WH Group Ltd
HKEX:288
Earnings Call Analysis
Q3-2023 Analysis
WH Group Ltd
As we reflect on the first nine months of 2023, it becomes clear that the company navigated a challenging macroenvironment. The slowing economy and increased rail risks have exerted significant pressure on operations. However, despite not achieving enviable results and facing substantial challenges, the company sold 2.38 million metric tons of packaged meat and 2.96 million metric tons of pork. With revenues reaching $19.5 billion and EBITDA at $1.6 billion, it's crucial to acknowledge the 36.4% year-over-year decline in operating profit, landing at $1.04 billion, and a 37.7% decrease in net profit attributable to owners at $569 million, translating to a basic earnings per share of USD 4.43. The resilience is particularly evident in the packaged meat sector, which remains the core operation and primary source of profit, contributing 51% of revenue and a staggering 146% of operating profits.
Geographically, China has been a beacon of stability, contributing 34.6% to revenue and 75% to operating profits, manifesting moderate growth. The U.S. operation, however, tells a story of underperformance, particularly in the production business, contributing 53% of revenue but only 11.7% to operating profits—a stark contrast to its potential. European operations are on a growth trajectory with 12.7% of revenue and 13% of operating profits, demonstrating that diversification across continents yields mixed outcomes.
The pork business endured losses, notably a $430 million setback, accounting for 41% of revenue. Amid these headwinds, the third-quarter fresh pork volume rose by 6.1%, reflecting a business capable of output growth even when facing profitability struggles. This detail underscores the specific nature of the U.S. challenges where stark discrepancies within operations exist—the packaged meat business is thriving, fresh pork is holding average performance, but hog production endures difficulties necessitating decisive reform or even divesture.
The packaged meats division experienced an 8% decline in U.S. sales volume with a notable exception for Saratoga's absence, trimmed to a 4% drop. Despite the reduction, margins remained robust with a third-quarter profit of approximately $650 per ton, aligned with the previous year, and year-to-date metrics showing a 10% improvement. However, unexpected shifts like a 96% spike in belly prices created temporary margin pressure, a situation anticipated to recover as prices stabilize. Executives express satisfaction with the packaged meats performance and optimism for the fourth quarter and beyond. The forecast suggests a trough in profitability metrics for Q3 but anticipates a rebound in Q4, despite typically lower metrics due to holiday ham shipments.
For the future, the company aims to leverage its strengths, particularly in scaling and intelligent manufacturing, to both consolidate global resources and capitalize on synergies. This is anticipated to bolster the leading market position and ensure sustainable growth. In terms of dividend policy, the pledge is to maintain at least a 30% net profit payout ratio, with the real delivery often exceeding that benchmark—assuring investors of the firm's commitment to shareholder returns.
