Investors and analysts, good evening. Our friends from the U.S. and Europe, welcome to our interim results announcement for 2020. We are going to broadcast this online. Allow me to introduce to you members of the management present. We have Mr. Wan Long, Executive Director, Chairman, and CEO of this group. We have Mr. Guo Lijun, Executive Director, Executive VP and CFO. Mr. Ma Xiangjie, Executive Director and President of Shuanghui Development. Executive Director and CEO of Smithfield, Ken Sullivan. We also have with us Mr. Liu Songtao from Shuanghui Development, Mr. Gao Yiwen, Mr. Glenn Nunziata, and Ms. Zhen Jinyan. My name is [Chen Ko Xiang]. I am going to hand the time over to Mr. Guo Lijun to take you through the interim performance of WH Group, which will be followed by Q&A. Mr. Guo?
Investors and analysts, good evening. I am going to report to you the first half performance of WH Group and business review. In the first half, the slaughtered hogs produced 10.4 million, a drop of 1.7%. Hogs processed, 22.4 million, a drop of 20.6%. Packaged meats sold, 1.575 million tons, a drop of 2.2%. We realized revenue, $12.481 billion, an increase of 12%. EBITDA realized, $1.236 billion, up 19.8%. Operating profit, $925 million, up 20.9%. Profit before tax, $848 million, up 23.8%. Profit for the period, $675 million, up 19.6%. Profit attributable to owners of the company, $550 million, up 18.8%. Basic earnings per share, $0.0373. The board has decided to keep interim dividend per share at HKD 0.05. The total payout is about $94 million, which will be allocated in October.
If you look at our segment revenue, packaged meat is still the core of our business, contribution at 46.8% to our revenue and 75% of our profit. Fresh pork contribution 44% of our revenue, 23.8% of our profit. Hog production, 5.1% contribution to revenue, 5% contribution to profit. Revenue by region. China contribution 41.8% for our revenue and 59.5% of profit. U.S. contribution 49% to revenue, 29.8% to profit. Europe contribution, 9.2% to revenue and 10.7% to profit. In the first half, we realized operating cash flow $1.219 billion, which is an increase of $820 million, 200% because of higher level of profit. CapEx, $234 million, a drop of $38 million or 14%. Interest-bearing liabilities, $3.1 billion. Leverage percentage 0.318, which is continuously dropping. In the first half, COVID-19 pandemic heavily impacted the global economy.
In China, as the epidemic was brought under control in the second quarter, our business operations quickly resumed and continued to improve with results improving substantially year-on-year. In the U.S., the virus spread rapidly in the second quarter, leading to labor shortages, production restrictions, increased costs, and drops in sales, which put pressure on our operations and caused a significant decline in our performance. In the first half, number of slaughtered hogs in China, about 19.9% to 251 million heads. Average hog prices, CNY 33.95 per kilo, an increase of 137%. Number of slaughtered hogs in the U.S. increased by 0.5% to 63.18 million heads in the first half. Average hog price during the first half, $0.95 per kilo, a decrease of 17.4%. If you look at the situation in the first half, the trends between the two countries are very different.
Slaughtered hogs fell in China, while hog prices increased in the U.S. We resumed operations and production in a timely manner in China. Revenue and profit hit record highs. We proactively responded to COVID-19 by adopting effective measures to protect the safety of our employees and maintain stable operations. Our profitability of packaged meats increased significantly, thanks to price adjustments, remarkable results seen from product mix optimization, and new product launches. We reduced frozen pork inventories to improve profits, increased imports to fill supply gaps in the domestic market. We have considered opportunities in the breeding sector to enhance competitiveness of our whole packaged meat business segment. In the first half, we realized operating profit $550 million, an increase of $ 125 million, 29.4%. Packaged meat, $417 million. An increase of 44.8%. Fresh pork, $102 million, a drop of $23 million.
Hog production, losses at $2 million, a drop of $5 million. For U.S. operations, we stepped up efforts to prevent COVID-19. European operations are showing strong momentum. As the health and safety of our employees remain our top priority, we stepped up efforts to prevent COVID-19, recording approximately $400 million in costs and charges. We adopted effective hedging strategies to ease the impact of low hog prices on profitability. U.S. hog prices have dropped substantially year-on-year. Hog production business has relied on effective hedging, leading to higher levels of profit. We proactively realigned product mix and business strategies to improve the profitability of fresh pork business. Our European operations benefited from favorable market conditions and improved management. Profits of hog production business increased significantly. Fresh pork business continued to improve. Profits of packaged meats business continued to grow.
