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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 Q3 and 9 Months 2019 Conference Call and Webcast. I now hand over to Anastasiya Sobotyuk, Director of Investor Relations. Madam, please go ahead.
Thank you. Good afternoon and good morning. Thank you for joining us today for MHP's conference call. On today's call, we will present and then together with you discuss MHP's financial results for the third quarter and 9 months of 2019. First of all, I would like to draw your attention that since the second quarter of 2019 and going forward, the company's results include operational and financial results of Perutnina Ptuj, and we call it PP. PP results are reported separately in the European operations.As usual, I have to tell you 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 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 your questions. And I hope now that everybody is ready, and we can start our call. Let's go to Slide #4. As usual, we start from macro environment, which was strengthening, by the way, during the third quarter of the year. Ukraine's real GDP slowed to 4.2% year-on-year in Q3 2019 from 4.6% in Q2 2019; however, much stronger-than-expected Q3 2019 GDP trail suggested full year growth will be closer to 3.5% year-on-year. Very good results. In Q3 2019, currency ratio revalued by around 9% year-on-year, so it becomes stronger and stronger. Annual inflation accelerated to around 8.5% year-on-year, driven mainly by devaluation of the currency. Some words about the land reform in Ukraine. The parliament approved the bill earlier last week. In particular, it bans companies with foreign founders from buying farmland until 2024, while making an exemption for existing foreign-owned land operators, which, President Zelensky said on the eve of the vote, would be decided with special national referendum with the relevant provision to be added to the bill before second reading. So finally, we proceed with land reform, which is absolutely positive. In addition, the IMF mission visited Ukraine on November 14 to continue discussions on new support program, which is also a very good sign. Coming back to the company's results, we go Slide #6. Key financials for the reporting period. Our financial results during 9 months of 2019 reflect an increase in production volumes, both due to the expansion of the Vinnytsia poultry complex and additional volumes from Perutnina Ptuj as well as Perutnina Ptuj's increased in efficiency since completion of the acquisition. However, the results are adversely affected by lower-than-expected exports due to some restrictions in EMEA region, world commodity prices and strengthening of the local currency. As you can see, the results are following: revenue of USD 1.505 billion, increased by 33% year-on-year; export revenue of USD 869 million, comprising 58% of total revenue with 32% of increase year-over-year; adjusted EBITDA margin declined correspondingly from 32% to 24% with adjusted EBITDA of USD 357 million, and it is mainly unchanged from prior year. And now I pass the word to Viktoria. She will comment our financial results during the period full greater details and of course by segment.
Thank you, Anastasiya. Good afternoon, everyone. Let's discuss our financial results for 9 months in more detail. Slide #7 shows our financial results by segment. Poultry operations remained our key segment as usual and during the 9 months generated the majority of total revenue, about 68% and 67% of company's EBITDA. Grain segment generate 12% of total revenue on third parties and about 27% of company's EBITDA. As you know, majority of grain produced we use internally to feed our chicken. Our certain smaller segments, meat processing and other agricultural operations generated about 7% of consolidated revenue and contribute 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 Europe operations segment generated approximately 13% of total revenue and 8% of company's EBITDA. Our export operations continue to develop impressively in 9 months this year and generate about 58% of total revenue, $870 million, 30 -- more than 30% higher compared to the last year, mostly due to the higher volume of export chicken meat, grains and vegetable oils. We will discuss the developments of all our segments more deeply on the next slide. Please go to the next Slide #8, poultry segment performance. During the 9 months, we increased our production volume by 18% due to the launch of additional 3 rearing sites, brigades, of Vinnytsia poultry complex phase 2. Currently, 6 new brigades for growing chicken are operating in Vinnytsia, and we are going to put into operation additional 1 brigade in Q1 2020 to continue our production growth. Revenue overall in poultry segment increased by 8% year-on-year, driven by chicken meat sales volume growth. Growth in revenue was mostly achieved thanks to our export growth strategy, which is focused on market and targeting. Since September 2018, certain key markets in MENA are temporary closed, showing the down our achieved export volume growth, 40% in H1 year-on-year, and export volumes are relatively flat