AS Agrova Baltics (EGG) Earnings Call Transcript & Summary

[Audio Gap] investor webinar. We will start with company's presentation and continue with live Q&A session. [Operator Instructions] For your convenience, we will be recording this session and replay will be available shortly after the call. Let me now introduce you to the management of APF Holdings, Jurijs Adamovics, APF Group Founder and Chairman of the Management Board; and Mihails Keziks, CFO and member of the Management Board. Handing over to you.

Good afternoon, ladies and gentlemen, dear investors, let's proceed to our semiannual webinar. We're going to cover quite an extensive agenda today, which is now available on your screens. So we'll cover all the important topics related to the operational and financial performance, the key developments in our business and also key developments in the industry during last year, and we'll also share the outlook for 2025. So I'll cover the topics from #1 to #5 inclusive. And we'll also share our views on the strategic outlook and the rest of the topics will be covered by my colleague, Mihails. So let's proceed to the performance highlights. The summary is now seen on the screen. If we speak of the operational performance, we have produced and sold 99 million eggs last year, which represents a 6% reduction to 2023. This is largely a result of egg laying cyclogram. So we have deliberately decreased the production capacities in summer of last year so that we can react accordingly to the very significant influx of third country imports into Europe. So this was a deliberate action on the management side. If we speak of EBITDA, it's EUR 6 million, which represents a 7% reduction compared to year 2023. And the annual revenue reached EUR 12.7 million, which is 5% reduction compared to the year before. If we speak of gross profit, here, we have a good news. The gross profit reached EUR 3.7 million, which represents a 29% gross margin. This is historically the best ever result APF has demonstrated and the management team is very happy to report this result to you. Also, one of the key highlights of last year is that APF is the first and only player in the poultry industry, and perhaps not even in our industry, that has switched to 100% green electricity. Starting 1st of July last year, we only use energy that is powered by renewable sources, meaning hydro and also our own solar park, which we will touch upon later in the presentation. New product launches and partnerships in 2024. Last year was quite rich with developments on this front. We have continued development of our egg white smoothies, which has demonstrated a very solid growth in 2024. We have expanded partnerships and started to offering our products in new partners, new supermarket chains, Sky and Rimi. We have also started distribution with [ Virsi ]. And we have also added additional flavor of our smoothies product, which was orange flavor. And all in all, if we look back at 2024, the sales reached almost 50,000 units, which represents a threefold increase compared to year '23. Now the other important development speaking of new products is introduction of liquid products. We have deepened our cooperation with HoReCa and started offering of liquid egg mass that is used in confectionery and food service industries. And last but not least, we have launched 2 distinct egg packaging solutions tailored to very different segments. The Eggjoy, which is now one of the new trademarks, which we have registered last year, which is now available in several pan-Baltic retailers. And we have also launched a so-called big format or family format in [Foreign Language] or in English, The Big Pack, which is also a new trademark that we have registered. And it actually, looking at the latest statistics, is likely to become one of our top 3 best-selling packaging solutions. Another very important milestone is our e-commerce project, entitled Fiteg2. Fiteg2 is also a new addition to the family of trademarks owned by the group. This is the project we have launched in very late of 2024. In fact, the official launch was during the Black Friday in the end of November last year. The product lineup includes 3 distinct products. First and foremost, the egg membrane collagen. Then we will have launched the egg white-based protein powder. And we have also launched 3 flavors of egg white-based protein bars. So these are all dry egg protein-based products with very high value added. And this is a very important project for the group, which we will develop further during the forthcoming years. The investments into the launch of Fiteg2 have totaled roughly EUR 300,000, and that includes product development, development of the e-commerce platform and all related infrastructure. And we are likely to have some further investments into this project during this year as we intend to go into the new markets. Just also a very short snapshot why we have decided to expand into this project and this product. Actually, this was a project in the making for quite a few years