Mhp Se
LSE:MHPC
Earnings Call Analysis
Summary
Q3-2023
In the first nine months of 2023, MHP, an agricultural and poultry company, saw their poultry sales rise by 13%, with exports up by 21%, leading to a 22% revenue growth to over $2.2 billion. Despite logistical challenges, the export share of poultry sales grew to 58%. Adjusted EBITDA climbed 20% to $329 million, although the Q3 EBITDA dropped by 8% to $111 million due to lower poultry and grain segment profitability, influenced by depressed grain prices. The net debt-to-EBITDA ratio was 2.51x. While poultry and processed meat operations remained the key revenue drivers, contributing to 55% of total revenue and 79% of EBITDA, the grain segment's EBITDA turned negative, amidst continuous international price drops and increased logistical costs from the war, setting MHP's grain segment profitability near zero for the 2023 harvest.
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Good afternoon, ladies and gentlemen, and welcome to MHP's Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note that this call is being recorded. [Operator Instructions]. I will now hand over to Anastasiya to take in the presentation.
Thank you very much. Dear stakeholders, good afternoon, and good morning. Thank you for joining us today at MHP's conference call, which is dedicated to the third quarter and 9 months results.
I'm Anastasiya Sobotyuk, Director of Investor Relations, together with CFO of MHP, Viktoria Kapelyushnaya, who will discuss MHP's financial and operational as well as the current operational environment and expectations for 2023 and going forward, taking into account that the war in Ukraine continues. Today's call is based on the press release and financial statements released earlier today. However, during our call, we will discuss our projections and plans based on our assumptions, domestic and international trends, please take it into account.
I hope you follow our presentation, and we are on Slide #3. So a few words about market environment. First of all, an update about the war. The war in Ukraine with intensive fighting in the south and east of the country and regular but frequent rocket and drone attacks against civilian infrastructure across Ukraine continue. The bombing campaign aimed at undermining the country's economic capability shows no sign of abating, unfortunately. We expect missiles attacks on the energy infrastructure specifically to intensify in the nearer days and weeks as winter is approaching rapidly. Market economic situation. Taken into account as many businesses have been adjusting to a new operational environment, which remains unpredictably volatile together with a significant level of support provided by international partners.
We, Ukrainians are grateful for and in Q3 2023 GDP growth was at around 8%, following a rise of more than 19% in the second quarter. Forecasted GDP growth in 2023 is expected to be around 5%. CPI slowed down to approximately 1.5% and expect it to be around 6% annually. Regarding foreign exchange, NB implemented foreign exchange flexibility just recently, which resulted in insignificant appreciation of the local currency.
With regard to harvest in 2023, Ukraine has got another strong result, one of the record harvest given the weather conditions were favorable and therefore, yields are expected to be strong. Harvest is expected to be over 75 million tonnes, of which 50 million tonnes potentially can be exported with significant logistic challenges. At the same time, please take into account that international grain prices continue to decrease, while logistic cost for exports continue to grow. Moreover Polish strikes at the border do not facilitate exports in general. Let me now proceed with the company's results for the third quarter of the year. We go to Slide #5 of our presentation. Let me start with operational highlights for the 9 months of 2023. First of all, it should be noted that operational and financial results in 9 months 2023 -- 2022 sorry, were severely impacted by the onset of the war, making year-on-year comparison difficult. Poultry sales increased by 13% in 9 months 2023, driven mainly by exports, which increased around 21% year-on-year despite different logistic challenges either driven by the war or by the restrictions set by neighbour countries. Total share of exports out of total poultry sales volume increased to 58% from 54%. Financial results for the 9 months of 2023 were following. Group's revenue increased by 22% and reached over USD 2.2 billion, with export revenue representing 60% of total revenue. Adjusted EBITDA increased by 20% to USD 329 million, mainly driven by higher export volumes of poultry meat and vegetable oils as well as longer war related expenses. And net