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Good evening, and welcome to attend the earnings release for the 9 months of 2020. The management will walk through financial summary, business review as well as [indiscernible] review. So beginning today's meeting, we have Chairman Lijun Guo of [indiscernible], Executive decapage Mr. [indiscernible] Executive Director as well as President of Shanghai a CFO of [indiscernible] , Mr. Leo; Shane Smith, CEO of Smithfield; Mark Hall, CFO of isos, Leena Union, CFO of [indiscernible] this is Robert in CEO, Mr. Go will work out the financial as well as business overview. Good evening. Now I will walk you through the performance of the first 9 months of 2023. So we have faced a very complex macro market environments, including some rail risks, slowing down economy, which has put a lot of pressure on our operations. And we have achieved -- we have not achieved deniable results, and we have put a lot of challenges. In the first 9 months, our package meat sold was 2.38 million metric tons. Work sold volume was 2.96 million metric tons. Revenue was $19.5 billion. EBITDA was $1.6 billion. Operating profits $1.04 billion, which is 36.4% year-over-year decline, profitable attributable to the owners of the company was $569 million, declined by 37.7%. Basic earnings per share was USD 4.43. In the packaged meat business, package witnesses our core operation and the major source of our profits. In first 9 months of 2023, package meat contributed to 51% of our revenue and 146% of our operating profits. Our pork business has incurred some losses, which contributed to 41% of our revenue and the last $430 million. Now from a geographic breakdown prospective, China contributed to 34.6% of revenue and 75% of our operating carpets. US Operation contributed to 53% of revenue and 11.7% of its opening project. European operation was 12.7% of revenue and 13% of operating profit. China business was very stable and continue to achieve growth. In the U.S. operation, we had underperformance primarily due to our production business. European business has achieved a meaningful growth in the first 9 months. In the first 3 quarters of 2023, Hawk prices in China were at low levels in terms of sufficient park supplies. In the U.S., the demand, there's growing and oversupply of meat protein caused low hog prices. In Europe, hog supply declined due to sharp costs and ASF driving a sharp increase in hog prices. The number of slaughter hogs in China increased about 3.3% year-over-year to 537 million hogs in the first through quarters of 2023. The number of slaughter hogs in the U.S. increased by 1.4% to 94.1 hogs million in the first 3 quarters of [ 2022 ]. Average hog price in time in the first 3 quarters was CNY 15.42 per kilogram. In the U.S., the hog price was $1.4 per kilogram. In Europe, the average hog price was EUR 1.7-something bill brand. In the first 9 months, China operation achieved operating profit of $788 million. Packaged meats achieved $695 million. Pork increase -- it resulted in profit of $59 million. I want to point a note that renminbi depreciated by 6% in the first 9 months. So our profits actually all interest in renminbi terms, but there were some decline after we translated into U.S. dollars. In the U.S., the operating profit was $122 million, decreased by 84%. The package meat increased by 2.7% to $765 million. In pork, the loss was $551 million. It's a significant as a significant decrease in the project or a significant increase in loss.
In Europe, the operating profit was $137 million package mix contributed to $70 million. It decreased by 5%. Pork has a profit of $61 million, which is a $79 million interest compared to same period last year. In the future, Group will continue to consolidate our global resources as due to the adjusted price improvements and control cost business philosophy, leveraging our strength in industrialization, scale and [indiscernible], upward intelligent manufacturing, automation and digital agent and maximize internal synergies to maintain our leading market position and achieve sustainable given. So that's all for the first 9 months. [Foreign Language]
So there are 2 questions from launching of Bank of America. The first question is about the China's packaged meat business. Apparently, the outlook for the pulp prices was lower than we had previously expected. And given the depressed hog prices how will that impact the outlook for the package mix profit in the fourth quarter? And also, what's the management outlook for hog prices in the fourth quarter? And second question relates to Smithfield. There's a lot of media reports about the potential spin-off IPO of Smithfield, does -- can management of the WH Group make some comments with respect to these media reports? And if there are any news or information that could be shared with investors.
[Foreign Language] So with respect to the outlook of hog prices in China because there's a large amount of capital invested into this industry recently in China as well as the continuous industrialization of hog production in China, there is a lot of supply the hogs. So the hog prices was lower than we had expected. For the fourth quarter, we expect the hog prices may slightly rebound, but will not increased significantly. This is primarily driven by holidays. And also given the current status of the sow inventory, we do not believe the hot prices will jump significantly in 2024.
[Foreign Language]
With respect to the outlook of package mix profits in the third quarter, we have achieved a profit of CNY 4,300 per ton, and we expect the profit will continue to maintain about CNY 4,000 per ton in the fourth quarter. That's because at the beginning of the year, we had expected the hog prices may increase in China. So we have adopted measures to hedge against the potential price increase of hog raw materials. So that's why we can maintain good profitability. And also because -- and our packaged meat profitability will not and even the potential increase in the fourth quarter of the hog prices may not necessarily immediately translate to a decrease of our packaged meats profits because our inventories because of the raw materials we use are not necessarily the hogs in the same quarter. So we have taken measures to hedge against the increase in hog prices.
