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Ladies and gentlemen, welcome to MHP Financial Results for the first quarter 2019. I will now hand over to Anastasiya Sobotyuk, Director of Investor Relations; and Kapelyushnaya Viktoria, Executive Director, Chief Financial Officer. Madams, please go ahead.
Thank you, Christina. Good afternoon and good morning. Thank you for joining us today for MHP's conference call dedicated to MHP's financial results for the first quarter of 2019.First of all, I would like to draw your attention that since today and going forward the company's results include also the results from operations of Perutnina Ptuj, so -- the PPJ. At this time, MHP's financial results for the first quarter of 2019, include the results of PPJ from the 21st February, 2019, when the acquisition was completed. Due to not significant impact on the MHP's results for Q1 2019, operating results and trends explanation were presented without PPJ impact.As usual, I have to tell in advance that some of the things we discuss today are forward-looking statements, please take it into consideration. And of course, 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, Viktoria Kapelyushnaya. She will present financial results of the company in the 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 your questions. I hope that everybody is ready. So we can start our presentation now.Let's go on Slide #4. As usual, we start from market environment. During reporting period, market conditions in Ukraine improved with a real GDP growth accelerated to 2.2% year-on-year expected according to NBU.In 2019, NBU expect a slowdown of economic growth in Ukraine to 2.5%, with subsequent acceleration to 2.9% and 3.7% during 2020, 2021, respectively.In Q1 2019, currency ratio remains relatively stable with around 6% revaluation year-on-year. Annual inflation accelerated to around 7% year-on-year, driven mainly by food prices increase.Some words about changes in Ukraine in general. So you well know that since 21st of April 2019 Ukraine has a new president, Mr. Zelensky. The Ukrainian society is now expecting for preliminary elections to Verkhovna Rada, Ukrainian parliament, this summer in July.So let's come back to the company's results, and we go all together on to Slide #6, key financial results for the reporting period. Our financial results in the first quarter reflect significant growth in revenue as new production facilities, I'm talking about Vinnytsia, have come on stream and include PPJ's revenue, since completion of the acquisition.As you can see, the results are following, revenue of USD 436 million, 42% higher year-on-year, of which export revenue was over 60%. EBITDA of USD 83 million and EBITDA margin of 19%, as a result of decrease in margin for all segments. Operating margins, frankly speaking, for the first quarter were mainly adversely effected by the high labor cost experienced since the second quarter of 2018. And now let me pass the word to Viktoria. She will comment our financial results on the first quarter in greater details.
Thank you, Anastasiya. Good afternoon, everyone. Let's discuss our financial result in more detail. Slide #7 shows our financial results by segment. On this 21th of February, MHP completed the acquisition of Perutnina Ptuj, the largest producer of poultry meat and poultry meat product in the Balkans Southwest Europe. MHP's financial result for the first quarter includes the result Perutnina Ptuj from this date when the acquisition was completed. Due to not significant impact on MHP result for the first quarter, operating result and trend explanation represented without Perutnina impact. Both the operations remained as usual our key segment. And during the first quarter generally the majority of total revenue around was 80% and 87% of company's EBITDA.Grain segment generate 12% of total revenue on third party and about 13% of company's EBITDA. As you know, majority of grain produced we use internally to feed our chicken.Our third and the smallest segment are the agricultural operation, generate around 10% of consolidated revenue and contribute 7% to consolidated EBITDA. Main components of this segment are meat products and convenient food production. Our export operation continue to develop impressively in Q1 and generate around 60% of total revenue $268 million, and this is 65% higher compared to the same period last year. Mostly due to the higher volume of export chicken meat and vegetable oils.We will discuss the development of oil segment more deeply on the next slide. Let's go to the next Slide #8, poultry segment performance. During the first quarter, we increased our production volume by 13%, due to the launch of additional 2 rearing sites of Vinnytsia poultry complex Phase 2. Currently, 5 new brigades for growing chicken are operating in Vinnytsia, and we are going to put into operation additional one in advance in 2019 to continue our production growth.Revenue overall in poultry increased by 28% year-on-year driven by chicken meat, vegetable oils, sales volume growth. Growth in revenue was mostly achieved thanks to our export growth strategy, which is focused on [indiscernible] targeting. We continue to concentrate and to roll out each product towards the most foreign market, and this give us the 48% growth of export volumes.In general, during the first quarter, our average sales price remains stable year-to-year. Poultry