Earnings Call: H1 2018

Aug 14, 2018

Dear investors and analysts, good afternoon. I am Louis Shen from WH Group. Welcome to our interim results announcement for 2018. This is the session for our investors. We have arranged some new products for you to try, especially some Chinese-style products. This is going to be one of our key focuses or key products for the year. Allow me to introduce to you members of the management, Chairman and CEO, Mr. Wan Long. Executive Director, Executive Vice President and CFO, Mr. Guo Lijun. Executive Director, President, CEO of Smithfield Foods, Mr. Kenneth Sullivan. He is responsible for the U.S. and Europe business. President of Shuanghui Development, Mr. Ma Xiangjie. CFO of Smithfield Foods, Mr. Glenn Nunziata. And to the far left, Ms. Joanna Yan, our finance director. Mr. Guo is going to take us through the situation for the first half of the year, and we will proceed to Q&A. Dear investors and analysts, I will report to you the performance of the company in the first half of 2018. Hogs produced, 10.127 million, up 1.3%. Hogs processed, 27.832 million, up 7.3%. Packaged meat sold, 1.603 million metric tons, up by 2.8%. Revenue realized, $11.169 billion, up by 4.8%. We continue to see better sales level. EBITDA, $1.101 billion, down by 20%. Operating profit, $867 million, down by 3.8%. Profit before tax, $837 million, up by 3.1%. Profit for the period, $661 million, up by 15.6%. Profit attributable to owners of the company, $557 million, up 13.2%. Basic earnings per share, 3.8 U.S. cents, up 5.6%. All these figures are before biological asset fair value adjustments. Dividend payout based on our performance in the first half, and also overall market situation and changing economic situations. We maintain very stable growth. We are offering the interim dividend per share at 0.05 Hong Kong cents, which is a flat trend to say a big thank you to our investors for their support. If you look at the hog prices in China and U.S., they have both declined. The lowest point or the hog prices in China was 12.3 per kilo, down by 23.8%, and $1.12 per kilo in the U.S., down by 4.6%. Packaged meat is our key business and also the mainstream of revenue and profit. In the first half, packaged meat contribution to our revenue was 52.8%, and 90% for profit. Fresh pork contributed 41% in terms of revenue and 10.7% in terms of operating profit. Hog production, 3.6% contribution to revenue. Our revenue by regions, 32.8% of revenue came from China, and 54.7% of operating profit came from China. U.S., 58.7% contribution to revenue and 38% to profit. Europe, 8.5% contribution to revenue and 7.2% to profit. Our key segment is packaged meat. If you look at the first half cash flow and CapEx or capital structure, everything is rather stable. Operating cash flow, $134 million. CapEx, $326 million, up $100 million. In the first half, $94 million dividend payout, which is up by 18% of earnings during the period. Since listing, we have paid $1.326 billion in terms of dividend. In terms of our liabilities, we maintain a rather low level. By the end of June, total interest-bearing liabilities, $3.369 billion, gearing ratio at 41%. The $4 billion debt caused by the acquisition of Smithfield in 2013 has been totally replaced. In the first half, our business review for China business, we have seen very solid results. Operating profit, $474 million, up more than $100 million. Packaged meat, $367 million. Fresh pork, $95 million, up by $50 million. Hog prices have come down, so hog production only recorded $1 million of operating profit, which is a reduction of $13 million. For the U.S. business, it has been under the impact of trade environment and industry dynamics. Operating profit, $330 million, a drop of $140 million. Packaged meat, $394 million, an improvement of $38 million. Fresh pork, loss of $15 million compared to the same period last year. It is a drop of $200 million. Hog production, when hog prices dropped by 44.6%, we have effective hedging and realized operating profit of $1 million, which is a reduction of losses by $20 million. For the Europe business, operating profit $63 million, down by $7 million. Packaged meat grew from $11 million to $27 million. Fresh pork business operating profit stood at $13 million, up by $12 million. Hog production, $20 million because of the fall in hog prices, down by $36 million. Other than the major business highlights, we also achieved $8.2 million from our poultry business. Despite the impact of changes in trade dynamics, the group leveraged its global presence in the industrial value chain and continued to achieve a sustainable growth in revenue and business scope. The China business seized favorable industry and market opportunities and delivered solid profit growth. The fresh pork segment experienced significant growth, and the packaged meats segment continued to realign its product portfolio. Profit in U.S. fresh pork segment declined significantly due to an overabundant supply of meat in the market and trade tensions. The hog production segment rebounded and profit in the packaged meat segment grew steadily due to effective hedging and the advantage of the vertically integrated value chain. European business continued to expand its scale and boost