MHP SE

Ladies and gentlemen, thank you for standing by, and I would welcome you to MHP's Q1 2020 results conference call. At this time, all participant lines are in listen-only mode. The format of the call will be a presentation by our management team, followed by a question and answer session. You will find a link to the WebEx presentation in your email invitation. The presentation flow is managed in real time and will be reflected on your screen automatically. If you have not received the documents, they are also available on our investor relations website. So without further ado, I would now like to pass the line to Ms. Anastasia Sobotnyuk. Please go ahead.

Thank you, Michael. Good afternoon and good morning. Thank you for joining us today for MHP's conference call dedicated to MHP's financial results for the first quarter of 2020. Just a quick reminder, MHP's financial results include the results of PPE from 21st February I have to tell you in advance that some of the things we discussed today are forward-looking statements. Please take it into consideration. And, of course, I encourage you to use today's press release with our financial statement for the detailed information. On today's call, we have CFO of MHP, Victoria Kapelushna. She will present financial results in general and by segments. and myself, Anastasia Sobotyuk, Director of Investor Relations. I will lead you through the presentation. After the presentation, we will be glad to answer all your questions, and I hope that everybody is ready, so we can start our call now. Let's go on slide number four of your presentation. First of all, let me start from challenges both Ukraine and the company faced since the beginning of 2020. An influence in January in Ukraine caused a temporary cessation of exports from Ukraine to the EU, Saudi Arabia, and other minimarkets, and the majority of CIS countries. Exports to the EU reopened at the beginning of March, Saudi Arabia and minimarkets reopened in February and then March, while the majority of CIS countries recommenced in May 2020. In order to mitigate the adverse impact of NMHP's operations and profitability, management decided to decrease capacity utilization of poultry production complexes by approximately 10% from February until the end of March 2020. Since the beginning of April, all of the company's poultry production facilities have been operating at full capacity again. So we all live in the period when we can see the impact of COVID-19 and of course the impact of the pandemic on the company in the first quarter was not material and the company largely continued to operate normally. As of the date of this report, the level of absenteeism of employees at MHPS group enterprises is at the same level as last year. Management implemented a range of measures for preventing sickness and spread of infection within the company. Of course, we worked remotely. We had additional medical screenings, corporate transfers, and use of protective masks, etc. The company's production facilities work was organized in shifts of smaller numbers of people to limit contact and minimize the potential spread of infection and in addition a wait list of potential workers was accumulated in case replacement of infected persons and those on quarantine would be required so if we look at the micro fundamentals then we can see that in the first quarter of 2020 A real GDP decrease by approximately 2%, a little bit less than 2% year-on-year. And in 2020, government expects negative economic growth in Ukraine at around 5%, minus, of course, 5%, with subsequent recovery to 2.4% during 2021. Consensus forecast was revised to the downside with expected around 7% real GDP decline in 2020. And of course, we all understand that that is an effect of pandemic. Retail sales growth decelerated around 11% year-on-year in Q1, driven by growth in real wages and affects revaluation. Hryvnia appreciated by approximately 8% on average year-on-year in the first quarter, and the government assumes that the budget assumes that the affects in 2020 will be at around 29.5 Ukrainian hryvnia per $1. Annual inflation decelerated to around 3% year-on-year, driven by utilities and imported durable goods. And the soaking rains of May are prompting to boost Ukraine's harvest in 2020, which is expected to be near last year's record harvest, around 98 million tons. And frankly, on our side, MHP expects good harvest this year. Let's go and see the results of the first quarter. Let's come back to them. So let's go on slide number six. of your presentation, key financials. So despite challenging start of the year, our financial results in the first quarter reflect efficiency of MHP team and substantial growth in revenue at Perugin-Abturil. So we can see that consolidated revenue constituted 443 million US dollars, which is 2% higher year-on-year. of which export revenue was over 54%, however, over by 12% year-on-year due to the avian influenza restrictions on exports since January and partially the effect of COVID. And EBITDA constituted $90 million, 8% higher year-on-year, with EBITDA margins at around 20%. So I now pass the words to Victoria. She will continue with the comments about the financial results for the first quarter of the year in greater detail.

