MHP SE

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's 3Q 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 questions via voice or the text feature. So without further ado, I would now like to pass the line to MHP. Anastasia, the floor is yours.

Thank you very much, Michael. Good afternoon and good morning. Thank you for joining us today at MHP's conference call. My name is Anastasia. I'm a director of investor relations and in the call today we will discuss MHP financial results for the third quarter and nine months of 2020. Today's call is based on data and information released earlier today through the third quarter and nine months 2020 press release and financial statements accordingly. However, during our call, we will discuss our projections and plans based on our assumptions and strategy. Please take it into consideration. So together with CFO of MHP, Victoria Kapelushnaya, we will present you financial results of the company in general. and best segments. And after the presentation, we will be glad to answer all your questions. Let's start slide number four of your presentation. So we will start, as always, from macroenvironment. And according to the results of the first nine months of 2020, the reduction of the composite production index, CPI, slowed down and amounted to around 6%. 6.5% in January-August and 6% in the third quarter of 2020. Accordingly, the Economy Ministry of Ukraine estimates the decrease in the volume of GDP during nine months of 2020 at around 5.5%. Accordingly to the survey, the Ministry left unchanged the forecast for a fall in GDP in 2020 at around 5% year-on-year. However, In the event of a prolonged lockdown in Ukraine and in the world because of COVID-19, the fall in GDP in 2020 in Ukraine will amount to 5.6% year over year. Meanwhile, Ukraine's annual inflation rate rose to 2.5% year on year in line with market expectations. Output pressure came from housing, water, electricity, gas and other fuels, restaurants and hotels. food and non-alcoholic beverages and miscellaneous goods and services. During 9 March of 2020, Ukrainian hryvnia developed by around 8% year-on-year as a result of economic instability due to COVID-19 in the world. I think we are ready to get back to the company's results and together with you, we will go on slide number six of our presentation. So here we have the financial results for the third quarter and nine months of 2020, which reflect the challenges MHP had been facing during the first half of the year and the third quarter of the year. The effects of a first quarter outbreak of avian influenza in Ukraine, the challenges posed by the global COVID-19 pandemic in the second quarter, and the gradual stabilization of economic situation and market environment in the third quarter of 2020. MHP's revenues in Q3 2020 remained broadly stable with 2% decrease only year-on-year and constituted around 547 million US dollars. MHP's revenue in nine months 2020 decreased by 6% year-on-year to $1,414,000,000, mainly adversely affected by low sales of grains in the third quarter of 2020 compared to the third quarter of 2019. And, of course, lower results in poultry segment, partially offset by strong results at Pirutnino-Ptui. Export revenue in nine months of 2020 was around $761 million, 14% down year-on-year. Many were affected by lower export of grain compared to nine months of 2019 and low paltry export prices. Adjusted to bidow margin in nine months of 2020 remained relatively stable and constituted 22% compared to 21%. percent in nine months of 2019, with adjusted EBITDA down from $302 million to $331 million as a result of challenging environment and its impact on MHP's financial results in the first half of 2020. As you can see from the report and here on the slide, EBITDA in the third quarter of 2020 remained broadly stable year-on-year. Let's look at MHP's financial results in greater details and by segment. Let's go on slide number seven of your presentation. As you can see from the table, contribution from MHP's revenue, sorry, contribution to MHP's revenue from poultry and relation operations was almost 70%, and from European operating segment, almost 20%. At the same time, poultry and grain growing operations contributed the most to the company's EBITDA, 60 and 26% respectively. Meat processing operations and other agricultural segment contributions still remains the lowest both to the revenue and to EBITDA of MHP. However, with this prospects to increase, taking into account current transformation of the company, and culinary strategy implementation. Let's have a closer look at each business segment on our next three slides. And here I pass my vote to Victoria. Thank you, Anastasia.