revenue through M&A. However, profit in the segment was down due to decreased hog price and increased expenses. WH Group has improved its global operations management through business integration and development over the past five years. As a consumer goods company, branded packaged meat is our core business. We will continue to innovate and realign our product portfolio and global trade strategy to mitigate the impact of trade dynamics and create long-term value for our shareholders, so that we can create better return to our shareholders. We will strengthen our global business operations through synergy to boost our global footprint. We will adhere to globalization strategy, strengthen global business platform, and expand business scale and scope. We will limit hog production sensibly, develop fresh pork business, focus on expansion of packaged meat business to enhance our brand value. Our next step is to leverage complementary advantages and realize synergies by integrating global resources, and realize further development through expansion of trading business and sales and distribution network. Concerning U.S. and Europe business, we will continue our earnings improvement and growth plan. We will accelerate the integration of new acquisitions in Europe to achieve growth in operational scale and profitability, boost business integration to tap internal potential, improve operational efficiency, and realign our business strategies and develop emerging markets. For the China business, we seize the favorable opportunity of the industry and accelerate the scale of fresh pork business, achieve volume growth in packaged meats through development of Chinese-style products and product portfolio realignment. We will do brand upgrades through innovative marketing strategies and enhance and accelerate our sales network development. That's the end of my presentation. Thank you. Thank you. Thank you, Mr. Guo. We will now enter the Q&A session. Before you ask questions, please tell us who you represent and your name. First question, please. Good afternoon. I'm from Goldman Sachs. My name is Lincoln. I have three questions. First, Mr. Guo, in the first half, packaged meat, the growth and volume and the prices. I think the sales has gone up by 12%, right? Second question, Mr. Ma, can you tell us something about new products launched, low temperature products. Can you tell us what is the current plan for new product launch? What will happen in the second half and in the next 2 years? Any changes to your channels? Then finally, Ken, a question for you. I will use English. Okay. Doesn't matter, we have interpretation. Smithfield business. Obviously, the fresh pork profit got hit by the increasing capacity and the global trade. How, especially now since we have this higher tariff from Mexico since June, how do we think about the fresh pork profitability throughout the rest of the year? I remember during the first quarter briefing call, I think you were still targeting positive profit growth for the overall Smithfield business for the full year. How do we think about the guidance, given the current situation? I will take the first question. For the first half, China business packaged meat volume growth of 3%. Our revenue, 12% improvement. Sales price increased by 9.8%. The second one for Mr. Ma is a big question. My thinking, last year we have launched more new products, so our attention has been rather diversified. From the beginning of the year, we have readjusted our R&D efforts. We have increased the number of R&D institutions, so now we have four centers for R&D. We have high temperature and low temperature research institutions. The footprint has been modified a little bit. Also when we look at the launch of new products, our R&D center will do the R&D work and then sales department will make the choice which product has greater potential in the market. Then the sales department will decide to go for which products first. We have employed more people. Every time we launch a new product, we rely on people in the front line. We have done a lot of market research and we will look at the market situation before we decide if a certain product has potential or not. We also want to increase the chances of success for every new product launched. So in recent years, the number of new products launched or the speed of such launch has come down. But we still launch very diversified choices. What can we look forward to? For in the first half, I think high temperature products, we have this King of Kings product, which was rather successful. I think you have the opportunity to try some of these products outside. The profit margin was very attractive. They really performed very well. Looking into the second half, we have some symbolic high temperature products. When we do launch of new products, we are looking at the entire nation. We have to reduce our cost and sometimes some of the key products or the new products will be launched in some of the provinces first. We'll gather the momentum before we expand to a wider sales network. We have launched some new sausage products. These are higher-end products. We have also launched some low-temperature products. We are launching some of these low-temperature products nationwide. Their