Good evening, and good morning to those from other time zones. First of all, we would like to welcome to our telephone conference for the third quarter results. I will first take you through the management present tonight. We have our Chairman and CEO, Mr. Wan Long, and CFO, Mr. Guo Lijun. We have Mr. Ma Xiangjie, Mr. President from Shuanghui. Mr. Ken Sullivan, CEO of Smithfield, and COO, Mr. Dennis Organ is also here from Smithfield. We also have other members of the management, including Mr. Liu Songtao from Shuanghui, and Mr. [Zhong Li Wei] from Smithfield, CFO Mr. Glenn Nunziata, CFO of the group, Madam Zhen Jinyan , and I am [Chen Huixia]. I am going to ask Mr. Guo Lijun to take us through the financial performance for the first three quarters of the year. Mr. Guo, please.
Good evening, dear investors. I am going to introduce to you the performance highlights for the first three quarters. Hogs produced, 15.324 million, a drop of 4.1%. Hogs processed, 33.165 million, a drop of 19.1%. Packaged meat sold, 2.383 million tons, a drop of 2.3%. Revenue, $18.767 billion, up 9.2%. EBITDA, $1.953 billion, up 12.8%. Operating profit, $1.467 billion, up 14%. Profit attributable to owners of the company, $890 million, up 8.5%. Earnings per share, $0.0604. Because of the African swine fever and COVID-19, for the first three quarters of the year, our sales scale was decreased. Because of the higher prices in China for fresh pork and products, revenue operating profit have significantly improved. Net profit increased by 8.5%. Since the beginning of 2020, COVID-19 has heavily impacted the global economy. In China, the pandemic was brought under control in the second quarter. Our business operations quickly resumed.
Company achieved remarkable results in product mix optimization, new product launches, price adjustments made in last year, and synergies between China and U.S. operations, with operating performance for the first two quarters improving substantially. In the U.S., the virus spread rapidly in the second quarter, leading to production restrictions, increased costs, and drops in sales, which put pressure on our operations. However, our performance improved in the third quarter. In Europe, all three segments continued to improve, leading to a significant increase in profitability. Number of slaughtered hogs in China fell 11.7% to 362 million heads in the first three quarters of the year, increased by 15.1% to 110 million heads in the third quarter. It shows that with the African swine fever under control, we are now resuming many operations and things are improving. In the third quarter, things have already shown a momentum of growth.
Number of slaughtered hogs in the U.S. increased by 1.7% to 95 million heads in the first three quarters of 2020. Hog prices in the first three quarters of 2020, hog prices in China remained high. Average hog price CNY 34.7 per kilo, an increase of 105.3% year-on-year. In the U.S., the average CME hog price during the first three quarters was $0.94 per kilo, a decrease of 19% year-on-year. It was just in China, and due to the pandemic, hog prices have dropped in the United States. For the first three quarters, operating profit, $877 million, up by 23.7%. Packaged meat, $650 million, up 30.8%. Fresh pork, $194 million, a flat trend. Hog production loss of $3 million, $7 million less compared to previous period.
Packaged meat business has improved a lot, reaching new heights, especially in China. U.S. business stepped up efforts to prevent COVID-19 to ensure employee safety and stable operations. We proactively adjusted product structure and business strategies. For the first three quarters, operating profit $464 million, a drop of 7.4%. Packaged meats $397 million, a drop of 33.9%. Fresh pork, $208 million, an increase of $228 million. Hog production, loss of $36 million. The pandemic has caused some impacts on our U.S. business. Less output, and the sales was under a little bit of pressure. For Europe, profits of packaged meat and hog production business continued to grow. Fresh pork business improved significantly. Operating profit $135 million, up 58%. Packaged meats $65 million, up 41%. Fresh pork, operating profit $10 million, an increase of $28 million. Hog production $72 million, up 33%. Fresh pork business in Europe has shown significant improvement.
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 affect 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 our global competitive advantages, seizing opportunities that result from global changes and industry integration, which will enable it to prevent risk, consolidate 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. We continue to seize opportunities brought on by increasing hog supply and decreasing hog prices.
We will further expand meat import channels to enhance market competitiveness. We will further enhance our integrated business model, move towards the upstream of the value chain by developing hog production business and expanding the poultry business. In U.S. and Europe, we adapt to changes in the business environment and proactively adjust our strategies. We leverage our advantages of integrated business model and further tap potential to achieve steady growth. We adjust product structure in the packaged meat business according to changes in sales channels to increase profitability. We promote technical transformation of fresh pork business, stabilize profitability of hog production business, and improve ability to mitigate an impact of market fluctuations. We enhance scale and profitability of European business through integration and utilization of product capacity of newly acquired business. That's all for my introduction for Q3. Thank you.
