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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, thank you for standing by, and I would welcome you to MHP's Q1 2020 Results Conference Call. [Operator Instructions] So without further ado, I would now like to pass the line to Ms. Anastasiya Sobotyuk. Please go ahead.
Thank you, Michael. Good afternoon, and good morning. Thank you for joining us today for MHP conference call dedicated to MHP's financial results for the first quarter of 2020. Just a quick reminder. MHP's financial results include the results of PP, Perutnina Ptuj from 21st [Audio Gap]. 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 [Audio Gap] 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 your questions. And I hope that everybody is ready. So we can start our call now. Let's go on Slide #4 of your presentation. First of all, let me start on challenges both Ukraine and the company faced since the beginning of 2020. [Audio Gap] influenza in January in Ukraine caused a temporary cessation of exports from Ukraine to the EU, Saudi Arabia and other MENA markets and the majority of CIS countries. Exports to the EU reopened at the beginning of March. Saudi Arabia and MENA markets reopened in February and then March, while the majority of CIS countries recommenced in May 2020.In order to mitigate the adverse impact of MHP's operations and profitability, management decided to decrease capacity utilization of poultry production complexes by approximately 10% from February until the end of March 2020. Since the beginning of April, all of the company's poultry production facilities have been operating at full capacity again.So we all live in the period when we can see the impact of COVID-19. And of course, the impact of the pandemic on the company in the first quarter was not material and the company largely continued to operate normally. As of the date of this report, the level of absenteeism of employees at MHP's Group enterprises is at the same level as last year. Management implemented a range of measures for preventing sickness and spread of infection within the company. Of course, we worked remotely. We had additional medical screenings, corporate transfers and use of protective masks, et cetera. So at the company's production facilities, work was organized in shifts of small numbers of people to limit contract -- contact, sorry, and minimize the potential spread of infection.And in addition, a wait list of potential workers was accumulated, in case replacement of infected persons and those on quarantine would be required. So if we look at the market fundamentals, then we can see that in the first quarter of 2020, a real GDP decreased by approximately 2%, a little bit less than 2% year-on-year. And in 2020, government expects negative economic growth in Ukraine at around 5%, minus, of course, 5% with subsequent recovery to 2.4% during 2021. Consensus forecast was revised, to the downside was expected around 7% real GDP decline in 2020. And of course, we all understand that, that is an effect of pandemic. Retail sales growth decelerated around 11% year-on-year in Q1, driven by growth in real wages and FX revaluation. Hryvnia appreciated by approximately 8% on average year-on-year in the first quarter, and the government assumes that -- the budget assumes that the FX in 2020 will be at around UAH 29.5 per $1. Annual inflation decelerated to around 3% year-on-year, driven by utilities and imported durable goods. And the soaking rains of May are prompting to boost Ukraine's harvest in 2020, which is expected to be near last year's record harvest, around 98 million tonnes. And frankly on the other side, MHP expects good harvest this year. Let's go and see the results of the first quarter. Let's come back to them. So let's go on Slide #6 of your presentation, key financials. So despite challenging start of the year, our financial results in the first quarter reflects efficiency of MHP team and substantial growth in revenue at Perutnina Ptuj. So we can see that consolidated revenue constituted USD 443 million, which is 2% high year-on-year, of which export revenue was over 54%, however, lower by 12% year-on-year due to the avian influenza restrictions on exports since January and partially the effect of COVID. And EBITDA constituted USD 90 million, 8% higher year-on-year with EBITDA margin at around 20%. So I now pass the word to Viktoria. She will continue with the comments about the financial results for the first quarter of the year in greater detail.