profit margin are very high as well. We also launched a number of meal kits. It's like meal boxes. They have performed quite well. So far, we have seen very good response from the market, so we are going to expand the sales channels to cover more places in the second half of the year. For high-temperature products, we want to launch more higher-end products. In the past, they were lower to mid-end products. We want to move gradually towards higher end, because the consumers in China, they are moving towards higher end as well. Actually, they represent two extremes, the higher end consumers and lower end consumers. For example, in villages and more remote places, they will go for lower end products. For people with higher level of purchasing power, for example, at major public transport interchanges, train stations, they have higher level of purchasing power, so will go for higher end products. So they are high quality and higher end products, premium products. Four of them have been quite successful. One of them is the white sausage product. It has milk inside. It got very good response. Also some U.S. sausages. We have sweet flavor for our sausages and also spicy sausages, and both flavors have been very welcomed by our consumers. Actually, sweet and spicy food is two mainstream flavors that are welcomed by Chinese consumers. Also the King of Kings, or King of the King ham sausage. Other than focusing on the higher end consumers, we also must not forget the mid-end or mid-stream consumers. We are going to launch some mid-end products in the second half. There will be higher end low-temperature products as well. The profit level is very attractive, almost doubled the previous level. We also have this line or series of products with the name of Marco Polo. They are very successful low-temperature products. We have divided the series into further breakdowns of different flavors, and one of them is the Vienna flavor. I think they're all gone outside in the foyer. That means it's very popular. You all love them so much, you have finished all of them outside. That's what's happening in the Chinese market. Sometimes we launch something and they are all gone in a short period of time. People just love them so much. I saw someone outside with a fork, and he came back for more time and again. He put many pieces on his fork before he left the table. I'm very confident when it comes to the profit contribution of these new products. That is for low temperature. We also, of course, focus on Chinese-style products. We have the preserved meat series. But the scale is not that big. When it comes to packaged meat products in mainland China, they are really diversified. In recent years Shuanghui has been laying very solid foundation to promote some new Chinese preserved meat products. The scale has been quite limited. Every time we launch something new, we want to be more cautious. We have to focus on the mass market and also explore opportunities of our products being served in restaurants. Sometimes if we see good response in the market, we launch a lot of that product into the market and then launch them into restaurants as well. Sometimes the restaurants will serve something different at the end, and the consumers cannot tell the difference. They would not know. That may affect our brand image. We will focus more efforts on making sure that the consumers understand that products from our brand are of the best quality. We may look into M&A opportunities at regional level or city level. Preserved meat must become the biggest brand under our company. We want to increase the volume to 100,000 tons. We see great potential in the market. This is indeed a huge market, and this is what I think will happen. We also have some factories in Europe and one in Romania. The facilities are very advanced. We are able to different types of processed, packaged meat. The profit margin is more than 50 million. They are higher-end products. I have talked about high temperature, low temperature and some Chinese-style products. Lincoln, the first one is about the fresh pork business. Yeah. How the global trade is being affected. Yeah. The second is about our projection for our U.S. business for 2018. Yeah. Let me first say that that was an impressive answer from Mr. Ma. The person he saw out there filling up his plate, I think was me. I am not surprised that one of the first questions here is about certainly our fresh pork operation and the international trade. Let me try and explain to you what I think is going on. Lincoln, you referenced the first quarter and that comment I made in the first quarter. I would just tell you a lot has changed since the first quarter. That is maybe an understatement. There is no question when you look at the year-over-year results, you can see the impact that trade issues and oversupply issues have had on our P&L. I know this is a group of analysts, and you always want a mathematical sort of equation in terms of allocating what is related to trade and what is related to supply. The fact is, that is not really possible to do. It is more of an art than it is a science. What I would tell you is, there is no question that the trade issues have had an impact on the U.S. P&L. Again, remember, I am an executive director