[Foreign Language] We have received a lot of -- with respect to your second question on the potential spin-off of IPO of Smithfield, we have recently received a lot of paces from the investment banks. We have received a lot of good ideas, but we do not have a detailed plan or a timetable. We are still evaluating and deliberating.
[Foreign Language]
And once we have a good and concrete plan for the IPO, we will make a proper announcement to the public.
[Foreign Language]
Three questions from Lilian of Morgan Stanley. The first question is on China's fresh pork business. So apparently, the third quarter sales volume of fresh forecast decreased. Is it because of our strategy or due to other reasons. And as mentioned previously, we expect a moderate or slight increase in pork prices in China in the fourth quarter.
So how will that impact the slaughtering volume as well as the profits for the fourth quarter because the fourth quarter profit of slaughtering fresh book in 2022 was fairly high. The second question pertains to the U.S. business. The package mix business in the U.S., the profitability apparently has decreased most over months. It's quite significant. There are also decreased year-over-year. Is it because of seasonality or other reasons?
So what's the outlook for fourth quarter of the packaged meat to profitability in the U.S.? And thirdly, as Chairman has commented earlier on the that on the Smithfield news, there's no timetable for Smithfield IPO, yes. but what is the company's or WH Group's overall and long-term view of Smithfields in the overall group, what's the position of Smithfields fields in the company's long-term strategy?
[Foreign Language] So this is a [indiscernible] of Chango. On the first question on China's fresh pork business. Mr. Ma wanted to clarify that the fresh bulk sales volume in the third quarter actually increased by 6.1%. And when you say decline, you are probably referring to the revenue. That's because of the decline in the hog prices, in pork prices because last year, at the peak, the port prices was CNY 29 per kg, but this year, it's only CNY 16 on average. [Foreign Language]
In the first 9 months, our slaughtering volume increased by 14%. We expect in the fourth quarter, we'll continue to have double-digit growth in the slaughtering volume and may potentially even be higher than the growth in the first 9 months.
[Foreign Language] So in terms of profitability for brush business, in the last -- in the fourth quarter of last year because we had some low-cost inventory in the frozen products, in the frozen pork products. And the prices of our selling products are relatively high. So we had pretty good profits on the frozen products. And also because last year, the overall trend of the pork price was declining is favorable to our fresh products or the product sales. So that slide in the fourth quarter of 2022, the profit for both our frozen and chilled products has been pretty good. But this year, because the ore process has been consistently low and depressed. So it is both frozen product as well as fresh pork products. So we expect the profit in fresh pork for the fourth quarter will decline compared to the same period last year.
[Foreign Language]
Just to clarify that the third quarter fresh porCNY volume increased by 6.1%.
[Foreign Language] So Chairman wanted to respond to your questions about our U.S. business. In the first 9 months of this year, the overall performance of Davis Group is not ideal. And we have a decline in profits, which has been quite -- the decline has been quite significant. [Foreign Language]
And the main reason was the driver of the decrease in profitability in our U.S. operation. [Foreign Language] Our China business has a fairly stable and healthy growth and the European operation performed even better in China, the profit increased by 6% in the RMB terms and 1.7% in U.S. dollar. [Foreign Language] The operating profit in U.S. decreased by more than 80%. If we look at net profit, it could be even worse. [Foreign Language] But there's a huge divert in the performance of our -- within our U.S. operation. The package mid business has performed very well, the hot production performed very poorly. The fresh pork business point had a sort of an average performance. [Foreign Language] So we'll continue to reform and improve our U.S. operation, we will expand and continue to invest in the package meat. [Foreign Language]
We have invested a significant amount of capital into production over the past few years, but it has been consistently high consistent high cost and poor performance. [Foreign Language] So we will -- we are determined to reform the our production business, reduce capacity or even considering potential assets or may say. So we will hope to believe from ourselves from the burden of our production.
