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Ladies and gentlemen, thank you for standing by, and I would like to welcome you to MHP's Second Half 2020 Results Call. [Operator Instructions] The format of the call today will be a presentation by the MHP management and IR team, followed by a question-and-answer session. [Operator Instructions] Without further ado, I would now like to pass the line to MHP. Anastasiya, the floor is yours.
Thank you, Michael. Good afternoon, and good morning. Thank you for joining us today for MHP's conference call. My name is Anastasiya Sobotyuk, Director of Investor Relations. And on the call today, we will discuss MHP's financial results for the 6 months of 2020. Today's call is based on data and information released earlier today, Q2 and H1 2020 press release and financial statements. However, during our call, we can discuss our projections and plans based on our assumptions and models. Please take it into consideration. Together with CFO of MHP, Viktoria Kapelyushnaya, we will present to you financial results of the company in general and by segments. After the presentation, we will be glad to answer your questions. Let's start. Slide #4. Macroenvironment. GDP in Q2 2020 was down by around 11%. Its sharp deterioration last quarter reflected the negative impact of a 2-month nationwide lockdown and a drop in foreign demand caused by coronavirus curves in Ukraine's trade partners. In contrast to many of its European peers, the current turn in Ukraine did not affect large industrial enterprises significantly, but it included a ban on domestic public transportation, which depressed economic house food in many small sectors. Still, the sequential decline in Ukraine's GDP of nearly 10% was smaller than those in the Eurozone, minus 12% and selected CEE neighbors, such as Hungary or Romania. In Q2, currency ratio depreciated by 8% year-on-year as a result of economic instability due to COVID-19. Annual inflation deceleration to around 2% year-on-year. The National Bank of Ukraine predicts that inflation will enter the target range of 5% by the end of the year due to the gradual recovery of the global economy and the rise in energy prices. Let's get back to the company's results, Slide #6. Key financials for the reporting period. The financial results during 6 months of 2020 reflects the challenges MHP had faced during the first quarter -- sorry, first half of the year, the effect of a third quarter outbreak of Avian influenza in Ukraine and then the challenges posed by the global COVID-19 pandemic in Q2. MHP's revenue was USD 867 million -- 8 million down -- sorry, 8% down year-on-year, mainly adversely affected by lower results in poultry operations, lower exports and prices and grain growing operations, unexpectedly lower results due to the extremely hot and weather conditions in the central regions of Ukraine. At the same time, MHP's meat processing division result was stable year-on-year. And Perutnina Ptuj generated strong results with better-than-expected financial results due to cost optimization and their trends in branded higher value-added products. Export revenue was $453 million, 18% down year-on-year. Adjusted EBITDA margin remains relatively stable and constituted 25% compared to 26% in the first half of 2019, with adjusted EBITDA down from USD 248 million to USD 216 million. Let's look at MHP's financial results in greater details and by segment. Viktoria, the floor is yours.
Yes. Thank you, Anastasiya. Good afternoon, everyone. Let's discuss our financial results for H1 2020 in more detail. Slide #7 shows our financial results by segment. Poultry operations remained our key segment, as usual during the first half, generated the majority of total revenue, around 70% and 56% of company's EBITDA. Grain segment generated 4% of total revenue on third-party and about 30% of company's EBITDA. As you know, majority of grain produced, we use internally to feed our chicken. Our stores and the smallest segment, meat processing and other agriculture operations generate about 8% of consolidated revenue and contributed 4% 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 Europe operating segment generated approximately 18% of total revenue and 12% of company's EBITDA. In the first half of the year, our export operation generated around 52% of total revenue, $453 million, 15% lower compared to the last year, mostly due to the lower volume and price of export chicken meat. We will discuss the development of our segment more deeply on the next slide. Please go to the next slide, #8, poultry segment performance. Despite the challenges posed by global COVID pandemic and avian influence, in Ukraine, our production volume during the H1 remains relatively stable. Since the quarter -- second quarter, all MHP poultry production facilities continue to operate at full capacity again. Revenue overall in Poultry decreased by 12% year-on-year driven by chicken meat sales price and volume decrease. Fall in revenue was mostly due to the avian influenza outbreak in Ukraine in the first quarter, which goes in temporary ban of exports from Ukraine as well as impact of COVID pandemic since March 2020. In H1, poultry export decreased by 10% to 170,000 tonnes, mainly in EU and MENA region. During the H1, our average export price decreased by 9% year-on-year in U.S. dollar terms, mainly driven by product mix change and weaker price on in the U.S., in European Union as many global competitors are currently experienced a reduced demand and