AB Akola Group (AKO1L) Earnings Call Transcript & Summary

Good morning, dear listeners. Welcome to Akola Group Investor Conference. I'm Emelia from NASDAQ Vilnius, and I'll be moderating today's event. We will start with the presentation from the management, which will be followed by the Q&A session. Please be informed that this webinar is being recorded and will be available for a rewatch on Nasdaq Baltic YouTube channel. I encourage everyone of you to share your questions in the Q&A session of the bottom of the of your screen. You can submit your questions either anonymously or with your name. With that said, I'm pleased to introduce today's presenter, the CFO of the company, Mazvydas Sileika. Mazvydas, please, the floor is yours.

Thank you, Amilia, and good morning, everyone. Thank you for joining Akola Group webinar, where we'll go through the activities of the group as well as we will present the financial results for 6 months of financial year 2024. So please bear in mind that the presentation might have some forward-looking statements, but this is completely only the assumptions of the current view of the management, and please don't take it for granted. So as presented, my name is Mazvydas, and I will take you today through the presentation and the group activities. So for the 6 months ended in December, manage 17 subsidiaries and to associates. During the quarter or the 6 months as well, we have completed acquisition of Grybai LT, a company which we bought from Auga Group. So this is a company we added to the structure. We also split a company called Landvesta 1 into 2 companies, and a new company now is called Sunvesta UAB, which is basically a company who is in a position to develop a sun panel electricity park. We are aiming actually to sell it. So we are not going to develop, but it has all the papers and ready to do that. And after the reporting period, we have closed a bunch of companies in the poultry business segment in Lithuania and Latvia. So with the reporting, we will have less companies in the structure imported. The geography of the group hasn't changed that much during the quarter. We still are present in the same countries we were a quarter before. So the main highlights of the group for the 6 months of '23, '24 is not that promising at this moment. However, we a period where the calculations for the ratios include third and fourth quarter of financial year '22, '23. But if you look at EBIT margin, which stands at 3.13%, it doesn't look that bad. It's actually a good result for the group because the five-year average is 2.18%, so it's above that. However, it is below the last year. Last year, we had a very good result for first half of the financial year, and the EBIT margin was at 5.26%. So it is a difference. That is a change. However, we can see that we are still above and quite substantially above the 5-year average. If we go down to the ratios which we calculate on a 12-month rolling basis, the story is a bit different. As I mentioned before, the formula or the calculations take into account very unsuccessful Q3 and Q4 of last financial year. And with those quarters included, we have a negative price to earnings ratio because we had a loss in Q3 in '22, '23. Return on capital employed is also very low. It is below 5-year average as well as below last year and the same store with earnings per share. due to the net negative result on the 12-month rolling basis. The earnings per share are negative and stands at minus 0.08. Hopefully, when we go forward, we will roll over the result of the last year and the ratios should read that. When we talk about the balance sheet, that it hasn't changed that much. It is decreasing quarter-by-quarter as well as year-on-year. The current balance sheet value stands at EUR 900 million last year, similar period, it was above EUR 1 billion. So we are decreasing the balance sheet, and it mainly comes from the decrease of our value of inventory prices today are lower than last year. If we talk about the main commodities we trade the composition of the balance sheet hasn't changed that much. We still have a majority of the balance sheet consisting of current assets. We have added some property, plant and equipment with the acquisition of Grybai LT, the soup production company, as well as the intangible assets. When we look at the working capital, construction and the short-term debt portfolio, it looks like the base is decreasing further, meaning that both working capital requirement is lower this year due to lower volumes as well as lower prices. And we have more equity in the system, which we use for trading rather than that. Going to the main ratios of the balance sheet. So long-term debt and leases are 27% of the overall portfolio, which stands at EUR 359 million as of end December. The CapEx, we managed to make this 2 quarters is EUR 90 million. So it is an intensive year for the group in terms of CapEx. We are aiming to build 2 factories in our Food segment. We already acquired 1 company in the beginning of the financial year. We also are kicking off a seed plant in Latvia, and we're also doing some maintenance and other investments overall. So the CapEx during the second half of the year will increase going forward. We are well positioned to finance our financial year. As mentioned in the first quarter webinar, we have secured all our financing lines, and they are abandoned or really sufficient for us to finance this year's activities and they stand at EUR 520 million. Our capital ratio is improving nicely. The balance sheet is decreasing. Our equity is increasing and we stand now firmly at 34%. By the end of the year, we project to improve further. The biggest challenge this year is the debt level. For the same reasons as mentioned before, calculate our level covenants or ratios on a 12-month rolling basis. And you can see that on a 12- month roll basis, EBITDA is only EUR 31 million which, of course, gives us a challenge in the area of the net debt EBITDA, which now looks at 11x. Net RMI adjusted