U.S. Markets close in 1 hr 44 mins

Edited Transcript of MHPCq.L earnings conference call or presentation 6-Sep-19 1:00pm GMT

Q2 2019 MHP SE Earnings Call

KIEV Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of MHP SE earnings conference call or presentation Friday, September 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anastasiya Sobotyuk

MHP SE - Corporate Secretary

* Viktoria B. Kapelyushnaya

MHP SE - CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Alexey Krivoshapko

Prosperity Capital Management Ltd - Portfolio Manager

* Sergey Dubin

Harding Loevner LP - Analyst of Frontier Emerging Markets

* Stella Cridge

Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research

* Yulia Di Mambro

Federated Investors, Inc. - Senior Investment Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to MHP Financial Results for Q2 and H1 2019 Conference Call and Webcast.

I now hand over to Anastasiya Sobotyuk, Director of Investor Relations. Madam, please go ahead.

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [2]

--------------------------------------------------------------------------------

Good afternoon, and good morning. Thank you for joining us today for MHP's conference call dedicated to MHP's financial results for the second quarter and 6 months of 2019.

First of all, I would like to draw your attention and remind that at the end of February, MHP completed the deal and acquired Perutnina Ptuj, so the PP, the name is PP. Therefore, going forward, the company's results include also operational and financial results of Perutnina Ptuj. PP is now reported separately in our financial statements, in our press release as the Europe operating segment.

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 presentation. After the presentation, we will be glad to answer your questions. I hope that everybody is ready. So we can start our call now.

Let's look at Slide #4. First of all, we will look at macro environment and show changes in Ukraine. Market conditions in Ukraine improved with a real GDP growth accelerated to around 5%, 4.6% actually, year-on-year in the second quarter of 2019. In the same period, currency ratio remained relatively stable with around 6% revaluation year-on-year. Annual inflation accelerated to around 9% year-on-year driven mainly by food prices increase.

Some words about changes in Ukraine. Since April of this year, Ukraine has a new President, Mr. Zelensky, and since the end of August, Ukraine has a new parliament with the majority of representatives from SoP presidential party, the Servant of the People. President Volodymyr Zelensky met with the new parliament and government leaders recently, and this caused the forthcoming performance. Speaking at the same gathering, Mr. Oleksiy Honcharuk, our current Prime Minister, said that the government would aim to accelerate economic growth to 5% in 2020 and 7% in the following years in order to achieve 40% economic expansion in the next 5 years. The key reforms and other immediate actions from Mr. President listed following: land reform, right to submit to parliament a land market bill by October 1, and invest by December 1 and complete this state and land cluster by January 1, so as to open up the land market in middle 2020. Privatization, with the first auction to be held in April 2020. And in general, both business climate and deshadowing, which is really, really optimistic.

Coming back to the company's results. Let's go on Slide #6 of our presentation. We will look at key financials for the reporting period. Our financial results during 6 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 increased in efficiency since completion of the acquisition. As you can see, the results are following; we've got revenue of USD 946 million, increased by 36% year-on-year. We have export revenue of $552 million, comprising 58% of total revenue, which is 43% higher year-on-year. We have adjusted EBITDA margin decline correspondingly from 36% -- 38% sorry to 26% with adjusted EBITDA down from $263 million to $247 million, mainly as a result of log result in Grain Growing operations compared to 2018 harvest. Challenging market conditions in the EU. We have historical low poultry prices there and increased poultry cost adversely affected by the higher labor cost experienced in the second quarter of last year in 2018.

And now I pass the word to Viktoria. She will comment our financial results during 6 months of 2019 in greater details and of course by segment.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Anastasiya. Good afternoon, everyone. Let's discuss our financial result with the H1 2019 in more details. Slide #7 shows our financial results by segment. Since Q quarter -- quarter #2, we added new segment, European operations into our segment reporting following the acquisition of Perutnina Ptuj, the largest poultry producer of poultry meat and poultry meat product in the Balkans region in Europe.

MHP financial results for the first half includes the result of Perutnina Ptuj from 21 of February when the acquisition was completed. Nevertheless, poultry operations remained -- segment poultry operations remained our key segment and as usual and during the first half generated the majority of total -- our revenue, about 33% and 66% of company's EBITDA. Grain segment generate 9% of total revenue on third party and about 13% of company's EBITDA. As you know, majority of grain produced we use internally to feed for -- our chicken. Meat processing and other agricultural operations generated around 7% of consolidated revenue and contribute 3% to consolidated EBITDA. Main components of this segment are meat products and convenient food production. The new European operations segment generate approximately 11% of total revenue and 6% of company's EBITDA.

