MHP SE (MHPC) Earnings Call Transcript & Summary

Good afternoon. Thank you for standing by. I'd like to welcome you to MHP's Second Quarter and First Half 2023 Results Conference Call. [Operator Instructions] Without further ado, I would now like to pass the line to the MHP team. Anastasiya, the floor is yours.

Thank you very much, Tim. Guest stakeholders, good afternoon and good morning. Thank you for joining us today on press conference call dedicated to the second quarter and 6 months results. Together with CFO of MHP, Ms. Viktoria Kapelyushnaya, will discuss MHP's financial and operational results as well as current operational environment and expectations for 2023 in general, taking into account the war in Ukraine continues. Today's call is based on press release and financial results published 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 account. I would like to inform everybody in advance that this call will last for an hour, and it is dedicated to Q2 and semiannual financial results only. MHP's management call dedicated to tender Boto will start at 3:00 p.m. U.K. time. We are moving on to Slide #3 now and let me start some general overview for the second quarter of 2023. The War in Ukraine continues, with intensive fighting in the South and East of the country and irregular but frequent rocket and drone attacks against civilian infrastructure across Ukraine. The bombing campaign aimed at undermining the country's economic capability shows no sign of abating unfortunately. Macroeconomic situation, taking into account that many businesses have been adjusting to a new operational environment, which remains unpredictably volatile together with a significant level of support provided by international partners, we, the Ukrainians are grateful for in the second quarter of 2023, GDP growth was around 18% with forecasted growth in 2023 at 2.3% as expected. CPIs slowed down to 1.5% compared to the first quarter 2023 that was at 3%. FX remains fixed. With regard to harvest in 2023, Ukraine is expected to have another strong result given that the weather conditions were favorable and therefore, you are expected to this chart. On this slide, you can see the forecast for 2023 harvest. If the harvest will be at 75 million tonnes, then 56 million tonnes can be exported with significant challenges on the way. Everything that cannot be exported due to the novel and the overloaded railways will be stored in their houses. At the same time, international grain prices continued to decrease, while logistic costs for exports continue to grow. Changes which took place in macro operational environment were following. On July 18, 2023, Russia unilaterally decided not to extend the Black Sea Grain Initiative originally signed by Ukraine. This has significantly restricted the capacity for seaborne grain for Ukraine agricultural produce and increased logistic costs. Also on the 2nd of May 2023, the European Commission adopted exceptional and temporary preventive mensuration input of a defined number of products from Ukraine to 5 member states. The European Commission lifted the restrictions from 15th September given that Ukraine agreed exerting control over its agricultural exports. Despite this, Poland, Hungary and Slovakia imposed these restriction conditions on a unilateral basis on the other range of very countable products that were previously restricted by the European Commission. Let me now proceed with the company's results for the first 6 months of 2023. Now moving on Slide #5 of the presentation. Let me start with operational highlights. It should be noted that operational and financial results in the first half of 2022 was severely impacted by the onset of the war, making year-on-year comparisons difficult. Pulp sales increased by 23% in the first half of 2023, driven mainly by exports, which increased by around 34% year-on-year despite different logistic challenges either driven by the war or by the restrictions set by neighbor countries mentioned a little bit earlier. Total share exports out of total property sales volumes increased to 58% from 53% last year. Financial results for the first half of 2023 are following. Group revenue increased by 35% and reached over USD 1.5 billion with actual revenue representing 63% of total revenue. Adjusted EBITDA increased by 42% to USD 218 million, mainly driven by higher export volumes of pulp and vegetable oils as well as lower gold related expenses. Net debt to LTM EBITDA ratio constituted, as you can see on this slide, 2.3p. Let's go on Slide #6 with key financials for the second quarter of 2023, which were following. Gross revenue increased by 36% and reached over USD 800 million with export revenue representing 63%. Adjusted EBITDA decreased by 9% year-on-year to over USD 100 million with EBITDA margin of 1%, significantly down as a result of substantial lower profitability in grain segment as a result of depressed grain pressures. Let's move on Slide #7, where we have financial results by segment. This is the results for the 6 months of 2023. As you can see from this slide, pulp portions remain our key segment. The group generated the majority of total revenue, around 73% and almost 100% of the company's EBITDA. The European iterating segment generated approximately 17% of total revenue and 17% of the company's EBITDA. Other 2 segments such as grain segment and meat processing or agricultural operations generated around 5% each. And as you can see, Grain segment has negative contribution to the company's EBITDA, Viktoria will provide you more current over more color on takes. Let's have a closer look at each business segment, and here, I pass my vote to Viktoria.

