Mhp Se

LSE:MHPC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's Second Quarter 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.

[Anastasiya Sobotyuk, executive]

Thank you very much. Dear stakeholders, good day to you. Thank you for joining us today. We are at MHP's conference call dedicated to the second quarter and 6 months 2024 results. I am 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.

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.

So we are now on Slide #3 of the presentation. So before I provide you with the macro environment developments in Ukraine, let me update you about war impact on MHP. Whilst the ongoing war continues to impact MHP's operations, the company has been able to adapt to the challenges of operating in war time.

As of today, over 3,000 employees have been mobilized to the armed forces of Ukraine. Irregular and frequent drone and rocket attacks against civilian, [ energy and other infrastructure ] targets have resulted in a challenging and disruptive operational environment, leading to unforeseen moderated costs. And in 6 months 2024, our related costs and losses amounted to USD 26 million. In 6 months 2023, they were twice lower.

Our country's operational production facilities in Ukraine continue to operate at close to full capacity and none out of operational facilities of the company's directly owned [indiscernible] assets have suffered significant physical damage from the recent Russian bomb attack. Unfortunately, as a result of shelling by the occupying forces on May 17 in Odessa region, a warehouse [ partially ] leased by the company to store frozen MHP's chicken meat products was completely destroyed, resulting in the loss of core poultry products was around USD 7 million.

So let me continue with the macroeconomic situation. Taking into account that many businesses have been adjusting to a new operational environment, which remains unpredictably volatile in 2024, GDP grew by over 4% with a forecasted growth in 2024 at 3.7%. CPI in Q2 2024 increased by 3%, which doubled CPI growth in Q2 2023. Starting from October 3, the National Bank has been implementing managed exchange rate flexibility, resulting in depreciation of Ukrainian Hryvnya, and therefore, we have a flexible currency rate.

2024 harvest is expected to be strong at 76 million tonnes, which is around 8% lower year-on-year. I'm talking about Ukraine, of course, triggered by a reduced area under crops and adverse effect on yield due to severe heat in summer. We will touch upon agricultural development at MHP a little bit later during the presentation.

Let me now proceed with the company's results for the second quarter of the year, and we move on Slide #5 of the presentation. Let me start first with operational highlights for 6 months of 2026 (sic) [ 2024 ]. As you can see from this slide, poultry sales decreased by 8%, driven mainly by decreased exports. Total share of exports out of total poultry sales volumes constituted 57%. It was a little bit higher last year, 59%.

Financial results for 6 months 2024 were following: Group revenue decreased by 4% and reached around USD 1.5 billion. With export revenue represented 64% of total revenue. Adjusted EBITDA increased by 21% to USD 264 million, mainly due to substantially strong results in agricultural business, driven by increased grain prices and the strong performance -- as well as strong performance at [indiscernible]. However, this was significantly offset by weaker performance in poultry and poor production businesses. We will touch upon these 2 business segments later in the presentation.

Let's go on Slide #6 with key financials for the second quarter of 2024, which were following. Group's revenue remained relatively stable, but decreased by 5%, reaching USD 770 million, and adjusted EBITDA increased substantially year-on-year and constituted $145 million with EBITDA margin of 19%, mainly driven by strong results in Agricultural division and European operating segment.

Let's move to Slide #7. Here, we have the financial results by segment. And as you can see, the biggest contributor to overall company's results is poultry and processed meat operations segment. The group generated the majority of total revenue, about 53% and 59% of the company's EBITDA with highest EBITDA margin, 20% across all business segments. Second biggest contributor to EBITDA was Agricultural division, 26%; and third one was European Operating segment with 18%.

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

[Viktoria Kapelyushnaya, executive]

Thank you, Anastasiya. Good afternoon, everyone. Let's have a precise look at poultry and related operations segment performance, Slide #8. Despite the challenges of the war in Ukraine, MHP performed well in Q2 this year, due to the, first of all, team's hard work and also favorable market conditions. Poultry price in Q2, both on export and domestic market remained almost at the same level as in Q1 2024. We don't expect further growth in poultry prices in H2. Commodity price risk is a common challenge for MHP. To mitigate it MHP is focusing on production and sales of ready-to-eat and ready-to-cook, non-commodity products as a part of our culinary strategy. They require a significant effort from our team and investment to launch new products and grow our market share. The trend will continue in near future. .

