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 for a rewatch 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 am pleased to introduce today's presenter, the CFO of the company, Mazvydas Sileika. Please, the floor is yours.

Good morning, everyone, and thank you, [ Emilia ]. Thank you, everyone, for joining their investor community, analysts and colleagues as well. My name is Mazvydas, and I will give you an overview of activities and financial results of Akola Group for the full financial year of '23-'24. As always, please keep in mind that the presentation consist directly or indirectly expressed forward-looking statements or current view of the group's management, but that's only based on assumptions and existing circumstances. I am the Chief Financial Officer and Board member of the group, and I will present to you today the main highlights for the full financial year of '23-'24. So as always, I will start with structure of the group. It hasn't changed a lot throughout the last quarter. But if we go back to the beginning of the year, we started with 69 subsidiaries, and we have ended the year with 64 subsidiaries, meaning that we have decreased the structure of the group. During the year, of course, we closed several companies. We opened several companies. But all in all, we have less in total count for the end of the financial year. During the last quarter, we have announced that, but we finalized and we finished the investment in natural functional drink start-up Brite. We initiated liquidation of Kormoprom Invest, so which will result and finish next financial year. We have registered new company, SIA KEKAVA BIOENERGY; and completed reorganization of GERERA UAB (sic) [ UAB GERERA ], which actually has finalized in financial year of '24-'25. So after the reporting period, we have sold shares in KG Khumex Coldstore and Khumex Holding. These are 2 companies based in the Netherlands. So in the first quarter of '24-'25 financial year, you won't see Netherlands as a country we operate in anymore. We also have sold shares of UAB Sunvesta, which was a holding company for one of solar panel production special purpose vehicles. If we go further on, the main highlights for the financial year '24 -- '23-'24 is that our EBIT margin reached 3.15%, which is much better than last year, which stands at 2.07%. And actually, this is a very satisfactory result for the group and its management because it's much higher than the 5-year average, which stands at 2.3%, but we also have reached our financial target, our long-term strategic target to have an EBIT margin of 3%. Hopefully, that will hold on. But this year, we have succeeded. If we look further, return on capital employed is close to 8%, better than last year, which was around 7%, 5-year average 7.2%. So we are better than the average, increasing the return on capital. However, we are a bit behind our strategic targets here. If we move on to earnings per share, they are slightly better than last year. They stand at EUR 0.17 versus EUR 0.16 last year. They are a bit lower than 5-year average, but the 5-year average is a bit distorted due to very, very good exceptional result in '21-'22, which brings us to price to earnings. We finished the price-to-earnings ratio close to 7. Last year, it was almost 8.6. 5-year average is 2.1. That's also a bit distorted due to a very exceptional year of '21-'22. But overall, I think long-term P/E of the group was around 9. So we are below long-term price earnings ratio so far. Balance sheet looks good. Overall, I think the end of the year is strong. We finished well. The total assets are just below EUR 900 million. So we are around EUR 100 million below the peak of EUR 1 billion in terms of total assets. However, balance sheet was increasing more on the side of property, plant and equipment because we are investing quite a lot. We had made investments last financial year. They have carried onwards to this financial year as well and property, plant and equipment stands in EUR 204 million. Short-term debt portfolio or overall working capital and its financing looks good. Consolidated borrowing base is lower year-on-year. It stands at 54%, which shows both that we had lower or lower numbers of working capital overall in the group and also that we have more equity now after this financial year, which we used to finance the working capital. We also use credit lines, which we have EUR 460 million total available for the group for its financing purposes, of which 40% is long-term debt. Long-term debt percentage has increased because we are investing quite a bit. So we are taking long-term loans out to finance our investments and CapEx requirements. Total debt portfolio stands at EUR 318 million for the end of the year, and we performed EUR 46 million