Good evening. First of all, welcome to 2018 annual results announcement for WH Group. I think you have already tried some of our products, and you got some gifts to bring home as well, many of which are our new products from Shuanghui and Smithfield. Please enjoy later. We will introduce members of the management. Mr. Wan Long, Chairman and CEO. Mr. Guo Lijun, Executive VP and CFO. Mr. Ma Xiangjie, President of Shuanghui Development. Mr. Liu Songtao, Executive VP and Finance Director of Shuanghui. CFO of Smithfield Foods, Mr. Glenn Nunziata. Miss Joanna Yan over there, our Finance Director. You should know me, I am Luis Chein, the Director. We will get started and invite our CFO, Mr. Guo Lijun, to take us through our performance in 2018, which will be followed by Q&A session. Mr. Guo, please.
Dear analysts, good evening. I will report to you the performance of WH Group in 2018. I will talk about highlights, then business review, then our strategies and outlook. Despite trade disputes, outbreak of African swine fever in China, and the overabundant supply of meat in the U.S., the group leveraged our global presence in the industry value chain and achieved steady growth in business scale and revenue. We continued growth momentum in packaged meat business with both sales and profits hitting record highs. Scale of slaughtering continued to grow with over 56 million heads in 2018, which further enhanced our influence on the global pork supply. We also maximized efficiency and reduced costs through continuous optimization of organizational structure. We enhanced global production network through M&A and organic growth strategy. Our consolidated financial review. Hogs produced 20.953 million, up 3.6%. Hogs processed 56 million, up by 4.2%.
Packaged meat external sales volume 3.361 million tons, up 2.3%. At the bottom, you can see key financial indicators. They are before biological asset fair value adjustments, and they exclude net gain resulting from U.S. tax reform and costs resulting from share award plan. For 2018, we realized turnover of $22.605 billion, up 1%. EBITDA $2.1 billion, down by 10.3%. Operating profit $1.65 billion, down 11.4%. Attributable profit $1.046 billion, down by 4.1%. Basic earnings per share $0.0713, down by 4.9%. Because of the U.S.-China trade war, our U.S. operations have been affected. The trade war and also ASF in China maintain certain uncertainties in the market. We propose final dividend per share HKD 0.15. For the whole year, HKD 0.20, which is 40% of attributable profit. The proposal will go through the board and to be released.
In 2018, hog prices in China and U.S. In China, per kilo, CNY 13, a reduction of 15.6% over 2017. In the U.S., average hog price, per kilo, $1.1, a reduction of 9%. Packaged meat is our core business. Contribution at 53.7% for revenue and 93.8% for profit. Fresh pork contribution to revenue 40% and 15% to operating profit. Hog production 3% revenue and 6.9% for operating profit. For the regional breakdown, China business 32.4% contribution to revenue and 56% contribution to profit. U.S. contribution 58% and 37%, Europe 9.3% and 6.9%, respectively. Our China business continues to be the most profitable. In 2018, operating cash flow $1.255 billion, down by 17% because of inventory increase compared to the previous year up by $72 million. Receivables also up by $78 million. Profit dropped by $20 million.
Another $83 million because of interest, leading to a drop of $250 million in terms of cash flow. CapEx $811 million, up by $281 million compared to the previous year. The increase is mainly for upgrading of our old facilities. We need to purchase new equipment and facilities so as to enhance operational efficiency. For example, we have a new distribution center, and we have also revamped some work processes in China and Europe. Newly acquired capacity also went through certain remodeling or upgrading. In 2018, we expect dividend payout $280 million, together with the interim payout of $94 million. The total year dividend payout $376 million, which is 40% of our attributable profit. Interest-bearing debt continues to drop, $3.119 billion. Gearing ratio 37%.
