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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to MHP Financial Results for the First Quarter 2018 Webcast. I now hand over to Anastasiya Sobotyuk, IR Director. Madam, please go ahead.
Good afternoon, and good morning. Sorry for the technical problems we have experienced at the beginning. So thank you very much for joining us today for MHP's conference call dedicated to MHP's financial results for the first quarter of 2018.I have to tell you in advance that some of the things we discuss today are forward-looking statements. Please take it into consideration. I encourage you to use today's press release with our financial statement for the detailed information.On today's call, we have: CFO of MHP, Victoriya Kapelushna. She will present financial results of the company in general and by segments; and myself, Anastasiya Sobotyuk, Director of Investor Relations. I will lead you through the presentation.After the presentation, we will be glad to answer all of your questions. I hope that everybody is ready. So we can start our call now.Let's go on Slide #4 of your presentation. As usual, we will start our discussion from the market fundamentals. Market conditions in Ukraine have been improving year by year, with a real GDP growth accelerated to around 3% year-over-year. According to the World Bank forecast for the growth of Ukraine GDP in 2018 and in 2019, it can reach the level of 3.5% and 4%, respectively. During the first 3 months of 2018, the currency exchange rate revaluated by around 2.5%. However, the Ukrainian budget assumes that the rate will be at around UAH 29 per USD 1 this year.In the first quarter of 2018, inflation decelerated to 13% year-on-year, driven mainly by transport and utilities prices.We actually remain positive about demand for meeting Ukraine in 2018, which is backed on the growing consumer purchasing power and affordability of poultry meat compared to other kinds of meat.Let's move on Slide #6 and look at key financials for the reporting period. In the first quarter of 2018, MHP demonstrated good financial results, driven mainly by an increase in production volumes of chicken meat and positive trends in chicken, especially in exports and meat-processing prices which resulted in revenue of USD 306 million, 10% higher year-on-year, of which export revenue was 53%; EBITDA of USD 89 million, a little bit lower than last year; and EBITDA margin of 29%, affected by IAS 41 standard loss, mainly in poultry segment as a result of stable prices in the first quarter of 2018 versus fourth quarter of 2017 compared to increased prices of poultry meat in the first quarter of[Audio Gap]Net income after the forex exchange resulted in USD 90 million, which is 58% higher year-on-year. And now we pass the floor to Victoriya, and she will comment our financial results of the first quarter in greater details and by segment.
Thank you, Anastasiya. Good afternoon, everyone. Let's discuss our financial results for the Q1 2018 in more detail.Slide #7 shows our financial results by segment. Our key segment, poultry operations, as usual during the first quarter generated the majority of total revenue and 87% of company's EBITDA. Grain segment generate only 2% of total revenue and 7% of company EBITDA due to seasonality of growing and harvesting process. We expect the majority of grain EBITDA during the Q2 and Q3 2000 -- this year. Our third and the smallest segment are the agriculture operations generate about 10% of consolidated revenue and contributed 9% to consolidated EBITDA. Main components of this segment are meat processing and convenience food production.Our export operations during the Q1 were at the last year level, with $162 million and 53% of total revenue. Actually, we continue to develop our chicken meat export sales, which grew to Q1 2017, but a part of our oil sales moved to Q2 this year due to FOB to DAP contracts stock changes. We will discuss the development of all our segments more deeply on the next slide.Please go to the next slide, #8, poultry segment performance. During this quarter, chicken meat production and sales volume increased by 7% and 9%, correspondently. Export sales of chicken meat increased by 82% due to the higher volume exported to MENA region and European Union due to the higher prices, export prices. Average chicken meat price for the Q1 increased by 23% in hryvnia terms, mainly driven by result of MHP