous answer. Concerning importation of meat last year, the total volume was 700,000 and that included certain amount procured from the source, for example, from Smithfield and also other players in the market. And on the sales end, we are talking about selling to both the Chinese market and also to the rest of the Asian market. And I also want to add that concerning the situation this year, we have seen rising hog prices in the markets in the United States and also Europe, while there is a decreasing trend for hog prices in the Chinese market. And in some countries in Europe, ASF is still affecting many people. And that means that will also affect the volume of exportation to China. So the overall trend this year may not be as positive as last year, both in terms of volume and profit. In relation to the import and export trade of meat, we have adopted a number of measures to alleviate the pressure caused by the factors I just mentioned. For example, for the Chinese side, we are increasing the utilization of imported meat in relation to processing, sales and also internal use. For example, for our packaged meat items, we are now relying more heavily on imported meat products. And the new department that was recently established is also using a lot of raw materials, which is also imported meat. Secondly, in relation to exploitation from the United States into China, we are now exploring more types of products and also greater volume of products, especially in relation to byproducts. In the past, because of a lack of technologies or know how in terms of processing and also insufficient labor, we were not able to recover certain byproducts for expectation to China. And nowadays, we are our technical people are working very hard both in China and Hong Kong and also other places so that we can add more value to such byproducts. Thirdly, in relation to synergies, we will continue to expand our procurement possibilities. So we are going to buy from more different places and markets. And we're talking about both pork and also other meat products. And finally, in relation to the Asian market outside of China, we have actually established multiple offices throughout Southeast Asia so that we can enjoy more sales channels and also expand the scale of our trade in relation to imported meat. So looking into the future, we believe that imported meat will be very important business to the group, both in terms of scale of business, profit level and also as a growth driver for China, U. S. And Europe business. As for your question in relation to seasonality, in China, pork is one major consumption item for Chinese people. So we don't really see much limitation in relation to different seasons. So basically, for both imported meat and also domestically produced meat, all seasons are good seasons, particularly days surrounding important festivals and holidays. For our external suppliers, overseas suppliers including those in the United States and Europe, additionally speaking, it is a rather low season for hog prices in Q1 and Q4. And therefore, our order volume will increase. And when they reach Q2 and Q3, the domestic consumption will improve and that means the hot prices will become higher and therefore our order level will decrease. But for the Chinese market, we enjoy a very balanced picture throughout the entire year covering all seasons when it comes to pork consumption. And we have also built very good capability level for inventory. So in other words, we don't have any peak season or low season except days surrounding important festivals and holidays. And I have a follow-up question for the U. S. Side. You have mentioned that we have incurred US38 $1,000,000 of COVID related expense in the Q1. May I know the allocations between urgent packaging in that segment? And I just want to know if you exclude the COVID related expense, what's the recurring EBIT level of product segment? And is there any chance that we can see the full year COVID related expense less than US100 $1,000,000 So this is Brian with Smithfield. So with respect to your question on allocating that Q1 COVID number, it was split fairly evenly between fresh package and hog production, plus or minus a couple of $1,000,000 So, it was split pretty evenly there with $12,000,000 or so going to fresh pork, dollars 14,000,000 to $15,000,000 going to package and about $11,000,000 going to hog production with the remaining going to Europe and the corporate segment. Our plan or budget for coming into 2021 was that we planned for $150,000,000 or so of COVID expenses in 2021. But because of our run rate that we experienced in Q1 and the fact that we were better than our plan, we're forecasting something south of that number. It's difficult for me to tell you that we feel certain that we'll hit something sub-one hundred million dollars A lot of that depends on help from the state health departments, the federal government, etcetera, with respect to vaccines, state laws and shutdown laws and that sort of thing, but we are doing everything in our power to control those costs. I think it was last quarter that Dennis said as aggressively as we leaned into COVID with respect to preventative measures, that's how aggressive we're trying to lean out of it. And so we're trying to manage those costs the best we can. We were successful in Q1, and like I said, we are confident that we'll be able to beat the full year budget plan of $150,000,000 or so. I just can't tell you with specificity that we'll end up below 100 Due to time constraints, we will conclude today's presentation and Q and A session. Thank you for your participation.