result in excess capacity. Sales volume on domestic market remained almost unchanged, mainly due to reduced poultry price by 13% year-on-year. At the same time, poultry production cost in H1 decreased by 11% compared to the same period last year due to the low cost of mix for the protein component. Fortunately, despite the pandemic, the level of absenteeism of employees at MHP Group Enterprise is at the same level as last year. The company did not incur significant incremental expenses related to COVID-19. Gross profit on the poultry and related operations segment decreased by 25%, mainly due to decrease of sales volume and chicken meat prices. Adjusted EBITDA before the 41 standard effect per 1 kilo in the first half of the year is $0.35 per kilo, which is more than 20% lower compared to the average figure in the same period last year. Decrease was mainly due to decline in chicken meat prices. Let's move to the next slide, #9. This year were extremely unfavorable weather condition in the central region of Ukraine since the company mainly cultivates land in the central region of Ukraine. This led to a decrease in the yield of winter crops and expected the lower use of spring crops compared to 2018. Although also, there -- these are still strong and well above Ukrainian average. External grain segment revenue in the first half amount $35 million. The decrease compared to the last year level was mainly attributable to the high amount of crops in stock designed for the sales as of 31 December 2018, compared to the stock for the sales as December 2019, mainly as a result higher yield in 2018. EBITDA, net effect IFRS Standard 16 constitutes $65 million by 12% lower compared to the last year mainly due to the lower yield of winter crops and expected volume of corn in 2020 compared to the 2019. Let's proceed to the Slide #10. Meat Processing and other agriculture operations segment historically generate the small part -- the smallest part of our financial results. The key business of segment at meat processing and convenient food production. Segment revenue and adjusted EBITDA in H1 remains unexchanged and amount 67 million and 9 million, respectively. Our meat processing division is actively working on new product with a target to provide wider range of options to our customers and trends business profitability, delivering convenient and well-demanded ready-to-eat products, such as dry meat slices, sandwiches and other meat snacks.Let's proceed to the Slide #11. This crisis, 2019, does not have a material impact on business operations of the Europe operating segment as a result of poor recovery and change in consumer preference in favor of ready-to-eat products, which constitute a significant part of Perutnina production. Following this strategy of Poultry production growth and increasing several facility capacity [ consideration ] in Serbia and Croatia, poultry production volume on Europe operating segment in H1 increased by 9% compared to the same period last year. Average poultry price decreased by 3% from $2.67 to $2.50, mainly due to oversupply on domestic market in Bosnia and Herzegovina, where one of our production facility is located. Average price of meat processing products were relatively stable. Europe operating segment generated $157 million revenue and $26 million of EBITDA in H1. Adjusted EBITDA margin constitutes 17%, 2% higher compared to the same period last year. The increase in adjusted EBITDA was mainly attributable to the higher sales of more profitable meat processing products in H1 2020. Slide #12, a few words about our cash flow and liquidity position. Net cash used and operating activity amounts to $22 million in H1 2020 compared to the net cash generated from operating activity $224 million in H1 2019, mainly due to the change in working capital. Huge working capital investment in H1 2020 are mostly related to the seasonal work in progress in grain growing division. It's usual for MHP, but in H1 2019 was positive influence of sunflower seeds usage from stock, while at the beginning of this year, sunflower seed stock were low -- significantly lower than usual. Total CapEx for H1 2019 is amount 41 million, mainly related to maintenance and Perutnina Ptuj project facility. Regarding the debt, at the end of the period, the company total debt was $1.5 billion and net debt about $1.3 billion. 98% of total our debt is long-term debt, about 95% of which are Eurobonds. Our average weighted interest rate currently is less than 7%. In terms of liquidity, at the end of June, we had about $185 million in cash, mostly in dollars. Net debt-to-EBITDA ratio by the end of the second quarter was 3.7 versus Eurobond covenant 3.0. Increase in leverage is caused by lower EBITDA in 2020 compared to the -- compared to 2019. No additional debt attracted. Exceeding the ratio of 3.0 does not lead to the breach of any covenant and our indebtedness agreement but to the introduction of additional control measures. Until we achieve net debt-to-EBITDA lower than 3.0, MHP has to supervise and assess incurrence of additional indebtedness, restricted payments, including dividends, external investments and some others. All our debt is dominated in foreign currency and foreign exchange risk, in our case, and natural hedges by significant share of export sales, hedging more than 50% of revenue, mainly dollar-dominated export revenue during the last year -- during the H1. 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 to give you our current business update and outlook.
