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Edited Transcript of 288.HK earnings conference call or presentation 24-Mar-20 12:00pm GMT

Full Year 2019 WH Group Ltd Earnings Call (Chinese, English)

Henan Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of WH Group Ltd earnings conference call or presentation Tuesday, March 24, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth Marc Sullivan

WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods

* Lijun Guo

WH Group Limited - CFO, Executive VP & Executive Director

* Luis Chein

WH Group Limited - Group Director and Head of IR

* Xiangjie Ma

WH Group Limited - President of Shuanghui Development & Executive Director

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Conference Call Participants

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* Lincoln Kong

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Luis Chein, WH Group Limited - Group Director and Head of IR [1]

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[Interpreted] Dear, analyst and investors, good evening. And friends from U.S. and Europe, good morning. Thank you very much for participating in the 2019 annual results announcement briefing for analysts offered by WH Group. We have the telephone conference and also broadcast on the Internet. I'd like to remind you, if you are calling in, you can use the Internet next time because at the same time, you can see our presentation materials.

Allow me to introduce to you who are present today. First of all, our Chairman and CEO of the Group, Mr. Long Wan. And then we have Executive Director, Executive VP and CFO, Mr. Lijun Guo; and then we have Mr. Xiangjie Ma, our Executive Director and President of Shuanghui Development; and Executive Director, President and CEO, Mr. Kenneth Sullivan. Other members of the management include Shuanghui CFO, Mr. Songtao Liu; and then Mr. Hongjian Wan; and from Smithfield Mr. Glenn Nunziata and Dhamu Thamodaran and myself, Luis Chein.

I'm going to pass the time to Mr. Guo to take us through 2019 financial performance, which will be followed by Q&A.

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [2]

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[Interpreted] Dear investors and analysts, good evening. I'm going to take you through the performance highlights of WH Group. For the year 2019, hogs produced 21 million, up 4.1%; hogs processed 53 million, down by 4.1%; packaged meats sold 3.34 million, down by 0.5%. Revenue realized $24.1 billion, up 6.6%. EBITDA realized $2.67 billion, up by 26.8%; operating profit, $2.031 billion, up 23.1%. Profit before tax $1.946 billion, up 25.6%; profit attributable to owners of the company $1.378 billion, up 31.7%.

Basic earnings per share USD 0.0937, up 31.4%. Because of the good performance of the company and strong cash flow, after considering a number of factors, the Board has proposed a dividend of HKD 0.265, together with the interim dividend, the total for the year should be HKD 0.315, which is an increase of 58%. It will be released after being endorsed by the Board.

As a leading consumer product company, packaged meat segment has always been our core, and this segment has contributed 51.2% to our revenue and 77.5% to our operating profit. Fresh pork contribution 41.8% and 19.8%, respectively. Hog production contribution 3.9% and 8.2%, respectively.

If you look at different regions, China contribution 36.3% to revenue and 47.1% for operating profit; U.S. contribution 54.6% and 45.9%, respectively. Europe contribution 9.1% and 7%, respectively.

The company has maintained a sound financial position with ample cash flow since its listing. Shareholder return continues to increase. For 2019, operating cash flow $1.463 billion, which is $208 million increase. CapEx $703 million, a drop of $108 million compared to 2018. Our dividend payout $594 million, which is 217 million increase or 58% more compared to previous year. Interest-bearing liabilities has been coming down. 2019, the figure was $3.092 billion, and the total equity ratio of 32.7%.

2019 witnessed great political and economic uncertainties and industry fluctuations. The group faced 3 major challenges, including international trade disputes, ASF and significant increase in cost. In the U.S., the pork supply increased, while trade dispute affected exports. In China, the pork shortage led to rising prices. In Poland and Romania, hog prices increased while exports were affected by ASF. Our group leverage is advantageous in terms of global resources, scale, integrated business model and management boosted synergies and effectively addressed these challenges.

As a result, the company achieved satisfactory operating results with both revenue and net profit hitting record highs, opening up a new prospect from development. Because of ASF impact, number of slaughterhouse in China fell 21.6% to 544 million heads. Number of or the hog price CNY 21.2 per kilogram, an increase of 63.3%. In the U.S., number of slaughterhouse increased by 4.3% to 129 million heads. Average hog price during the year was USD 1.12 per kilo, an increase of 3.7%.

