MHP SE (MHPC) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to MHP's First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I will now hand over to Anastasiya to begin the presentation.

Thank you very much, Jim. Dear stakeholders, good day to you. Thank you for joining us today at MHP's conference call dedicated to the fourth quarter and annual results of 2023. I'm Anastasiya Sobotyuk, Director of Investor Relations and ESG compliance, together with Viktoria Kapelyushnaya, CFO of MHP, we will discuss MHP's financial and operational results for 2023. Today's call is based on the press release and financial statements released 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 now move to Page #3 of the presentation. A few words about market environment first. First of all, let me provide you with the update about the war first of all. War continues to have a major impact on company operations and our full year 2023 performance reflects the resilience and agility of our business model and the tremendous efforts of our workforce. Irregular and frequent drone and rocket attacks against civilian, energy and other infrastructure targets continue, presenting us with a challenging and disruptive logistical environment, driving additional war-related costs. At the date of the publication, all our production facilities in Ukraine continues 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. In the event of adverse operational impact, the group responds immediately, ensuring it is ready to take all actions necessary to rebuild, restore and restart production in the shortest time possible. Some words about macroeconomic situation. Taking into account that many businesses have been adjusting to a new operational environment in Ukraine, which remained unpredictably volatile in 2023, GDP grew by over 5%, with a forecasted growth in 2024 at around 3%. CPI slowed down to 5% compared to 2022 increased by over 26%. This year's harvest is expected to be strong at around 74 million tonnes. Let me now proceed with the company's results for the fourth quarter of the year. We go to Slide #5 of the presentation. Let me start with operational highlights of this presentation. [ Poultry meat ] sales by exports, which increased by around 8% year-on-year despite different logistic challenges, mainly driven by restrictions set by neighbor countries. Total share of exports out of total poultry sales volumes increase -- remained relatively stable year-on-year and constituted 57%. Financial results for 2023 were following: Gross revenue increased by 14%, reached over USD 3 billion, with export revenue representing 60% of total revenue; adjusted EBITDA increased by 16% to $445 million, mainly due to increased exports of poultry, increased poultry prices for processed meat, increased vegetable oil sales and strong performance [indiscernible]. However, this was significantly offset by weaker performance for the agricultural operations segment. Net debt to LTM EBITDA ratio contributed 2.47x. Let's go on Slide #6 with key financials for the fourth quarter of 2023, which were following. Group's revenue remained relatively stable, but decreased by 5%, reaching $727 million and adjusted EBITDA remained stable year-on-year and constituted $116 million with EBITDA margin of 16%, mainly driven by stronger results in poultry and the European operating segment. Let's proceed on Page #7 of the presentation. As you can see, these are the financial results by segment. Before presenting the results, let me remind you that MHP changed the presentation of segment information at the end of 2023 in order to accurately reflect the diverse nature of the group's business operations and improve the granularity of the reporting. As of now, MHB has 4 business segments, such as poultry and processed meat, vegetable oil operations, agriculture operations and European operating segment. As you can see, poultry and processed meat operations remains our key segment. The group generated the majority of total revenue, about 54% and 72% of the company's EBITDA. Vegetable oil operations generated 20% of the revenue and contributed around 18% to EBITDA. The European operating segment generated approximately 18% of total revenue and 20% of the company's EBITDA. Let us have a closer look at each business segment. And here, I pass my word to Viktoria.