in Q3 compared to the Q3 2018. Part of the volumes were successfully redirected to other markets, but those restrictions have some negative effect on our average export price. We continue to concentrate and route each product to its most favorable markets. In general, during the 9 months, our average sales price remained stable. Poultry export price decreased by 4%, and price in domestic market were up on average by 6% year-on-year in the U.S. term. Average poultry production cost in 9 months, in accordingly with our budget, increased by 10% year-on-year, reflecting higher cost of mix for the protein components as well as higher payroll cost experienced since the mid of 2018. Poultry production cost in Q3 remained almost at same level at its Q3 2018 and H1 2019. Due to the increase of revenue and production costs, gross profit of poultry segment remained relatively stable, while EBITDA increased by 2%. Adjusted EBITDA before the 41 standard effect per 1 kilo in 9 months is $0.44 per kilo, which is 19% lower compared to the average of 9 months last year. Decrease was mainly due to increase in production and delivery costs. Let's move -- go to the next Slide #9. External Grain segment revenue in 9 months amount $174 million twice higher year-on-year. This increase when compared to the last year level was mainly attributable to impressive high harvest in 2018 that leads to the high amount of growth from 2018 harvest sold in H1 this year. The group has adopted IFRS 16, starting from January 1, 2019 in order to achieve comparability with presentation used in 2018 EBITDA. EBITDA was additionally disclosed without effect IFRS 16. Adjusted EBITDA net of IFRS 16 for 9 months this year constitutes $71 million by 45% low compared to the last year mainly due to decline in grain price as well as slightly low yield of corn, but anyway, in 2018, our yield of corn was very impressive. And this year, 9.4 tonnes, but last year it was 10.9 tonnes. An additional negative effect was due to depreciation of Ukrainian hryvnias against dollars. FX cost of grains -- expenses in Grain segment were mostly from in H1 2019 with high exchange rate.Let's proceed to the Slide #10. Other agriculture segment historically generate the smallest part of financial results. The key business activity of segment are meat processing and convenient food production. The segment generate revenue of $107 million by 10% higher, mostly as a result of higher volume and price of meat processing product. EBITDA of the segment, $12 million by 14% lower compared to the last year mainly due to the lower result of milk operation, partly offset by higher meat processing results. Go to the Slide #11. European operation segment, representative by the Perutnina Ptuj operations, generate $193 million of revenue and $29 million of EBITDA that is 30% higher compared to the same period last year. We expect increase of total EBITDA of 2019 by 25% as minimum by -- increased by 25% compared to the last year. This is the best proof that our ability, ability of MHP to manage business successfully, not only in Ukraine hence in Europe. Why we achieve so good financial results, mostly because we could increase our sales volume by approximately 10%, and at the same time, we provided good optimization program in feeding, hatching and processing process.A few words about our cash flow and liquidity position, Slide #12. Despite the decline in EBITDA, net cash generated from operation activities significantly increases to $320 million this year compared to the $200 million last year. Increase was mainly due to positive cash flow in working capital during the 9 months, mostly related to decreased investment inventories sunflower and soya during the 2019 as well as increase in the amount of trade payable. Total CapEx for 9 months is amount $100 million, mainly related to launch of production site of phase 2 Vinnytsia poultry complex and maintenance CapEx. Our total CapEx for this year will -- we expect it on the level $110 million.Regarding our debt. At the end of period, the company's total debt was $1.58 billion and net debt about $1.29 billion. 93% of total debt is longer debt and it is -- 93% of which Eurobond. Due to adopting IFRS 16 starting from January 1, 2019, the group recognized right of the assets and lease liabilities in the consolidated statement of financial position. However, for purposes of Perutnina Ptuj calculation, debt and EBITDA was present net of IFRS 16 adjustment. Our average weighted interest rate currently is about 6.8%. In terms of liquidity at the end of September, we had around $280 million in cash, mostly in dollars. Net debt-to-EBITDA ratio was -- by the end of 9 months was 2.96. Almost all our debt is denominated in foreign currency, mostly in dollars. ForEx risk -- exchange risk, in our case, are naturally hedged by significant share of export sales, having 58% of revenue in dollar-denominated export. During the 9 months, we fully covered all our debt service expenses and other payments in foreign currency. Our currency balance remains strong positive. And now I give the floor to Anastasiya to give you our current business update and outlook.