Ladies and gentlemen, if you'd like to register for question, please press star one on your telephone keypad. Thank you. [Non-English content ]
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That was the first question in relation to the China business. At the moment, we see the drop in prices for fresh pork and also chickens. At the last meeting, Mr. Ma mentioned that some of your profit will go into structural upgrade of your business, and the level will not exceed 4,000 per ton. What is the plan or growth momentum for packaged meat in the next year? What measures are you planning to implement? What will happen or how are you going to deal with the situation if the volume does not increase next year? According to Mr. Ma's answer, we would not say that the fluctuations of the fresh pork prices or chicken prices are fluctuating. Actually, at the moment, chicken prices are rather stable, and we have seen a small margin of decrease for fresh pork prices.
We expect there will be more room for further decrease for fresh pork prices next year. The profit therefore created will go into improvement of our products and enhancing overall quality of our products so that we can increase the level of sales in the market, and at the same time increase the volume of sales. For the third quarter, we are going to increase our investment in the market. Since the fresh pork prices are not decreasing significantly, this is the reason why the year-on-year per ton performance seems to be lower. Quarter-to-quarter performance seems to be dropping. For next year, when pork prices are decreasing more significantly and our market investment is already well positioned, we expect that there will be a growth trend for the per- ton profit next year.
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In relation to the growth of volumes of sales for packaged meat, we are actually very confident and we expect very good momentum of growth next year.
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In terms of relevant measures we are going to implement, I can divide them up into six areas. First of all, we are going to focus on promoting existing single items and also products under the brand of Wang Zhong Wang and also barbecue sausages, etc.
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Secondly, we are going to continue to promote some major or leading single items that have been launched this year. These new products would include those under the brands of Lamala, Huoxu anf eng and also Cooking Sausage.
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The third area of measures will include promoting new channels to sell our products. We are going to develop some standard shops to promote our meatball items, and we will also construct some cooked food stalls and also promote Chinese style cooked items. At the same time, we are going to identify new catering and restaurant channels to promote our products.
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The fourth area of our measures would include more investment into the markets at the same time improving our overall product quality also enhancing the overall experience in doing business with us, so as to push ahead sales figures.
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The fifth point is about enhancing market management focus on informatization, standardization also professionalism for our channels.
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Finally, we are going to launch measures in relation to optimization of our team management for the rearing business, or we are also going to provide incentives to our staff members, we will do appraisal accordingly so that they will have higher level of awareness to further their development in the business.
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In relation to other part of the question, we will continue to develop improve market management. Therefore, we are fully confident in relation to our sales figures in the next year. Next year, we expect the hog prices to fall, there will be more room for our cost to be lowered. There is no need for us to sacrifice the growth in our profit in exchange for the growth in sales.
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Follow- up question for Mr. Ma. Just now you talked about how optimistic you feel about the volume for the coming year. Can you actually provide some breakdowns or quantify such optimism? Can you really achieve growth of more than 5%? I understand that there will be further room for improvement for packaged meat per- ton profit. In the past three quarters, the average figure is CNY 3,100 per ton. What level do you expect to reach next year?
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While it is a fact that for our packaged meat products, we have not seen growth in the past two years, that does not mean there will not be growth in the future. Actually, while we have enhanced our promotional efforts and also market management initiatives, we have already seen some trends of growth. We expect that in the next year, as I already mentioned, we are going to focus on certain major single items, and it is rather difficult for me to quantify things at this meeting. But overall speaking, it is not an issue to achieve medium- to high- single- digit growth. In relation to the profit situation next year, part of our cost is going to be spent on improving our product qualities, and the other part will go into enhancing market initiatives.
Overall speaking, per- ton profit can grow in a stable manner, but it is hard to say whether we can actually go beyond CNY 4,000 per ton or not.
[Non-English content ] My next question is for Glenn on the U.S. packaged meat. Surprisingly, in Q3, the U.S. packaged meat actually saw margin expansion on a year-on-year basis despite the volume decline. What was the reason behind the margin expansion? Going forward, heading into fourth quarter, what are our outlooks for the volume and margin trends, especially considering the high base of Q4 last year in terms of margin? Thank you.