Good afternoon, everyone. Let me give you a more closer to our poultry segment performance, slide number eight. As you know, since the beginning of second quarter, all our company's poultry production facilities in Ukraine have been operating at full capacity again. MHP continues to develop its exports to MENA market, increasing the share of small whole chicken production. As a result, the total number of heads in Q3 increased by 9% year-on-year, but overall poultry production tonnage decreased by 3%. The switch in production and sales was driven by higher profitability, per kilo and more favorable market environment in Meno compared to the other export regions. Overall revenue in poultry segments decreased by 6% year on year, driven by decrease in price of chicken meat. Decrease in revenue was mostly due to the avian influenza outbreak in Ukraine in the first quarter this year, which caused a temporary ban of exports from Ukraine to EU, as well as impact of COVID pandemic since March 2020. Despite the challenges, MHP delivered satisfactory results in Q3. Volume of chicken meat in Q3 significantly increased compared to the second quarter. as well as year-on-year. This was mainly due to increased export sales, including to MENA, EU, and Africa region. The increase in exports last quarter led to decrease in poultry meat stock accumulated in the first half of the year, as well as overall increase in sales volume for nine months this year. During the nine months, our average export sales price decreased by nine percent year-on-year in U.S. dollars, mainly driven the product mix change, usually increasing the share of small whole chickens, and also a weaker price on fillet in you, as many global competitors were suffering from reducing demand and excess capacity. Poultry price in Myanmar market especially in the third quarter, are more favorable and stable. Price on domestic market decreased by 10% year-on-year, mainly affected by global COVID pandemic and alien influence in Ukraine. This increasing was in June 2020. Since the third quarter, and started beginning from May, poultry price in Ukraine begun to recovery and by today reach the level of last year. Poultry production costs in Q3 remained almost the same as in the third quarter this year due to increased price of corn. a new harvest by 40% higher price of corn year to year, we already see an increasing in poultry production costs starting from October. This factor may affect the increase in meat price in next year. We think that we can increase price in the Q4 in Ukraine and going forward. Gross profit of the segment in nine months decreased by 22%. Adjusted ABDA before 41 standards for one kilo in nine months was $0.36 per kilo, which approximately by 18% low compared to the average ABDA per kilo during the nine months last year, mainly due to decrease of chicken meat prices. Let's move to the next slide, number nine, about our grain segment. This year, unusually bad weather conditions in the central region of Ukraine have led to significantly lower yields across most crops compared to the 2018, especially corn. At the same time, our yield of corn in the western and the eastern region of Ukraine was around 9 tons per hectare. But in the central region, our main hard peak area, our corn yield was less than 5 tons per hectare. It is our anti-record during all our history of MHP. However, negative impact on grain results caused by low yields of crops was upset by significant increase in grain prices. Approximately 40% corn price increase year to year. External grain segments revenue in 9 months 2020 amounts to 90 million. The decrease compared to the last year level was mainly due to low volumes of crops available at the beginning for external sales in the first half of the year. EBDA of this segment, net effect of IFRS 16 is $78 million, by approximately 10% higher compared to the same period last year, mainly due to the higher price for grain, especially corn and sunflower seeds, partially offset by low yields, of crops this year compared to the last year. And our expectation about the BDA per hectare this year around $220. Let's go to the next slide, slide number 10. The key business of segments, as you know, is the meat processing and convenient food production. Volume of convenient food are growing, plus 8% in Q3. and close four percent during the nine months compared to the same period last year supported by a new product development program started by the end of 2019. mid processing program product volume decreased by around five percent in nine months mainly in traditional store segments we expect to change volume dynamics to positive site following the wide range of new product introduction to the market in the fourth quarter this year. Segment revenue in nine months remain on exchange. They amount to around $106 million. Interested EBDA is around $15 million, 25% higher compared to the last year. driven mostly by higher returns of earnings from our milk operation. Let's go to the slide number 11. Following the strategy of poultry production growth and the slide number 11, European operating. Following the strategy of poultry production growth and increasing facility capacity utilization in Slovenia, Poultry production volumes of European operating segments in Q3 increased by 14% compared to the same period last year. Poultry and meat processing product sales increased in nine months compared to the same period last year by 10%. Average poultry price decreased by 6%. mainly to decrease our price only in one region, in Balkan, only in Bosnia. Average price for the meat processing products were related stable year to year. European operating segment generates around 250 million dollars of revenue and around 38 million of EBITDA in nine months This is by 20% higher compared to the same period last year, mainly to increase our sales and especially increase the share of meat processing in our sales. And additionally, we increase our production efficiency. Slide number 12. A few words about our cash flow. and liquidity position. Net cash from operating activity amounted $140 million compared to the net cash generated from operating activity $332 million in H1 2018 mainly due to the change in working capital. Use of funds in working capital during the nine months was mostly related to investment in crops in fields to be harvested in Q4. The difference compared to the same period last year was mainly attitude to higher investment in inventory during the nine months this year, sunflower and soya, designed by internal consumption, mostly due to the low stock of crops at the beginning of this year. compared to the stock, which we have sunflower soil at the beginning of last year. Total capex for nine months, it is around $60 million, mainly related to modernization products, launch capex related to launch new product development, maintenance capex, and peritoneum of two years. development facilities. Regarding debt, at the end of the period, by the end of nine months, total hour debt was approximately $1.5 billion, and net debt about $1.2 billion. As you know, more than 98% of total hour debt is long-term debt. And our average weight interest rate today is below seven. In terms of liquidity, at the end of October, we had approximately $300 million, mostly cash, mostly in dollars. We have a very good liquidity position. Due to the challenges in 2020 that led to decrease in our EBITDA And net debt-to-BD ratio by the end of the period, 3.3. But at the same time, having 55% of our revenue, more than $650 million nominated export revenue during this year, we fully covered all our debt service and all our expenses in dollars. and other payments in foreign currency. And company currency balance remains strongly positive. And now I give the floor to Anastasia.