debt-to-EBITDA is also quite high at 7.3. So we are above our targets we set for ourselves. Short recap what we did with the segments. Just to remind you that we have merged 2 segments which previously were grain, oilseeds and feed with products and services for farmer. And now we have 1 unified segment, which is called Partners for Farmers, where we report everything which is connected with agriculture, in terms of trading, servicing the farmers providing them feed, feedstuffs and of course, inputs and buying and trading grain out of the Baltics. Other segments were a bit more clarified, but they remain more or less the same, meaning agricultural production now is called Farming. Food products, food production and other activities are more or less the same. It's a basket of small activities or businesses we own and try to develop. So when we look at our sales dynamics, we see that we have sales this quarter as well as for the 6 months of this financial year, and they are now even below the sales of '21, '22. And the main reasons for that are lower volumes traded in terms of tonnes. So year-on-year, we have minus 27 on the tonnage we traded. So this year, it's close to 1.5 million tonnes in various commodities. Last year, same period was 2 million tonnes of various commodities traded. That, of course, is mainly impacted from the Partners for Farmers segments. You will see further on in the presentation how it layers up. But that's the main decrease, and that's mainly influenced our sales. The other reason is we are trading commodities and we're selling products in lower prices because sales decreased more than the tonnes we traded and the sale decrease stands at 33%. So both, lower tonnes and lower prices impacted our sales revenue. However, I would really like to emphasize that we are on track with our strategy, which is to increase our earnings and EBITDA from our food production businesses close to 30%. And you can see now that the sales are nicely hedging to 30% for half of the year stands at 26% coming from food product production segment. When we look at the gross profit composition, we see that the trends remain very similar. We delivered EUR 77 million of gross profit. It's comparably lower number than last year. However, higher than in '21, '22. But when you look at the margins, the margins are actually quite nice. For 6 months, the gross profit margin stands at 10%, which is actually higher than last year and the year and it's much higher than 5-year average, which is 6.7% for the first half of the financial year. So meaning that with the lower sales or the lower volumes we traded, overall, the trades were more profitable, one part of that. The other part is that the earnings coming from food production are much higher and much profitable. So we can see that now the gross profit coming from the Food Production segment stands at EUR 28 million, which is 37% of the gross profit, whereas last year, it was only EUR 12 million, and it was 11% of the overall gross profit. So it means that I want just to reiterate that the food production is more and visible in our portfolio. It gives more stability as well as more margin to the overall profitability. And the Food segment, it's both our grain-based foods produced better results -- of course, the winner or the star of the first and the second quarter is poultry production because now we have 3 quarters in a row poultry production is rebounding and delivering results. So you can see how much that affects the overall results when we talk about good poultry performance. So we can move now forward to the operating profit dynamics, it is much lower than last year. But as I mentioned before, last year was really exceptional for the first half of the year. The second half was a very different story. We delivered EUR 24 million in operating profit. Nice split between production -- Food Production and Partners for Farmer segment. However, you can see here that farming is lagging a bit behind and it has a negative result for the first half of the year. It also impacts our margins. Margins are now in the operating profit level lower than last year. However, they are still higher than the historical average, which for 5 years stands at 2.2%. So what actually this tells us that even though we had a good profitability and gross profit margin, however, we carry a significant part of our fixed operating expenses. So the overall mass of gross profit we produced was not enough to cover our operating expenses in the same manner as we did in the gross profit level. And thus, we are producing a bit lower results overall in the operating profit level, especially that was evident in the second quarter. So first quarter was really strong. Second quarter due to lower trading activity, lower activity from the farmer side as well as poultry was very strong in first quarter, lower in the second quarter. That's impacted our operating product. So moving forward, I think that should even out throughout the year. So let's look more now attentively to the segments themselves. And Partners for Farmers is the first one. I will first talk about the sales. As you can see, the main impact for the group consolidated sales, of course, comes from this segment. So we have a difference of roughly EUR 400 million in sales for this segment compared to last year. So this year, it's EUR 571 million in sales. Last year, it was close to EUR 1 billion. So that's the main difference, and the main difference comes from grain trade. So you can see that we have traded roughly 655,000 tonnes of grains and oilseeds last year. Whereas last -- this year, sorry. Whereas last year, we have traded 1.2 million tonnes of grains and oilseeds compared year by year. So it's a huge difference. It's 50%, and that's where the ton difference and sales in terms of euros comes from. Because other segments, you can see that feed and inputs, they are roughly in the same level or even growing a bit. So that's where the sales impact comes from. So when we look at gross profitability, of