Thank you, Anastasia. Good afternoon, everyone. Let's discuss our financial results for the first quarter in more detail. Slide number seven shows our financial results by segments. Post-reoperations remain our key segment as usual and during the first quarter generate the majority of total revenue, about 70% and 77% of company MDA. Grain segment generates only 6% of total revenue on third party and about 11% of company MDA. As you know, majority of the grain produced we use internally to feed our chickens. Our third segment, meat processing and other agricultural operations, generated about 8% of consolidated revenue and contributed 6% to consolidated VDA. Main components of this segment are meat processing and convenient food production. Following the acquisition of operations in Europe, The new European operating segment generates approximately 17% of total revenue and 12% of company EBITDA. In the first quarter, our export operations generate about 54% of total revenue, $237 million, 12% low the low volume and price of export chicken meat as a result of export restrictions caused by avian flu case in the Venetian region. We will discuss the development of all our segments more deeply on the next slide. Please go to the next slide, number eight, quality segment performance. During the third quarter, we increased our production volume by 4% year-to-year due to the offering new rearing site launch into operating during 2019, as well as due to the increased share of heavy chicken produced. Revenue overall in poultry decreased by 7% year-on-year, driven by lower export chicken meat sales volume and chicken meat price decreased. Decrease in revenue was mostly due to the ban export market as a result on outbreak of an influenza in the Venetian region of Ukraine. During the first three months, our average chicken meat sales price decreased by 3%, poultry export price decreased by 2%, and price on domestic market were down on average by 3% year-on-year in dollar store. Average poultry production costs in Q1, in accordance with our budget, decreased compared to the same period last year by 7%, reflecting low cost of mixed fodder as well as low utility costs due to the warm winter and cheaper natural gas prices. Gross profit of poultry and related operations segments for Q1 remained relatively stable Decline in revenue was mostly offset by reduction of production costs. Adjusted BDA before the 31 effect per one kilo in Q1 is $0.36 per kilo, which is almost the same year-on-year, slightly lower just by 3%. Let's move to the next slide, number nine. External grain segment revenue in Q1 amount $25 million. The decrease compared to the last year level was mainly attributable to the low amount of crops in stock designed for sales at the beginning of this year compared to the stock for sales at the beginning of last year, 2018. It was a result of record yield of crops in 2018. EPDA net effect of FRS standard 16 constitute 10 million, by 9% lower compared to the last year, mainly due to decrease in . MHP expect good harvest, especially of winter crops in 2020. Let's go to the slide number two. and other agriculture operations segments historically generate the smallest part of our financial results. The key business of segment are meat processing and convenient food production. The segment generated revenue $34 million by 16% higher compared to the last year, mostly as a result of higher prices and sales volume of meat processing products. EBITDA of the segment was $5 million. Manly is higher compared to the last year. Manly reduces the better return earnings from wheat processing products and milk operations. Slide number 11. European operating segment generates $78 million of revenue and $11 million of our EBDA. Injected EBDA margin constitutes 14%. almost unchanged compared to the Q1 2018. Our European operation continued to perform well in line with our expectations, demonstrating 9% growth in poultry meat sales volume and 16% growth in poultry products year-on-year with stable prices. In our financial statement, we include peritoneal financial results since the date of our acquisition, the first of March, last year in 2018. Increased sales volume of processing products provided optimization and efficiency improvement across all business operations using the best MHP practice, demonstrating clearly how we can improve performance of European poultry producers using our experience and findings. We are going to continue to develop this segment further and see huge potential and synergy in exchange of experience between Ukraine and European teams there. Slide number 12. A few words about our cash flow and liquidity position. Despite the increase in EBITDA, net cash from operation activity decreased to 39 million in Q1 compared to 142 million in Q1 2019 due to negative slow in working capital in the first three months this year compared to the last year, which was mostly related to high investment in poultry business during the first quarter. Due to the low stock of crops, sunflower and soya, designed for internal consumption in the beginning of this year compared to the beginning of 2018. Investment inventories related to grain growing entities in respect of forthcoming spring sowing campaigns, and also increased NET receivables, which is expected to be reimbursement in April and May this year. Total capital was amounted to 21 million, mainly related to investment in maintenance and production facilities. Regarding debt, the group has adopted IFRS 16 starting from this January 2019. Applying IFRS 16, the group recognized right of use assets and lease liabilities in consolidated statement of financial position However, for purposes of common non-calculation, debt was present net FRS 16 adjustment. If any lease that would have been treated as operating lease under FRS as an effect for the 1st January 2018 is treated as operating lease. Accordingly, this approach, at the end of the 1st quarter, the company total debt was 1.5 billion dollars. and net debt about $2.5 million, $1.2 billion. 98% of total our debt is long-term debt, about 93% of which are Eurobon. Our average weighted interest rate currently is around 7%. In terms of liquidity at the end of the March, we had about $250 million in cash mostly in dollars. Net debt to EBITDA ratio, net of FRS-16 effect at the first quarter end was 3.17 versus Eurobond Covenant 3.0. Also exceeding the ratio 3.0 does not constitute the breach of any covenant on the indebtedness agreement. This leads to introduction to additional control measure by MHP regarding insurance of additional indebtedness. Restricted payment, which included dividend distribution, merges with parties outside of group and granting on financing of any kind to 30 parties. Such restrictions become effective on the date of publication of our Audit Consolidated Financial Statement of 2019 and continue now. Almost all our debt is denominated in foreign currency, mostly in dollars. Foreign exchange risk, in our case, is naturally hedged by significant share of export sales. Having 54% of revenue, around $233 million dominated export revenue during the last quarter, will full cover all our debt service expenses and other payment in foreign currency. Our currency balance remains strongly positive. And now I give the floor to Anastasia to give you our current business update. Thank you, Victoria.

