MHP SE

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's third 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 like now to pass the line to Anastasia Sobociuk. Please go ahead, ma'am. Your line is open.

Thank you very much, Rafal. Dear stakeholders, good afternoon and good morning. Thank you for joining us today at MHP's conference call dedicated to the third quarter and nine months results. I'm Anastasia Sobotyuk, Director of Investor Relations. Together with CFO of MHP, Victoria Kapelushna, we will discuss MHP's financial and operational results. as well as current operational environment and expectations for 2024. And of course, going forward, taking into account that war in Ukraine continues. Today's call is based on a press release and financial statements that is earlier today. However, during our call, we will discuss our projections and plans based on our assumptions, domestic and international trends. Please take it into consideration. We are going to slide number three of our presentation. A few words about macroenvironment. First of all, an update about war impact. War continues, but MHP operations and results continue reflecting the resilience and agility of our business model and tremendous efforts of our workforce. Regular and frequent drone and rocket attacks against civilian energy and other infrastructure targets continued and have resulted in a challenging and disruptive operational environment, leading to unforeseen war-related costs. In nine months, 2024, war-related costs and losses amounted to 38 million US dollars. At the date of the publication, all our production facilities in Ukraine continue to operate at close to full capacity and our own facilities have not suffered significant physical damage. We can of course give no assurance that this will remain the case and that our production facilities and the infrastructure that we use will not become a target of new attacks. Microeconomic situation, taking into account that many businesses have been adjusting to new operational environment, which remained unpredictably volatile in 2024 GDP's growth during third quarter this year expected to be at 4%. Harvest this year is expected to be good, a bit lower than last year at approximately 74 million tons. As of today, Ukraine harvested over 90% of the land. Let me now proceed with the company results for the third quarter of the year. We'll go to slide number five. Let me start with operational highlights. Poultry sales decreased, as you can see, by approximately 8% in nine months of 2024, year-on-year. driven mainly by a decrease in volumes of exports. Financial results for the nine months of 2024 were following. Groups revenue remained stable at around 2.3 billion US dollars, with export revenue representing 60% of total revenue. Adjustability increased by 33% to 437 million US dollars. mainly driven by strong and much stronger than expected results in agricultural division. Net debt to LTM EBITDA ratio constituted 2.1. Let's go on slide number six of our presentation with key financials for the third quarter of 2024. So group's revenue increased, as you can see from this diagram, by 5% year-on-year and reached 773 million US dollars. At the same time, driven by strong results in agricultural division and generated by carotene upturi, net profit increased by 75% and reached 173 million US dollars. And adjusted EBITDA increased by 56% to 96 million US dollars. We go on slide number seven of our presentation, which show us the results for nine months by segment. As you can see from this table and the diagrams here, the biggest contributor to overall company's results in poultry and processed meat operation segment, the group generated the majority of total revenue above 53% and 49% of the company's EBITDA with highest EBITDA margin 18% across all businesses. Second biggest contributor to EBITDA was agricultural division 38% with a significant contribution of 164 million US dollars to the group's EBITDA. Outstanding result and a second historical record during the last 10 years. Let us have a close look at each business segment, and here I pass my word to Victoria.