In 2019, facing a number of unfavorable factors, including ongoing trade disputes, ASF, cost inflation as well as the increase in meat supply in the U.S., WH Group proactively adjusted its business strategy, leveraged advantages of its vertically integrated business model and diversified geographic presence and further boosted synergies. Its operating performance continued to improve. Total revenue increased by 6.6% for the whole year and 14.8% increase for the quarter. Profit attributable to owners of the group for the whole year increase was 31.7%, Q4 increased 92.4%.

Operating profit for China for the whole year increase of 4.6%, for Q4 increase was 19.2%. Hello? And our U.S. business operating profit increase of 53% the whole year. For Q4, increase of 106.2%.

WH Group has achieved stable growth since its listing. With its operating performance hitting a record high in 2019, which highlights the group's advantages and the resilient capabilities. Between 2014 and '19, revenue CAGR growth reached 1.6%; operating profit CAGR growth of 4.7%; net profit CAGR growth of 11.3%; profit attributable to owners of the group, CAGR growth of 13.3%.

Concerning China business in 2019, we seized market opportunities, eased cost pressure and achieved stable development. First of all, we proactively presented ASF and adopted effective inventory strategy for fresh pork business, both revenue and profitability of the segment hit record highs. We developed new products and optimized product mix for packaged meat business, adjust the price to assort substantial cost increases.

Thirdly, we fully promoted process innovation and technological innovation to effectively ease cost pressure. Off three, we enhanced efficiency by improving management adopted innovative marketing approach to launch new products.

In 2019, Shuanghui business realized operating profit and margin $957 million, which represents an increase of 3.8% year-on-year, among which packaged meat reached $673 million, a drop of 5.5%; fresh pork $262 million, up 46.4%; hog production, a loss of $13 million.

For U.S. and Europe, we significantly improved our performance by optimizing operations. U.S. package meats business achieved record earnings for the fifth consecutive year with continuous improvement in product mix.

As for our hog production business in the U.S. and Europe, we substantially improved due to the effective hedging strategies and ASF prevention measures.

Thirdly, we further had deepened synergies and expanded exports to enhance the profitability of the U.S. fresh meat business. For 2019, we see a growth of 30% for export volume and 2.3x growth for export to China. It effectively enhanced our profitability. We improved management capabilities by leveraging furnaces of new management team, promoted integration of the newly acquired businesses to increase production capacity.

In 2018 and '19, we have done some investment restructuring. And by 2020, we will be able to realize new capacity. For U.S. business, 2019, we realized operating profit of $932 million, up 51%, among which packaged meat realized $847 million, up 7.9%; fresh pork $150 million, up by 212%; hog production $83 million, up $230 million.

For Europe, operating profit $142 million, up 25% since event. Packaged meat $54 million, up 8%; fresh pork a loss of $9 million; hog production $97 million realized, up 234%.

For our outlook and strategies, as there are many uncertainties ahead, which may impact the development of the group, such as global economic trends, geopolitical conflicts, trade situations and ASF in 2020. In addition, the novel coronavirus has created a new threat.

Signing of Phase 1 of the China-U. S. trade agreement is conducive to U.S. exports and further expands our collaborative abilities. WH Group is committed to giving for play to the group's global competitive advantages, seizing opportunities that result from global changes and industry integration to prevent risks, consolidate its leading position in the industry and ensure the sustainable development of the group.

In China, we commit to our strategy of launching new products, optimizing our product portfolio towards cooking ingredients, maintaining a stable share in the packaged meat segment and improving sales management to meet market challenges. Take the integration of meat industry as an opportunity to increase market share in fresh pork business. We'll further expand meat imports to boost synergies through a closer coordination with our distributors in China and overseas suppliers.

We will further enhance our integrated business model, move towards upstream by developing hog production business and expanding poultry business. For U.S. and Europe business, we'll leverage the furnaces of the integrated business model, accelerate product mix optimization in packaged meats business to boost business scale and profitability.