Thank you, Viktoria. Let me conclude the presentation and provide the business outlook for the rest of the year and foreseeable future. First of all, let's touch upon land reform. I've mentioned it in the beginning of the presentation, and I have to say that after more than 25 years of discussions, the land reform looks like absolutely feasible, with first steps already undertaken by the government. The president proposed to have a national referendum to resolve some challenges and issues like who and what kind of company can buy the land. And MHP views this progress as positive as it will finally open up a free land market and create new opportunities for local agribusinesses of all sizes. The second point is global commodity market. MHP is currently operating in a challenging environment in terms of pricing trends. Moreover, certain key markets in MENA have temporarily restricted import of poultry products from international producers, including MHP, and we are hopeful that some of these issues will be resolved early in the new year. However, we significantly expanded our operations in other markets in the MENA region, increasing volumes through geographic diversification. This is a strategy we follow, and we foresee new opportunities in Asian markets going forward. Global crop pricing trends have been challenging during the last 5 years, we all know, which, even with strong yields, set a lower level for MHP's Grain Growing profitability and result for 2019. Opportunities, MHP has already started to explore new opportunities in Japan and is expecting for Chinese market to be opened in early 2020. MHP continues to develop PP, companies in the Balkans to increase both the capacities, mainly in Serbia and Croatia, and cost efficiency, preparation of this process and products brands. MHP is currently developing new pilot projects to transform its relationship with retail, starting from Ukraine by creating own commercial kitchens. Some words about Perutnina Ptuj. We are really pleased with first 7 months results of PP and efficiency improvements already achieved are ahead -- are absolutely ahead of initial expectations. MHP, with its vertically integrated business model, we know, we understand, it is based on company's efficient cost of production, strong balance sheet and strong cash generation, and it is well placed to manage these short-term challenges we have discussed. Now we will open a question session. [Operator Instructions] Alexandra?
[Operator Instructions] The first question is from [ Javier Panela ] of [ Corey ]
I have a couple of questions. The first one is regarding the MENA country that has halted imports from poultry. Can you give us a little bit more color what country is it? And did this country, basically, halted all imports from chicken or simply from Ukraine, from you, can you give us more color? And why do you expect this country to open again in the near term? And then regarding on the cash flow. I'm trying to understand how did you manage such a good working capital in the 9 months, basically in the context of increasing -- so basically, in the context of higher production of poultry than the sales you did in volumes -- you achieved in volumes. So how did you manage that working -- good working capital in the 9 months? And what should we expect for the fourth quarter?
First of all, thank you for the questions. Regarding the first question, regarding situation in MENA region. Yes, today, we see a very difficult situation in this region. Depends on the country. For example, Egypt implemented unofficial, yes, but anyway, ban for import of chicken meat from any country. Egypt would like to develop, yes, and mostly would like to concentrate to develop local production capacity. And the additional, we have some problem, not always, but these are temporary, not right now, but anyway, in the third quarter, we had some problems with our exports to Iraq. Right now, today, we have something for export, but not so significant. No, but anyway, we sent -- we are continuing to work with Iraq, and we have some problem with exports to Saudi Arabia. But anyway, we are working with Ukrainian authorities. And we expect that in the near future, we receive the permission for export...
Early in 2020.
Early -- and maybe end of the about -- in December this year. And we -- yes, because we had a lot of meetings with Ukrainian, [indiscernible] and we visit this country. It's not just -- this restriction not just related to Ukrainian company. And for example, we know that Saudi Arabia implemented ban for import meat processing products from Brazil. Anyway, we understand one and we are doing the -- all our history we always told about big risk for all companies which provide a lot of export. It is completely understandable. The main hedge of this risk to have diversification -- geographic diversification because nobody cannot guarantee -- can guarantee that sometimes in some countries implemented some ban. And this is my answer, which is very important for us, and we all list out during the all our history. The most important market for us is domestic and local market. Because just here, we sell branded products, value-added products and we see the big potential for growth in domestic market. Regarding your second question about cash flow, working capital 9 months. This year, as I told you in our presentation, at the beginning of the year, we've had a very high stock in sunflower seed and especially in corn because, you remember, in 2018, because there was excellent harvest of corn and we sold a lot of corn during the H1 this year. And additionally, we used -- we decreased our stock sunflower and soya during the 9 months is the main reason why we have a decrease in working capital and increase in trade payables.
And for the last quarter, can -- what should we expect?
Last quarter, we don't expect any investment, any increase in the working capital, in the first quarter too. Because we understand that now we leverage 2.9. And this is why we very -- we're working very precisely with our investment in working capital, and we try to optimize this process.
[Operator Instructions] The next question is from Konstantin Fastovets of Adamant Capital.
I have a couple of questions. So a few of them have to do with the Grain segment. I was wondering if you could tell us what price you use this year internally for the corn sales and what price you used last year? And also -- so if I look at EBITDA, excluding revaluation, I see that -- so for this year, your EBITDA is a bit larger than it was last year, despite the fact that prices are lower. So is it fair to conclude that your selling volumes are -- were higher in this quarter? And also, with this in mind, what do you expect for the fourth quarter? And what kind of the EBITDA per hectare do you expect to see for this year?