export product mix, change in increased sales to more profitable market in line with its market targets and strategy.Average per unit poultry production cost in first quarter expectedly according to our budget increased by around 15% in the hryvnia terms year-on-year, reflected higher prices of other components, including grain and protein as well as higher overall payroll cost. And -- but at the same time, average per unit poultry production cost in the first quarter is the same as the Q4 last year.Financial result of poultry segment increased compared to the same period of last year, mainly attributable to increase of chicken meat price and volume. EBITDA per 1 kilo chicken meat, before effect of 41 -- IAS 41 IFRS standard, in the first quarter this year was about $0.55, which is 8% higher compared to the same period last year.Let's move to the next slide, #9. Due to the seasonality of growing and harvesting process, the revenue and EBITDA of grain segment are insignificant. In first quarter, we expect the majority of grain EBITDA during Q2 and Q3 this year. $7 million of revenue generate by sales of the grains harvested in 2017, this is lower than Q1 of last year, more than twice, with an unfavorable weather conditions during the harvest 2017, which led to lower yield across all crops especially this quarter.EBITDA in Q1 2018 was closely to the last year level, $6 million.Spring sowing campaign finished. In total, around 367,000 hectares are going to be harvested this year. This is more than last year by 4,000 hectares.Let's proceed to the Slide #10, other agricultural segment. Historically, generated the smallest part of our financial results. Key drivers of this segment during the first quarter were increase of processing and meat products [ priced ] by more than 30% and stable sales volume. We remain a market leader in meat-processing industry of Ukraine and continue to adopt our product to the market, which currently demanded for product at affordable price. The segment generates revenue $31 million by 24% compared to the last year and EBITDA $8 million by 60% higher compared to the same period last year due to the higher results in meat-processing business mostly.EBITDA margin was higher to the last year, by 6% compared to the last year.Slide #11. Few words about our cash flow and liquidity position. Net cash generated from operation activities before working capital investment was $69 million, by 77% higher compared to the same period of previous year. Actually, cash from operation before working capital changes for the Q1 2017 include upfront payment of interest on senior notes in amount to $31 million that is normally due to in Q2. Excluding interest, cash from operations before working capital change for Q1 2017 was about $70 million. The decrease in cash from changes in working capital during the Q1 compared to the same period last year is mostly related to much higher investment in stock of sunflower, soya bean seeds and other food components at the end of Q1 2018 compared to the end of Q1 2017, and secondly, increase of oil stock due to the FOB and DAP contract structure changes.Total CapEx for the first quarter is around $52 million, mainly related to Phase 2 of Vinnytsia poultry expansion project. At the end of the period, the company's total debt was $1.2 billion and net debt of $1.058 billion. Currently, our short-term debt accounts for 8% of total debt only. The rest 92% is the long-term debt, mostly Eurobond. Today, our average weighted interest rate currently is about 7.4%.As you know, in April 2018, we have issued the $550 million Eurobond for 8 years and risk coupon 6.95%. Due to the new Eurobond issue, our average weighted interest rate is expected to -- in the future is about 7%.In terms of liquidity, by the end of the first quarter, we hit about $136 million in cash, mostly in dollars. Net-debt-to-EBITDA ratio was 2.3 versus Eurobond covenant ratio 3. Almost all our debt is denominated in foreign currency, mostly in dollars. But forex risks in our case are naturally hedged by significant share of export sales. Today, it is approximately 56% dollar-denominated revenue during the first quarter. And we have positive trend increasing our revenue in dollars to cover all our debt service expenses and other payments in foreign currency as our currency balance remains strongly positive.And now I give the floor to Anastasiya to give you our current business update and outlook.