of the WH Group, and so I would tell you, I do not think it has had much of an impact on our Chinese business. I think that is part of the appeal of the WH Group, is the geographic diversification that we have with a platform in China, in the U.S., in Europe. We are able to weather these sorts of things. Let me get back to the U.S. business, which is what I am responsible for. What I would tell you about the impact of the trade issues is, all I know is when I made that comment, I saw profits in live production. I saw a reasonably good year in fresh pork. You can see the kind of year that we have had so far in fresh pork. What happened was, when the trade issues were beginning to fester and were beginning to percolate, there has been a pretty dramatic impact, market impact on live hog prices and meat prices in the U.S. It has really been somewhat a psychological impact. All the trade discussion, the markets wanted to react and react quickly and immediately. The mechanism they had to do that was the hog futures. Initially, hog futures were impacted, but then I think the psychology of the market impacted the meat values. That is what happened in the first half, is our meat values just didn't hold. The first half has been challenging from a fresh meat standpoint. The good news is, I think the back half will be better for fresh meat, in particular, given where hog prices are. I think we should have a decent fourth quarter, pretty good fourth quarter, if hog prices sort of will level out where the future suggests they will now. It is really a tale of two halves. I think in the first half, you saw most of that impact manifesting itself in our fresh meat operation. In the second half, I think you will see it in the live production side. There have been two issues on trade. There has been China, first, and Mexico. The issue with both of those has been the duration of that dispute. Initially, when China and the U.S. started to spar over the tariff issues, the general consensus was there was a willingness on both sides to get to an agreement, and that perhaps that could be done relatively quickly. There was a spirit of cooperation. Obviously, the longer it has gone, the less that hope, or that hope has disappeared somewhat. That is the first thing, is the Chinese market, and that sort of disagreement has lasted longer than anyone anticipated. The second thing that happened is, there were issues with Mexico as well, which is another large market for U.S. pork. I think it is no secret the Trump administration has made trade one of the central points of its policy initiatives. We were hit with both China and Mexico. Again, going back to where did it manifest itself, it really happened in our fresh meat operation, and in the back half, it will be in our live production. I would tell you, if you want to measure the impact, look at the year-over-year results for Smithfield, and I would suggest to you that the majority of that is market-related, related to those trade disputes. One of the confusing things, I think, for people is when they ask us about our export volume. Our export volume is actually not down. Our export volume is relatively flat year-over-year. The simple reason for that is that we are in the meat business. When you produce meat, you have got to sell it. These trade issues between governments have zero impact on worldwide pork consumption. People still eat. They do not care that someone is having a trade dispute. All it really does is impact the flows of meat around the world and where ultimately that ends up. Our volume to China is down 20%-30% year-over-year through the first 6 months. I expect that will get even larger. That decline will grow even in the back half because of the current tariff situation. On the other hand, we have increased our exports to countries like Korea and other countries in South America. In total, the volumes are not off. You can look at the values, and you might be able to make an argument that you are not getting as good value. But I would tell you that the impact has really manifested itself in the U.S. business, and it has been on price levels, is really what the impact has been. In terms of the overall outlook, I think the first half that we had, I think we'll have a similar type of half in the back half. It'll move somewhat between the segments. Again, I think fresh pork will do better, but live production will not do as good. When you look at price levels out there, it looks to be a tough fourth quarter for live production. The only good news I have to report on that front is that, I think, in terms of the trade disputes, I think Mexico has a reasonable likelihood to get resolved. I think that perhaps unlike the China dispute, I think they're close on a Mexican trade deal. I do think that we're going to see something, and see something relatively soon. I don't have a perfect crystal ball, but certainly, we talk to a lot of people, and I think that that's the expectation, that we'll see that issue get resolved. If we do, it has the potential to give us a bump in live hog prices. We'll see. It's hard to predict these markets. Again, the last thing I'd point to is, I am sitting up here as an Executive Director of the WH Group, and the good news is, our China