Thank you, Anastasia. Good afternoon, everybody. Let's move to the slide number 10. Sorry. Let's move to the slide number 8. Despite the challenge of the war in Ukraine, MHP performed good results in Q3, which are lower than Q2, mainly due to stable poultry price and increase in cost of production. Poultry price in Q3, both on export and domestic market, remained almost at the same level as in Q2. Poultry costs in Q3 increased compared to the Q2, mainly due to the higher corn and electricity prices. We see further upward trends in costs in Q4 and into 2025. Commodity price risk is a common challenge for MHP. To mitigate this, MHP is focusing on production and sales, not commodity products. This requires a significant effort from our team and investments to launch new products and grow our market share. We managed to increase in nine months this year our volume of non-commodity products by 10% in Ukraine and by 45% on export markets. Total share of non-commodity product in our poultry sales is 20% in volume and 30% in EBDA. We will continue to concentrate on selling non-commodity product with focus on most marginal. A few words about our vegetable oil segment, slide number 9. In Q3, our ABDA for vegetable oil operation was similar to Q2. The decline in vegetable oil result compared to the last year was primarily due to a drop in oil prices. In 2024, we had a negative trend in sunflower oil prices, which lead to decrease of oil crushing margin. We assume that margin of the segment in Q4 will decline further. Let's move slide number 10, agricultural operations. As of today, MHP harvesting campaign is complete on around 345,000 hectares. the land yield for spring crops are lower than in 2023, especially corn, our yield 8.4 ton per hectare. A lower yield of spring crops was due to unforeable weather conditions, severe heat in central region of Ukraine. However, Starting from September 2024, there has been a significant increase in grain prices, which has increased our profit per hectare. Segment revenue in nine months amounted to $176 million compared to $138 million in nine months last year. This increase was mainly attributable to higher sales volume and price of corn on export markets. In the agriculture operations segment, net IFRS 16 in nine months was $164 million compared to $32 million losses last year. This result was driven by higher evaluation of harvest agricultural produce and crops in the field due to the increased grain and oilseeds price partially offset but lower use. Let's go to the slide number 11. Several words about our European operating segment. In nine months, poultry meat sales of European operation segment increased by 9% year to year. Meat processing product sales were up by 4%. EBITDA of European operating segment in Q3 remained almost at the same level. EBITDA growth in 9 months was driven by high sales in Croatia, Bosnia and Serbia due to the strategic focus on these markets. Slide number 12. A few words about our cash flow and liquidity position. Cash flow from operation before change in working capital decreased. $290 million compared to the $315 last year. Investment in working capital amount only $25 million. This was mainly due to the increase in VAT, re-endorsement receivables. Total CAPEX in nine months amount $217. marking a significant increase compared to the last year. The rise is driven by extensive maintenance and modernization of existing facility, construction on new bioenergy production facility, investment in cost optimization and our culinary strategy project, and expansion of Pirutnina production facilities. Regarding debt, at the end of the period, company total debt was $1.5 billion, net debt approximately $1.2 billion. The liquidity position at the end was $327 million in cash, $165 million of which was held by the group subsidiary outside Ukraine. And now I give the floor to Anastasia for Outlook.

Thank you, Victoria. Let me provide you with Outlook, taking into account the war operation environment and the current market drivers as well. Considering the fast-moving nature of the war, MHP can give no concrete insurance as you understand 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 our employees and to rebuild, restore and restart production in the shortest time possible. We are proud to have a professional team and a business model which create a basis for sustainable results in operations. Despite the ongoing challenges, our commitment to ensuring sustainable development remains at the heart of all of our economic activities. As a pioneering and innovative leader in 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 and this is really important now taking into account what is going on in Ukraine and with the Ukrainian energy infrastructure in order to mitigate operational disruptions caused by Russia's targeting of Ukraine's national grid and energy sector. If energy disruptions lead to a complete blackout in Ukraine, MHB will not be able to operate at full capacity and its operations will face a significant increase in production costs, which will negatively impact financial results, for your understanding. We remain incredibly grateful for the support and patience of our investors who have supported the group and as it navigated the most difficult period in Ukraine. Let me conclude the presentation now, and we are ready for the discussion and your questions. Thank you for cooperation in advance.

Thank you. Thank you very much for the presentation, Victoria and Anastasia. Ladies and gentlemen, we'll be now moving to the Q&A part of the call. If you are dialed in via the telephone, and if you want to ask a voice question, please press Start To. That's Start To on your keypad for any questions. If you are dialed in via the web, you may also ask a voice or a text question. We'll give a moment or so for any questions to come through. Okay. We have the first question from Mr. Anton Aniks from Knightshead Capital Management. Your line is now unmuted. Please go ahead.

Hey, guys. How are you? I'm there in that quarter. Congratulations. I hope you're well. Just a couple of questions. Year-to-date, you're basically at your prior full-year guidance for EBITDA. I'm curious, given that we're now in late November, if you would give us... perhaps updated thoughts on how you think the full year P&L is likely to evolve. And then, conversely, CAPEX is obviously up meaningfully year over year, given all the initiatives you have outlined. But it seems to be tracking a little lower than your prior full year expectations. So it would be helpful to hear your thoughts on if there's an updated CAPEX. guidance, and I've got a couple quick follow-ups.

