To results announcement for 2019. Allow me to introduce management members who are present. First, we have Mr. Guo Lijun, Executive Director, Executive Vice President, and CFO. Mr. Kenneth Sullivan, Executive Director and President, CEO of Smithfield. He is responsible for U.S. and Europe business. We also have Mr. Ma Xiangjie, Executive Director and President of Shuanghui Development. We also have Mr. Glenn Nunziata, Executive VP and CFO of Smithfield, and other members of senior management. I am Luis, and I will now hand the time to Mr. Guo Lijun to talk about the performance of the Group in the first three quarters of the year, which will be followed by Q&A.
Dear investors, good evening. I am going to introduce to you our performance in the first three quarters of the year. Up to September, we have 15.977 million hogs produced, hogs processed 40.9 million, which shows a flat trend. Packaged meat sold, 2.439 million, up by 0.3%. Revenue realized, $17.193 billion, up by 3.7%. EBITDA, $ 1.731 billion, up by 9.4%. Operating profit, $ 1.295 billion, up by 7.2%. Profit attributable to owners of the company, $ 820 million, up 8.5%. Basic earnings per share, $0.0558.
If you look at the different segments, we have 51.7% of contribution from packaged meats. It shows that packaged meats are still our core business, and we will continue to heavily invest into this segment. Fresh meat, 41.9% contribution for our revenue, and operating profit contribution 12%. Hog production 3.3%, and 5.4% respectively. China business contribution 35.6%. U.S. 55.5% of our revenue, and operating profit 38.7%. Europe, 8.9% and 6.6% respectively. China business is still more profitable.
Now I will talk about business review of the first three quarters. Due to a number of unfavorable factors, including ongoing trade disputes, the spread of African swine fever, as well as increase in supplied meat in the U.S., we faced unprecedented challenges in the first three quarters. For China business, ongoing outbreak of ASF led to accelerating decline in hog and breeding sows inventories. Hog prices continued to rise as a result of constricted supply. In September 2019, you can see a drop of hog inventory by 41%, and breeding sows drop by 38.9%. This is from the Ministry of Agriculture and Rural Affairs.
For the U.S. side, pork supply continued to grow while the exports to China increased, along with the emerging price gap between these two countries. The spread, therefore, between hog and pork prices in the U.S. improved. In Q3, we see marked improvement comparing the hog prices and pork prices. For the first three quarters, hog price in China continued to increase. Average hog price was CNY 17/kg , an increase of 34.9%. The U.S. average hog price was $1.16 / kg, an increase of 4.5% over the same period last year.
For the first nine months, you can see the curve is going up very substantially for China in red. The orange line is for the U.S. market. The Group proactively adjusted the business strategy, bringing into full play the advantages of having a vertically integrated business model and diversified geographic presence. Its operating performance continued to improve quarter by quarter, with a significant increase in the third quarter. We see the operating profit going up by 54.8%, offsetting the drop in the previous two quarters.
For net profit, we have seen decline for the first two quarters, and for third quarter, an increase of 66.7%. 4.2% increase in Q1 for operating profit in China and a drop of 20-odd percent in the third quarter, up by 18.4%. For the U.S. side, Q1, a drop of 22%, Q2, 2.1% drop, and Q3, substantial increase of 169.9%, which is almost a twofold increase. Business review in China for the first three quarters. We have leveraged our nationwide platform and seized market opportunities.
Profitability of fresh pork business hit record high again. Secondly, we have price adjustment of packaged meats that made favorable progress and effective cost transmission mechanism was formed. We fully promoted process innovation and tech innovation to effectively ease our cost pressure. We have launched new products with great results. Market innovation made new breakthroughs.
For the Chinese side, Q1 compared to the previous year, operating profit realized $ 709 million. Margin dropped by 0.7 percentage point. Packaged meat, a slight drop, while fresh pork increased rather substantially. Hog production. Due to less hog production or advanced hog production and processing, the losses increased by $ 13 million. U.S. and Europe. For profitability of U.S. business improved quarter by quarter and recorded remarkable year-on-year increase in Q3.
Hog production business substantially improved and achieved a turnaround thanks to the effective hedging strategies. Exports to China increased remarkably. Performance of fresh pork business significantly improved. Hog production and packaged meats in business in Europe continue to grow, while fresh pork business was still under pressure due to the ASF. For the first three quarters for the U.S. business, operating profit $501 million, up by 23%. Operating profit margin up by 0.9%.