Thank you, Anastasiya. Good afternoon, everyone. Let's have a precise look at poultry segment performance, Slide #8. Despite a number of difficult due to the war in Ukraine, we delivered quite strong result in Q2 this year, thanks to a combination of market environment and enormous amount of work undertaken by MHP team. At the same time, the results for the next period of the 2023 can be mostly affected by challenges and risks associated with war and market environment that are not under MHP's controls. I will talk about the transformation in our presentation. Our strong result in Q2 2023 were made possible by fact that our team was able to increase our flow of sales volume level and exceed the average meat price, full market comparing Q1 this year. In H1, we had an additional positive effect on the port of cake and seed report reduction due to the level ratio of flower seeds and oil. Currently, we see one more trend in some flower prices, which may lead to a decrease of oil crushing margin and a result to increase in poultry production costs. Export price in Q2 increased by 5% quarter-to-quarter as a result of increase in price for fillet and breast cup in the EU and U.K. channels. However, in Q3, 2023, export prices started to decline. We expect the international price to continue to fluctuate and show negative trends based on assumption, the international poultry price correlated further with the downward trend in the grain markets. Poultry meat in Ukraine increased by 8% compared to the Q1 2023, driven mainly by increase in sales volume of high-margin products here as well as increased share of sales of other relatively expensive ready-to-cook products. In Q3, poultry price in Ukraine have largely stabilized. MHP is regularly exposed to commodity price risk. To mitigate this risk, we continue to focus more and more on noncommodity products ready-to-eat and traded to cope. However, penetrating and increasing our share of this market requires a lot of effort and expenses as of today and in the near future. Let's move to Slide #9, grain growing operations. It is important to highlight the extra price for grain from Ukraine is significant low compared to the international price, usually due to cost substantial increase as a result of war in Ukraine, additionally challenged by recent termination at the Black Sea Grain Corridor. Obviously, this negatively affected the profitability of MHP as well as all agri producers in Ukraine. EBITDA of grain segment net of IFRS 16 in H1 this year was negative at the level of $27 million comparing to a positive amount $44 million last year. This was mainly due to significant decrease in international grain prices, which continued to decline in Q3 as well as increased logistic cost due to the war impact, we expect our grain segment profitability from the 2023 harvest to approach zero. All at the same time, all spring crops are currently in good conditions, you expect better than in 2022 due to the good weather conditions in Ukraine. Let's turn to Slide #10. The financial performance of the meat processing business is mostly stable year-on-year. Sales volume of meat growth decreased, driven by temporary suspension of production facility Ukraine Bacon in the Donetsk region in Q2 2022. We continue to develop our convenience products. Today, our production facility operate at 100%. Let's proceed to Slide 11, several votes about Perutnina Ptuj. EBITDA of our European operating segment in H1 slightly increased, mainly due to the growth in capacity and sales volume in Serbia and Croatia as well as slightly higher price of meat and meat processing products. A few words about our cost flow and liquidity position, please go to the Slide #12. Cash from operations before change in working capital amounted to $106 million compared to the USD 264 million last year. This amount included payment in February 2023, part of the deferred interest payment agreed with creditor in March 2022. Related to working capital amount to USD 70 million in H1, mostly due to reduction in stope of meat or grains, corn and sunflower at the end of Q2 this year due to recoveries logistics and group diversification and optimization action, while it was significantly disrupted due to the more activities last year. However, it should be noted that investment in merchant capital will substantially increase in H2 2023, resulting in substantial cash outflow due to the future requirements, partisan of sunflower seeds, fertilizers, seeds, flower farming business as well as the termination of the grain deal by Russia that's causing significant restrictions in the capacity for the sea borne trade for Ukrainian agriculture exports. Total CapEx in H1 amounted $92 million and mainly related, firstly, purchases of digital generators to mitigate the impact of possible power outages, high investment in CapEx related to cost optimization and culinary strategy projects, maintenance and new product development and also improvement of the Perutnina Ptuj production facilities. Regarding debt. As the end of the period, the company total debt was nearly $1.5 billion, net debt about $1 billion by the of the cuts of June. For the first time in our history, our short-term debt increased up to $725 million. This is because the hot like our first EUR 500 million bond, which is due for repayment in May 2024 is now classified as short term. The group had reached agreement in principle with a number of international and development financial institution to enter in facilities agreement, providing up to $400 million in aggregated. We understand that our lenders expect us to utilize this liquidity in a center of exercise to buy back as many as possible notes well in advance of the scheduled maturity in May 2024. The operating environment remains volatile, extremely challenging and unpredictable, including the NBU restructure regarding capital movements outside of Ukraine with the Ukrainian legal entities and individuals. The liquidity position at the end of the H1 was $502 million, $277 million of which was held by group subsidiaries outside in Ukraine. It is important to note that accordingly to rule instituted by NBU, the foreign currency proceeds from exports from Ukraine might be repatriated to Ukraine with 6 months of recognition which in principle limits our ability to utilize the actual cash for debt servicing. Given current operational environmental and significant uncertainty, we summate our minimum sales cash balance at $200 million. And now I give the floor to Anastasiya for update and outlook.

