MHP SE

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's Q3 and 9 Months 2021 Financial Results Conference Call on the 18th of November, 2021. At this time, all participant lines are in listen-only mode. The format of today's call will be a presentation by the MHP management and IR team, followed by a question and answer session. So 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. As Michael said, my name is Anastasia Sabatuka. I'm a director of investor relations. And also on the call today, of course, we will discuss together with Victoria our MHP, our company's results, financial results for the third quarter and nine months of 2021. Today's call is based on information released earlier today. There is press release and financial statements. However, during our call, we will discuss our projections and plans based on our assumptions and the domestic and international trends. Please take it into account. So, as I said, together with the CFO of MHP, Victoria Kapelushina, we will present our financial results of the company. in general and by segments. And after the presentation, we will be glad to answer your questions. So let us start. We go on slide number four of the presentation. I hope you go the presentation well in advance. So we start with the macro environment. Ukraine's GDP in the third quarter of 2021 was up by 2.4%. with inflation ratio which increased to 10%. Since the end of September, Ukrainian currency has been strengthening and as of today, it has appreciated by around 2% year-on-year. With regard to COVID-19 landscape, as of today, Ukraine is number 16 in the world with rather high daily statistics in new cases and deaths, unfortunately. and also, unfortunately, with a rather low level of vaccinated people. It is not because Ukraine is lacking vaccines, but because there is a big number of people who are against, actually, who are against the vaccination. As of today, only more than 22% of the Ukrainian population is fully vaccinated. Let us come back to the company's results, and we go together with you on slide number six of the presentation. So let me start with operational highlights for the period of nine months of 2021. Paltry sales remained stable at around 522,000 tonnes. Paltry exports increased by 8% and reached around 300,000 tonnes in nine months. driven by increased sales volumes predominantly to the MENA region. Total share of exports out of the total poultry sales volumes increased to 57%, from 53% in 9 months of 2020. Financial results for 9 months of 2021 looks as follows. Revenue increased by 16% and reached $1,647,000,000 U.S., with export revenue representing 51% of total revenue, mainly driven by an increase in exports of poultry meat. Adjusted EBITDA increased by 72% and reached $519 million, driven mainly by excellent results in grain growing operations. As a result of substantial EBITDA growth, not that the LTM EBITDA ratio constituted around 2.1%. Let's go on slide number seven of the presentation. So here we have the key financials for the third quarter of the year. MHP's revenue increased by 20% and reached $658 million, with export revenue represented around 52%. Adjusted EBITDA margin increased by around 115% year-on-year and reached 186 million US dollars with EBITDA margin of 28% as a result of positive results both in poultry and grain growing operation segments. Slide number eight. It shows us our financial results by segment. And as you can see from the table, the vast majority of revenue in nine months of 2021 came from poultry and related operations. That was 69%. And of course, the European operational segment, it was 18%. At the same time, grain growing and poultry operations contributed the most to the company's EBITDA, 50% and 41% respectively. The biggest contributor to export revenue was from poultry operations. That constituted 699 million US dollars. Let's have a closer look at each business segment and results on our next slide. Here I pass my word to Victoria. Thank you, Anastasia.