Thank you, Anastasiya. Good afternoon, everyone. Let's discuss our financial results for the first quarter in more detail. Slide #7 shows our financial results by segment. Poultry operations remained our key segment as usual and during the first quarter generated the majority of total revenue, about 70% and 77% of company EBITDA. Grain segment generated only 6% of total revenue on third party and about 11% of company EBITDA. As you know, majority of the grain produced we use internally to feed our chickens. Our subsegment, meat processing and other agricultural operations generated about 8% of consolidated revenue and contributed 6% to consolidated EBITDA. Main components of this segment are meat processing and convenient food production. Following the acquisition of operations in Europe, Perutnina Ptuj, the new European operating segment generate approximately 17% of total revenue and 12% of company EBITDA.In the first quarter, our export operation generate about 54% of total revenue, $237 million, 12% lower [Audio Gap] volume and price of export chicken meat as a result of export restriction caused by avian flu case in Vinnytsia region. We will discuss the -- develop of all our segment more deeply on the next slide. Please go to the next Slide #8, poultry segment performance. During the first quarter, we increased our production volume by 4% year-to-year due to the offering new rearing site launch into operation during 2019 as well as due to the increased share of heavy chicken produced. Revenue overall in poultry decreased by 7% year-on-year, driven by lower export chicken meat sales volume and chicken meat price decrease. Decrease in revenue was mostly due to the banned export market as a result on outbreak, avian influenza in Vinnytsia region of Ukraine. During the first 3 months, our average chicken meat sales price decreased by 3%., poultry export price decreased by 2%, and price in domestic market were down on average by 3% year-on-year, in dollars term. Average poultry production cost in Q1, in accordance with our budget, decreased compared to the same period last year by 7%, reflecting lower cost of mixed fodder as well as lower utility costs due to the warm winter and cheaper natural gas prices. Gross profit of poultry and related operations segment for Q1 remained relatively stable. Decline in revenue was mostly offset by reduction of production costs. Adjusted EBITDA [Audio Gap] per 1 kilo in Q1 is $0.36 per kilo, which is almost the same year-on-year, slightly low just by 3%. Let's move to the next Slide #9. External grain segment revenue in Q1 amount $25 million. The decrease compared to the last year level was mainly attributable to the low amount of crops in stock designed for sales at the beginning of this year, compared to the stock for sales at the beginning of last year, 2018. As a result -- it was a result of record yield of growth in 2018. EBITDA net effect of IFRS 16 constitute $10 million, by 9% low compared to the last year, mainly due to decrease in sales.MHP expect good harvest or -- especially winter crops in 2020. Let's go to the slide number [Audio Gap] processing and other agriculture operations segment historically generated the smallest part of our financial results. The key business of segment are meat processing and convenient food production. The segment generated revenue of $34 million by 16% higher compared to the last year, mostly as a result of higher prices and sales volume of meat processing product. EBITDA for the segment was $5 million, mainly -- is higher compared to the last year, mainly due the better returns earned from meat processing products at milk operations.Slide #11. European operating segment generated $78 million of revenue and $11 million of our EBITDA. Adjusted EBITDA margin constitute 14%, almost unchanged as compared to the Q1 2019. Our European operation continued to perform well in line with our expectations, demonstrating 9% growth in poultry meat sales volume and 16% growth in poultry product year-on-year with stable prices. In our financial statement, we include Perutnina financial results since the date of our acquisition, the 1st of March last year in 2019. Increased sales volume of processing products provided optimization and efficiency improvement across all business operations using the best MHP practice demonstrate clearly how we can improve performance of European poultry producers using our experience and findings. We are going to continue and develop the segment further and see a huge potential and synergy in exchange of experience between Ukraine and European teams here.Slide #12. A few words about our cash flow and liquidity position. Despite the increase in EBITDA, net cash from operation activity decreased to minus $39 million in Q1 compared to $142 million in Q1 2019 due to negative cash flow in working capital. [Audio Gap] 3 months this year compared to the last year, which was mostly related to high investments in inventory in poultry business during the first quarter due to the low stock of crops, sunflower and soya, designed for internal consumption in the beginning of this year compared to the beginning of 2019. Investment in inventories related to grain growing entities, in respect of forthcoming spring sowing campaign and also increase in the receivables, which is expected to be reimbursement in April and May this year. Total CapEx was amounted to $21 million, mainly related to investment in maintenance and Perutnina Ptuj production facilities. Regarding debt, the group has adopted IFRS 16 starting from before January 1, 2019. Applying IFRS 16, the group recognized