In Q4, we are continuing to concentrate on selling processed meat with focus on the most marginal products. Our results for Q2 decreased compared to the last year mainly as a result of lower sales volume of poultry meat on export markets. First of all, due to the higher MHP stock of meat at the beginning of 2023.

A few words about our Vegetable Oil segment, Slide #9. EBITDA for Vegetable Oil operation last quarter was similar to the Q1 this year. In H1, we had negative trend in Sunflower Oil prices, which led to decreased oil pricing margin. Decline in vegetable oil margin year-on-year was primarily due to the drop in oil prices internationally year-on-year and also stabilization on vegetable oil production and sale in Ukraine, having adopted the operational environment, which [indiscernible] disruption in logistics. We expect margin in the H2 to remain lower and to continue to decrease negatively, affected by significantly lower harvest of Sunflower because of severe heat in summer which is not expected to be offset by increased oil price at this stage.

Let's move to the Slide #10, agricultural operations. Segment revenue in H1 amounted to $180 million compared with $112 million last year. The increase was mainly attributable to higher volumes of corn sales on the export market, [ our last half of the year ]. EBITDA of agricultural operations segment, net of IFRS 16 in H1 was $69 million compared to the $26 million versus last year. This result was mainly due to users of the higher current market price for interest segment and external sales compared to the lower prices applied to the previous year harvest.

This year, MHP harvest of wheat was a record high with 7.2 tonnes per hectare and our [ exit ] was one of the strongest in MHP history with 3.7 tonnes per hectare. More over export of crop proceeds well with no significant disruption of growth in logistic costs. I also want to mention that yesterday, we anticipated lower use of spring crops compared to the last year due to unfavorable weather condition in the central region. Despite of challenging weather conditions, anyway MHP expects this year financial results in Agri segment to be higher compared to the last year. First of all due to the current higher prices of the grain.

Let's proceed to Slide #11. Several words about our European Operating segment. EBITDA of European operating segment in Q2 amount, $49 million compared to the $20 million last year. This growth was driven by higher poultry and poultry products sales in Slovenia, Bosnia and Serbia due to the strategic focus on this market as well is in line with our production increase strategy.

Slide #12. Few words about our cash flow and liquidity position. Cash flows from operations before changes in working capital decreased $167 million compared to the $206 million last year, mainly as a result of the lower profit before taxes. Investment and working capital amounted to $24 million compared to the last -- compared to the situation last year's [indiscernible] release. These changes was mainly due to significant release of sunflower seed and vegetable oil inventories in H1 last year, which had been unusual higher at the end of 2022 due to the disrupted logistics from the [indiscernible].

Total CapEx in H1 amounted $134 million, making a significant increase compared to 2023. This rise is primarily driven by our investment in culinary strategy project and also cost optimization. Secondly, construction of new bio-energy production facility, also expansion and improvement of Perutnina Putj production facility and extensive maintenance and modernization of existing facilities.

Regarding the debt. At the end of the period, the company total debt was nearly $1.5 billion, with net debt about $1.1 billion. On, as you know, May 10, MHP Eurobond 2024 was duly and fully repaid as far as the terms and condition to provide to. The liquidity position at the end of H2 was almost $3 billion in cash. $123 million of which was held by the group subsidiary outside Ukraine. Given current operational environment and significant uncertainly, we estimate our minimum sales cash balance at $200 million.

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

[Anastasiya Sobotyuk, executive]

Thank you, Viktoria. Let me provide you with outlook taking into account war operational environment and current market drivers. Considering the fast-moving nature of the war, MHP can give no concrete assurance that its production facilities and associated infrastructure will not be targeted or adversely affected in the future. In the advent of future attacks, the group is fully prepared to respond immediately, taking all necessary actions to protect its employees and to rebuild, restore and restart production in the shortest time possible. .

Despite the ongoing challenges, our commitment to ensuring sustainable development remains at the heart of all our economic activities. As a pioneering and innovative leader in biogas and bio-energy [ fills ] 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 to mitigate operational disruptions caused by Russian 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 cost which will negatively impact financial results. We remain incredibly grateful for the support and patience of our investors who have supported the group as it navigated the most difficult period in Ukraine's history.