Good afternoon, everyone. Let's have a look at MHPA Ukrainian poultry segment performance slide number nine. It is important to highlight During the nine months of the year, all MHP poultry production facilities in Ukraine have been operated at full capacity. As you can see, MHP delivered exceptional strong results in Q3 compared to the Q3 2020, driven mainly by strong poultry provides both in Ukraine and internationally. Total revenue in poultry segment increased by 20% year-on-year, driven mostly by increase in poultry price, export driven by price growth of chicken fillet in EU and quotas international. In Ukraine, gradually compensating a substantial increase in poultry production costs and we reached the same level of profitability as in pre-COVID time. Poultry production costs In Q3 2020, increase by 21% in U.S. year-on-year, driven by significant growth of grain and protein prices. Let's move to the next slide, number 10. Our grain growing segment has performed exceptionally strong results this year. EBITDA in nine months constituted 261 million, compared to the 70-80 million last year. The mainly attitude to impressive higher harvest of winter crops over 20% higher year-on-year and spring crops over the 50% year-on-year. As well as strong international grain price which around 40% higher compared to the last year. EBITDA this year per hectare mixed crops is expected to reach record more than $900 per hectare. Let's go to the slide number 11. Need protesting business perform well following a strategy to culinary and transformation of company which is a positive trend in volume and price. mainly due to increased sales, more expensive SKU, an expansion of cooperation with large horeca channels such as McDonald's, Ukraine, KHC, since the second quarter this year with more marginal product sales increase. Adjusted at the same time, adjusted EBITDA of this segment decreased, driven mainly by increase in raw material price, poultry meat, spice and packaging materials, which has not yet been offset by an increase in price of meat processing products. We expect to achieve profitability of pre-COVID time in the beginning of next year. Let's proceed to the slide number 12, several words about Pirotnin Aptui. Growth in capacity in Serbia and Croatia resulted in 15% increase in poultry sales year-on-year, which resulted in ABDA growth around 30% year-on-year for 9 months. Moreover, the significant ABDA growth is attributable to high operation efficiency, which allowed to offset growing cost of raw material, positive impact from appreciation of euro against dollars, as well as $1 million one-off effect related to insurance and some change in accounting treatments from past events. We will continue to invest into development of peritoneal operations through 2022, rising operational efficiency and sales volumes. Slide number 13, a few words about our cash flow and liquidity position. Cash from operation increased mainly in line with increase of EBITDA. An additional impact was due to change in fair value of biological assets and agricultural produce, which represented non-cash adjustment. Use of fund in working capital during the Q3 was mostly related in low investment in inventory. designed for international internal consumption total complex in q3 amounts 38 million mainly related to modernization projects new product developed maintenance and routine up to production facilities for the development total complex this year is expected to be around 120 million dollars regarding that due to significant improvement in the bda we substantially improved net debt ratio net debt to EBITDA to 2.1 versus EBC limit 3. Moreover, we expect further improved LTA-EBITDA in Q4. At the end of the period of 9 months MHP, total debt was nearly $1.5 billion and net debt about 1.2. 99% of total debt is long-term debt. 96 of them is Eurobond. Our average weight interest rate currently is 6.7. In term liquidity, at the end of September, we had around $300 million in cash, in dollars. Our currency balance, as always, remains strongly positive, and all our dollar-dominated export revenue full covered all our debt service expenses and other payment in foreign currencies. And now I give the floor to Anastasia for an update and outlook. Thank you, Victoria.

So we are now approaching the final slide, slide number 14. And as we could all see, the company's performance both in the third quarter and within the nine months of the year was exceptionally strong. The company continues to progress with its culinary transformation. And as of today, a new concept of meat markets 2.0 launched with 200 stores to be opened by the year end. Donor markets are functional, expected to be around 70 points by the end of the year. own retail network, convenience store format with focus on meat and ready-to-eat and ready-to-cook products with around 25 stores planned, already 11 opened to be opened by the end of this year. MHP will continue its transformation and will increase production of value-added products for sales both on the domestic and export markets going forward. Regarding agri-division, all agri-producers in Ukraine have been enjoying excellent weather conditions, generating strong crop yields this year, and the powerful combination of positive price and weather trends reported at the time of our half-year results in September has continued through the harvesting season. This year at MHP, we have got one of the strongest harvests in our history. However, going forward and taking into account current forward contract prices, we do not expect grain prices in 2022 to remain as high as they were in 2021. As we are approaching the year end and taking into account even stronger results in grain growing operations than previously expected, the full year EBITDA is expected to be in excess of 600 million U.S. dollars. The net debt to EBITDA ratio is expected to be around 2 by year end. Looking ahead to 2022, protein price trends are expected to soften and this will be compounded by further substantial cost increases, particularly in fertilizer, fodder and utilities, which we are already experiencing in the fourth quarter of this year. As a result, Next year's results are expected to revert to more customary levels after MHP's exceptional performance in 2021. Thank you very much. I think I can stop here, and we are ready for questions. Operator?

Thank you very much. We will now be moving to the Q&A part of the call. If you are dialed in via the telephone, please press star 2 on your keypad for any questions. That's star 2 for any voice questions. You may also ask a text question or a voice question if you are dialed in via the web. We'll now give a second or so for the questions to come in. Thank you. Our first question comes from Mr. Konstantin Pastavits from Ademon Capital. Please go ahead, sir. Your line is open.

Hi. Thank you for the call. I have a couple of questions. So one relates to the cost per kilo in the poultry segment in the third quarter. So from what I see is that the cost is up about 15 cents versus Q2. Could you give some sort of a breakdown of what the main reason for the increase is? I'm guessing that natural gas had an impact here. And also, could you guide us on where you see costs in the fourth quarter? in this segment as well.

Yeah, thank you for your question. Yes, you're right. The cost of production Q3 higher than Q2. And the main reason for this because cost of proteins, sunflower and soy protein, significantly, approximately by 7, 8 cents higher compared to the Q2. Because Q2, it was very... It was low, and plus the increase in Q3, increased cost of packaging and electricity. If you compare it to the Q3 compared to the Q4, we see the slightly higher cost of production, not slightly, yes, it is around 5 cents because the price or is the main reason of this is the cost, is the price of gas.