Thank you very much, Victoria. So we all must admit, I think, that the first nine months of 2020 were extremely challenging. And we have faced a few challenges since the beginning of 2020. such as avian influenza in Ukraine, which resulted in the temporary closure of some export markets in the first quarter, the COVID-19 pandemic then, and its disruptive effects, which resulted in oversupply and high stock levels in European markets, lower prices globally, turbulent market, crop yields adversely affected by the worst weather conditions in the central Ukraine for at least 30 years significant grain price growth year-on-year which already resulted in substantial protein production cost increase and volatile exchange rate in Ukraine so what do we expect going forward definitely we expect increasing grain prices MHP will continue to rebalance poultry sales to more profitable export markets to largely offset the effects of flower poultry prices in Europe, diversification remains our key priority in export geography and sales, and one of MHP's competitive advantages is production flexibility. So we can quite easily increase or decrease production of small birds and big birds. We also expect poultry prices in our major markets to adjust gradually in response to increased production costs driven by high grain prices. The company also expects to derive increasing benefit from its shift towards a more value-added strategy and the development of antibiotic-free products to be sold initially under our Nashariaba brand. And just to remind you, that since the beginning of 2020, MHP has been gradually transforming from protein or industrial into culinary company, launching on the market new products supported by product campaigns, introducing new formats of cooperation with our partners, like franchisees, retail, and horeca. And before we start question and answer session, I would like to say, and I think to summarize, our conference call today, that despite all challenges we faced in 2020, MHP is targeted to maintain a status of the most cost-efficient company in a class. And we have all resources for leadership, business model, our strategy, strong team, and innovations. Thank you very much. And Michael, we are ready for questions.

Thank you very much, Anastasia. We will now enter the Q&A session. If you have any questions, please press star 2 on your telephone pad and wait for your name to be called. 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 to come in. So just a reminder, star two on your telephone keypad for questions. You may also ask a question online via text or voice. Thank you, our first question comes from Mr. Javier Tinedo from Torreal. Please go ahead, your line is open.

Hello, thank you for taking my question. It's just a short one. Just to understand, now that we are almost in the middle of November, could you give us a sense on how the EBITDA for net of IFRS 16 would look like in a full year basis? And at the same time, what's your forecast for working capital? Because I guess that in the last conference call you said that you expected basically no inflow, not a major cash outflow in working capital in the cash flow. Could you just confirm that we should expect such a movement also with the visibility you have today? So yeah, those two questions, EBITDA please for 2020 and working capital outflow for 2020.