[Foreign Language] The fresh pork business is reasonably okay and put the [indiscernible] achieved meaningful improvement after we made changes in the management team. we will continue to upgrade the business, continue to increase the level of automation and industrialization and hope to continue to improve its performance.
[Foreign Language] Our fresh pork business remains the largest in the world, and we will strengthen the business through continuous optimization. [Foreign Language] With respect to the IPO news reports of Smithfield as mentioned earlier, we do not have concrete plans or account tables yet. Once we have a good structure, a good plan, we will make announcements accordingly. [Foreign Language]
Go ahead. Go ahead.
Yes, I'll go back to the second question was about -- which was about the U.S. packaged meats business volume and margins. So our sales volume was down about 25 million kilograms, which is about 8%, but you have to keep in mind, that takes -- that includes Saratoga, which was the spice company that we had that we sold last year. Excluding Saratoga, our sales volume was only down about 4% from the prior year third quarter. And for the quarter-to-date period, our branded retail deli sales volume for industry categories was down 2%, and this outperformed the broader U.S. packaged meats industry, which fell 3% during the quarter. And if you look at those same metrics on a year-to-date period, our branded retail Deli Sales volume was down about 4%, which is really in line with the broader U.S. packaged meats industry, and that's really driven by changes in [indiscernible] [Foreign Language] When you think about the margins that we were able to generate in Q3, we saw profit again of about $650 a ton and that's all with Q3 of last year. on a year-to-date period about $830 a metric ton, which is about 10% higher than we saw in Q3 of last year. But a significant portion of our bacon business is on a lag in pricing formula and that's actually priced weeks in advance of the production window.
So we did see belly prices spiked by about 96% from $85 a 0 rate in the second period. in our pricing on the formula just didn't keep pace with the charters. And so we saw a point in time where we saw a decrease in profitability. But that has since begun to recover as those prices have declined from the summer search. Will we do expect to see healthy margins in this category for the rest of the year?
[Foreign Language]
So overall, I would tell you, we're extremely pleased with the results from our packaged meats business and the performance of our packaged base business. We feel that our portfolio allows the consumer to move up and down between branded and private label. It keeps them in our overall offering. We're really excited about the fourth quarter and the future growth of that business. [Foreign Language]
next question is from Jefferies.
The first question pertains to the U.S. package mix business. As a follow-up to his comment earlier, can we understand, interpret your comments that the third quarter of this year should be a trough, in terms of profitability for package mix. Are we expecting the per ton profit to rebound in the fourth quarter of 2023? And second question relates to Chairman's comments earlier on the pork production business. Chairman mentioned the facility of exiting from the business. But in the past, the management has commented that the plan is to reduce the capacity from 70 million hogs past to 50 million hogs this year. So what's the progress in the capacity reduction? Or is the company exploring a more aggressive approach in the reduction? [Foreign Language] So with respect to your question on cost production, number one, we are for hog production. Number one -- for hog production, we will look to reduce the capacity. And number two, if the conditions are mature, or are appropriate we will consider exits completely, entirely or possibly depending on which structure will help us maximize the profits of the business. There are different alternatives and options we are evaluating.
[Foreign Language] The question is that if we were to exit from the -- or scene of the production business, what would be the net asset value of this business. The responses that we don't have the exact numbers at this point because we are evaluating different options to speak.
[Foreign Language] So we were to exit from the production where we will look to sell them instead of just closing them down. [Foreign Language]
With regards -- this is Mark Hall. With regards to the packaging margins, I would say that, yes, the third quarter will be the low point in terms of profitability per metric ton for the packaged meats business. And again, as Shane indicated, it was really a very strong quarter and would have been stronger if not for the 96% run-up in belly prices during the quarter. We see margins rebounding in the fourth quarter, but keep in mind that seasonally, the fourth quarter from a profit per metric ton basis isn't typically as strong as the first half of the year because there's a high volume of holiday ham shipments that go on during the fourth quarter of the year. But as far as the full year on a metric ton basis, we're sticking with our past statement that the packaged meats business will deliver between $750 and $800 per metric ton.
