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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 Fourth Quarter and Full Year 2017 Financial Results Conference Call and Webcast. I will now hand you over to your host, Ms. Anastasiya Sobotyuk, IR director. Please, you may begin.
Good morning, and good afternoon. Thank you for joining us today for MHP's conference call dedicated to MHP financial results for the fourth quarter and 12 months of 2017. I need to tell you in advance that some of the things, which we discuss today are forward-looking statements. Please take it into consideration. I encourage you to use today's press release with our financial statements for the detailed information. Just to remind you that my name is Anastasiya Sobotyuk, and I am a Director of Investor Relations. I will lead you through the presentation. Today as MHP's CFO, Victoriya Kapelushna is on business trip with problematic connection. But we expect that Victoria will join us later for question-and-answer session, which we usually have at the end of the presentation. During the session, we will be glad to answer all of your questions. I hope that everybody is ready. So we can start our call now.Page #5 -- sorry, #4 of your presentation. We will start from market fundamentals. Market conditions in Ukraine noticeably improved with the real GDP growth accelerated to 2.1% year-on-year. The National Bank of Ukraine keeps its forecast of economic growth in Ukraine for 2018 at around 3% and 10% to 12% inflation year-on-year. In 2017, inflation accelerated to around 14% year-on-year, driven mainly by utilities prices increase. During 2012 -- during 2017, currency rate remained relatively stable with around 4% elevation year-on-year, somewhat about changes in the Ukrainian legislation. Since 1st January of 2018, VAT subsidies for poultry companies in Ukraine are annulled. In the financial model, MHP does not consider any VAT support for its operations in the forthcoming years, starting from 2018. Several words about consumption of meat in Ukraine and harvest. In 2017, harvest in Ukraine constituted around 62 million tonnes of grains, of which over 50% is expected to be exported. MHP's results in grain growing operations in 2017 were below our expectations, adversely affected by bad-weather conditions during July and August and resulted in around 2 million tonnes of crops with yield significantly higher than Ukraine's average. Driven by law and stable income per capita in Ukraine, in 2017, consumption of different kinds of meat per capita increased by approximately 1 kg, it's rather stable with a significant preference to poultry meat, first of all, the cost of affordability. We expect this trend will continue in the medium-term future.Coming back to the financial results of the company. Let's go on Slide #6. Key financials. In 2017, MHP demonstrated strong financial performance, despite stable production of chicken meat, lower-than-expected harvest of crops, but driven by poultry exports and poultry price increase, mainly for exports, MHP generated revenue of around USD 1.3 billion, 13% higher year-on-year, and export revenue constituted around 57% of total revenue. EBITDA of USD 459 million, increased by 11% year-on-year with EBITDA margin of 36%, relatively stable year-on-year. Net income after FX constituted around USD 230 million compared to USD 69 million 2016, including USD 36 million and USD 145 million respectively of noncash foreign exchange translation losses.Let's go on Slide #7. It shows our financial results by segment. In 2017, our key segment poultry operations contributed around 82% to total revenue and around 80% to the company's EBITDA. Grain segment contribution to EBITDA was 21%, including revaluation assets of grains and only 9% to total revenue as majority of grain, which was produced in 2017 was used internally for food production. Our third and the smallest segment, other agricultural operations contributed around 9% to the consolidated revenue and 4% to consolidated EBITDA, main components of this segment are meat processing and convenient food production. Our export operations constituted to -- actually significant amount, 57% of total revenue and developed impressively. So constituted at the end of the year, $732 million, 15% higher year-on-year, driven by higher volumes and prices of exports of chicken meat.Let's have a closer look at each business segment on our next 3 slides. Let's start from poultry segment performance. Slide #8. During 2017, chicken meat production and sales volumes remained relatively stable, namely an increase in export sales volumes, which correspondingly offset by a decline in domestic market sales. Export sales of chicken meat in 2017 increased by 16% year-on-year, mostly due to higher volumes exported to the Middle East and Northern Africa and to the European Union countries.Export sales accounted for approximately 