Our export operations continue to develop impressively in H1 and generate around 60% of total revenue, more than $550 million, 46% higher compared to the last year mostly due to the higher volume of exported chicken meat. We will discuss the development of all our segment more deeply on the next slide.

Please go over to the next Slide #8, poultry segment performance. During the first half of this year, we increased our production volume by 15%, due to the launch of additional 3 rearing sites, brigades, of

Vinnytsia poultry complex Phase 2. Currently, 6 new brigades of growing chicken are operating in Vinnytsia, and we're going to put into operation additional 1 brigade at the beginning of 2020 to continue our production growth.

Our revenue overall in poultry segment increased by 12% year-on-year driven by chicken meat sales volume growth. Growth in revenue was mostly achieved thanks to our export growth strategy, which is -- focuses on market and targeting. We continue to concentrate and drove each product to its each most favorable market and this gives us the 43% growth of export volume. In general, during the first half of the year, our average sales price remains stable. At the same time, poultry export price decreased by 6% mostly due to situation in Europe. And price in domestic market, we're up on average 3% year-on-year in -- average poultry production, of course, in the first half in accordance with our budget increased by 11% year-on-year, reflecting higher cost of mix for the protein component as well as higher payroll cost experienced since H1 2018.

During 2019, production cost remained relatively stable in grain and are comparatively in line with our year budget. Following to chicken production and sales volume growth, gross profit of poultry segment also increased by 3% while EBITDA increased by 5%. Adjusted EBITDA before the 41 standard effect per 1 kilo in the first half of year was $0.4 -- $0.42 (sic) [$0.46], which is more than 20% lower compared to the same period last year. But 15% higher compared to the Q1 this year.

Year-on-year decrease in profitability of poultry segment was mainly due to the growth in production and delivery costs. Quarter-on-quarter profitability increased thanks to price growth, both on domestic and export market.

Let's move to next Slide #9. Grain Growing operations. External Grain segment revenue in the first half of the year was amount $83 million. The increase compared to the last year level was mainly due to the impressively higher harvest in 2018 that lead to the higher amount of crops in stock designed for sales as by the end of 2018. EBITDA include effect of revolution grain, constitute $34 million by 30% lower compared to the last year mainly due expected -- lower expected average yield of crops this year compared to the last year. But till the moment are in line with our budget -- year budget.

Let's go to the Slide #10. Other agricultural segment. As usual the key businesses of segment are meat processing and convenient food production. The segment generate revenue of $68 million by 67% higher compared to the last year, mostly the result of higher price of meat-processing product.

EBITDA was $8 million by 25% lower compared to the last year mainly due to the lower result of milk operation, partly offset by higher result of meat processing.

Please go to the Slide #11. The European operation segment generate $170 million revenue and $16 million of EBITDA for this 4 months after acquisition. Year-on-year, Perutnina Ptuj profitability on EBITDA level increased by EUR 3.5 million, approximately by -- higher by 26% compared to the same period last year as a result of optimization program implementation. We expect for full year, the result of Perutnina Ptuj will be higher compared to the last year as minimum at least by 20%.

Please go to the Slide #12, a few words about our cash flow and liquidity position. Net cash generated from operation activity increased significantly to $224 million compared to the $80 million in the same period last year, thanks to optimized trends in working capital. Positive cash flow and working capital during the first half of year compared to the same period last year was mostly related to low investment in inventory during the H1 due to the higher stock of crops, sunflower and soya, designed for internal consumption as by the end of the year compared to the end of the year 2017 as well as increase in accounts payables for seeds and planned production product to be paid in the Q3 this year.

Total CapEx is amount approximately $60 million mainly related to the launch of production site of Vinnytsia poultry complex. Regarding our debt. At the end of the period, the company total debt was $1.5 billion. Net debt about $1.3 billion, around 80% of total debt is a long-term debt. Our average weight interest rate currently is about 7%. In terms of our liquidity by the end of June, we had around $160 million in cash mostly in dollars. Net debt-to-EBITDA ratio as by the end of the quarter was pick up 2.92, a result of completion, Perutnina Ptuj acquisition. It is lower than our Eurobond covenants. Almost all our debt is denominated in foreign currency mostly in dollars. Foreign risk in our case, we have the nature of hedge by significant share of our export sales, having 60% of total our revenue around $550 million, mainly a dollar-denominated export revenue during the first half of the year before the cover 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.