business, Mr. Ma's business, has performed extremely well this year. Our European business, I would tell you, I think has performed well. The packaged meat business, the fresh meat business, the poultry business, all that is really performing well. Live production on the international segment, meaning in Poland and Romania, that piece has seen lower prices as well and has had a decrease there. But the other parts of the business are fine. I think in total, the fundamentals and the trajectory of our company are positive. These trade issues will get resolved. The supply issues will get resolved. I think it's a testament, really, to the WH Group that the impact has been, in total, fairly minimal to the total company in total, even though I bear the brunt of it in the U.S. business. Oh, thank you, Ken. Next question. Thank you. I am from Merrill Lynch. I am Lu Chang. I have three questions. First two about China, and then one about U.S. First, hog prices in China. Beginning from Q3, we see a rebound trend. Can you share with us what will happen next with hog prices in China? Second question, operating profit for packaged meat for Q2, 22%, rather high. The hog prices previously for a rather long term was about 10 to 11 renminbi per kilo, rather low. What do you think will happen to operating profit? 22% is quite good, so what is the reason behind this? Is it because you have higher priced inventory from before, or is it because you have other raw materials offsetting the rising hog prices, or is it because you are focusing more on new products? Please share with us what you think about the second half in terms of operating profit for packaged meat in China. Do you think you can maintain the same level? Final question, for Ken. Ken, just now you have shared with us a lot of useful details on the outlook for hog production and fresh pork business in the U.S. But how about the packaged meat business? We noticed that packaged meat business in the U.S. have seen pretty nice margin expansion in first half, especially in Q2. Given the current price and the futures, what is our outlook for the packaged meat OP margin in second half? Are we going to see largely similar margin to first half, or are we going to see some variation? Thank you. And I will take the first two questions. It is about hog prices. Hog prices in China, beginning from 2016 to the peak, large scale pig farms have readjusted their footprint. We believe hog prices in China in the future will have some moderate fluctuations. The last round of the lowest point of hog prices was lower compared to the current cycle of low level. Beginning from June, we see a rebound of hog prices and all the way into July. Many people asking me about such cycles. The price level started coming down from June 2016, and then this year, July, we saw a rebound. Actually, July every year we see a rebound. That is like a cycle. This is an annual and seasonal cycle. This is in relation to how pigs are bred. When the hogs are ready for slaughter, they are about six or seven months old. So that means the major breeding activities took place in the previous winter. That also means when there is a peak for breeding, there is a lower point for the number of hogs produced. It is all a biological cycle, and it turns into a seasonal cycle. The average price for hogs when it leaves the farm, it is about 14 renminbi, and the market peak was about 40 per kilo. August this year could be the turning point for hog prices in China. This is our prediction. Hogs produced in September will go up or reaches the peak. When it comes to consumption, the peak is towards the end of the year. I think by December, many people will use pork or prepare the pork for preserved products for the Chinese New Year. We anticipate the hog prices to fall again around February 2019, because that will coincide with the Chinese New Year. We believe the hog prices for the whole year, the average is about 13.3 renminbi per kilo. Hog prices for 2019, perhaps overall speaking, it will be a bit higher compared to 2018, with more or less the same seasonal fluctuations. That is our prediction for hog prices. I think our prediction should be quite reliable, quite accurate, because it is getting easier and easier to predict hog prices fluctuations, because of the growth cycles of hogs. You asked a second question. We have hit the bottom for hog prices this year. How come the operating profit is so high? That was your question. Actually, it is not that high. It is a reasonable level. Because when hog prices fall, there is a lagging behind factor. If you look at our inventory, the cost of the inventory is not as low as the hog prices at the same time in the period, because we purchased the inventory from the previous period when the hog prices were slightly higher. But the cost, overall cost impact, which has a lagging behind impact, will be lower in the second half. The hog prices in the second half will be higher than the first half, but the cost for our inventory, for our raw materials, is lower in the second half compared to the first half. We have also seen some fluctuation in the prices for other raw materials, such as poultry. We will start using low-cost inventory in the second half. At that time, the hog prices will be higher