Good morning for those participating from the U.S. side, and good evening for those in Hong Kong. Welcome to 2017 third quarter results announcement for WH Group. Allow me to introduce members of our management present. Our CEO, Mr. Guo Lijun. Mr. You Mu, who is responsible for Shuanghui, responsible for Chinese business. We also have Mr. Kenneth Sullivan, who's responsible for Smithfield. He is mainly responsible for our U.S. and European business. Participating over the phone, Mr. Glenn Nunziata from Shuanghui. We also have some senior management staff including Mr. Liu Songtao, Mr. Ma Xiangjie, and Mr. Ying for fresh product. I will hand over the time to Mr. Guo to talk about the performance of WH Group for the third quarter of this year, which will be followed by Q&A. Mr. Guo, please.
Dear investors and analysts, good evening. I'm responsible for introducing to you the performance of WH Group between January and September 2017. For the first quarter of the year, we have enjoyed a growth of 5.7% for hogs produced, reaching 14.98 million. Hogs processed up 9.1%, reaching 39.2 million. Packaged meat external sales volume up by 1.3%, reaching 2.374 million. Revenue $16.285 billion, up 3.2%. We realized EBITDA $1.752 billion, up 5.2%. Operating profit $1.379 billion, up 7.6%. Profit attributable to owners of the company, $779 million, up 5.1%. Basic earnings per share $0.057. I would like to emphasize that the figures I have just announced are before biological asset fair value adjustments. If you look at the different segments of our business, swine business segment, packaged meat took up 52.3% and profit contribution 74.7%. Fresh pork revenue contribution 43.2%, profit contribution 25.7%.
Hog production 2.3% and 7.8% for revenue and profit contribution. If you look at the performance by region, China business takes up 33.5% of revenue and 43.6% for operating profit. U.S. business 59.1% for revenue, 48.6% for operating profit. Europe 7.4% for revenue and 7.8% for operating profit. This year for the first three quarters, we have done work in four areas. We have relied on our value chain and the advantages sustaining stable growth. Our Chinese business continued to improve with strong quarter-on-quarter and year-on-year growth. Our U.S. business delivered steady volume and profit growth in the first three quarters. We have taken the opportunities to complete M&A to complete our global supply chain, expanded our business performance. For the first three quarters, the Chinese business achieved $626 million. For packaged meat, we have reached $528 million in terms of profit.
For fresh pork, $76 million and the operating profit rate 2.3%. Hog production $19 million, operating profit rate 32.2%. Compared to the same period last year, the third quarter would have seen $242 million in terms of operating profit and margin 12.3%. If you look at our overall performance in Q1, the figure was $159 million. Q2, it increased to $200 million, 25.8% increase quarter-on-quarter. Another 21% for Q3. You can see our Chinese business is performing very well with a growth of at least 20%. For our U.S. business, for the first three quarters, we have reached operating profit of $670 million, margin up by 7%. Packaged meat operating profit was $488 million, down by 3.7%. Fresh pork, $276 million, up 17.9%. Hog production, there is a loss of $1 million, and a reduction of loss by $36 million. For our Europe business, we also maintained strong growth momentum.
For the first three quarters, operating profit realized $108 million, up 157%. Packaged meat realized $ 14 million, down by 48.1%. Fresh pork, $3 million, turning around the historical losses for fresh pork. Now we have a surplus. Hog production, $90 million, up 157.1%. If you look at our Chinese, U.S., and Europe business, the first three quarters realized profit growth. Chinese business, compared to the previous period, we have this continuous growth quarter-on-quarter and also year-on-year by at least 20%. U.S. and Europe business operating profit achieved very substantial growth. Looking into our next step, our operating profit and the relevant policies, we will adhere to a globalization strategy. We will develop large networks and achieve great growth. We are going to limit hog production, develop fresh pork business, and focus on expansion of packaged meat business and improve brand value.
We'll leverage complementary advantages and realize synergies, expand our business scope, and diversify into various animal protein as appropriate. That is our group strategy. As for our Chinese business, we will continue to enjoy steady growth and continue to improve our performance. Based on the performance in the first three quarters, we continue to enjoy very good growth, and in Q4, we will continue such a growing trend. We're going to remain low raw material cost with good new product launch with positive effect, new plants going into operation, and we will enhance performance through restructuring of R&D and operations. We will continue to promote process innovation and re-engineering, and sales opportunities during the peak season will present new growth momentum. For U.S. and Europe business, our operating results will continue the strong momentum both in volume and profits. One Smithfield strategy will further drive cost reduction.