A few words about poultry business. MHP expects poultry production facilities to operate close to full capacity with sales in line with the budget forecast. In the second half of 2024, MHP expects poultry prices to be stable, both on international and Ukrainian market. Grain market remains volatile, showing more positive trends in prices, adversely affected by challenging weather conditions. Perutnina Putj continues to grow in sales following both growth and culinary strategy of the group.

Let me conclude the presentation now here. We are ready for the discussion and your questions. Thank you for cooperation in advance. Michael?

[Operator]

[Operator Instructions] Our first question comes from Stella Cridge from Barclays.

[Stella Cridge, analyst]

Thanks for all the updates. And I wondered if I could ask on 2 areas. Just starting with the energy area. So you mentioned there about trying to grow your internal reliance for power generation. I wondered where you stood at the moment in terms of how much power you're getting internally and through various projects that you're working on now or in the future, where do you think you may be able to reach in terms of internal power generation? That would be great. And just on the CapEx side, I mean, given that we're halfway, would you be able to give us an update on what you plan to spend in the second half of the year, that would be great.

[Viktoria Kapelyushnaya, executive]

First of all, thank you for your question -- thank you for your question. Regarding energy covering, which we -- efficiency and energy, maybe your question regarding [indiscernible] because it is about gas, it is a very open issue. Approximately now, we are approximately now we recovered it around 30%, and now we in [indiscernible], and we have the CapEx to now we're in process of creating core energy. We will produce even electricity from gas and that is why we have -- yes, it is one of the reason why we have the CapEx for this year because we understand the risk, the future risk regarding electricity.

And with current correlation in price between gas and electricity, first of all, it is security, it takes safety and security. Yes. And together with this, together with this cogeneration, we will have approximately 50%. Our -- we will be 50% sales-efficient, it is 50% without generators, because we don't generate it. But at the same time, we have generated, which allowed to us to be 100% efficiency.

[Stella Cridge, analyst]

For a certain period.

[Viktoria Kapelyushnaya, executive]

Yes for a certain -- yes, because it is always an issue. Unfortunately, yes, I think that we cannot guarantee that we can work -- we generate for -- so even for 10 days, I assure that it would be a problem. Regarding the second -- your question about our total CapEx for full year, our expectation is that our CapEx will be around $350 million. It is a CapEx including Ukraine and outside in our European facility. .

[Operator]

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

[Dmitry Ivanov, analyst]

Maybe just on the CapEx side, you mentioned like $300 million, $350 million CapEx for this year. I know like it still might be too early for your budget, but how should we look at the correct number next year because like $350 million obviously includes certain culinary projects and energy projects like you mentioned. Like, if you could provide like maybe like some preliminary view on the CapEx next year, that would be great. This is like my first question.

And the second question would be, you also like shared some guidance dynamic for the second half of the year when it comes to the key segments. Maybe if you could maybe provide your view some guidance on the EBITDA for the second half of the year. How do you look -- how should we look at the EBITDA compared to the first half or maybe to the second half of the previous year? That would be great. And this last question, could you kind of update us on the latest cash position after June 2024. Thank you very much.

[Viktoria Kapelyushnaya, executive]

Okay. The question about the total CapEx for next year. Yes, we expect the total CapEx to be around [ $250 million ], yes. It will be the best amount which we would like to invest in our European facilities. Regarding EBITDA, yes, regarding EBITDA for this year. Yes, as you see that in poultry segment and the vegetable oil segment in the first half of the year, we generate lower results compared to the previous year. And we expect that for full year, our results in these segments will be low, but at the same time, as I mentioned in presentation, we expect the higher financial [ EBITDA ] in our grain segment, due to the even the lower harvest of the spring despite of how the spring growth.

And based on our forecast, we see that our EBITDA, it would be at a level similar to last year. I remind that it would be record. Yes, it was $458 million, regarding -- $450 million maybe and for this year, $460 million. Yes. And cash, current position in cash, very similar that we had by the end at the first of July around $300 million.

[Dmitry Ivanov, analyst]

Okay. And the proportion of the offshore cash, should we assume similar?

[Viktoria Kapelyushnaya, executive]

Yes, completely the same, nothing changes, even slightly lower and broad -- slightly lower, but not so significant change.