Thank you, Anastasiya. Good afternoon, everyone. Let's have precise look at poultry and related operations segment performance, Slide #8. Despite number of difficulties due to the war in Ukraine, MHP delivered a good result in Q4 last year, thanks to a combination of market environment and enormous amount of work undertaken by MHP. Poultry price in Q4, both on export and domestic market remained almost at the same level in Q3 2023 based on the assumption that international poultry prices correlating with price trends for grains, we don't expect poultry increasing in 2024. MHP is commonly exposure to commodity price risk. To mitigate this risk, we continue to focus more and more on noncommodity products, ready to eat and ready to cook and following MHP's culinary transformation strategy. However, penetration and increasing our share of this market requires substantial efforts and expenses today and in the near future. In Q4 2023, we continue to increase sales volume of processed meat. We focused on the most marginal product. Our strong results for the 12 months last year, mainly driven by higher sales volume for poultry meat on export market and by increase of price of processed meat. A few words about our view, Vegetable oil segment. Slide #9. In 2023, we had additional positive effects in vegetable oil operations due to increase in sales volume of vegetable oil, which was partly offset by lower oil prices last year. In Q4 2023, we had a negative trend in the flour prices, which led to a decrease of oil crushing margin. We assume that margin of the segment in 2024 will remain at the level of Q4 last year. Let's move to Slide #10. Agricultural operation. It is important to highlight that due to continuous rocket strike on Ukrainian ports infrastructure and termination of the Grain deal by Russia, export price for grains for Ukraine [indiscernible] compared to the international price. Obviously, these circumstances negatively impact the profitability of MHP grain results as well as all agri producers in Ukraine. Last year harvest around -- we harvested around 346,000 hectares of land in Ukraine, and there's around 2.5 million tons of growth by 22% higher than in 2022, mainly due to the favorable weather conditions during the harvesting season. It is the one -- last year, it is one of the MHP's record harvest. EBITDA, at the same time, in the back of agriculture operations segment in 2023 except net of IFRS 16 was $6 million compared to the $99 million in 2022. This result was mainly driven by significant decrease in international grain prices. We expect our agriculture segment profitability from the 2024 harvest to be close to the results of [ 2022 ]. Let's move to Slide 11. Several words about European Operating Segment. EBITDA of European Operating Segment in 2023 increased to $91 million mainly due to increase in sales volume and price of poultry meat and poultry products. This was driven by increase in HoReCa sales channel as well as due to increase in sales of sausage. An additional positive effect was due to decrease in grain prices is the main component for mixed fodder production, which have reduced cost. A few words about our cash flow and liquidity position, Slide #12. Cash flow operations before the changes in working capital was $377 million compared to $479 (sic) [ $478 ] million last year. This decrease was mainly as a result of interest payments in February 2023, part of deferred interest payment consisted of its creditor in March 2024. Release of working capital amount [ $62 million ] in 12 months 2023, mostly due to return of stocks of chicken meat and vegetable oil to normal level from unusual high amount in 2022 caused by disrupted logistics due to the war activities. This has partly recovered afterwards due to the Grain deal and diversification of delivery routes by group. Lower investment in raw materials during 2023. Energy supplies, fertilizers, plant protection [indiscernible] compared to the 2022 due to the relative stabilization of situation in Ukrainian economy and lowering of disruption in supply. And also even stable amounts of trade accounts receivable compared to significant growth in sunflower oil and chicken meat receivables by the end of 2022. Total CapEx in 2023 amounted $212 million and mainly related to purchases of diesel generators to mitigate the impact of possible power outages, higher investment in cost optimization and investment in culinary strategy projects, maintenance and new product development and expansion and improving and growth of Perutnina Ptuj production facilities. Regarding debt and our cash position. By the end of the year, the company's total debt was $1.5 billion. Net debt of $1.1 billion. As you know, there was a tender for the purchase bonds, 2024 a nominal amount $151 million in Q3. At the beginning of 2024 was made the second tender for the purchase bond in amount $138 million and current outstanding bonds 2024 is $211 million. The liquidity position at the end of the 2023 was $436 million in cash, $310 ( sic) [ $311 ] million of which was held by the group subsidies outside Ukraine. But as today, we have our cash total provision, $316 million, including outside Ukraine only $120 million. It is important to note that the accordingly to rules instituted by National Bank of Ukraine, the foreign currency proceeds of export from Ukraine must be repatriated to Ukraine within 6 months of recognition, which in principle limit our ability to utilize of offshore cash for debt repayment. On November 10, 2023, the National Bank of Ukraine decreased the maximum settlement period from 6 months to 3 months for repatriating cash from the export of a specific agricultural products, including of grains and oil. Given the current operating environment and significant uncertainty, we estimate our minimum state cash balance at [ $200 million ]. And now I give the floor to Anastasiya for updates and outlook.

Thank you, Viktoria. The company is not in a position to state any outlook with confidence due to the continuous risks of operating in war conditions and with major facilities in regions under assault by Russia. And the heavy March and April bombings of civilian infrastructure and energy facilities were a stark reminder that the whole of the territory of Ukraine is under the threat. And extensive military operations are not confined to the front line. MHP will continue to do our outmost as a team and as a business to remain strong and agile. To push innovations ever further and to carry out our business to the highest international standards. Crucial to maintaining food security and stability in Ukraine. The group will remain at the heart of our communities and support our people and their families as their needs change and the situation develops. Let me conclude the presentation now. We are ready for the discussion and the questions. Thank you. Thank you for your cooperation in advance. Tim, we are ready for questions.

[Operator Instructions]. So we have a couple of questions. So our first question comes from Stella Cridge from Barclays.

[indiscernible] many thanks for all of the updates. I was wondering if you could just give us an idea of what you're thinking about in terms of CapEx spending in 2024, what kind of key projects that you'll be looking at? And perhaps any expectations around working capital, that would be great. And secondly, I wanted to ask when you have fully drawn the $400 million DFI facilities. Could you let us know what the amortization profile of those facilities will be and the final maturity date? That would be great.