41% of chicken more than sales compared to 39% in 2016. Average chicken meat price in 2017 increased by 24% in [ greener ] terms, mainly driven by MHP's export product mix optimization as well as geographic diversification, and slightly upward trends in price on international commodity markets as well as income per capita increase of the domestic market. So there were several drivers.Average per unit poultry production cost in 2017 expectedly increased by around 20%, reflecting higher prices of food components, including grains and protein as well as higher overall payroll cost. Financial results are following. Revenue in 2017 increased by 10% year-on-year, EBITDA increased by 37% year-on-year, mainly attributable to an increase of chicken meat prices and high government grants income due to amendments in the tax code of Ukraine, partially offset by increased production costs.EBITDA per 1 kg of chicken meat before effect of IAS 41 in 2017 was about 0.40 -- sorry, $0.64, 31% higher year-on-year. EBITDA margin in poultry segment reached 35% in 2017 compared to 28% in 2016.Let's move on Slide #9. Grain growing segment performance. External grain segment revenue in 2017 amounted to USD 117 million. The increase year-on-year was mainly attributable to the strong harvest in 2016, as significant part of which was sold in early 2017. EBITDA includes effect of revaluation grains in the field, constituted USD 95 million, by 37% lower compared to the last year, affected by unfavorable weather conditions, which led to lower yields across all crops, but especially in corn and increased cost reflecting higher prices of seeds for growing as well as higher-land lease, energy and payroll expenses. In line with the yield decline, EBITDA per 1 hectare in 2017, decreased by -- sorry, decreased to USD 267 million.Let's move on Slide #10. Other agricultural segment performance. Historically, this business segment generated the smallest part of our financial results. Key drivers of the segment during the reported period were an increase of processed meat products price by 16% and growth of sales volume by 6% year-on-year. The segment revenue was USD 120 million, by 24% high year-on-year, and EBITDA was USD 19 million, by 19% higher year-on-year, mainly due to higher results in meat processing business operations. EBITDA margin was stable and resulted at 16%.Let's have a look at our VAT and liquidity position. Slide #11. A few words about cash flows and liquidity position here. Net cash generated operating activities before working capital investment was USD 333 million in 2017, 22% higher year-on-year, which is in line with EBITDA trends if we exclude effect of noncash IAS 41. The decrease in cash from changes in working capital, in 2017 year-on-year, is mostly related to lower investment in the stock of sunflower seeds at the end of 2016 compared to the end of 2017, reimbursement of VAT receivables in 2016 for periods previous to 2016, and a decrease in prepayments of sunflower oil and rapeseed. Total CapEx in 2017 amounted to USD 123 million, mainly related to construction of new broader rearing sites of phase 2 of the Vinnytsia poultry expansion project as well as purchases of agriculture machinery and expansion of rearing sites at the Starynska breeding farm. Maintenance CapEx, both for poultry and grain growing businesses, including agricultural machineries upgrade. Some words about that. As of 31st December 2017, the company's total debt was USD 1,157,000,000, and net debt was about USD 1 billion, about 85% of total debt are Eurobonds maturing in 2020 and 2024. Short-term debt accounted for around 4% of total debt only, the rest was long-term debt. The average weighted interest rate was lower than 8%. At the end of December, in which MHP's liquidity position was strong with around USD 126 million in cash, mostly in dollars. Net debt to EBITDA ratio was 2.25 versus Eurobond covenant of 3x. And which means debt is predominantly dominated in foreign currency, mostly in dollars. FX risk is naturally hedged by significant share of export revenue, 57% of revenue in 2017. This covers all our debt service expenses and other payments in foreign currency. Our currency balance remains strongly positive.Page #12, where you can see the outlook for the 2018 and going forward. So to conclude the presentation, let me provide you with the business outlook and 2017, I have to say, was another successful, but not an easy year for MHP, given the challenges presented both on export market and with weather conditions for the crops to grow. But both operational and financial results showed and confirmed that the company and its management team are ready to face difficulties and deliver strong results. Just to mention that our Eurobond issue, in April 2017, was another success of the year. The issue was more than 3x oversubscribed, which demonstrates MHP's strong relationships with its bondholders