of CapEx investments during '23-'24 financial year. Part of those investments, which were actually announced carried over to this financial year. Some of them will go live soon, some of them during the financial year. But some of them will be implemented during all the financial year '24-'25 and start only in '25-'26. So keep track on our public announcements, and you will see how we are going on with the investments overall. One of the probably most important ratio is capital ratio. From the lows of 28% or low 30s%, we are now stand at 36%, which I think is very good still for a group, which is primarily dominated by short-term assets, which basically indicates that we are still quite a bit of a trader in commodities. But also, I could say that we had our debt level under control. The year overall was a bit bumpy, but we finished strong. So we managed to keep our debt level under control. Net debt stands at 4x EBITDA. RMI adjusted debt stands at 3.8x, which is just below our long-term target, which is 4. And we also delivered EUR 75 million of EBITDA, which is in range of our strategic goal between EUR 70 million and EUR 90 million. A short slide about changes in our segment revision, but I think you have seen this throughout all the financial year, and you are more or less now familiar with them. So I will move on to revenues, which are basically lower year-on-year. You see that we have delivered EUR 1.5 billion in revenues, which is EUR 500 million less than last year. We also traded just above 3 million tons of various commodities. So volume is down by 700,000 as well. But all in all, I would say that we have a healthy split, and we are increasing the split between our food production activities and trading. Now the split stands at 26% and 75%, which is -- which has changed year-on-year from 21% and 83%. So the revenue of 12 months for '23-'24 was lower by 25% year-on-year compared to 18% contraction in volumes year-on-year. So this suggests that there is a price correction going downward in the main commodities and activities we operate or commodities we trade. So even though we have less volume, but the price correction is there also quite substantial. The biggest decline in revenues, of course, is attributed to partners for farmers, which is 21%, and that mainly was impacted by lower trade in grain and oilseeds, which has both lower volumes and lower revenues due to decrease in prices. Even though farming have higher volume in terms of tons we produce in our farming companies, However, top line also decreased there because lower commodity prices were evident year-on-year. So even though we grew in volumes in Food segment, however, the price correction is there in the market is going downwards. So we have also a slight decrease in revenues, but they are, of course, lower compared to Partners for Farmers segment. So it looks like this year, we managed to keep the profitability or look for better trades and deals, which delivered better results overall. However, we were dealing in a more declining price environment and in declining revenues. So we move forward to gross profit dynamics. We have delivered EUR 152 million of gross profit, which actually is a bit lower than the historic '21-'22, but higher than last year. So meaning that maybe we are getting a bit more stable or the trading environment we are operating in is less volatile. I would like to draw your attention that our share coming from food production has increased as well here. Last year, it was 23% of total gross profit. This year is 39%. One very important thing, which highlights the profitability or the success of this year is, of course, the 12 months gross profit margin, which stands at 10.1%. It's better than last year. And I think it's one of the best in the last 5 or 6 years, so to say. It's even slightly better in the record year '21-'22. So gross profit is also better than 5 years average, which stands at 6.6%. So we're searching for better trades and partners for farmers, but also with rebound in poultry and strong results from other food segments, we managed to increase our gross profit quite substantially. Of course, it's still diluted by trading business a bit, but it is compensated by our Food segment, which is actually illustrating our strategy going forward and why we are so heavy investing into food production in all the segments. Unfortunately, Farming segment on contrary delivered historically low gross profit, 5-year 12 months average is around 24.3%. Last year was around 15%. That's, of course, both due to weak or low grain prices as well milk prices. So farming result is lower than last year, but farming results were very good for the last 3 years. They were increasing year-on-year. So this year, we have a bit of a setback, but that's, of