Mhp Se

LSE:MHPC

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's Q1 2024 Results Conference Call. [Operator Instructions] So without further ado, I would now like to pass the line to Anastasiya Sobotyuk. Please go ahead, ma'am. Your line is open.

[Anastasiya Sobotyuk, executive]

Thank you, Michael. Dear stakeholders, good afternoon. Thank you for joining us today at MHP's conference call dedicated to the first quarter results. I'm Anastasiya, Director of Investor Relations and ESG compliance together with Viktoria Kapelyushnaya, CFO of MHP, we will discuss MHP's financial and operational results for the period.

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 Slide #3 of the presentation. A few words about macro environment. Taking into account that many businesses have been adjusting to a new operational environment, war environment which remains unpredictably volatile in 2024. In Q1 2024, GDP grew by over 3% with a forecasted growth in 2023 at the same level, 3%.

CPI slowed down to 1% compared to 3% in Q1 2023. 2024 harvest in Ukraine is expected to be strong pretty much at the same strong level as it was in 2023, which is around 74 million tonnes.

Let me now proceed with the company's results for the first quarter of the year. Let's go together to the Slide #5 of the presentation. First of all, the war continues. And the first quarter of this year's performance reflects the resilience and agility of our business model and the tremendous effort of our workforce, irregular and frequent drone and rocket attacks against civilian energy and other infrastructure targets continue.

MHP would like to inform its stakeholders that due to shelling by the occupied forces on May 17 in Odesa region, a warehouse property leased by the company to store frozen MHP chicken meat products was completely destroyed, resulting in the loss of poultry products worth over USD 8 million.

MHP's employees fortunately were not injured. Moreover, the company provided comprehensive medical and technological assistance to its employees. At the date of the publication, all our production facilities in Ukraine continue to operate at close to full capacity. When you look at our financial results for the first quarter, you can see that group's revenue decreased by 4% and reached approximately USD 720 million, with export revenue representing 63% of total revenue. Adjusted EBITDA remained stable and on constituted $119 million, [ year ] with EBITDA margin of 17%. War related expenses increased by 67% year-on-year and constituted around USD 10 million.

Let's move to Slide #6, where you can see the financial results by segment. Main contribution to MHP's financial results in the first quarter of 2024 were Poultry & Related Operations. The group generated the majority of total revenue, about 55%, as you can see, and 72% of the company's EBITDA and the European Operating Segment generated 19% of total revenue and contributing 15% to the company's EBITDA.

Let us have a closer look at each business segment, and I would like to pass my word to Viktoria here.

[Viktoria Kapelyushnaya, executive]

Thank you, Anastasiya. Good afternoon, everyone. Let's have a precise look at Poultry & Related Operations segment performance.

Slide #7. Despite of numbers of difficulties due to war in Ukraine, MHP delivered a good result in Q1, thanks to the combination of market environment and enormous amount of book undertaken by MHP team. Poultry price in Q1, both on export and domestic market remain almost at the same level as Q4 2023. We don't expect further growth in poultry prices in this year.

Commodity price risk is a common risk for MHP. In order to mitigate this risk, MHP continued to implement a culinary strategy and focus more and more on production and sales of noncommodity products, which are ready-to-eat and ready-to-cook. At the same time, it requires substantial effort from our team, investment in CapEx as well as expenses to launch new products and increase our share on the local market. This trend will continue in the near future. In Q1, we continue to concentrate on selling processed meat with a focus on the most marginal product. Our strong result of Q1, mainly driven by higher sales volume of poultry meat in export market and by positive [indiscernible] of revaluation of biological assets and agricultural produce accordingly to IFRS 41 standard.

A few words about new segment, Vegetable Oil, Slide #8. In vegetable oil operation in Q1, we had lower EBITDA compared to the same period last year. This increase in the vegetable oil sold sector did not manage to sufficiently mitigate a decline in vegetable oil prices. In Q4, 2023 and Q1, this year, sunflower prices trend was negative, which will lead to a decrease of our oil crushing margin. We assume that the margin of the segment this year will remain in the level in Q1.