Thank you, Viktoria. Globally, as you know, the poultry industry has gone through an extremely challenging time in the first half of this year. With disruption due to the COVID pandemic, significantly lower prices for poultry meat globally and oversupply in many markets. In spite of these challenges, the company has managed to produce a good set of results and is relatively proud of this achievement. We all understand that the world has changed the laws during these 6 months, and we all know that this is not the end of the story. So we all have to accept new environment, new format of communication, new format of life and work. Here at MHP, we're also transforming, transforming challenges into opportunities for our customers, partners, for the company. Since the beginning of 2020, MHP has been gradually transforming from protein to culinary company, launching on the market, new products supported by product campaigns, introducing new formats of cooperation with our partners, franchisees. We continue to develop Perutnina Ptuj, working continuously on cost optimization, production facility modernization and improvement in management approach. The main drivers until the year end we see. First of all, for poultry division, poultry and food market and in Ukraine; second, we are in line with the strategy regarding Perutnina Ptuj and, therefore, expect strong and higher annual financial results year-on-year; and third, increased share of high-priced products in the meat processing portfolio, both in Ukraine and in the Balkans. Unfortunately, as Viktoria mentioned as well, the results in grain operations has to be adjusted to the adverse effect of high temperatures and arid weather condition MHP's harvest experience in the central regions of Ukraine. Therefore, we expect lower results in all. Now going to both markets. MHP currently exports to over 80 countries of the world. All markets are open. General situation, demand and supply is stabilizing. Regarding new formality -- normality, the company continues to operate normally. A full range of measures has been implemented to prevent the spread of infection within the company. And as of today, there have been less than 200 COVID cases recorded at MHP, with the vast majority of people recovered. In spite of the unusual combination of headwinds of the company has faced this year-to-date, we currently expect to deliver financial results for the full year similar to 2019. Thank you very much. We are ready for questions now. [Operator Instructions] Thank you for preparation in advance. Michael?
[Operator Instructions] So the first question comes from [ Mr. Mario Palumis ] via text from [ Bearing ]. Could I check what EBITDA margin do you target at PP? How long before you get there? And how are you planning to get there?
Just a second.
Sorry. Yes, sorry. You're asking about EBITDA margin Ptuj, Perutnina Ptuj, yes?
Correct.
Now we -- yes. It's the correct question. Yes. Now we have the EBITDA margin of Perutnina Ptuj around 18%.
[Operator Instructions] Our next question comes from Ms. Natalia Shpygotska from Dragon Capital.
Two questions from my side, please. First of all, could you please comment a bit how the company's poultry prices performed so far in the Q3 of 2020? And the second question, what's your target net debt level for this year?
Thank you for your question. Yes, regarding our price, our situation in price, in Q3 in Ukraine compared to the Q2, we have slightly higher price by just a few percent compared to the second quarter of this year due to seasonality. And regarding our target, yes, it's very difficult. Yes. So we understand that our net debt-to-EBITDA by the end of the year will be around 3 and maybe slightly even higher than 3 because it will depend on our financial results in farming business because right now we understand that we will have lower-than-expected yield, especially just corn in farming business. And that is why our EBITDA in farming business, so this year, will be lower than our expectations. This is very based on our current situation and how we see this situation today. We understand that our leverage by the end of year will be around [ 3 ].
Our next question comes from Mr. Javier Pinedo from Torreal.
I was wondering if you could help us a little bit more what are going to be the main drivers for you to reach the same level of EBITDA as last year. I mean when we look year-on-year, the prices for second half of this year in the poultry division, do you expect them to recover, to increase a little bit, to stabilize? So the direct question is with the EBITDA declining in the first half that much, how do you expect such a growth in EBITDA in the second half of the year to reach the same level on the full year basis?