Thank you very much, Viktoria. Definitely, first half of the year was full of different challenges, which the company managed to overcome. Looking forward, we understand that although the situation in Ukraine will remain prudent and have in store the war is ongoing. The group's Ukrainian maturations should continue, Poultry production continues to operate at 100%, at least now. Culinary transformation is on its way and harvesting spring crop is on. After the reporting period, at the beginning of September, the company signed a shareholder agreement with the intrigued subsidiary of Tanmiah Food Company public-related company on the South Stock Exchange with intention to establish a joint venture in policy farming in the Kingdom of Saudi Arabia, the joint venture is scheduled to be registered, hopefully in the fourth quarter of 2023. When it comes to expectations for the second half of 2023, results should be influenced primarily by customary market factors. In poultry business, for example, we expect some pull-down board correction in global poultry prices in the coming months. Increased logistic costs are expected to continue in 2023. Grain prices in Ukraine and internationally are expected to remain depressed in the second half, combined with the logistics difficulties in Ukraine and despite good harvest yield, the company expects a weak financial performance in the grain segment, as already highlighted by Viktoria earlier. While poultry prices in Ukraine have largely stabilized, international prices are expected to continue to fluctuate around a generally negative trend. Taking into account the announcement on a tender offer released today, later today at 3:00 p.m. U.K. time, with an approximately 40 minutes as mentioned at the beginning of the call, MHP will have a share recall on foot. Please kindly join us for the instructions provided by JPMorgan team. Now thank you very much. We are ready for questions to ensure that all participants on today's call have equal opportunities. Please follow the rule, one participant, 2 questions. Thank you for cooperation in path. Tim?

Thank you, Anastasiya. [Operator Instructions] Our first question comes from Antonio Luiz Gomes from Ninety One.

Within the limits of what you can talk about before the tender call, could you outline the key terms of this new IFI loan that you're going to do in terms of maturity and so forth?

Antonio, can hear me?

Yes.

I think you can, Anastasiya. Unfortunately, we do not cover questions with regard to the terminal offer on this call. So if you join our discussion meeting the conference call involve 40 minutes. We cover all these questions with regard to the financial results.

Anastasiya, sorry, yes. I can answer for your question regarding the tort this facility for 6 here.

Okay. Great. And then in terms of your cash restrictions, correct me if I'm wrong, the IFI debt, you're allowed to pay coupons on in U.S. dollars from your local currency holdings. Is that correct? How does that look for your U.S. dollar liquidity to pay the coupons on the remainder of your bonds?

Yes. Yes. Well, first of all, you know that we paid in the past our coupon, yes. And yes, the implemented up restricted, it seems to me more than 1 year ago. Yes, we pay it in the past, and we understand that-- we understand that we need to pay coupons in the future. But anyway, it is a temporary solution.

Okay. Okay. That makes sense. Great. I mean I have more questions, but those are my key main ones. I guess we can talk at another time for the remainder. Thank you.

Our next question comes from Anton Anikst from Knighthead Capital Management.

A very nice job on managing cash flows in Q2. I was hoping you would give us a little bit more detail on the various components of the $140-plus million of cash generation. First of all, if I heard Vik, if I heard you correctly, the $70 million inflow from working capital did not include any meaningful VAT recoveries. Is that accurate?

70. If your question about our release of working capital, with in H1 was $78 million. Yes, it includes some of the renouncements very significant yes. But please repeat the first part of the question.

I was just looking at the various components of the cash flow, one of which was the $70 million of cash generation from working capital. I was confirming that was mostly inventory driven and that there was no meaningful...

