MHP SE

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's second quarter 2024 results conference call. At this time, all participant lines are on listen-only mode. The format of the call today will be a presentation by the management team, followed by a question and answer session. So without further ado, I would now like to pass the line to Anastasia Sabotik. Please go ahead, ma'am. Your line is open.

Thank you very much. Dear stakeholders, Good day to you. Thank you for joining us today. We are at MHP's conference call dedicated to the second quarter and six months 2024 results. I am Anastasia Sobotyuk, Director of Investor Relations and ESG Compliance, together with Victoria Kapelushno, Chief of MHP. We will discuss MHP's financial and operational results. Today's call is based on a press release and financial statements released earlier today. During our call, we will discuss our productions and plans based on our assumptions, domestic and international trends. Please take it into consideration. So we are now on slide number three of the presentation. So before I provide you with the macro environment developments in Ukraine, let me update you about war impact on MHP. Whilst the ongoing war continues to impact MHP's operations, the company has been able to adapt to the challenges of operating in wartime. As of today, over 3,000 employees have been mobilized to the armed forces of Ukraine. Irregular and frequent drone and rocket attacks against civilian, energy and other infrastructure targets have resulted in a challenging and disruptive operational environment, leading to unforeseen war-related costs. And in six months, 2024, war-related costs and losses amounted to 26 million U.S. dollars. In six months, 2023, they were twice lower. All companies' operational production facilities in Ukraine continue to operate at close to full capacity. And non-out-of-operational facilities of the companies' directly owned oil assets have suffered significant physical damage from the recent Russian bombing tariffs. Unfortunately, as a result of shelling by the occupying forces on May 17, in the Odessa region, a warehouse partly leased by the company to store frozen M.H.P. chicken meat products was completely destroyed, resulting in the loss of co-operative products worth around $7 million. So let me continue with the macroeconomic situation. Taking into account that many businesses have been adjusting to a new operational environment, which remains unpredictably volatile in 2024. GDP grew by over 4% with the forecasted growth in 2024 at 3.7. CPI in Q2 2024 increased by 3%, which doubled CPI growth in Q2 2023. Starting from October 3rd, the National Bank has been implementing managed exchange rate flexibility, resulting in depreciation of Ukrainian hryvnia. And therefore, we have a flexible currency rate. 2024 harvest is expected to be strong at 76 million tons, which is around 8% lower year on year. I'm talking about Ukraine, of course. Triggered by reduced area under crops. Adverse effect on yield due to severe heat in summer. We will touch upon agricultural development at MHP a little bit later during the presentation. Let me now proceed with the company's results for the second quarter of the year and we move on slide number five of the presentation. Let me start first with operational highlights for six months of 2026. As you can see from this slide, poultry sales decreased by 8%, driven mainly by decreased exports. Total share of exports out of total poultry sales volumes constituted 57%. It was a little bit higher last year, 59%. Financial results for six months 2024 were following. Group revenue decreased by 4% and reached around 1.5 billion US dollars. with export revenue representing 64% of total revenue. Adjusted EBITDA increased by 21% to $264 million, mainly due to substantially stronger results in agricultural business, driven by increased grain prices and the strong performance, as well as strong performance at Perodnyi Noctur. However, this was significantly offset by weaker performance in poultry and oil production businesses. We will touch upon these two business segments uh later in the presentation let's go on slide number six with key financials for the second quarter of 2024 which were following group's revenue remains relatively stable but decreased by five percent reaching 770 million us dollars and adjusted to bidda increased substantially year and year and constituted 145 million dollars with a bidda margin of 19 percent mainly driven by strong results in agricultural division and European operating segment. Let's move to slide number seven. Here we have the financial results by segment. And as you can see, the biggest contributor to overall company's results is poultry and processed meat operation segment. The group generated the majority of total revenue, about 53%. and 59% of the companies EBITDA with highest EBITDA margin 20% across all business segments. Second biggest contributor to EBITDA was agricultural division 26% and third one was European Apparency segment with 18%. Let us have a closer look at each business segment and here I pass my word to Victoria.