and their trust in the company. Moreover, MHP's paid its annual dividend of USD 80 million to its shareholders with around 7% yield. For 2018, we set several targets to become even more efficient across all our business segments. First of all, due to the vertically integrated business model, high efficiency of the production side and innovations based on our best knowledge, MHP's the lowest-cost producer of chicken meat. Our target is to maintain this status and to continue to be the most competitive producer of poultry meat. Second, it's our investment into the Vinnytsia poultry complex, phase 2, which proceeds in line with time and budget, several rearing sites will be launched in operations in the middle of 2018, several of them will be launched at the end of 2018, and that will allow MHP trade around 40,000 tonnes of chicken meat to the current 570,000 tonnes production capacity. The full launch of phase 2 -- sorry, this phase 2 will be 260,000 tonnes of poultry meat, and it is anticipated in 2021, 2022 years. Third, our export brands are developed in line with our operational growth in 2018, which is expected to result in 260,000 tonnes to 270,000 tonnes in between of poultry meat. And finally, the construction of the biogas station of 12 megawatts capacity is on its way, and it's planned to be launched in operations gradually, since the end of 2018. Generally speaking, we see positive trends in Ukraine with the GDP growth and current stabilization on all these can drive to the stability and near-future increase in income per capita in Ukraine. And consequently, growth in consumption, local market is an important market for us, and we are always ready to start driving demand for poultry meat in Ukraine in the future. We are confident that with our vertically integrated business model, we will continue to deliver strong financial results, supported by significant and growing share of hard currency revenues from exports of chicken, oils and grains. Thank you very much. Now, we will open question-and-answer session. [Operator Instructions] Thank you for your preparation in advance. Operator?
[Operator Instructions] Our first question comes from Stella Cridge, Barclays.
If I could ask a couple of questions. The first is on the outlook for CapEx in 2018. So I think on the previous conference call, you gave us a color around $230 million to $240 million, I just wondered if you could provide an update as to whether that still stands and what the main items would be? And the second question would be on working capital. So as you mentioned that their [ food ] was a little bit, I guess, higher than maybe what was expected before? I just wondered going into 2018, what's your expectations on working capital there, particularly as you go through the expansion? And the final question would be in relation to the refinancing outlook. So I think you mentioned many times different options you would consider for the 2020 bond. Just wondering if you can give an update on what you're thinking on that at the moment? That will be great.
Just to be documented, it's Victoriya Kapelushna, speaking, CFO of the company. Yes, I thank you for the question. Regarding to give you explanation about our CapEx for 2018. Yes, you're completely right. Our CapEx approximately $230 million to $240 million, mainly related to the second phase of Vinnytsia and slight maintenance CapEx. And about second question, about the working capital. Yes, exactly, this year -- not this year, last year. We have weak investment in working capital. First of all, because we decided to increase our stock of sunflower seed by the end of the year, sunflower and soya, the main contribution to increase in total working capital. First of all the because these sales, a lot are going to GDP. And usually in the fourth quarter, price of sunflower seed or soya significantly lower during the second half of next year. Regarding capital investment in working capital for 2018, we don't expect any increase in our stock and inventory of sunflower seed and soya. We would like to keep completely the same volume, and I would say 100,000 tonnes by the end of the year, and this is why all our investment in working capital will be related to increase our chicken stocks, chickens in [ broiler ] farm, this is why our expectation about investment, it will be around $40 million.
Live chicken.
Live chicken, yes. About live chicken stock, yes. Because as you know by the middle of this year, we will launch the second stage of Vinnytsia, we launched for breeder and that is why we need to provide investment in working capital. And regarding the third question about refinancing. Yes, you're completely right. We have 500 -- approximately $500 million Eurobond to reach maturity 2020. And now we are thinking about maybe refinancing. It will depend. We think about this and everything which will be defensive situation in financial markets.