debt-to-EBITDA ratio constituted 2.51x. Let's go on Slide #6 with key financials for the third quarter of 2023. Groups revenue, as you can see, remained relatively stable and reached USD 739 million. At the same time, the result of the Poultry and Grain segments in Q3 2023 are lower compared to Q2 2023, mainly caused by decrease in price for poultry meat and grain on international markets and this negative trend continues in Q4 2023. Adjusted EBITDA decreased by 8% year-on-year to $111 million with EBITDA margin of 15%, down as a result of significant lower profitability in grain segment as a result of depressed grain prices. We now move on Slide #7 of the presentation, where we can see the financial results by segment. Before presenting the results, let me draw your attention to the change of the presentation of segment information, in order to accurately reflect the diverse nature of the group's business operations and improve the granularity of reporting. From this report, MHP has implemented changes with the presentation on business segmentation information. These changes include introduction of new vegetable oil operation segment, which represents production and sales of vegetable oil and related products. Consolidation of all meat production operations under the poultry and processed meat and related operations segment. Combined grain operations and [ milk ] cattle farming in the agriculture operational segment. And of course, comparative results for the 9-month period ended 30 September 2022 have been restated. As you can see now from the slide, poultry and processed meat operations remain our key segment. The group generated the majority of total revenue, about 55% and 79% of the company's EBITDA. Vegetable oil operations generated 21% of revenue and contributed around 22% of EBITDA. The European operating segment generated approximately 18% of total revenue, and 20% of the company's EBITDA.
Grain segment this year generated 6% of total revenue and has negative contribution to the company's EBITDA. And Viktoria will provide you with more color on the drivers.
Let us have a close look at each business segment now. Here. I pass my word to Viktoria.
Thank you Anastasiya. Good afternoon, everyone. Let's have a precise look at poultry and processed meat and related operations segment performance. Slide #8, as Anastasiya mentioned, this segment includes poultry meat and processed meat product, ready to cook and ready to eat. Despite a number of difficulties due the war in Ukraine in which we delivered a quite good result in Q3, since the combination of market environment and enormous amount of work undertaken by MHP team. Poultry export price in Q3 decreased by 2% quarter-to-quarter, mainly in EU and U.K. market. Based on assumption that international poultry price correlate with the price trend in grains, we don't see poultry price opportunity for increase. Poultry meat price in Ukraine increased by 4% in Q3 compared to the Q2, driven mainly by increase in sales, volume of high-margin products, namely fillet. MHP is commonly exposed to commodity price risk. To mitigate this risk, we continue to focus more and more on non-commodity products, ready to eat and ready to cook, and following MHP culinary transformation strategy. However, penetration and increasing our share of this market requires a lot of efforts and expenses as today and in the near future.
In Q3, we continued to increase sales volume of processed meat. We focused on the most marginal product. Our strong results for 9 months we made possible by the fact that our team was able to exceed their forecast expectation for average mid price across all markets in comparison to the price in 9 months 2022. Let's move to the Slide #9, Vegetable Oil Operations segment. Sales of vegetable oil increased significantly, mainly driven by increase in production of sunflower cake due to the both additional crushing capacity and change in the recipe as well as partial restoration of logistic routes compared to the 2022.
In 9 months, we had additional positive effect on vegetable oil operation result due to the favorable ratio of price, both for sunflower seeds and oil. Currently, we see a negative trend in sunflower prices, which may lead to a decrease of oil crushing margin.
Let's move to the Slide #10, agricultural operations segment. Increase free international grain price continued to decrease. It is important to highlight that due to continuous rocket strikes on Ukrainian port infrastructure and termination of the Grain deal by Russia, export price for grain from Ukraine is significantly low compared to the international price. Obviously, these circumstances negatively affect the profitability of MHP Grain result as well as all agri producer in Ukraine.