Thank you Anastasia. Good afternoon everyone. Let's have a precise look at poultry and related operation segment performance. Slide number 8. Despite the challenges of the war in Ukraine, MEC performed well in Q2 this year due to, first of all, teams' hard work and also favorable market conditions. Poultry price in Q2, both on export and domestic market, remained almost at the same level as in Q1 2024. We don't expect further growth in poultry prices in H2. Commodity price risk is a common challenge for MHP. To mitigate it, MHP is focusing on production and sales of ready-to-eat and ready-to-cook non-commodity products as a part of our culinary strategy. They require significant effort from our team and investment to launch new products and grow our market share. The trend will continue in near future. In Q4, we are continuing to concentrate on selling processed meat with focus on the most marginal products. Our results for Q2 decreased compared to the last year mainly as a result of lower sales volume of poultry meat on export markets, first of all due to the higher MHP stock of meat at the beginning of 2023. A few words about our vegetable oil segment, slide number 9. EBITDA for vegetable oil operation last quarter was similar to the Q1 this year. In H1, we had negative trend in sunflower oil prices, which led to decrease oil production margin. Declining vegetable oil margin year-on-year was primarily due to the drop in oil prices internationally year-on-year and also stabilization on vegetable oil production and sale in Ukraine, having adopted the devaluation environmental with no significant disruption in logistics. We expect margin in the H2 to remain low and to continue decrease negative effects by significant low harvest of safflower because of severe heat in summer, which is not expected to be offset by increase of price at this stage. Let's move to the slide number 10, agricultural operations. Segment revenue in H1 amount $180 million, compared with $112 million last year. The increase was mainly attributable to higher volumes of corn sell on the export market last half of the year. BDA of agricultural operations segment net of FRS16 in H1 was $69 million compared to the $26 million losses last year. This result was mainly due to use of the higher current market price for intersegment and external sales compared to the lower prices applied to the previous year harvests. This year, MHP harvest of wheat was a record high with 7.2 tons per hectare, and red seed was one of the strongest in MHP history with 3.7 tons per hectare. Moreover, export of crops proceeds well with no significant disruption of growth in logistic cost. I also want to mention that as today we anticipate lower use of spring crops compared to the last year due to unfavorable weather conditions in the central region. Despite of challenging weather conditions, anyway MHP expects this year financial results in agri-segment to be higher compared to the last year. First of all, due to the current high prices of the grain. Let's proceed to slide number 11. Several words about our European operating segment. EBITDA of European operating segment in Q2 amount 49 million compared to the 20 million last year. This growth was driven by higher poultry and poultry product sales in Slovenia, Bosnia and Serbia due to the strategic focus on this market, as well as in line with our production increase strategy. Slide number 12 is about our cash flow and liquidity position. Cash flows from operations before changes in working capital decrease 167 million compared to the 206 million dollar last year mainly as a result of the low profit before taxes. Investment in working capital amount 24 million compared to the situation last year to release These changes were mainly due to significant release of sunflower seeds and vegetable oil inventories in H1 last year, which had been unusually high at the end of 2022 due to disrupted logistics from the war. Total CAPEX in H1 amounted to $134 million. making a significant increase compared to 2023. This rise is primarily driven by our investment in culinary strategy projects and also cost optimization. Secondly, construction of new bioenergy production facilities. Also, expansion and improvement of the production facilities. extensive maintenance and modernization of existing facilities. Regarding debt, at the end of the period, the company total debt was nearly $1.5 billion, with net debt about $1.1 billion. As you know, on 10 May, MHP Eurobond 2024 was duly and fully repaid. as per the terms and conditions stipulated. The liquidity position at the end of H2 was almost $3 million in cash, $123 million of which was held by the group subsidiary outside Ukraine. Given current operational environment and significant uncertainty, we estimate our minimum safe cash balance at $200 million. And now I give the floor to Anastasia for update and outlook.

Thank you, Victoria. Let me provide a good outlook taking into account war, operational environment and current market drivers. Considering the fast-moving nature of the war, MHP can give no concrete assurance that its production facilities and associated infrastructure will not be targeted or adversely affected in the future. In the event of future attacks, the Group is fully prepared to respond immediately, taking all necessary actions to protect its employees and to rebuild, restore and restart production in the shortest time possible. Despite the ongoing challenges, our commitment to ensuring sustainable development remains at the heart of all our economic activities. As a pioneering and innovative leader in the biogas and bioenergy fields in Ukraine, MHP is constantly working on boosting our energy independence and resilience by integrating more renewable energy sources into our energy mix. MHP continues to invest in alternative energy sources to mitigate operational disruptions caused by Russian targeting of Ukraine's national grid and energy sector. If energy disruptions lead to a complete blackout in Ukraine, MHP will not be able to operate at full capacity and its operations will face a significant increase in production cost, which will negatively impact financial results. We remain incredibly grateful for the support and patience of our investors who have supported the group as it navigated the most difficult period in Ukraine's history. A few words about poultry business. MHP expects poultry production facilities to operate close to full capacity with sales in line with budget forecast. In the second half of 2024 MHP expects poultry prices to be stable both on international and Ukrainian markets. Grain market remains volatile, showing more positive trends in prices, adversely affected by challenging weather conditions. Pyrodnina Ptui continues to grow in sales, following both growth and culinary strategy of the group. Let me conclude the presentation now and here. We are ready for discussion and your questions. Thank you for cooperation in advance.

