AB Akola Group (AKO1L) Earnings Call Transcript & Summary

Good morning, dear listeners. Welcome to Akola Investor Relations Conference. I'm Emilia 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 on the Nasdaq Baltic YouTube channel. I encourage everyone to submit questions in the Q&A section at the bottom of the screen. You can submit them either anonymously or with your name. With that said, I'm pleased to introduce today's presenter, the CFO of the company, Mazvydas Sileika. Please, the floor is yours.

Good morning, everyone, and thanks for joining me this morning. My name is Mazvydas, and I'm the Group CFO of Akola Group and a Board member. Please be aware that, of course, the presentation can have or I can express directly or indirectly some assumptions or forward-looking statement that, that's, of course, only the current view of the management. So I'm with the group since 2020, 4 years now, and I'm going to take you through this presentation this morning. So Akola Group consists of 63 companies as of 9 months of '23-'24 financial year. We actually are cleaning up a bit our structure. We have 7 companies less than basically a year before. We want to close companies which are not operating or optimize our activity by merging companies together. And we have already merged 4 companies into 1 in Latvia with our poultry operations. Now we have 1 company called Kekava Foods there. We closed 3 companies on, on-the-go in the quarter, and we acquired a minority share in a start-up called OMG Bubble Tea last quarter. That's not in the company list. We don't show that in our company count because we have a minority stake, but it is now actually a significant or important part of our business development going forward. After the reporting period, we made another minority investment into a drink start-up which is called Brite. That's also not represented here. And we have started the reorganization of 1 more company in this quarter. So this after reporting period and when we merge the companies, we'll have 1 more company less in the structure. Looking at the main ratios after 9 months of this financial year, we see that there is some stabilization in the performance of the group. If we still compare it to the last year, we are lower both on sales and earnings. However, you can remember that last year was a bumpy ride for the group when we talk about changes in commodity prices, and the volatility in the market was very big. Last quarter, we had a significant net loss. This year, we still have a net loss, unfortunately, but it's much, much lower. If we look to our EBIT margin, it stands at 2.2% this year versus 2.7% last year. So the gap is not that big. And it's much more than 5-year average. However, when we look at return on capital employed, unfortunately, it's much lower than last year, which stands at 4.5%, and it's below the 5-year average. We will see how it transforms to the end of the day, however, at this point now, it is below the 5-year average. P/E is very high. Of course, we have lower earnings per share due to calculating the result on the 12-month rolling basis. The EPS is only EUR 0.04. But if you look, of course, our net profit is lower compared year-on-year quite significantly, and we'll talk about that later why did this happen. Balance sheet looks strong. Balance sheet value is decreasing. Now we are below EUR 900 million. At the peak, we were close to EUR 1 billion. But with lower commodity prices as well, lower inventory on our books, we see that we are going down, and this was actually expected by us. Borrowing base, if we calculate on the whole group level, is also very conservative. It stands at 49%. So meaning that we have less inventory on our books, but as well that we have quite a lot of equity of our own, which we are using such to trade main commodities and other stuff. At closing of this quarter, we had EUR 490 million of available credit lines, and we performed EUR 29 million of CapEx. This year is intensive in CapEx, and we will have more to come in the last quarter. As you know, we are building 2 -- 3 factories. But of course, not everything will be finished in this financial year. There will be a rollover going forward. Due to the lower overall debt position, long-term debt, including leases, has now a significant share, a more significant share. It is 42%. And the total debt overall is EUR 311 million, including leases at the end of the quarter. Overall, group has EUR 303 million of its own equity. Capital ratio remains very solid and strong. It rebounded from 30% to 35% due to the decrease in the total balance sheet value, but of course, as well that the company is profitable and adding up to the equity. EBITDA on 12-month rolling basis is EUR 52 million for the [indiscernible]. So you see on the 12-month basis, we are a bit above that. And the debt-to-EBITDA ratios are actually going back to normal. They were elevated last quarter. This one, they are going back and net RMI adjusted