Since we were listed, you can see that our debt ratio and gearing ratio have been dropping continuously. 2018 business review in China. Growth in operation scale and achieved record profits. Despite the impact of the swine fever, fresh pork business experienced solid growth in scale and profits due to advantages of the nationwide operational scale. New product and channel development for packaged meat business yielded satisfactory results, resulting in continuous improvement in product portfolio and solid volume growth in new channels. We built a professional marketing team and systematic marketing management mechanism to improve marketing capabilities and implement new initiatives. Our underlying profit, $922 million. Packaged meat, an increase of $20 million and an upward trend for fresh pork and pork production is a declining trend. U.S. and Europe business review.
Profit in the packaged meat business across the U.S. and Europe achieved record high with the advantage of the vertically integrated value chain and continuous enhancement of product mix. Profits in the U.S. fresh pork and hog production businesses declined significantly due to an overabundant supply of meat in the market, as well as trade tensions. European business significantly optimized business portfolio and expanded the scale through M&A. The profit in hog production declined significantly due to a decrease in hog price. U.S. business operating profit and margin is a downward trend. Packaged meat up $59 million. Fresh pork down by $381 million, and the losses for hog production increased by another $79 million. Europe operating profit, a drop of $22 million. Packaged meat, increase of $33 million. Fresh pork, increase of $8 million. Pork production, a drop of $70-odd million. Strategies and outlook.
Since the company was listed four years ago, the achievements of WH Group have highlighted the group's advantages and anti-risk capability as a multi-regional consumer product company. Packaged meat segment has always been our core. We believe the group will further consolidate our global leading position and achieve sustainable growth by adhering to our strategies. For Europe and U.S., we'll continue to implement the earnings improvement and growth plan, accelerate integration of newly acquired projects in Europe to achieve growth in operational scale and profitability. We'll boost business integration to tap internal potential, improve operation efficiency. We'll give full play to the advantages of the new management team and continue to drive global growth. Through reform and innovation, we have a new team for the U.S. business.
For Shuanghui in China, we'll continue the strategy of optimization of product portfolio in the packaged meat segment and market expansion in the slaughtering segment, accelerate product innovation and channel transformation to cope with challenges in the market. We'll carry out industrial upgrade and logistics enhancement to improve operation and service efficiency. We will enhance business scale and profitability through IT and digital transformation. We'll spare no effort to prevent and control ASF and avoid potential losses, and to achieve profit maximization through the advantages of our nationwide industrial platform in China. Thank you very much.
Thank you, Mr. Guo. Before we start, actually, we have many empty seats in the front. For those who are standing at the back, please come forward. Otherwise, you'll be standing for a long time. Two over here, and then three or four over there. We'll start the Q&A. We expect many people to ask questions, so one question per person. Over here.
Good evening. I have a question. The ASF created a lot of impact, and I got some news from China, more than 20% drop of output. You are an international firm, so you have great advantages. You are in the safest place, so to speak. What about upstream operation flexibility? If there is this huge supply difference in China, per kilo, hog price goes up by $1 , let's say that happens. Per hog, 100 kg. You do the math, that is $2 billion, right? You have some hedging, I heard, so it's not that simple, but can you just tell us something more? How do we calculate this?
It was $1.1 per kilo last year. That's the average. If hog prices in the U.S. Well, let's say 17 million hogs produced per kilo, $0.01. $1.30-$1.40 per hog, and at the end, 20 million odd. That's the impact. That's the level of impact. $0.01 increase in hog prices can really have that big benefit. Well, there are always fluctuations.
Thank you.
Where do you work? Xinhua? Okay. Before you ask your questions, please tell us who you work for and your name.
I'm Citibank analyst. I want to ask a question about reality. Packaged meat products in China. Since you were listed, packaged meat volume, well, most of the time, I remember it never reached the expectation level for different reasons. Some I understand, some not really. This year, second half, hog prices will go up. Last time when the hog price was high, our packaged meat performance did not reach the target. Now, the previous question already set the ground. Based on the current situation, what will happen in the second half when hog prices go up? What will happen to the volume? This is a function matter. How do you explain this? You have some projections. What's the level of increase that will lead to a certain increase in the volume?