That's fantastic and maybe just as a clarification point at the moment. I know the markets on the EM side have been fairly strong year-to-date. And do you consider these market condition you're seeing at the moment may present an opportunity?
Yes, we consider this. We would like to use this opportunity and maybe we'll see. We understand that and potentially we would like to provide transaction to exchange -- to exchange maturity of current Eurobond.
[Operator Instructions]
Excuse me, ladies and gentlemen, in case we do not have any further questions, as we understand, we do not have any further questions because of the silence. I have to tell -- thank you very much for the time. Thank you very much for your questions. And in case you want to ask questions, please send us your questions via e-mail. We're always ready to discuss any issues, any questions that you have.
We got the question from the participant who is going to introduce himself. Shall we take it?
All right, yes. Thank you.
[Operator Instructions]
Hello, can you hear me? Hello.
Yes, we can.
This is Dmytro Konovalov from HSBC. I'm really sorry for not introducing myself. My question is about the VAT outlook, as though so as I understand, there is no VAT from January 1 of this year to MHP. Is there any potential VAT in the future? And also, are there any other government support or subsidies the company might receive going forward?
Okay. Thank you for the question. Regarding grant for 2018, yes, because they are now low, we don't see any possibility to receive grant regarding VAT, which we received last year approximately around $40 million, yes. And we did not include in our forecast, in our budget for 2018. And maybe, we don't know exactly, maybe we receive some compensation of cost of construction. But anyway, we cannot give the exactly numbers.
But as I mentioned in my speech, actually, we would rather to be conservative on this issue and that is why in our model, we have 0 VAT subsidies, starting from 2018 and going forward.
Okay. And also another question is about your international expansion. Like you will expect significant increase in the export of poultry this year. Could you share any plans or maybe outlook regarding the next year regions maybe opening other facilities and -- or regions in Europe? And also, how the existing facilities are producing or slicing, or basically performing at this time.
Okay, thank you for the question. Yes, you're completely right. This year, we will increase our production volume, and we proposed approximately 60%, 70% of new meat that we will send for the export. Maybe you know that our main route is to have geographic diversification. And today, we are exporting in more than 60 countries in different regions and what is important for us that we sell the right product for some countries -- for right country for this product. And we see potential for growth everywhere, mostly for more chicken carcasses but more chicken in MENA region. Regarding quotas in Africa and CIS countries, regarding fillet to Europe. That is why we see potential for growth and you understand just last year, completely the -- we produced completely the same volume of chicken meat, but anyway we increased our export approximately by 10%.
Our next question is from Ahmad Zuaiter, Jadara Capital Partners.
I have two questions just on the export side. So what is your market share now in the key focus countries and regions, specifically Europe and MENA? And how is that market share changed over the last year? And if you can talk a bit about some of the difficulty the Brazilian exporters are having in those markets. The second question, can you talk a bit about what the breakup of your margins and your prices in specific export markets relative to the domestic market. So what are your yields per kilo in Ukraine versus those in key export markets? And if you can break down your EBITDA margin per kilo in the fourth quarter, the $0.72. How does that differ in exports market versus what you're realizing in Ukraine?