As of today, MHP harvesting campaign is complete, on around 300 -- more than 300,000 hectares of land. Corn harvesting is more than 82% complete. Sunflower, soya, wheat and rapeseed are 100% completed. Yield growth -- growth are significantly better than last year. It is one of the record harvest of Q3 MHP.
Despite of [ recourse ] yield, EBITDA of agriculture operations segment net of IFRS 16 in H1 was negative and resulted minus $32 million compared to the positive result, $55 million last year. This result was mainly driven by significant decrease in international grain prices, which continued to decline in Q3 as well as increased logistics costs due to the War impact, that is why we expect that our profitability in grain segment in 2023 harvest to be close to zero. Let's proceed to the Slide #11. Several words about our European operations segment. EBITDA with European operations segment in 9 months increased to $67 million, mainly due to increase in sales volume and also price for poultry meat and poultry products. This was driven by an increase in HoReCa sales channel as well as due to increase in sales of meat sausages.
Slide 12, a few words about our cash flow and liquidity position. Cash flow from operation before changes in working capital amounted to $315 million compared to the $379 million last year. This amount includes payment on February '23, part of different interest payment agreed with creditors in March 2022. A release of working capital amount to $80 million in 9 months this year, mostly due to first return of stock or chicken meat and vegetable oil to normal levels from unusual high amount in 2022, caused by disrupted logistics due to the war continuous. That it was partially recovered afterwards due to the grain deal and diversification of delivery via road by the Group. Secondly, low investment in raw material during the 9 months 2023, energy supplies, fertilizer, plant protection materials, animal feed components comparing to the same period of last year due to relative stabilization of situation in the Ukrainian economy and lower risk of disruption in supply. Stable amount of trade account receivable compared to significant growth in sunflower and chicken meat receivables during the 9 months of the last year.
However, it should be noted that investment in working capital will substantially increase in Q4, resulting in substantial cash outflow due to the huge requirement purchase of sunflower seeds, fertilizer and plant protection materials.
Total CapEx in 9 months amounted approximately to $160 million and mainly related to purchase of diesel generators at the beginning of this year to mitigate the impact of possible power outages, high investment in cost optimization and culinary strategy project maintains a new product development and improving an expansion of Perutnina Putj production facilities. Regarding debt, by the end of the period, the company total debt was nearly $1.5 billion and net about $1.1 billion. Last week, the group completed tender offer and purchased tender notes for amount $151 million for $128 million using disbursement first tranche from IFI Facility and on cash.
The liquidity position at the end of Q3 was $446 million in cash, only 50% of which was hold by group subsidiary outside in Ukraine. It's important to note that according to rule instituted by National Bank of Ukraine, the foreign currency proceeds of export from Ukraine must be repatriated to Ukraine, which in principle limit our ability to utilize the offshore cash for debt repayment. In November 2023, The National Bank of Ukraine decreased the maximum settlement period from 6 to 3 months for repatriating cash from the export of agricultural product.
And as a reminder, there is still a restriction on capital movement from Ukraine. Therefore, debt servicing and principle repayment are prohibited. Given current operation environment and significant uncertainly, we estimate our minimum sales cash balance at $200 million.
And now I give the floor to Anastasiya for update and outlook.
Thank you, Viktoria. Definitely, we continue facing all challenges, instabilities and disruptions associated with the war. Although the situation in Ukraine remains fluid and highly uncertain while the war is ongoing, the group's Ukrainian operations continue, so poultry, vegetable oil and grain operations continue to operate at 100% or close to 100% capacity utilization and, of course, the culinary transformation year on its way.
When it comes to outlook for 2024, we expect further downward correction in global poultry prices in the coming months. High logistic costs are expected to continue into 2024, especially for exports. Grain prices in Ukraine and internationally are expected to remain depressed. Risks remain on the downside as international poultry or protein prices correlate further with the downward trends in the grain market.