Mr. Ma?
It's hard to give you a number, but I think I can share some of my views. Based on our experience, volume is not totally decided by hog prices. Because fresh pork is expensive or meat, in general, is expensive. It is possible that in the second half, when hog prices go up for our sales volume or scale, it's good news. High hog prices may also mean expensive raw material, so our cost will go up. We have looked into the market situation.
Second half, hog prices will be higher. I don't know where you got your figures. It sounds a bit exaggerated. I wonder where you got them. I think, yes, our prices will go up in the second half and next year. Beginning from the second half, our development strategy and operations will be fine-tuned. High quality, high price, high profit. That's the three highs we focus on. We have medium-level products and not so much focus on premium products. But now we decided to focus on the three highs because of the rising trend for hog prices. Well, as you can see, last year, towards the end, the profit came down. One-third of our products have been affected. The government has announced some measures, and in Q2 and Q3, I think we will see the turning point for hog prices. That will relieve some pressure on operations.
I want to add one figure. 2016 hog price, compared to the previous year, increase of 22%. Packaged meat sales volume increased by 1.5%. That's 2016. In other words, hog price increase does not necessarily mean volume will come down. Just like what Mr. Ma has said, we have to look at our history. Every time hog price increased, inflation happened, costs went up. Profit growth may see a new opportunity. 2008-2016, the cost structure has changed many times, and we can see more or less the same trend or movements.
Next one.
I'm from Morgan Stanley. My question is about U.S. We are concerned about the recovery for U.S. Hog price in China triggered growth in export around the world. In Q2, in U.S., the future prices. Perhaps the profit for your operations will go up in Q2 if we do the math. How does it compare to last year? Fresh pork and the hog production, we already see the second quarter 2019's future price imply the return improved quite a lot. What's the management guidance for 2019 fresh pork and the hog production return for the U.S.?
With respect to hog production, you're right. Recently, I mean recently, over the last week, we've seen a dramatic movement in the futures curve related to hogs in the U.S. To put it in perspective, in one week's time, the futures strip moved and would indicate almost a $200 million move in our P&L. Okay? To put this in perspective with respect to the trade war, the U.S. total number of pigs is 17% of China's population of pigs. Okay? No matter who you believe and what statistics you're going to rely on, any impact of this disease, once trade barriers are relieved, will be very, very meaningful to the U.S. business. Now obviously, we have customers to serve in the U.S., and we're not going to export all our meat. Chairman indicated previously, and we've been talking about decreases in exports to China over the last few years have been dramatic.
Last year alone was 45%. Obviously, we would love to get that back. We're going to find new markets for that meat, but we would love to get that back. Q2 looks profitable based on future curves today. Last year, that Q2 number for hogs was around $20 million. The curve would indicate that would almost double this year. I would caution you to rely on a futures curve. It tends to move quite a bit with media reports. We are very careful not to rely too much on those media reports because obviously, we don't have a resolution just yet, but we feel pretty good. Q1 is very tough quarter for us. The Q1 loss will more than double what we lost in Q4 of last year in hog production. The markets haven't been kind to us.
That said, we do expect to make a pretty decent margin, or we do expect to be profitable in fresh pork. We're doing things to our business, despite exports, that are going to improve our margin. We named a new management team at the end of last year. We have a new leader for our fresh pork business, and he's a change agent, and he's doing beautiful things to that business. We feel pretty good. All that said, we really need these trade valves to open and for us to really optimize our profitability in hogs and fresh pork.
[Non-English content]
Next question.
Credit Suisse, Christine. I have a question as a follow-up. Can the management talk about U.S.-Mexico trade war? Can you give us any update? In relation to that, we all know export to China, well, certain chemicals or what we call the lean meat element cannot be included. Market, given the requirement for the U.S. pork exports to China. I think second question related is to the Mexico and the U.S. trade war. We all know that the NAFTA Agreement has been reached, in September of 2018. Right now it hasn't really been officially signed. Can you give us an update towards NAFTA?