In the first half of the year, for U.S. business, we realized $276 million for operating profit, a drop of 6.1%. Packaged meat, $243 million, a drop of 45%. Fresh meat, $116 million, an increase of $130 million. Hog production, $20 million losses, a drop of $42 million. European business operating profit, $99 million, an increase of 115%. Packaged meats, $34 million, 26% increase. Fresh pork, $2 million, an increase of $9 million. Hog production, $68 million, an increase of 183%. The European side, everything is growing, including the overall profitability level. Looking ahead, the situation surrounding COVID-19 remains grim. There are still many uncertainties ahead in terms of global economic trends, geopolitical conflicts, trade tensions, and ASF, which will heavily impact the global economy and the industry. WH Group will take effective measures to protect the health and safety of our employees and maintain stable operations.
The group is committed to giving full play to its global competitive advantages, seizing opportunities that result from global changes and industry integration, which will enable us to prevent risk, consolidate our leading position in the industry, and maintain the group's sustainable development. In China, we are committed to our strategy of launching new products, optimizing our product portfolio, increasing sales, and improving sales management to consolidate our market position. Viewing the integration of the meat industry as an opportunity to increase market share of the fresh pork business.
We will further expand meat imports to enhance market competitiveness. We will further enhance our integrated business model, move towards the upstream of the value chain by developing the hog production business and expanding the poultry business. For U.S. and Europe, we adapt to changes in the business environment and proactively adjust strategies. We leverage the advantages of the integrated business model.
We realign product mix in the packaged meat business, bring changes in sales channels to improve profitability. We promote technical transformation of the fresh pork business to improve operational efficiency. We stabilize profitability of the hog production business and improve the ability to mitigate the impact of market volatility through hedging. We enhance scale and profitability of the European business through integration utilization of production capacity of the newly acquired business. That is the end of my report. Thank you.
[Non-English content] Ladies and gentlemen, if you would like to register for questions, please press star one on your telephone. Thank you. [Non-English content ]
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[Non-English content] Okay.
Actually, there are two questions. The first question relates to the situation in China. For the first half or the second quarter, the group's performance was very positive, and we can see increases in both the level of profit and quantity in relation to packaged meat business per ton. Do you believe that you can continue on with such a rising trend in the second half of the year? In relation to fresh meat business, what is your projection for the second half in relation to profit per ton? In the second quarter, we have seen some clear trends in relation to meat and also fresh meat business. Do you think you can share what you think will happen in the second half? What is the level of increase year-on-year?
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In relation to the first question, it is about the per ton profit level for packaged meat segment in the second half. We believe in the second half of the year, there will be a dropping trend for pork prices. We also believe that while the prices of chicken meat may be stable, there could be some slight decline as well. Our expectation is that there will be a stable trend in relation to per ton performance of packaged meat, and there should not be any serious declines.
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In relation to the sales volume of packaged meat products, there is a decline of 4.3%. At the same time, for fresh products, the external sales figure has increased by 0.4%. For the second half, in relation to our inventory for frozen products, it is at a rather low level, and there is also a drop in relation to imported meat levels. Therefore, the profit level should show a declining trend for fresh meat products. But because the packaged meat profit is still rising, that should act as a very good offset.
The following question is for U.S. Maybe I will ask in English and I will translate in Chinese as well. We understood that in second quarter, the packaged meat was very much affected by COVID, the virus situation. What is the recent development in the U.S. market? Are we seeing some recovery? What is the trend for the packaged meat in the second half or third quarter as we are observing the market development? Also, similarly for the upstream production and the fresh pork business, because when we see from the market price, hog production, the implied production in terms of the profit in the market is still negative and is still trending down for third quarter and the fourth quarter. How is the impact to the U.S. operation, even considering the hedging?
Similarly for fresh pork, we are seeing the spread of pork price versus hog price start to come down, are we implying a narrowing margin for fresh pork in third quarter? What is the trend are we seeing for fresh pork as well? Thank you.