Let's move to the Slide #9, agricultural operations. Segment revenue in Q1 amount $69 million compared to the $77 million last year. The decrease was mainly attributable to low volumes of corn sales on domestic market. EBITDA of Agriculture Operations segment net of IFRS 16 was $17 million compared to the $3 million last year. This result was mainly due to significant negative revaluation of winter crops in fields in Q1 2023 adversely affected both of 41 standard and EBITDA.

In Q1 this year, certain stabilization of price had no significant positive impact of total -- our EBITDA.

Let's approach to the Slide 10. Several words about European Operation -- Operating Segment. EBITDA of operating segment in Q1 amounted $18 million and remained almost stable compared to the last year. The increase in revenue was offset by a decrease in 41 standard.

Slide 11, few words about our cash flow and liquidity position. Cash flow from operations before changing working capital this year slightly decreased to $90 million compared to $98 million last year. The release of working capital amount to $12 million mostly due to the higher trade accounts payable and other liabilities as a result of procurement of material for spring sowing campaigns, such as energy [ supplies ], plant protection material, animal feed components and other.

Total CapEx in Q1 amount to almost $60 million and mainly related to maintenance and modernization projects, construction of energy production facility, investment in cost optimization and culinary strategy projects and expansion and improvement of Perutnina Ptuj production facility.

Regarding debt, at the end of the period, company total debt was $1.5 billion and net debt about $1.1 billion. At the beginning of '24, MHP completed its second tender for repurchase of bond 2024 in amount of $138 million. The last tranche from IFIs in total amount of $180 million were received in May this year. On 10th of May, MHP Eurobond 2024 was fully repaid.

The company completely fulfilled its obligation regarding MHP Eurobond 2024. The liquidity position at the end of the first quarter was $390 million in cash, $280 million of which was hold by group subsidiaries outside Ukraine. As today, we have around $300 million in cash, including only $130 million outside in Ukraine. Given current operational environment and significant uncertainty, we estimate our minimum safe cash balance at $200 million.

And now I give the floor to Anastasiya for update and outlook.

[Anastasiya Sobotyuk, executive]

Thank you, Viktoria. MHP is expected to operate at close to full capacity in Ukraine subject to any possible direct or collateral disruption damage to MHP's operations only storage. This is our plan, I would say. Perutnina Ptuj continues to develop according to its strategy. MHP has almost adapted to the war environment, at the same time is experiencing many logistic challenges, especially with exports to the EU. This is what you can see from the news and we remain conservative to any positive trends for -- price trends for grains, poultry meat and vegetables as of today.

In general, there is a high level of uncertainty, as Viktoria mentioned regarding how operations in next quarters will look like and what kind of financial results this uncertainty will bring to the company. But MHP team is undertaking all necessary steps to the extent possible, of course, to continue its operations at efficient levels to manage all difficulties associated with war and overcome war-related obstacles.

We are now ready to start our Q&A session. Thank you very much. Michael, we need your help.

[Operator]

[Operator Instructions] Our first question comes from Mr. Anton Anikst from Knighthead Capital.

[Anton Anikst, analyst]

A couple of kind of obvious questions. In years past, you've endeavored to give us a little bit of a high-level guidance for the year, not just in terms of utilization capacity -- in your capacity utilization but also high-level EBITDA CapEx ideally broken out between Ukraine and Perutnina. If you're in a position to share your outlook today, that would be extremely helpful. I know that the situation is extremely fluid still.

And then number two, maybe either Anastasiya or Viktoria, if you could tell us a little bit about the change in cash since the end of March. I would have thought the redemption of the last of the bonds in early May should have been a liquidity-neutral events since you drew down on the IFI facilities to clean up the bonds. So maybe the $90 million drop in cash from end of March to early June, if you could bridge that for us, that would be very helpful.

[Viktoria Kapelyushnaya, executive]

Thank you for your question. And regarding the first question about our guidance for full year, yes, our total EBITDA, how we see from today. Yes, you understand it's very difficult to predict. But as of year-to-date, we understand that our EBITDA for full year, it would be around $400 million. yes, 25% approximately, it is contribution from Perutnina. And total CapEx approximately $300 million, $300 million plus and around 1/3 from Perutnina -- [ through ] the CapEx of Perutnina. Yes, our liquidity position decreased since April because we repaid Eurobond. Yes -- and yes, you know that we [ direct ] from IFI only $400 million, and total our Eurobond, it was to be repaid more than $470 million. Yes, and coupon and coupon we paid in April and in the beginning of [ 10th of May ], coupon [ for other ] Eurobonds.