course, due to the repricing in the market. So moving down to operating profit, which stands at EUR 47 million for the end of '23-'24. It is higher by EUR 6 million from last year. And I would like to draw your attention that in the operating profit level, both Food and Partners for Farmers delivered very similar results. Actually, they are more or less equal, both delivering or contributing by EUR 21 million to the consolidated operating profit overall. Can we call it the new normal or the normalization? Well, hopefully, it is fair to say that last year and the year before was really antitypical. So more stability, less volatility in the market, hopefully, will allow us to deliver this kind of results or even better going forward. As I mentioned before, we are really pleased and happy that we managed to reach 3.1% in EBIT margin, which is actually really high compared to 5-year average, which stands at 2.6%. We also have reached our strategic long-term target. Of course, one of the things which maybe unproportionately decreased or didn't allow us to gain all the growth in gross profit is inflation in OpEx. Year-on-year, we have 13% higher operating expenses. We have quite a lot of pressure from wage inflation, various taxes have increased, logistics costs. So that's on our OpEx end. If we look forward, that's still a big challenge for us going forward. That didn't -- maybe the rate or the quickness, the pace how some of the costs are increasing has decreased. But overall, the trend is upwards. So yes, in total or overall, in summary, it is a quite -- not quite, but a strong and successful financial year. It was a bumpy year, but we finished -- we managed to finish strong and delivered satisfactory results. We are within our EBITDA strategic range, which is between EUR 70 million and EUR 90 million, whereas for the full financial year, we have close to EUR 75 million in EBITDA. I would like to move to our segments and I'll talk a bit more about them. And I will start from Partners for Farmers. Quite a bit has already been said, but just to look more carefully at this, we have a sharp decrease in sales by close to EUR 500 million. We have also a drop in volumes by another 700,000 tons, and that was reflected also in the consolidated results. But if we look at the different business lines, so grain storage and logistics has higher income from drying service and very strong continuous gross profit. If you remember or if you don't, I will remind you that during the harvest in '23, there was some humidity and rains. So the grains delivered to elevator network were a bit more humid. So we had more income from drying services. So that's why we have really good and strong results coming from this business line. Grains and oilseed trade, we have lower quantities traded. However, we were focusing on more profitable trades. We were targeting to increase our profitability. And if you look at the business line more attentively, the overall or total gross profit is lower by EUR 4 million. However, the gross profit in percentages is higher and it stands at 3.4% versus 2.2% last year. So the grain trade wasn't easy because we have lower volumes coming from Latvia. They had lower harvest last year. And also the quality of the grain, which was traded for us last year was a bit antitypical. The quality was lower. Then we can move to feed business. Both compound feed and feedstocks were traded in similar to previous year's gross profit level in terms of percentages. Combined feed category profitability decreased due to slightly lower share of higher profitability compound feed trade. So meaning that we have diluted our compound feed production with feedstuffs trade. Also last year, we still had a quarter included of our previous Russian subsidiaries, which had a very good quarter of last year. That's also a bit uncomparable for going forward. Inputs, it's a good year for the inputs overall. Quantity-wise, key input categories were growing, especially seeds and also we restored the profitability in fertilizers. We have both -- in both positions, we have growth in quantities as well. However, plant protection and micronutrients category were below average profitability, mainly due to oversupply in the market of these products and the competition last year was really fierce. Hopefully, we have a new page, a clean page going forward in this kind of trade, and we will see how it goes next year. Agricultural machinery, highly competitive market due to supply distortion still coming from COVID times. We have high stock reserves in warehouses. Overall, the market on average in the Baltic states have decreased by 30% in the main categories. And overall, farmers were cautious after last year's harvest because quality was below average and the prices were not very