We will promote technical transformation of fresh pork business to improve operational efficiency. We'll stabilize the profitability of the hog production business and improve ability to mitigate impact of market fluctuations through hedging. We'll seize opportunity of hog shortage in Asia and better coordinate exports to China and other Asian countries. To enhance the profitability of fresh pork business, we'll enhance scale and profitability of European business through integration and utilization of production capacity of the newly acquired businesses.

That's the end of my report. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language)

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Unidentified Analyst, [2]

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[Interpreted] So the question concerns the impact on both China and the U.S. business caused by the coronavirus outbreak. I would like to know, particularly, what is the impact level on your packaged meat business? For example, what do you think about the volume for the full year in relation to this segment?

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Luis Chein, WH Group Limited - Group Director and Head of IR [3]

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[Interpreted] Well, Mr. Ma is offering his comments in relation to the question.

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Xiangjie Ma, WH Group Limited - President of Shuanghui Development & Executive Director [4]

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After the spring break, in Mainland China, we have seen rather big impacts caused by the virus outbreak. And we have seen rather big impact on the packaged meat business as well.

So basically, we are looking at rather strong demand in the earlier stage after the outbreak at the supermarket channel, and there are 2 reasons behind this. First of all, normally, when people are being quarantined at home, they would have this tendency to hold certain products at home. And at the same time, other channels are not opened for business. So mainly, our consumers are gathering or purchasing the products at supermarkets.

And basically, the business we do is very closely related to people's daily life. So after the outbreak of the coronavirus, the government has demanded us to continue with what we do and provide a stable level of supply.

And we do face 2 major issues, and those issues have been resolved in a satisfactory manner. The first issue we faced is that we have this insufficient level of attendance of our employees. And the second issue relates to logistics.

Indeed, at the very beginning of the coronavirus outbreak, we have faced some great challenges in terms of delivering our products to our consumers. But we have quickly resolved that problem at a later stage.

And also because most of the sellers in our network have accumulated a certain level of inventory. So while there was some impact on product delivery at the beginning of this outbreak, at the end, there were no serious impact on the terminal sales.

So while we saw a reduction in terms of products delivered from our factories, in fact, there's some kind of supplementation at the terminal level. And very quickly, we have caught up with the volume of sales that we have launched in the very beginning of the outbreak.

So judging on the current market situation, we believe that for the whole year, the sales volume for packaged meat products will continue to maintain stable growth. Thank you.

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Unidentified Analyst, [5]

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[Interpreted] So the question I asked also is in relation to what you think will happen to the profit per ton situation for packaged meat products. Because in the past, it was like CNY 3,000 per ton. What is the situation for this year?

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Xiangjie Ma, WH Group Limited - President of Shuanghui Development & Executive Director [6]

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[Interpreted] Well, the situation is last year, we have conducted 6 rounds of price increases, and we believe there will be good performance within this year. So we expect there will be very positive growth for per ton price and also per ton profit.

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Unidentified Analyst, [7]

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(foreign language) So I've got a question for Ken on the U.S. side, actually the U.S. hog production business. Can you share with us the unit profitability on a per head basis for hog production in the U.S. last year? And also within that, how much is from the hedging gain? And what's the outlook for the hog price this year in the U.S. judging from various factors such as COVID-19 and other factors? And with that assumption, what is our projection for the unit profitability for hog production in the U.S.?

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [8]

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Ken, you can take the question.

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [9]

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Okay. If I understood the question correctly, you were asking about the farm operation or the live production side in 2019. You also asked about 2020. In 2019, we made a profit in -- on the farm side, I think it was around $4 a head, $3 or $4 a head. We're raising maximally 17 million hogs in the U.S. and I'm speaking now specifically about the U.S., not Europe. Europe is considerably more profitable on the live side. So last year, in 2019, and we made a profit of somewhere around $3 or $4 a head on all the head in the U.S. in -- but I would tell you, in large part, that was because of some very good hedge positions that we took when the opportunity arose to lock in some profits, we took it. For those of you who have followed the company for many years, you have heard me say before that we are very active trying to hedge risk in the live production side of the business. And in particular, we look into margins. When we --

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [10]

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Ken, can you pause? Ken, can we pause a little bit for translation?