debt-to-EBITDA is 4.5. Short slide about the changes in the group structure. I probably won't go through it. You will have it in the presentation if you want to follow up that after the webinar. I will move to sales, and you can see that sales are lower this year. For the first quarter, we have -- for the -- sorry, for the 9 months of this financial year, we have EUR 1.1 billion in sales. Last year, it was close to EUR 1.5 billion. So we have a significant gap or change in sales. The same goes for the volumes. We have 2.3 million tons of various commodities sold, when last year, we had close to 2.7 million. So you can see that the revenues are 25% lower year-on-year, and volumes are 12% lower year-on-year. So suggesting that the average price correction was also -- fell. So we are lower not only on revenues, but the commodities that we trade at were lower on price as well. The segment responsible for the biggest drop is Partners for Farmers. As you know, this is the commodity throughput we have. The main changes are probably in grain trade category. You will see that later on. But we see that farming has delivered more or less better result in terms of sales, but the impact for overall group earnings is lower. Food segment delivered something similar year-on-year in terms of sale. So you can see the food segment is keeping on increasing in the overall sales mix, and now the food segment sales at 26% of the total sales, which is actually nicely corresponding the strategy we have going forward. If you look at our gross profit dynamics, so we have EUR 104 million of gross profit for 9 months, EUR 9 million less than last year. We could say not that much less, but that also translates further on down the profit and loss. However, the 9-month gross profit margin is actually higher than last year, and it's much higher than 5-year average. 5-year average is 5.9%. So on gross profit level, we have lower trade. We are actually doing quite good because, to be honest, we are looking for that profitability and looking for more juicy deals and trades, but the pressure overall in the market remains very good. You can see that food segment is delivering fantastic results compared to last year. And it goes both. We have very good results coming for the -- from the poultry segment. It has finally rebounded. The dynamics are very good, and we have a strong result delivered by the poultry segment. But overall, the food segment as such instant meals for flour and breadcrumbs, we are delivering a solid forecastable result year-on-year, where, of course, we have more volatility in the Partners for Farmers segment. And this year is very unfortunate for the farming segment. We had a significant write-down of cost in the farming segment because the assumptions taken into account last financial year are not there. Prices were lower and the costs were higher on input. So we had a loss in the farming segment, which, of course, doesn't help with the overall profitability. EBIT margin is a bit lower compared to year-on-year. It stands at 2.2%. However, it's still higher than 5 year's average. So overall, the group is looking better. Of course, OpEx pressure is there. We have an 8% increase in OpEx, which doesn't help to deliver more stable result. But of course, the main impact for the contraction in EBIT is lower sales year-on-year. You can see that the food segment is continuing very strong going forward as well in EBIT level at EUR 12 million compared to last year's EUR 2 million. However, Partners for Farmers are much lower year-on-year, EUR 19 million versus EUR 39 million. And as I told before, farming has not had a successful year, and we have negative figures there, which doesn't help overall the group results. So I'll go now to the segment information. We don't have that many changes important for farmer segment, it's more or less the same. If we look at the total sales of the segment, this is the main reason why overall, the group sales are lower, because we have EUR 400 million lower sales in this segment and around 400,000 lower tons which we sold. The main implication here is that we have lower grain sales, 400,000 tons of lower grain sales. We have feed more or less the same level of sales, and then inputs are also more or less the same quantities. Some are even higher. So overall, we have a better result there. Grain storage and logistics, higher income from drying services and continuously strong gross profit. You can see that we have EUR 11 million versus EUR 8 million last year. Grain and the oilseed trade, as I mentioned before, lower quantities traded. Strong competition among exporters as well as Russian activities very, very high. They discount their sales in the market. But overall, the gross profit is still satisfactory. And of course, we will end up full year results lower in terms of quantities, and probably strategically are 2 reasons for that. We have lower harvest overall in Latvia, so we have lower quantities to