export price decreased by 5%. And price in domestic market, we are up on average by 2% year-on-year in dollars term. Compared to the first quarter 2018, price decreased by few percent goes traditional with first quarter is the lowest season both on domestic and export market, compared to the fourth quarter, when higher demand is driven by Christmas and New Year.Based on current trends, we see our average chicken meat sales price in Q2, current chicken meat price, is about 5% higher compared to the first quarter. For the full year of 2019, we expect growth in domestic price about 6% year-on-year, export price remains relatively by region and currently low compared to the last year. Average poultry production cost in Q1, in full accordance with our budget of 2019, increased by 15% year-on-year, reflecting higher cost of protein components of [ milk powder ] as well as higher payroll cost, which we increased in the Q2 2018. Compared to the Q4 2018, poultry production cost in the first quarter remained almost at the same level, with the exception of seasonal influence of gas cost. We expect production cost to be quite stable during the remaining quarters of 2019, supporting better profitability driven by higher price in remained quarters of 2019.Gross profit of poultry segment decreased by 4% in line with the increase in production cost, while EBITDA decreased by 6%. Adjusted EBITDA before the first one -- standard effect for 1Q in first quarter was $0.36, which is significantly lower compared to the previous year. Decrease was mainly due to increase in production cost and delivering cost. But our expectation for full year, this year, 2019, our EBITDA for 1Q, we will be around $0.45, $0.46 due to the higher price and stable cost. It will be few percent lower compared the last year, 1Q last year. Let's go to the -- let's move to the next Slide #9. External Grain segment revenue in first quarter amount $52 million. The increase compared to the last year level was mainly due to the impressive higher harvest in 2018 that lead to the higher amount of crops in stock designed for sales at the end of 2018. EBITDA include effect of revaluation grain, constitute $11 million by 83% higher compared to the last year, mainly due to increase in sale. The most part of profit from grain sold in Q1 was recognized in 2018 through the revaluation of biological assets. MHP expect good harvest or winter growth in 2019, and we expect to generate good financial result from farming business this year.Let's go to the Slide #10. Other agricultural segment historically generates the smallest part of our financial results. The key business segments are meat processing and convenient food production. The segment generate revenue of $42 million by 35% higher compared to the last year, mostly as a result of the higher price of meat processing product, and as well it includes Perutnina Ptuj result after acquisition date. EBITDA $6 million in the first quarter was 25% lower compared to the same period last year, mainly due to significantly lower result of milk operations partly offset by higher meat processing result.Slide #11, a few words about our cash flow and liquidity position. Despite the declined EBITDA, net cash generated from operation activity significantly increased to $142 million in Q1 compared to $29 million in Q1 last year. Increase was mainly due to the positive cash flow in working capital during the first quarter, related to lower investment in inventory due to the higher stock of crops sunflower and soya, accumulate of the end of 2018 for internal consumption during the 2019 as well as increase in payable for seeds and planned production product.Total CapEx in the first quarter is around $33 million, mainly related to the launch production site of Phase 2 Vinnytsia poultry complex. For the full year, we -- our forecast will be CapEx around $120 million in Ukraine, and for modernization of Perutnina in 2019, we are going to spend around $25 million. The full CapEx program for Perutnina for the next few years is currently under discussion. Regarding debt, the group has adopted IFRS 16 starting from the first January this year. Applying IFRS 16, the group recognized a right of use assets and lease liabilities in consolidated statement of financial position. However, the purposes of covenant calculation debt was presented net of IFRS 16 adjustment, as if any lease that would have been treat as operational lease under IFRS as effect before the 1st January, 2019, is treated as operating lease.As of the end of the period, the company total debt was $1.5 billion, net debt about $1.2 billion, 83% of total debt is long-term debt, about 87% of which Eurobonds. Our average weight interest currently is around 7%. In terms of liquidity at the end of the period, we had $282 million, mostly in dollars in account. Net debt-to-EBITDA ratio of -- by the end of the first quarter was 2.6 versus Eurobond covenant 3.0. Almost all our debt is denominated in foreign currency mostly in dollars.Fixed rate risk in our -- foreign risk in our case nature of hedged by significant share of export sales, having more than 60% of revenue, mainly dollar-denominated export revenue -- during the last -- during the first -- last -- during the last year we fully covered all our debt service expenses and other payments in foreign currency. Our currency balance remains strongly positive. And now I give the floor to Anastasiya.