Thank you very much, Victoriya. So to conclude the presentation, let me provide you with the business outlook for 2018. It was a good start of the year, frankly speaking. Both operational and financial results showed and confirmed that the company and its management team are delivering results in line with forecast for 2018. As Victoriya just mentioned, we had a very successful Eurobond issue in April 2017 (sic) [ 2018 ]. Moreover, MHP has just recently paid its annual dividend of USD 80 million to its shareholders, with around 7% yield. And we have clear targets across all of our business segments in 2018, namely to continue being the lowest cost producer of chicken meat ,to be the most comparative producer of poultry meat, to proceed with the launch of Phase 2 of the Vinnytsia project on time and on budget. So we are expecting 4 to 5 rearing sites to be launched in operations since the end of May this year, which will allow MHP to add around 35,000 tonnes of chicken meat to the current 570,000 tonnes of production. The full launch of Phase 2 is expected to be in 2021 and 2022 years.We want to export, and we plan to export around 260,000 tonnes of chicken meat, in line with the company's export strategy. We will proceed with construction and we are proceeding with construction and launch of the second biogas station of 12-megawatt capacity at the Vinnytsia complex. And we plan we want to receive better results across all crops than last year and higher EBITDA per hectare.We are confident that with our vertically integrated business model, we will continue to deliver strong financial results, and they will be supported by significant and growing share of hard currency revenues from exports of chicken, oils and grains. And now we will open the question session.[Operator Instructions]Thank you for cooperation. Operator?
[Operator Instructions] Our first question comes from Nikolay Kovalev, VTB.
I have 2 questions. The first question is on prices. It would be very helpful if you can comment how your prices in April and May compared to the first quarter? And the second question is on the government support. I see that you booked 0 for the first quarter, and I was wondering if you can comment what would be according to state policies for this year. And how much money do you expect as VAT refunds and government support?
Thank you for your questions. Regarding the first question about our price, domestic market price increased very insignificant few percent but we expect fully increase in this summer because the summer, as you know, is a peak season, is a high season for us. And regarding export price in the April and May compared to the first quarter price high approximately by 5%, 7%, yes, due to increasing price in Europe and increasing price in Saudi Arabia and due to the mix. Regarding the second question about VAT, please repeat.
It was generally about the state support. Because I saw you booked 0 for the first quarter, amount was like insignificant...
Yes, yes, yes. I understand. No, last...
So my question was, like, for this year, how much you expect?
We don't expect any state subsidies this year, any subsidies. We don't expect any subsidies which we include in our P&L this year because we are accordingly -- state budget, we will not receive. Yes, it was just a subsidy for 1 year, which we received last year.
Our following question will come from Andrew Howell with Citi.
Yes, 3 questions from me. Firstly, on your production volumes, up 7% year-on-year. Just to understand -- I understand you operated full capacity. So what's the basis of that? Is there just some seasonality variation in production volumes or you -- have you managed to increase capacity a bit in the first quarter? Second question is on the small margin compression in gross margin you saw in poultry. Is this just purely function of the IAS 41 gain, not repeating this year as it did last year? Or is there some other reason to -- for the lower margin? And finally, just on your M&A strategy, I don't know if you could comment on that. In light of the news flow on the Saudi group acquiring Doux last week, do you have any comment essentially on how you think about M&A opportunities looking forward?
Thank you. Thank you for your question. About the first question, why -- yes, during the first quarter, our production volume increased by 7%. I will explain. Every -- yes, every week, we floated approximately 6.5 million heads of chicken, but we produced 2 different -- not different, chicken with 2 different weight, small chicks with weight approximately 1.2 kilo and big chicks with weight approximately 2 kilo. Last year, at the same period in the first quarter, yes, 40% -- approximately 40% of all heads, we produced small chicks. Because last year we exported a lot of small chicks to Egypt. And this year, percent of small chicks was approximately 25%, up to 30%. Yes, it is our flexibility. Yes, we can produce -- because every week we floated completely the same volume of 6.5 million heads of chicken. But despite our export -- despite of our price -- despite of our export strategy -- not strategy -- yes, despite of our structure, we produce less of small chicks. And this is why this year, yes, we produced more heavy chicks, and that is why we received more volume. The second question about low margin, important segment, yes -- compared to the last year -- yes, at what is very interesting. If you look at our EBITDA for 1Q, yes, we have EBITDA high by approximately 8%. But it does -- EBITDA margin is low because we have significantly lower effect of 41 IFRS standard. Last year, it was $22 million. This year, only $2 million. Why, why it has happened? Because we...