For my clear understanding, your question involves -- thank you for your question, sorry. Your question about the price of corn this year compared to the last year, yes?
Yes. Yes. It's internal, right? So your Grain segment sales to the...
Internally, yes. Last year, we recognized our corn with price $133. This year, $120. And regarding -- and this year, our financial results of Grain segment will be significantly lower than last year, as I told during the presentation, one of the reasons why. The second reason, currency ratio because you understand if you calculate this price even in hryvnia, this difference is significantly higher. And we understand that we bought fertilizer, seeds and [ PCP ] with currency ratio 27, 28, when we include in our cost of production, we include this current currency ratio, 24 and 5. And this is why, if you look at -- in our cost of production in dollars, it significantly higher than if you calculate just in euro -- in dollar, because our function currency is hryvnia that is why we calculate and divide in current currency ratio. This the second reason. In total, our EBITDA for this year will be around $200, $190.
This is including revaluation?
Yes, that's including revaluation. But anyway, we use and recalculate just revaluation regarding our corn, which we keep in storage. We don't use any of that -- you understand, yes?
Yes. Yes. Okay. And then -- and also I had a couple of quick questions on the poultry segment. So I calculate -- so from my calculations, what I see is that your costs in the third quarter, they're actually a bit lower than they were in the second quarter despite the fact -- and this is in dollars, right, and despite the fact that the hryvnia appreciated by about 5%. Can you explain why that happens? And also your outlook for the fourth quarter?
Yes. Your question about the third quarter slightly lower compared to the second quarter? Yes? That's your question?
Yes. That's for the cost -- your cost for Q1?
Yes. Cost of production. It's slightly lower by 4% because it is a -- yes, you're right, that's very significant account.
But given that -- given the hryvnia is -- was stronger, right, for -- over this period, wouldn't that inflate your hryvnia cost in dollars, shouldn't that have happened in the third quarter?
No. No. Konstantin, please repeat because maybe I did not catch your question. Your question what is happened...
Yes. Yes. So the question is that -- so you have hryvnia costs, right? Costs that are in hryvnia for your poultry production. And given that the hryvnia has appreciated by about 5% in the third quarter relative to the second quarter. I would expect to see an increase in your cost in dollars, and what I see is a decrease in your cost. So that's sort of the question.
But -- yes, I understand your question, but hryvnia as compared to dollar appreciate, but not so significant because that anyway it appreciate. But in hryvnia term, our cost slightly low too, which is why is a slightly -- is the main reason because in the first quarter, we had very good protein, cost of protein and low price of gas, you understand, compared to the second quarter just this year.
Okay. Okay. Okay. And then finally, one last question on the -- I know you had a response on this on your website with the Anti-Monopoly Committee, I saw that. Maybe just anything else you could add? Do you think this is a threat at all for MHP? Do you think this is something political? Anything you can comment on that would be helpful.
Konstantin, you are from Ukraine. And you understand, yes? First of all, we are a very transparent company, and we are ready to open all information. And to be honest, believe me we have very strong competition on domestic market with our competitors. We are the biggest producer, but anyway, we feel this competition in all our channels. On supermarkets, if you go with our franchisee in open market, in meat processing companies, everywhere. If you go to the -- and this is why because the big market share of industrial production. But at the same time, I assume that we -- I'm sure it's 100%, but we have very competitive environment. But anyway we understand that we improve this. We had some communications Anti-Monopoly Committee, we will see.
The next question is from Natalia Shpygotska of Dragon Capital.
I have two questions, please. First is on company's CapEx plans for the next year. And the second is on the commercial kitchens you have mentioned. Could you please elaborate a bit on that?
Natalia, thank you very much for your questions. Let me start from the second question, right? And as far as you remember, you may have remembered that during our Investor Day in London, we touched upon a transformation of our commercial partners. We were talking about the transformation of our corporation with the retail, right? So instead of providing them with product, right, which they afterwards, after deboned, cut, cut into different pieces, et cetera, we take this responsibility, and we create kind of commercial kitchens, right? And this way, we can optimize our business, business model, right? And we can to provide our customers with the product, which they -- let's say, we unveil their wishes and provide them with the product. They were even -- even they didn't think about really, but they like it.
Okay. So let me talk about competitors like -- could you provide more -- yes? Sure. Please proceed, sorry.