internally. We have built an in-house research and development team, which was working on this project during last years. And basically, the idea was to capitalize on the highly lucrative and high-margin sports and health nutrition market in the 3 categories that we have launched. The estimated market size is EUR 28 billion in 2023 and demonstrating double-digit year-on-year growth in the last 5 years. So we do believe that this is an industry to be in for a poultry player like ourselves as we want to move on to production of a high-value product where our core business producing table egg can be used as a raw material for high-margin products. Sustainability initiatives. Sustainability remains at the core of our business and year '24 was quite eventful in this regard. So in spring last year, we have launched our own solar park, which is now fully operational and is capable of producing enough electricity to fully supply Aluksne Poultry Farm with its electricity needs during summer months. And during the year, the production output of our own solar park can meet up to 25% of annual consumption, which is quite sizable. And we intend to extend solar energy capacities further as we increase production capacity of the factory in subsequent years. Also, as I mentioned before, transition to 100% green energy is also a very important milestone and an important point to emphasize on our sustainability agenda. So as I have mentioned before, starting July 1, 2024, we have transitioned to using 100% renewable electricity, which, I guess, give us the right to say that APF eggs are produced exclusively using green energy. Also, we have reaffirmed our commitment to top-in-class energy management standards by renewing our ISO energy management certification in February. This is a very important certification that we continue to maintain in the future as well. Also, as part of our commitment to food safety and quality assurance, the Aluksne facility has successfully passed an announced audit, which once again represents that the operations and quality assurance at Aluksne facility adhere to the world's best standard, and we expect to maintain this commitment going forward as well. Next, we proceed to the post-IPO investment program and its execution. And as our investors remember, the key rationale for doing IPO was to implement the fourth development stage of the factory, which is now nearing its completion. But to be more specific, if we speak of the warehousing facilities and the liquid egg product production facilities, these are fully completed, fully commissioned. So this part of the investment project is 100% executed. The total CapEx reached EUR 3.6 million. The next and more substantial part of our investment project was construction of 2 additional barns, which looking backwards was 88% completed at the 31st of December last year. But I'm happy to share that the construction works are pretty much completed and the equipment assembly works are nearing completion as we speak. So these 2 new barns will be fully operational in May of this year. So the construction budget for these 2 buildings is EUR 2.7 million and the cost of equipment is EUR 3.4 million. And the total investment in launch of these 2 barns, including assembly of equipment and the investment that we need to populate these 2 new buildings with new flocks is EUR 9.2 million. Another development project that we have is development of our own pullet rearing facility in Preili. The reason we emphasize this particular part of the project is because a recent media coverage, which happened a couple of weeks ago with the Minister of Regional Development visiting the site as there have been some bureaucratic delays in completing environmental impact assessment processes. Now I'm happy to share with you the investors that when it comes to the preparatory work on our side, and submission of all the respective paperwork to the state authorities, everything is duly completed on APF side. Yes, it is quite unfortunate that this process has taken more than 3.5 years, but that's the reality we are facing when it comes to respective processes when dealing with competent authorities. Nevertheless, the final submissions on our side are completed. And we expect that the positive decision that will allow us to launch operations should be provided to us during first half of this year. Just as a reminder to investors who are not familiar, Preili facility is located 150 kilometers from our main site in Aluksne. And the intention is that we're going to produce our own pullets for ourselves. This part of the production process is now fully outsourced. As up today, we have been buying all of the flock from our partners in Poland. So the intention is to swiftly progress to a full vertical integration. And once the equipment is installed in this facility, we should be in a position to meet our own pullet needs and we'll be growing our own birds. Egg industry landscape and the financial results for last year, these are the topics that my colleague, Mihails will cover.