Yes, you're completely right. Mostly related to decrease our inventory, yes. Because by the end of the year, we have unusual stock sunflower seed and meat and oil yes, and we decreased during the H1 2023. But during the presentation, I told that in H2, we an investment in working capital because we need to buy big stock of sunflower seeds, fertilizer, it is usual because if you got something special for 2023. Yes, every year, we usually we buy a lot of fertilizer and seeds for our farming business and sunflower seeds.

Understood. So just for an update on VAT would be very helpful. When we last spoke in May, you were expecting about $120 million for the full year 2023, of which I think as of May, you had only collected about $10 million and you were looking to maybe collect 15% to 20% in the set...

No. We are doing a... Yes. During the H1, it seems to me dementor IT, it was around $40 million. Yes, around $40 million. But you understand it is always is a big -- this amount always unfortunately not under our control, 100% yes.

Actually probably good. 4-0, $40 million?

$40 million... Around 40.

Okay. And should we still expect maybe $80 million...

Yes. No... Yes, we still expect -- yes, we still expect based on our forecast. Yes, we still expect. But anyway, as I would like to repeat is not completely under our control.

Of course. Understood. And then just curious, there was about $13 million of cash used in investing that was not CapEx, what was that? Because it was not the Saudi JV because that was obviously after June 30.

Just I will expect maybe we will send to you this information in a stack. Okay?

That's fine. We can follow up on that necessary...

Yes, we will send it to you.

In the same section, $32 million from financing, I'm assuming that you're drawing on the EBRD facility or is there some...

Yes, yes, you're correct. Yes, yes. But anyway, yes, yes, you're completely correct, but we repaid last month.

Got it. And what's cash today? Obviously, very nice cash generation from March to June and what are the splits...

Yes, if you ask me right now, around 410 million.

Got it. And that's, what? Half and half Ukraine overseas? Or what are this on...

Yes. Yes. Yes. I told yes, yes, half of them in Ukraine. Yes.

Okay. And then final question. We obviously saw the press release about the Tanmiah JV a couple of weeks ago. It looked like that only required $7 million of cash investment upfront. Should we expect more investment later?

No, no. Yes, it's appropriately 7 million. Yes.

And are you contributing assets because it's 45% of BRL 200 million is obviously much more than $7 million. Do you understand my question?

Yes. Yes, we talked about the old investment, but we believe, I would like to explain, we invested around $7 million, but we expect that JV will take loans...

To invest more.

Yes, yes, yes.

[Operator Instructions] We have a text question from [ Serge Maticapital ]. What security is being offered under the refinancing facility and will the 2026-29 bondholders find themselves in a structurally subordinated position?

Sorry. Please repeat the question, sorry.

Yes, of course. What security is being offered under the refinancing facility and will the 2026-29 bondholders fund themselves in a structurally subordinated position?

No. Yes, it's unsecured, Yes, and the growth. And yes, the current one with the IF. At the same to say the same package of guarantor and almost the same covenant to reach our current euro bonds.

Okay. We have a voice question from [ Natalia Bogota ].

Just more clarification. If I heard correctly that the maturity of these new I5 facilities are 6 years?

Yes. You're completely right. Yes, 6 years but with amortization credit not bullet.

We have a question from Stella Cridge at Barclays.

So far 2 questions for me. The first one was, what do you plan for your CapEx to be for the whole of 2023? And secondly, what do you expect the working capital need will be in the second half of the year in total? That would be great.

Thank you for the question. Our CapEx in the H1, it was approximately $100 million and approximately the same level we understand the event CapEx in the second half of the year, $110-120 million. And regarding cohort of capital, we expect an investor worked for full year with around $70 million.

We have a question from [ Dimitri Eval ] from [ JFS International ].

Viktoria, I have 2 questions. The first one regarding your short-term bank loans. I think you have around $220 million of short-term bank loans. Could you please share some color on strategy with regards to this repayment of the short-term bank facilities? Do plan to expand the facilities? Did you receive waivers from bank lenders because I remember it was August December period when you had just renegotiate extensions. So any color on the short-term bank facilities would be helpful. And the second question with regards to expectations of your EBITDA generation. So I remember that you previously guided for the full year EBITDA in line with the previous year EBITDA, given the environment of volatility in poultry prices in international markets and other things like some deterioration. Do you still plan to generate same amount of EBITDA for the whole year? So what's the kind of outlook for the second half of 2023?