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [4]

--------------------------------------------------------------------------------

Thank you, Viktoria. To conclude the presentation, let's go to Slide #13. Let me provide you with the business outlook for the rest of the year. First of all, some words about market. Just recently, Ukraine was approved and opened for exports to Japan and MHP has already started to explore new opportunities with trial deliveries.

Our Chinese market is still on its way to be opened for Ukrainian producers by the end of 2019. So we are still expecting it to be opened. Market conditions in Europe are kind of challenging and poultry prices are starting to go a little up. However, despite current challenges, MHP team expects to impact the African swine fever in China and other far eastern markets to have a positive impact on meat prices over the coming months. We have clear targets across all our business segments in 2019. And first of all, that will be an increase in production volume of chicken meat by around 100,000 tonnes as a result of expansion of the Vinnytsia poultry complex, third line Phase 2 in Ukraine. Mostly sent for exports, so the forecasted volume is around 380,000 tonnes of chicken meat. That will be supported hopefully by growth in local and export prices, especially export prices based on current price trends.

An increase in production volume of chicken meat by around 80,000 tonnes following the acquisition of Perutnina Ptuj with expected higher financial results year-on-year due to cost optimization but we already have seen that the results have been significantly increased and improved. And of course, we have expectations for good yields -- for strong yields for our spring crops and actually have good yields across all crops as of now. The company is targeted to maintain a status of the most cost efficient producer in class mostly in Ukraine and striving to do so together with its new company, Perutnina Ptuj, in the Balkans by taking care and constantly control its production cost across all business segments. We are proud that during the first half of the year, Perutnina Ptuj has performed ahead of our expectations since its acquisition in February 2019. And we all remain confident in delivering full year results in line with the Board expectations.

And now we will open a question session now to ensure we get questions from all the participants. Please ask 3 questions each, and then pass your vote to the next participant. Thank you for collaboration.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) So we have our first question from Yulia di Mambro from Federated Investors.

--------------------------------------------------------------------------------

Yulia Di Mambro, Federated Investors, Inc. - Senior Investment Analyst [2]

--------------------------------------------------------------------------------

I have a few questions, please, and my first question is on your short-term debt. I believe you previously mentioned that a -- quite a significant portion of this debt was in acquisition bridge from International lenders. And if I'm not mistaking you in the process of negotiating with the lenders about potentially turning into a term loan. So if you could give us an update on the progress there? And if they haven't gone anywhere, what are your plans for the short-term debt? That's my first question. My second question is around your working capital. What are your expectations for working capital in general for the full year? And what do you expect in the second half of the year? And also on labor costs, do you still expect them to be fairly stable in the second half of the year?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you very much for your question, question by question. Regarding the short-term debt, you're completely right. Yes, we have the bridge, short-term bridge of half of them. And now we're considering a few possibilities, how to attract long-term debt, yes.

(technical difficulty)

Decreased our leverage by the end of the year, and we expect that our leverage should be -- our leverage will be around -- area around 2.8x.

--------------------------------------------------------------------------------

Unidentified Analyst, [4]

--------------------------------------------------------------------------------

All right, okay. And just if I may, I just have a follow up. You mentioned working capital, you mentioned EBITDA and you mentioned leverage, what are your expectations for full year CapEx?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [5]

--------------------------------------------------------------------------------

Our full year CapEx, if exclude amount which we paid for Perutnina, it's around $140 million. Exclude payments for Perutnina.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

So we have another question from Alexey Krivoshapko from Prosperity.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [7]

--------------------------------------------------------------------------------

Viktoria and Anastasiya. Can you please explain possibly a bit more about what impact would opening of Japanese market have on your ability to sell chicken? And what kind of prices are there? How much you can possibly sold?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [8]

--------------------------------------------------------------------------------

Yes. Alexey, thank you very much for this question. Yes, you're completely right, just a few weeks ago Japanese market will be opened. Yes, and maybe you know that Japan is one of the biggest importer in the world. It's a very, very attractive market. But at the same time, import, yes -- we can export to Japan, the special projects, yes. It is not the same, which we today export in different, more than 70 countries, the special product. That is why -- we expect -- yes, it's a product, you're completely right. This -- the product with additional value added product, no it is -- yes, it's value added product. And we can increase our and sell this product to Japan. Due to the selling, we increase our profitability. But to be honest this year, we only start to export and maybe we send few test...