Thank you, thank you for your question. Yes, first of all, you know that the total market import and export market of chicken meat, approximately 12 million tonnes. Last year, we exported around 220,000 tonnes, and today our market share is very -- is less than 2% of the total market. Regarding the specific market, for example, MENA region, total import to MENA region today is approximately 3 million tonnes. Last year, we exported approximately 100 -- around 100,000 tonnes, which is why our market share is 3%. And regarding Africa, because we exported to Africa on lake water. The same situation in our market change, its market not so significant, 3% only. And maybe we have slightly higher market share in CIS countries as Azerbaijan, Tajikistan. In these countries, I suppose that our market share approximately 10%, 12%. But anyway, we understand that these different markets have weak potential for growth, and you know that poultry consumption -- poultry has the highest speed of growth, that is why we see a lot of potential for our growth for all market, but we need to understand and we use this. We should send right product for right market, what this means. For example, it is not good idea to send and to sell in CIS country, fillet. It is much better to circulate to Europe. Because it's a higher price. The same situation that Europe compared, for example, to MENA region. And it is -- yes, and that is why. Regarding our profitability export and domestic market, it depends on the parts of the chicken. Because, for example, regarding, for example, quarter legs of chicken. Sales on domestic market very similar to price of export market, very, very similar. Regarding, for example, fillet, export price of fillet higher approximately by 15 -- minimum 15% higher than price of domestic market. That is why it's not possible, it's not a good idea to try and compare the average price of Ukraine with average price of export, because it a different breakdown. We sell mostly for export 3 products; whole chicken, legs and fillet. In the Ukraine, we sell a lot of carcasses and [indiscernible] and that is why always the drive of Ukraine is low, but it is not whole chicken. Because we sell in Ukraine more parts of chicken with low price natural mix. Product mix is different, yes, because, in the product mix, we -- more expensive of exports, that is why. Regarding your question about EBITDA per kilo, yes, that last year it was $0.72 but we suppose this year it will be -- EBITDA is $0.72, but in this we -- in our EBITDA includes some grant, yes, some grant. But anyway, our expectation about EBITDA per kilo is minimum for next year is $0.6.
Great, that's very helpful. And can I just follow-up with an additional question? Since you've canceled -- from what I've read, you've canceled the acquisition opportunity in Poland. What are you budgeting for total capital to be deployed in acquisitions in 2018? Is there anything on the horizon?
First of all, and for us, the most important thing to buy the right target for -- according to our strategy, yes. If you look at our leverage, by end of the year, our leverage would very low, 2.2, net debt to EBITDA. And you have a lot of liquidity in our account. Yes, that is why, regarding the size, the most important thing to understand -- for us to understand how we can improve? And how we can increase efficiency of when you -- our target, which we would like to buy. And for us the most important to understand is the potential for growth. And that is why, it is not issue about money. The growth potential where we can spend $200 million, $300 million, it is not problem. The most important thing to find to have the right target.
Our next question's from Sergey Dubin.
Victoriya, just a quick question. Sorry, if you already answered it, but just to clarify, regarding the animal breeding subsidy that you saw in 2017. How much was that as a percentage of your EBITDA? And do you expect that to continue in 2018? Has the Parliament made a legislation about that? Or is it still up in air?
Sergey, excuse me, please repeat.
Yes, so regarding animal breeding subsidy that you received in 2017. What was that as a percentage of your EBITDA? That's the first question. And the second is regarding 2018, would they continue to provide a subsidy for this year or is that -- has been canceled?
Okay, thank you. As I told before for 2018, we do not have any subsidies, accordingly low. And last year, if you look at our P&L, our total subsidy, it was approximately $42 million. Anastasiya, is it correct? Okay, approximately -- it will be approximately...
Correct.
Yes. It is correct. Is it correct, Anastasiya? It's $42 million?
No, no, no. It's $53 million.
52 -- yes, $53 million. It was approximately 11% of total of our EBITDA, because last year, our EBITDA, which was $460 million.
Okay, so there's no more subsidy going forward starting from this year?
Yes.
[Operator Instructions] And we have a follow-up question from Ahmad. Please, Mr. Ahmad, go ahead.
Just a follow-up question. So on Vinnytsia 2. I understand you're going to introduce 40,000 new tonnes of capacity in 2018. Is there an opportunity to accelerate the capacity additions in 2018? And what would cause that change of plans or acceleration?
Sorry, you're question about acceleration of building capacity, yes?
Yes, yes.
Yes, that's right.
Well, we -- this year, we will launch [indiscernible] in the first half of year. I suppose that in maximum capacity of the second stage we look at the maximum capacity in 2021. Yes, first of all, I will explain, it is not good idea in 1 year increase and produce additional one thousand hundred -- 100,000 tonnes. Yes, we would like gradually increase production volumes of our capacity.