Sure. I can talk about the Mexico resolution first. An agreement was reached between U.S., Mexico, and Canada in the fourth quarter of last year. That's great news. The problem, though, is the tariffs placed on pork were in retaliation to the 232 tariffs on steel and aluminum, and those are still there today. We are continuing to work through our contacts in both the U.S. and Mexican governments to get some relief there. At the end of the day, you've all read the same media reports that I have about President Trump's technique with these tariffs. We need the political barrier to go away for those 232 tariffs to go away. Relations continue, negotiations continue, but those trade tariffs are still there on pork in Mexico. Okay? That gets confused quite a bit, so I'm glad you asked that question.
20% tariff on pork still exists today despite a Mexico-U.S. agreement. Okay? I think your next question related to ractopamine. We are required to ship ractopamine-free pork to China. Smithfield is the largest supplier of ractopamine-free pork in the U.S. We feel like we are well-positioned, the minute this trade war is over, to begin shipping product at decent margins to China to help with the current supply issue in ASF. We still, despite the trade war, maintain our ractopamine-free inventory. We did not change our philosophy. We believe that China is an important trading partner for us. It's always been one or two to the U.S. as far as pork exports go, and we were not willing to change our inventory technique and our feeding technique just because of this trade war. We still have that inventory. We're ready to ship today.
Next question.
Thanks. [inaudible] CICC. My only question is for the U.S. operations. But I promise just one question, but a few bullet points. Excuse me. Okay. The first one's following the pig future price move up recently in the U.S. market. Can I get a sense of the pork price reaction in the real market? Also how about change of the trend between the pig and pork prices over the past week? I just want to learn some factors. Okay. That's the first question. The second bullet point is about, can I check your frozen pork inventory, given the pig and pork price outlook? Is that normal or just above more than normal? Normal, I mean hand-to-mouth use for. Okay? The third bullet point is about—
Hold on. I don't think I understood the second point.
The frozen pork. No, the pork inventory.
Pork inventory?
Yeah. What's your inventory currently? Is it more than normal or just normal? Normal, I mean for hand-to-mouth use.
Got you.
Okay. The last question is about the grain prices. Because reasonably, if we forecast the lift-up of the trade war between the U.S. and China, maybe we'll see the soy surge or grain feed ingredient prices as well. Okay?
Yeah.
Can I get a sense of about your hedge position build-up on the grain side, as to how much has been built up for a full year's use? Thank you.
Sure. With respect to your first question related to meat prices. Year-to-date through February, hog prices had dropped 22%. Meat prices had dropped 16%.
[inaudible]
Over the last week or so, as we've watched hog futures go up, we haven't seen much of a reaction in the USDA pricing, and I'll tell you why. The USDA, or the U.S. pork market, is very seasonal. We're sitting here in March. Easter is in late April, and it's a very, very important holiday for us. What we've seen is ham demand staying strong. Bacon demand is staying strong. When those two primals, the belly and the ham, stay strong with respect to demand, meat pricing usually holds. Okay? To put it a different way, we're currently profitable in fresh pork despite the rising hog prices. That can change rapidly. Okay? These hog prices are moving very quickly. We still feel pretty good that the fresh pork side of our business is going to be profitable. Inventory. Our inventory levels are normal, so there's nothing abnormal.
I will tell you, though, where Easter falls in the year is important to our inventory and working capital build. Again, Easter is later. Last year, Easter was right after the quarter end, most of that inventory had been shipped. This March, you should expect to see that inventory on hand, and we'll start shipping late, late March, or early April for the Easter ham season. Finally, on grains. We do take a very precautionary hedging position on grains. Generally speaking, if you think about it on a macro sense, grain costs are down, they've continued to move down ever since the U.S. took the foot off the gas on the ethanol policy. Generally speaking, grains are relatively cheap in the U.S. We do take strong hedging positions. We go long on grains.