Got it. And what about Q1 of 2022? Do you expect the gas prices to spill over into costs and raise costs for that period?

No, we try to be always conservative, especially at the beginning of the year, and that is why we put in our budget, especially in the first quarter, cost price of gas equals the current price of gas. Yeah, that is why in the short-term period, we don't expect any decreasing in price.

Okay, so just to reiterate, so in the first quarter of 2022, you do not expect any additional costs because of the gas price as compared to Q4.

Yeah, yeah, compared to the first quarter, yeah. Not in the third quarter because consumption in the third quarter, it is not.

Okay, yeah, got it. Also, could you, just wanted to clarify, so the guidance that you give on EBITDA, 600 million, that's including IAS 41, but excluding IFRS 16, right?

Yeah. Yeah, EBITDA, sorry? Yes, yeah, you completely, yeah, excluding 16, yeah, but including 41, you're completely right. Because, yeah, if you speak about the effect of 41, yeah, I would like to just clarify. If you speak about the effect of 41 by the end of the year, it is an effect regarding just agricultural produce, not regarding the biological assets in the field. Yeah, because you understand by the end of the year, we will have approximately 1 million tons of water in our silo system. Yeah, and this way we recognize this is the corn at market price, which is the effect of this.

Yeah, yeah, yeah. And then the other figure that you gave, that $900 per hectare, how much of that is due to IFRS 41?

900, how much? 45 standard. uh it is approximately you speak about the total just one minute around yeah i know the total yeah total approximately 140 140 million dollars by the end of the year okay so for the that's for the year yeah yeah for the year yes for the year and regarding 130 140 million yes yeah 140 50 yeah 140 150.

Okay, okay, that's good. That is all from me, thanks. 140, right?

Yeah.

Okay, okay, thanks.

Thank you very much. Our next question comes from Mr. Toby Hanson from Bank Recruit. Please go ahead, sir. Your line is open.

Hi, I just wanted to clarify in the outlook, you say for the Pulse-Free segment in 2022, softer price trends. Does this mean that, are you just saying that you won't see prices up 30% year on year like you have, or are you expecting lower prices year on year?

Yeah. Yeah, you're right. Yeah, this year, yes, we increased price to compensate for Compensating increasing, of course, significant. Next year, we try to be more conservative at the beginning of the year and our expectation to increase approximately by 10%, by 10% since December. Year to year, it will be higher because we increased during the 2021, we did increase our price. But in our budget, increasing approximately by 10%.

Okay. And the second question was, obviously you're in a good position having had a good harvest, but there must be other players in the industry who are suffering from the higher costs. Are you seeing a reduction in supply in the market yet?

Yes. Your question, I would like to, if I understand you correctly, your question about the enough offering proposal on the market grade?

No, sorry. I'll try to be more clear. So you're obviously, the profitability that you're seeing is good and you're seeing good volumes, but there must be competitors of yours in the industry who do not have the vertical integration benefit and so are more exposed to the high crop prices. Are you seeing any competitors struggling and supply issues leaving the market?

Yes, it's a very good question. Maybe you know that at the beginning of this year, because price of grain increased significantly from the first quarter last year, and maybe you know that player number in the past, player number two, Agra Mars, disappeared from the market. Yeah, current situation, you know, It's very difficult to say about poultry competitors. The current situation is not so good because price of grain increased significantly, not just price of grain and price of soya increased. But at the same time, I know that it's a very bad situation in the Ukrainian market with pork producers. Because regarding chicken meat, price increased by 25-30%. Or regarding pork, price increase only by 5%. And I'm sure that a lot of our competitors from pork industry today has very, very difficult situation. Regarding poultry, yes, but I think that better than in pork.

Okay, thank you. The final question I had was on capital allocation. So you've You've given the special dividend of 30 million. Can you say anything forward about use of cash that will be building up on the balance sheet? Is it more likely to go towards M&A or can we expect more dividends on top of the annual dividend if the outlook remains positive next year?

Thank you. It's a very good question about the next year. Yeah, we pay this dividend as exceptional one-off dividend. Yeah, special dividend. And we will continue to be the company who pay dividend every year.

Okay. Thank you.

Thank you very much. Just once again, a reminder for any additional questions, star two, or you may ask a voice or text question online. We'll give another 15 or 20 seconds for the questions to come in. Thank you. We have a question from Ms. Natalia Shipigotska from Dragon Capital. Please go ahead, ma'am, your line is open.

Good afternoon. Thank you very much for the presentation and congratulations on the great results. I have a quick question. Could you please share who would be a successor for Mr. Malnik on the position of Chief Operating Officer, please? Thank you.

