MHP SE (MHPC) Earnings Call Transcript & Summary

[Audio Gap]

It is not because Ukraine is like in a vaccine, vaccines. But because there is a big number of people here who are again actually or against the vaccination. As of today, only more than 23% of the Ukranian preparation is fully vaccinated. Let us come back to the company's results, and we go together with you on Slide #6 of the presentation. So let me start with operational highlights for the period of 9 months of 2021. Poultry sales remained stable at around 522,000 tonnes. Poultry exports increased by 8% and reached around 300,000 tonnes in 9 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 USD 1.647 billion, 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, net debt-to-LTM EBITDA ratio restituted around 2.1. Let's go on Slide #7 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 USD 658 million with export revenue represented around 53%. Adjusted EBITDA margin increased by around 150 -- 115%, sorry, year-on-year and reached USD 186 million with EBITDA margin of 28% as a result of positive results both in Poultry and Grain Growing Operations segments. Slide #8. It shows us our financial results by segment. And as you can see from the table, the vast majority of revenue in 9 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 USD 699 million. Let's have a closer look at each business segment and results on our next slide. Here, I pass my word to Viktoria.

Thank you, Anastasiya. Good afternoon, everyone. Let's have a look at the MHP Ukrainian Poultry segment performance, Slide #9. It is important to highlight that during the 9 months of the year, all MHP poultry production facilities in Ukraine have been operate at full capacity. As you can see, MHP displayed exceptional strong results in Q3 compared to the Q3 2020, driven mainly by strong poultry price, 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 quarters internationally. In the Ukraine, gradual recompensation a substantial increase in poultry production cost and we reached the same level of profitability as in pre-COVID time. Poultry production cost in Q3 2021 increased by 21% in U.S. year-on-year, driven by significant growth of growth for grain and protein prices. Let's move to the next slide, #10. Our Grain Growing segment has performed exceptionally strong results this season. EBITDA in 9 months constituted $261 million, compared to the $78 million ,last year, mainly due to resin higher fares or winter growth, over 20% higher year-on-year and clean growth 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 projection [indiscernible] is expected to reach a record of more than $900 per year. Let's go to the Slide #11. Meat Processing business performed well following a strategy to culinary and transformation of company, which is a positive trend in volume and price, mainly due to increase in sales, more expensive SKU and exception and expansion of cooperation with large hotel channels such as McDonald's Ukraine since the second quarter this year with more marginal product sales increase. Adjusted -- at the same time, adjusted EBITDA for this segment decreased driven mainly by increase in raw material price, poultry meat price and packaging materials, which has not yet been offset by an increase in price of meat processing product. We expect to achieve profitability of pre-COVID time in the beginning of next year. Let's proceed to the Slide #12. Several words about Perutnina Ptuj. Growth in capacity in Serbia and Croatia resulted in 15% increase in poultry sales year-on-year, which resulted in EBITDA growth around 30% year-on-year for 9 months. Moreover, the significant EBITDA 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 of FX related to insurance and some change in accounting treatment from past event. We will continue to invest into development of Perutnina operations through 2022, rising operational efficiency and sales volume. Slide #13, a few words about our cash flow and liquidity position. Operations -- cash from operations increased in line with increase of EBITDA. An additional impact was due to change in fair value of biological assets and agricultural produce which represented noncash adjustments. Use of fund in working capital during the Q3 year was not related to low investment in inventory designed for international -- internal consumption. Total CapEx in Q3 a minus $38 million, mainly related to modernization projects, new product developed, maintenance and Perutnina production facilities' further development. Total CapEx this year is expected to be around $120 million. Regarding the debt, due to significant improvement in EBITDA, the substantially improved net debt ratio, net debt-to-EBITDA, to 2.1. We have [indiscernible] Moreover, we expect further improved LT EBITDA in Q4. At the end of the period of 9 months MHP's total debt was nearly $1.5 billion and net debt about $1.2 million. 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 payments in foreign currency. And now I give the floor to Anastasiya for an update and outlook.

Thank you, Viktoria. So we are now approaching this final slide, Slide #14. And as we could all see, the company's performance, both in the third quarter and during the 9 months of the year was exceptionally strong. The company continues to progress with its culinary transformation. And as of today, a new concept of mid-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 2000 -- 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 harvest in our history. However, going forward and taking into account carrying 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 USD 600 million. 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, food 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?

[Operator Instructions] Our first question comes from Mr. Konstantin Fastovets from Adamant Capital.

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 $0.15 versus Q2. Could you give some sort of 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?

Yes. Thank you for your question. Yes, you're right. The cost -- our cost of production Q3 rise in Q2, and the main reason was this because cost of proteins, sunflower and soy protein significantly approximately by $0.07, $0.08 higher compared to the Q2. Because Q2, it was very one-off. Yes, it was more -- look, it was lower, yes? And plus increase in Q3, increased cost of packaging and electricity. If you compare it to the Q3 compared to the Q4, we see a slightly higher cost of production, not slightly, yes, it is around $0.05 because the price 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 -- in that period?

No, we -- yes, we try to be always conservative, especially at the beginning of the year, and that is why we put in all budget, especially in the first quarter, cost price of gas equal the current price of gas. Yes. That is why in the short-term period, we don't expect any decrease in a price.

Okay. 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?

Yes, yes, compared to the fourth quarter, yes. Not in the third quarter because consumption in the third quarter, it is not.