Thanks a lot. First of all, thank you for your question. Yes, as I told during the presentation that our expectation, yes, our result is good, mostly due to the result of farming business of agricultural sector. Our expectation for full year or every day around 500 million, around 500 million. Regarding the CAPEX, in nine months we invest in CAPEX, just in CAPEX we invest 220 and plus we provide some acquisition. And that is why our total CAPEX for nine months around 200, 250. Our expectation for full year was approximately 300, maybe 310. Thank you.

You guys still hear me? I was just curious. Obviously, despite EBITDA coming in higher and CapEx coming in maybe a smidgen lower than we thought a quarter or two ago, cash generation is an area where we still arguably are falling short despite the EBITDA growth. Do we think 2025 is the year when we might actually see meaningful cash generation and reduction in net debt.

How are you thinking about it? Thank you for your question. Yeah, regarding 2025, as I told during the presentation, now our cost of production since the second half of the year increased. And we see that our cost of production next year will be slightly higher, first of all, Yeah, because few reason for this. Yeah, corn price. But anyway, corn price we produce internally and we have the better result in our agriculture. But at the same time, we have the higher protein cost because crushing business and crushing operations, business in Ukraine now is not very affordable. Yeah, price on some flowers, even domestic market increase so significantly. It is one of the reasons why protein is higher. The second, the third reason, price of gas and electricity increased and now increased significantly, especially compared to the 2023 and compared to the beginning of the year. And that is why we see that cost of production in griveness term will increase next year approximately by 30%, around 30% in griveness term. That is why we at the same time regarding price on domestic market and price on export market, we don't expect significant increasing, especially on export market. This is why if you speak about EBITDA for next year, Our expectation, no, we try always to be very conservative. And now we understand that our EBITDA, it would be around 450 maybe. Yes, it's very difficult to predict, especially in current situation. Yeah, but anyway, we see these figures for next year.

Okay, that's helpful. And finally, unrelated, any updates on how DGV, what's happening there would be very helpful too. your kind of high-level thoughts on what's happening over there?

No, you know, the GV is operating, and we have some issues, but I think that, yeah, it is not a big business, yeah, but it is business which is interesting for us, and we see that maybe we will increase slightly this business.

Okay, thanks again, and good luck.

Okay, thank you. We'll be moving now to the next question. The next question comes from August Nivi from Alquery. Please go ahead, your line is now unmuted.

Hello, can you hear me? Yes, yes, we can hear you. Thank you and congratulations on the third quarter results. I have two quick questions. The first related to the agricultural segment. Can you explain further what is behind this trend of the results in the agricultural segment and how did you see that sustainable for the fourth quarter, maybe into the first quarter of 2025? That's the first question. And the second one, can you elaborate a little bit more on also the liquidity that you have as of today, liquidity sources, cash in hand, and how do you see any maturities in the next year or so? Thank you.

The question about the profitability in our farming business depends on the trees and one of them is the price. We understand the price in the Ukrainian market of grain always correlates with the world price. We cannot predict. Yeah, regarding, because why now we have high, significantly high grain price compared to the year ago? Because logistic cost, yeah, from Ukraine decreased significantly. Regarding grain prices, we know that grain price depends on harvest, depends on climate conditions, not just in Ukraine, and mostly in the USA, in Brazil, and blah, blah, blah. That is why it is some uncertainty. If we put in our budget the price very similar with current price, because current price, slightly lower, because this is the average which we have during the last five years. Regarding our liquidity position, current liquidity position around $300 million. And for next year, our maturity long-term repayment around $190 million. We have underlying client. for today around $200 million. And we continue to work with banks, with other financial institutions to attract new loans because for us it's very important to have some additional possibility to have liquidity and underlying clients.

Just if I might, a quick follow-up on the first question. You say that essentially the two drivers of high-yield profitability in the agricultural segment is related to the price part, but also to the logistical cost. And if I understood you correctly, the logistical cost has declined. Is that because of the poor availability, and do you expect that to continue this in the short term?

Yes, yes, you're completely right. Yeah, you're completely right. Yeah, because just, yeah, you're completely right. Because now we use the Ukrainian ports, and previously it was so difficult way from Constancia, from other European ports.