than the current level. The overall cost for pork will be lower. The profit level for packaged meat as the entire segment will show positive growth. It is about the packaged meat outlook for U.S. business. Yep. Mr. Ma is full of good news. The second half packaged meats, lower raw material. That is good. Thank you for asking a question about U.S. packaged meats. I think our margin structure there, I think we averaged somewhere around 10.5% in the first half. It was not too long ago that business was 5% or 6%. Certainly that is an area that we have continued to migrate up the margin scale on that. I would tell you that I expect a good second half in packaged meats. Our markets are a little bit different than China. We have price discovery in the United States, so raw material prices are known to everyone, including our customers. A lot of business is formula based. It is based off of the raw material. Nonetheless, I think we have had good success in holding price points. In general terms, raw materials should be lower. Even though our customers know that and negotiate on that basis, I think that we are going to have a good second half. Historically and seasonally, the second half for packaged meats is stronger than the first half. I think we will see that. I think year over year, you are going to see very good growth out of our U.S. packaged meats business. Shall we- Next question. I am from Credit Suisse. My name is Palm. I have two questions. First, Mr. Ma, you talked about this figure, Chinese style packaged meat. Your plan is to open 5,000 outlets and then another 10,000 the following year? That sounds like a lot. What is the logic supporting this figure? If it is actually realized, what is the contribution in terms of revenue and profit? That is the first question. The second question is for Mr. Guo. Just now, you mentioned, in the first half for 6/30, all the USD debt has been paid off, so your overall cash flow has been enhanced. Considering the whole year, what is the dividend payout level compared to last year? Do you think it will improve rather substantially? Is that possible? What will be the percentage of increase? 5,000 plus 10,000 outlets, I think that is rather conservative, if you ask me. I did not want to present a very big figure. I did not want to scare you. Our colleagues were debating this. The real target we set internally is much bigger. But we want to be stable and steady in our plans, so we have chosen the rather conservative figures. The investment going into every single outlet is not that much, and within one year of operation, we can get all the money back. So we will set up these outlets selling our products, including the Chinese-style products and also barbecued pork. When we plan ahead on the expansion, we still have to be rather cautious. We do not blindly pursue numbers. Under Shuanghui, we want to do value-adding to our existing outlets. For some outlets, perhaps some products are selling better, then we make adjustments accordingly. We want to sell fresh products and also packaged products. And we have to find the right product mix. We want to choose locations that are premium locations. We want the right size for our outlets. And we are not even talking about smaller shops in bigger malls. If you add everything together, our own outlets and also shops in shops or shops in malls, the final figure is even much bigger. We are talking about 20,000. You quoted the figures. I think these outlets are very important because they represent the overall image of Shuanghui. 5,000, 10,000, we have it. We will make sure that happens. The revenue is about 3 billion for the 10,000 outlets. And of course, we will adjust the product mix and try to focus on products with higher profit margins. I think the profit contribution will also be very attractive. All right. Let me take the second question. If you look at the combined debt level, it is indeed rather low. And at the group level, the M&A-related debt, $4 billion, it was already paid off. No more debt on our books. At the moment, if you look at the debt situation, we are very solid, and the financing cost is also rather low. We face not much pressure. When it comes to dividend payout, our policy or strategy is that it should not be less than 30% of the year's net profit. I think that is the same guideline for the years to come. In recent years, our operating profit, our cash flow have been very strong. So we have paid a bit more in terms of dividend. The range has been between 30%-50%. This year, I believe we will continue to follow the same range. But of course, it all depends on the whole year operating situation, and also we need to get the approval by the board and our shareholders. Thank you for the very detailed explanation. I am from Morgan Stanley. First question for Mr. Ma. You detailedly explained how to drive future growth. There are so many measures in the pipeline. So 2020 sales growth, what is it going to be for packaged meat? You are launching high profit products. So what will be the future growth of OP margin? Second question is, your sales channels, fresh pork and packaged meat, how many are in traditional channels? How many in supermarkets? How many in shops and malls? Is that layout going to change? Then