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

Yes. Yes. EBITDA. Sorry. Yes, yes, you completely -- yes, excluding 16, yes, but including 41, you're completely right. Because yes, if you think about the impact of 41, yes, 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 biological assets in the field, yes? Because you understand by the end of the year, we will have approximately 1 million tonnes of ore in our silos. And this is why we recognize this core net market price, which is the effect of this.

Yes, yes. And then the other figure that you gave, that $900 per hectare, how much of that is due to IFRS 41? Give us at in that...

It is approximately -- we speak about the total just 1 minute, around, yes, I know that total, yes, total approximately 140, $140 million by the end of the year.

Okay. So for the -- that's for the year, yes?

Yes. For the year. Yes, for the year. And regarding the 140.

130 or 140 million?

Yes, yes, 140 million currently.

140, right?

Yes.

Our next question comes from Mr. Toby Hanson from Boundary Creek.

I just wanted to clarify in the outlook, you say for the Poultry 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.

Yes. Yes, you're right. Yes, this year, yes, we increased price to compensate -- compensating reason, of course, is significant. Yes, next year, we try to be more conservative at the beginning of the year and our expectation to increase approximately by 10% since December. Year-to-year, it will be higher because we increase during the 2021, we did increase our price. But put 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, a question about the enough offering proposal on the market grade?

No, sorry. I'll try to be more clear. So your -- 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 more exposed to the high crop prices. Are you seeing any competitors struggle and supply leaving the market?

Yes, it's a very good question. You know that at the beginning of this year, because price of grain increased significantly from the fourth quarter last year, and maybe you know that player number in the past, player #2, AGRIMAR, disappear on the market -- from market, disappear from market. Yes, current situation, it's very difficult to say about poultry competitors. Yes. it is currency addition is not so good because you price of grain increased significantly, not just price of grain and price of soya increase. 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%. Regarding pork, price increased only by 5%. And so that a lot of our competitors from pork industry today, has very, very difficult situation. Regarding poultry, yes, but I think that's better than in pork.

Okay. The follow-up question I had was on capital allocation. So 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 in Grains is positive next year?

Thank you for the very good question about the next year. Yes, we paid this dividend as exceptional, one-off dividend. Yes, special dividend. And we will continue to be the company who pay dividend every year.

[Operator Instructions] We have a question from Ms. Natalia Shpygotska from Dragon Capital.

Congratulations on the great results. I have a question. Could you please share who would be a successor for Mr. Melnyk on the position of Chief Operating Officer, please?

Yes. Just a second, Natalia. Thank you very much, Natalia. I think you are asking about the successor at the Board of Directors, right?

Yes. Yes, because company report says that Mr. Melnyk has resigned. 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 will -- we can receive the feedback and positive decision, hopefully, a positive decision on a candidate.

Our next question comes from Mr. Antonio Gomez from 91.

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 if you're thinking of any debt repayments with all that cash that you have on balance sheet, if you have a target for leverage, anything along those lines?

Thank you for your very good question. Yes. You know that one of the [indiscernible] to be an international company, and we are continuing to consider the possibility to buy some meat processing company in Europe. And -- but it's not something new because it seems to me during the last 7, 8 years, we have been try to find the right targets. And we are very happy and we're very satisfied with acquisition Perutnina, yes, of Perutnina. And because just -- yes, we increased our EBITDA in Perutnina during 2 years, more than 60 -- 65%. And that is why it is a [indiscernible] number one. But maybe you understand that it is not possible guarantee that we can find the right target for us with right price, yes? That is why the main priority for us it is an acquisition in Europe. The second priority we would like to invest money to convert the MHP to [indiscernible] company in Ukraine, but it's not so significant money. It is not -- and we -- and we continue to invest money to modernization, to project related to improve our cost of production with good IRR of this investment. And -- but at the same time, for us, comfortable level is the -- yes, because we don't have a comfortable level of debt is 2.5 million, yes? And for us, it will be significantly more interesting to invest money to have a little different projects, which bring to MHP more profitability.

We have 1 text question from Nick Ivanov from PGIM. What is your CapEx guidance for 2022?

As I told previously, one of the priority is acquisition. And unfortunately, we cannot say that any figures numbers about this. Regarding our CapEx includes maintenance CapEx for next year, we will see approximately $200 million, around.

We have a question from Ms. Janna Nikina from BCB Securities.

Congratulations on the solid set of results. Could you give us an update on your Vinnytsia project? Is it still kind of like you're waiting to develop it further? Or for now, you're waiting and seeing how everything develops?

Now we don't see to increase capacity in Vinnytsia. For us, the first priorities that sold previously to buy some -- to provide some acquisition in brand and all our projects mostly to concentrate how to improve our profitability to create new main production area and to produce more product -- value-added products and projects, which relate to improve our cost of production.

And another question. Would you mind updating us how your position right now in the MENA region? And how dynamic change over the past quarter? And going into the fourth quarter? And maybe into the beginning of the year?

You asked about the MENA region, right? 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 then the beginning of next year to see if it changes, are you increasing your presence there? Or any of that information? More color would be...

No. No, we were stable in MENA region. Every year, every month, we export approximately 10,000, 12,000 tonnes in this region, yes. And we were -- the price of this region is good, yes. But at the same time, we have strategy to sell on this region more products with a value-added product as [indiscernible] 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 additional -- with high profitability and to be close to our customers. At the same time, now we open our distributor company in Saudi Arabia. And so -- and we would like to be close to our customers.

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 1:1 slot with the company for the NDR, please do so via the company IR website or e-mailing [email protected]. More details about the road show is visible now on the presentation slide. Having said that, I'll pass the line back to Anastasiya 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 will now be closing all the lines. Goodbye.