Thank you for your question. Yes. Yes, you’re completely right. Our expectations this year, we achieved very similar EBITDA that we generate last year despite a very -- despite of environment, despite of COVID pandemic and despite of situation with avian flu, especially in the first quarter. How we achieve this? Yes, I will explain because this the fall, we expect that in the second half of the year, we will sell more volume, yes, compared to the first half, especially for the export. Because in the first half of the year, we sold 170,000 tonnes for export. Now in the second half of year, we understand that our sales volume will be around more than 200,000 tonnes. Yes, because you remember that in the first quarter, we had banned for exports, not just to Europe, and we had banned to export and a lot of MENA and CS countries. It is the one reason. And the second reason for growth, for higher our results compared to the first half of the year is the more stabilized price in MENA region. For example, because today, current price in MENA is doing much better than in the first half of the year, is this driver for our growth.
Okay. And just a follow-up, if I may. In terms of poultry prices around the world, not just in Ukraine or in MENA, what are you seeing? Are you seeing more or less at the recovery in poultry price worldwide also in the second half or in U.S. dollars? Or do you think that the depreciation of some emerging currencies are putting prices on pressure -- pressure on prices, sorry. Can you help us understand your view?
Yes. You're completely right. We assume that current price of fillet in Europe and current price of quarters in the volt. Today, one of the lowest level during the maybe last 10 years. Yes, 10 years. And regarding, for example, situation in Europe, current situation with euro, yes, no currency ratio between euro and dollars do not help this situation. And if you calculate in dollars, the price look like better. But at the same time, we -- yes, we understand that world chicken price should increase, maybe not right now. But anyway, we expect that we will see this trend at minimum next year.
Our next question comes from Mr. Konstan Fastovets, Adamant Capital.
So yes, I wanted to maybe clarify with regard to the prices. Could you say what your outlook is for prices domestically and export prices separately for the second half? Yes, let's just start with that.
Yes. Your question about price in the second half of the year. Price, if you think about export price, we need to speak about different parts of the chicken and a different market. Okay. First of all, as I talked previously, current situation will produce price of small chicken. Yes, small chicken or whole chicken. In MENA region, looks like better by approximately 10% compared to the price, which we had in the first half of the year. Around 10%, 15%, some 20% depends on the country. For example, in Saudi Arabia, now price is much better compared to the beginning of the year. Regarding price of fillet, yes, current price very similar that we have in the, yes, current price and our expectation for the second -- and our expectation for the second half of the year, that price will be similar we have in H1 and the same situation this quarter. Yes. What we see, we see that only in the second half of the year, we will sell more volume for exports, we understand. And we significantly increased our sales volume to MENA region. And as especially right now, we see the good price in this region. Regarding Ukrainian price, yes. Yes, our expectation that the current price is slightly higher, just maybe a few percent compared to the second quarter. Maybe 3%, 4%. We understand that now this is the high season, maybe by the end of the year, price slightly decreased. But if you compare to the average price, H2 compared to H1, price of ticket will be higher just a few percent. If you compare H1 -- H2, higher compared to the H1 in Ukraine.
Okay. Got it. And if you said the same thing for exports, so just overall, H2 versus H1, would you -- where would you estimate it to be?
Overall, it's higher. Yes. Because -- yes.
Higher.
Because -- yes.
Okay. Okay. That's clear. And also, I had a question with regard to other unallocated expenses. Just, it's a technical thing, I guess, but they're really small in the second quarter. Is there a reason why they went down so much?
We will -- yes. Yes, maybe we received some compensation, insurance compensation, and we included this -- yes. We received some insurance compensation, yes. And that is why it was one-off. Yes. That is why it was one-off.
Okay. So it's one-off. Okay. Okay. And then also...
We can clarify that via direct e-mail, okay?
Okay. Yes, yes. That's fine. And then also could you give an estimate of where -- so you expect corn yields to go down relative to last year. Could you give an estimate of where you expect EBITDA per hectare for this year overall, given the recent updates on the weather?
Yes. It's very difficult question, but based on current situation, we expect that -- but it will -- yes, but you understand, it will depend on the price of corn because, yes, you see that during the last 2 weeks, the price of corn is decreasing day-to-day. Yes. But based on current situation and current expectation, yes, we see that we will have the total EBITDA that's very similar as the last year. It was around -- yes.
Okay. That's clear. That's clear. And then just finally, on dividends. So if indeed your EBITDA for the year is the same as last year, do you expect dividends to return to the previous year levels? Or do you think it's more likely that you will stay at the level that you paid for this year?