First of all, thank you for your question. [indiscernible] forecast our budget for 2024. You understand there's a very big problem predict and are regarding our financial results. Based on current situation, we expect that our financial reserve will be around [ $400 million ]. Our CapEx, which we now perceive for 2024, around $300 million, because we continue to invest money in maintenance CapEx. Maintenance CapEx is very, very important for us to remain [indiscernible] to provide maintenance and reconstruction for our facilities. Yes, we are continuing investment in our strategy regarding [ Perutnina ] and company because we would like to sell and produce more and more non-commodity products, both for export and for Ukraine. And we continue to increase our capacity [indiscernible] European facilities. [indiscernible]. We don't expect -- we expect investments around [ $40 million ] because we always have some uncertainly regarding the IT tax reform. And our investment in working capital, it will depend what volume of grains, such as sunflower seed and soya seed we would like to have by the end of the year. Our [indiscernible] around [ $30 million to $40 million ]. And regards maturity, maturity of our DFI and amortization. Our loan DFI for 5 years from current date, today. And we -- regarding maturity, we will pay in annual [indiscernible].

So is it -- it would be sort of $400 million divided by -- sort of the ecopayments ramped over those years. Is that right?

Correct. Correct. Correct. Yes. Excellent..

Great. Thank you for that. Can you just clarify this $300 million CapEx number that you gave, does that include some of these smaller acquisitions that you've done as well that you reported today?

Yes, yes. [indiscernible] CapEx includes the small acquisitions. You're right.

Our next question comes from Himanshu Porwal Seaport Global.

Very quick question on liquidity. So the $300 million liquidity that you mentioned is sitting outside of Ukraine. Does that include the DFI loan that you have, which will be utilized for the 2024 maturities? Or that is separate from what is to be utilized for this repayment. And if you can just again clarify that number once again because I think there were 2 or 3 numbers that were floating around. That's it. Thank you.

Yes. Yes. No. This, our liquidity outside of Ukraine and our liquidity does not consist from DFI because [indiscernible] in near future in a few days. Yes.

As of today, you have like $316 million sitting outside of Ukraine.

Without this. Yes. Without this. And especially, I told that outside in Ukraine, today we have only $120 million. So maybe the lowest level -- is the lowest level of our liquidity during the last 3 years. Yes, because I -- no, I explained why. No, it did not include $180 million from DFI.

Okay. So going forward, I mean, depending on the NBU decision, I mean, you would still be able to use this FX to service your coupon on the future other bonds like 2026, 2029s and come 2026 maturities, they should be available. So any plans for buying back any of these 2026 maturities once you are sorted with the '24s? Is that something you plan to do?

Yes, you completely right, maybe I would not tell you, but we have no real program of current regulation of NBU. Yes, to provide fairly for our bond, yes. Yes, we will now [indiscernible] problem because you remember that, yes, we cannot pay interest rate. Yes, we cannot pay from Ukraine into coupon, this is a problem. We will have some discussions with National Bank about, yes, there are changes to this rule but in a way, it is a real problem. The potential, there's a problem however [indiscernible].

But given that you already have cash outside of U.K., so you can use that to service the coupon on the upcoming maturity, right?

Yes. But our outside in Ukraine very low level. I told you now we have only $120 million. Yes. But in near future need to repay our bonds, we repeated [indiscernible] from DFI but the level of cash is real low.

Okay. So as of now, it has come down to $120 million. Right? Cash outside of Ukraine.

No. Yes, exactly. But after the repayments given our cash outside in Ukraine will be around $60 million.

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

If I may, I would like to please clarify a couple of numbers. If I understood correctly, the company's current cash is $216 million, including $120 million outside of Ukraine. Is it correct?

Yes, it's correct. Yes, Natalia, it is correct.

Thank you. And you also mentioned this year's financial result of $400 million. Can you please confirm if it's EBITDA, excluding IFRS 16 for this year?

Yes. Yes, you're right. But it's approximately and it's very difficult to predict.

Perfect. So just a small clarification. So company does plan to repay its 2024 notes like next week with the remaining DFI financing?

Yes, it's correct.

Perfect. And just small operational question, please. Based on company's reports, it appears that poultry exports in Q4 have declined by 12% -- I'm sorry, 15% quarter-on-quarter. Can you please elaborate a little bit on the poultry export trends during the last quarter last year and probably some early estimates from first quarter this year?

Yes, it's lower little lower because last year we exported as I have explained at the beginning of 2023, we had a big stock in chicken meat. And that is why, yes, our exports 2024, it will be slightly lower by approximately by [ 20,000 to 30,000 lower ] compared to the 2023 because in 2023 we exported not just meat which we produced in 2023 and meat which we had in our stock by the -- at the beginning of 2023.

And should we expect some return in that level in Q1 of 2024? Or level on last quarter would be like the best guidance for most recent quarter?

So improve -- maybe just -- no, it is approximately 5%, 7% lower than 2023.