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Ken or Glenn, do you take the question?
Yes. Good evening, this is Ken Sullivan. I think the first question was about packaged meats. Let me just say this about the U.S. business. 2020 obviously has been a great challenge for the U.S. business. I am going to pause there. I do not know what the translation is going to be, so should I continue or pause periodically for translation?
I think you can pause a little bit throughout and we can translate.
Okay.
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We have established an extremely strong foundation in the U.S. business, and coming into the year, we were poised for a great year for growth. In fact, in the first quarter, we had a wonderful first quarter.
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The worldwide pandemic, obviously, that impact started with us in the second quarter. It has been a real challenge. Our commitment here in the U.S. has been to our employees to keep them safe and to also continue to operate our facilities to maintain the food supply.
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To do that, we committed substantial cost, substantial funds to protect our employees. We committed over $350 million in the second quarter to protect our employees and incurred other costs associated with COVID.
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We're proud of doing that. We think it was the right thing to do from a corporate responsibility standpoint. We're grateful to Chairman Wan for his unwavering support of Smithfield and our employees.
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For us, 2020 has been again, a tale of two quarters, meaning the first quarter was a blowout, wonderful quarter in which we substantially increased profits. The second quarter was not that way. We had to incur a lot of COVID costs and absorb all those costs in the second quarter.
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The second quarter, of course, is April, May, and June. These are the months that have been the hardest hit for COVID in the United States, and our business was under extreme pressure during those months.
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We have begun to recover from that. I would think that the second quarter would be our low. We have begun to build back capacities. We've moved past a lot of one-time expenses that we had to incur.
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The United States economy is moving again, beginning to move again. I think the third quarter, we certainly will face some continued pressure. It won't be as much as the second quarter, and I would expect we'll build momentum into the fourth quarter, which is typically our best quarter of the year. At least it has been historically.
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The point I would like to make is that the foundation of the U.S. and European businesses are very strong. If you look at what we did in 2019, we were planning to have an even bigger year in 2020. This worldwide pandemic has caused a temporary stop in that momentum.
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That does not change the strong foundation that we've established. If you look at our business over the back half of this year and into next year, and certainly going forward, we're very optimistic about the foundation that we have and our possibilities in the future.
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COVID will represent a temporary event in the long history and trajectory of this company. As I said, we are proud of the actions that we have taken, even proud of the cost that we have incurred to keep our employees safe.
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That said, you asked some specific questions. Let me first address the hog production question that you asked.
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If you look at what the cash markets would indicate, or the futures markets indicate for pig prices in the United States, clearly, they are very low and much lower than last year.
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If you do the math, you would see some very substantial losses in the live production side if you did not have any hedge protection.
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Fortunately, we have hedge protection. We, in 2019, began to layer in a very substantial hedge position for 2020.
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As a result, that hedge position will absorb most of the losses that we would otherwise have had in the first six months, and certainly in Q3.
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Q4, the fourth quarter, is always the lowest point for pig prices in the United States. We do have some hedge protection there, but we still have some open position that if there's a rebound in the pig price, we're hoping to capture that.
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In totality for 2020, if we didn't have any hedge position, our losses would have been more than $40 a head in the live production side. But because we have hedges, we'll have a small loss, but it will most likely be measured in a single digit per head.
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I think the second question was about packaged meats.
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I don't remember exactly what the question was, but just in general terms, obviously packaged meats margins are below what they were last year. A lot of that has to do with our manufacturing cost. As you know, COVID has presented a real challenge for our plants in the United States, and we've absorbed a lot of incremental additional cost related to COVID.
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In addition, volumes have been impacted by a number of factors, including the raw material availability. Slaughter capacity in the United States got down to close to 50%, and so there were fewer raw materials available.
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There was tremendous disruption in our various sales channels, specifically our food service business with all the restaurants in the United States effectively temporarily shut down or reduced to just takeout business. The food service business was off. We have a pretty good-sized food service business, and obviously the demand shock there was felt in the second quarter.
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We are obviously building back in the third quarter, and we will continue that momentum into the fourth quarter, but that is about all I would say on that. We really do not know how COVID will end here in the United States yet. I would just repeat what I said at the beginning, which is the foundation we have in our U.S. and European businesses is very strong. These second quarter and maybe even third quarter, I think will be anomalies in the long run of Smithfield, and are not at all indicative of some underlying issue or trend.