We all see that pandemic caused considerable global disruption in business activities and our everyday life. Although the effect of the COVID-19 pandemic did not have a material impact on MHP's first quarter performance, and the company's powder production facilities have been operating at full capacity since the beginning of April, COVID-19 is expected to have an adverse effect on the company's earnings in Q2 of this year, mainly because of the impact on prices as many global competitors are currently experiencing reduced demand and resulting access capacity. Moreover, nobody can predict how the situation will develop and what kind of circumstances COVID-19 will have on the global economy. potential maybe second wave in the second half of 2020. Nevertheless, MHP is well positioned to face these present uncertainties and the potential turbulence and demand for poultry meat both in Ukraine and export markets, taking into account its business model, competitive production costs, and market diversification. So MHP's main drivers driver of growth in 2020 are expected to be, first of all, an increase in production by around 20% year-on-year, mainly driven by full-capacity annual utilization of Phase II, Line 1 of the Vinica complex, and an increase in production volume at Perutni-Napturi. The second is an increase in poultry exports by 10%. to around 390,000 tons despite challenges in the world poultry market. Third is an increase in efficiency of green growing operations following optimization of production codes and efficient rotation of crops, maybe good prices. And fourth is a transformation from a raw material company into a culinary company. So now we will open a question session. To ensure we get questions from all the participants, please ask three questions each, and then pass your word to the next participant. Thank you for cooperation. Michael?

Yes, thank you very much, Master Zia. We will now be proceeding to the Q&A session. To ask your question, please press star two on your keypad, star two on the keypad. You may also ask a question using the chat function on the webcast feature if you're logged in online. So star two or the chat. We'll give a minute or so for the questions. Thank you. Okay, our first question comes from Mr. Daniel Zachkevich from Barclays. Please go ahead.

Hi, thanks for the call. Just based on the outlook that you've given, where should we expect net leverage to be by the end of the year? And could you also just go over the capex we should expect for the year? And then finally, could I just ask, just on the working capital movements, was that a normalization of working capital or is it something we should expect to unwind the large outflow we saw in Q1? Thank you.

Thank you very much for your questions. Are you asking about the CapEx for 2020 or going forward?

Just for 2020, yes.

2020, thank you very much.

Great question. We have a very modest CapEx, total amount around $100 million. Regarding working capital, yeah, we, to be honest, we're very flexible in working capital, and now we understand the current situation on the market, and we think that our investment in working capital for a full year will be very insignificant, maybe $20 million, $30 million. And regarding your question about our leverage and our – on leverage by the end of 2020, our target to have leverage by the end of 2020 around 2.8. Okay, thank you.

Okay, I would just like to send a reminder for star 2 for questions on the keypad, star 2, or alternatively ask on the chat. So our next question comes from Mr. Konstantin Pastavich, Armand Capital. Please go ahead.

Hi, thank you for the call. I have a couple of questions. So first of all, could you comment on the price outlook for the second quarter and maybe for the rest of the year as well? You mentioned that the pandemic is having a negative effect on demand globally. So I guess that means that your export prices may go down further. And with that, I also wanted to clarify on where you see domestic prices going as well, because in the first quarter, when I compare the data that you have on average with what the Ukrainian Statistics Service is showing, so your prices are down by 11%, and they actually showed that meat prices overall were up by 2.4%. And I understand the difference is that you sold more frozen poultry. Well, could you go into that a bit and sort of talk about why that happened and whether you expect that to change going forward?