Packaged meat, $601 million, up by 8.1%. Fresh pork business dropped by $22 million. Hog production, $26 million improvement. For the European side, operating profit $ 85 million, dropped by 3.3%. Packaged meat, $ 46 million realized, up by 18.4%. Fresh pork, a drop of $ 28 million. Hog production, $ 54 million operating profit realized, an increase of 62%. For our next step concerning our strategies and outlook.
Since the beginning of this year, the group has been facing unprecedented challenges due to the ASF and trade disruptions. Our performance, however, has highlighted the Group's advantages and resilience capabilities. We will proactively adjust our business strategies based on the market situation to achieve steady growth. We believe the Group will further consolidate its global leading position and bring higher returns to our shareholders by adhering to our strategies.
In China, we will spare no effort to implement controls to prevent ASF risks. We will increase selling prices to improve profitability. We will accelerate product mix optimization, focus on new product development, and marketing innovation. We will ease cost pressures through management innovation and technological innovation. We will expand our sales network to increase market reach and capture the opportunities throughout the industry integration to further expand our business scale.
As for the U.S. and Europe business, we will continuously utilize our advantage of having a vertically integrated business model to achieve high profitability. We will accelerate product mix optimization in packaged meat business to boost business scale and profitability. We will accelerate technical transformation of fresh pork business to improve operational efficiency, adjust export strategies, expand export channels, withstand market volatility through effective hedging strategies. With the newly acquired production capability in Europe, we will accelerate integration transformation to achieve synergies to increase scale and profit. That is the end of my report. We now welcome questions from you.
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Good evening. First of all, I would like to congratulate the group for its outstanding performance for the first three quarters of the year. I have three questions to ask. Two are for the China side and one for the U.S. side. For the time being, I would like to focus on the first two questions for the China business. First of all, we have seen the hog prices going beyond CNY 40/kg .
What is your prediction for the hog price trends for the coming year? Second question is about the packaged meat business. I would like to ask what will be the per ton profit for packaged meat products next year, and how much price increase has already been incorporated into the formula? Thank you.
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Thank you very much for the questions for the China business. Perhaps I can answer both at the same time. Concerning the normal cycles for hog prices, they have been interrupted by the international incidents. We believe we have to do some reassessment for the hog price predictions. But basically, we expect that the first half hog prices will be higher than the second half hog prices. We do have to carry out further studies into future trends of the hog prices. For example, covering 2020.
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As for your second question, we have seen that for the first two quarters this year, the profit level has been falling slightly, but the management has already taken very effective measures to turn things around, and our efforts have been reflected in the performance of our profit level in Q3, which has shown very remarkable improvement. As for our next year's strategy, actually we are still working on some specific guidelines, so we cannot offer any concrete answer at this moment. But we are working very hard towards this, and we will soon come up with the necessary solutions.
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The follow-up question was about the plan to increase hog prices in the following year. The answer was that there have been five price hikes this year, because we need to consider the fact that the prices for raw materials have continuously been increasing. At our meeting in November, we have presented the sixth round of price increase proposal, and we will continue to work into further price hikes for the coming year. We have to adhere to the principle that when the raw materials are more expensive, we have no choice but to increase our prices.
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I've got a question on the U.S. side for Ken, Glenn. In Q3, we have seen pretty strong earnings recovery for the hog production business, but we believe that hedging has played a very important role. But if you look at the current spot market, the hog price in the U.S. is still pretty weak. On the future market, the future price still has not recovered to the level that we saw back in Q2. How much visibility do we have for the hog production profitability for 2020 in terms of the profit per head, and what's the underlying assumption? Thank you.
Thanks for the question. This is Glenn, I'll take that. You're right. The cash spot market in the U.S. is down from its peak back in Q2. As we've done for many years, manage our hog production segment utilizing a variety of tools, including grain procurement, raising and labor costs. We were able to manage the hog production profitability this year and take advantage of some hedging scenarios to help maintain profitability in the back half of 2019.
With respect to 2020, the cash market is showing, it moves up and down quite a bit every day, by the way, every week, but it's showing somewhere around $9 - $12 a head, depending on the last time you looked. That profitability favored Q2 and Q3 of 2020. We are, as we always do, actively seeking ways to lock in, if you will, or to manage our profit for the hog production segment 2020. But again, liquidity is limited, given that we're only sitting here in October. So we will continue to monitor the hog markets next year. Again, our optimal situation will be defined as the weeks here pass and we see more liquidity in 2020. But we will do what we can to manage that hog price 2020.
Yeah. This is Ken Sullivan. I would just add to that.
Ken, before you continue, can we translate first?
Oh, yes. Sorry.
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Ken, you may continue.