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Thank you.
Thank you so much, Ken. Sorry for taking so long.
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I have two questions, one for China and one for U.S. business. The first in relation to China is actually a follow-up question in relation to packaged meat performance or the per ton price. I understand that the profit per ton for China business in the second half of last year was already over CNY 3,000. For the first half of this year, it has already gone beyond CNY 3,800. That is way beyond the average level. We have then seen a drop in hog prices or pork prices. I believe that the price adjustment has already started. I would like to ask the management of Shuanghui, in your mind, what is the sustainable level of profit for packaged meat?
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Actually, we have considered such matters in great detail. Last year, we saw the price increase by 20%, and this year the per ton profit level is close to CNY 4,000. We believe that in the next two to three years, pork prices will show a downward trend, but the profit coming from such a trend cannot stay inside the company totally. There are two reasons.
After the drop in the prices of raw materials, we will increase the level of quality so that we can make contributions back to our consumers. Secondly, we are going to do more in terms of promotion and also expand the scale of sales for packaged meat products. We believe that in the future, per ton profit level will have certain room for improvement and sustain at a level of more than CNY 4,000. Our overall objective is to stabilize the per ton profit level and gradually increase the level of sales.
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The next question is for Ken. Just now, Ken, you mentioned that we spend more than $350 million in first half on employee protection or the quarantine measures. I also read our open letter to the U.S. senators, and I was amazed by all the details on all the great efforts that we have made to protect our employees and incur additional costs. The question is, for the more than $350 million, was this largely incurred in [audio distortion]? The line was not very clear just now, so I repeat again. Basically, for the additional cost that we incurred to protect our employees, just now Ken mentioned it was more than $350 million. And you also mentioned there were some one-off costs.
Heading to second half, how much additional expense are we going to incur in relation to all the quarantine related measures or employee protection? Given that we had a pretty good second half last year with a high base and all the additional costs as well as all the uncertainty due to COVID-19. On a year-on-year basis, are we still going to see pretty big earnings pressure or more specifically year-on-year earnings decline heading to second half? Thank you.
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Ken or Glenn, you can answer.
Okay. Thank you for the question. The $350 million was just the second quarter on a year-to-date basis because we did incur cost in March. It is closer to $400 million actually, which the point I would make about that is, going back to my initial comments about the foundation of Smithfield, these are incremental costs, and it is somewhat indicative of the kind of year that we could be having absent COVID.
There has certainly been some market disruptions and price changes that it is hard to predict how that would have happened absent COVID. But the costs are the cost, and it was $350 million in the second quarter. That is comprised in basically three buckets. It is people related costs. These are costs associated with paying our employees to be at home, for example. So in the United States, we have had aggressive contact tracing programs. We have loosened our HR policies.
We have adopted policies like anyone over 60, we have put on paid leave and asked them not to come into the plants. Let me pause there and let you translate, or let us get that translated.
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Again, I was saying that the $350 million is principally in three buckets, and the first one is people-related costs. That is, again, comprised of keeping people at home and paying people on quarantine, paying people that are out on our liberal leave policies.
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It also includes what we call responsibility pay premiums. We've increased the hourly wages of our production employees to reward them for accepting the responsibility of maintaining the food supply.
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There are other things in the people-related costs, including the cost of hiring private labs to perform COVID testing on our employees on site at the plants.
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The second of the three parts of the $350 million are facility-related costs.
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These include the modifications we've made to our plants. They include all the personal protective equipment that we've bought, meaning face masks and shields and sanitizing stations and temperature screening systems.
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But it also includes the impact of slowing down our line speeds, our decreased efficiency, our downtime, some product issues that we had to render because of market disruptions. And that is substantial. The unabsorbed overhead, if you will, of running plants at less than capacity is substantial.
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Finally, the third bucket is our community-related costs. We donated over $40 million of product to food banks across the country. You may or may not know that in the United States, with the economy shut down, there were more than 40 million jobless claims or unemployment claims that have been made in the country. This was our effort to be socially responsible, and we donated product worth about $40 million to food banks. Sorry, $30 million.