If you think about it, the biggest input into our business for hog production are those grains, we try to protect ourselves. When we see futures moving a certain way, we'll try to protect ourselves going long. The other thing we're doing, quite honestly, is finding other ingredients. There's other fats and proteins and carbohydrates we can feed our pigs other than corn and soybean. We can flex, if you will, our formula to a certain extent, to replace those goods if the pricing doesn't suit us.
Good. Can I [inaudible] you, how many months is usually put into the future for the hedging?
On average, typically we go out a year. On grains, we can go longer. It really depends on liquidity. If you look at the hog market, there's really no liquidity past a year. Grains, you'll find some liquidity going out past a year.
I see. Thanks, Glenn.
No problem.
Okay. Thank you, Glenn.
Next one.
Mr. Wan, my Chinese is not so good.
It's okay.
My question is about your global footprint or network. Can you explain to me the logic behind this? Smithfield and European enterprises, you can optimize them after acquisition, but if you look at the whole group, what is the synergy? Where is it? The volume in previous years, the greatest growth is in fresh pork, but the least for packaged meat. The profit is highest with packaged meat, so I want to understand better. In five years or in 10 years, what's the percentage of profit coming from packaged meat, and what about your future acquisition? Are you going to look at packaged meat, or hog production, or fresh meat?
Well, we have been thinking about exactly the same questions. Our slaughtering, packaged meat production operations, everything have to follow the same logic. For many years, we are pork-oriented. We want to be the expert in pork. We want to do better than anyone else in pork. We have been following that target. At the moment, we have global footprint. At the right time, we will also consider beef and chicken, because we have to move alongside market demands. If we diversify, it should be good news. Of course, we'll be very prudent. Production, slaughtering, processing, packaged meat, we have to do something about production and processing. These two industries, we have to make them strong. We have to make the operations outstanding. For slaughtering, synergy impact is very important. Although the profit level is not attractive, or sometimes it doesn't perform so well. I can give you one example.
If we have 60 million hogs or even more in our own slaughtering plant, we will enjoy advantages with the byproducts, because all the byproducts are also very valuable. We maintain slaughtering operations because it gives advantages to the other parts of our business, and we will consider beef and chicken at the right time. For the U.S. business and the China market, will continue to be our core markets. That we can leverage on our global presence and network and synergy. That is the logic behind our future development. She's not using a mic, so the interpreter cannot hear her. It's not coming through. It's not coming through. Sorry, the interpreter cannot hear the speaker because she's not using a mic. I think our advantages include many. We are the biggest player in the world, so scale. That means market. We are the strongest player.
We have a lot of influence. ASF outbreak, so serious in China, but Shuanghui slaughtering business still grew. That is because of our scale. We are simply big enough. We have our networks, we have our channels, of course, otherwise we can't support this large scale. China Shuanghui advantages, I can tell you this is very clear. I think that's enough.
Yes. Thank you, Mr. Wan.
I'm from Goldman Sachs. I want to ask about China's slaughtering business. Q4 profit was very good because of the national footprint. Mr. Ma, what about this year and these few months? What is the profit level? If hog prices are to rise substantially, is that going to affect operational profit for slaughtering business? Another small question about import. I want to get more details. We heard that China has started importing some U.S. pork.
Of course, we still face a tariff. From the group's perspective, if the tariff is lifted in April, in terms of importation, how quickly can we in large batches import from the U.S.? I heard 300,000 tons have been imported previously. What about this year? Lifting of the tariff or hog price trends? Can you tell us what's the possible peak of import for pork?
All right. Allow me to talk about the swine epidemic, how that affected us. That was the outbreak in August last year. In Q3, a lot of trouble caused to slaughtering, and it caught many people off guard. Many industries were in shock, and they could not react quickly enough. When we moved towards the end of the year, we understand that things were becoming normalized.