No, the price. Not an estimate.
We recognized -- yes, we recognized biological assets on our balance based on current market price. And during the first quarter 2017, market price in Ukrainian market increased and that is why we had the main driver for increasing this effect of biological assets. During the first quarter, and especially price of April in Ukrainian market very similar than price of, as I told before, it was just 1%, yes, higher, the same is January. That is why, we, in the first quarter, we did not have so big effect of IFRS 41 standard. And the third question about our acquisition and through this acquisition....
Where, where exactly, Andrew?
I'm just curious, I know there have been reports of your interest in Doux. If that's not happening, what is your strategy in terms of further acquisitions? Are you looking at opportunities? Could you tell us a little bit about what sort of opportunities would still be of interest? Just kind of update us on your thinking?
Okay. Yes, thank you. Yes, we continue to consider possibility to buy some poultry company. Yes, you know the situation with Doux is to continue to considering and thought it will be interesting to buy some poultry and meat-processing company in Europe and maybe in the inner region. And we continue to provide deeply research and now we're considering few options, yes. But unfortunately, we cannot provide any announce now in the market.
Our next question comes from Yulia di Mambro, Federated Investors.
I have 3 questions, please. Just a follow-up on the margin discussion. Could you please give us a little bit more color on the competitive landscape in your export market now? And do you expect to be able to offset the cost inflation through higher prices there because inflation in Ukraine is still fairly high? That's my first question. My second question is on your working capital. Would you be able to give us updated guidance on where you expect it to go, the expected reversal in Q3, like you had last year? And generally, where do you expect it to end for the full year? And my last question is on your leverage. It's inched up this quarter. Or what's kind of your general tolerance level for this year? I know that your covenant leverage is 3x. Do you feel comfortable going all the way up to 3x? And also on your drawdown on your shortened banking facilities in Q1, do you expect to repeat that this year?
Well, thank you. Thank you for your question. The first question about the export price and -- not just the export price and competition in the export market -- no, first of all, in the standard total exporting market is around 11 million tonnes. Yes, today, we export and last year we exported 220,000. This year, I hope that we export 250,000 to 260,000 tonnes. We are competing in this market with Brazilian companies, some with American companies. And it depends on product, depends on the region. To be the first good situation in the European market, yes, and price of European market is good now. And regarding MENA region, yes, maybe you know that Saudi Arabia are known well for import chicken meat from Brazil. Yes, today, price of Saudi Arabia is higher than last year significantly. But at the same time in other regions, for example, Arabic Emirates, Iraq, Sardinia and other countries of this region, price not so interesting, yes. And -- but anyway, yes, in our case, we have the flexibility, yes. We -- and we have -- the big advantage is that, we according to our strategy, we don't concentrate in one region. Today, we export in more than 60 countries with different products and that is why it is a good insurance for us to receive -- and what is a very important, the right product for right region. Yes, it is fast, it is good insurance for our high profitability. Regarding price of Ukraine, we -- you know maybe we try to be -- we always try to be conservative, and we include in our budget increase in price of chicken in domestic market but very insignificant. Yes, last year, maybe you remember, the price in domestic market increased by approximately 27%, December compared to January. This year, we put increasing around 5%, not more. Anyways, we will see, yes, by the middle of year. But to be honest, we don't expect and -- yes, if we receive the high price, it will be good for us, yes. But we put in our budget very conservative forecast. The second question you about our investment in working capital. We -- generally, we expect investment in working capital for full year around $60 million, but it will -- our investment, it will depend what volume of sunflower seed and soya we would like to have by the end of the year. Last year, by the end of the year, we had 300,000 -- 350,000 tonnes. If we keep completely the same volume of sunflower seed, our total investment in working capital will be $1,050,000,000. If we would like -- if we see and we see very soon to buy more, we will receive, yes, we will invest around -- or we will invest in working capital $80 million or $90 million and maybe up to $100 million. It will be very flexible in this purchase in cost of sunflower seed. But anyway, for us, very interesting to buy sunflower seed during the fourth quarter because during the fourth quarter, during the harvesting time, price of sunflower seed and soya -- but lower, substantially lower than price of sunflower seed during the next 9 months of next year. And the second your question about our leverage, it's a good question, especially. It depends on what investment in working capital we will have. But anyway, even if we invest in working capital $90 million, in this case, our leverage by the end of the year will be below 2.5. It will be around 2.45. It's a very comfortable level for us, yes, because you remember that more than 90% of total our debt is long-term debt that we feel very comfortable and to have even the slightly higher leverage 2.6, 2.7, we don't see any trouble.