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [9]

--------------------------------------------------------------------------------

trial deliveries.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [10]

--------------------------------------------------------------------------------

Yes, deliveries -- because for us yes, it's very important to make the big preparation, yes. But potentially for us, it is very -- I didn't say what it is. It is a product from legs, yes. But yes -- you understand the price of legs, bulk price of legs is very low, yes. It's not just today and because America every year, America -- exports from America is approximately 6 million, 7 million tonnes. And the special product to Japan, it's a special product from legs, yes. From legs result more sometimes and result some preparation. This is very attractive price. But anyway, yes, we're very happy that market will be open for us but in a way, it is a long-term period for time, yes. When we start to export very substantial volume growing with grain.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [11]

--------------------------------------------------------------------------------

Can I ask you the second question and then I guess, will get others as well. What is your current expectation for Ukrainian business CapEx for next year? And how much do you think you will be investing in Perutnina?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [12]

--------------------------------------------------------------------------------

First of all, yes, we have planned to, yes to try to decrease our net debt-to-EBITDA. That is why we don't expect any huge CapEx for next year. And our expectation in Ukraine, we will invest approximately $120 million, $130 million. At the same time, in Perutnina, around EUR 25 million.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [13]

--------------------------------------------------------------------------------

Am I thinking that Perutnina will essentially reinvest its own profits, more or less?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [14]

--------------------------------------------------------------------------------

Yes. Yes, more clearly invest its profits from Perutnina. You're completely right.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

So we have another question from Stella Cridge from Barclays.

--------------------------------------------------------------------------------

Stella Cridge, Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research [16]

--------------------------------------------------------------------------------

And the first question I wanted to ask was about the qualified opinions in the financial results regarding the assessment of the leases. And I was just wondering what do you have to do to kind of rectify the situation as it stands? And are there any implications for the company in terms of any kind of loan agreements for having such an opinion and in the financial statements? That would be great. And that was my first question. And the second question is on land reforms. So I heard your comments at the beginning about the potential timelines for the land reform, sounds like it may be coming in fairly soon. Just as it stands at the moment, what's your kind of key expectations of how this will proceed? And what's your assessment at the moment of the -- likely financial impact and on the company as you see things right now. That would be great.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [17]

--------------------------------------------------------------------------------

Yes. Okay. Thank you for your question. Regarding IFRS 16, we are very upset with current situation, qualification opinion yes, to be honest, everybody know this was the first time in our history. But anyway, it will happen -- it is what it is, yes. Might be, you understand that we have 370,000 hectares of the land, at the same time, we have more than 220,000 agreement -- lease agreements. And we have some problems, yes maybe small problems with accounting lease agreements. But at the same time, we're sure that by the end of the year, we do not have any qualification for this point. And any qualification in general, yes. And with it I would like to emphasize that, that as may be as you know that all our covenant, in all our loan agreements, the Eurobond, everywhere don't include effect and obligation accordingly IFRS 16. But anyway, we understand it is not good idea that anybody cannot see the equity figure, you can see the equity figures but yes, but our details could not provide to us comfort for these figures. But you need to remember now we have the review, and I'm sure that I would like to repeat again that by the next year, we will not have any -- by the end of the year, we will not have any qualification in our financial report. Other question, yes, it is very important about land reform. Maybe as you know, yes, we believe that land reform will be implemented by the middle of next year -- by the middle of year not -- by the middle of next year, yes. And yes it is big opportunity for us. Yes, we have appetite to buy land, yes. But at the same time, we understand that after the implemented land reform, we saw that not a lot of fit owners of the land will be ready to sell immediately after implementation. Yes. But anyway, it is a good opportunity for us. For us it will be interesting and it is a good -- yes, we're ready. We're ready to finance. Financial impact, the transaction, it will depend but we feel that maybe at the beginning -- during the maybe the third period of time after implementation -- the approval may be 10%, maximum 15% of the owner of the land, we were ready to sell.

--------------------------------------------------------------------------------

Stella Cridge, Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research [18]

--------------------------------------------------------------------------------

And if I can ask I mean, you've obviously mentioned that one of the key-ins for next year will be to reduce leverage. When you think about this 10% to 15% of people that maybe incline to sell, how much cash in your mind do you think you have to save to potentially cover the cost of that land?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [19]

--------------------------------------------------------------------------------

Okay. No, it will be depends -- yes I think that $50 million, yes, we can. Minimum $50 million, yes, why not.