trade there. And the other reason is that we were quite selective when buying grains in the second half of the year because the market is quite difficult and competition very high among global exporters. Feed business, strong result from compound feed category, was outweighted with deteriorated margins in raw materials and feed additives trade. This is much lower this year because we have a lot of restrictions for transit and import into Poland from Ukraine. The materials which we trade are actually very cumbersome now to bring through the border. And of course, we have to compete with Russian and Belarusian origin in the European market because it's still imported and companies and users buy them. So this year is nothing compared to last year in terms of profitability, but that comes more from the trade, which we have from Ukraine to the rest of the Europe. Compound feed looks very good. It's fully utilized, and strong results from there. Inputs, quantities via key input categories were growing. Normalized profitability for seeds and fertilizers trades. Last year, you remember, fertilizer trade were very complicated. However, plant protection and micronutrients category, way below average, mainly due to oversupply in the market. The competition is tough, so the margins are going down as well. Agricultural machinery, very, very competitive market. This year, the market is actually contracting quite a lot from 20% to 40% in different categories and actually different markets. Food production, total sales are more or less in the same level. Quantities-wise, we have grown, and we have grown mostly in flour and breadcrumbs. Poultry is more or less stable. Instant foods looks as well better. So overall, poultry has stabilized their results, and not even stabilized but start growing nicely forward. We have good prices in the shelves or in the supermarkets, and we have much better input structure, meaning that the gas prices through the winter and currently, the feed prices are favorable for us. So the margins have opened, and we have the result for poultry segment coming in that area, we would expect or we would perform. And you see how poultry is important overall for the group. When we have a good result for the poultry overall, the result is coming even better. Instant and ready-to-eat foods, lower quantities, though record high profitability, illustrating a decline in some of the costs, and we have favorable sales prices. Overall, we also added some extra products and extra production from that acquisition of Grybai LT stews and soups, which we bought from our group. So this segment is actually becoming very significant and important for the group, and we are developing that further with our investments, which you probably more or less know about. So we have EUR 41 million of gross profit compared to EUR 19 million last year, and a lot of that comes from poultry. Agricultural production, sales-wise, only little less. Ton-wise, even more. We have higher sugar beet production this year, so that's why we have higher quantities. But overall, rather than that, if you take that out, the quantities are more or less flat, but we have lower production prices for about 30% to 35% in the crop area. And the input prices still were quite elevated, which made this segment actually unfortunately unprofitable from the crop production perspective. The harvest for '24 looks well now. We have sown around 19,000 hectares of arable land. The condition of the crop is actually good or very good here in Lithuania and in our farming companies. Their humidity is really enough, and we have all the inputs bought and application is not lower from our side. That's the same actually more or less story as well for Lithuania. Maybe the difference is that we have lower winter sowings this year in Lithuania that can impact the harvest a bit. But rather than that, Lithuania is looking good. A bit more complicated situation going up north to Latvia and Estonia. Winter kill during the spring was more visible there. So we have some resowings with spring crop in Latvia and Estonia because the harvest was impacted there. So it looks like it's a bit more difficult year or harvest you can see for those areas coming for the next season. Milk production, somewhat better raw milk purchase prices year-on-year. However, costs remain still quite high because that come also from our own feed production and the inputs we use to produce that feed. But the prices dynamics are not favorable for us. In the last few months, we started the mill -- raw milk prices started to decline. And we don't expect any positive actually changes to the next autumn because usually during the summer, seasonally, the prices are decreasing even further. So that's probably more or less from my side. I hope to get your questions, and please don't forget to subscribe to our news and investor alerts on our website. And thanks for listening, at least for now, and looking forward to your questions.