Just for your question, yeah, you're completely right. Our current price, yeah, and our situation. your outlook, especially for Q2 and for full year. Q2, it is not very simple. It is, to be honest, a difficult quarter. First of all, demand, especially demand, European demand, is low of filet. And in Europe, in the second quarter, we exported less than our plant. And now we decrease our export to Europe by 30% compared with our plant. But at the same time, at the same time, we see very good demand of small cheese in MENA region. We always, during the last years, we always repeat on one very important for us strategic that we have the market, export market, geography market diversification. And that's why in our production and our sales, we can switch to produce heavy big chicken, switch to produce small chicks, which today we can export to Myanmar. Regarding the situation with price in Ukraine, Yeah, in February we decreased our price and current our price around approximately the same, 11, maybe even 10% depend of product law compared to the last year when I talk about the price of fresh products. But our expectation is that we expect that price will recover because I am sure that all our competitors Doesn't matter, not only in poultry industry and pork industry today work with very low profitability and sometimes I'm sure that our competitors generate losses. That is why we understand and we feel this and even we see some signal about that price will recover in domestic market.

Could you comment on the share of frozen chicken that you sell? Because from what I understand, it negatively affects your average price. Is that something that you agree with?

Yeah, because in the first quarter, we decreased some period of time. We decreased, and you especially, due to stopped due to implemented ban for our export to different, no, to export, we increased our, we increased our sales, frozen sales in Ukraine. Yeah, in the first quarter especially, a lot of sales and with low price because all the price on frozen is a low than prices fresh product with branded mostly.

Right, and so, and will that, will that share a frozen product, will that be going down in the next three quarters, or do you expect it to... Yeah, in the second quarter it's going down, yeah. So can we, would it be true to say that that's one of the reasons why your domestic prices should be going up compared to...

Yeah, one of the reasons, yeah, because we sell more the frozen, but the second reason, yeah, we decrease our price. We decrease our price on, yeah, in the few, yeah, not because unfortunately, because we, and current situation in the second quarter, unfortunately, we slightly decrease our price again compared to the first quarter.

Right. Okay. And then, and you mentioned, you mentioned that you said it's 11% down year and year. Did I hear you correctly at the moment? Yes. Okay. Okay. And also, so I guess tied with that, if we talk about costs, so your costs went down quarter to quarter, right? Significantly because I guess no bonus payments and also a cheaper gas and, and, and the devaluation effect. Do you still, well, given where costs are at the moment, And during the last call, you said that you're targeting, you're expecting to see EBITDA per kilo at about $0.4. Is this something you still find realistic for this year, given where prices are and where costs are, or do you think that it's going to be lower than that?

Yeah, in the first quarter, we generated very similar figures, close to 0.36, but Now, in the second quarter, we understand that our EBD per kilo will be low, yeah, because price, especially the two main reasons of this, basic price slightly low, and especially low the import, export price, yeah, because today the export price, especially for quarters, low compared to the first quarter. compared to the beginning of the year by approximately 20%. In the second quarter, we will generate our interest per kilo. It was lower than 0.3. Around this, maybe slightly lower. But we are sure that by the second half of the year, price in Ukraine will recover. And maybe we will see and hope that we will see some recovery in dry cement in the vault.

OK. I see. Thank you. Thank you for this. And then just one more question with regard to the grain segment. So could you give a bit of an outlook on where you see yields for this year as compared to last year? Because of the drought, projections were very pessimistic with the drought.

Yeah, up to today, the situation with the weather in Ukraine is good, especially in the region where we have our fields. Yeah, it's good. Yeah, and we expect, at minimum, we expect that yield per hectare, not lower than last year. But, yeah... uh yeah but until today nobody knows what will be for the next year especially to speak about the sunflower seed corn which is in the autumn yeah but until today outlook of our youth is good okay and your and your forecast of 100 295 dollars per hectare that's including revaluation right biological yes yes yeah

Including, yeah? And do you expect the effect to be positive for the year or negative for the year for this revaluation?

No, a revaluation of the A2B may be positive because I hope that at the end of the year we will have the higher level of stocks in corn compared to the previous year. But I think that the amount of revaluation of the A2B is not so significant. It's not so significant.

Okay, thank you.

Thank you. Thank you very much. Our next question comes from Miss Natalia Shudkovska from Dragon Capital.

Please go ahead. Thank you very much for the presentation. I wonder if this... Yes.

Natalia, I'm sorry.

I can't hear you.

The voice on the back. I mean, the music.

Yeah, I don't know where this... Oh.

Thank you very much. Thank you very much for the presentation. Again, a couple of questions from my side. Can you please check how the company's European asset, mainly Peter Nina Ptui, performed like for like so far in the second quarter of the year? And if the recent developments with respect to COVID pandemic has affected the company's strategic view on its presence in Europe other markets than Ukraine, I mean, Europe, possibly MENA. Have companies' plans changed with respect to M&A, probably some greenfield facilities all over the world? Thank you.