Yes. Thank you for the question. Regarding the first question, yes, you completely revised the total amount of short-term debt, $120 million. And we need until the shutter debt until looks until the first call approximately. And for us, very, very important to provide because you understand now we have short-term bank $750 million is anti-record in our history. And for London, for bank, it's very important that we sort how to say, problem sole issue regarding Eurobond 2024 has to be honest, is one of the reasons why we go to together with the tender because we understand that we need -- is very important to prolongate current short-term financing, a short-term loan. Because we understand it's completely impossible in Ukraine in track something new financing, not just for MHP, for all companies, even for MHP yes. This is why every in a subject, yes, how we -- out what result we achieved or is our current tender regarding refinancing. No, no deference the problem did we change maturities of set. Regarding the second question about our EBITDA for full year, we understand that we had acquired Group's financial results in poultry segment. But at the same time, we understand that farming business, grain segment on depress the total reason why international price, logistic cost. And now we it is our expectation about your EBITDA for full year, we are similar and close to the last year.

Just to confirm the current short-term bank lenders asked for some repayment of upcoming bonds. So it's a kind of condition providence for them to extend maturity. So you haven't received any waters yet, and we are waiting for the results of the tender. Is it correct?

Yes. No, today, right now, we need to have any weather because our maturity by the answer of the year. That is why... Yes, yes. It is not right now, yes, by the end of the December. December general uses.

Sorry, and one last kind of question regarding key outflows. You already specified your carpet guidance, working capital outflows. Are there any outflows we should be aware of? So for example, some investments in upcoming on campaign or harvest. So any other outflows apart from the mentioned the working capital and CapEx that we should incorporate in our model, that would be very thoughtful.

No, just payment, interest payment. This year, it was $130 million taxes, approximately 20 to 25 -- not something special.

Okay. So all this investment in Sonata next year. So it's about the working capital. So basically, it's a...

Yes. Yes, you're completely right. Yes, it is -- this is why in the first half of the year, we have very leased in working capital, $70 million. In the second half of the year, we had investment in working capital, approximately 140-150. For full year, yes, in the full year, it is around $70 million to $80 million investment in working capital.

[Operator Instructions] We have a question from [ Vidhi Vira ] at Goldman Sachs.

Congrats on the results. Just wanted to understand the working capital dynamics a little better. So does this $140 million working capital outflow in second half include any outstanding from that? Or that is just the working capital buildup because I remember that last year, we were not expecting much working capital investment for this year given so many years of high working capital plus grain prices coming down, poultry price is coming down. So what is driving this additional $140 million working capital investment in second half?

Okay. Thank you for the question. Yes. First of all, in the second half of the year, we will invest purchase and fertilizer. We are utilized so in campaign yes, for spring to comp because we always make stock officialized by the end of the year and seeds for grain business, for farming business. And additionally, we invest money for -- to buy some flower seeds because every year by the end of the year, we have the stock of some flower seeds approximately for 4 months. It is the main investment. And the CAT, we expect that 60% yes, approximately, we will receive 50, it's on the question.

And one last question. If you can just explain in detail what you're seeing on the pricing side in different markets for export markets of poultry? And versus last year, how do you see the year to end? Would it be flat? Would it be much lower? Just some color there will be helpful.

Yes. Thank you for the question. What we see right now, right now in September, and we see the price in October, price of export market price of chicken decreased approximately by -- minimum by 10%, depends on the market at 8 and around 10%. And we told during the presentation, we understand that price usual advice of meat correlate with price of grain. And that is why to be honest , we do not expect any increase in price. We need and that is why we expect that our profitability and our financial results in the second half of year would be lower in the than first half.

We have one more question from Zafar Nazim from JPMorgan.

Just one clarification for me. The undrawn facilities of $93 million, does it include the EBRD facility of $90 million?

Yes. Yes, you're completely right. But we had this facility by the 1st of July because you understand our financial report is the 1st of July. Right now, we don't have a facility and now we don't have any undrawn facility.

I think we have one last text question as well from [ Constantine Chernov ]. I think some of this was answered, but he does ask how much cash held offshore could be used to repay debt coupon and principal?

Right now, our payments to coupon, annual repayment of coupon is around $100 million.

Okay. And he also asks, could you please confirm whether the new $400 million international funding facility is secured or unsecured?

Unsecured. Yes, I told that our IFI facility has completely very similar covenant package and the same guarantor that we have in Euro bonds.

Okay. Perfect. Thank you. So I'm not seeing any more questions. So maybe I can hand back to you and especially at Viktoria for closing comments.

Thank you very much, Tim. I would like to thank the audience. I would like to thank our stakeholders for the call, for the questions. And session our next call, which will start in about 50 minutes. Thank you, and have a good day. Bye.