MHP SE

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's second half 2020 results call. At this time, all participant lines are in listen-only mode. The format of the call today will be a presentation by the MHP management and IR team, followed by a question and answer session. After the call, you will have the opportunity to ask questions. If you are dialed in via the web, you may also ask the question using voice or the text feature. Without further ado, I would now like to pass the line to MHP. Anastasia, the floor is yours.

Thank you, Michael. Good afternoon and good morning. Thank you for joining us today for MHP's conference call. My name is Anastasia Sabatiuk, Director of Investor Relations. And on the call today, we will discuss MHP's financial results for the six months of 2020. Today's call is based on data and information released earlier today, Q2 and H1 2020 press release and financial statements. However, during our call, we can discuss our projections and plans based on our assumptions and models. Please take it into consideration. Together with CFO of MHP, Victoria Kapelushina, we will present you financial results of the company in general and by segments. After the presentation, we will be glad to answer your questions. Let's start. Slide number four. Macro environment. GDP in Q2 2020 was down by around 11%. Its sharp deterioration last quarter reflected the negative impact of a two-month nationwide lockdown and a drop in foreign demand caused by coronavirus curbs in Ukraine's trade partners. In contrast to many of its European peers, the current time in Ukraine did not affect large industrial enterprises significantly. but included a ban on domestic public transportation which depressed economic output in many small sectors still the sequential decline in ukraine's gdp of nearly 10 percent was smaller than those in the eurozone minus 12 percent and selected ce neighbors such as hungary or romania in q2 currency ratio depreciated by eight percent year-on-year as a result of economic instability due to COVID-19. Annual inflation acceleration to around 2% year-on-year. The National Bank of Ukraine predicts that inflation will enter the target range of 5% by the end of the year due to the gradual recovery of the global economy and the rise in energy prices. Let's get back to the company's results. Slide number six. key financials for the reporting period. The financial results during six months of 2020 reflects the challenges MHP had faced during the first quarter, sorry, first half of the year. The effects of a first quarter outbreak of avian influenza in Ukraine, and then the challenges posed by the global COVID-19 pandemic in Q2. MHP's revenue was $867 million, 8% down year-on-year, mainly adversely affected by lower results in panel three operations, lower exports and prices, and grain growing operations, unexpectedly lower results due to the extremely hot and arid weather conditions in the central regions of Ukraine. At the same time, MHP's mid-processing division result was stable year-on-year, and 13 October generated strong results with better-than-expected financial results due to cost optimization and their strengths in branded higher value-added products. Export revenue was $453 million, 18% down year-on-year. adjusted EBITDA margin remained relatively stable and constituted 25% compared to 26% in the first half of 2019, with adjusted EBITDA down from $248 million to $216 million. Let's look at MHP's financial results in greater detail and by segment. Victoria, the floor is yours. Yeah.