Thank you very much for the question. This is a question regarding cow perutnina. Yeah, perutnina demonstrated very good result in the first quarter. And today, Pirutnina sells approximately by 5% volume higher compared to the last year. It is mostly a product. It is mostly sausages and convenient food, less meat. And generally, yeah, Pirutnina, as you know, the health facility and Pirutnina operate in different countries in Europe. Balkans and Slovenia, Croatia, Serbia looks like well. And we hope and we saw that Perutnina this year will increase our BDAs minimum by 15% compared with last year. Regarding second equation about our activities in a different region, MENA in Europe. Yeah, as I told previously, the situation with our export to Europe is not simple. It's difficult. You know that Horeca now is closing everywhere in European countries. But at the same time, we decreased by approximately 20% maybe our export volume to Europe compared to our plans. But now we feel very good demand for chicken from MENA region, from Saudi Arabia. And we are increasing to export small chickens in this region. And as I told previously, it's very good for us that we provide and we're working, we have the very wide range diversification of our experts. Yeah. Regarding your last question about M&A. Yeah. Yeah, M&A, strategical. Yeah, for us, potentially for us it will be very interesting to buy some to provide expansion in Europe. Because as you can see from our financial performance that it is not just blah blah blah and we really can improve and do good business in Europe. But now we only consider different possibilities. yeah you understand that it's very long term process because we just small remark we start our negotiation and we the first time met with Pirutnina six years ago that is why potentially but not right now thank you thank you very much okay thank you very much we have a

One question coming online from Eward McCarron from, again, Asset Management. This is a clarification on working capital. Was that a further 20 to 30 million actual expected on top of the 116? And should we not expect the Q1 working capital to be unwound?

No, no, no, no. Our total investment for full year, our total investment in working capital, it will be around 20, 30 million dollars. It is our investment in the first quarter. It was temporary investment.

Okay, so we'll just do one more final call for questions. Let's start to once again for questions on your phone or on the keypad. We have a question from Mr. Dilawar Farazi from Loomis. Please go ahead.

Hi, guys. Thanks very much for the presentation, as always. I just want to clarify a couple of things. I may have missed them because the line was cutting in and out. Pricing expectations for Europe and your production, you're reducing the production to Europe 20% from your expected plan. What is your expectation for year-on-year European exports and the pricing expectations as well? Yeah. And the leverage you're giving at the moment, that's IFRS leverage, right? That's it.

Yes, exactly. Yes, when you speak about our leverage, around 2.8, 2.5, yes, leverage, we calculate accordingly our IFRS.

Sorry, IFRS 16, yes.

No, without, net of 16 standard, yeah, net of accordingly condition of our year bonds. Regarding your first question about our volume in the year, compared to the year to year, we see price decrease approximately, no, today, because we don't know what will be in the future, today approximately by 15%. 15-20% year-to-year, if you speak about price of fuel to Europe. And regarding volumes, yeah, today we decreased approximately 20%, around 20%. But we expect that in the H2, volume, will increase, because we understand that this decreasing of our volume, export volume to Europe, correlates and relates to decreased horeca.

And you believe MENA will make up the shortfall, or which region do you think is specifically going to be more of a focus for you?

It's a very good question because situations can change, but today it is the most primitive region.

Great. Thank you, guys.

Thank you very much. Our final question comes from Ms. Joanna Freeview from Bank Financial. Please go ahead, Joanna.

Hello. Good afternoon. Thank you for the presentation and for having my questions. I have three questions. The first one would be, are you planning to pay out more dividends in 2020? The second one is, what would you consider to be the lowest level possible of capex in order to preserve cash in 2020? And the last one is, regarding the amount of that outstanding to be repaid in 2020 and 21, are you going to repay this amount or refinance during the next two years?

Thank you.

I will start from question number three. Is our repayment amount for 2020 very insignificant? Is it significantly less than we keep cash in our account? Is it five times lower than cash in our account today? Lost our CapEx for this year. Maybe institution was very become more challenging, we can maybe decrease our complex by 20%, 25% is the max. But regarding dividends, to be honest, it's all at the same, but anyway, we are a public company, we have a very strong dividend policy. And potentially, yes, we would like to continue to pay dividends.

Thank you. If I'm allowed, one more question. Do you have any undrawn revolving credit facilities available?

Yes, we have approximately, yes, undrawn lines today around $200 million.

Okay, thank you. Thank you very much. I'm showing no further questions. Anastasia, I'll pass the call back to you for your concluding remarks.

Hello, and thank you very much, Michael. Thank you very much to all of you. Of course, as usual, in case you have your further questions, please call us or drop a line by email. We'll be glad to cover all of them. Thank you, and we'll be in touch. Have a nice evening. Have a nice day. Bye-bye.