Our next question comes from Mario [indiscernible], Barings.
I've got 3 questions, actually. So first of all, talking about the domestic market, I see that volume has decreased by about 4%. So I just wanted you to get your view on why that's the case. And do you see any issues for 2018 in the domestic market? The second question is on the land bank. So you're increasing the capacity of chicken, but the land bank pretty much stays constant. So does that mean that you'll have less seeds that you would sell to third parties -- sorry, less grains? And then on the CapEx, I just wanted to understand what is your project in terms of CapEx. How much do you forecast to spend on the Vinnytsia complex over the next few years?
Thank you for your -- sorry, thank you for your question. I will start from question number 3. Total CapEx for this year, it will be around $250 million, $260 million. Total cost approximately $170 million, $180 million, it is the CapEx for Vinnytsia project for the second stage. And total cost of the second stage is around $380 million, yes, $380 million, $400 million, but we invested some amount last year. This year, $170 million, $180 million. And in 2019, a very small amount in 2020. Regarding our land bank, yes, you are completely right. We increased our capacity after we launched the second stage approximately by 250,000 tonnes of chicken meat. Now we will produce additional 250,000 tonnes in the 2021. Yes, even with current land bank, we can be completely self-sufficient for 850,000 tonnes production of chicken meat because we can produce corn and we cultivate corn not only for 50% of total our land bank. We can grow corn up to 70% of our land because corn is the monocrops and we can grow corn after the call. There is no problem. But at the same time, we have appetite to increase our land bank up to 500,000 to 550,000 hectares, but it will be dependent of price with a potential acquisition. We are not ready to buy land bank with any price. It's not necessary because we would like to keep IRR of this investment approximately minimum 20%. That is why, we opened for new acquisitions but it will depend on the price and plus we would like to buy land in some region because south and the east of Ukraine are not interesting for us. And the first question about domestic market. Yes, you are right, in the first quarter, we slightly decreased by -- for meat 4%. It is not decreasing. It is, yes, I told maybe [ this amount ] about this stable, yes. But regarding for full year, we expect that our sales volume in domestic market will be very similar to last year, maybe with slightly increase, not so significantly, only maybe few percent. I will explain why. Because why -- the very important and the main task for us is to increase our export. You will completely understand that because during the -- yes, because we understand. This year, we will increase our production volume by 35,000 tonnes, next year additional. And during the next 2 years, 3 years, we increase our production volume approximately by 250,000 tonnes. That is why we -- and most part of them, we will send for the export. That is why, for us, it's very important to create base for future increasing our export.
[Operator Instructions] We have a question from Konstantin Fastovets, Adamant Capital.
I had one question with regard to costs. I see from the way I calculate your cost for Q1 and these exclude revaluation and they should exclude amortization as well. I see that in the first quarter of 2018, they're about the same as they were in the fourth quarter. And I'm wondering why this is the case as in the fourth quarter your costs usually go up because bonuses are paid to employees. Could you comment on those dynamics?