Hello, for this year, we understand that the BDA of this year will be slightly lower than last year. Because first of all, our expectation, our budget and our expectation before from grain segments was higher. And we understand that we will generate this year. And the second issue, as I told in the presentation, the cost of production of chicken since October increased. At the same time, we understand that price will be increased, but not at the same period of the time. That is why our current expectation for full EBITDA for this year by approximately 5-10% lower compared to this last year. Regarding working capital, uh due to the current situation on ukrainian market with with crops we understand how important for company to create and to purge and flower seed and soya in the first quarter and that is why we understand that investment in working capital this year will be approximately around 200 million dollars i will explain why Because as I mentioned in presentation, at the beginning of this year, we had one of the lowest stocks in our history. Stocks of, I will explain, stocks of sunflower and soya. And this year, due to the current situation, we would like to have on stock by the end of this year, sunflower, sweet, and soya. Minimum by five months consumption. And price, and the price, as I told in presentation, current price of sunflower seeds compared to the price last year, no, year to year, current price higher, more than 50%. It is one, is the second reason why, yeah, we will have so huge investment in working capital. But it is a vanu during the first half of the year. During the first half of the year, we consume this stock for chicken production.

Okay, thank you. Our next question comes from Ms. Natalia Stugotska from Dragon Capital. Please go ahead, ma'am. Your line is open.

Good afternoon. Thank you very much for the presentation. A couple of questions from my side, please. First of all, could you please update on the company's plans for CAPEX for 2021? Should companies stick to maintenance CAPEX or probably some expansion plans to Europe has arrived?

Thank you. Thank you very much for your question. Yes, we try to be modest in our CapEx investment. And for next year, our CapEx will be around $100 million, include maintenance CapEx. And also the CapEx for provide modernization and buy new equipment for production, new products, for launch new products, value-added products for Ukrainian markets. and for export market. Also, we have some capex for providing more optimization with buyback period less than two years. Total capex around 100 million.

Thank you very much. Provided the total capex for the next year is materially below the company's cash balance as of September end of September of $300 million. Would the company proceed with keeping this cash on balance, or does the company consider any other options to utilize this liquidity?

Natalia, as I told you, in the first quarter we will have the investment in working capital, because we need to buy a lot of, and now we are in the process of buying a lot of sunflower seeds and soya. Because by the end of the year, in September, to be honest, we did not provide a lot of purchasing because it was a harvesting campaign. And this year, harvesting campaign started later compared to this year. And that is why we invest around $200 million for working capital. In the first quarter, around $150 million. By the end of the year, our liquidity position will be around 150 million.

Understood. Thank you very much. And one more question from my side, please. According to the last draft of state budget, the minimum salary in Ukraine is about to increase by about 20%. Do you expect this increase to affect in any way company's total salary costs for the next year?

I think a very good question. But to be honest, yeah, even current salary of our workers in different region in Ukraine higher than minimum salary. And, yeah, even I can say not significant, but enough substantial higher than minimum salary. Yeah, we don't expect so big increase in the salary.

Mm-hmm. Understood. Thank you very much.

Thank you very much.

We have a question coming by text. Could you please provide more details about FX revaluation? What items lead to significant losses?

Yeah, because if you look, yeah, because at the beginning of the year, currency ratio between dollars and grivna in Ukraine was lower than, currency ratio was lower than 24. Yeah, 24 grivnas per one dollar. And by the end of nine months, it was around higher than 28. Yeah, that is why just, and all our debts in hard currency, revolution our debt position, Yeah, it is the real, it is huge. But I would like to emphasize this is the non-cash losses. Because at the same time, you know that 55% of total our revenue in hard currency. And that is why today we generate for full year more than $1 billion in dollars and euros.

Okay, thank you. Our next question, a voice question, comes from Mr. Konstantin Pasovich from Aramont Capital. Please go ahead. Your line is open.

Hi. Thank you very much for the call. A couple of questions from me. So the first one regarding prices. So you mentioned that on the domestic market, poultry prices in the fourth quarter are looking to be about the same level of last year. Could you talk about what you see for exports for the fourth quarter?