course, it's lower than last year because the last year was phenomenal for this segment, which impacted the overall consolidated group result. But when we look at grain storage and logistics part, higher quantities coming to our grain elevators and higher income from drying and cleaning services to improve the gross profit. So more or less the result for the full year already is visible in this segment. So it's better than last year by EUR 3 million. If we look at grain and oilseeds trades, it's, of course, lower, both. Profitability-wise is lower as well as volume-wise is lower. So we have EUR 5 million versus EUR 26 million last year. However, if you look at the gross profit for this part on a 5-year average basis, it is better. So the trades we made actually are quite profitable. However, we have lower trading volumes. And looking for the second half of the year, in the end of December, we still had roughly 0.5 million of grains and oilseeds still to trade. So the next half of the year, we still have a significant amount of grains and oil seeds to trade, where we expect or we hope that they will improve the result going forward. So feed business is doing as well, worse on gross profit on the basis compared to last year. Feed production, compound feed production is quite stable. It delivers a good, stable results quarter-by-quarter. However, raw material feedstuff trade, there's a bit more -- actually that is a trade -- is a bit more complicated this year. There are many reasons there. We have complications on the Polish-Ukranian border to trade. The prices are a bit more volatile this year. So the result is also a bit different. When we look then at inputs, inputs are growing quantities wise in the main categories. We have -- and we see a normalized profitability margins for main fertilizers as well as seeds. However, plant protection and micronutrients category this year is struggling. And it's struggling because, of course, maybe that the weather was not really good in autumn for application. Prices are a bit depressed for main grains. But also, we evidenced a very high oversupply in the market, which increases the competition between the traders quite heft. Agricultural machinery delivered a very similar result as last year, even though have a slight decrease in margin. Overall, the market is very challenging. The market is decreasing by 15% to 20% this year. So the competition is really fueling in. But for now, the first half of the year was quite successful for our machinery trade. Now let's move to the Food Production part. So in terms of sales, the results are only slightly lower in terms of tonnes and quantities, we delivered more. So overall, the segment is really doing very well. And that comes partly from poultry business. You can see that in terms of gross profit, we have EUR 16 million versus EUR 11 million and this EUR 16 million already makes the poultry business in black figures when we talk about net profit as well. So that really helps a lot because that gives stability. And we can see that, that came from quite good pricing, whereas our input prices decreased, meaning energy and feed. But of course, the price pressure from main buyers and supermarkets each coming in for the next half of the year. So we will see where we will end up. But so far, the dynamics were favorable for us. Other Foods are delivering as well, very good results. We can also see that it includes 5 months results of our new company, which we acquired from Auga Group, Grybai LT. So it is now included in instant food products. So all the categories and our food production are growing. They are stable. And that's why we delivered a very nice results of EUR 28 million gross profit compared to EUR 12 million last year. We have a good cost structure. We still have a good pricing lift on. Of course, that cannot persist for a very long period. We see some pressure for our main buyers as well as competitors on the pricing side, but we see that dynamic so far is good. We are able to manage our input cost quite well. Agricultural production very mixed feelings for agricultural production so far. Sales are lower because the main prices for main grains are lower. Milk prices are lower as well. But if we exclude our sugar beet production, the harvested quantities year-to-year are very similar, we can see flat. So with all the challenges, with all the dry weather we had during harvest, we delivered a good result in terms of quantities. However, prices, which we get for the crops is 30% to 35% lower. So of course, the input prices are decreasing as well, but still a gap remains because they are decreasing slower. However, for the 6 months or by the end of December, we still had around 40% of our grains, which we harvested unsold. And looking at the dynamics of that, it should improve the results going forward because overall, those are quantities which we will still trade. Looking forward. So we roughly saw a 5% less of winter sowings. That's not that much significant number, but it's a lower number year-to-year. So far the proposition after the winter is quite good. So we'll see how the spring goes and then towards the beginning of the summer. Milk production really doesn't help the segment this year. You can see that last year, we have a gross profit of EUR 3 million. This year, it's only EUR 1 million. The prices are really depressing the market. They are 25% lower and there are some signs of increase However, they are still very challenging and not that favorable for us. So the prices are not variable. The costs are decreasing. Inputs, key prices are decreasing, but they are doing that lower than the price increase. So it is not a very favorable conditions as of now for milk production in the market. So please subscribe to our newsletter. If you haven't done that yet, you can do that. If you go and you jump on our website, which is akolagroup.lt, and you will receive all the latest news from us. Other than that, thank you very much, and I'm looking forward for the questions.