According to the government's announcements, they decided to launch some new directions and new measures. It so happened we are exactly in line with the government's directive. Beginning from October, I think our operations more or less returned to a very good momentum. What about this year? Hog prices will start from a lower level and then increase in the second half. Shuanghui has a lot of advantages because we have national presence, and we are very responsive to market changes. In Henan, Shandong, and other big provinces some players have been pushed out of the market. That was good news to Shuanghui. Our future development, well, I'm very confident. I'll talk about trade. Pork import last year, U.S. to China. This is a drop of 45%. We are still doing this, although there is a tariff of 50%. Some products are suitable for export to China.
There are still advantages. Secondly, we have options. If byproducts are doing well or meat is doing well, we'll move our direction very swiftly. It is about synergy. If it's advantageous to China and to the U.S., we will do it. If all the tariffs are lifted on the 1st of April, of course, that is the best news. We can expand the volume of export to China. Byproducts can be exported, meat products can be exported.
The next step, looking into the future, how much import for China?
It depends on the U.S. cost and also what's happening in China. At the moment, the ASF outbreak will create impacts on hog prices, as Mr. Ma has said. Second half, hog prices will be higher. Next year, hog prices will be higher than this year. Based on our judgment on hog prices and also ASF and also trade war being resolved, the possibility of that, I think the import level will continue to grow because we feel optimistic and synergy will be played out as well.
Thank you, Mr. Guo. Next question.
I'm from Deutsche Bank. I want to ask about profit. Our understanding is that hog prices in 2019 will go up, competitive environment in China will be less fierce. Can I understand that way? I've heard about the inventory level, to be optimistic the profit margin for packaged meat can go up as well.
Allow me to take that question. 2019, the cost for packaged meat compared to 2018, there will be some increases because of hog price going up and also because of cost for other raw materials. We have increased the salary for some of our staff. When the cost is going up, we are actually fully prepared. On the one hand, we will continue to use a structural reform to absorb the cost, and we will enhance product prices. In 2018, around December, we already adjusted the prices for 1/3 of our products, which is about 2.5%-3% to our total revenue. For 2019, we also have plans to carry out price adjustments. Thirdly, we have to make good use of this opportunity to increase inventory for raw materials. With the trade war easing out, we have to consolidate low-cost resources outside of China to hedge against rising prices.
We continuously carry out industrial reform. We enhance processing work efficiency, dilute the cost and expenses. We will continue to digest the increasing costs, and at the same time maintain packaged meat in terms of stability of operating profit or even increases for the profit level.
Next question.
I'm Anson from Daiwa. About the fresh pork, we know that fresh pork, we usually export roughly 20%-25% of our U.S. fresh pork every year. If we are seeing very good opportunities in China, how flexible can we change that ratio? Can we export much more than that 20%-25% in the past? Also, how can we ship among different countries?
The trend has been within a range of 22%-27% or something like that over the last half a dozen years or so. The answer is, I think what you'll see is an immediate shift in destination. Because at the end of the day, there's still U.S. customers to satisfy and ship to. There's other markets that we're absolutely obligated to fulfill. What's interesting is U.S. production's up for the third straight year. If demand stays where it is today, that number could tick up a little bit. I would not expect a material increase in that number. It's not going to go to 35%, 40%. It may tick up to 26%, 27%, 28%, but it really just depends on how quickly companies in the U.S. can react to trade tariffs going away. I will say, though, with respect to China, we are the largest ractopamine-free supplier.
There's not a whole lot more out there in the U.S. to react quickly to get to China. Okay? There's other ractopamine-free pork. We're not the only ones. We are an extremely large market share of shipments to China. We always have been, and we will be for quite a while. The top four export markets for the U.S. have been Mexico, China, Japan, and Korea, and those have been relatively consistent. What we've seen over the last year or two are increases in destinations like Central America. Colombia has been a great customer of ours, Southeast Asia. What I would expect to see when China ramps up quickly, what typically comes right away, are byproducts or offal. We'll see some of that shift away from other destinations going straight to China.