Yes, it is a good question about our price. And what we see in general price of meat in Ukrainian market, I cannot imagine how that is possible. I cannot imagine situation if price of meat includes poultry, pork and beef price does not increase. Because we understand that 60% of the cost of different kinds of meat is grain. grain increase more than 40%. And I would like to emphasize that poultry has advantages compared to the other kinds of meat, because you remember that for production one kilo of poultry you need to spend significantly less kilo of grain compared to the pork and beef. That is why we understand that price of meat should be increasing in Ukraine. Yeah, in October, September, to be honest, the price of meat increased, but not so significant, a little bit, but at the same time, we expect that price will increase. Regarding export price, yeah, the same situation, because it is not just a situation with increasing price of grain just only for Ukraine. It is a whole trend. And we understand that if you look at futures, price of meat will have to increase too, but we understand that it will be some in lack of time. That is why regarding first quarter, we don't expect any increase in price of filet in Europe, and to be honest, we don't expect any increase in price in quarters in Africa, no, in the world. But regarding 2021, it would be very logical that mid-price will increase.

So in the fourth quarter, when you say no increase, do you mean no increase relative to the third quarter or to last year?

In Ukrainian prices. No, compared to the third quarter, no. Compared to the last year, it was low, yeah. When I talk about the increasing price, I compare the price per quarter compared to the third quarter, yeah.

Okay, so $1.4 per kilo, yeah, that's roughly $1.4.

No, no, no, our price, yeah, because when we spoke about average price, this average price depends on mix. Yeah, it's mixed, but yes, mixed for fourth quarter will be very similar than third quarter. That is why, yes, the same price, yeah.

Okay, okay, that's clear. And then regarding costs, so costs are going up, right? And they went up in the third quarter. And also because, so in the fourth quarter, do you expect prices per kilo to go up significantly? For you, and I understand that there's also bonuses that are usually paid in the fourth quarter. So besides the bonus factor, do you expect the cost to go up because of these higher grain prices per kilo? And if so, by how much?

Yes, the main driver for increasing our cost in the fourth quarter is the grain price. Yes, you're completely right. And our expectation is approximately by 15%, around 15%. is a minimum increase, which we see, and the situation with bonus, yes, but we will see what amount of bonus we will pay for this year. It is a very big issue.

Okay, so 15% quarter-on-quarter, correct?

Yes, yes.

And then could you talk about, so the grain segment right now, the harvest is much lower. Are you still self-sufficient in corn, given where your yields are?

No, and now we are buying not just sunflower seeds and so on, and now we are buying corn too.

Okay, and could you remind me?

Because we have never had in our history, yeah, we have never had in our history So low yield, of course. It was the first time in our history, yes. Right, yes.

What the conversion is, how much corn you need. Could you remind us what the conversion is? How much corn you would need to be fully self-sufficient? So how much you need to buy to be fully self-sufficient until the next harvest?

Okay. Yeah, it is not approximately 200,000, 200,000, 250,000. Yeah, we need to buy, but until today we have bought something. Yeah, I don't know exactly figures, but we bought part of them.

Okay, okay, that's clear. And finally also, so you gave an EBITDA per hectare estimate for this year for grain at $220 per hectare. Could you confirm this figure, and also could you say if this is excluding IFRS 16 or including IFRS 16?

No, no, excluding.

Okay, so $220 per hectare, excluding IFRS 16 for the full year.

But our expectation, because until today we have not finalized our gathering campaign, of course. It is not so big, but

And what do you assume, what do you put in the biological revaluation into the sticker? Do you put anything in or do you assume it to be around zero when you say 220?

Around zero, around zero.

Okay, that's clear. Thank you very much.

Thank you.

Thank you very much. We will do one final reminder for questions. Start two on the keypad for any additional questions. We'll give another 30 seconds. So we have a question from VT Jita from Goldman Sachs. Please go ahead, ma'am. Your line is open.

Hi. My question is about EBITDA margins. Since costs have increased for grains and you are no longer self-sufficient and probably first time that you are buying corn out in the market may not be at the best prices. So do you expect EBITDA margins to worsen from here on for the fourth quarter and for the next year?

Yeah, thank you for your question. It's a very good question because as I told previously, now it is no simple time for all meat companies in the world because due to the price of grain, cost of production has increased and situation with price is open. But we think that we can manage price in Ukraine. and especially because we understand how we will launch a new product, not just a new marketing campaign. At the same time, we have planned regarding the next year and the same situation in the fourth quarter, especially in December, regarding the export. We will mostly concentrate to sell for the export small chick for MENA region. As I told previously, price on MENA is more attractive for company, is more attractive, is more profitable than price of quarters and filet. And that is why our expectation is that next year we can manage, yes, our profitability and our expectation is that we can keep our margin for next year the same levels that around at the same level that we will have this year. Around total, our EBD margin will be around 20%. It's our full cost.

