MHP SE (MHPC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's Third Quarter 2024 Results Conference Call. [Operator Instructions] So without further ado, I would like now to pass the line to Anastasiya Sobotyuk. Please go ahead, ma'am. Your line is open.

Thank you very much, Rafael. Dear stakeholders, good afternoon, and good morning. Thank you for joining us today at MHP's conference call dedicated to the third quarter and 9 months results. I am Anastasiya Sobotyuk, Director of Investor Relations. Together with CFO of MHP, Viktoria Kapelyushnaya, 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 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 are going to Slide #3 of our presentation. A few words about market environment. 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 9 months 2024, war-related costs and losses amounted to USD 38 million. And 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. Macroeconomic situation. Taking into account that many businesses have been adjusting to new operational environment, which remains unpredictably volatile in 2024, GDP's growth during the 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 #5. Let me start with operational highlights. Poultry sales decreased, as you can see, by approximately 8% in 9 months of 2024 year-on-year, driven mainly by a decrease in volumes of exports. Financial results for the 9 months of 2024 were following: Group's revenue remained stable at around USD 2.3 billion, with export revenue representing 60% of total revenue. Adjusted EBITDA increased by 33% to USD 437 million, 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 #6 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 USD 773 million. At the same time, driven by strong results in agricultural division and generated by Perutnina Ptuj, net profit increased by 75% and reached USD 173 million. And adjusted EBITDA increased by 56% to USD 96 million. Going on Slide #7 of our presentation, which shows the results for 9 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 USD 164 million to the group's EBITDA. Outstanding results and a second historical record during the last 10 years. Let us have a closer look at each business segment. And here, I pass my word to Viktoria.

Thank you, Anastasiya. Good afternoon, everybody. Let's move to the Slide #10 -- sorry. Let's have -- let's move to the Slide #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 common challenge for MHP. To mitigate this, MHP is focusing on production and sales noncommodity 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 9 months this year, our volume of noncommodity products by 10% in Ukraine and by 45% on export markets. Total share of noncommodity products in our poultry sales is at 20% in volume and 30% in EBITDA. We will continue to concentrate on selling noncommodity products with focus on most marginal. A few words about our vegetable oil segment, Slide #9. In Q3, our EBITDA 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 crush and margin. We assume that margin of the segment in Q4 will decline further. Let's move, Slide #10, agricultural operations. As of today, MHP harvesting campaign is complete on around 325,000 hectares of the land. Yield for spring crops are lower than in 2023, especially corn, our yield, 8.4 tons per hectare. A lower yield of spring crops was due to unfavorable 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 9 months amount to $276 million compared to the $138 million in 9 months last year. This increase was mainly attributable to higher sales volume and price of corn on export market. EBITDA for the agricultural operations segment, net IFRS 16 in 9 months was $164 million compared to 32 million loss -- 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 by lower yields. Let's go to the Slide #11. Several words about our European operating segment. In 9 months, poultry net sales of European operations 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 #12, a few words about our cash flow and liquidity position. Cash flow from operations before change in working capital decreased $290 million compared to the $315 million last year. Investment in working capital amount only $25 million. This was mainly due to the increase in VAT reimbursement receivables. Total CapEx in 9 months amount to $217 million, marking a significant increase compared to the last year. The rise is driven by extensive maintenance and modernization of existing facilities, construction on view by energy production facility, investment in cost optimization and our culinary strategy project and expansion of Perutnina 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 Anastasiya for outlook.

Thank you, Viktoria. Let me provide you with outlook, taking into account that the war operation environment and the current market drivers as well. Considering the fast-moving nature of the war, and which we 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 created 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 bio energy 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 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, MHP 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's history. Let me conclude the presentation now, and we are ready for the discussion and your questions. Thank you for cooperation in advance.

[Operator Instructions] We have the first question from Mr. Anton Anikst from Knighthead Capital Management.

Very nice quarter. Congratulations. Hope you're well. Just a couple of questions. You're -- 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 of quick follow-ups.

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 EBITDA around $500 million. Regarding the CapEx in 9 months, we invest in CapEx -- just in CapEx, we invest $220 million and plus we provide some acquisition, and that is why our total CapEx for 9 months, around $250 million. Our expectation for full year, it was approximately $300 million, maybe $310 million. Thank you.