I think I should stop here and conclude the presentation, and we are ready for discussion. We are ready for your questions. To ensure that all participants on today's call have equal opportunities, please follow the rule that 1 participant can ask [ 3 ] questions. Thank you for cooperation in advance.
[Operator Instructions] Our first question comes from Stella Cridge from Barclays.
There is one, and many thanks for the updates on the call. I wanted to ask about the new bank financing that you obtained. I noticed in the press release today, the amount available had gone up from when you made the tender announcement. I was just wondering if you could talk about why that amount was increased to whether you expect this to be fully available through to the maturity date to pickup the bonds that would be great.
Yes. Thank you for your question, yes. If [indiscernible] loans is available for further drawdown, but what is very important to know, subject to fulfillment of some conditions, especially no diverse material changes, no event will be fold, a breach of covenants and with conditions.
And what was the reason the size was increased?
Size, yes, because we took approximately $300 million -- up to a total amount around up to $400 million including loan for CapEx.
Could you just say perhaps -- sorry, if I'm not following fully, just explain the breakdown as the total amount available and which part would be...
The amount available -- to today's total amount of IFI financing available for refinancing bond. We have a total amount of [ $170 ] million. And plus, yes, we have the loan from IFI $80 million of CapEx.
Our next question comes from Konstantin Fastovets from Adamant Capital who asks, would you consider opening a tender offer to bondholders of 2026 and 2029 eurobonds?
So the question was, would you consider opening the tender offer to bondholders of 2026 and 2029 eurobonds?
Yes. Thank you for repeating the question because that question as we did not catch. No, it's very difficult to say because everybody understands with very difficult conditions and to really now, and the first task for us to solve a problem we've cut our eurobond 2024.
[Operator Instructions] So our next question comes from Dmitry Ivanov from Jefferies.
Viktoria, many thanks for the presentation and update. I think like in Q3, you repaid certain like bank facilities for approximately USD 100 million. Could you please provide more color on this repayment because you mentioned in the presentation that any principle repayments are prohibited according to the National Bank of Ukraine, but how did you manage to repay these bank facilities for this amount during Q3, whether or like [indiscernible] local facility settled and why did you decide to repay these facilities? That's my first question.
The second question will be on this availability of this $270 million. So could you specify the availability period for this facility? Will it be available, let's say, next year, so any color on the availability would be helpful.
Thank you for your question. Especially thank you for the first question. Yes, exactly we repaid $100 million. Yes, it is [ PXA ] financing from EBRD. As you understand that EBRD and [indiscernible] have the special status and is possible to repay this loan. And we must repay because we decreased our stock of sunflower seeds and that is why we repaid this loan. Regarding the second question about availability period until the maturity -- until the 10th of May next year.
And the [indiscernible] facilities, what is the -- do you have any availability under the [indiscernible] facilities because I imagine you should invest in working capital, do you have access to this [indiscernible] facility? And if so, what's the limit -- what is the committed limits under this [indiscernible] facility for now.
Yes. You know that EBRD took part in -- together with other IFIs facilities of refinancing [indiscernible]. And now we're in negotiation with the EBRD about prolongate, right now, yes, we have some issues about this.
And how do you plan to manage it to use like your cash balance to fund this working capital?
No. It is completely understandable, we would like to attract these facilities. But yes, we have some process about this. Yes, because for us, it would be the most important thing to get facility for refinancing eurobonds because we want to solve this problem.
So we have a follow-up question from Stella at Barclays.
I just wanted to ask about the NBU restrictions. I mean does this mean that you have to repatriate all of this hard currency cash balance that you have? Or is a part of it that you're able to retain offshore? And how do you plan to service the external debt from an interest point of view in the coming year if these restrictions are still in place, that would be great.
Yes, your question about is this amount in offshore today, yes, outside and Ukraine. Yes, if this is your question, what is the amount of today. Right now, yes, we have outside right now is approximate because you understand it. When we talk about the outside, we talk about the MHP and Perutnina. And Perutnina is the obvious situation. Yes, in MHP, today, we had approximate to date -- yes, approximately $130 million outside.