Thank you, Anastasia. Good afternoon, everyone. Let's discuss our financial results for H1 to 2020 in more detail. Slide number seven shows our financial results by segment. Multi-operations remain our key segment. As usual, enduring the first half generates the majority of total revenue, around 70% and 56% of companies' EBITDA. Grain segments generate 4% of total revenue on 30-party and about 30% of companies' EBDA. As you know, majority of grain produced we use internally to feed our chickens. Our stores and the smallest segments, meat processing and other agricultural operations, generate about 8% of consolidated revenue and contributed 4% to consolidated EBDA. Main components of this segment are meat processing and convenient food production. Following the acquisition of operations in Europe, the new Europe operating segment generated approximately 18% of total revenue and 12% of companies' EBDA. In the first half of the year, our export operations generate around 52% of total revenue, $453 million, 18% low compared to the last year, mostly due to the low volume and price of export chicken meat. We will discuss the development of our segment more deeply on the next slide. Please go to the next slide, number eight, poultry segment performance. Despite the challenges posed by global COVID pandemic and avian influence, in Ukraine, our production volume during the H1 remained relatively stable. Since the second quarter, all MHP poultry production facilities continue to operate at full capacity again. Revenue overall in poultry decreased by 12% year-on-year, driven by chicken meat sales price and volume decrease. Fall in revenue was mostly due to the avian influenza outbreak in Ukraine in the first quarter, which caused a temporary ban of exports from Ukraine, as well as impact of COVID pandemic since March 2020. In H1, Poultry export decreased by 10% to 170,000 tons, mainly in EU and MENA region. During the H1, our average export price decreased by 9% year-on-year in U.S. dollar term, mainly driven by product mix change and weaker price on fillet in U.S. in the European Union, as many global competitors are currently experiencing reduced demand and resulting excess capacity. Sales volume on domestic market remains almost unchanged, mainly due to reduced poultry price by 13% year-on-year. At the same time, poultry production costs in H1 decreased by 11 compared to the same period last year, due to the low cost of mixed-fodder protein components. Fortunately, despite the pandemic, the level of absenteeism of employees at MHP Group Enterprise is at the same level as last year. The company did not incur significant incremental expenses related to COVID-19. Gross profit of the poultry and related operation segments decreased by 25%, mainly due to decrease of sales volume and chicken meat prices. Adjusted to BTA before the 41 standard effect, per one kilo in the first half of the year is $0.35 per kilo, which is more than 20% low compared to the average figure the same period last year. Decrease was mainly due to decline chicken meat prices. let's move to the next slide number nine this year were extremely unfavorable weather conditions in the central region of Ukraine since the company mainly cultivates land in the central region of Ukraine this led to a decrease in the use of winter crops and expected the lower use of spring crops compared to the 2018 although also These are still strong and well above Ukrainian average. External grain segment revenue in the first half amounts to $35 million. The decrease compared to the last year level was mainly attributable to the high amount of crops in stock designed for the sales as of 31 December 2018 compared to the stock for the sales as December 2019, mainly as a result higher yield in 2018. EBDA, Net Effect IFRS Standard 16, constitutes 65 million by 12% lower compared to the last year, mainly due to the lower yield of winter crops and expected the lower yield of corn in 2020 compared to the 2018. Let's proceed to the slide number 10. Meat processing and other agricultural operations segments historically generate the smallest part of our financial results. The key business of segments is meat processing and convenience food production. Segment revenue and adjusted BDA in H1 remains unexchanged. and amounts $67 million and $9 million, respectively. Our meat processing decision is actively working on new products with a target to provide a wider range of options to our customers and strength business profitability, delivering convenient and well-demanded ready-to-eat products, such as dry meat slices, sandwiches, and other meat snacks. Let's proceed to the slide number 11. COVID-19 does not have any material impact on business operations of the Europe operating segment as a result of and change in consumer preference in favor of ready-to-eat products, which constitute a significant part of Perutnina production. Following this strategy of poultry production growth and increasing several facility capacity taxation in Serbia and Croatia, poultry production volume of Europe operating segment in H1 increased by 9% compared to the same period last year. Average poultry price decreased by 6% from $2.67 to $1.50, mainly due to oversupply on domestic markets in Bosnia and Herzegovina, where one of our production facilities is located. Average price of meat processing products were relatively stable. Europe operating segment generate $157 million revenue and $26 million of EBDA in H1. Adjusted EBDA margin constitutes 17%, 2% higher compared to the same period last year. The increase in adjusted EBDA was mainly attributable to the higher sales of more profitable meat processing products in H1 2020. Slide number 12, a few words about our cash flow and liquidity position. Net cash used and operating activity amount to 22 million in H1 2020 compared to the net cash generated from operating activity 224 million in H1 2019 mainly due to the change in working capital. Huge working capital investment in H1 2020 are mostly related to seasonal work in progress in grain growing division. as usual for MHP, but in H1 2019 was positive influence of sunflower seeds usage from stock, while at the beginning of this year, sunflower seed stock were low, significantly low than usual. Total CAPEX for H1 2019 is amount 41 million mainly related to maintenance and Perutnina Ptui project facility. Regarding debt, at the end of the period, the company total debt was $1.5 billion and net debt about $1.3 billion. 98% of total our debt is long-term debt, about 95% of which are durable. Our average weighted interest rate Current is less than 7%. In terms of liquidity, at the end of June, we had about $185 million in cash, mostly in dollars. Net debt to EBITDA ratio by the end of the second quarter was 3.7 versus Eurobond Covenant 3.0. Increase in leverage is caused by lower EBITDA in 2020 compared to 2018. No additional debt attracted. Exceeding the ratio of 3-0 does not lead to the breach of any covenant under our indebtedness agreement, but to the introduction of additional control measures. Until we achieve net debt to EBITDA lower than 3.0, MHP has to supervise and assess insurance of additional indemnities, restricted payments, including dividends, external investments, and some others. All our debt is dominated in foreign currency and foreign exchange risk, in our case and natural hedges by significant share of export sales heading more than 50 percent of revenue mainly dollar dominated export revenue during the last year during the the h1 we fully covered all our debt service expenses and other payments and foreign currency our currency balance remains strongly positive. And now I give the floor to Anastasia to give you our current business update and outlook.