Thank you, Jurijs. Thank you, dear shareholders for watching. So let's now go to dive into market situation and the financial data, and we will start as usually with egg market segmentation in all Baltic states. What is of most interest here, of course, is the share of barn eggs in all 3 Baltic countries. And here, as you can see, at the end of 2024, still Estonia was having the smallest share of barn eggs. It was only 14%. That is explainable with the position -- strategy of Estonian big supermarkets that announced that they are planning to shift to the barn eggs at the year 2026, 2027. But still, you can see that this market share is growing. In Latvia, very good result. The share almost doubled to the previous year, and it was, of course, due to the last year share was rather small in Latvia as well, but we are, of course, proud of this increase we have last year, and we expect it to grow forward since largest retail chains have announced this transition as well in Latvia. And as you can see, it's 30% last year. And the leader, again, among all 3 Baltic states is Lithuania, where market chains are moving faster. And so they have already reached 37%, and we expect increase forward. And also, we are active in Lithuanian market as well that you will see in the next slides. This slide, here, we provide the development of egg prices in all Baltic states and Poland, comparing them to the average egg prices of APF monthly. It's very important to look here and to see what was this year. So from this slide, you can definitely read that there was a noticeable decrease in egg prices in the first half year of 2024 that was driven, as Jurijs said, by influx of substandard eggs from countries into Europe. And due to this, APF had to reduce the production capacity to decrease the supply of eggs to address this market situation. As you can see, we have managed to stabilize the prices somewhere in May, June last year. After that, on 1st July, the import duty was imposed by European Commission, and this stabilized the prices overall in European market, they started to recover. But by the end of the year, on top of that, additional avian influenza outbreaks appeared in Europe and also in the United States that have even more increased the demand for eggs, also for barn eggs. So the price have reached historical maximum and APF was able to trade the eggs over 2 months over the average prices of all 3 Baltic states and that allowed us to compensate the negative result we had in the first half of year so to finish this year on a good profit level. Now also let's have a short look into our sales of eggs breakdowns. First one will be breakdown by eggs sold to retail and eggs sold to industry, which means for processing, which is usually used when there is no sufficient demand from retail. So as you can see, we have managed to significantly decrease by 30% the share of eggs sold to industry, what was driven by the higher demand for barn eggs in all Baltic states. Another breakdown is split between eggs sold at APF own labels or eggs sold under supermarket private labels. As you can see, this year, this share of eggs sold to the supermarket private labels almost doubled. It unfortunately is unavoidable market tendency that we had to follow. And it's also explained by our strategy in this year that we was entering new supermarket, new big players in Lithuania and in Latvia, which is most common way to start it with a wider range of private label eggs sold. This slide presents the breakdown of eggs sold by destination. So reducing the eggs sold to industry, as mentioned before, we also managed to sell more eggs into Baltic states and the share of eggs sold to all 3 Baltic states have grown from [ 76 million ] year before to [ 86 million ] in 2024. But of course, you may notice that share of eggs sold to Lithuania almost tripled during last year, what is explainable, of course, by this leading position of Lithuania in transferring to the barn eggs in egg market. Next now, let us view main financial results. And actually, as usual, we explained the factors that influenced the change in EBITDA, first of all, of 2023 to 2024. So as we mentioned before, the net change in EBITDA during these 2 years was rather minor. It's only 7%. But again, factors inside the year was rather significant. The main decrease of sales we have, of course, in egg sales, as you've seen in the first slide, as Jurijs mentioned, we have a decrease of 6% in eggs sold and there was some decrease in average price. But due to the better product mix we received between barn, cage eggs, industrial, retailer eggs., So total impact on turnover was smaller, was only 5%. And in terms of money, it's reached EUR 720,000 smaller sales. But on top of that, it was improved by feed expenses reduction that we achieved. It was significant. It was more than EUR 1.2 million. Part of it is, of course, a decrease in consumption due to lower production capacity this year, but much bigger impact comes from the feed prices that have stabilized during last year. After that, there was some increase in administrative and production expenses that was associated with packaging, which is linked to better mix, but also increase in payroll expenses that are associated in both increase in average headcount, but also increase in salaries. Below EBITDA, changes in net results are even more obvious. Of course, EUR 200,000 reduction due to a decrease in EBITDA of 7% as mentioned previously, another EUR 200,000 increase in interest expenses that's explainable of attraction of more expensive financing this year. After that, a part of it, all other positions mainly have improved and brought our net result positive. But as mentioned also previously, due to ongoing investment Phase 4, we are restructuring our production plants, and we built new production facilities, and we were forced to write-off or dispose part of our fixed asset that brought us EUR 285,000 losses, and that doesn't allow us to finish this year with a profit. Nevertheless, our net loss in this year is very small, only EUR 5,000. And finally, let's have a general look at all main financial indicators. What you may obviously see here from this set of numbers that during the last 3 years of 2022, '23 and '24 when the company is running on its full current capacity of 3 barns, we were able to provide a stable and sustainable level of turnover. And in terms of gross profit and EBITDA, it was rather stable or even growing that in total proves that the strategy the APF have chosen is stable and sustainable. And due to investment phase we are now ongoing, of course, the net results are volatile. This year, slightly minor negative. So all indicators associated with this are negative, which is understandable by this investment phase when the loan service is high, but profit is still to come in this year, 2025. So here, we also wanted to add one more indicator. As all known, as I mentioned, we have attracted significant loan facilities, but result is still to come next year. Nevertheless, our net debt to EBITDA indicator is on a comfortable and sustainable level. And by the year 2024, it's just slightly above 2. I would finish here and back to Jurijs for the next information.