Thank you for the comprehensive presentation. Now we will proceed with the questions. [Operator Instructions] The first question is regarding investment targets. In a recent interview, Mr. Zubas stated that Akola Group has a 5-year strategy, which foresees EUR 300 million investments and a target to boost sales to EUR 3 billion. Would you please provide a bit more flavor about investment targets?

Yes. So that's part of our 5-year strategy, and we have built it around several pillars. One pillar is that we want to be and we want to remain the leader in our Partners to Farmer segment, meaning that we have to be the best performing player best partner for farmers in Latvia, Lithuania and Estonia, where we sell inputs. We want to be an efficient grain trader. So we want to maintain our market share. The other part is built on fast expansion in our food production businesses. We want to increase, which I have really mentioned several times before, and we are steadily increasing our food production segment, meaning that either expanding our existing businesses or adding new ones. So we're expanding our noodle, instant noodle production. We are building a factory in Alytus. You probably know that. We have communicate that to the market. We're also in building a new breadcrumb factory in Kedainiai, which is also expanding our existing business. That was also in the news. And we added new businesses like the soup business, which we bought. So that's also putting something into our portfolio new, which we think we can grow. So the food part is mainly about instant ready-to-eat convenient foods. That's the segment we really believe in because people are busy these days. Life is very fast, quick and that's where we think is a growing nice segment where we can save time for people. And those really taste, healthy ready-to-eat meals can -- has a good trend. The other part of food production expansion is that we are actively looking for acquisitions outside of Baltics. We also have said that several times. We have -- we don't have yet things to communicate to the market but we are working on that. And that would be something new for the group. So we really cautious about this, and we want to make it, of course, successful but we are actively working on that. So that would be also in the same area, which I have mentioned before, either in our existing food business portfolio or something very similar in the segment of ready-to-eat convenience foods. So the other part, of course, we want to maintain our arable land, which we have. We are not maybe planning to expand it a lot, but we want to maintain it. We want to be a very efficient agricultural production. And of course, we want to be a significant player in the milk production part. So we're having all this in mind, that's how the strategy is built. And that's how we based our EBITDA targets. So now the long-term EBITDA target, which we have communicated to the market is in the area of EUR 70 million to EUR 90 million. When we will implement those investments which we have now in the pipeline, we will probably reiterate and we will issue a new long-term target for the group EBITDA. So we will see what will be the market conditions, are we going according to the business plan, and you will see how we see the growth in EBITDA as well. And this year is very significant because part of those investments, which was mentioned in the interview, a significant part of that is done this year. This year, we have planned somewhere between EUR 70 million to EUR 85 million of investments. Next year is still being planned. But things like seed production plant in Latvia is going to kick off. That's a significant investment and that's one of the things where we are aiming to maintain our leadership. We are the main market player in seeds and seed production in the Baltics. So that's what we are strengthening. Then we have our biogas part. We have already started production of -- sorry, construction of biogas plant in our [ Lithuania Kaišiadorys plant ]. So that's also an area where we want to maintain the efficiency of our agricultural production. And we are also looking to do the same in our poultry segment. That's, of course, not yet communicated. We are still working on that on the business case. It's still in the movement part, but that's the area where we think biogas also should work because we have input, we have the manure. We have the manure coming from the chicken growing, and that makes complete logic and sense for us to look. So the other parts of the acquisitions or the expansions and the investments, that's still to come. And as soon as we will have some news, we will share either in terms of organic growth, organic expansion and investments into our existing businesses or acquisition-wise. And this is the background where actually the future sales growth has to come as well as future EBITDA. So that's everything around that. And to be completely precise, our 5-year strategy is built until the year '26, '27, meaning our financial year. And closer to that, we will review the strategy, how we perform then we will build up on that for the next 5 years. And we will communicate that to the market as well in a timely manner, what should and could you actually expect. Thank you for the question.