Mr. Ma, first half, high temperature and low temperature packaged meat volume, what is the split? Finally, for Ken, the last question is, U.S. hog production business. I know that you comment on the second half it will be more difficult for hog production. Because we can see now from the future strip implied the hog production return going to be even worse than last year's fourth quarter in terms of the loss. So how do you think about that, and how big kind of loss we are expecting based on the current situation? Thanks. First three questions, I will answer them all. First, the volume change. Sales volume projection by 2020, right? I dare not answer that because I do not want to be quoted on any newspapers. But I can share some personal thinking. We have done some preparation work. We have realigned our different teams. We have teams dealing with international clients, older clients, or regular clients. Some clients have made so much money, they do not want to put in so much effort anymore. There are clients like that in reality. Some other clients will divert their attention and resources to other things, not meat products anymore, to divert their risk. So we have diversified clients, so we need different teams to tackle different clients. For international clients in the past, we will justify them up according to the regions, but today, we will look at the channels and what kind of products they are selling. We will classify them into different groups accordingly. We will look at different regions and also what kind of channels they rely on. Do they focus their attention on, for example, supermarket channels? We have made adjustments targeting our different clients. Also, we have to look at different market segments. For example, this client used to dedicate all their resources into selling our products, but today, they have diverted half of their resources to sell other things. Then we have to re-categorize such clients. We do face many challenges because clients do change their approach from time to time. Our adjustments have only just begun. We have to continue to look into the market situation. We are very confident, and if you look at the new products and how they have performed, we are very confident in the market. Basing on our launch of new products this year, next year, and the year after, I think there will be very attractive growth. Next year, the growth level will be bigger than this year. You asked about channels. The volumes going into different channels. There are four major channels. For example, the supermarket channels and traditional channels that focus on mid-end products, and then e-commerce, that is another channel. Then we also have self-operated, self-owned outlets. For the modern channels, we are looking at 10% growth. The prospect is very positive. For e-commerce channel, the growth is even greater, almost 50%. For traditional channels, is a rather moderate growth, about 2%. Also self-operated and self-owned outlets, also rather moderate growth. I think in the past, traditional channels would take up about 70% of our business, but today, things are turning around. E-commerce has been the biggest driver of growth. The modern channels have the best growth momentum. Our strategies will be to expand further modern channels because we have to follow consumer trends. We need to reconsolidate some mid-end channels and target mid-end customers, and if we see signs of certain things developing too fast, sometimes we have to pull things back a little bit. Lower the heat, so to speak. For example, high temperature products. There was a price competition in the market, and we readjusted our selling price, and today we focus more on young people, because young people cannot cook anymore in China. We target them, and we target small families or young families. We want to focus on convenience. Some young people do not even know how to slice a big chunk of pork into thin slices, so we pre-make many things for them. I have talked about different channels and the percentage. The third question is about the volume for different products, right? In the first half, high temperature products, the growth was 4%-odd. Low temperature products, 13-point-odd percent. Chinese-style products, about double the previous figure. We feel very confident about this. I am not sure if this figure has been released previously. Because when we talk about low temperature products, we can be further divided into different types of low temperature products. Actually, for leisure-type products, Shuanghui has already started launching some new leisure products, and we have become landmark products in the market, and many other brands will copy us. We have seen very good growth for low temperature products. We want to further expand our series of leisure products, so that we will see better growth for all three categories of products. About the hog production forecast projection for the year. Okay. In terms of the outlook for hog production, you referenced price levels. Price levels are out there. You can see what the futures board looks like. I would tell you that over the last 6 months, I think that hog prices are averaging somewhere around $0.43 a pound, $43 a hundredweight. Over the last 5 months, it is about $40 a