favorable. So the decision to invest was a bit difficult on their end. Also, financing was not very easily available. Subsidies and grants were a bit late. So all in all, the market in agromachinery was quite complicated. Food production. So you can see that total sales in terms of euros have decreased, but only slightly. However, the main positions have increased in volume. So we are producing and selling more in the market. Poultry business showed restored profitability. And I think it's -- overall, it's a fantastic result for the poultry business, not in terms that they were really in a hard situation for the last 3 years. But overall, we managed to perform and deliver fantastic results for this year. I think if we look forward for poultry to keep up will be the most important thing going forward. But of course, you can see that the price for poultry meat has decreased or is decreasing slightly in the market. There is competitive pressure there. However, the decrease in main input costs as energy and feed was quicker. So that allowed us to maintain or to increase our profitability in this segment. Also, the competition environment is very dynamic. We have some supply disruptions coming from main export markets, but that won't last for long and the situation changes quite quickly all the time. But we are really happy with the results we have for this year for sure. So in instant and ready-to-eat foods, we have lower quantities, though very strong profitability. So illustrating decline in cost, which is outweighed by slower correction in sale prices, but don't be misleaded the correction or the decrease in the market price is really ongoing, and it is there. Also, what has helped and what has delivered the result is the inclusion of Grybai LT activity. This is the last summer's acquisition from our group, soups and stews, so they are here as well. So we also delivered and increased these categories business lines results as well. Flour, so we have lower grain prices, pushing down flour production cost, and that's why we have slightly better result year-on-year. The same goes with coating systems. We have improved profitability due to decrease in grain prices in the market. So what actually helped our food production business is because we had decreasing input prices, didn't help that much our agricultural production, meaning our farming companies. This is a bit of a different story. You can see it's a natural hedge, but they do correlate in opposite sides. Overall, we have lower sales. We went from EUR 50 million down to EUR 45 million, which reflects lower grain prices as well as only slightly higher milk prices year-on-year. Volumes are higher, both in milk category as well as main cereals, but the increase mainly came from positions like beetroots or sugar beet, which are overall heavier than grain and other oilseeds. So crop production, lower production prices in combination to still expensive inputs. That's the story of last financial year. Grain prices decreased quicker than the input prices. So the overall profitability is a bit weak. And I think it's the same story for all the market and for all the farmers out there. A quick glance to the harvest of 2024. So approximately 90% of the fields are harvested and all the main commodities are, of course, harvested. Maize and peas and beans are still left, but preliminary or approximately, we have above-average yields for winter wheat, which is the main commodity for us and close to average yields for malting barley and winter rapeseed. So roughly 55% of the '24 harvest is already sold under forward sales contracts. So I think it's a healthy proportion going into the financial year '24, '25. If we look at milk production, so we have better result in terms of gross profit overall. We have EUR 4 million versus EUR 3 million last year, but the raw milk price is continuously low. So we see a slight increase. However, it's very hard and you have to be very efficient to have better results year-on-year. You have to be more efficient as a big farm because internal feed production was still quite high last year, quite expensive due to input prices. And that, I think, is a story for the whole market. What actually helped us is that we have higher tons per cow annually last year than the year before. So last year, we had 11.8 tons per cow annually versus 11.4 tons a year before. So that helps both total volumes produced as well as profitability in margins. So this was it from my side. Thank you very much for listening. I hope you have questions, and I'm ready to answer them as we go forward. And just a quick reminder, if you haven't yet registered, please go to our website, subscribe to our news and you will be always up to date with the group's public announcements. Thank you very much.