Thank you.

Okay, thank you. So a reminder to ask a voice question, please press star two on your keypad. That's star two. We'll give a moment for any additional questions to come in. Okay, we have a question from Mr. Dimitri Ivanov from Jefferies.

Go ahead. Hello, can you hear me?

Yes.

Thank you, Victoria, for the presentation. I just have a quick question on your capital expenditures, CapEx, for the next year. I think you previously mentioned that you expect some reduction in capital expenditures in the next year. Could you please maybe elaborate what's like the number you budget in terms of the capital expenditures for the next year and what are the key items you assume when it comes to CAPEX 2025? That will be helpful. Thank you.

Thank you for your question. First of all, our CAPEX for the next year we see today around 250, 270 million. Yeah, it is half of them, it is a maintenance CAPEX and compliance CAPEX which we will provide in Ukraine and in Balkan region and we have approximately 70 million, 80 million CAPEX for expansion in Balkan with a plan to increase our capacity and plus CAPEX which allow to us to to implement our strategy, go to the culinary company to produce more and more non-commodity products. It's the main pillars of our CapEx. Thank you.

Okay, thank you very much. And when it comes to M&A acquisitions, like, I mean, you made some acquisitions already this year. Like, this number, like, 250, does it include, like, only CapEx, or? Some potential M&As might be on top of this number, just to clarify. Thank you.

No, no, no. Yes, I talked about just CAPEX because the same situation that we had this year, our CAPEX for nine months, 220, and top of them, we have approximately 40 million is acquisitions. Yeah, acquisition, one of them. We did abroad, yeah, in Perutnina, and we provided in Ukraine, too. Yeah, just only CAPEX, 250.

Okay, thank you very much. So basically, just to summarize, around $450 million will be done next year, $250 million in capex half of this maintenance, and on top of that, there will be some M&A-related expenses if you decide to proceed with any of the acquisitions. Okay. Thank you very much. That's all from me. Thank you.

Okay, thank you. So we'll be now moving to the next question from Magnus Sherman from Octus. Please go ahead. Your line is open now.

Hi, thanks for taking my question. I wanted to return to this point about energy resilience and energy use. How much of that of the CAPEX for next year goes to these new energy projects? And could you talk a little bit about what the longer term target is in terms of power production? And then finally, you mentioned your production cost will rise about 30% next year. How much does energy contribute to that rise? Thank you.

Thank you for your question. This year we invested in different energy projects, approximately 50 million. For next year it would be around 10-15 million. Regarding the increasing and what is the percent, yes, we see and we put increasing in gas and electricity, approximately 10.8% from increasing energy.

Okay, thank you.

Okay, thank you. Just another reminder for any additional voice questions, please press star 2. We have a follow-up question from August Nivy from AllQuery. Please go ahead, your line is now open.

Thank you for taking my follow-up. I have a question on what is your estimated cash taxes for This year, is there any way we can estimate it for next year? And the second is, are your working capital needs for roughly 2024? And if you see that increasing for 2025 or remaining more or less the same?

This year, I understand that our investment in working capital for the year, it would be around 50, 60 million. Why? Because the price, as I told you previously, the price of sunflower seeds increased by more than 30%, and our contribution, our investment in working capital, first of all, related to increasing this price, because always by the end of the year we have stock of a minimum of 100,000-200,000 tons of sunflower seeds. Regarding next year, we don't expect any huge investment in working capital, maybe around 20 million, because always is the issue, what we have situation with the receivables, maybe 20, so it is very difficult to predict. Regarding taxes, this year our total taxes will be around 15, and we expect more or less the same level. There will be more, as you said, over the next year.

Thank you. You said 15 million? One five, right?

Yes, one five. Yes, 15.

Thank you. Okay, thank you very much. I will now pass the line back to the team for closing remarks.

Thank you very much, Rafael. Dear stakeholders, thank you very much for the meeting today. I hope we managed to cover all your questions, at least those which you managed to raise. And of course, if you need to continue the discussion, please send your questions to me. Of course, I will handle them in due course. As of now, thank you and have a lovely day. Bye.

Thank you. Thank you so much. Bye.

This concludes today's call. Thank you and goodbye.