Thank you, Mihails. So let's proceed to the strategic outlook for 2025. So I'll cover here both operational targets and also financial. So let's start with operational milestones for this year. So today, obviously, the first and foremost perspective is to complete the launch of fourth and fifth barn and populate with a new flock of 250,000 hens. And this is something we are aiming to complete in May this year. So this would imply that in July this year, the factory will operate at the full capacity. So this is very important for us. And if all is well, which it should be, we are targeting a 60% increase in egg production output on a year-on-year basis. Also, given that last year, we have installed and launched the liquid egg production line, we have set an ambitious target for the team to reach a 20% market share in Latvia and reach 10% market share across the Baltic, which is ambitious but doable. And also speaking of operational priorities, we also intend to enhance the vertical integration and launch a pullet rearing facility in Preili. That's also a strategically quite important milestone for us. That is also important from the perspective of biosecurity. Also, the growth of e-commerce platform. As mentioned, this is a strategically new pathway for the group. We intend to expand our presence in the Baltics. We're working actually right now to launch at least 2 new products in the second half of this year. And once we have reached the internally set KPIs for the Baltic markets, we intend to do rollouts in other European countries as well to make sure the Fiteg2 business reaches necessary scale. And also year '25 will be very important in preparation of our next investment phase. Once the Barn 4 and Barn 5 are fully commissioned and operational, the development team, our in-house development team, will proceed with engineering design for 3 new barns, 125,000 birds each, and we intend all the engineering and design work to be completed this year to enable us to start construction in 2026. So 3 new barns is an investment addition for 2026, but that requires some preparatory work -- homework to be done this year. Now speaking of our financial outlook for this year. As mentioned before, we expect to reach 60% increase in the production output, which should translate into a fairly substantial increase in the revenue. So we expect to reach EUR 21 million of revenue in year '25, which represents a 60% growth compared to year '24. And we also expect a very substantial boost in our EBITDA. The target is to reach EUR 5.98 million, which represents a very ambitious 131% growth versus current year. The key growth drivers will be expanded production capacity, which is going live in a couple of months. We also expect to penetrate the liquid egg market. We intend to boost the growth of Fiteg2 e-commerce platform. We expect to reach some efficiency gains from internal pullet rearing. And we also expect that a very substantial contribution to our margins will be from the fundamental change that is happening in the industry. That is that the supermarkets are gradually going into the sale of cage-free eggs only. And we expect that this category to substantially dominate the supermarket shelves in the year to come. That means that a high-margin product mix will dominate in the product catalog that we are offering to our clients. So thank you very much for listening to our update and the presentation. And I think we are ready to proceed to questions.