Yes. Thank you for your question. Yes, you are completely right. In the first quarter, there is both, yes, but at the same time, you remember, at the end of the first quarter, we had very unusual temperature, yes. And our consumption of guests in the first quarter, to be honest, it was significantly high in the first quarter, one of the reason why bonus is equal. And either one of the -- and it's the main reason maybe, and some different mix of product which we sold in fourth quarter and the first quarter.
And then, maybe a clarification. Do you expect -- what kind of cost do you expect for this year? On average, do you expect them to stay roughly flat from the first quarter? Or do you see these going down since as you mentioned this looks like a one-off, right, with product assumption?
No, no, no. Yes, yes, thank you for your question. I expect that our cost of production will increase, I will explain why because since April/May, we increased sellers approximately by 25% is one of the reasons that price will slightly increase because yes, not so significant but anyway in percentage terms our share of salary in cost of production approximately 13% and 25%. It is around 3%, 4%, yes, I see increasing.
So around -- for the year, on average 2018 versus 2017, you think about 3%, 4% growth on cost. Did I hear that correctly?
'17, no. It is compared to the first quarter of 2018. Because I told in presentation, our cost of production, Q1 '18 compared to the Q1 '17 is a difference around 15%, yes. If you compare to the Q1 '18, our cost for next 9 months will be higher approximately by 4%, 5%, based on increase in salary and then the current price of oil will increase and utilities and especially -- price of fuel increase and that is why we'll have some effect and influence in our cost of products.
Our following question comes from [ AJ ] [indiscernible], Barings.
On acquisitions, there was a question about whether you are still looking to acquire Doux, whether you are still in the process. I couldn't really hear the answer. So could you please go over that again, if you're still in the process of acquiring the French poultry producer, Doux? And then on the EBITDA, could you give us or confirm the guidance for EBITDA for this year?
Thank you for your question. Regarding guidance this year, we expect -- because at the beginning of the year, we always be very conservative for cost for our financial results for full year. And based on current situation, we expect that our EBITDA will be higher for full year compared to the last year, approximately 3%, 5%. It will be approximately $470 million, $480 million.
Okay. Thanks for that and then on the...
And the question regarding the acquisitions, on May 18th, actually last week on Friday, there was an announcement by Tribunal de Commerce regarding the decision on the Doux asset liquidation and the decision states that the winner is the alliance, I would say, or the union with LDC and Al-Munajem, et cetera. So it's not MHP. And so we are not on the list of winners, I would say, right. That is why we're going to proceed with acquisitions outside of Ukraine, as Victoriya mentioned, right. So we are considering several options in the EU, both in the EU and in the Middle East.
We have as our last question from Nikolay Kovalev, VTB.
I have a quick clarification question. For your EBITDA guidance of $470 million and $480 million, do you factor any revaluation of biological assets, and if so, by -- what is the amount?
Yes -- no, it's very insignificant. We put approximately around $5 million. Because you understand, by the end of the year, we will have the higher heads -- volume of heads of chicken because they're large, sized bigger. But anyway, we put very conservative forecast -- approach.
Okay.
A note regarding biological assets, it's about [indiscernible].
[Operator Instructions] We have a question from Andrew [ Faraday ], Concord Capital.
I had a question regarding the farming segment of the company. Could you bring some light about the future of sowing campaign? And maybe EBITDA per hectare in 2018? Could it be at the level of 2016?
Sorry, your question -- we've finished our sowing campaign.
Sowing campaign, actually, it was complete on time despite all the challenges with weather conditions actually. And we are expecting good results, both for winter crops and for spring crops. And the EBITDA can be around $320, $340 per hectare. This is our expectation, at least, now.
Based off current situation because you understand, until the harvest especially the spring crops, yes, we have some period of time which is meaning 4 months.
Yes, it can be correct. Yes.
[Operator Instructions] We have no other questions. Dear speakers, back to you for the conclusion.
Thank you very much for the call, everyone, and have a lovely day. In case you have your further questions, please e-mail us or give us a call. Goodbye.
Thank you, bye.
Ladies and gentlemen, thank you for participating. You may now disconnect.