Thank you for the presentation. We will now proceed with the questions. Before that, I would like to remind everyone, you can submit the questions in the question box below. The first question is, do you expect grain trade margin compression to last -- into the last fiscal quarter or maybe even next fiscal year?

I would not like to make very far forward-looking answers regarding this. We will see. Now regarding the next year, the situation is still evolving. Now everyone is trading as we call weather, better impact for the future harvest is very important at this stage now, and that, you can see dictates the wheat price and the rapeseed price in the market. It has increased recently to area of EUR 250 and EUR 260 from the lows we could see -- we have seen in spring of around EUR 220 per ton, and that's mainly because of new weather developments globally. And especially in Russia, winter kill had an effect there as well. They are now estimating a lower harvest, so that made a bit more lift for the price overall. So it's still very hard to say how the price will form in the next harvest. Now it seems that the conditions are very good here and the price has lifted up to better levels globally, so that helps our local farmers. How we'll look at the trade, it's hard to tell. It truly depends a lot on the final harvest amounts and how players, big players like Russia will act in the market because recently, it makes a lot of impact.

Thank you. Could you comment on the plans to reach the targeted EBITDA for the full financial year of EUR 70 million to EUR 90 million?

Fourth quarter is critical for us. In both -- in a few categories. One of them is, of course, Partners for Farmers. Fourth quarter is very, very important as we are selling big amounts of inputs to the farmers. So a lot of earnings have to come from there. Last year, we were very unfortunate in this area because, if you remember, we had quite significant drought. And when the drought happened, of course, all the farmers stopped buying inputs and investing into the future harvest because we didn't see any sense. They were expecting lower yields, and that in a sense, happened. So far, we see the activity of the farmers as positive this year. It still can change because we are very vulnerable with the weather. But so far, the weather helps, so it is important as well for machinery sales. We will see how that will perform and evolve because farmers are buying tractors and cultivators before the harvest, and if they have a good opinion of the harvest and they see that it can be a successful year, they're more willing to invest. The other part which is very important is poultry. Poultry seasonally has a strong fourth quarter due to, of course, lower input prices coming from gas consumption, but also because the weather is better and people tend to consume more meat and they go out and they grill more, and we have usually higher sales. So fourth quarter is very critical and important. You can see that the gap is quite big. But it's usually the last 3 years that we deliver, and we need to deliver quite a lot in the fourth quarter. The other thing which is still a big unknown for us, because we do the calculations and assumptions in the end of the year, it is the biological value of the crop and our milking cows. So that also impacts and can change the full year results quite significantly because we have to do the revaluation. If we would think that we are very far apart from the guidance, we probably would issue a statement. But as of now, we are looking for the last quarter to be very strong.

Thank you. The next question is regarding operations in Ukraine. Should operations related to grain, oilseed, oil trade from Ukraine decrease in the future? And are you looking for other options to replace this part of the business?

This is a very difficult question. We are actually at the grace of the geopolitics here. We have people there. We know how to source grain, oilseeds from Ukraine, however, the trade through the border and the logistics are really very difficult currently, and the main assumption we are working on that it will remain so. So basically, we think that we don't foresee a quick rebound there because this is connected with a lot of politics. And you know that politics are very difficult as also we have a lot of elections this year. But the other thing is also that Ukraine is actually exporting quite well through their black -- at the seaports, so that also changed the playing ground a bit because there are less surplus quantities which are willing to be -- or to be traded through the Ukrainian-Polish border. What we are trading quite well, we are trading quite well under origins, and they are mainly Kazakh origins, like sunflower meal, rapeseed meal, some oils. But we don't see other huge opportunities to change the volumes which we had from Ukraine. Because basically, you understand that the logistics plays a very big part here, and the geographies which are near Lithuania or near the Baltics, they are mainly Russian and Belarusian, Ukraine, which we don't trade with the first 2 of them. So to find other areas where you have commodities which can be brought to Europe or to Baltic seaports, it's not easy anymore. As I mentioned at the beginning, we are trading Kazakh origin, but that only comes from western part of Kazakhstan because that's where only the logistics make sense. Other goes to China and other Asian countries. So to be honest, not a lot of different areas where we can still source commodities profitably.

Thank you. What is the long-term EBITDA target for instant foods segment when all new facilities will be up and running?

We haven't disclosed that yet. We will do that in an appropriate manner because we need to see where we will settle down in the market. So far, we had a very strong market, as you can see, and that was mainly impacted by previously, COVID, and then, of course, the high inflation and so on. So we will see how that goes, and we will communicate accordingly to the market.

Thank you. And Akola has invested in a beverage start-up. Could you tell us more about this investment, as the group has no control in the start-up?