Like I said, the ractopamine-free supply will be the challenge for other companies besides Smithfield in the U.S.
Okay. Thank you, Glenn.
Next question. Do we have any other questions? If not, r eally? Last chance. Okay. Another follow-up.
I want to ask you about packaged meat products in China. In your PPT, I see that you have mentioned new management is in place, and in English it says, reform and innovation. Right? When it comes to channel innovation for packaged meat, can you update us? Last year, we talked about Chinese-style packaged meat products and then Smithfield products. You've been around for about three years, so what do you think about the sales of packaged meat products? What is the growth of sales, and what about the channel footprint with the new team in place? How much innovation have you completed? What's going on? Can you update us, please? Another question about inventory. Mr. Liu talked about inventory, and from your annual report, we've done the math. Inventory is not that high, about 400,000 tons only. I think inventory can last for three to four months tops.
Have you restocked your warehouses in the first half, or are you going to? How long does it take to restock?
You asked three questions. Channel innovation and packaged meat growth in sales and inventory. Right? Last year— I don't want to talk about traditional ways of doing business because you want to know about innovation. Product innovation is one of them. We filled the gap for high-end products. In the past, we focused on lower-end or mid-end products. Today, we are moving towards higher end. We want to fill that void. If you look at the new products, most of them are high quality, high price, high profit products. In Q4, we launched a number of new products. The trends are very clear, and I can give you some figures. Last year, we developed two new products, and we produced more than 5,000 tons already. Short period of time for R&D and quick launch, and we have set up new channels for sale.
We have the plan to set up 5,000 shops. We use the brand effect of Shuanghui to set up the new shops. Our boss wanted to focus on better taste. This year, 20,000 self-designed devices. I think you have heard about similar efforts, like special branded points of sales, like a special booth. We will continue to innovate. We don't want our competitors to copy us, because we have seen that trend. When we succeed in a new way of promotion, they will just copy us and do exactly the same thing. We are going to launch some innovative points of sales. We will produce our own videos, and we'll play them online. They will be everywhere. It will create a lot of traction. We expect a lot of growth. For the whole year, no accurate figure, but for packaged meat, sales and profit will show very stable growth.
At the moment, we are very confident. Inventory. That's for the year-end inventory. Before Chinese New Year, inventory will go up to meet the demand. One day we can sell 2,000 ton, just before the big festival. Our inventory level compared to other players is of course higher, but there's no need to worry. When it comes to pork products, of course, some of the inventory is fresh. Some will be frozen or chilled. We will readjust the proportions very quickly. When the hog prices change, we can quickly do some promotion and get rid of more frozen meat or fresh meat accordingly. Thank you.
I also want to say a few words. Every year, you're concerned about packaged meat products. You always have many questions about the segment. If you look at the volume this year, the development may seem very slow. Sometimes we see fluctuations, but we have reorganized the structure. Our profitability continues to increase year-over-year. The volume is not increasing substantially. We have many options in front of us. There are external factors and also internal factors. We will further optimize the structure for our packaged meat business. We want to be close to families, close to households. We have to develop high-temperature products and low-temperature products, household products, leisure products. We are going to expand our footprint. Among those products, we are adjusting our structure. In that process, our packaged meat products will definitely go through fluctuations. It's not like in the U.S. They mainly focus on low-temperature products.
In China, the situation is different. Chinese-style products, high temperature, household products. We have to resolve all the fundamental issues. We have to perform industrial-level reform. When it comes to structural issues, we are confident that we can do very good fine-tuning. We are working very hard. From now on, Chinese-style products and low-temperature products and high temperature, leisure, stabilize high temperature, and increase our efforts for low temperature. This year, after the fine-tuning, packaged meat scale will continue to expand. Our capability of operations will continue to improve. The three high products mentioned by Mr. Guo is also very relevant. Okay?