[Operator]

Next question comes from Mr. Stella Cridge from Barclays.

[Stella Cridge, analyst]

Many thanks for all of the updates. And I wondered if I could ask about some of these changes that were introduced by the National Bank of Ukraine at the beginning of May regarding access to FX for different purposes. I was wondering if you expected those changes to have any kind of positive effect for MHP? Or just how you view the potential impact of those changes, that would be great.

[Viktoria Kapelyushnaya, executive]

Thank you so much for your question. Unfortunately, these changes which issued by National Bank at the beginning the May did not bring to us any benefits because we are based of even as these changes to we -- from Ukraine, we cannot, we cannot repay no coupon, no -- we kept -- from Ukraine no coupon, no loans. Just it is regarding only improvisation regarding dividends, yes, about only dividends and limitation, which we can repay from these dividends, it would be $1 million a month. Yes, nothing, so a few changes. Nothing given a real change.

[Stella Cridge, analyst]

Are you aware of any subsequent discussions that have happened since these changes were announced with big companies like yourself with regards to future -- with your payments that you need to make?

[Viktoria Kapelyushnaya, executive]

No. Okay, we understand that current situation is difficult, and we understand that we have the strict obligation. No, we will discuss, but to be honest, and in the past, we discussed. No, okay. We will see.

[Operator]

[Operator Instructions] Our next question comes from Ms. [indiscernible] from Goldman Sachs Asset Management.

[Unknown Analyst]

Congrats on the results. I just had like 2 questions. One was on the volume trends. So this quarter, we saw a decline in volume, meaningful decline in volume in both domestic as well as export markets. So just trying to understand what's driving this? Is it operational constraints? Or are you finding that the prices are not attractive? If you could give how that -- a color on how that has progressed? And second one is on the $130 million cash, which is outside of Ukraine. How much of that is at the European facility? And from what I remember, that cannot be used, right, to service the coupons?

[Viktoria Kapelyushnaya, executive]

Yes. Thank you for your question. Regarding situation on domestic market, yes, we decreased our sales volume in domestic market in Q1, yes, compared to the last year and price in domestic market slightly decreased too. Yes, based on current situation, we understand that maybe on domestic market for full year we sell maybe in slightly lower compared to the last year.

Regarding export, it is, yes, in first quarter, we increased our volume for it with compared to the first quarter 2023, compared to the -- in the first quarter of 2023, we sold less because at the beginning of 2023, we had high stock, yes, high stock. And this year, during this year, we didn't have high stockages, yes, reason why, so difference in sales volume you can see.

Regarding cash, yes, today, we have $130 million cash outside to Ukraine and around $80 million, it is Perutnina [ Ptuj ], our balkans.

[Unknown Analyst]

One more from my side, if I may. On the EBRD maturity profile, when does that start? I believe that there was an amortization plan, right?

[Viktoria Kapelyushnaya, executive]

Yes, our [ non-adjusted ] EBRD or all our IFI loans, yes, for maturity 5-years with amortization, semiannual. Yes.

[Operator]

Our next question comes from Erica Ive from MetLife.

[Erica Ive, analyst]

I was just wondering, have you started to think about the refinancing of the 2026 bond. And given that you amortized and will amortize the IFI facilities that would create some headroom. So possibly would you use the IFI facilities so far to refinance also the -- sorry, '26 bond.

[Viktoria Kapelyushnaya, executive]

Thank you for the question. We understand that we have obligation for Eurobond 2026, but only, yes, 20 years -- 20 days ago, we repaid our previous Eurobond, yes. And to be honest, I think for us, it would be very difficult to attract additionally, yes, $500 million or $400 million from IFI. No. Yes, no, we understand the obligation we're thinking. But unfortunately, right now, I cannot say anything.