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Ken or Glenn, can you take the question?
Sure, Luis. This is Glenn. I can take it. I think the question was a little fuzzy on the phone. I believe he was asking about the margin for Q3 packaged meats. Is that correct?
Yeah, that's right.
Okay. We still are dealing with the headwind of COVID-19 as it relates to food service demand in the U.S. And so although the nation and most of the states are opening up and we saw that in Q3, there's still quite a bit of headwind as you compare that volume to normalized periods in the prior year. The contributor to margin in Q3, we experienced some lower raw material cost values related to the fresh pork value chain, but we were able to hold on to pricing. So our average unit sale price was up slightly, let's call it just above flat. So we took advantage of the lower raw material values, and as a result, we saw some margin expansion. But our volume was down quite a bit if you compare it to the previous Q3 period.
Thank you, Glenn. How about the outlook for [I think it's Q4] in terms of volume and margin?
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This is Ken Sullivan. If I could address the broader picture in the U.S. I am going to talk for a few minutes, and I will pause for translation a couple of times.
Okay.
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The pandemic in the U.S. has obviously presented historic challenges for the U.S. business in 2020.
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We had a record first quarter, very strong first quarter, then the pandemic hit.
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The biggest impacts have been from, number one, demand destruction, in particular in the food service sector.
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The shut down orders in the United States have had the most significant impact on our food service and restaurant industry.
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We have gone for many months with restaurants not being allowed to serve customers in the restaurants.
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That has opened up in recent months, but they are still nowhere near the capacity that they've been in prior years.
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We have a tremendous food service business in the U.S., in particular in packaged meats, and that has been our challenge is the downturn in the industry.
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In addition, the pandemic has also presented us significant cost headwinds.
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These cost headwinds have been wide-ranging from responsibility pay, meaning increased pay to our production employees.
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We increased our pay by as much as 25%, which is a significant cost to the business.
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We did that for two reasons.
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The first is we were having significant absenteeism as fear gripped the United States and employees were afraid of the virus.
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The second reason we did it was it was the responsible thing to do. America was closed down, and we asked our food and agriculture workers to continue to report to work, and it was simply the right thing to do.
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I'm sorry that it has impacted our profits in such a significant way.
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I do not regret paying the responsibility bonuses.
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I hope our shareholders appreciate that sometimes in corporate world, you have to do the right thing without regard to cost. We've had faced that extraordinary situation this year in the U.S.
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In addition, we've had significant unabsorbed overhead as our plants slow down and process less animals because of the pandemic. Our overhead absorption was decreased significantly and that leads to inefficiencies.
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We've also had to absorb significant cost increases on our farms because the processing plants, the harvest plants in the United States could not process all the pigs, and they backed up on the farms, and that has caused great cost inefficiency and cost increase on the farms.
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Ultimately, our integrated business model has worked as expected in 2020.
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The big difference between 2020 and last year is on the farms, our live production and low hog prices.
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We have significantly mitigated the damage from low hog prices by our hedging program, which has contributed over $500 million year to date.
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The pandemic, as I've said, has presented us with historic challenges, but I do think that we have turned a corner.
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I think we will continue to see headwinds for the next six months, but things are improving.
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We are obviously hopeful in the U.S. that vaccines and therapeutics will be changing the situation in 2021.
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I would just tell you that if you have some patience with the U.S. business, our foundation is very strong.
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The next six months, as I said, will bring some further headwinds, but the foundation remains strong.
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If you look at our balance sheet, I think we have actually strengthened our balance sheet.
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We would expect rebounding demand in 2021.
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We have a management team led by Dennis Organ that I think is very strong and very capable. As we get past the first quarter and into 2021, things will be improving, and I expect that we will get back to the type of performance that we saw in the record first quarter in 2020.
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Before I end my comments, I would like to acknowledge the WH Group and Chairman Wan for their steadfast support throughout this pandemic in the United States.
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Thanks a lot for the useful information, Ken, Glenn, and we also appreciate all the great efforts made by the management team. That's all my questions, thank you.
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[Non-English content ] Ladies and gentlemen, to register for question, please press star one on your telephone. Thank you. [Non-English content ]
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From Lincoln from Goldman Sachs. The first question is in relation to the China business. According to your sharing earlier, you said that for Q3, your packaged meat and also fresh pork business, the sales volume has been showing some momentum of growth. I want to focus more on the packaged meat business. As Mr. Ma has mentioned earlier, in Q3 you have launched some new products and you have also concentrated some efforts on exploring channels. You talked about the profit per ton being lowered in Q3, and you have some plans or measures to tackle this issue. Will these measures continue in the future? What will happen to your investment into improving product quality?