--------------------------------------------------------------------------------

Stella Cridge, Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research [20]

--------------------------------------------------------------------------------

$50 million?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [21]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Stella Cridge, Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research [22]

--------------------------------------------------------------------------------

Okay. Would there be -- would you say that, that's the kind of middle number? Or do you think it could be potentially higher? I know we're just trying to -- none of us know what the market is going to turn out like, but do you think it could be potentially be a bit higher than that?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [23]

--------------------------------------------------------------------------------

Sorry, can you please repeat?

--------------------------------------------------------------------------------

Stella Cridge, Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research [24]

--------------------------------------------------------------------------------

Yes. Sure, I was just saying, of course none of us know at this stage how the market will evolve and what the land prices will be? But just that $50 million number, which you see that kind of maybe on the low end of what the potential range could be? What would you see as the high end of the range if may be land lease will be more expensive than what you were expecting?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [25]

--------------------------------------------------------------------------------

Yes. No, it's very -- maybe all there to see. But anyway, just a simple calculation. Average rent payment in Ukraine and approximately $140, $150 per hectare. That is why if you put the simple calculation, I think that fair price of rent should be around $1,000, $1,200...

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [26]

--------------------------------------------------------------------------------

To buy.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [27]

--------------------------------------------------------------------------------

Yes, to buy, to sell land. But anyway we will see. Nobody knows, but we will see.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

So we have another question from Sergey Dubin from Harding Loevner.

--------------------------------------------------------------------------------

Sergey Dubin, Harding Loevner LP - Analyst of Frontier Emerging Markets [29]

--------------------------------------------------------------------------------

Actually my questions would be follow up on the previous caller. So with respect to EBITDA impact of IFRS 16, most companies have report under this IFRS standard actually provide comparison to understand what was the boost in EBITDA and EBITDA margin because you introduce this IFRS 16 accounting, which obviously impacts your reported figures. So can you -- would've been very helpful if you put it in your presentation. But maybe you can walk us through how that accounting standard changed your reported metrics? And what would have -- what is a pro forma number if this wasn't implemented? That's question #1.

Question #2 is also on the land reform. Everybody keeps talking about this 10% to 15% owners that can potentially sell, but nobody can give me a clear idea as to why it's 10%, 15% and not 25% and 30%. So how did you arrive to that number, I mean, why are you quoting that based on what? And then the second question on that is also regarding the, I think the math that you're doing is like cap rates, right? So you're saying $120 per hectare to rent. So therefore, it should be $1,000 to buy. But again, what's the justification or the basis for it? Is there precedence that you can point to? You know the country is in CIS, that has happened? It would be helpful to get some basis from these various numbers that are being quoted?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [30]

--------------------------------------------------------------------------------

Okay. As I said from the second question about 15%, why we think that 15%, because first of all, as you know, we operate in different part of Ukraine. And we're very close to the owners of the land, yes, especially (inaudible). And we feel we are under a tense atmosphere and we speak with owners and it is way, yes I will explain why because I try to explain why I think that just 15% because a lot of owners think that, yes, we are not ready to sell immediately. Because a lot of owners will rate better price. And yes, that is why. Solid expectation. But anyway, we will see. But anyway it's very difficult -- what I would like to emphasize, it's very, very difficult to consolidate land in Ukraine because compare, for example, in Russia, in Ukraine, land provide to owners by the special place because in Russia -- I cannot -- unfortunately I cannot explain, we don't -- you understand in Russia.

(foreign language)

That is why yes -- it is a special part of the land, a special part of the land and that is why it's very important if you would like to buy, for example, 1 field, 300 hectares of the land, you need to buy this field from more than 100 owner of the land. You understand this point, yes? That is why I think that we will see some difficult for consolidated some fields. And I think that because we have been working with people for a long time, we understand these people and the people trust us and I think that we will have some preferable. And we -- I think that we can provide this consolidation much better than some -- it seems to me than somebody.