Yes.

Just a second, Natalia.

Yes, yes.

Thank you very much, Natalia. I think you're asking about this accessory at the board of directors, right?

Yes, yes, because the company's report says that Mr. Melnik has resigned from... Yes, yes.

Natalia, look, it's an ordinary, I would say, rotation of the top management of executive directors at the board. So at the moment, we are looking for a candidate, Right, and one of the executive directors will become a part of the board and that will be of course subject to the shareholder approval. So we will have to convene in AGM in the nearest time so that we can receive the feedback and positive decisions, hopefully positive decisions on a candidate.

Understood. Thank you very much.

Thank you. Thank you. Our next question comes from Mr. Antonio Gomez from 921. Please go ahead, sir. Your line is open.

Hi there. Thank you for your time. I just had a follow-up on your capital allocation strategy. You mentioned dividends. I was just wondering if you had any plans in terms of M&A or CapEx, where you're looking to spend that money and also you know, if you're thinking of any debt repayments with all that cash that you have on balance sheet, you know, if you have a target for leverage, anything along those lines. Thank you.

Thank you for your very good question, yeah. You know that one of our priorities, yeah, to be an international company and we are continuing to consider the possibility to buy some meat processing company in Europe but it's not something new because it seems to me during the last 7-8 years we have been trying to find the right target and we are very happy and we were very satisfied with the acquisition of Pirutnina because we increased our EBD in Pirutnina during only two years more than 60-65% and that is why it is a priority number one but maybe you understand that it is not possible Guarantee that we can find the right target for us with the right price. That is why the main priority for us is acquisition in Europe. The second priority, we would like to invest money to convert the MHP to a culinary company in Ukraine, but it's not so significant money. It is not And we continue to invest money to modernization to project related to improve our cost of production with good IRR of this investment. But at the same time, for us, the comfortable level of debt is 2.5. And for us, it will be significantly more interesting to invest money, to have a lot of different projects, which bring to MHP more profitability.

Okay, thank you.

Okay, thank you very much. We have one text question from Nick Ivanov from PGI-M. What is your CAPEX guidance for 2022? Thank you.

Thank you for your question. As I told previously, one of our priorities is acquisition. And unfortunately, yes, we cannot say that any acquisition numbers about this. Regarding our CAPEX include maintenance CAPEX for next year, we will see approximately $200 million around.

Okay, thank you very much. We have a question from this Jana Nikina from BCB Securities. Please go ahead, Jana, your line is open.

Thank you so much. I hope you can hear me. Congratulations on the solid set of results. Could you please give us an update on your Vinica project? Is it still kind of like you're waiting to develop further or for now you're waiting and seeing how everything develops?

Thank you. Now we don't see to increase capacity in Vinica. For us, the first priority is to buy some to provide some acquisition abroad and all our project mostly to concentrate how to improve our profitability through create new maybe production area and to produce more product value-added product and project which relate to improve our cost of production.

Thank you so much. And another question, would you mind updating us how is your position right now in the MENA region and how dynamics changed over this past quarter and going into the fourth quarter and maybe into the beginning of the year? Thank you.

You asked about the MENA region, right? Yes, please.

And the second part of your question, about what?

Just general update, how dynamic develops in the MENA region in the third quarter, going to fourth quarter, and in the beginning of next year to see if it changes, are you increasing your presence there, or any of that information?

Now we are very stable in MENA region. Every month we export approximately 10,000-12,000 tons in this region. We were the price of this region is good, but at the same time we have strategy to sell on this region more product with a value-added product as shawarma, for example, and we have the strategy to increase sales of value-added products on this region. This is our strategy. It's not our strategy to increase just sales volume as commodity. We mostly concentrate how to sell more products with high profitability and to be close to our customers. At the same time, now we open our distributor company in Saudi Arabia, and we would like to be close to our customers. Thank you.

Thank you very much. Given that we are seeing no further questions, I would like to remind all participants of the buy and sell side communities of the MHP company-organized non-deal roadshow next week. If you are interested in booking a one-to-one slot with the company for the NDR, please do so via the company IR website or emailing MHP at closer.com. More details about the roadshow is visible now on the presentation slide. Having said that, I'll pass the line back to Anastasia for her concluding remarks.

Thank you very much for the very nice reminder, Michael. Thank you for your support, and thank you everybody who managed to join the call. In case you have further questions, of course, we are here, and you can reach us easily, and we will be glad to answer your questions. Thank you, and have a nice day, and have a nice evening. Bye.

Thank you very much. This concludes our conference call. We'll now be closing all the lines. Goodbye.