Earnings Improvement and Growth Plan will remain an important measure for further profit enhancement. We'll enhance business scale in Europe through acquiring new capacity. Dear investors and analysts, WH Group performance for the first three quarters has come to an end. We welcome your questions.
Thank you, Mr. Guo. We'll now proceed to the Q&A.
[Non-English content] Second question, because I think Mr. Guo just mentioned the outlook for U.S. fourth quarter. Excuse me, can you hear me?
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Oh, okay. Sure. The second question is about U.S. fourth quarter outlook, because I think Mr. Guo just mentioned we're looking for volume and profit to go up continually in fourth quarter. But given the fresh pork has a really high comp from fourth quarter last year, especially we are looking at the hog price trend in U.S. is continue coming down. What is the fair kind of outlook for the segment profit in fourth quarter for both fresh pork and hog production? Thanks.
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Allow me to answer your previous question for the Chinese business. For the first three quarters, I would like to provide the following breakdown figures for fresh meat external sales volume, it reached 1.09 million tons, year-on-year growth of 11.9%.
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For packaged meat business, we realized sales volume of 1.188 million tons, a fall of 1.1%.
Okay, Ken, you can take the second question, which is about the Q4 outlook for the fresh pork business.
Okay. Hello, this is Ken Sullivan. I'm not sure I understood the question or heard the question very clearly, but I think it's about the fourth quarter outlook for fresh pork. What I can tell you about the fourth quarter is we really don't expect much different than what we have historically, which is seasonally we have low hog prices in the fourth quarter and fresh pork is typically our best quarter for fresh pork. With that said, we do have new plants that have come online in the United States. We have two major new plants and even third that's operating, and I do think that's having some impact. We've certainly seen it over the last month or so on higher hog prices. Typically at this time of year, you would see a fall in hog price.
We do have higher prices than we had last year, higher live hog prices than we had last year. I think you could see some economics shifting between the live production side and the fresh meat side. I still expect the fourth quarter to be seasonally a good quarter for fresh pork, but I do think you could see some shifting of those economics. Frankly, it's still shaking out the new hogs and the new shackle space that have come online are impacting the markets. We'll just have to see as we move through the balance of the quarter here, exactly how much shifts between the farms and the fresh pork side.
Okay, thanks, Ken.
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[Non-English content] The third question is about Smithfield. We notice that over the past few quarters on the packing side, U.S. is actually seeing some margin erosion. Going in the fourth quarter, what's our outlook for the packaged meat margin on a year-on-year basis? Thank you.
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I would like to interpret the first question asked about Shuanghui's development. For the first three quarters, the packaged meat business in terms of volume, there's a drop of one point. For the whole year, are you still hopeful that you can achieve the single-digit growth? The answer offered was, for Q3, we have already turned around the sales situation, and we feel fairly confident in general that we can achieve the annual target.
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The second question was concerning the third quarter operating profit. We see a rather substantial drop. Is it caused by the government subsidy level? The answer offered by the CFO of Shuanghui was, yes, we do see a decline for the operating profit level for the n on-operating profit for the third quarter, and that is indeed caused by the drop in government subsidy. Because there is a time lag in terms of the realization timetable of government subsidies, and the shortfall is around CNY 80 million compared to last year.
Okay, Ken or Glenn, you can take the third question, which is about the outlook for packaged meat business.
Sure. This is Ken. I'll answer that question. Again, I'm having a little bit difficulty hearing the question, but I think it was about has there been margin erosion in packaged meat in the U.S. business. What I would tell you is fundamentally, there is no change, if you will. With that said, though, it has been a challenge this year in one product category, and that has been our bacon product category. Belly prices have been very high this year. I think on a year-to-date basis, they're up over 30% over last year, and in the third quarter alone is up about 57%. The raw material for our bacon category are bellies, and those have been very high priced this year. It has placed margin pressure in that particular product category. We sell a lot of bacon.
That is the impact that you're seeing this year. I would tell you that's not a permanent shift. It's not a fundamental shift. That is purely market driven. We price our bacon based off of formulas and a trailing look back at the markets. Sometimes that works for you, and sometimes it works against you. In this context where we had rapidly rising belly prices, it worked against us. If you look at all the other product categories, we're either maintaining the margin or up. In some cases, our margins are up very nicely, including in sausage in the third quarter. The bottom line is that erosion that you see is directly attributable to the bacon business. I see that more positively going forward. I think our packaged meats group will have a good fourth quarter to finish out the year .