Thank you, Viktoria. Let's go to the final slide where we recount the outlook section. So I will conclude the presentation, and will provide you with the business outlook for 2019.This year, we started together with Perutnina Ptuj, and it is different, challenging but encouraging for sure. We have a clear understanding that going forward we will grow together, exploring new markets, developing new products, promoting strong brands. We know that we will work with a great team and smart team, which will do their best and everything in order to reach our targets and succeed. Every day, together, we will continue to prove to our stakeholders, partners, farmers, employees and society that we are efficient leaders and we produce higher quality products meeting demanding EU standards. Coming back to the start of 2019, coming back to the first quarter and looking beyond, I would like to say that despite substantial influence of higher labor cost on MHP group financial results, which have also been diluted by PPJ's structurally lower margins, we remain confident in the prospects for the group and our expectations for the full year remain unchanged. We have clear targets across all our business segments in 2019, namely an increase in production volume of chicken meat by around 100,000 tonnes as a result of expansion of the Vinnytsia poultry complex, we're talking about Phase 2. Mostly sent for exports, of course, forecasted at around 380,000 tonnes of chicken meat this year. That will be supported by growth in local and export prices based on current price trends. We have an increase in production volume of chicken meat by around 80,000 tonnes following the acquisition of PPJ, with expected higher financial results, of course, year-on-year due to cost optimization first of all. Gradual launch of an alternative energy biogas, this is number 3 in our priorities right now. We are launching first phase of the Vinnytsia biogas station which has 12-megawatt capacity. So the launch is expected to be in the middle of 2019, very soon. And the fourth one is, we expect strong yields across all crops that will definitely [indiscernible] overall financial results of MHP in 2019.So the company is targeted to maintain a status of the most cost efficient producer in class both in Ukraine and striving to do so together with its new company PPJ in the European Union by taking care and constantly control its production cost across all business segments. We're confident that we will manage to reach it.Thank you very much, and now we will open the question session to ensure we get questions from all the participants. Please ask 3 questions each, and then pass your vote to the next participant. Thank you for preparation in advance. Christina?
[Operator Instructions] Our first question comes from Stella Cridge from Barclays.
I may take up my full 3-question slot if you don't mind, I think I'll ask them in turn. The first one is about the short-term debt. So I see that cash is still in excess of short-term debt, but the short-term debt is fairly high at $260 million. Could you break us down what that short-term debt is? And what the plan is with regards to refinancing or perhaps paying down some of the cash balance? That would be great.
Yes. I thank you for your question. Yes, we have disposition in short-term debt, but at the same time we have undrawn incline, yes. And you see that in our cash we have by the end of the year around 200 -- we repay. Yes, we -- in the second quarter we repaid some part of short debt. Yes, it is approximately maybe $50 million -- $80 million. Yes. And regarding short-term debt, you understand that if you look at our current working capital, yes, we finance short-term debt approximately by 30% of our current assets. That is why, yes, we understand that it is very important to have some undrawn incline that is why we don't see any problem with short-term debt around $200 million on our balance sheet.
So you had the $260 million, you repaid the $80 million. So you're saying that the rest of it is mostly going to be addressed with these undrawn facilities, is that right?
Yes.
Yes. Okay. All right. That's great. And the second question was, so I think on the previous conference call you said that you thought there would be some working capital outflow for the whole year, but obviously, you saw there was this large inflow in the first quarter. So after this Q1, I was wondering what's your expectations for working capital in the last 3 quarters of the year?
Yes. First of all, we don't expect weak investment for full year 2019, investment in working capital. Total investment in 2019, it will be around $50 million -- around $40 million.
So you mean -- so basically, if you have this big inflow in Q1, do you mean that you have...
But -- anyway, if you did the best -- yes, it will be best over the situation because you understand we can manage our investment in working capital, because the most part of investment in working capital depends on how many tonnes of sunflower seed and soya we have by -- at the end of the year. Last year, we had very weak investment. And we will see situation of the market, maybe we slightly increase our volumes of stocks of sunflower seed or soya, or maybe, even we slightly decrease. We -- first of all, we would like and is very good for us, we can manage our investment in working capital by approximately $100 million. $100 million we can just -- because by the end of the year -- our last year, we have around $80 million -- around even $100 million in stock sunflower seed and soya.
