MHP SE

Ladies and gentlemen, thank you for standing by, and I'd like to welcome you to MHP's first quarter 2023 financial results call. At this time, all participant lines are in listen-only mode. The format of the call today will be a presentation by MHP's management and IR team, followed by a Q&A. So without further ado, I would now like to pass the line to MHP's team. Anastasia, the floor is yours.

Thank you very much, team. Dear stakeholders, good afternoon and good morning. Thank you for joining us today for MHP's conference call. I'm Anastasia Sabatyuk, Director of Investor Relations and International Communications. On the call today, together with Victoria Kapelushnaya, CFO of MHP, we will discuss MHP's financial and operational results for the first quarter of 2023, as well as current operational environment and expectations for 2023, taking into account that war in Ukraine continues. Today's call is based on information released earlier today publicly. However, during our call, we will discuss our projections and plans based on our assumptions, domestic and international trends. Please take it into consideration. Let me proceed with the presentation, and we all go to page number three with macrofundamentals. Let me start from how we live and operate. I would like to note that from October 2022 and up to now, Russia has been launching a number of missile and drone attacks against energy and the civil infrastructure of Ukraine, targeting Kyiv massively during the last two weeks. The terrorist attacks seriously and adversely affected energy distribution across Ukraine. In the first quarter of 2023, Ukrainian citizens and companies, including MHP, faced complex challenges related to providing energy to their homes and production facilities. The impact of the war in Ukraine remains unclear and can change seriously, quickly, and without any notice. When we look at macroenvironment in the first quarter of 2023, it was as follows. Ukrainian economy has been adjusting to the war environment, heavily supported by international donors. Black Sea grain deal has been prolongated just yesterday by another two months. However, we understand that operational routine remains challenging due to delays in ship checks in the Bosphorus from the Russian authorities. So for traders in Ukraine, it is absolutely difficult, if not impossible, to plan any logistics National Bank of Ukraine forecast GDP growth of 2% in 2023 and annual inflation of 15%, with around 27% inflation in 2022, for your records only, only if there is no further deterioration of the hostilities. The currency ratio remains more or less stable. Let me proceed with the company's results. and we go to page number five of the presentation. So we are on slide number five, key financials. Sorry. MHP is reporting good operational and financial results for the first quarter of 2023, thanks to strong demand, positive price movement, and minimal disruption to operations as a result of the enormous amount of work undertaken by the MHP teams since the beginning of the war. It should be noted that operational and financial results in the first quarter, 2022, last year, were more seriously affected by disruptions in the early stages of the war. Results for the next periods of this year may again be adversely affected by war-related challenges, but of course, they are not under MHP's control. When comparing the first quarter of 2023 results generated by businesses in Ukraine, please keep in mind that operational environment in March last year, that was the first full month of the war, was absolutely different to March 2023. And therefore, operational and financial results of MHP in the first quarter last year were significantly and negatively affected by war-related challenges Ukraine has been facing since then. Therefore, I would suggest to focus on the comparison of the first quarter 2023 with the fourth quarter last year. It is more relevant. In detail, the results for the first quarter 2023 were following. Revenue increased by 35% year-on-year and constituted $746 million and was down 3% quarter-on-quarter. War-related expenses decreased substantially by 77% to $6 million, and that was $26 million in the first quarter last year. Export revenue increased by 69% to $520 million, which is 70% of total revenue, and increased 6% by 6% quarter-on-quarter. Adjusted EBITDA net of ARS-16 increased year-on-year to $117 million from $43 million last year, same period, and was 7% higher quarter-on-quarter. Adjusted EBITDA margin increased to 16% from 8% in the first quarter last year and from 14% in the fourth quarter 2022. Let's proceed to page number six, where we can see the financial results by segment. As you can see from the table, the vast majority of revenue, as well as EBITDA, in the first quarter of 2023 was generated in poultry and related operations, which included the results from the crushing of vegetable oils, and by the European operating sector. Traditionally, due to seasonality effects and partially because of disruptive grain deal operations, contribution to the revenue from grain growing segment was low, 4% only. Let's have a closer look at each business segment and results on our next slide. And here I pass my word to Victoria.

Victoria, it seems like you're on mute.