--------------------------------------------------------------------------------

Sergey Dubin, Harding Loevner LP - Analyst of Frontier Emerging Markets [31]

--------------------------------------------------------------------------------

I'll ask you just a bigger question, so let's say it's 10% to 15% the first year but then if prices go up, it would be another 10% to 15% the next year, et cetera. So the bigger question is, given the fact that even if you take your assumptions at $1,000 per hectare, you can easily see how 1/3 of your 370,000-hectare land bank is up for sale, you have to come up with upwards of $400 million, right? So how would you -- how does that additional CapEx square with your leverage covenants? And with your ability to maintain, I think, under 3x net debt-to-EBITDA and your ability to basically finance that. I mean, that's what my real question is because at some point, they'll be more land for sale and if not, if you're not going to buy, somebody else will buy it. So how do you look at that planning for this CapEx?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [32]

--------------------------------------------------------------------------------

So first of all, yes, I mean yes I understand your question and that is why we see the situation regarding land and especially regarding cover leverage. And that is why we have decided to postpone -- invest money in the first line of Vinnytsia. Yes, we just -- now, we launched this -- will go live by -- at the beginning of next year. And when I talk about the CapEx, $120 million to Ukraine, we can decrease this CapEx because this is some different project and we can slightly decrease this CapEx. It is not this necessary. Our maintenance CapEx approximately $50 million, $60 million. And that is why, we will see, if needed. Yes, if we will see that we need more money for provide -- yes, we need to projects in land, we will provide more money. We can stop our -- yes, so we will not invest in some other project. And it depend on situation. Yes, we would like -- yes, it will be better and we have the plan to decrease our leverage. But at comfortable level for us, 2.6x -- around 2.6x. But anyway, if we see a very attractive condition and if we will have a good appetite to buy land in Ukraine, we will continue -- we continue to live with the leverage at 2.85x, 2.9x, 1 year more. Because we -- for us, it's very important to use this opportunity. Yes, why not. Even -- regarding your second question about -- no, sorry can you repeat that? Can you please repeat?

--------------------------------------------------------------------------------

Sergey Dubin, Harding Loevner LP - Analyst of Frontier Emerging Markets [33]

--------------------------------------------------------------------------------

Yes. IFRS 16, so I'd like to understand what's the impact of adoption of IFRS 16 on your reported EBITDA and EBITDA margins? And what would've have been without...

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [34]

--------------------------------------------------------------------------------

In H1?

--------------------------------------------------------------------------------

Sergey Dubin, Harding Loevner LP - Analyst of Frontier Emerging Markets [35]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [36]

--------------------------------------------------------------------------------

No, in H1, first of all IFRS 16 regarding just farming business regarding Grain Growing operations. We don't have any effect in IFRS 16 in our other segments, any. And regarding Grain Growing business, in the H1, yes so we did not have any effect of -- in P&L in IFRS 16. Yes, thank you very much for your idea. Yes, regarding for full year, yes, we will show comparison our EBITDA from farming business with effect IFRS 16 and without. Yes, we will put this information, we disclosed this information in our presentation. Yes, thank you very much for your idea.

--------------------------------------------------------------------------------

Sergey Dubin, Harding Loevner LP - Analyst of Frontier Emerging Markets [37]

--------------------------------------------------------------------------------

And why don't you have anything in the first half. Like I'm not clear on that. Like why wasn't there any impact on the first half results?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [38]

--------------------------------------------------------------------------------

No because we calculated just effect of 41 Standard. And in this case, we don't use any effect of 16.

--------------------------------------------------------------------------------

Sergey Dubin, Harding Loevner LP - Analyst of Frontier Emerging Markets [39]

--------------------------------------------------------------------------------

Okay. I'll follow up with you separately because it's a longer discussion. One last question just on Perutnina Ptuj, so what -- it looks like you already implemented some cost-cutting measures there and boosted your margin. So what do you think you can boost your margin when you're done with all your cost cutting? What can be the maximum achievable EBITDA margin for this business? And then could you also shed some light, you said there is challenging conditions in Europe, why is it challenging? What's going on? And kind of is that a temporary thing? Is that a much more longer-term impact? Like can you give some color or some background?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [40]

--------------------------------------------------------------------------------

Regarding Perutnina Ptuj, yes, first of all, as you know Perutnina Ptuj, a very good brand and that is why this very bad condition in Europe, yes that does not have any influence in Perutnina. No and not just in Perutnina. If you produce -- if a European producer has a good brand and not so big difference in influence in the price, yes.