Just two observations. You referenced the hog prices being down from the second quarter. That's true, but you should understand there's a very strong seasonal pattern happening there, happens every year. It's a historical sort of proven pattern. I would not be concerned about the decrease in hog price from Q2 to Q4. It happens every year. That's the first thing. You want to translate that?
Sure.
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The second observation I'd make is as it relates to the outlook for 2020 in live hogs. Glenn's right, the markets today are showing either break even or profits in every quarter of next year. But the biggest change year-over-year is expected to be Q1 2020 versus Q1 2019. We suffered significant losses last year in the first quarter. It put us on a hole early in the year. I don't expect that to happen again in 2020.
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Thank you, Ken, Glenn.
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Morgan Stanley. Lillian.
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[Non-English content] The third question is about U.S. fresh pork business. I think it's also related to the import, export or the trade business between U.S. and China. Given the price gap is widening, are we seeing the chance for increasing export to China? What's the outlook for fresh pork's return? Because we are seeing a very quick narrowing of loss in third quarter. Does that mean that we're going to expect profit in the fourth quarter of 2020?
I will answer that. This is Ken Sullivan.
Ken, maybe we will let Shuanghui to answer the first two questions and we will—
Oh, sorry.
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Okay. The first question that was posed to the management in China side was about the third quarter in relation to the sales and profit breakdown for fresh meat products and also packaged meat products. Whether this is going to continue on for the rest of the year or even into the next year. Can the management explain what are the reasons for such good performance in Q3 other than the increases of the price and imported pork and also some low cost pork in the inventory?
Are there any other reasons? Can we continue on to use such low cost inventory next year? When will the inventory run out? The management's response was concerning the sales figures for fresh products, it was 377,000 tons. For packaged meat products, the sales figures is 430,000 tons. There are very complicated reasons behind the good profit level other than the ones mentioned by the lady who asked the question about imported pork and also low cost inventory and also price hikes.
The Group also implemented a number of innovative ideas and measures to make sure that we can continue on with such high profitability level. Actually, it is very often a question posed to the management. Always we answer we are not absolutely certain, because we are always bound by the impact coming from the fluctuations of the prices of our raw materials. But we will spare no effort in maintaining the high profit level.
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The second question was about the per ton profit prediction for next year. The answer was, for fresh products, the per ton profit we expect Q4 to continue on with the trend that we have seen in Q3. For the first half of 2020, because of high hog prices, we believe that the per ton profit level may drop slightly.
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Ken, you can take the question for the U.S. business, which is about the import-export trading business and the expectation for next year.
Yeah. Well, there's no secret that our fresh pork business has been the segment that's been hurt most by the tariff wars. If you look at the results over the last 18 months, it's clear where that impact is being felt. That said, I do expect that we'll be rebounding in fresh pork. The ASF issue in China, the need for pork in China, the spread between live hog prices in China and the U.S. is now about 4.5x , I think. So I think we'll see an improvement in our fresh pork segment, certainly into Q4 and into 2020.
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Goldman Sachs, Lincoln. Lincoln.
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The first two questions are about the China business. The first one is about what Mr. Ma just shared with us concerning fresh pork profitability that may not be able to be extended further in Q4. Is it because of the significant spread in the prices, or is it because of the release of some of your inventory? Because I do see some rather big discrepancies comparing the hog processing figure and also overseas sales figure.
The second question is about what Mr. Ma referred to earlier concerning the packaged meat profit level. It may not perform very well into the next quarter, but we do see a very positive recovery in Q3. Why doesn't it extend to Q4? Or do you think there is any chance of things turning around for Q4 as well?
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Perhaps I can respond to the first question now, which are in relation to the reasons behind the extension of per ton performance for fresh products. Actually, we are looking at consistent trends for Q3 and Q4. We believe that the hog prices in Q4 will be higher than the hog prices in Q3, and we also have certain profit from our inventory, and that can offset certain decline in the profit for fresh pork.
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To answer your second question about the overall prospect into the fourth quarter, we do not expect any fundamental changes compared to the operation in Q3. We believe that we will continue to be optimistic in expecting some growth by extension of Q3 into the final quarter.
[Non-English content] Also, on the U.S. export side, I also got a question for Ken. You mentioned earlier that this tariff stuff is a key concern for the export business, but given that the super large China-U.S. price gap, we should be able to export from now. From Smithfield perspective, are we sort of prepared to export more to China? If that's the case, that would be if we direct the exports from other country to China, or it's more like we shift those domestic business volume to China, or how much are we sort of preparing for the export business for 2020?
Ken, we will translate first and then we will let Gordon to answer this question and you can follow up with Gordon's answer.