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [11]

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Yes, I apologize.

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Unidentified Company Representative, [12]

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(foreign language)

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [13]

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Ken, you may continue.

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [14]

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No. Okay. So as I was saying, for those of you who have followed the company for a number of years, you know that we actively look to lock in margin. We do that by both buying the inputs, corn and the soybeans that comprise most of the feed and by selling the hogs through the futures markets. I'll pause.

Last year, 2019, we were successful in doing that because we were able to make a profit of $3 to $4 a head. If we had not hedged, we would have realized losses closer to $13 to $15 a head.

So the approach we take is to try to minimize risk in that area. We were successful doing that. And we focus our attention on our fresh meat business and our packaged meats business, where the profits are more reliable and consistent.

In terms of 2020, we continue to be in volatile markets, but we continue to be active hedgers, and we've been doing this for some time now for many months. As soon as the market gives us enough liquidity, we are taking this off the table. Well, let that get translated.

In terms of some numbers, again, we are reluctant to give specific guidance because the markets are so volatile. But I would tell you this, that our hedging program for 2020 looks to be very successful again. If we had not hedged, we would have some fairly significant losses that we would project for the balance of 2020. As it is, today, we have hedged. We're not 100% hedged, but we have a significant hedge position. And as we look forward, in 2020, we look to be on the positive side of the ledger, in a small way, but on the positive side.

I would say this. You didn't ask about this, but I'll point it out our European live production business is doing very well. And the returns in Europe have been very strong, Europe and Mexico. And so we made somewhere around $20 to $25 a head last year in live production in Europe. In 2020, it looks even better. That is related, of course, to the worldwide protein shortage related to ASF.

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Operator [15]

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(foreign language)

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Lincoln Kong, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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[Interpreted] Okay. There are 2 questions, 1 for China business and 1 for the U.S. business. So the first part of my question concerns China. I understand that the profit level for Q3 and Q4 for the slaughtering business is rather positive. Is it helped by the fact that you have sold a lot of your inventory? And what about this year? What do you think will be the level for profit for slaughtering business? Do you think this coronavirus outbreak is actually helping in a way to accelerate or the -- is the ASF accelerating the market sales?

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Luis Chein, WH Group Limited - Group Director and Head of IR [17]

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[Interpreted] Thank you very much for your question. Now we'll hear the response from Mr. Ma.

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Xiangjie Ma, WH Group Limited - President of Shuanghui Development & Executive Director [18]

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We have seen rather good levels of profit for Q3 and Q3 last year concerning slaughtering business in Mainland China. It is a fact that one of the major reasons is because of lower price for our inventory. And we expect a rather substantial decline concerning the hog production level for the Mainland China business compared to last year.

And the fact is, we see a continuous reduction in relation to how reduction in volume. So the slaughtering volume and also the profit level compared to last year, we also expect a sort of decline.

And this year, we are going to take advantage of the fact that there is a rather substantial price difference or price spread between the hog prices in China and also the hog prices in the United States. We are going to expand the level of importation. So while we are looking at a declining level of slaughtering volume, we believe we can maintain stability for the sales volume for fresh pork.

And while the impact from the coronavirus is rather insignificant on the slaughtering business, the ASF epidemic has created a lot of incentives for the slaughtering business in Mainland China. Actually, more than 4,000 slaughtering houses have withdrawn from the market. And that in turn increased substantially our market share. And with resumption of pork production in Mainland China, we expect that there will be significant growth in the volume of slaughtering.

That's the end of my reply.

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Lincoln Kong, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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(foreign language) So second question is on U.S. especially regarding the COVID-19 operating impact on the U.S. business, particularly on the fresh pork segment. So have we seen any early sign of impact given the outbreak? And if we were to had some expectation, what will be the impact on the U.S. business? Is it more on the labor shortage? Or it will be any disruption in exports business for U.S. or in, I think, an extreme case, do we need to secure more domestic supply first before we do more exports? So how do we think of the U.S. fresh pork margin for this year?

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [20]

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Ken, you can take the question.