Michael, thank you very much. Thank you very much Anastasia for the presentation. We will now be moving to the Q&A part of the call. If you have any questions, please press star two. That's star two on your keypad for any questions. You may also ask a voice or a text question if you are dialed in by the webcast. We'll give a moment or so for any additional questions to come through. Thank you. Our first question comes from Stella Critch from Barclays. Please go ahead, ma'am. Your line is open.

Hi there. Many thanks for all the updates. I wondered if I could ask on two areas. Just starting with the energy area, so you mentioned there about trying to grow your internal reliance for power generation. I wondered where you stood at the moment in terms of how much power you're getting internally and through various projects that you're working on now or in the future, you know, where do you think you may be able to reach in terms of internal per generation? That would be great. And just on the CAPEX side, I mean, given that we're halfway through the year, would you be able to give us an update on what you plan to spend in the second half of the year? That would be great.

First of all, thank you for your question. Yeah, thank you for your question. Regarding energy, Covering which we yourself efficiency and energy. Maybe your question regarding Electricity. Yeah, because it is about gas. It is very open issue Approximately now we are approximately now we are recovered it around 30% and now we in process and we have the capex To now we in process to create in core energy or we will produce even electricity from gas And that is why we have, yeah, it is one of the reasons why we have the big effects for this year, because we understand the risk is a huge risk regarding electricity. And with current correlation in price between gas and electricity, and first of all, it is the safety and security. Yeah, and together with this, Together with this cogeneration, we will have approximately 50%. We will be 50% self-sufficient. This 50% without generators. Without generators. But at the same time, we have generators, which allowed to us to be 100% self-sufficient.

For a certain period of time.

Yeah, for a certain, because it is always the issue. Unfortunately, yeah, I think that, yeah, we cannot guarantee that we can work with generator for 30 days, even for 10 days. I'm sure that it would be a problem. Regarding the second equation about our total capex for full year, our expectations, our capex will be around $350 million. It is a complex including Ukraine and outside in our European facility.

That's great.

Many thanks.

Okay, just once again, star two for any questions. That's star two. For any voice questions, you may also ask a text question if you're dialed in via the web. We'll give a minute or so for any additional questions to come. Okay, we have a question from Mr. Dimitri Ivanov from JFS International. Please go ahead, sir, your line is open.

Hello, thank you for the presentation. Can you hear me? Yes, please go ahead, Dimitri. Yes, thank you again for the presentation. Maybe just on the CAPEX side, you mentioned like 300, 350 CAPEX for this year. I know it still might be too early for your budget, but how should we look at the CAPEX number next year? Because 350 obviously includes certain culinary projects and energy projects, like you mentioned. If you could provide maybe some preliminary view on the CAPEX next year, that would be great. This is my first question. And the second question would be, you also shared some guidance dynamic for the second half of the year when it comes to the key segments. Maybe if you could maybe provide your view, some guidance on the EBITDA for the second half of the year. How should we look at the EBITDA compared to the first half or maybe to the second half of the previous year? That would be great. And the last question, could you kind of update us on the latest cash position after June 2024? Thank you very much.

Okay, the question about the total capital for next year, we expect the total capital to be around 250 million. It will depend on the amount which we would like to invest in our European facilities. Regarding IBD, regarding IBD for this year, as you see that in poultry segment and in the vegetable oil segment, in the first half of year we generate lower results compared to the previous year. And so we expect that for full year our result in these two segments will be low. But at the same time, as I mentioned in presentation, we expect the higher financial and high BD in our grain segment due to the even the lower our harvest of the spring despite him yeah despite of how do the springs crop and the base of our forecast we see that our BD it would be in level yeah similar to last year I remind I remind this would be recall yeah it was four hundred four hundred fifty million regarding four hundred fifty maybe and for this year four hundred sixty just yes and cash and cash current opposition is very similar that we have that we had by the end and the first of July around around three hundred million dollars

Okay, and the proportion of the offshore cash, should we assume similar?