Can 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 are arguably 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. Yes. 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, because yes, because a few reasons for this, yes, corn price. But anyway, we -- yes, 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 Croatian business and Croatian operations business in Ukraine now is not very affordable. Yes, price of -- price on sunflower seed in domestic market increased so significant. 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 [ grains tons ] will increase next year approximately by 30%, around 30% in [ grains tons ]. 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 -- we try always to be very conservative. And now we understand that our EBITDA, it will be around $450 million maybe. Yes, it's very difficult to predict, especially in current situation. Yes. But anyway, we see this figure for next year.

Okay. That's helpful. And finally, unrelated, any updates on the Saudi JV? What's happening there would be very helpful to hear kind of high-level thoughts on what's happening over there.

No. The JV is operating, and we have some issues, but I think that, yes, it is not a big business. But it is a business which is interesting for us, and we see that maybe we will increase slightly this business.

We'll be moving now to the next question. The next question comes from [ August Mi from Alquary ].

Congratulations on the third quarter results. I have 2 quick questions, the first related to the agricultural segment. Can you explain further what is behind the strength of the results in the agricultural segment? And how do you see that sustainable for the fourth quarter and 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?

Yes. Yes. The question about the profitability in our farming business, yes, it depends on the two reasons, one of them is the price. Yes, we understand the price in Ukrainian and market of grain always correlates with gold price. Yes, we cannot predict regarding -- because why now we have high -- significantly higher grain price compared to the year ago? Because logistic cost 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 U.S.A., in Brazil and that is why it is some uncertainty. If we put in our budget, the price, very similar with current price. Because current price is slightly lower because this is the average during -- which we have during the last 5 years. Regarding our liquidity position, current liquidity position, around $300 million. And for next year, our maturity long-term repayment around $100 million. We have undrawn line for today, around $200 million, okay? 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 undrawn...

And just if I may, a quick follow-up on the first question. You say that essentially, the two drivers of higher 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 port availability? And do you expect that to continue at least in the short term?

Yes, yes, you're completely right. Yes, you're completely right. Because -- yes, you're completely right. Because now we use the Ukrainian ports. And previously, it was difficult way from Constância, from other European ports.

[Operator Instructions] We have a question from Mr. Dmitry Ivanov from Jefferies.

Can you hear me? 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 expenditure into 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 for your question. First of all, our CapEx for the next year, we see today around $250 million, $270 million. Yes, it is half of them, it is a maintenance CapEx and compliance CapEx, which we will provide in Ukraine and in Balkans region. And we have approximately $70 million, $80 million CapEx for expansion in Balkans with a plan to increase our capacity and plus CapEx, which allowed to us to implement our strategy, go to the culinarian company to produce more and more noncommodity products, the main pillars of our CapEx.

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

No, no, no. Yes, I talked about just CapEx because the same situation that we had this year, our CapEx for 9 months, $220 million. On top of them, we have approximately $40 million is acquisitions. Acquisition is one of them. We did abroad in Perutnina, and we provided in Ukraine, too. Just only CapEx, $250 million.

Okay. Okay. So basically, just to summarize, around $450 million in EBITDA next year, $250 million in CapEx, half of it is maintenance. And on top of that, there will be some M&A-related expenses if you decide to proceed with any of the acquisitions.

Yes.

So we'll be now moving to the next question from [ Magnus Sherman from Octus ].

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?

Yes. Thank you for your question. This year, we invested in energy, different energy projects, approximately $50 million. For next year, it would be around $10 million, $15 million, yes. Regarding the increasing and what is the percent, yes, we see and we put increase in gas and electricity, approximately 10%, 8% from increasing energy.

[Operator Instructions] We have a follow-up question from [ August Mi from Alquary ].

I have a question on what is your estimated cash taxes for this year? And is there any way we can estimate it for next year? And the second is on 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 million, $60 million. Why? Because price, as I told previously, 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 minimum 100,000 to 200,000 tons of sunflower seed. Regarding next year, we don't expect any huge investment in working capital, maybe around $20 million because always is the issue what we will have deviation with VAT receivables, maybe $20 million, $30 million, it's very difficult to predict. Regarding taxes, this year, our total taxes will be around $15 million. And we expect that more or less, the same level -- will be more or less the same level the next year. Thank you.

To clarify, you said $15 million, 1-5, right?

Yes, 1-5, yes. 15.

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

Thank you very much, Rafael. Dear shareholders, 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.