Sorry. Thank you, Anastasia. Good afternoon, everyone. Let's have a precise look at poultry segment performance, page number seven. Our good result in Q1 were possible because our team was able to maintain sales volume and average meat price across all markets at the same level as in Q4 2022. In Q4 2022 as well as Q1 2023, we get an additional positive effect on the cost of the cake and fodder for poultry production due to the variable ratio of price between sunflower and sunflower oil. Currently, we see that price ratio between sunflower and oil has stabilized and therefore we don't expect so positive effect on production costs to continue to be in place going forward unless the situation changes. Export price from the beginning of September 2022 due to the change in the economic environment in the EU and UK as well as increased competition in the MENA region started to decline, which resulted in 5% decrease in price quarter to quarter. As of now, current price in EU and MENA region have stabilized. At the same time, poultry meat price in Ukraine, despite substantial decrease in population and disposable income, increased by 8% in Q1 compared to the Q4, But this is still lower than in Q1 2022 by 10% in dollar storm, driven mainly by depreciation and Ukrainian grievance. MHP is regularly exposed to commodity price risk. To mitigate this risk, we continue to focus more and more on non-commodity products ready to eat and ready to cook. However, penetration and increase of our share on this market require a lot of effort and expenses as today and in the near future. Let's move in slide number eight, grain growing cooperation. It is important to highlight that despite of a quite high price of grain on international markets, export price for grain from Ukraine is significantly lower compared to the international price. due to the logistic cost substantial increase as a result of the war in Ukraine and challenge unstable logistic and recreation grain deal. Obviously, this operational environmental negatively affects the profitability of MHP as well as all agri-producer in Ukraine. Revenue in grain segment in Q1 increased to 69 million from 35 million last year, mainly due to the higher export of crops as a result of special restoration of logistic rules compared to the operational environmental and the beginning of full-scale Russian invasion in Q1 2022. EBITDA of green segments, net IFRS 16, consists of 3 million almost unchanged compared to the last year. All winter crops are currently in good condition. This year MHP is going to harvest around 350,000 hectares. MHP's spring sowing campaign is almost finalized. Let's proceed to the slide number nine. Mid-processing business financial performance remained almost unchanged due to the positive effect of increasing price and optimization of product mix with higher focus on higher margin product was upset by suspension of Ukrainian bacon operation in the Donetsk region in April 2022. As of today, MHP produces around 1,000 tons of meat processing products per month. Before 2022, we produced around 3,000 tons per month using both companies and rented facilities. Let's go to the slide number 10, several words about pyrucnine up to weight. Growth in capacity in Serbia and Croatia resulted in 8% increase in poultry sales year-on-year. EPD has increased 30% year-on-year due to the fall of energy and grain prices in EU, as well as higher price for meat and meat processing products in Q1 compared to the same period last year. Compared to the Q4, Price have remained almost at the same level, and we don't expect significant price changes further in the future. Slide number 11. A few words about our cash flow and liquidity position. Cash flow operation before changes in working capital amount around $100 million. This amount includes payment in February Part of deferred interest payment agreed with creditors at the end of Q1 2022. Investment in working capital was insignificant, mostly due to the fact that investment in grain farming business was upset by low stock of meat and grains at the end of Q1. High investment in working capital during the 2022 was caused mainly by the fact a realized working capital while the war in Ukraine is in place. We also see an additional risk of non-reinforcement of VAT in 2023 driven by challenging economic environmental in Ukraine. Total CAPEX in Q1 amount around $40 million, and mainly related to purchasing diesel generators to mitigate the impact of possible power outages, maintenance and new product development, and improvement of pyruvatein up to production facilities. Regarding the debt, by the end of the period, the company net debt was 1.2%. The company paid all debtors' coupons on time. MHP remained in responsible partners and have also paid spring coupons. At the same time, we received the approval for prolongation on commitment line from all banks till August-December 2023, second time since the beginning of the war. The operational environment remains volatile, extremely challenging, and unpredictable, including the NBU restrictions regarding capital movements outside of Ukraine for the Ukrainian legal entities and individuals. The liquidity position at the end of the quarter was $360 million in cash, mostly in dollars, and held mainly outside Ukraine. Given the current operational environment and significant risk associated with work, we estimate that our minimum safe cash balance is around $250 million. Thank you. Anastasia?