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [21]

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Okay. The impact so far is as follows. In terms of operations, we are running 100% full. We are operating all our plants at a 100%, and we are producing as quickly as we can. So there's been no impact so far from COVID-19 in terms of the operations of our plants.

There are many restrictions in the United States that have taken effect over the last 2 weeks and many businesses ordered to close for a period of time. But we are identified as a critical industry by the government, and we have been asked to continue to run our operations at full speed.

It's obvious, but I'll say it anyway, no matter what the country is going through or the world is going through, people need to eat, and we are a food company, and we are producing food.

Second, you asked about labor. We do not have any labor issues related to COVID-19 right now.

I think our employees, while some of them are afraid, I think they are grateful to have jobs and a paycheck when so many in the U.S. are afraid of losing their job or already have.

Labor shortages in the industry have been an issue over the last 18 months. But we are going to go from the lowest unemployment rate in the history of the country to maybe one of the highest unemployment rates in the history of the company. So I think labor availability may actually improve over this crisis.

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Unidentified Company Representative, [22]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [23]

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Finally, on labor front, the risk is that employees get scared and therefore, do not want to operate the plants. So far, that has not been an issue. I don't really expect it to be an issue, but it's a risk.

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Unidentified Company Representative, [24]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [25]

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You also asked about how we allocate product. And I think your question was, do we have some obligation to produce for the domestic customer before we do for export customers?

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Unidentified Company Representative, [26]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [27]

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And my answer to that is we can service both markets. We have abundant supplies. We have a lot of pork in the U.S. We are an exporting country. And so every year, we are exporting 25% to 30% of all production. And I do not expect that to stop.

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Unidentified Company Representative, [28]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [29]

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So the business today is healthy, and particularly, our fresh pork business is healthy. There's demand from both the U.S. side and export side, and we are servicing both markets.

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Unidentified Company Representative, [30]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [31]

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I am not suggesting that there's no impact from COVID-19. There is an impact, but that impact is mostly a rotation between sales channels. Foodservice business is going to be down because restaurants are closing. And retail has been up because people are buying food in the grocery, just like my colleagues in China have seen with their experience.

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Unidentified Company Representative, [32]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [33]

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So the markets could be a little choppy, meaning there's -- when you have dramatic stops and starts and stops and starts as the country deals with the virus and the shutdowns, it could get a little choppy. But so far, our business is okay.

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Unidentified Company Representative, [34]

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(foreign language)

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [35]

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Okay. Thank you, Ken. (foreign language)

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Operator [36]

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(foreign language)

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Unidentified Analyst, [37]

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(foreign language)

[Interpreted] I have 2 questions. The first one concerns the China business. In Q1, because of the coronavirus outbreak in Mainland China, I understand that many food and beverages establishments have ceased operations. Does that have any impact on the fresh pork business in Mainland China? Are you expecting certain demand to shift from Q1 to Q2? And are you expecting a shift of the higher point of the hog prices to a later point in the year? And what is the impact on the situation for Q1 and Q2 in relation to fresh pork business? Can you provide some guidance?

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Unidentified Company Representative, [38]

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(foreign language)

[Interpreted] Thank you very much for your questions. And in relation to the COVID-19 outbreak, at the initial stage, the impact on packaged meat is the same as compared to the impact on fresh pork business, because many agricultural products, trading markets have been closed down, and many people have been in isolation for quarantine reasons. Of course, there are some impact on the sales volume. But because we need to continue on with the slaughtering of hogs, the -- during the initial stage, the hog prices have been dropping.

(foreign language)

But the impact on hog prices caused by the coronavirus outbreak is rather short-lived, and we expect that the higher point of hog prices will be in January of the year, and we do not believe that high point will be moved to a later stage in the year.

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Unidentified Analyst, [39]

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So I will ask the U.S. question in English. So Ken, my question is focused on any behavior changes in U.S. consumers. As we are seeing when the coronavirus outbreak happened in China, there was a lot of behavioral change. I'm just wondering, when you're seeing the short-term disruption of everybody's life and when people feel unsecure, when you first look at the news and the confirmed cases, usually consumer will stock up the food in refrigerators at home, will that change the mix of the constructs to consume the protein in the U.S.? As we all know that, the beef has been a primary protein for U.S. consumers. Do you see this coronavirus outbreak was short, at least, issue the short-term will help or resulting some shift in protein from the people and other protein more towards pork or (inaudible) ?