Thank you, Victoria. Globally, as you know, the poultry industry has gone through an extremely challenging time in the first half of this year. With disruption due to the COVID pandemic, significantly lower prices for poultry meat globally, and oversupply in many markets. In spite of these challenges, the company has managed to produce a good set of results and is rightly proud of this achievement. We all understand that the world has changed a lot during these six months, and we all know that this is not the end of the story. So we all have to accept new environment, new format of communication, new format of life and work here at mhp we're also transforming transforming challenges into opportunities for our customers partners for the company since the beginning of 2020 mhp has been gradually transforming from protein to culinary company launching on the market new products supported by product campaigns introducing new formats of cooperation with our partners franchisees We continue to develop Perutnin Aptui, working continuously on cost optimization, production facility modernization, and improvement in management approach. So main drivers until the year end, we see, first of all, for poultry division, both in export markets and in Ukraine. Second, we are in line with the strategy regarding Perutnin Aptui, and therefore expect strong and higher annual financial results year-on-year. And third, increased share of high-priced products in the meat processing portfolio, both in Ukraine and in the Balkans. Unfortunately, as Victoria mentioned as well, the results in grain growing operations has to be adjusted to the adverse effects of high temperatures and arid weather conditions MHPs harvest experience in the central regions of Ukraine. Therefore, we expect lower results in corn. Some words about markets. MHP currently exports to over 80 countries of the world. All markets are open. General situation, demand and supply is stabilizing. Regarding new formality, normality, the company continues to operate normally. A full range of measures has been implemented to prevent the spread of infection within the company. And as of today, there have been less than 200 COVID cases recorded at MHP, with the vast majority of people recovered. In spite of the unusual combination of headwinds of the company has faced this year's date, we currently expect to deliver a financial result for the full year, similar to 2019. Thank you very much. We are ready for questions now. to ensure that all participants on today's call have equal opportunities. Please follow the rule. One participant, three questions. Thank you for preparation in advance. Michael?

Thank you very much. We will now be starting the Q&A session. If you have any questions, please press star two on your telephone and wait for your name to be called. That's star two. You may also ask a question via text or voice if you are dialed in via the web. So we'll give a minute or so for the questions. So the first question comes from Mr. Marius Haloumis via text from Bering. Thank you for the presentation. Could I check what EDIDA margin do you target at PP? How long before you get there, and how are you planning to get there?

Just a second.

For PP, . Sorry?

Yeah, sorry. You're thinking about the margin, yeah, of the routine up to it, yes? Correct. Now we, yes, is the correct question. Yeah, now we have the ABD margin of the routine up to around 18%.

Sorry?

Okay, so we would just like to just once again remind you of the questions at star two for questions, star two for any additional questions. Thank you, our next question comes from Ms. Natalia Sugotska from Dragon Capital. Please go ahead. Your line is open.

Good afternoon. Thank you very much for the presentation. Two questions from my side, please. First of all, could you please comment a bit how companies' poultry prices performed so far in the Q3 of 2020? And the second question, what's your target net debt level for this year? Thank you very much.

Thank you for your question. Yeah, regarding our price, our situation in price, in Q3 in Ukraine compared to the Q2, we have slightly higher price, but just a few percent compared to the second quarter of this year due to stability. And regarding our target, yeah, it's very difficult. Yes, we understand that our our net debt to EBITDA by the end of the year will be around three and maybe slightly even higher than three because it will depend on our financial result in farming business because right now we understand that we will have lower than expected yield, especially just corn in farming business. And that is why our EBITDA We are in the farming business, so this year will be lower than our expectation. It is very based on current situation, how we see the situation today. We understand that our leverage by the end of year will be around three.

Understood. Thank you very much.

Thank you very much. Our next question comes from Mr. Javier Pinado from Torreal. Please go ahead, Javier, the line is open.

Hello, thank you very much for taking my question. I was wondering if you could help us a little bit more, what are going to be the main drivers for you to reach the same level of EBITDA as last year? I mean, when we look year on year, the prices for second half of this year In the policy division, do you expect them to recover, to increase a little bit, to stabilize? So the direct question is, with the EBITDA declining in the first half that much, how do you expect such a growth in EBITDA in the second half of the year to reach the same level on the full year basis? Thank you very much.