Thank you very much, Victoria. Thank you. So let me provide you with the current outlook. for 2023. At least this is how we see this year going forward. MHP is expected to operate at close to full capacity, subject to any possible direct or collateral disruption or damage to MHP operations or rented storages. MHP has been adapting to the war environment and at the same time experiencing new logistic challenges. I'm talking about recent temporary restrictions, bans for exports of agricultural produce set by a few EU countries, which we had to face starting from the beginning of the second quarter of the year. This challenge has not been completely resolved yet. With regard to agricultural commodities prices, we see them stabilised. now both for grains, vegetable oils and poultry meat. However, we remain conservative to any positive trends in prices as of today. In general, there is a high level of uncertainty regarding how our next quarter's operations will look like and what kind of financial results this uncertainty will bring to the company. But MHP is united as never before to support Ukrainian population and of course the whole world to provide food security to the extent possible. MHP team continues to undertake all possible efforts to manage all difficulties and overcome obstacles. We are now ready to start our Q&A session. Team.

Thank you. We'll now move to the Q&A. If you'd like to ask a question, please press Start to on your phone and wait to be prompted. If you're dialed in by web, you can either type your question in the box provided or request to ask a voice question. We'll now wait a moment or two for the questions to come in. So our first question comes from Crystal Doulos from Blackbeard Asset. Your line is now open, sir. Please go ahead. I believe you're muted. Could you try unmuting? Let's move to the next one. So our next question is from Anton from Knighthead Capital. Sir, your line is now open. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the question. Just a couple of clarifying things for me. Number one, I think, Victoria, you said most of the cash is offshore. Can you give us the splits and also tell us how much is at Perotina?

Yeah, hello. Thank you for your question. It's approximately 50 million, 50-60 million in Perutino.

And of the non-Perutino cash, is substantially everything offshore? How much is inside Ukraine?

No, outside in Ukraine, around 10%.

Got it. Okay. And then on the call about a month ago when we talked about 4Q results, I believe you threw out as $200 million as your minimum cash balance. Now, we obviously had a positive cash generation quarter despite paying an extra $19 million or so in deferred coupons in February. So I'm curious why I think you've changed your view from a $200 million minimum to $250 million minimum. I'm curious what informs that change. Thanks, Victoria.

I thank you for the question because I told you I remember that you're 200 to 150 years between the figures and what is very very important because some as uncertainly what I would like to say because so we had some incident with our not not our storage near our storage due to the muscle muscle attacked yeah we had some incident with anesthesia at all And as a very important point, because we have some problem with export to Europe, and that is why I think that we need to have, because unfortunately we are continuing to live and to operate in war, and we cannot predict. And potentially tomorrow, yes, unfortunately, it would be a very terrible case. Yeah, because, yeah, and that is why we estimate that we must have this amount. Because you know that we have 26 employees in our company, and we are responsible not just for these employees and for your families, and that is why we feel responsible and not just the families of our employees. And we rent our land from $100,000. approximately more than 100,000 people rent land. And that is why we understand that something happened with our facilities because, yeah, this is the biggest risk for us. We need to provide and we need to guarantee people some level of income.

No, that all makes sense. And then just a couple more things. Still thinking 150, 170 million of capex for the year?

Yes, yeah, approximately this amount, yeah.

And what's the latest on VAT reimbursement? What, what? VAT reimbursement. I believe there's 150 million at stake.

Yes, according to our budget this year, we should receive around 120 million VAT.

Sorry, you said 120, right?

120, 140. But to be honest, as I told you during the presentation, I had some concern because in the first quarter, we received around only 10 million. Around 10 million, yeah.

Got it. And then the final question, what's the latest with Enbo with respect to currency controls? Are they working with you?

No, nothing changes, no. Completely the same restriction for legal entities and individuals. Yeah, it's completely prohibited to pay abroad.

Understood. Okay, nice job this quarter and good luck with everything. Thank you.

Yeah, thank you.

Thank you, Anton. The next question comes from Feloshi from Higher Ground. He asks, How is the readiness to pay the bond maturing in 2024? How is the readiness to pay the bond maturing in 2024?

It's a very good question. Yeah, I understand. It's a very, very good question. Yeah, we understand that, yeah, approximately in 12 months, yeah, since maturity of our bond. And we will attempt on addressing this issue. No, no, we, yeah, we understand that it's very important for us, this very important deal, yeah. And we will intend on addressing this issue appropriately in due course.

Thank you. Our next question comes from Constantine from Apter Capital. Sir, your line is now open. Please go ahead.

Hello? Do you hear me? Hello? Yes. Okay, perfect. So my first question is on the pricing environment. Sort of internationally, we're seeing that pricing for poultry is softening. So maybe you could comment on what you're seeing across the markets of your exposure. Do you see sort of pricing environment stabilizing, softening? Like what's the trend there? That's my first question.