But regarding Perutnina Ptuj, as I told in presentation, we increase EBITDA by around 20% and our -- in absolutely figures, yes. And we expect this minimal the same result for full year, and a regarding the next year, regarding 2020, we have target to continue provide cost optimization through investment. Because you understand during the first half of year, we did not invest and we had this result investment because it's completely impossible to achieve a result -- we don't -- we did not have any time to provide this investment. And additional, we have planned not just provide cost optimization and we have planned to increase production capacity, and we have planned to increase our sales volume minimum by 10% for next year. That is why we have potential for growth in Perutnina, not just for 2018 and 2020. Regarding the general situation with price of fillet in Europe, yes, today the price of fillet breast in Europe in one of the lowest levels during the last maybe 10 years. Yes it is this huge difference compared to the last year. Our expectation, I'm sure that a lot of -- and if you look at different market and especially if you look at, for example, in Polish market, Polish producer in -- has increased significantly production volume but at the same time, there are a lot of small Polish producers. And our opinion maybe during the near future, a lot of small Polish producers will be disappeared from the market. And we expect by the middle of next year, price of breast might be -- have to stabilize. But anyway, MHP continue to be the most efficient poultry -- one of the most efficient poultry producer in the world. And that is why even with its current low price, we continue to generate good profitability from the export and from the exports to Europe.

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [41]

--------------------------------------------------------------------------------

Do we have any further questions, please?

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Yes. I'm sorry we have another question from [Javier Penedo] from (inaudible)

--------------------------------------------------------------------------------

Unidentified Analyst, [43]

--------------------------------------------------------------------------------

No, my questions were answered.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Okay so we have another question from (inaudible) [Alumis] from (inaudible)

--------------------------------------------------------------------------------

Unidentified Analyst, [45]

--------------------------------------------------------------------------------

You spoke a lot about new markets that you're opening in the Far East. Can you just to check if there is any other material changes to your export markets, whether positive or negative, to your existing markets?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [46]

--------------------------------------------------------------------------------

Yes. We, in general, we expect -- because now is the world poultry price is at lower level. And due to the situation in China with...

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [47]

--------------------------------------------------------------------------------

Swine flu.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [48]

--------------------------------------------------------------------------------

Swine flu. Not just MHP and I'm sure a lot of analysts expect that price of poultry may increase next year. Yes, everywhere because you know the situation with China, with pork. But anyway, we will see.

--------------------------------------------------------------------------------

Unidentified Analyst, [49]

--------------------------------------------------------------------------------

And in terms of your rights to export to certain regions that's -- it is nothing material, there is no changes to your export markets? In the past...

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [50]

--------------------------------------------------------------------------------

Sorry?

--------------------------------------------------------------------------------

Unidentified Analyst, [51]

--------------------------------------------------------------------------------

In the past, there has been some restrictions so there is anything material to your -- I just want to check from a risk point of view, all your markets are still open, existing markets?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [52]

--------------------------------------------------------------------------------

Yes. No, sometime you have to understand that we have some problem -- temporary problem with exports in different manner, region. And sometime we have the temporary problem with the export to Africa region and even CIS country. Yes or always, we have some temporary problem in different markets. That is why we have -- that is why it is our main route of our export -- of export our activities is geographic diversification. Because I cannot say that everywhere we have the best of the best situation. Or to be honest, always we have some problem and that is why we move. We direct some product from one region to other region, it depends on the price, it depends on the situation with some restrictions and with some changes.

--------------------------------------------------------------------------------

Unidentified Analyst, [53]

--------------------------------------------------------------------------------

So at the moment, there's nothing that will impact exports volumes materially, overall?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [54]

--------------------------------------------------------------------------------

No. Materially, yes. I would like to repeat, yes, we have some temporary restrictions but at the same time, we understand while we can redirect this product from 1 market to other market.

--------------------------------------------------------------------------------

Unidentified Analyst, [55]

--------------------------------------------------------------------------------

Okay. And which market is impacted at the moment, if you don't mind me asking?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [56]

--------------------------------------------------------------------------------

Temporary -- yes, we've temporary issue in some regions in MENA.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

So we have another question from [Chillgal Forenzi] from [Alumisel].

--------------------------------------------------------------------------------

Unidentified Analyst, [58]

--------------------------------------------------------------------------------

Just a couple of questions on pricing in the different regions, please, to clarify. So Europe, and I like to think that on average across Europe prices were down 6% year-on-year? That's my first question and then if I can split it.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [59]

--------------------------------------------------------------------------------

No. No, it's the average export price, it's the average export price.

--------------------------------------------------------------------------------

Unidentified Analyst, [60]

--------------------------------------------------------------------------------

Average export price. So what was the price for Europe year-on-year? Was that...

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [61]

--------------------------------------------------------------------------------

Year-on-year, in the Europe price decreased -- yes, I will tell you, 1 minute, approximately by 20%.