[Erica Ive, analyst]

And Sorry, if I push a little bit more, could you possibly as well around the tender offer, basically a similar process to what you've done for the 2024 bond?

[Viktoria Kapelyushnaya, executive]

Yes. So it seems to me every thing possible. It seems to me in current situation, everything is possible. Yes. I cannot say exactly what we'll do. I know they just, yes, we had a lot of Eurobonds in the past, and we always fulfilled all our obligation and promises, but how we will, yes, how we'll do it, yes, we need more time. We are [ now on it ], I'd like to say.

[Operator]

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

[Dmitry Ivanov, analyst]

Okay. Can you hear me?

[Viktoria Kapelyushnaya, executive]

Yes, yes.

[Dmitry Ivanov, analyst]

I have 3 quick questions, if I may. The first one, if it's possible, just to give us more color on the available facilities that are available for MHP to draw down. So of course, it includes $80 million CapEx facility from the DFIs. But could you kind of give us a number, what is available in terms of the financing, our working capital needs and et cetera, as of the latest available date, if possible. So it's like my first question.

[Viktoria Kapelyushnaya, executive]

Regarding our undrawn facilities, we had approximately $200 million and include $80 million for financing CapEx of IFIs, yes, you're completely right. Yes.

[Dmitry Ivanov, analyst]

Could you tell the number, total number available?

[Viktoria Kapelyushnaya, executive]

The total number around 200.

[Dmitry Ivanov, analyst]

200. And what's -- is it like available like for 1 year, like for 2 years, like what's like availability period for this [ financing ]?

[Viktoria Kapelyushnaya, executive]

Yes, approximately, yes, it is a different period, but approximately 1 year.

[Dmitry Ivanov, analyst]

I understand. Second question would be on CapEx. Again, like you already provided like numbers and the CapEx guidance of $300 million plus. I think you also specified on the last call that it includes your M&A -- potential M&A. I would kind of just try to understand this number, like $300 million plus is quite material and a significant number for the company, if we look at the historical CapEx outflows. So is it fair to assume that this CapEx will go down, for example, next year when you are -- when these projects that you mentioned are completed. So basically, like what kind of more sustainable level of CapEx for the business once the company completes its -- like projects?

[Viktoria Kapelyushnaya, executive]

First of all, you need to understand the maintenance CapEx for all our facilities in Ukraine and in abroad, 100-plus is a maintenance regarding all our businesses, poultry, vertical integration that we have integration business model. And yes, you're completely right, previously in 2022 and 2021 because 2020, it was a very bad year for MHP. We a little bit how to say try to spend less, yes, for maintenance. And we have realized it's not possible because you understand we are continuing to work at 100% capacity utilization, yes, and that is why we need to spend money, yes, and we need to have the -- the right shape of our fixed assets, yes, which is our minimum, yes, our level $100 million. And at the same time, we have there our strategy to [ culinary and ] company produce more non-commodity products. This is why we buy additional equipment, yes, we launch additional equipment because only we increased sales not just right now and in the future, noncommodity products. That is why we need to buy additional equipment for this.

And yes, M&A but we did but very not so big amount, yes, for M&A, including this CapEx, only one company in Ukraine market, yes, is very insignificant amount. And we have the CapEx -- capacity on Perutnina, yes.

[Dmitry Ivanov, analyst]

Understood. But looking at all-in CapEx, including to these projects, should we expect some reduction in CapEx spend next year like -- should like number be below 300 all-in?

[Viktoria Kapelyushnaya, executive]

No, I think that it is our strategy, but when I look at our CapEx approximately $250 million, it is real because we have appetite to increase our volume in European market, and we would like to sell more and more commodity products.

[Dmitry Ivanov, analyst]

Understood. Final question. Apologies. You also mentioned it already, but regarding this new National Bank of Ukraine rules, right? So basically, you mentioned that the new rules did not bring any benefits to the business, right? So basically, just correct my understanding, but if we read like official press release, I think like the National Bank of Ukraine allowed Ukrainian corporates to service interest on the old external debt. So basically, they're allowed to use onshore liquidity at service. But you mentioned that it didn't bring any benefits to the business. Just wanted to clarify this, is this [ restrictive ] of this, our new rules by the NBU allowed the company to service a coupon and interest on the offshore debt.