Okay, okay. And just a follow-up. So what is causing these prices to not rise very quickly? Because... MST is like a leader with majority production coming from MST. So I'm sure smaller players in the unorganized sector will be feeling the pinch much more than what you all are feeling. So what is the possible explanation for prices not rising in tandem with grain price increases?

my big excuse really, but I didn't catch the connection. The connection is really, really poor. So if you can make your question very short and straightforward, that will be perfect. Thank you.

Okay. Is it better now? Absolutely. Yes, please. So I was asking what is the reason that the prices are not increasing for poultry and as quickly as the brain pressures are increasing.

Excuse me, could you please maybe write your question into the line? Okay, because really we cannot catch.

Connection is bad.

Yeah, connection is really bad.

Okay, so we will move to the next question from Mr. Alexander Sychov from NNIP. Please go ahead. Your line is open, Alexander.

Yeah, hello. Thank you for the presentation. So I understand you're accumulating a lot of working capital this year. How should we think about it going forward? Say next year, I understand production is going to be more or less flat. So should we expect it to normalize somehow next year or? or it will be more dependent on the prices of grain, etc. Can you elaborate a bit on this one, and how should we think about your leverage then, because I understand it's going closer to four times from something like 3.3 now.

Thank you for your question. Regarding working capital for next year, you understand that working capital of will depend on the price of grain. If price of the grain is the same level, we, anyway, we don't have any investment in working capital because we continue to keep the same level of grain on sunflower seed in our storage. But if price of the grain goes down, in this case, Even with completely the same volume with grain, we will have reinvestment. Divestment from working capital, yeah? Because you understand this year we invest around 220, around $200 million in working capital for creating stock. The price will be lower, for example, by 30%. our investment not investment our position will be low by 30 percent and that is why we will have the investment from working capital we will have positive yeah positive position from investment yeah but anyway anyway it any uh it's any way we will uh we don't have any we we don't have any plan to invest more in working capital for next in next year in next year regarding this uh and regarding The second question about leverage, yeah, you understand it will depend of our BDA. Yeah, at the level of BDA. At the same time, we have planned to decrease because current level of leverage, 3.5, it is not comfortable for us. And we try to decrease, but it will depend of our situation with prices. But anyway, our target is to decrease our leverage next year.

A small follow-up on working capital, if I may. So can you explain what went wrong? Because I understand that a couple of months ago on the September call, you got it for like $50 million accumulation of working capital this year. Now you expect it at $200 million. So what went wrong? You didn't expect price increase or something? Or maybe there are some hedging options you can consider in the future? Something like that. What's the reason for such a change in working capital expectations?

Yes, yes. It's a very good question. Yeah, it's a very good question. Just maybe we talk about that on the investment 50 million. First of all, is there two reasons why? now we have completely other plan for investment 200 million first of all because three months ago nobody knows that price of grain increased by for example for corn by 40 percent for sunflower seeds by 60 percent one of the reasons increase of price and the second reason even three months ago we did not think and we did not have target to have in our storage in our storage stock for five months. Based on current situation, we decided that we must do it. It is the two reasons. Just all reasons why we increase our investment capital regarding our stock by the end of the year. Stock of crops, of grain.

Understood, thank you.

Thank you very much. I would now like to go back to the question of Vidi Vera from Goldman Sachs. She has typed out her question. Why does the price of poultry not quickly adapt with the growing prices of grain? How are smaller players surviving? Are you seeing smaller players shutting? So why does the price of poultry not quickly adapt with the growing prices of grain? And are you seeing smaller players surviving or shutting down?

Yeah, you're completely right. Now we feel that it's not just small producers, small poultry producers survive and feel not so good. And even the player number two in the Ukrainian market, Agra Mars, has some problems. And with the current situation, we understand that some company will disappear of the market. And that is why we are sure that domestic price, yeah, we will increase, yeah, because we don't see any other possibility. Not just, I would like to repeat again, not just regarding Polish meat, regarding all kinds of meat, I'm sure. But, unfortunately, it is not possible to make in one one second yeah we need some time but i don't think that it will be long time i suppose that yeah during this six months or we can compensate growth in our cost no now i talk not about the port i talk about the price of meat on domestic market thank you

Thank you very much. Our next question comes from Mr. Nick Ivanov, PGIM. Please go ahead, Nick. Your line is open.