a right-of-use asset and lease liabilities in consolidated statement of financial position. However, for purposes of covenant calculation, debt was present net IFRS 16 adjustment, as if any lease that would have been treated as operating lease under IFRS as in effect before the 1 January 2019 is treated as operating lease. Accordingly with this approach, at the end of the first quarter, the company's total debt was $1.5 billion and net debt about $2.5 million -- $1.2 billion, 98% of total our debt is long-term debt, about 96 -- [93%] of which are Eurobond. Our average weighted interest rate current is around 7%. In terms of liquidity at the end of the March, we had about $250 million in cash, mostly in dollars. Net debt-to-EBITDA ratio, net of IFRS 16 effect at the first quarter end was 3.17 versus Eurobond covenant 3.0. Also exceeding the ratio of 3.0 does not constitute the breach of any covenant under indebtednesses agreement. This leads to introduction to additional control measure by MHP regarding incurrence of additional indebtednesses, restricted payment, which included dividend distribution, mergers with third parties outside of group, and granting on financing of any kind to third parties. Such restriction become effective on the date of publication of our audited consolidated financial statement for full year of 2019 and continue now.Almost all our debt is denominated in foreign currency, mostly in dollar. Foreign exchange risk in our case is naturally hedged by significant share for export sales, having 54% of revenue, around $237 million, mainly in dollar-dominated export revenue during the last quarter. We also cover all our debt service expenses and are other payment in foreign currency. 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, Viktoria. We all see that pandemic caused considerable global disruption in business activities and our everyday life. Although the effect of the COVID-19 pandemic did not have a material impact on MHP's first quarter performance and the company's poultry production facilities have been operating at full capacity since the beginning of April, COVID-19 is expected to have an adverse effect on the company's earnings in Q2 of the year, mainly because of the impact on prices as many global competitors are currently experiencing reduced demand and result in excess capacity. Moreover, nobody can predict how the situation will develop and what kind of circumstances COVID-19 will have on global economy tension, maybe second wave in the second half of 2020. Nevertheless, MHP is well positioned to face these present uncertainties and the potential turbulence and demand for poultry meat, both in Ukraine and export markets, taking into account its business model, competitive production costs and market diversification.So MHP's main drivers -- driver of growth in 2020 are expected to be, first of all, an increase in production by around 20% year-on-year, mainly driven by full capacity annual utilization of Phase 2, line 1 of the Vinnytsia complex and an increase in production volume at Perutnina Ptuj. The second is an increase in poultry exports by 10% to around 390,000 tonnes despite challenges in world poultry market. Third is an increase in efficiency of grain growing operations following optimization of production costs and efficient rotation of crops, maybe good prices. And fourth is a transformation from a raw material company into a culinary company. So now we will open a question session. To ensure we get questions from all the participants, please ask 3 questions each, and then pass your word to the next participant. Thank you for cooperation. Michael?
[Operator Instructions] Our first question comes from Mr. Daniel Zaczkiewicz from Barclays.
Just based on the outlook that you've given, where should we expect net leverage to be by the end of the year? And could you also just go over the CapEx we should expect for the year? And then finally, could I just ask just on the working capital movements, was that a normalization of working capital? Or is it something we should expect to unwind the large outflow we saw in Q1?
Are you asking about the CapEx for 2020 or going forward?
Just the 2020, yes.
2020. Thank you very much.
[Audio Gap] we have very modest CapEx that amount around $100 million. Regarding working capital, yes, we -- to be honest, we're very flexible in working capital. And now, we understand the current situation on the market. And we think that our investment in working capital for full year will be very insignificant, maybe $20 million, $30 million. And regarding your question about our leverage and our leverage by the end of 2020. Our target to have leverage by the end of 2020, around 2.8.
[Operator Instructions] Our next question comes from Mr. Konstantin Fastovets, Adamant Capital.
I have a couple of questions. So first of all, could you comment on the price outlook for the second quarter and maybe for the rest of the year as well. You mentioned that the pandemic is having a negative effect on demand globally. So I guess that means that your export prices may go down further. And with that, I also wanted to clarify on where you see domestic prices going as well because in the first quarter, when I compare the data that you have on average with what the Ukrainian statistics service is showing. So your prices are down by 11%, and they actually showed that meat prices overall were up by 2.4%. And I understand the difference is that you sold more frozen poultry. Well, could you go into that a bit and sort of talk about why that happened and whether you expect that to change going forward?