Thank you for the presentation. We will now proceed with the questions. [Operator Instructions] The first question we received is congrats on a solid end to the relatively challenging fiscal year. Could you please elaborate on EBITDA outlook for the new financial year?

Thank you very much. Indeed, it was a bump here, but we finished strong. The fourth quarter looks to be very important for the last 3 years, as I was telling during all the year, during these webinars. So this year, we managed to finish strong. Last year, as you can see, was maybe a bit different story. Last year, we had adverse weather conditions in June, which didn't help us to have good trading conditions. So this year was a different story. So we finished strong. Regarding next year, please follow our -- any updates, but the best indication is our strategic target. So that still remains unchanged, and it is between EUR 70 million to EUR 90 million. We will update that if we will see that we have certain ground to do that or to do so.

And could you please indicate an approximate CapEx size for this year?

CapEx size will be something very similar to last financial year. The main investments we have announced that we are building a bioenergy plant in [indiscernible] as well as seed factory in Iecava in Latvia by Dotnuva Seeds. We have other maintenance investments. So those are the biggest ones. We also announced that we are started planning and we are working forward on bioenergy plant in Kaišiadorys, but that's still in a preliminary phase because we are going through all the permitting and working with the local [ county ] and local communities. So those are main investments for next financial year potentially. The other ones are more or less the finishing of the noodle factory in Alytus, which should go live quite soon in September or October and also the coating systems or breadcrumbs production plant in Kedainiai, which should go live by the end of the third quarter or beginning of the fourth quarter. So -- and that will sum up more or less to the same amount as last financial year.

What are your plans concerning minority shares in subsidiaries?

So we have -- well, we have a different approach there. We have -- we had really weak results in poultry parts. So we were not in a position to actively buy shares. We are suggesting from time to time to sell shares for [indiscernible] minority shareholders, and we are open for that. However, we haven't yet announced any public tender for that. But if there is an occasion, we are open to buy the shares there as well.

And which segments would have the biggest potential to contribute to profitability in the coming years?

Well, it's still very early in the financial year. I guess that maybe something similar can be forecasted or thought of as this year, I mean, in terms of in the proportions. The things which might change, of course, is we will see through the year how trading is going on. The quantity of the total harvest in Lithuania looks good. It stands at 7.5 million tons of various crop commodities. Overall, in the Baltics, 13.5 million tons. So in terms of quantity, it looks like a good trading quantity. Quality is a bit challenging as last year. We have, on average, lower quantities -- quality, sorry, and we lack a bit of a high-protein or high-quality grain. So we'll see how that will develop in the market. So that can change. We will see how the input prices go throughout the year. So it is still to judge how it is going to be for the trading segment of Partners to Farmers. In terms of food, I think all the logic is still there for a good result, but that's meaning in terms of EUR 70 million to EUR 90 million in total consolidated. And we will see how fastly or how quickly our new investments, which I just mentioned will go live this financial year, will start contributing to the consolidated profitability and consolidated EBITDA. And I think we will see that in the second and maybe third quarters in a sense. So we will see if the trade -- what's the trade -- trend, sorry, overall for the consolidated group performance.

Could you share some thoughts on how farmers are doing and if they're willing to spend more or inputs or equipment this year?

So as I mentioned just before, it's a bit early to say. We just harvested. It is already evident the overall harvest is good in terms of tons. Quality is a bit below average. Maybe less encouraging thing is the overall price for grain. So it is a bit on the lower side. We'll see what's the trend going forward into the year. So it really depends when the farmers are selling grain. If they managed to sell grain in the beginning of summer where the price of main milling wheat was a bit higher and was really satisfactory for the farmers. So I think that will improve their financial position who are selling today or now. Yes, the price is a bit on the lower side, but I think on average, the farmer should be profitable. Part of the harvest will be sold later. So we will see how the price will help moving forward if it will go up and that will add up to profitability of the farmers. So it's still hard to say how good it will be, but I can say now that it's not bad. It's a working condition environment where we are operating and the farmers are operating actually.

And could you please share your top 3 local competitors in grain trade and how Akola compares to them size-wise?

In grain trade, so well, we have Agrokoncerno grudai, we have Agrorodeo and we have [ Scandagra ]. Probably those 3 will be closest in size in terms of volumes. I don't know the specific volumes, but I guess that Agrokoncerno grudai and Agrorodeo might be higher in terms of volumes. [ Scandagra ] may be a bit lower, but it depends year-on-year. The differences mainly are maybe in the infrastructure. Agrokoncerno grudai has the highest capacity in terms of elevators. We are the second in terms of the capacity of elevators. And then goes [ Scandagra ] and Agrorodeo are basically operating without their own elevator capacity. And maybe the other difference is that we operate in Lithuania, Latvia and a bit in Estonia in terms of grains or grain trade. The same is doing [ Scandagra ], but Agrokoncerno grudai and Agrorodeo, they are not in Latvia and Estonia. So maybe those are the main differences between the competitors there.

The next question is regarding share buybacks. As Akola shares are trading at a 1/3 discount to book value and at the same time, return on capital employed is below strategic target. Would you agree that doing buybacks of own shares would achieve best returns and increase value of remaining shareholders?