Yeah, thanks. My question has been partially answered, but still I just want to clarify things. At the second quarter call, your expectation for net leverage was to approach three times by the end of this year, 3.1, you probably said. Right now, at Q3, it was 3.3. And you mentioned that probably currently it's 3.5. What is your expectation for net leverage by the end of this year?

You're completely right. You're completely right. Three months ago, I talked about by the end of this year, we will try to have our leverage around three. But at the same time, Now we understand that our EBDA for full year will be low. And it's the two reasons. Yeah, one of them from our farming business, the bad condition, weather condition, and very low anti-record our yield in corn. And the second reason is situation in poultry segments. The same situation is increased cost of production. And it is the one reason. why our leverage by the end of the year will be higher, 3.5 approximately, and maybe around 3.5, 3.6. And the second reason, which we spoke just 10 minutes ago about previously, we thought that we invest in working capital this year around $50 million. Now we understand that we must invest around $200 million for creating grain stock. and some flowers. Thank you.

Thank you very much. Our next question comes as a follow-up question from Mr. Javier Tinedo from Torreyao. Please go ahead, Javier. Your line is open.

Thank you very much. I'm really sorry for coming back to the question. I'm not very familiar with the sector and the business you do. Can you please explain me why does an increase in crop prices lead to such a high inflow in working capital in the fourth quarter? I mean, just a concept, conceptually speaking. I mean, you see in October that they're going to increase. So why do you need to invest in working capital? I would assume, yes, that they would be 30% higher than they would have done because of the price increase, et cetera. But I don't understand the process, the decision process.

Thank you for the question. I will try to explain. Yeah, previous question. Three months ago, we thought that by the end of the year, we keep in our storage sunflower seeds only for two months. Approximately for two months, this is approximately, I will tell you, approximately 200,000, 100,000 tons. Now, based on current situation, with deficit of sunflower seeds, we decided that we must keep in our storage, just sunflower seeds, 200,000 tons. You understand? It's just issue of volume. And three months ago, our expectation, it's not just our expectation, expectation of all players, of meat crushing companies in Ukraine and not just in Ukraine, in the world, our expectation was about the price of sunflower seeds will be approximately $400 maximum. Today's price is approximately $750. That is why, yeah, two reasons. We will make, and now we are making stock for more volume of sunflower. The same situation with sunflower seed and soil. And other issue about the price because we need to buy. Okay, understood. And now we're protesting and we're buying.

Okay? Thank you. Okay, just as a follow-up on that. Basically, next year, at the same price, if you decide that life goes more normal, you can decrease the volume you have to change and you can have a cash inflow in working capital next year at the same price level of corn, right? So even if prices don't move next year, but you decide that you can operate with just two months rather than four months, then you decrease your working capital easily at an amount of, let's say, $100 million.

Yes, you're completely right. If next year we would like to keep less volume, we will hear questions flow from working capital.

Okay, now I understand. Thank you very much.

Yeah, thank you.

Thank you very much. Our final question today, this is a follow-up from Mr. Konstantin Pasovic. Your line is open. Please go ahead.

Yeah, thanks. Just a quick follow-up. I just wanted to clarify. So for the poultry, if we look at poultry per kilo, if it's not per kilo, So in the third quarter, it was 0.38. And given that costs are going up and where the prices are, could you say what your estimate is for the fourth quarter for this figure? Will it go down to like 0.2 or something less drastic?

Yes, exactly. In the first quarter, we expect that EBITDA per kilo will be low. Yeah, per kilo will be low. Yeah.

Thank you very much. I'm seeing no further questions. I'll pass the line back to you, Anastasia and Victoria, for your concluding remarks.

Thank you very much, Michael. Thank you very much, everybody. Very good conversation, very detailed questions. And of course, if you have your questions more than you managed to ask today, please give us a call or send a message. Thank you very much and have a lovely evening. Bye-bye.