Yeah, completely the same, nothing changes, even slightly low, yeah, and broad, yeah, slightly low, but not so significant changes.

Understood, so around 120, okay, offshore. Yeah, yeah.

Okay, okay. Thank you.

Thank you very much.

Thank you. Okay, thank you very much. I'll take the next question, two questions from Miss Natalia Shpilotskaya from Dragon Capital. First question, what are the company's CapEx needs to boost its self-sufficiency in electricity from 30 to 50%?

No, we invest approximately 40 million. Yeah, 40, yeah, 40, 50 million dollars.

Okay, the second question. Could you please comment why the company's poultry exports decline and what drives local meat sales? Thank you.

Poultry export decline, as I told in presentation, that last year, in 2023, we had very significant stock at the beginning of the year. And now we understand that we can export. approximately 95,000. Our usual export is approximately 95,000. Last year, at the beginning of last year, we exported a lot because we had in Ukraine a very big stock in storages.

Thank you. We have another question from Brendan Breen from Andromeda Capital, perhaps already answered. How has the third quarter performance been so far compared to the second quarter?

Yes, approximately the same level. We expect that it's very similar, the same level. Especially if you speak about poultry segment, if you speak about Oil, it was the oil generation slightly low, but in general, yeah. But anyway, in general, I expect that we, the second half of the year, we expect the levels at H1.

Okay, thank you very much. We'll just give another 30 seconds or so for any additional follow-up questions to come through. Okay, we have a question from Mr. Magnus Sherman from Roark. Please go ahead, sir, your line is open.

Hi, thanks for taking my question. I want to start on the Black Sea. I'm trying to get a sense of how much you rely on that route for exports at the moment, and also get your thoughts about how confident you are in continuing that while the war is continuing in the absence of a firm agreement. Then my second question is about the free trade agreement with the European Union and some of the restrictions that are in there. How much is that impacting your revenue from the EU? And then the third question is on the energy projects. Could you talk a bit about what sort of projects? You mentioned gas to electricity. Is that the only thing you're doing? And what's the lead time on those? Thank you.

Yeah, regarding the first question about our confidence in Black Sea, it is an open question. It's a very open question, to be honest. But anyway, without even Black Sea, we can use our logistics through Constanze, but the logistics through Odessa, The support is significantly lower than logistical from construction, but it's an open question. I cannot tell exactly. The second question about our free trade regime in Europe, yes, we have some limitation. We cannot, we have limitation, not just MHP, it's Ukraine. But anyway, yeah, we export not just in Europe, and we export in Britain and other regions. And yeah, if you ask me, is it good that we have a limitation to export in Europe? No, it's bad. And it would be, yes, the situation bring to us a slightly worse result. But anyway, we understand how we increase our export in other regions. on this energy different kinds of energy product projects which are in place just to name them yeah yes as i told previously we have the project where generate electricity from gas cogeneration and even we have the project with our solar energy and we will and we will invest no and now the investment in this project total in this project around 50 55 million dollars Thank you.

Thank you.

Okay, thank you. We have a follow-up question from Miss Natalia from Dragon Capital. If 50% self-sufficiency in electricity supply is reached, would that allow full capacity utilization of one of the company's major policy facilities in a situation of a blackout? or partial capacity utilization of both facilities, Vinicia and Mirovica. Thank you.

Yeah. Yeah, first of all, I would like to explain. If I talk about 50%, we have some cogeneration, alternative generation electricity in different power facilities, not just in Vinnitsa, in Mironivka, and plus we have generators, yeah, diesel generators. And that is why we understand that few days We will be completely self-sufficient at 100%. If the situation will continue more than three days, or five days, ten days, it would be some problems. But anyway, it would be a problem not just in our enterprise, it would be a problem everywhere in Ukraine, in the country. Thank you.

Okay, it looks like we have no further questions. I'll pass the line back to the management team for their concluding remarks.

Thank you very much, Michael, for your support. Thank you everyone who joined our conference call and presentation. Of course, I remain at your disposal. If you have any other questions which we didn't answer today or you didn't raise today, please go ahead and send me a message. Thank you and have a lovely day. Bye.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.