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[Non-English content] The first one about U.S. is about acquisition. There was a few acquisitions for the Smithfield in Europe. Do you expect that there will be a stronger growth of European business looking forward in 2018 with acquisition? Is there any color you can share with us regarding the European acquisition? The second question regarding Smithfield is about cash flow. We remember that in the first half result that operating cash flow of WH Group fell 85% year-over-year, mainly due in the U.S. tax difference and also high inventory in U.S. Are there any changes in the operating cash flow? Is that operating cash flow in Smithfield turn positive? Or WH the whole group operating cash flow turn positive year-over-year growth in third quarter alone? Thank you.
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To answer the first question about the Chinese business in terms of the new products for third quarter, what is the contribution in terms of sales and also profit margin? Are they performing better than some of your traditional products? The answer of it was, for the packaged meat business and the contribution in Q3, we can see that the volume of sales continues to improved, but the profit contribution may be still on the lower side compared to the traditional products. Because at the beginning of the product launch, normally a lot of expenses will go into promotions. For the Q3 performance or contribution level, our company has done a lot of structural adjustment and they are showing gradual impacts.
We believe that the performance in terms of profit for our new products, they may not seem particularly high at the beginning, because we have invested heavily into the promotion of such new products. We are confident that many of our new products are very promising. They have received very good response from the market, and they will continue to provide greater and greater contribution in terms of the performance in 2018.
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There was a follow-up question. The profit changes, is it caused by the cyclical changes of hog prices and not because of the launch of new products? The answer of it was concerning the enhancement of our scale of business. The fee level in general will be reduced over time. The second factor is about our cost control measures. As you know, the hog prices were rather high in the first half of the year, leading to very high level of cost. After we have entered Q3, the cost level has gradually come down, and that will provide positive impact on the profit growth momentum. As I have said, we have not seen very high level of contribution from new products because we are mainly investing into these new products at the preliminary stage. Afterwards, we believe that the administrative cost and other expenses will gradually come down. Thank you.
Ken, can you first take the question about the Europe M&A and the expectation for in 2018? For the third question about the cash flow, I think, Glenn, I will let Gordon to answer the overall cash flow perspective first, and will let you answer from the U.S. perspective.
Okay, Luis. Are you ready to get the answer on Europe? Okay. You're right. We have announced an acquisition in Europe over the last four or five months. In one word, it's about growth. I'm going to pause for translation because I'm aware that I probably am speaking too long for it to be translated. The bottom line is that our acquisitions in Europe are about growth and I'll expand more after you translate.
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We didn't really acquire businesses. We acquired assets. We acquired four new plants, and I'll explain that here in a moment.
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We acquired a beautiful new packaged meats or processed meat plant. We acquired a semi-processed plant. We acquired a chicken plant that is in the process of still being constructed. We've acquired, for now, a position in a fresh meat plant.
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These plants are beautiful new plants, but they are underutilized. We are in need of—
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—in our European business, we have grown so much that we are nearing the end of our capacity. Acquiring these new plants presents us the opportunity for growth in all stages of our business.
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We're a vertically integrated company in Poland and in Romania. It allows us to expand our package capacity, it allows us to expand our live production, which has been very profitable in Europe. It allows us to further expand our poultry business. It will improve our fresh pork margins, in that, the plant we acquired is a newer modern plant.
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These plants represent a really a two- to four- year plan for us to grow the business.
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That's all.
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Concerning the cash flow situation in the first three quarters, there is a drop of $213 million and there are three reasons. The first one is because of the increasing inventory cost, leading to a higher volume.
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The second reason is due to the higher occupation of our assets, especially because of the acquisition activities leading to higher levels of fees.
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You are referring to receivables, yes.
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The third reason, last year there were certain loans from the U.S. shareholders leading to an impact on the tax payable level, and this year we no longer have this impact.
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Looking into the future, with higher level of profit and expansion of our scale and also the contribution coming from our M&A project, we believe there will be a very positive improvement of the cash level.
Okay, Glenn, if you have anything to add about the U.S., you can add on some comments.