And I talk about NBU restriction and anyway, we need to repatriate this money to Ukraine and now during the 3 months. And yes, we understand for us, it is -- we understand that we have some problem how we continue to repay in especially repay the coupon [indiscernible] And bond, to be honest, we're very happy that we have this DFI facility for refinancing because -- yes, because it is a real big issue for us.
Sure. Sure. That all makes sense. But just in terms of actually making the interest payments, I mean, could you use this DFI facility? Or what other sources of cash may be you would be able to use for that?
No, no, no no. Yes, we have the special proposes here with a limitation. Yes, we must use this facility only for refinancing in principle. Yes, we cannot use for something else.
Sure, sure. Okay. That's understood. So to cover the interest, what would be the main plan?
Yes, we try -- until today, we try to use our cash, which we keep in offshore. And to be honest, we ask National Bank to provide some liberalization because we understand it is just not MHP and other big Ukrainian companies have completely the same situation with banks, with eurobonds, but unfortunately, we have what we have.
Okay. That's understood. And maybe if I could just ask to clarify. So you said the EBRD has special treatment, so you're able to make interest payments to them. Is that also the case for DFC and IFC who run the new facilities?
Yes, you are completely right, the same stuff. Yes, fortunately, IFI, EBRD, IFC, DFC so they have completely the same status and it's possible to pay on the other end principle and interest.
[Operator Instructions]. So we have a question from Natalia Shpygotska from Dragon Capital.
May I please also check company's cash balance as of now.
Yes. Thank you for the question. Right now, approximately [ $350 million ].
We have a question from Vidhi Vira from Goldman Sachs.
A question about working capital. You mentioned that there is some outflow expected in 4Q. So if you could give some color? And second question about grain prices in Ukraine. Can you give us some sense on how much they are below international prices?
Thank you for the question. Regarding the first question, as I told during the presentation, yes, in the fourth quarter, we have investment in working capital, mostly related because as usual, we -- in the fourth quarter, we buy stock of sunflower seeds, we buy fertilizer and we expect that our investment is around $100 million. And always we have some uncertain play regarding the reimbursement VAT. During our expectation, that not just expectation regarding our forecast and calculation, we expect that we receive around $40 million, but it is always a big issue. Yes, that is why our investment in working capital is approximately $100 million and it comes from -- regarding reimbursement, may be, [ $130 million ] but we will see what situation we see with the reimbursement.
Regarding the second question, what is the difference between international prices and Ukrainian price, what I can say is that, I know that, for example, it's very important if tomorrow, war will stop, yes, Ukraine price will increase approximately if you speak about the grain -- approximately in Ukraine by $40, $50.
We understand that current situation and situation with war decreased price for Ukrainian agri producer is minimum by 50 -- it depends on crops by $50, $40.
Thank you. We have a follow up question from Dmitry, Jefferies.
Just a quick follow up question on the facility that you signed with DFIs. You mentioned $80 million available utilization. Is my understanding correct, is that purely for CapEx spend. So for example, you can't use it to fund working capital. So basically, you expected to fund your capital expenditure needs by potentially next year? Or like if you can share any color would be great?
Yes, you're completely right. We can use only for CapEx and for some particular project. Yes, you're completely right. [indiscernible] for working needs, not just for maintenance CapEx and you understand how for MHP is very important, yes, to provide maintenance CapEx , but no, we can use just for special crop -- for special projects.
And just to double check only $270 million is available for like bond refinancing. And just I want to double check. Is it something that could be increased? Or is there like opportunity for this amount to go up? Just want to understand, you have always like kind of very small way you think like you could increase this amount for the additional bond buybacks because amount outstanding is higher, right? So you still have $350 million of bonds outstanding versus $270 million. Just wanted to understand how you plan to narrow these gaps.