Thank you for your question, Yann. Yeah, you're completely right. Our expectation is this year we achieve very similar EBITDAs that we generated last year, despite of environment, despite of COVID pandemic, and despite of the situation with avian flu, especially in the first quarters. How we achieve this? Yeah, I will explain, because first of all, we expect that In the second half of the year, we will sell more volume compared to the first half, especially for the export. Because in the first half of the year, we sold 170,000 tons for export. In the second half of year, we understand that our sales volume will be around more than 200,000 tons. Yeah, because you remember that in the first quarter, we had been for exports, not just to Europe, and we had been to export and a lot of MENA and CIS countries. It is the one reason. And the second reason for growth, for higher our result compared to the first half of the year, is the most stabilized price in MENA region. For example, because today current price in MENA is much better than in the first half of the year. This is the driver for our growth.

Okay, thank you very much. And just to follow up, if I may, in terms of poultry prices around the world, not just in Ukraine or in MENA, What are you seeing? Are you seeing more or less the recovery in the import price worldwide also in the second half or in US dollars? Or do you think that the depreciation of some emerging currencies are putting pressure on prices? Can you help us understand your view?

Yeah, you're completely right. We think that the current price of filet in Europe And current price of quarters in the world today is one of the lowest level during the maybe last 10 years. Yeah, 10 years. And regarding, for example, situation in Europe, current situation with euro, yes, no, current situation between euro and dollars, to be honest, helped this situation. And if you calculate in dollars, the price look like better. But at the same time, yes, we understand that world chicken price should increase. Maybe not right now, but anyway, we expect that we will see this trend at minimum next year. Thank you very much.

Thank you. Thank you very much. Our next question comes from Mr. Constant de Vastos, Adamant Capital. Please go ahead, sir.

Hi, thank you for the call. So yeah, I wanted to maybe clarify with regard to the prices. Could you say what your outlook is for prices domestically and export prices separately for the second half? Yeah, let's just start with that.

Yeah, your question about price in the second half of the year. Price, if you speak about expert price, we need to speak about different parts of the chicken and different market. Okay, first of all, as I told previously, current situation with price of small chicken, yeah, small chicken or whole chicken in MENA region looks like better by approximately 10% compared to the price which we had in the first half of the year. Around 10, 15 sometimes percent depends on the country. For example, in Saudi Arabia now price is much better compared to the beginning of the year. Regarding price of filet, current price very similar that we have in the current price and our expectation for the second half of the year that price will be similar to what we have in H1. And the same situation with quarters, yeah. What we see, we see that only in the second half of the year we will sell more volume for exports, we understand. And we significantly increase our sales volume to MENA region. And now we see the good price in this region. Regarding Ukrainian price, yeah. Yes, our expectation is that the current price is slightly higher, just maybe a few percent compared to the second quarter, maybe three, four percent. We understand that now we have the high season, maybe by the end of the year price slightly decreased, but if you compare to the average price H2 compared to H1, price of chicken will be higher just a few percent. If you compare H1, H2, higher compared to the H1 in Ukraine.

Okay, got it. And if you said the same thing for exports, so just overall H2 versus H1, where would you estimate it to be?

Overall is higher, yeah.

Okay, that's clear. Also, I had a question with regard to other unallocated expenses. It's a technical thing, I guess, but they're really small in the second quarter. Is there a reason why they went down so much?

Maybe we received some insurance compensation and we included this. We received some insurance compensation. And that is why it was one-off.

Okay, so it's a one-off.

We can clarify that via direct email, okay?

Okay, yeah, yeah, that's fine. And then also, could you give an estimate of where... So you expect corn yields to go down relative to last year. Could you give an estimate of where you expect EBITDA per hectare for this year overall, given the recent updates on the weather?

Yeah, it's a very difficult question. But based on the current situation, we expect that. But you understand it will depend on the price of corn because you see that during the last two weeks, the price of corn is decreasing day to day. Yeah. But based on current situation and current expectation, we see that we will have the total EBITDA that's very similar than last year. Okay, that's clear.

And then just finally on dividends, so if indeed your EBITDA for the year is the same as last year, do you expect dividends to return to the previous year levels or do you think it's more likely that you will stay at the level that you know, that you paid for this year?