Mm-hmm. Thank you for your question. Regarding price, as I told, in the first quarter last year price decreased significantly compared to Q2, Q3 2022. And the first quarter price remains the same level. I talked about the price of filet in Europe and price of whole chicken in MENA region. And our expectation and we put in our budget completely the same level of the price. But yeah, current price. We think that we don't see any, to be honest, we don't see any signal and any reason for increased price. Because you know the price of grain during the just last month is decreasing. Price of gas in utility decreased. And that is why we don't expect any increase in price. But now is the summer region, or summer period is the hot season. Yes, and our expectation in the second half of year is in the lower season, price will decrease even.

Got it. And on the volume side, what are you seeing?

Regarding volume side, I think that we will continue to work at 100% capacity utilization. And we will sell the same quantity, the same volume that we sold in the first quarter in Ukraine for export.

Got it, got it. And then historically, the second quarter is a high working capital consumption quarter. And obviously, we are in the second half of the second quarter. What are you seeing this year? Should we expect a substantial working capital outflow in the second quarter? And maybe related to that, if you could comment on where the cash position is right now, that would be helpful to get a sense of what's happening to the working capital.

Yes, we expect that investment in working capital in the second quarter, not so big amount, but it depends on, as I told previously, it depends on the issue of reimbursement VAT. Yeah, it is one of the reasons. And the second, that we invest money in sewing containers. It's the two main reasons why we invest in working capital. Regarding our current position today, we have in the county approximately $340,000. $340,000 of cash.

Got it. And then just on VAT reimbursement point, so you collected out of $120,000 this year, you collected $20,000, right?

Last year, I think.

No, you expect to what to collect 120 for the full year. And so far this year, how much you collected?

Yeah, this year we received just around 10 million.

Around 10 million. And so when should we expect for you to collect the rest of 120?

The rest of the year, yeah.

But is there any point in the year, so is it December or it's September, or when do you think it's going to happen, and what is it conditional on?

No, traditional, yes, I think that we need to receive this money every month, different part of this amount. But anyway, until today, we received very small amount. No, we expect that in the second quarter we expect to receive additional maybe 15 million, 20 million.

And then finally, just on the sowing campaign, so the spring sowing campaign is almost over, I would guess. Any outlook for the harvest? You know, what do you expect? Is that better than the last year?

Yeah, it's a very good issue, but unfortunately still older. Until today is is winter crops looks good, but now only May.

Yeah. Got it. I'm sorry, just one last point. So we saw that the facility in Odessa region was affected by the recent strike. What's the situation out there? So I think you mentioned that 10 million of working capital of inventory was affected. Like any additional color you could give would be helpful.

regarding I will explain we keep there approximately 3,000 3.5 thousand tons and now we try to estimate because what happened there because our product partially was depressed partially and now we provide very very deep investigation yeah all portion of this and after that we will understand what is amount of what volume we need to utilize now I cannot say exactly figures but at the same time I understand the sum volume unfortunately we will utilize but I cannot say got it all right thanks so much for your comments very helpful good luck thank you Thank you.

Thank you, Konstantin. Our next question comes from Ludovic Walter from Sona Asset Management. He asks, how should we think about your working capital cash consumption this year?

Regarding our investment in working capital this year, we estimate this amount. No, to be honest, It's very difficult to predict regarding, I would like to repeat again, it is a big issue with VAT reimbursement. Total, our expectation, not just expectation, based on our budget, I think that we should get $120 million, but anyway, we cannot guarantee that we will receive this amount, and that is why it is one of the investments in working capital. But exclude VIT reimbursement, our estimation, it is approximately 20, 30 million.

Thank you. Our next question comes from Dimitri Ivanov from Jefferies. Your line is now open. Please go ahead.

Thank you very much for the update. I guess it's a bit difficult question, but I mean like you mentioned that in your budget you assumed prices the same levels as in Q2, which kind of like if you look at the sunflower prices, I think like sunflower prices like dropped by 25, 30%, if I remember correctly, our discussion. I'm just trying to understand like in your kind of base case scenario, like status quo scenario, Do you expect like a lower EBITDA levels for the groups for the rest of the year? Just if you can give us a bit more color on like EBITDA generation like side of the business, like in your base case scenario, that would be helpful. Like my first question.