Yes, yes. Sorry, I did not catch you. Yes, $270 million, yes, it is a real available amount from DFI financing -- for refinancing only -- for refinancing eurobonds.
Do you plan to increase this amount because you still have $350 million bonds outstanding, right? Is there any discussions?
Yes, it would be great -- it would be great if I can increase this amount. But unfortunately, it's very difficult. Yes, it's very difficult. Even today, I cannot imagine where you can attract additional long-term financing.
Okay. Understood. Thanks for the color.
We also have a follow-up question from Vidhi Vira at Goldman Sachs.
I just wanted some color on pricing that you are seeing in international and domestic, we saw some increase in Ukrainian market. Do you expect that to remain stable? And in international markets, do you expect further weakening from 3Q levels? Or do you think that it has stabilized now?
Regarding domestic price. Yes, you understand the level of inflation this year in Ukraine approximately by 9%, 10%. And the next year, according to National Bank inflation -- level of inflation will be -- forecast approximately the same. At the same time, we don't expect to increase price in domestic market, maybe just slightly increased because changes mix because we have the strategy to go to the more culinarian company, culinarian product, but it's not very significant. Regarding international price, what we see right now is that price in Europe and U.K., which is a price right now slightly decreased. And we understand that in general, when price of grain decreased, price of meat is -- the cycle, the price of meat will decrease, yes, but with lack in time. This is why if you ask me about trend with price for next year, we don't expect that price international or Ukrainian price will increase in [indiscernible] respect. And we see the risk, is very strong. The international price will decrease because now it is a price -- international grain price now is very low level.
We have a question from [ Erica Ive ] at MetLife.
And I would like to go back to a moment to the IFI facilities. You mentioned you have an outstanding balance to draw down of $217 million for debt repayment. And in addition to that, $80 million for CapEx and that brings me to $350 million. But if I look at the press release, you are saying that you have a total facility of $480 million and you are going to use $107 million so if I look at the math, you should have available $373 million, not $350 million. Am I missing something?
Okay. Yes, you're completely right. But we use 130 -- approximately $130 million for repayment bond which we buy during the tender. Yes, because you understand that we [indiscernible]. A few days ago with settlement our tender for $151 million, and we use this money -- IFI money.
Yes. But basically, part of the tender was funded by you and then you draw down the facility only for $107 million, at least is what I read in the press release.
Yes, I will explain because, yes, it's a very precise conclusion. IFIs don't provide money for discount for -- how to say, for initial amount of bonds. We buy our bonds, total amount of $151 million, but we paid for this bond $128 million and different of this $23 million, IFI will not provide to us. Okay, you understand my point, right?
Okay. And then of the repatriation rule that you're saying that it moved to 90 days from 180 days for some specific agricultural products. What is it included? I mean, I guess, poultry is excluded. And what is included in this specific agricultural products? And how much revenues in total, basically that entails.
Yes, today includes just grain and sunflower. Yes, it is approximately 40% of total ROI export, [ 40% and 45% ] maybe [indiscernible] total export. And I'm not sure, and I told the ones -- I have a lot of consumers that maybe tomorrow this, yes, may be pulled and as the product will include -- you understand my point?
Okay. I see. And then just a last quick question is that -- are you considering another tender offer for the 2024 bonds.
It's a very good question. It's a very good question. We will think about, yes.
So I'm not seeing any more voice questions. And Anastasiya will follow up separately to follow up on any remaining text questions. So perhaps at this point, I can hand back to Anastasiya and Viktoria for closing remarks.
Thank you very much, Keith. Thank you very much, everybody, for participating in our call dedicated to the third quarter results. Thank you for all your questions. And of course, if you have follow-up questions, please feel free to contact us, and we'll be glad to answer them. In case you need a call with us, please send us a message. We will be glad to make a call. So have a lovely day, and bye.
Thank you. Bye.
That concludes the call for today. Thank you, and have a nice day.