[Operator Instructions] And let's start with the first question we have received. And it goes, do you plan to create shareholder bonus offers for your Fiteg2 product, similar like [ Virsi ], [indiscernible] and others?

That's something that is on the table. No decisions were made so far, but we see that there is such a request from our investors, from our shareholders. So we will give it due attention and we'll come up something that is attractive to our shareholders, yet is economically beneficial for the company as well.

Next question, could you please comment on the prospects of further liberalization of the European agricultural market for Ukrainian producers? What impact do you anticipate this may have on APF's operations going forward?

This is a very important question and liberalization of -- further liberalization of European market for Ukrainian producers is a matter that is quite critical, not only for the egg industry, but also for the agriculture sector at large. And we are taking a very active position here using NGOs that represents our industry, both in Latvia and also in Brussels. We are, of course, quite mindful that any continuation of the current regime will be harmful for both LatAm producers and also European producers. No secret that this issue is quite painful for the industry. It was quite helpful, and we believe it was very fair that starting 1st July last year, import tariffs were introduced for Ukrainian poultry products in the magnitude of EUR 0.15 for every 10 eggs. That has helped a bit to stabilize the market and to stabilize the prices, yet we believe that this is not fully sufficient. So we remain of the view, and this is also what we conveyed through our industry association, the NGO that represents local producers, that the issue of competition, which is one of the key pillars establishing European Union needs to be very carefully followed to, and we will be advocating hard for a fair competition and that substandard products are not allowed on the market and the same standards are applied to all market participants because fair competition is important, and we believe it should remain at the core of pan-European market.

The next question, what are your expectations regarding operational margins for the main business lines? Do you anticipate maintaining the same levels of gross margins in 2025 as achieved in 2024?

Yes. The short answer is yes. We expect the gross margins to be on the same level, mostly due to the fact that the product mix, as I said, is changing. We're introducing 2 additional cage-free barns in the coming months. We will be further decreasing the share of enriched cage eggs in our product mix, which means that if -- assuming that markets -- that the overall market sentiment remains as it is, as a minimum, we should be reaching the same gross margin levels as we have reached in '24. If markets are favorable, we should outperform 2024.

And the last question we have currently received. Could you provide your perspective on the current situation with U.S. poultry egg prices? What are the implications for the European market? And how might this affect APF's business model and strategic positioning?

We monitor very closely developments of the egg market in U.S. No secret that in U.S. retail, the egg prices are being sold at the historically maximum prices globally. This is largely due to the fact of the outbreak of unprecedented scale of bird flu. Our opinion is that this is likely to have a short-term effect and the main U.S. producers are likely to renew their bird flock in the next 6 months or so. So the situation that is happening in North America now represents a short-term spot opportunity for European players able and willing to export to U.S. We have taken a strategic decision that Baltic clients that are at the core of our client base right now and also the European clientele that we're servicing today remain the key priority for us. And given the limitations of production capacity that we see, we have decided not to pursue opportunities in the U.S. market at this stage.

And we have received another question. [Operator Instructions] So are there any updates on biogas project?

The biogas project is currently on hold, if I may say so. This is largely due to the fact that last year, we have made a few site visits to a leading European biogas producers. We have also held a series of meetings with specialized funds, investment vehicles investing in the biogas sphere. And we have taken a strategic decision that for the implementation of biogas project, the land plot that we have currently secured is not optimal because the best practice today shows that investment viability and potential sale of that project in the future improves if you have a direct access to the gas pipeline, gas grid on the same land plot. In our situation, the nearest connection to the gas grid is 14 kilometers from our site. So at this stage, we are pursuing potential land plot acquisitions where we would have direct access to the gas grid. So this is the #1 priority for the biogas project development team for the next few months to come. So once this is completed, we'll then resume biogas project development.

Thank you. Now all questions are answered. So thank you for being with us today.

Thank you very much dear investors. See you next time.

Thank you.