hundredweight. The last 5 months are really where the pain will be felt because July, we actually made money in live production. It is the last 5 months that really matter. The future strip would suggest around a $0.40 average there. Our hedge price is a little bit better because we have taken some protection. We are a couple of cents better than that. I think you can use those figures to try and model out what you need to with a couple of caveats. One is the Mexico deal. If the Mexico deal gets announced, I think that has a pretty good likelihood of impacting those price levels certainly in the future strip, and I think you could see a bump in those price levels. I do think that is going to happen in terms of a Mexico deal getting announced. Second thing I would point out to you is that those are pretty low prices. When you have low prices like that, fresh pork tends to benefit. The issues we had in the first half with fresh pork, the meat values have seemingly stabilized over the last couple of weeks. We are actually very nicely profitable today in fresh pork. If those price levels do materialize, our fresh pork operation should have a very good fourth quarter. That said, you know the business we are in. It's got all kinds of externalities to it, and things can happen. But that's what it looks like today. Final question, please. Citibank. One question for China, one for U.S. Mr. Ma, you talked about many new products. For high profit products and other products, what will be the sales contribution? Can you give us some new guideline? What is the split or percentage of these new products? I remember that is today is from a question asking about the pork price, which is related to trade war. It's in the hands of Beijing and Washington. We cannot do too much about it. I'll ask one question which you can do about it. It is about organization and supply chain improvement. Years ago, you talk about One Smithfield program, then talk about ERP system. I remember in Virginia you gave a very good presentation about bullet point, unfortunately, I didn't take picture. Right. I just want to know that in the past few months, when the trade war was picking up, about your organization is still focusing on improving the organization, supply chain, et cetera, or everybody's just focusing on the price war, how to make sure the volume is good. Yeah. If understanding is right, if you are still doing something about organization, supply chain efficiency whatsoever. Is anything you can do to do some cost savings which will mitigate part of the price impact, which you are seeing. If there is something, how long will it last? Thank you. To answer your first question concerning packaged meat. What is the level of contribution from high profit products? I haven't done the math actually. But I can tell you all the new products launched are high-end products. When we launch more new products into the market, I have to make sure the certain vacuums on the range of our products are filled. I think the impact will be more clear in the next two years. Ken, you can take the question. Okay. Thank you for that question. It's a good question actually. And I'm happy to report that we did not take our eye off the ball in terms of our One Smithfield, one ERP system. Just this month we have completed the third and final phase of One SAP. And I'm happy to report that so far, there's some wood up here I want to knock on it, but so far it's gone very well. And so I'm actually proud that given the size and magnitude of that implementation, I think it was a fantastic implementation. You're right, One SAP, I've told you before, is the catalyst for us to unlock further cost savings at Smithfield. And I think you mentioned supply chain. Supply chain is one of the largest ones. I should have mentioned earlier, by the way, in response to the question about packaged meats. Even though our packaged meats margins are up and our packaged meats performance is doing very well, it is actually doing better than you think. The first half of the year was burdened by $50 million of increased distribution cost. That has got a lot to do with transportation shortages in the U.S. There has been a lot written about it in the Wall Street Journal and other places about the high cost of transportation. Even with that $50 million headwind in the first half, you see that we have still improved the margins. That, by the way, the transportation cost thing will moderate. The supply will equilibrate, and we will get back to more reasonable transportation costs. But the One SAP implementation now allows us to do things differently. We have redesigned our distribution system. We have invested in new distribution points. I expect we will start to see the benefit of that over the next 12 months and a little bit longer because there is another distribution center that we are constructing. We are investing in cold storage locations so that we are not paying third-party cold storage rates. That is something that I expect over the next, let us just say 12 to 24 months, will have a very positive impact on the trajectory of our packaged meats business in the U.S. Thank you, Ken. Because of time constraints, that is the end of today's sharing session. Thank you very much for your attendance.