Next one, Citibank.
I want to ask another question about U.S. Historically, the peak volume of export from U.S. to China is 300,000 tons. That volume dropped due to the price gap difference is getting narrowed. Assuming the price, it is very wide open due to the higher China price whatsoever. In a blue sky scenario, what is the biggest volume that the U.S. can export in terms of volume to China? Is any ballpark number works? Historically, peak volume number is 300,000 tons. Is that go to 600,000 tons or whatever? Give us some color on that, would be very helpful.
It would probably be reckless for me to give you an exact number. Okay? We have shipped as much as 300,000 metric tons. I think that was 2016 was our peak year. Last year to China, we did 124,000 metric tons. The year before that was 225,000 metric tons or something like that. We have capacity to do more than 300,000 metric tons . But as I said earlier, our biggest challenge is having to balance U.S. customer demands with export demand. It's important for us to manage our U.S. customer base. Exports have a tendency to not be consistent.
Got you.
Okay? 300,000 metric tons, 225,000 metric tons, 147,000 metric tons , but what is consistent is Walmart, Kroger, Sam's Club, Costco, right? Those are consistent. We have to be very careful that we serve our U.S. customer base consistently and well, so that we will continue to be viewed as the provider of choice while serving this export market. The answer to your question is, we can do more than 300,000 metric tons, but it would absolutely depend on what type of year it was, what type of product it's going to be, et cetera. We have our U.S. customers to serve, and we need to be careful about that. We could, absolutely. Because we have enough ractopamine-free pork and other pork to go.
Like I said, we are the largest supplier of racto-free in the U.S., so we are the provider of choice for China. But there's other destinations as well that don't require that racto-free.
One question. Could you give us color on the percentage of byproducts in the year of 300,000 tons, the volume and the year? What percentage are the byproducts versus the fresh pork?
That year actually, we shipped a lot of primal, a lot of muscle meat. I don't have the exact numbers in front of me. It was probably more than half was byproduct. We shipped a lot of muscle meat that year to China.
Technically speaking, if the China export go up, is it quicker to do the byproduct or the fresh pork?
We are prepared to do it all. We've tooled up our fresh pork plants over the years. As Chairman said earlier, it's a huge synergy for WH Group, right? Our plants are prepared to ship pork to China. There's various ways to do that. You can do it by carcass, you can do it by primal, or you can do offal. We're prepared to do all three. Thanks.
Thank you Glenn.
Okay, only in the front.
Do you recall that in 2016, when U.S. exported most volume to China and also supported U.S. fresh pork return, that actually achieved that $22 /lb .
[inaudible]
Yeah. In our best guesstimate right now, do we think that in 2019 or 2020, we can actually get close to that record return or actually could be even higher?
It's hard to predict that. We would absolutely expect to return to double-digit profit per head in fresh pork if we were able to get these export channels open. We really would. It's tough to predict that, because the other aspect of this that's important is production is up. Since 2016, three new plants have opened. They do anywhere between 10,000 and 15,000 head a day. It's a lot of pork. I can't predict for you exactly what our margin will be, but we expect it to be strong for fresh pork.
Okay.
All right, last question, because we are overrunning, actually.
Mr. Guo, one question. Dividend payout ratio a little bit lower. Can I ask why?
Overall dividend payout policy is no less than 30% of net profit for the year. Since IPO, we have executed that policy. 2015, 30%, 2016, 46%, 2017, 45%, this year, 40%. 2018, the trade war created great impact on us, especially on our U.S. business. In my report, you can see 2017 operating profit and cash flow showed declining trends. If you look at the current situation, the trade war and the ASF outbreak epidemic create a lot of uncertainties ahead of us. We will look at actual operations of the company, and at suitable level, we will reduce the payout ratio, so that in the future, our operations resume or return to a growing trend. We will increase the payout again gradually. Thank you.
Thank you very much for your time. This is the end of our analyst presentation.