Okay. That's understood. And I guess, the final question would be, so I noticed under IFRS 16 you started reporting the leases on the balance sheet. And -- but I noticed that the -- with the EBITDA, have you adjusted that? Have you left it unadjusted? I just noticed some other companies that are adopting IFRS 16 are seeing some EBITDA adjustments so I just wondered what was going on there.
Yes. First of all, yes, in the first quarter, you cannot find any -- and we cannot put any -- we cannot find any influence in EBITDA because, yes -- in -- cannot influence because only we will see this influence on EBITDA when we sell our growth which we get this year. Because last -- because in the first quarter, we sold crops which we gather last year. That is why any influence in EBITDA.
Our next question comes from [ Jun Mon-Koo ] from [ Yatton Bank ].
Sorry, I missed the earlier part of the call, but could you just kind of remind us what happened with the margin pressures on the EBITDA and the gross profit? And then your expectations for margins for the rest of the year as well?
First of all, when you -- when we disclosed the information regarding the financial results for Q1 2019 right at the beginning, we thought that we bought a new asset, right? Which is located in Balkans, this is Perutnina Ptuj, right? And so we have an effect from -- just give me a second. Okay.
Viktoria wants to continue.
Yes, thank you for your question. Yes, in the first quarter, we generate maybe one of the lowest level of EBITDA margin and one of the lowest figures EBITDA per 1Q in our history, one of the lowest, maybe it is not the lowest but one of the lowest. I will explain why because since the second quarter last year we increase our salary by more than -- around 30% and the second increase protein in our cost of production. That is why in the first quarter our cost of production increased year-to-year by 15%. At the same time, price remains very similar level and that is why we generate so low level of EBITDA. Regarding our next quarters of 2019, we see that our cost of production will not increase and maybe it even just slightly decrease in the third quarter. At the same time, we expect our price on domestic market will increase compared to the general by approximately 9%. And even current price on domestic market higher than price in the first quarter approximately by 5% -- no, 4%, 5%. And it -- and we see the real driver which allowed us to achieve EBITDA per kilo approximately $0.45. It will be just 10% and 15% lower than last year.
[Operator Instructions] We have a follow-up question from Stella Cridge from Barclays.
I actually wanted to ask about land reforms. So I'm aware there's a new presidential administration in place. Obviously, you've got the local elections coming up. And just sort of what -- had there been any discussions recently? As this new administration has come in on their view on land reform? Do you think you have to more wait for the parliamentary elections to take place before you get an idea of what the landscape might look like with regards to land reform? You -- just to ask, if there's an update on that front in the last couple of months?
No, nothing. Any update about land reform? Any update? And we don't expect any news about land reform maybe by the end of the year, yes.
No update.
No update, no update, no update, no, because now everybody in process for the new parliament election. After parliament election it will be time for creating coalitions, and that is why, to be honest, I don't expect any Changes.
Changes, and in use maybe by the end of the year.
Okay. That's a helpful update. And I also wanted to ask about the decline in the export poultry prices. So you mentioned in the release that prices were down 5% year-on-year. I just wonder, what are you seeing in the global poultry market at the moment? Have you seen any impact from the swine fever that we've seen in the Chinese market? Or just -- what are the broad dynamics that have been putting more pressure on the poultry prices over the past year?
Yes. Thank you for your question, great question, yes. Regarding the poultry price worldwide, it's very interesting question because it's completely different trends. If you look at the price of fillet in Europe, here in MENA, price decreased, which is substantially, yes, around maybe 20%. If you look at the price, for example, of MENA region for small chicken. Price depends on country, for example, price in Saudi Arabia year-to-year increase. Price in Iraq, for example, decrease. General situation with price of legs, yes, due to situation with Chinese swine...
Swine flu.
Swine flu. Yes, we refuse that price is increasing but not so significant. But in a way we see the price of legs is increasing month-by-month. That is why it's completely different trends. But regarding legs, because price in process is increasing.
And what's the reason why the European prices have been under such pressure?
Yes, because it seems to me of the owners last year, it was very high price on the European market, and it was maybe the highest price during the last 5 years. And -- as a very important point here, but because seasonally especially temperature everywhere in Europe in March or in May. In June, it was not very good and it will be -- it was the same sun or even because barbecue season it was not so good.
[Operator Instructions]
Thank you very much for the call, and thank you very much for the attendance and your questions. In case you have any further questions, please e-mail us or give us a call. Thank you very much, and have a lovely day. Bye-bye.
Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.