Yes, I agree. The textbook would say so. But at this point in time, we haven't approved and the Board so far hasn't suggested any buybacks. So we will see how that goes forward in the future. But I don't dismiss this kind of tool that can be used in the future, so to say. I would maybe say the main reason why that wasn't yet used or wasn't used extensively is that we are going for quite intensive investment stage, which, on average, should bear a higher return on capital as well as on equity and we are diverting or putting our funds liquidity to those investments. So that's basically maybe the main reason so far not to go into large-scale share buybacks. But I totally agree that the combination of the price and returns would suggest that.

Have you seen a drop in prices for agricultural land with the drop in agricultural prices in general?

No, we haven't seen a specific or substantial impact for that. Land prices are quite stable, especially those which are the most productive in the most efficient regions because basically, if you remember the slide I showed you before, we had 3 fantastic years for farming. They were increasing year-on-year. And only this year, we have a slight drop in profitability, but the previous 3 years were very, very good, delivering good results for the farmers. So that's the main reason that the land -- agricultural land price hasn't moved downwards.

Do you have any plans for more equity research coverage for retail investors to be able to have better access?

We are discussing that from time to time. We are really interested, and I think it's very important to deliver good quality research for our investor base. We are considering either to increase the coverage in terms of times we release them or to expand the base of the research coverage analysts. So that's constantly on the table, and we will see if that bear fruits in the future, and we will do that.

And finally, how do you evaluate the recent news concerning Scandi Standard acquisition in Lithuania?

Yes. It's an interesting move by Scandi Standard. We haven't seen them buying that kind of assets so far in the market. Their acquisition strategy so far was to expand into markets to buy brands, premium brands with good market share. They did that in Ireland, and they did that previously in different Scandinavian countries. So this is a new move for them as we see it. They bought basically a processing production plant in Lithuania. They also will have to secure themselves supply of lightweight. As I understand, they will try to raise and they will raise chicken broilers themselves. So they haven't yet also done that extensively. That's also a new move for them. So while we are looking and analyzing that extensively and deeply, it is hard still to understand where they will sell the poultry meat, which we will produce in Lithuania, Will that go for the local markets or for the Scandinavian market. And that it's mainly -- that mainly will depend how it will shape the competition between us and them because either we will compete in Scandinavian markets. So they will produce here and export or they will try to compete here in the local Baltic market, which I think is already quite competitive having the Polish producers. Just around the corner, we have also last year, acquisition in Estonia, one of the biggest poultry producers, and they should pick up as well. So still hard to say. Only I could say that it's a new move for them, new maybe strategic move part of their new strategy, but it's something.

It looks like we've covered the most questions so far. If you have not sent in your question yet, please do so now. And the final question I have is, could you please elaborate on your M&A strategy further?

For sure. I think there's very few things we can do still in Baltics, but we, of course, are active in Baltics. We look around and we look for potential targets, which could be good add-ons for our existing businesses, either in scale or in product type. However, probably medium to long term, our M&A strategy will shift more towards looking for targets outside the Baltics. We are doing that already, but a bit more in a passive way. So we look at the deals which are brought to us to evaluate them. But I could say that we will be very disciplined, and we will be very picky to do something outside the Baltics due to the potential scale and risk in managing a business outside the Baltics. But it also would be a very logical strategic move for us going forward, especially if we talk about food production part, that probably is the focus for us to develop further because we see the returns. There are very good or better than in trading, which shapes and changes and improves the overall profitability and value of the group. So that would be the target for us, food production going forward in medium to long term outside the Baltics.

And as all questions have been answered on behalf of Akola and Nasdaq Vilnius. Thank you, everyone. It was a pleasure being with you today. The recording of the presentation will be available on the Nasdaq Baltic YouTube channel. Thank you for a very informative conference.

Thank you, everyone. Thank you, everyone, very much. Thank you. Have a good day.