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Allow me to take the part of your question in relation to the figures. For Shuanghui packaged meat products, for Q3, we have seen a year-on-year growth of sales by 2.3%, and for fresh pork sales volume, we have seen a drop of 6%. As for some poultry, in other words chicken meat products, the growth is 17.3%.
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I will answer your question in relation to our channels. On top of the expansion of our traditional channels, we are going to mobilize our teams and also make some changes in relation to our clients and develop some dedicated products. For one of the channels, we have a growth of 300 clients, and we have established 8,000- odd standard shops, and the accumulated sales growth is 117%.
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Secondly, we have established this Chinese style cooked items channel. We have developed new clients, 350 of them. We have established 1,670 points of sales or shops, and the overall sales has been growing by 28%.
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The third channel is the food or catering channel. The number of clients is about 430, a growth of 430 clients in total. The sales volume has been growing by 35.6%.
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Moving forward based on this foundation, we are planning to expand our professional team and also agencies and develop more dedicated products to realize growth in sales.
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For your third part of the question, this is not exactly a new question. Since the prices surged, beginning from last year, next year, we believe that the profit created by lowering the hog prices will be going into three major streams. First of all, enhancing our product quality. Secondly, investment into the market. And thirdly, it is about the profit level. At the moment, we have already started our work in relation to the first two items. And once we have reached the target for our future sales volume, we will continue to place more focus or emphasis on enhancing our profit level.
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That's the end of my answer. Thank you.
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The follow-up question was in relation to the 6% of external sales. Whether that referred to all the fresh pork included the imported products. The answer was imported meat was also included, and we have seen quarter-to-quarter growth of the level of imported meat. But last year in the second half, imported meat was also growing rather quickly. So the year-on-year comparison base figure was rather high.
[Non-English content] Actually, the second question specifically for Ken. Because I guess this will be your last briefing call in this role. Ken, if you look in the past few years in this capacity, how would you rate the Smithfield performance? Say, putting aside the pandemic, what do you think has really improved or changed in the past few years for Smithfield? Because I think the capital market really underappreciate the value of Smithfield. Where do you think could be the further improvement or in the future that help extract the value of Smithfield in your mind? Thank you.
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Ken, can you answer the question?
Yeah. Thank you for the question. I would just say that I agree with your assertion that the market severely undervalues not only the WH Group stock, but by extension, our Smithfield business. Certainly, the growth of our packaged meats business over the years, and the growth of the margins in the packaged meats business over the years has been the big story for Smithfield, and it is a severely underappreciated one. I am sure if you do the sum of the parts on the WH Group stock, you will see just how severely undervalued it is. I'll pause there for a second for translation.
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I mentioned at the outset our first quarter performance in Smithfield.
If you look at our first quarter performance, and indeed the second half of 2019, you get some sense for the momentum and strength that we have built in Smithfield.
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That includes our European business, by the way.
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The previous four years saw the highest record or the highest profits in Smithfield's history in the previous to 2020.
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What we achieved really was a big cultural change. I think you know that Smithfield was a collection of companies, and over the last four years, we transformed the culture to be one company, One Smithfield. You have all heard a lot about One Smithfield.
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The significance of One Smithfield is that now our operations, our sales, our marketing, all of which are aligned, and we are selling all our brands, and that has been a very powerful profit engine for us the last few years.
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Dennis Organ has been a major part of that consolidation. He is an excellent operator. He knows the business very well. He is going to do a great job continuing the progress.
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His focus will be on converting more and more raw materials.
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As well as improving the underlying fundamentals in our fresh meat and our hog production business.
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The bottom line is, the pandemic clearly has had material impact, significant impact on the business. You have to look past that. You have to look beyond the really historically large cost impacts that we have had to absorb, the disruption of our food service business. When that rebounds, we will be rebounding very strongly. I am very confident, very bullish about Dennis and the management team.
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Chairman Wan has big growth plans. We are working on them right now for the next several years.
And I think it is going to be an exciting time for Smithfield as part of the WH Group.
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Great. Thank you. Thank you, Ken .
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Okay. Thank you. Thank you, Ken, for the answer. In the interest of time, I think we will conclude the meeting now. Thank you all for attending the meeting today.