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With all that said, I do not expect the same level of cost in Q3. Much of the cost that we incurred in Q2 was one time, but the plant modifications, for example. There will be ongoing costs into Q3, and hopefully as we enter Q4, we have that well under control. But make no mistake, we have continued to reward our employees with responsibility pay into the third quarter, so there will be costs associated with that. I just want to go back to the main point here, which is we can measure costs associated with COVID.
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We can measure COVID costs and certainly they were substantial in Q2. I think they will be less in Q3 and hopefully even far less in Q4. It really goes back to my earlier comments, which is the foundation of our U.S. and European businesses are very strong, and to some degree, these costs, if you add them back, are a measure of just how good our business is foundationally.
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And I would just like to add one last thing publicly. I want to again thank Chairman Wan for his support of Smithfield and all our employees. There is nothing that he hasn't allowed us to do, and he's encouraged us to take care of employees and that's what we've done, and we're grateful for that.
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Thank you very much, Ken. This is very helpful. Take care, stay safe.
Thank you.
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Again, I have two questions. The first one concerns the China business. In relation to your slaughtering segment, I can see a very big difference in Q2 in relation to the volume of slaughtering and also the sales volume. Can I interpret the difference in the sense that basically it is driven by the U.S. import? What was the overall import volume for the first half? Do you believe that in the second half of the year, there will also be a large volume of import from the United States?
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In relation to what happened in the first half of the year, I can tell you that the import and export trading between China and the United States have been very normal. Actually, we have seen increases both in the volume and the profit level compared to the previous year. Things have been performing very well involving U.S., Hong Kong, and China.
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Especially in relation to our operations in China in the first half. Despite the fact that the supply of live hogs was quite tense and also relatively high hog prices, we were able to maintain very positive trends for both sales and profit levels. It is indeed mainly because of the support of imported meat.
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My expectation for the second half of the year, I would expect things to continue on in the normal sense in terms of trading between China and the United States but I think in terms of volume, there will be some impact, mainly coming from the widespread of the virus in the U.S.
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Because of the pandemic in the United States, there was a lack of operations or insufficiency in our number of labors working, and there's a decline in the output levels, and prices have been risen to higher levels. But if we look at the situation for the entire year, we still believe that we are going to see some very positive increases compared to last year.
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WH Group has a very strong trading team that has been dedicated to developing other markets other than the United States, for example, markets in Europe and also in South America. This is done to secure sufficient supply of meat to our companies.
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Thank you.
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The second question is about the U.S. fresh pork business. First of all is in terms of the slaughtering volume or the hog processed, could you share with us how much are we seeing the decline in the second quarter for U.S. business? What is the latest data in terms of the plant resumption or the utilization rate, as I think we have reopened most of the plants? Given that the current hog and the pork price spread, how should we think of for the U.S. fresh pork margin into the second half?
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Okay, Ken?
Hello, this is Glenn. I'll take a stab at answering the question.
Okay, sure.
With respect to your first part of the question, volumes for fresh pork in the second quarter. Slaughtering volumes or harvest volumes were down almost 20% in the second quarter.
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Ken talked about the components of our COVID-related costs incurred in the second quarter, and one of those components related to facilities.
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And obviously he mentioned the concept of slowing lines, decreased efficiency, incurring some significant downtime. We've had to shift production between channels like retail and food service. In the beginning of the pandemic, there were some plants that were completely shut down.
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As discussed earlier, we do expect and have seen a rebound in production. With our safeguards in place and with the success of implementing a lot of these preventative measures in our facilities, and just as the country migrates into this pandemic and starts to testing improves and treatment improves, we're seeing our production tick up and we expect that to continue to rebound here into the back half of 2020.
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With respect to your second part of the question, the meat spread or the fresh pork profit spread in the U.S. Ken mentioned earlier that some of the numbers associated with hog pricing. The hog prices in the back half are down. Q4 is real low right now. That we do know. With respect to the meat prices, however, there is just a lot of volatility in these markets. It's been very difficult to analyze and predict where meat prices and USDA meat markets are going to end up, Lincoln. It's difficult for me to forecast for you where I see the meat spread in the back of the year. As I sit here right now, those hog prices being low will obviously help at least the bottom half of the spread.
We have a lot of hogs.
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Thank you.
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Thank you, Ken and Glenn.
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Thank you all for attending.