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Unidentified Company Representative, [40]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [41]

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Okay. This is Ken. I did not hear all of that question, but I know it was related to COVID-19 and meat in the United States. And so let me talk about that a little bit. And then if that question wasn't answered, we could follow-up.

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Unidentified Company Representative, [42]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [43]

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The United States is on, I believe, day 8, I think, of a 15-day effort to try and slow the spread of the virus.

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Unidentified Company Representative, [44]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [45]

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Life in the U.S. has changed dramatically over the last 10 days.

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Unidentified Company Representative, [46]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [47]

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There are lots of closings and shutdowns.

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Unidentified Company Representative, [48]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [49]

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And people are being advised to stay home and not have social interaction.

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Unidentified Company Representative, [50]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [51]

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So the biggest impact we have seen so far in our business is a dramatic shift towards retail and away from food service as restaurant operators are either -- have significantly cut back their operations or have closed entirely.

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Unidentified Company Representative, [52]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [53]

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Consumers in the United States are reacting to this by rushing to the grocery stores and cleaning out the grocery stores. The meat case and other grocery items are being cleaned out.

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Unidentified Company Representative, [54]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [55]

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So for the first time in my lifetime, I've gone to the grocery store and seeing empty meat cases and empty shelves.

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Unidentified Company Representative, [56]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [57]

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And as soon as we replenish those meat cases and the shelves, the product disappears again. People are buying significant amounts of supplies.

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Unidentified Company Representative, [58]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [59]

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And they are buying pork, chicken and beef. They're buying everything in the meat case.

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Unidentified Company Representative, [60]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [61]

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To the extent that pork is priced lower than beef products. If this goes on for a lot longer, you certainly could see a rotation amongst the proteins away from beef to lower-priced chicken and lower-priced pork.

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Unidentified Company Representative, [62]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [63]

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But so far, that has not happened.

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Unidentified Company Representative, [64]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [65]

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I -- if I predict what's going to happen, I think we've had a huge shift to retail. But inevitably, the country will have to open up again, and economic activity will have to resume. There's increasingly a debate in this country about how long we can shut down the economy. And every day, there are more voices growing that say we can no longer shut it down, we have to open up.

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Unidentified Company Representative, [66]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [67]

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When that happens, we could see a swing back to food service as restaurants that have been closed for weeks or a month, reopen and need to restock.

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Unidentified Company Representative, [68]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [69]

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The big question is, will overall demand -- will there be any demand destruction as a result of COVID-19?

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Unidentified Company Representative, [70]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [71]

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I think the answer to that is the longer the economic shutdown continues, the greater the chance of that happening.

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Unidentified Company Representative, [72]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [73]

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If that happens, if there's demand destruction in the United States, we will do what we've always done, which is we will export product outside of the United States as just as we're doing today. We will try to find markets. China is a market that there's a symbiotic need. There's a mutual benefit in terms of U.S. product going to China under the Phase 1 agreement and because China -- China's supplies are short.

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Unidentified Company Representative, [74]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [75]

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The bottom line is we're in uncharted territory. We've never been through this before.

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Unidentified Company Representative, [76]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [77]

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So it's a little bit difficult to predict what will happen in the future.

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Unidentified Company Representative, [78]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [79]

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I do know that people eat and protein is always part of the diet.

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Unidentified Company Representative, [80]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [81]

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As I said earlier, with these shifts, rapid shifts, the business could get choppy, meaning running full out and then seeing a decrease.

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Unidentified Company Representative, [82]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [83]

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And we made toggle back and forth like that.

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Unidentified Company Representative, [84]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [85]

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Right now, the business is okay. In fact, our results year-over-year are very good.