[Dmitry Ivanov, analyst]

Understood. Around [ 120 ] offshore.

[Viktoria Kapelyushnaya, executive]

Yes, yes.

[Operator]

I'll take the next question -- 2 questions from Ms. Natalia Shpygotska from Dragon Capital. First question, what are the company's CapEx needs to boost its self-sufficiency in electricity from 30% to 50%.

[Viktoria Kapelyushnaya, executive]

No, we invested approximately $40 million. Yes. $40 million, $50 million.

[Operator]

Okay. The second question, could you please comment why the company's poultry exports declined and what drives local meat sales?

[Viktoria Kapelyushnaya, executive]

Poultry export decline. As I told in the presentation that last year into 2023, we had very so significant stock at the beginning of the year. And we understand that we can export approximately 95,000, our usual export approximately 90,000, 95,000. Last year, at the beginning of last year, we exported a lot because we had in Ukraine, very big stock. Yes, very big stock in storages. .

[Operator]

We have another question from Brendan Breen from Andromeda Capital perhaps already answered. How has the third quarter performance been so far compared to the second quarter?

[Viktoria Kapelyushnaya, executive]

No, yes, approximately the same level we expect that is very similar, the same level, if you speak about poultry segment. If you speak about oil, it was oil generated slightly lower, but in general, yes, but anyway, generally, I expect the second half of the year, we expect the levels at H1.

[Operator]

[Operator Instructions] Okay. We have a question from Mr. Magnus Scherman from Reorg.

[Magnus Scherman, analyst]

I want to start on the Black Sea. I'm trying to get a sense of how much you rely on that route for exports at the moment and also get your thoughts about how confident you are in continuing that while the war is continuing in the absence of a firm agreement.

Then my second question is about the free trade agreement with the European Union and some of the restrictions that are in there. How much is that impacting your revenue from the EU? And then the third question is on the energy projects. Could you talk a bit about what sort of projects you mentioned gas to electricity. Is that the only thing you're doing? And what's the lead time on those?

[Viktoria Kapelyushnaya, executive]

Regarding the first question about our confidence in Black Sea, it is open question. It's a very open question, to be honest. But anyway, without even Black Sea, we can use our logistics through [ Constanta ]. But, yes, the logistic goes through Odessa port is significantly lower than logisticals from [ Constanta ]. That is the open question. I cannot tell exactly.

Yes. The second question about our free trade regime in Europe. Yes, we have some limitation. We cannot -- we have limitation, not just MHP, in Ukraine, yes. And -- but anyway, yes, we export not just in Europe, and we export in Britain and other region. And yes, if you ask me, it's good that we have a limitation to export in Europe? No, it is bad. And it would be -- yes, the situation brings towards worse -- slightly worse result, but anyway, we understand how we increase our export in other regions.

[Anastasiya Sobotyuk, executive]

And this energy, different kind of energy product -- projects which had [indiscernible]. Just to name them.

[Viktoria Kapelyushnaya, executive]

Yes. Yes. I said at previously, we have the project to generate electricity from gas, cogeneration. And even we have the project with our solar energy and we will invest -- And now the investment in this project, total in the project around $50 million and $55 million. [indiscernible].

[Operator]

We have a follow-up question from Ms. Natalia from Dragon Capital. Is 50% self-sufficiency in electricity supply is reached. Would that allow full capacity utilization of one of the company's major poultry facilities in a situation of a blackout or partial capacity utilization of both facilities, Benicia and [indiscernible].

[Viktoria Kapelyushnaya, executive]

First of all, yes, I would like to explain. If I talk about 50%, we had some cogeneration, alternative generation electricity in different facilities. Not just in [indiscernible] and [indiscernible], we have generators, diesel generators. And that is why we understand that in few days we will be completely self-sufficient at 100%. If the situation will continue more than 3 days or 5 days, 10 days, it would be some problems. But anyway, it would be probably not just in our private. It would be a problem everywhere in Ukraine, in country. Thank you.

[Operator]

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

[Anastasiya Sobotyuk, executive]

Thank you very much, Michael, for your support. Thank you, everyone, who joined our conference call and presentation. Of course, I remain at your disposal. If you have any other questions which we didn't answer today or you didn't raise today, please go ahead and send me your message. Thank you, and have a lovely day. Bye. .

[Operator]

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