The next question, could you please indicate total CapEx for this financial year and next?

So this financial year, I just mentioned, this is somewhere in between from EUR 70 million to EUR 85 million. It is -- a few things are still ongoing. As usually, a few things carry over to next financial year but you can expect to have it somewhere in that area. For the upcoming financial year, we haven't yet planned. I don't have a precise number, so I wouldn't like to give you a misleading figure. So we will communicate that when we are actually ready.

Next question, given Q2 results, are you still targeting to meet budgeted EBITDA?

We are still on track to be in the gap of EUR 70 million to EUR 90 million. That's probably what I can tell you. We haven't revised that. However, I want to emphasize that spring is very important for us because spring is still a very active period for input sales as well. You can see that we still have a lot of grain to trade. So it really depends how we will trade the grain, and other parts like machinery sales are crucial. So we are -- as of now, we are aiming for that strategic number but spring is really very crucial for us. As you can see, last year, spring was really challenging, very cold conditions, farmers went varying -- late into the fields. They were making all the decisions to buy inputs very late into the year, and that influenced our results alone. So spring is crucial. Let's wait for the last 2 quarters, but we are keeping our forecast and that strategic gap.

The next question, Food Products segment, net revenues were down. Could you comment on reasons and demand side dynamics?

Dynamics of demand are good. The sales are only slightly lower. And that comes from lower sales price, basically, the main parts of the products we sell tend to decrease in price. Only, that's the main reason. And it's only still only a slight effect because everything has price pressure. Poultry products has price pressure, noodles, breadcrumbs, flour, you name it. Everything is decreasing because after the high inflation. Supermarkets and consumers are looking for cheaper offers and cheaper solutions. So there is price pressure coming from the demand side. However, as of now, as of end of December, and the decrease was only a slight of revenue.

Could you give arguments why Grains' trading segment was merged with Services for Farmers segment? Is the willingness to hide unsatisfactory results of trading?

No. I mean, we see as management that one segment as one, as a whole. We manage that -- like in the Board and the management level, we see that as 1 segment. That's one of the key reasons. The other part is that, that segment more or less runs around the farmers. So basically, the dynamics, the fundamentals which influence the segments are the same. Basically farmers, farmers, financial health, grain prices, grain demand supply input demand supply and demand side. So we wanted to show the investors the segment in the same way we look at as well as you know, that's everything about the farming and farmers and grains.

Could you please elaborate a bit more on competition in grain input trade?

Yes. So this year, the quantities of an are fine. They are close to -- a bit higher than historical average in Lithuania. So there are enough quantities actually to trade. You can see that we had a successful year with our elevators. We managed to take in more rains than last year. So we have enough grains to trade. Latvia and Estonia is a bit different situation. They have 5% to 10% lower in grain quantities because the weather conditions there were even more rough than Lithuania, especially in Estonia. And there, the situation in terms of grain, grain trade or grain production is really difficult. In terms of inputs, so input wise, the competition persists especially in the plant protection part because there is a huge oversupply from the trader side in the market. So really, price pressure is there. Also the weather in autumn was not that good for application of plant protection products. So farmers were a bit hesitant to buy them. The other thing is that the grain price was not that favorable for farmers. So they were not that willing to sell the grain in autumn and they were keeping them and hoping for better prices in spring. So that also influenced farmers' decision to buy inputs, including plant protection. That they were a bit stranded on liquidity because we didn't sell the grain. So input part is a bit more challenging in terms of competition, but especially in the plant protection. Fertilizer wise, quantity-wise, we are doing good. We are growing a bit and as well as the profitability coming from there is quite normalized.

Thank you. It looks like we've covered all your questions so far. [Operator Instructions] On behalf of Akola Group, thank you, everyone. It was a pleasure being with you today. The recording of the presentation will be available on NASDAQ Baltic YouTube channel. Mazvydas, thank you for a very informative conference.

Thank you very much. Thank you for joining.