Astarta Holding PLC (AST) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the annual results call for ASTARTA. My name is Kaiza, and I will be coordinating today's call. [Operator Instructions] I will now hand over to your host, Marcin Gatarz, to begin the call. Marcin, please go ahead.

Good afternoon, everyone. It is Marcin Gatarz from Pekao. I'm happy to welcome you to today's call. We'll discuss ASTARTA's 2019 results. The company is represented today by Mr. Viktor Ivanchyk, CEO; and Mr. Viktor Gladkyi, CFO; and Mrs. Yuliya Bereshchenko, Business Development and IR Director. There is presentation for annual results available at ASTARTA's Investor Relations website. We will start with presentation and then there will be time for your questions. Now let me hand over to the company for presentation.

Thank you, Marcin. Everyone received the link to our presentation. So I would like to turn straight to Slide #3, where we provide an overview of our P&L results for 2019 and compare them to 2018. The company managed to increase its revenue significantly due to Q1 harvest in 2019 and that reflected in the strong volume sales growth in the agricultural segment, which also contributed about half of the total revenues. The sugar segment was basically flat as the prices for sugar was slightly up, but the volumes were slightly down. The soybean and Dairy segments demonstrated good performance with 18% and 18% revenue growth. More than half of our revenues are generated by sales to overseas markets. And out of EUR 253 million exports, EUR 150 million is done through the EU market. The gross profit margin went down from 26% to 20%, although there is always an impact from IAS 41 standard related to the changes in fair value of biological assets and agricultural produce. If we exclude those and you have a look at the lower right-hand corner, there is a table, which shows our growth and EBITDA margin, excluding the impact of the biological assets. The EBITDA increased on strong results from the Dairy segment, from higher margin in the soybean processing and the bottom line turned from lack -- from negative EUR 18 million to nearly EUR 2 million. Now moving on to the cash flows and our balance sheet. As we highlighted in our last results, in 2019, we focused on maximizing our operating cash flows. We started selling our 2019 harvest on a much higher pace compared to the previous year. We managed our working capital much better, and we reduced our days of inventory turnover as well as receivables turnover. And that allowed us to generate EUR 170 million of operating cash flows compared to just EUR 16 million in 2008 (sic) [ 2018 ]. Since our margins in the sugar segment remain very low, we preserve our cash by also managing our CapEx. So our CapEx was limited, just EUR 22 million, of which significant amount is related to finalizing the storage facility CapEx, which is now totally completed. Since we were in breaching our covenants...

[Operator Instructions] [Technical Difficulty]