Just for your question. You're completely right that our current price and our situation, our outlook, especially for Q2 and for full year. Q2, it is not very simple. It is, to be honest, is a difficult quarter. First of all, demand -- especially demand of -- European demand is low for fillet. And in Europe, in the first -- in the second quarter, we exported less than our plan. And we -- and now we decreased our export to Europe by 30% compared with our plan. At -- but at the same time, the interest in [indiscernible] we see very good demand of small chicken in the MENA region. And so we always -- during the maybe last year, we always repeat on one very important for us is strategic that we have the market -- export markets, geography market diversification. And that's why in our production, and our sales, we can switch to produce heavy big chicken, switch to produce small chicks, which today we can export to MENA. Regarding situation of this price in Ukraine, in February, we decreased our price and current our price around approximately the same 11% maybe even 12% depends on product level compared to the last year. When I talk about the price especially the fresh product. But our expectation that we expect that price will recover because I'm sure that all our competitors, doesn't matter, not only in poultry industry and pork industry today work with very low profitability. And sometimes, I'm sure that our competitors generate losses. That is why we understand and refuse this, and even though we see some signal about that price will recover in domestic market.
I see. Could you comment on the share of frozen chicken that you sell? Because from what I understand, it negatively affects your average price. Is that something that's -- that you agree with?
Yes, because in the first quarter, we decreased -- some period of time, we decreased and due -- especially due to stock, due to implementing ban for export to different -- no, to export, we increased our sales -- frozen sales in Ukraine in the first quarter, especially a lot of sales and withdrawal price because all the price of frozen is all the prices of fresh product with branded mostly.
All right. And so -- and will that share of frozen product, will that go -- be going down in the next 3 quarters? Or do you expect that to...
Yes. In the second quarter, it is good. Not in...
Okay. So can we -- is it -- would it be true to say that, that's one of the reasons why your domestic prices should be going up compared to what should be...
Yes. It is one of the reasons that we sell more of the frozen. But the second reason, we decreased our price. We decreased our price on -- not because, unfortunately, because we -- in current situation in the second quarter, unfortunately, we slightly decreased our price again compared to the first quarter.
Right. Okay. And then -- and you mentioned that -- you said it's 11% down year-on-year. Did I hear you correctly, at the moment?
Yes.
Domestic price?
Yes.
Okay. Okay. And also -- so I guess tied with that, if we talk about costs, so your costs went down quarter-to-quarter, right, significantly because, I guess, no bonus payments and also cheaper gas and the devaluation effect. Do you still -- well, given where costs are at the moment, and last -- during the last call, you said that you're targeting, you're expecting to see EBITDA per kilo at about $0.40. Is this something you still find realistic for this year given where prices are and where costs are? Or do you think that it's going to be lower than that?
Yes, in the first quarter, originally, it's very similar figures, close to $0.36. But now in the second quarter, we understand that our EBITDA per kilo will be low, because price, especially the 2 main reason on this. We price slightly lower and especially lower import/export price. Because today, the export price, especially for quarters low compared to the first quarter -- no, just compared to the beginning of the year, lower by approximately 20%. That is why in the second quarter, we will generate our [EBITDA] towards per kilo it was lower than 0.3, around [Audio Gap] may be slightly lower. But we're sure that by -- in the second half of the year, price in Ukraine will recover. And maybe we will see and hope that we will see some recovery in price in [indiscernible].
Okay. I see. And then -- and just one more question. With regard to the grain segment. So could you give a bit of an outlook on where you see yields for this year as compared to last year? Because of the drought there was -- projections were very pessimistic because of the drought.
No, no, no. Situation -- yes, up to today, situation with weather in Ukraine is good, especially in region where we have our fields is good. And we expect -- at minimum, we expect that would yield per hectare not lower than last year. But until today, nobody knows what will be for the next year, especially if we speak about the sunflower, sweetcorn which is in autumn. But until today, our growth of our yield is good.
Okay. And your forecast of $295 per hectare, that's including revaluation, right?
Yes.
Including, yes? And do you expect the effect to be positive for the year or negative for the year, for this revaluation?
No. Revaluation of the -- it will be may be positive because I hope that at the end of the year, we will have the higher level of stocks in corn compared to the previous year. But I think the demand of revaluation, it will be not so -- not significant until we maintain maximum. Yes, it's not so significant.
Our next question comes from Ms. Natalia Shpygotska from Dragon Capital.
A couple of questions from my side. Can you just check how the company's European asset, mainly Perutnina Ptuj, performed like-for-like in -- so far in the second quarter of the year? And if the recent developments with respect to COVID pandemic has affected the company's strategic view on its presence in other markets than Ukraine, I mean, Europe, possibly MENA? Has company's plans changed with respect to M&A, probably some greenfields facilities all over the world?