[Foreign Language] The second question is about the U.S. What's our outlook of the whole hog and pork prices of the U.S. next year. And also, can you give us some color on the volume growth of packaged mid next year? [Foreign Language]
So 3 questions from CICC. The first on China's packaged meat business. So the third quarter profit per metric ton was CNY 4,000 -- CNY 4,300, which has a significant quarter-over-quarter increase. How much of this is driven by increasing prices, how much of this driven by the decrease in the raw material costs. Management commented earlier that Zhongli has increased the price for some products. Can you explain the scope and the magnitude of the price increase?
And second question on the U.S., what's the management's outlook for the hog and pork prices for 2024 and the outlook for the package mix volume of 2024. And third question for WH Group, is there any plan to increase the dividend payout ratio in the future? [Foreign Language]
So on the package mix products profit in the third quarter, the quarter-over-quarter increase was $250 million. If we break down that $250 million, $100 million is driven by increase in selling prices. $100 million is driven by the decrease of raw material and ingredient costs and $50 million is driven by our improvements in the manufacturing process. And with respect to the increase of our products, the increased of the price of our products. One, in the scope is around 1/3 of our packaged meat products. The magnitude of the increase on average was 3%. So if you spread out that to the entire package mix operation, it's a 1% increase in the selling prices. [Foreign Language]
So when we look at the old production outlook, we anticipate when we see processing in Q4, that will continue on their seasonal decline and remain well below 2022. We do anticipate the raising costs will continue to trend lower in Q4. We'll begin to see the benefit of the reform measures and lower grain prices. Hog sale prices on a lag basis, we expect them to be in the $57 and $100 rate.
That's down about $10 a hundredweight from what we saw in Q4 of 2022. And on a raising cost basis, we're exporting corn on a Fed grain basis to fall below $6.20 a bushel in Q4. So that would be about 15% below what we saw on a year-to-date basis in '23. And when you think about soybean mill across that same time period, we expect that to fall somewhere around $460 a ton from a year-to-date price above that's about $485 a ton. [Foreign Language]
In the fresh pork side of the business, we do expect net values to trend seasonally lower as we move through the fourth quarter, that may pressure our profitability. But with higher market auto numbers coming in, actually higher than anticipated, hog costs, again, we're forecasting to move lower, which will be supportive of the spread in comparison to the prior year. USDA projected about a 1% increase in 2023 porCNY production from 2022. And that's expected to put -- or continue to keep some downward pressure on the USDA Cartus cut out. But we do think higher prices will offset some weakening need values and be beneficial to the overall spread. [Foreign Language]
With respect to the dividend payout ratio, our policy has always been no less than 30% of the net profits of the year. But usually, in practice, we have achieved a higher dividend payout ratio. So as we continue -- as our business continues to grow, the cash flow continue to improve, we expect to continue to pay the dividends higher than our policy ratio of 30%.
[Foreign Language]
And for the insight and marketing, you also share with us the price loop of hog in pork in the U.S. 2024.
The outlook for price
Sure. So this is Lane. The expectation is for an overall reduction in the sale of about 1% to 3% in the industry for next year. And it takes time for that to work through the industry, but that is the expectation, which would be supportive of higher prices for both hog and meat values.
[Foreign Language] Okay. And what about the demand side, what's our value growth outlook of package made business in 2024?
Yes. So the outlook for packaged meats growth is volume of about 1%. And really for packaged meats, it's about the continuing shift in terms of our mix of products skewing more to the higher-end value-added products, whether it's smoked sausage, dry sausage, cook bacon, et cetera. So really margining up from that perspective.
[Foreign Language] Today's meeting has concluded. Thank you for your participation. Thank you.
Thank you.