Regarding your first question about our CapEx for next year. We see our CapEx very modest for next year. Because, first of all, you understand right now we have very high leverage, 2.9. This is not comfortable level for us. And this is why we try to optimize our CapEx. Our CapEx will include our maintenance program, additionally, our investment in the Perutnina Ptuj because we see as a big potential for growth. And we will concentrate mostly through adding the program and program, which Anastasiya talked about...
Commercial.
Commercial kitchen. It is a new program for domestic market, which, I suppose, in the near future, we will see -- everybody will see the revolution -- revolutionary product in domestic market. And we will continue to invest some -- we will have some projects, which improves our efficiency in our production area with payback periods 2 years. And this is why we mostly concentrate only on CapEx, which will bring to us effect as soon as possible. And amount, it will be clearing. [ Placement ] amount will be around $80 million, total amount.
Including maintenance?
Yes, including maintenance. Yes, you're right.
The next question is a follow-up from Konstantin...
Wait, please, excuse me, excuse me. Sorry, I would like to clarify, sorry, it is the $80 million without maintenance. Total around $110 million, sorry, $110 million.
So now the next is the follow-up from Konstantin.
Could you talk a bit about prices? So pricing for poultry for the fourth quarter locally and internationally? And also for the next year, where do you see -- what kind of growth do you see for next year?
It's a very interesting question. Regarding the premium price, we think that our price will remain at the same level. But you for next year, we expect that rate of inflation will be less than 5% that is why we try to be conservative. And so we put in budget the same level, but anyway, we will see it. Maybe just we can increase, not just price, maybe because we will produce more value-added products, and it will be some drivers of growth, our price in domestic market. Regarding export market, and especially in fourth quarter, unfortunately, price in fourth quarter is lower than in third quarter, especially in Europe. It's the two reasons why this happens. First of all, because a lower season; always in wintertime price lower than in summertime, one reason. And the second reason because we view a lot of new -- not a lot of, but anyway, Europe now imports more from Brazil, and production -- Polish production is increasing. And at the same time, price on MENA region -- especially in MENA region result, pressure is low. But at the same time, and today, we understand the price in -- even in Saudi Arabia is lower than in H1, which is why I think that our price for fourth quarter -- export price will be lower compared to the 9 months approximately by 7%, 8%. And regarding the next year, we understand that price we think that will remain the same level, and this -- but at the same time, we understand and we see some opportunity for growth our price. I will tell what is it. First of all, we will start to export to Singapore, to Japan, but it's not so significant, but anyway. And additionally, we expect that Ukrainian -- we already received permission for export to China. China is very, very attractive market. It's just with -- it's just Ukraine who received permission to export. We can redirect our product special quota duck meat from Africa to China with significantly high returns. It is some opportunity for growth. And at the same time, we understand that price of filet in summertime will be higher than in wintertime.
Got it. And maybe you could also a few words on next year's costs. Do you -- because -- I mean, do you think salaries are going to be -- there's going to be a bump to salaries to anything that might affect cost growth for next year significantly?
No. We don't expect any increase in the cost in hryvnia term. We don't expect any increase. But regarding in dollars term, it will be the best of currency ratio, we understand. In the hryvnia term, we expect that our cost of production will remain at the same level than today than in 2019.
The next question is again a follow-up from Javier.
In addition, on this price environment, you mentioned back in September,that basically, the African swine fever in China and in other eastern markets were one of our good drivers for the price increases from October going forward. And I guess that this seasonality, summer/winter and imports from Brazil and higher increases in Poland were something that you already knew by September. So I was just wondering what has changed that you don't see prices going up now that you saw 2 months ago?
Yes. We -- yes, now I talked about just current situation, which happened in October in this year in the third quarter. Everybody -- if you look at analysis from Rabobank and other analysts, everybody except that it was cheap in price.
Alexandra, can you hear us?
Hello.
Yes, I muted his line so it came from Javier's line.
Okay. Can we proceed? Javier, can you hear us?[Technical Difficulty]Alexandra, I think we can put this question offline so we can proceed with questions. Thank you.
Okay. At the moment, there are no further questions.
All right. As we understand, we run out of the questions. Just in case you missed the opportunity to ask your question, please dial our telephone numbers or send us e-mails with your questions or list of questions, we are here to help you. And of course, we will provide you with detailed answers, no problem at all. For today, thank you very much for participation. It was great to hear you, and have a lovely day. Goodbye.
Ladies and gentlemen, this concludes today's webcast. Thank you for your participation. You may now disconnect.