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Unidentified Company Representative, [86]

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(foreign language)

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [87]

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Okay. Thank you, Ken. (foreign language)

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Operator [88]

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(foreign language)

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Unidentified Analyst, [89]

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(foreign language)

[Interpreted] (inaudible) Okay. I have 2 questions. The first one is in relation to the packaged meat business in Mainland China. Last year, we saw that there was this overall stability in relation to the sales volume for this segment. What is the level of contribution from your new products? And previously, the management has mentioned that the per ton price will have some room for increase. And is that coming from overall structural readjustment? Or is it some sort of contribution coming from the price increase as well?

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Unidentified Company Representative, [90]

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(foreign language)

[Interpreted] So to answer your first question, in relation to packaged meat products, we have actually launched more than 80 new products into the market last year. And the contribution or the proportion of overall sales volume was 10%, and the growth was around 1.8%. In relation to the revenue contribution, it was around 13.7%, and the profit contribution was around 2.2%.

(foreign language)

So in relation to the trends of the pricing for this year, or part of it does come from the structural readjustment, and part of it does come from the price increase.

(foreign language)

That is my answer.

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Unidentified Analyst, [91]

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(foreign language)

[Interpreted] I would like to have a follow-up question. In relation to the per ton pricing trends for this year, do you think the same situation would remain?

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Unidentified Company Representative, [92]

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(foreign language)

[Interpreted] Well, to answer your question, I don't believe that the price increases accumulated last year will be facing a decrease this year. I believe the average price of our products will actually be higher compared to the average price last year because we have accumulated such increases of the price level step-by-step last year. So I believe the price increase impact will actually cover the entire year.

(foreign language)

And when it comes to new products launched this year, our focus is to move towards mid- to higher-end products. So we do not expect the average price level for these products to come down, we believe that will be continuous growth.

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Unidentified Analyst, [93]

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(foreign language) My second question is on the U.S. fresh pork for Ken. Actually, I noticed that in the fourth quarter, actually, the fresh porks margin have been ramping up and increasing very quickly. Just wondering what is the driver behind it on the widing price spread? And how should we think about the fresh porks margin levels for this year?

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Unidentified Company Representative, [94]

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(foreign language)

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Lijun Guo, WH Group Limited - CFO, Executive VP & Executive Director [95]

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Ken, you can take the question.

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [96]

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Yes. First, your observation is accurate about fresh pork margins in the fourth quarter in 2019, they will be strong.

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Unidentified Company Representative, [97]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [98]

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I think at least one of the -- there's 2 main reasons I would point out.

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Unidentified Company Representative, [99]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [100]

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The first is our export program, not only ours, but other industry participants, I think exports were up significantly in the second half of 2019, and that certainly helped the fresh pork complex.

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Unidentified Company Representative, [101]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [102]

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For those of you who followed the company for a long time, you know that, that benefit of the exports, it really is in the form of higher prices because of less domestic availability.

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Unidentified Company Representative, [103]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [104]

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So exports are very important to the U.S. pork industry and as exports climbed, rose in the second half of the year, that was good for our fresh pork business.

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Unidentified Company Representative, [105]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [106]

--------------------------------------------------------------------------------

Second, the fresh pork business in the U.S. is a seasonal business. And routinely, the fourth quarter is the best quarter for fresh pork.

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Unidentified Company Representative, [107]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [108]

--------------------------------------------------------------------------------

That strength has carried into 2020, into the first quarter of 2020.

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Unidentified Company Representative, [109]

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(foreign language)

--------------------------------------------------------------------------------

Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [110]

--------------------------------------------------------------------------------

So our Q1 2020 fresh pork results are strong.

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Unidentified Company Representative, [111]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [112]

--------------------------------------------------------------------------------

Obviously, what -- part of what is happening is the ASF issue in China is having impacts on markets worldwide and that shortage or that decreased supply that China experienced is having an overall positive impact on the pork markets around the world.

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Unidentified Company Representative, [113]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [114]

--------------------------------------------------------------------------------

The spread between hog prices in China, in the U.S. are as high as it's ever been.

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Unidentified Company Representative, [115]

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(foreign language)

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Kenneth Marc Sullivan, WH Group Limited - Executive Director, CEO of Smithfield Foods & President of Smithfield Foods [116]

--------------------------------------------------------------------------------

Okay.

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Unidentified Company Representative, [117]

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Okay. Thank you, Ken. (foreign language) Thank you very much for joining the call.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]