But -- sorry, I am a bit confused. So you're at capacity -- at a 100% capacity utilization. You have a very small market share in MENA. Your competition in MENA is very weak. Why not increase capacity more aggressively and take significant more market share? You're only at 3% in that region. So just walk me through the rationale for being more gradual. Why is the 100,000 tonnes of additional capacity the golden number?
Yes, thank you so much for your very good question. First of all, our strategy not just to have the EBITDA per kilo $0.1 as Brazilian food and as a company export is the huge -- big exporter in the world. Our target to have per kilo minimum $0.5. In this case, it's not the good enough idea to significantly increase capacity and to push on the market and decrease pricing, our pricing. For us, the most important to keep right mind for right product, and this situation will help us to have high profitability, high EBITDA margin because in our case, investment in the new capacity is significant and we result good profit and good EBITDA per kilo. We cannot have good IRR of this project. First of all, we don't need -- yes, it is possible, you're completely right. We can spend a lot of money, but in this case, IRR of the project should be very low because we need to decrease for us.
Great, so at $0.50 EBITDA per kilo in MENA, what is the IRR that you're earning?
No, no, in the $0.50 is our average EBITDA, yes. IRR of this project will be around 20%.
20%?
Yes, IRR, yes.
We have a follow-up question from Sergey Dubin.
Actually, I have a follow-up on what the previous caller was just asking just to make sure I understand. So if you're competing with Brazilians in, let's say, MENA region, effectively you're a price taker, right. so because you only have 3% market share, and they have, I don't know, probably 70% or whatever. So essentially, you're not really able to dictate the price. So whatever price you just essentially match the price that's prevailing in the market. So why -- I'm a little unclear or confused as to how you -- you have a certain cost of production and then you take the price and export market of whatever the prevailing price is really depends on whole host of factors beyond your control. So given that, how are you -- are you able to say that you're going to at least earn $0.50? I mean, are you -- can you just walk me through this, because I'm not understanding that part of it.
Okay, thank you for your very good question. First of all, because our cost of production, and so as it stays [indiscernible] the cost of production [indiscernible] is one reason. And the second reason when I told before, the most important thing to right product -- to sell the right product for right market. And situation with Brazilian food, Brazilian food produces a lot of small chicks with higher cost of production, because total production of small chick is 1 kilo, always higher the cost of production chicken. Hello?
Yes, here. Yes, yes.
Yes, it is higher the cost of production of chicken 2.2, for example, is one reason. And that is why we not just look to sell small chickens in MENA region. We produce small chicken and big chicken, we cut a lot of chicken and sell parts of chicken. This situation allows to us to receive better price for different part of chicken and this is why we significantly -- not significant, but higher EBITDA margin and higher earning -- EBITDA per kilo than other competitors.
Right, but can Brazilian food also produce various parts of chicken and sell them at different price points because -- and how difficult is that for these guys. And -- why are you able to arbitrage that sort of product mix?
No, no, I can't see this. I do tell you. If you revise each operation about the price of our small chick and price of Brazilian food in MENA region, price is very similar. Yes, but Brazilian food sale at this price, it's seems to me 60% or maybe 70% of total export. In our export sale of small chicken just 20%. You understand my point?
Yes.
Because we produce less small chicken with higher cost, but in the same time we produce more chicken with the low cost and to resell and very important was, yes. Brazilian food today export around 1 million tonnes -- no, more than the 1 -- around 2 million tonnes and to try to earn money through reduced volume. Our strategy is to find the right region, right product and to try, manage possibility of our export is very important.
And can you outline like very broadly, what -- roughly what's the differential in between your cost of production versus Brazilian foods?
Unfortunately, we can see in the P&L, as you were saying but we cannot -- unfortunately, Brazilian food not open this information. I can give you just our cost of production. Our cost of production is $0.7, average small plus big chicken, $0.7.
[Operator Instructions] We have no other question at this moment. Dear speakers, back to you.
Once again, thank you very much for the conference call. I thank you very much for you questions. In case you require any clarification, please e-mail us or give us a call. Thank you, and have a nice day. Bye-bye.
And goodbye.
Thank you. This concludes today's conference call. Thank you for your participating. You may now disconnect.