--------------------------------------------------------------------------------

Unidentified Analyst, [62]

--------------------------------------------------------------------------------

20%, okay. And in the MENA region?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [63]

--------------------------------------------------------------------------------

Yes, no -- if you compare with -- compare to -- MENA region is very interesting as it depends on region. Yes, in some region, even increased. In some region, decreased. Yes and you can...

--------------------------------------------------------------------------------

Unidentified Analyst, [64]

--------------------------------------------------------------------------------

The price across MENA, what was it?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [65]

--------------------------------------------------------------------------------

Yes, in total in MENA, it is 0 approximately.

--------------------------------------------------------------------------------

Unidentified Analyst, [66]

--------------------------------------------------------------------------------

Flat. Okay, and...

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [67]

--------------------------------------------------------------------------------

Slightly higher by 5% -- higher because as the mix maybe increased by 5% because in the different, moving in different countries.

--------------------------------------------------------------------------------

Unidentified Analyst, [68]

--------------------------------------------------------------------------------

Okay. And then in Ukraine, what was the price that was slightly positive, right?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [69]

--------------------------------------------------------------------------------

In Ukraine, price increased by 3%.

--------------------------------------------------------------------------------

Unidentified Analyst, [70]

--------------------------------------------------------------------------------

Okay. So given the slowdown in Europe, in prices anyway, can you just explain the dynamics of our impacting that price movement? I mean, is it because of increased exports from Brazil? Or what's driving that?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [71]

--------------------------------------------------------------------------------

Yes. It is a lot of different factors. One of them Brazil. And the second as I said so previously, Polish producer significantly increase production volumes. But at the same time, yes, we know that a lot of small Polish producers today, I am sure at 100% generate losses. And huge losses with current price, yes with current price, especially small Polish producers.

--------------------------------------------------------------------------------

Unidentified Analyst, [72]

--------------------------------------------------------------------------------

But you said -- just going forward then, I guess, this swine flu situation in China will result in substitution from pork to poultry. What are your expectations for prices then in Europe for next year? Do you expect them to materially increase -- I know it's difficult to make that call given the various factors, but what are you guys thinking? What are you guys modeling, base case?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [73]

--------------------------------------------------------------------------------

You're completely right. It's very difficult. If you look at different research -- analytic research, for example, from Rabobank, the research was 40 pages. Yes, everybody is expecting the price should be increased.

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [74]

--------------------------------------------------------------------------------

Yes, but it is still feasible.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [75]

--------------------------------------------------------------------------------

But, yes anyway nobody knows exactly. That is why I think that we put in our budget for the next year, the price very similar with current conditions -- with current level.

--------------------------------------------------------------------------------

Operator [76]

--------------------------------------------------------------------------------

So we have another question from Stella Cridge from Barclays.

--------------------------------------------------------------------------------

Stella Cridge, Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research [77]

--------------------------------------------------------------------------------

Just in terms of the follow-up. So before you were talking about the flexibility that you might have on CapEx, if you needed to generate some additional funds for land purchases. I was wondering, when it came to dividends, is that also something that you see is potentially a bit flexible either in the absolute level of payout, or whether you could delay the payout to perhaps generate some more cash in the short term? Just wondered there what your thoughts were on that state?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [78]

--------------------------------------------------------------------------------

I think you've heard correct. We're a public company. And since 2012, we announced that we will pay dividend every year. That is why we need and must be consistent with our dividend policy.

--------------------------------------------------------------------------------

Stella Cridge, Barclays Bank PLC, Research Division - Head of EEMEA Corporate Credit Research [79]

--------------------------------------------------------------------------------

So you've been paying about $80 million a year in total. And so you're basically saying that, that more or less is the dollar value that you would like to stick to every year?

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [80]

--------------------------------------------------------------------------------

No more than less, yes.

--------------------------------------------------------------------------------

Operator [81]

--------------------------------------------------------------------------------

So we have no further questions. Dear speakers, back to you for the conclusion.

--------------------------------------------------------------------------------

Anastasiya Sobotyuk, MHP SE - Corporate Secretary [82]

--------------------------------------------------------------------------------

Thank you very much for the call today, and thank you for your questions. In case you missed the opportunity, please use our e-mails and we will come back to you shortly. Thank you, and have a nice day. Bye.

--------------------------------------------------------------------------------

Viktoria B. Kapelyushnaya, MHP SE - CFO & Executive Director [83]

--------------------------------------------------------------------------------

Thank you, bye.

--------------------------------------------------------------------------------

Operator [84]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's webcast call. Thank you for participation, you may now disconnect.