[Viktoria Kapelyushnaya, executive]

Thank you for your question. Yes, what is the difference? And what is in euro, if company attract new loan after 24th of February, you had the new loans. In this case, is it possible to provide services, yes, we had the debt on 24th of February. It is not just MHP, [indiscernible] it is same situation all Ukrainian company, which have the Eurobond. And nothing changed. And we cannot repay coupon from Ukraine for debt which we had on 24th of February. It is, yes, it is possible to service a new debt.

[Operator]

The next question comes from Mr. Konstantin Chinarov from Aptior Capital.

[Konstantin Chinarov, analyst]

Firstly, could you please remind us how much debt you have in 13 facility right now? And what is the maturity of that debt?

[Viktoria Kapelyushnaya, executive]

Yes, 13 around $130 million of debt.

[Konstantin Chinarov, analyst]

$130 million of debt and then $80 million of cash on the balance sheet there.

[Viktoria Kapelyushnaya, executive]

Yes.

[Konstantin Chinarov, analyst]

And what's the maturity of that debt? And is it the bank debt or some kind of other facilities.

[Viktoria Kapelyushnaya, executive]

Yes, it's a bank debt for 3 years, approximately.

[Konstantin Chinarov, analyst]

So 3 years from now. Okay, got it. And then, excuse me, maybe I missed the point, but could you please again clarify CapEx guidance of $300 million to $350 million looks very high compared to historicals. And obviously, you mentioned that maintenance CapEx is $100 million. So on top of $100 million, $200 million to $250 million, that's expansion CapEx. And if you could clarify what you're planning to build? And any color on that would be helpful.

[Viktoria Kapelyushnaya, executive]

Yes, there is some for expansion. Yes, we increased our sales volume and production volume in Perutnina, and some increase in the CapEx for increased production volume on noncommodity product. And we have some CapEx, especially is very actual right now for some alternative energy.

[Konstantin Chinarov, analyst]

Got it. Got it. And so when I think about sort of your guidance of $100 million EBITDA, $300 million to $350 million CapEx, historically, cash tax was, let's say, $10 million and leases were $15 million. So that leaves relatively limited cash flow to service indebtedness and cash interest is likely to be $150 million. So how do you think about that in terms of liquidity of the business. Maybe you expect release of working capital? Or if you could sort of explain your thinking about liquidity of the company for the rest of the year? And any color on the working capital would be helpful.

[Viktoria Kapelyushnaya, executive]

Yes, yes. Regarding working capital, we don't expect any huge investment in working capital 2024, just one -- yes, just one issue important issue about VAT reimbursement, not maximum, it would be maybe $20 million investment working capital potential, maybe 0. And based of current, yes, our forecast for 400 million, $300 million, $120 million, $130 million, all our debt services. Now we expect that by the end of the year, we will have the very, yes, maybe slightly higher our leverage, but we understand that we will keep paying cash, approximately $200 million because we cannot have less in current situation, we cannot have less than the $200 million in account.

[Konstantin Chinarov, analyst]

Got it. Got it. So $200 million, and that's the minimum level to run the business from your perspective?

[Viktoria Kapelyushnaya, executive]

Yes.

[Operator]

We have a follow-up question from Stella Cridge from Barclays.

[Stella Cridge, analyst]

If you don't mind, I also just want to ask on the amortization payments of the IFIs and just what your base case is, is it that you would plan to pay those Ukrainian cash balances because you have the carve-out? Or is there any option with the IFIs to, say, rollover the final maturity or extend a little bit. Just want to get a sense of what the base case on your cycles?

[Viktoria Kapelyushnaya, executive]

Yes, we can pay from Ukrainian cash position. Yes, you're completely right. For IFI, we can pay -- yes, from Ukrainian cash and from Ukraine, yes.

[Operator]

It looks like we have no further questions. I'll pass the line back to the management team of MHP for the concluding remarks.

[Anastasiya Sobotyuk, executive]

Thank you very much. Thank you very much, everybody. That was a very good discussion. At the same time, as you know, if you have any further questions, you can reach the company easily. So have a nice day then. Bye.

[Operator]

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.