Yeah. yes, about our best scenario, our EBDA, yeah? Correct, yes, so just assuming you're... Oh, you remember, before the war, I would like to just mention, before the war, our EBDA in 2013, it was 750, around 700. That is why I think that depends on a lot of different reasons, but if you base of current situation without without completely current situation, I think that we generate our BDA will be very close to the last year BDA, maybe slightly higher, but not so significant. Last year we generated 380. But what I would like to emphasize, it's very difficult to predict with current situation what potentially can be, can potentially happen. But situation will be completely the same I think that yeah unfortunately price of grain very low yeah and that is why you know our expectation about it being gray segments not very very high and as I mentioned in during the presentation and presentations that now crash in business and yeah and correlation between price of sunflower oil and sunflower seed is not very attractive.

Understood.

Basically, you expect... You need to understand, if price of export meat increase by 10% or 20%, yes, we will generate higher. But, as I told before, I don't see any reason any signal that price of export meat will increase.

That is clear. So, basically, assuming current poultry and sunflower prices, you expect similar level of EBITDA generation similar to the previous level year EBITDA. Okay. Second question on this upcoming short-term bank loans. As you mentioned, you extended some of the credit facilities to August, December. What's your strategy when it comes to if lenders will ask just to repay? Will you expect just to initiate a new extension or are you ready just to pay them in cash? just any color would be helpful on this 150 million short-term debt facilities?

No, we have very good banks. I think that banks is very good, our partners, yeah. And I'm sure that we will ask again about prolongation. I think that we can achieve some, achieve some... Well, some results which satisfied both of us. Okay, okay. But anyway, it is under discussion. We clearly understand that we prolongate until August and December, and after that we will have, and before this deadline, we will have the new round of negotiations. You understand.

Thank you very much. The last question for me is about this ban on crops and products originating in Ukraine from certain European countries. From a segment perspective, which segment might be affected by this ban? Are we talking about grain segments or other segments will also be affected? For example, sunflower oil wasn't weren't listed as a banned product. So I'm trying to understand which of your segments might be affected by this temporary trade ban from certain European countries.

Yeah, poultry segment because during the week we could not export in Europe during the weeks around this. And our logistic was now increased when we export to Europe.

And poultry segment will be affected? Yeah, exactly, yeah.

Because legit, the costs increase.

Okay, so poultry is a product that was also like temporary banned. Yeah, yeah, yeah. And no transit is also allowed, right? So there's no way just to transit, so you have just to use other alternative ways just to bypass these countries to export.

Yes, yes, yes.

Okay, that is clear. Thank you very much.

Thank you.

Thank you, Dimitri. Our next question comes from Federico from Perella Weinberg Partners. He asks, how much debt is sitting in the EOS segment? How much are the unencumbered assets in the EOS segments?

Oh, sorry, please repeat the question. How much debt in the EU segment? How much debt in the EU segment? Around 130 million euro debt.

And he also asked, how much are the unencumbered assets in the US segment?

And how much assets? Value assets, yeah? Oh, I cannot, yeah, it is balance sheet, I don't remember, yes. We will provide you something else. I don't remember about assets. I know the debt, but it's approximately maybe three, no, I cannot say.

Thank you. Our next question comes from Klim from Lord Abbott. Can you please comment further on the effects on MHP of various grain import bans and tariffs imposed by European countries? Is it possible to quantify the effects?

Sorry, current logistic cost increased, OMHP, to Europe increased approximately by 15%. If you calculate, I cannot right now calculate, but this is wrong. No, I cannot calculate approximately, maybe 5%.

Okay, thank you. So just a reminder, if you'd like to ask a question, please press star two on your phone and wait to be prompted. And if you're dialed in by web, you can either type your question in the box provided or request to ask a voice question. Let's wait a moment or two for them to come in. So we have a follow-up from Ludovic from Sona Asset Management. He's asking, have you drawn on the EBRD facility or is the $340 to $350 million current cash balance you mentioned earlier excluding any drawing on the EBRD facility?

40 million, yeah, so we attract 40 million, and this amount includes our acquisition.

Thank you. Let's wait a moment or two to see if any more questions will come in.

I think We had a nice call today and we answered many questions. I would like to thank investors for the questions raised. And of course, if you have any outstanding questions, please email or give me a call and we can discuss them in detail. And for now, we would like to thank you and wish you a nice day.

Thank you. That concludes the call for today. Thank you, everyone, and have a nice day.

Thank you. Thank you.