Now first of all, it will depend. So situation with our leverage, yes, is our net debt-to-EBITDA because you know that we will -- yes. It will be depend. No. It's -- to be honest, it's too early to say. We will see our situation as our position. But we understand this minimum $30 million, we will pay. But anyway, we will see.
We had 1 question from [ Eugena Onobulo ] from Bearings, which I believe has already been answered about current supply and demand dynamics of chicken in the market and outlook for prices. I will open your line just in case you have something that you would like to add that was not yet answered on the call.
No. I think it was already answered.
In this case, we'll just do one more call for questions. [Operator Instructions]
Michael, as I can see, we do not have further questions. Am I right?
Sorry, Anastasiya. We do have a couple more. If you don't mind, I will just take a couple more questions.
Sure. Thank you.
We just came through. So the first one was from [ Vida Vera ] from [ Goldman Sachs ].
So my question is what is the guidance of working capital going forward for the year?
Sorry. Question about CapEx, yes? Working capital, yes? Ukraine...
Working capital guidance.
Yes. Yes. Yes. This year, we expect that we will have investment in working capital, yes, because due to the current situation with grain, with sunflower seeds, yes, we understand that we should make some stock on sunflower seed by the end of the year. That is why we expect that our investment in working capital for this year will be around $100 -- $120 million.
So this is in addition to the one that we spent in the first half of the year? Or it is total for the year?
Sorry?
This $120 million, is it in addition to what we spent in first half? Or is it total for the whole year?
No. For whole year. No. For whole year. For whole full year. Yes. For whole year.
The next question comes from Mr. Dilawer Farazi from Royal London.
I think my question has been answered. I just wanted to just double check on the CapEx that you expect for the year, for the full year. And just to reconfirm, I heard right earlier on, you expect that net leverage will go down from the current 3.7 level back down 3x by the end of the year, is that right?
Yes. Our CapEx for full year around $100 million. And our expectation by the end of the year, our reach will be around 3. Yes, maybe slightly high even in rate. Yes.
We have a question coming online from Mr. Patrick Mouchel from PM. What are your plans to reduce leverage?
Now question about land -- yes, about leverage. As I said previously, due to our forecast for the rest part of the year, our leverage by the end of the year will be around 3, maybe 3.1. Yes, around these figures. 3, 3.1.
We have a follow-up question from Mr. Konstan Fastovets from Adamant Capital.
Yes. Just -- yes. I just wanted to ask one quick question on your European segment. I see the costs went down in the second quarter relative to the first quarter. Could you say why that happened? And also, what level of costs should we expect going forward? Do you expect them to be stable, go up or down from H1?
Konstantin, just give me a second -- just give me a second. We need to dial Viktoria in again. She disappeared from the line. Just a second.
Sorry.
Yes. We can hear you. Please go ahead.
Yes. Yes. It's okay. Yes. I'm connected.
Okay. You can hear fine? Do I need to repeat it? Or...
Yes. Please repeat the question. Yes.
Okay. Yes. Yes. No problem. Yes. So my question was that from what I calculate, I see that your cost at Perutnina Ptuj went down in the second quarter relative to the first quarter, just a little bit. I think it's like 5%, within 5%. And I wanted to ask why that happened and also what your outlook is for the segment. Do you expect cost per kilo to go up or down in the second half of the year relative to the first half?
Yes. But your question about cost only in Perutnina or cost of MHP Ukraine?
Perutnina. Perutnina.
Perutnina. Yes. No, in Perutnina, cost will be the same. Yes, it will be the same because, yes, we provided a lot of action with increased efficiency. But now we understand that cost will be the same that in the second quarter, yes.
And the final question we have online is just a clarification once again on the EBITDA margin. Do you buy for PP going forward, 2021, 2022?
Our target in Perutnina, we understand that is the target for EBITDA margin in Perutnina, 18%, 19%. Because -- yes, because we have the strategic plan to increase sales volume at the same time, yes, we understand that we -- at the same time, we will increase our sales volume, and we try to keep the same level that we have today, profitability.
I'm seeing no further questions. I'll pass the line back to you, Anastasiya to conclude the call. Thank you.
Thank you very much for the call, everyone. Of course, as you know, in case you have further questions, please let us know via e-mail or direct telephone. So we will be glad to answer all your questions. Thank you very much, and have a nice day. Bye-bye.
Bye. Bye. Thank you.