The question was divided into two parts. The first part is for the China side. What is the trend expected concerning the importation volume of pork from U.S. into China? Back in August, we have had some news that there is no need to panic, although there was a price spread. What is the latest update? Because in the past two months, we are wondering if there is any increase in terms of pork imported into China from the U.S. Do you have any news to share with us concerning the tariff issue?
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Allow me to first respond to the first part of the question. We have seen some new peaks in terms of live hog prices, and especially beginning from Q3, the hog prices have been increasing rather substantially. At the moment, it is standing at more than CNY 40/kg already. Comparing this figure with the slightly over $1 / kg in the United States, we can see about a very significant price spread, which is around 5x-6x different. Because of the African swine fever epidemic, that had led to a serious shortage of live hog in China. Actually, this situation is advantageous in relation to importation.
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Secondly, under the current situation, despite the very high level of tariff, in relation to U.S. pork and byproducts and other types of meat being imported into China, all these situations are actually bringing us benefits. We are planning to step up our efforts in relation to procurement of various products. So we expect that soon enough, we are going to see some historical peak figures in relation to importation.
Okay. Ken, you can answer the question.
Okay. Just in general terms, we've had four or five years of expansion in U.S. hog herd. We have had, as I've said repeatedly, a lot of meat. In general terms, exports are up for us year-to-date of almost 24% overall, and China is a big part of that. We're sending a lot of product to China today. There's no question that that trend will continue, and that's a positive thing for the U.S. industry. I know that all U.S. packers are doing China business and are actively seeking to fill the need that China has. That's a positive thing for the U.S. industry because we have a lot of meat to sell.
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UBS, Christine Peng.
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I have two questions for the Chinese side, and then later on, I will ask another question for Smithfield. The two questions for China: I'm rather concerned about the frozen meat inventory level. I understand previously you have already offered some explanation in this area, but I would like to get a more concrete figure for my reference, if that is okay. The second question is about: is there any upper limit or ceiling for price increase?
Can you also explain to me what are the logical thinkings behind such price hikes? Is it product driven or is it demand driven? How do you gather the information or the data? Can you also share with me what you think about the logic of the overall sales volume?
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Okay. Allow me to answer your questions. Concerning the first question about the inventory. Seriously, I am afraid I cannot offer you any satisfactory answer. I have already responded earlier to another question concerning when the inventory will run out, so I won't repeat myself. For the second question in relation to the upper limit of price increase. Actually, we cannot do any forecast, which is very helpful because we can only insist on the strategy of looking at the prices of the raw materials.
When the hog prices go up and to a certain level that we cannot digest it ourselves, we have no choice but to increase our prices. It is indeed very difficult for us to give you any prediction in relation to the hog prices in the following year. We can only adopt measures phase by phase to increase the prices. In fact, we have not increased our prices for a very long time now. Every time if we do have to increase the prices, we do want to restrict the increase to a limited level so as not to damage the market sales situation. We will always choose to do it step by step. The major point here is to continuously work out the formula of price hikes according to the fluctuations of the raw material prices. Thank you.
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Well, in that case, Mr. Ma, I would like to pick your brain in relation to how you decide to make a price increase when there are fluctuations to your cost or the raw material prices. How do you deliver this judgment or make this decision? Is it a response to the volume or does the company attach more importance to profitability compared to sales volume?
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Well, all I can say is that we continue to adopt a strategy which is called when the water level rises, the vessel rise with it. The first thing is for the water level to rise, meaning we need to see fluctuations or increase of the prices of the raw materials first, and then in a passive manner, we have to impose a price hike. It shows that when you compare which one is more important, whether it is sales volume or profitability, we believe actually sales volume is more important to us, because we cannot allow price hikes to go up to a certain level that it affects our sales volume.
Thank you management. I have a question for Smithfield Management. In the earlier discussions, you pretty much mentioned that you are positive towards the fresh meat profit outlook in 2020. Do you mind sharing with us the guidance in terms of the unit profit you can achieve for the fresh meat division of Smithfield 2020? Thank you.
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This is Ken Sullivan. I will take that question. I wish I could give you more certainty about per unit profitability forecast, but frankly, it would be irresponsible of me to try and give you exact figures for a forecast, because these markets are so volatile. What I can tell you is this: there is no question that the ASF issue in China is causing great demand out there, and it will alleviate some of the pressures that we have had in fresh pork over the last 18 months.
We are already seeing it in the fourth quarter, and I expect to see it into 2020, all the way through 2020 and perhaps beyond. I think the last thing I would say is that we have invested and are investing in automation in our fresh pork plants and process redesign in our fresh pork plants. I do think that fresh pork will trend in a very positive direction going forward.
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[Non-English content] Thank you for joining our earnings call. Thank you.