Thank you very much for the question. The first question regarding Perutnina. Yes, Perutnina demonstrated very good results in the first quarter. And today Perutnina sales approximately by 5% volume higher compared to the last year. It is mostly a product is mostly sausages and convenient food like meat. And in general, Perutnina, as you know, the head facility at Perutnina operate in different countries in Balkan and Slovenia, Croatia, Serbia as well. And we hope and we saw that Perutnina this year will increase our EBITDA at minimum by 15% compared with last year. Regarding the second, your question about our export activities in different region MENA and Europe. As I told previously situation with our export to Europe not simple, is difficult. But as you know that HoReCa now is closing everywhere in European countries. But at the same time, we decreased by approximately by 20%, maybe our export volume in Europe compared to our plans. But we now -- we see very good demand of -- for chicken from MENA region, from Saudi Arabia. And we are increasing to export small chick in this region. And as I told previously, it's very good for us that we have -- we provide, and we're working to have the very wide range diversification of our export. Regarding your last question about M&A. M&A is strategical for us. Potentially for us, it will be very interesting to buy some -- to provide expansion in Europe, because as you can see from our financial performance that we -- it is not just [indiscernible] and we are really -- can improve and do good business in Europe. But now just we only consider different possibilities. You understand that it's very long sort of process because we -- just small remark, we start our negotiation and -- with the first time met with Perutnina 6 years ago. That is why potentially, but not right now.
We have one question coming online from [indiscernible] Asset Management. This is a clarification on working capital. Was that a further $20 million to $30 million outflow expected on top of the $116 million? And should we not expect the Q1 working capital to be unwound?
No, no, no. Our total investment for full year. Our total investment in working capital, it will be around the $20 million to $30 million. It is our investment in the first quarter. It was temporary investment.
[Operator Instructions] We have a question from Mr. Dilawer Farazi from Loomis.
I just want to clarify a couple of things. I may have missed them because the line was cutting in and out. Pricing expectations for Europe and your production. You're reducing the production to Europe 20% from your expected plan. What is your expectation for year-on-year European exports and the pricing expectations as well? Yes. And the leverage you're giving at the moment, that's IFRS leverage, right? That's it.
Yes, exactly. When we speak about our leverage around 2.3, 2.5, is the leverage we calculate accordingly our IFRS.
IFRS 16, yes?
No, without IFRS. It's net of IFRS -- net of 16 standard, net of. Accordingly, condition of our Eurobonds. Regarding your first question about our volumes in the year compared to the year-to-year, which is the price decreased approximately -- no, today, because we don't know what will be in the future. Today, approximately by 15% -- 15%, 20% year-to-year, if you speak about price of fillet to Europe. And regarding volumes, we decreased approximately, let's say, 20% -- around 20%. But we expect that in the H2, volume will increase because we understand that the decrease in -- of our volume -- export volume to Europe [indiscernible] and related to decreased HoReCa.
And you believe MENA will make up the shortfall or which region do you think is specifically going to be more of a focus for you?
It's very good question because situations can change. But today, it is mostly in MENA region.
Our final question comes from [indiscernible] from [ BankFinancial ].
I have 3 questions. And the first one would be, are you planning to pay out more dividends in 2020? The second one is, what would you consider to be the lowest level possible of CapEx in order to preserve cash in 2020? And the last one is, regarding the amount of debt outstanding to be repaid in 2020 and '21, are you going to repay this amount or refinance during the next 2 years?
Yes. I will start from the question number three, is our repayment amount for 2020 is very significant -- is a significantly less and we keep pushing our account. It will be 5x lower than as in our account today. Lowers our CapEx for this year maybe if situation is very...
Becomes more challenging.
Yes, more challenged, we can maybe decrease our CapEx by 20%, 25% is the max. But regarding the dividend, to be honest, it's all the same. But anyway, we are a public company. We have the very strong dividend policy and potentially, yes, we would like to continue to pay off dividend.
If I'm allowed, one more question. Do you have any undrawn revolving credit facilities available?
Yes. It was approximately, undrawn line today around $200 million.
I'm showing no further questions. Anastasiya, I'll pass the call back to you for your concluding remarks.
Hello, and thank you very much, Michael. Thank you very much to all of you. Of course, as usual, in case you have your further questions, please call us or drop a line via e-mail. We will be glad to cover all of them. Thank you, and we'll be in touch. Have a nice evening. Have a nice day. Bye-bye.
Thank you.