Sure, Luis, and thanks, Gordon, for that introduction and summary. Gordon is correct, those were the primary specific drivers of the consolidated cash levels. I guess I just wanted to quickly highlight the trend in the U.S. on cash flows. I'll pause there for translation.
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In the U.S., what we're seeing in 2017 is very consistent with what we've seen over the last two, three, and four years, where we begin with negative operating cash flows in the first quarter and a very upward trend from Q1 through Q4, whereas, whereby the Q4 operating cash flows over the last two to three years have been anywhere between $600 million and $750 million.
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Gordon is right. Fluctuations in market prices and raw materials will absolutely impact operating cash flows in the U.S., but overall the trend this year is consistent with previous years.
We expect a good fourth quarter from an earnings perspective, and therefore we expect a good fourth quarter from a cash flow from operating activities perspective.
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[Non-English content] The last question is about U.S. hog production business. I understand, Ken, you have talked about the dynamic relationship between hog production and fresh pork in the fourth quarter, but I will presume that for the hog production, majority of the profits should be already hedged for the fourth quarter at this current juncture. How should we think about the full year hog production business profits for Smithfield? What do you see the hog price trend for next year?
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The first question was about the profit level dropping by 22.5% in Q3. Is there any room for improvement in Q4? What about the performance for the year-on-year and quarter-on-quarter performance? The answer given was, concerning packaged meat profit margin, we will expect, we see growth in year-on-year comparison and quarter-on-quarter comparison, because of the expansion of our scale and also the lowering of our cost. The second half of last year, we have adjusted upward the prices of some of our products, and that is also another cause leading to the performance of the profit margin. Overall speaking, the margin level for Q3 will continue to grow. Looking forward into Q4, we believe that we can at least maintain the same level or even have some slight improvement, because the raw materials impact, and also there's a slight decrease of the price of the raw materials.
We have also done some restructuring of our products, the overall Q4 performance should be slightly better than the Q3 performance. The second question was about hog production. The profit level for this segment was quite positive. What are the reasons? What is the level for Q4 for this segment of business? The answer of it was, we have seen very positive performance of the hog production segment, and that is because rather low hog prices during the period, and also the expansion of scale, therefore diluting the overall processing fee for our products. We believe that for Q4, we can maintain steady growth for both our scale and also the operating profit level. Overall speaking, we expect growth for both fresh pork business and also packaged meat business.
Okay. Ken, you can take the question on U.S.
Okay. I'm going to attempt to answer it. Excuse me, but I'm having a little bit difficulty hearing the question. Let me answer the part that I think I did hear clearly, which is the outlook for live production next year. As we stand today, it looks like we'll have a loss in live production for 2016 and 2017 but 2018, based on the futures markets today anyway, looks like we will not have losses next year.
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Predicting price levels is always a very tricky business. I would tell you that as I look forward to 2018, I think the idea that we've got more shackle space, meaning more plants online, it should be bullish for hog prices.
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We're a vertically integrated.
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We're a vertically integrated company. We're raising 50% of the hogs that we process. If indeed there is a shift, we should see the benefit of some of that shift.
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Forecasting or projecting—
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Forecasting or projecting absolute profit level is very difficult to do, and I don't think it serves anybody well to try and do that.
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I think there was also a question about the fourth quarter, but I'm not sure what it was.
Yes.
Andy, do you hear it?
Yes. For the fourth quarter, I think for hog production business, I presume at this time conjuncture, pretty much of the quarter should be already hedged or the profit should be already secured. How do we see, I mean how much less loss-making are we seeing for the fourth quarter? It looks like it should be less loss compared to last year, right?
Well, remember, hedging is a dynamic thing, meaning we're always actively making decisions around hedging, whether to increase our position or lighten our position. This year is no different in the fourth quarter. I would just tell you that typically in the fourth quarter we lost, we will lose money in the fourth quarter. I would tell you at this point on a per head basis, that looks like it could be anywhere from, let's call it, $12-$20 a head. In other words, the final chapter is yet to be written. We're obviously just one month into the fourth quarter, we've got two more months. I think it's on that order of magnitude where it may be anywhere from $50 million-$70 million, I think.
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The overall picture, of course, again, as an integrated company is I'm expecting a reasonably good fourth quarter.
Ken, can you say that again? We can't hear very clearly.
I just said from an overall integrated company standpoint, leaving aside the specific segments, I'm expecting a reasonably good fourth quarter.