No, first of all, it will depend on the situation with our leverage. Yeah, it's our net debt to BDA because you know that we will have, yeah, it will depend. No, to be honest, it's only to say we will see our situation at our position. But we understand this minimum $30 million we will pay. But anyway, we will see.

Okay, thank you.

Thank you.

Thank you very much. We had one question from Yejide Onobulu from Bearings, which I believe has already been answered about current supply and demand dynamics of chicken in the market and outlook for prices. I will open your line, Yejide, just in case you have something that you would like to add that was not yet answered on the call.

Hi there. No, I think it was already answered. Thank you. Thank you.

In this case, we'll just do one more call for questions. That's star two for questions. We'll give another 30 seconds.

Michael, as I can see, we do not have further questions. Am I right?

Sorry, Anastasia, we do have a couple more. So if you don't mind, I will just take a couple more questions.

Sure, thank you.

We just came through. So the first one was from Dita Vera from Goldman Sachs. Please go ahead. Your line is open.

Hi. So my question is, what is the guidance of working capital going forward for the year?

Sorry, my question about CapEx, yeah? Working capital, yeah? Working capital guidance. Yeah, yeah, yeah. This year we expect that we will have investment in working capital, yeah, because due to the current situation with grain, with sunflower seeds, yeah, we understand that we... we should make some stock on the flower seed by the end of the year. That is why we expect that our investment in working capital for this year will be around $120 million.

So this is in addition to the one that we spent in the first half of the year, or it is total for the year? Sorry? Okay. This $125 million, is it in addition to what we spent in first half, or is it total for the whole year?

No, for whole year. No, for whole year. For whole year. Yeah, for whole year.

Okay, thank you.

Thank you very much. The next question comes from Mr. Dilawar Farazi from Royal London. Please go ahead, Dilawar. Your line is open.

Guys, thank you very much for the call. I think most of my questions have been answered. I just wanted to just double check on the capex that you expect for the year, for the full year. And just to reconfirm what I heard earlier on, you expect that net leverage will go down from the current 3.7 level back down to three times by the end of the year. Is that right?

Yeah, our capex for the full year is around $100 million. And our expectation by the end of the year, our leverage will be around three. Yeah, maybe slightly higher than three.

Yeah. All right. Thank you.

Thank you.

Thank you. We have a question coming online from Mr. Patrick Moshel from PM. What are your plans to reduce leverage?

The question about plan, yes, about leverage. As I told previously, uh due to the our forecast for the rest part of the year our leverage by the end of the year will be around three maybe 3.1 yes around these figures 33.1 thank you we have a follow-up question from mr constant devastos from our moon capital your line is open sir yeah uh thanks just yeah uh just wanted to ask one quick question on your european segment

I see the costs went down in the second quarter relative to the first quarter. Could you say why that happened? And also, what level of costs should we expect going forward? Do you expect them to be stable, go up or down from H1?

Konstantin, just give me a second. Just give me a second. We need to dial Victoria in again. She disappeared from the line. Just a second.

Hello? Sorry. Yes, we can hear you. Please go ahead. Yeah, yeah, it's okay. Yes, I connected.

Okay, you can hear me? Do I need to repeat it?

Yeah, please repeat the question, yeah.

Okay, yeah, yeah, no problem. Yeah, so my question was that from what I calculate, I see that your costs per etnia up to you went down in the second quarter relative to the first quarter just a little bit. I think it's like within 5%. And I wanted to ask why that happened and also what your outlook is for this segment. Do you expect costs per kilo to go up or down in the second half of the year relative to the first half?

Yeah, but your question about cost only in Perutnina or cost of MHP Ukraine? Perutnina. No, in Perutnina cost will be the same. Yeah, it will be the same because, yeah, we provided a lot of... provide a lot of action with increased efficiency but now we understand that cost will be the same that in the second quarter yeah okay thanks thank you thank you and the final question um we have online is just a clarification once again on the ebitda margin uh do you buy it for pp going forward 2021 2022 uh our target in perut nina we we understand that is a target for EBITDA margin in Perutnina, 18-19%, because we have the strategic plan to increase sales volume. At the same time, we will increase our sales volume, and we try to keep the same level that we had today, profitability.

I'm seeing no further questions. I'll pass the line back to you, Anastasia, to conclude the call. Thank you.

Thank you very much for the call, everyone. Of course, as you know, in case you have further questions, please let us know via email or direct telephone, so we will be glad to answer all your questions. Thank you very much, and have a nice day. Bye-bye.