Hello? Can I continue now? Okay. To continue, our efforts allowed us to repay about EUR 100 million of finance debt from financing cash flows. And the reduction on the balance sheet was about EUR 83 million. And this allowed to reduce the key leverage ratios, including net debt-to-EBITDA from 4.8% in 2018 to 3.5% as of year-end 2019. Also for everyone's ease of understanding of our leverage, most of our debt is related to working capital facilities. So if we adjust our net debt for readily marketable inventories, which are equal to finished goods, the leverage ratio is below 2. Since we are still in breach of covenants, we admit -- we highlighted on this page, but we remain convinced that the banks will not accelerate repayment of the loan. Moving to more granular analysis of our segment performance. On the agricultural side, Slide #5, you can see our harvest yields and the sales volume as well as the prices. For everyone's benefit, we also highlighted the change of IFRS 16 standard related to the land leases on our P&L in the agricultural segment. As you know, the standard requires to split the related amounts into 2 parts, one is related to depreciation and other to interest on lease liability. On a cash flow basis, the numbers are low, and you can see the cash flow land lease liability payment at the bottom of the table as a memo item. The revenues were up by 62% because we accelerated sales of our harvest from 2019. And also in the first half of 2019, we were still selling bulk of our corn from 2018 harvest. The unfavorable weather and lower-than-expected yields led to our gross profit margin contraction because of the lower contribution of the biological assets and agricultural produce. And that also was reflected in EBITDA, which was down from EUR 70 million to EUR 53 million, corresponding to 26% EBITDA margin in 2019. Of course, our costs were heavily influenced by appreciation of the local currency, which took a reverse in trend at the beginning of 2020. But 17% appreciation of euro against hryvnia also had its impact on our cost. Nonetheless, we focus on reducing of our fixed cost, certain for more G&A, general and administrative costs reduced from 9% of revenues to 7%. And our selling and distribution costs were also down from 16% to 13% of revenues on change of delivery terms. Slide 6 back to the helicopter picture of how we performed in the agricultural segment in terms of our yield and productivity in 2019 and the previous 3 years. We -- strategically, we would like to keep #5 position in terms of the overall land bank that we have in operation. For the last 2 years, this land bank yielded 1 million tons of grains and oilseed harvest for us. And we are the largest sugar beet grower in the country with 1.7 million harvest. The storage capacities, which was a 5-year investment project, is given -- they're approved to us from this year. Essentially, all of our harvest is going to our in-house storage facilities and also, we have room to do large-scale services to third party. On the land bank, we continue to optimize our land resources by rolling over or terminating lease contracts depending on the quality of land. Preempting the question on the land reform in Ukraine, we believe that the current version of the legislation is not going to change our business model. We will rely on long-term land lease contracts in the future as we did in the past. We also look for other opportunities. In the agricultural segment, we started an organic crop growing project on soybeans recently. And we introduced an integrated IT software solution for the agricultural segment, which helps us to manage and digitalize operations not just in the fields but also at the stage of planning, monitoring the crops at all stages to the sales. In -- what is also -- what we also would like to highlight today is that we have been working with independent farmers for quite a long time on sugar beet growing. 20% of the sugar beet, which is processed by our sugar mills, is coming from farmers that we have been cooperating for a long period of time. These are our key suppliers. And now because we built sizable storage and handling capacities, we would like to extend this cooperation from sugar beet to other crops, grains and oilseeds. So we are actively working on expanding our network of farmers cooperate in the regions of our operations. Slide #7, obviously, we don't control the prices, but we watch the developments in the global markets and how they affect us. The recent events are such that corn and oilseeds are coming under pressure from bioethanol and oil market. However, we do see potential in the wheat because in the current pandemic situation, many governments globally replenish their strategic reserves. And we believe that wheat situation will be better than with other grain crops. Moving on to sugar segment on Slide 8. No surprises here. The market -- the pricing for sugar is still suboptimal, both at global and local markets. However, we focus on rationalizing our operations. We produced 300,000 tons of sugar by using 2 less sugar mills. We recorded marginal but positive EBITDA in this segment, and our CapEx has been reduced to maintenance levels of EUR 1 million. And of course, we focus on cost cutting. Our SG&A cost in total went down from 19% to 15% of revenues in 2019. Slide #9. As you know, there has been an uptick in the global sugar prices at the end of the year, but that was very short-lived. And now the global prices are going down. The Ukrainian sugar prices are staying flat for the moment. We do believe that we are in the third year of the adjustment for the local sugar producers in Ukraine. And the level of production is going down with consumption. And this year, we believe that these 2 should match. Moving on to Slide 10. In terms of our strategic positioning, we are #1 sugar player in the market. And regardless of the level of consumption in the country, we would like to keep 20% to 25% market share, but focus on our cost. Last year, our high-quality sugar production was at 90% of total. And we now have a product sales mix approximately on a 50%, 50% basis between industrial consumers and retail consumers. Due to the quality of our sugar, we retained our key relationship with industrial consumers, such as Coca-Cola, Danone. On the cost-cutting front, we put 2 sugar mills out of operations in 2018 and '19, and that was together 20 -- about 1/4 of our capacity. And this year, we would like to keep the same amount of sugar produce, but we will not utilize one of our smaller sugar mills in order to have better cost. Sugar beet planting area last year was reduced by 13% from 40,000 hectare. And this year, our planting area for sugar beet will stay the same. Moving on to soybean processing on Slide 18 (sic) [ 11 ]. We are one of the top soybean crushers in the country, #2 with 14% market share. We operate at full capacity. The crush margin was widening last year and that allowed us to have a profit margin of 16% versus 13% in 2018. And this translated into EBITDA of EUR 7 million. Since this is a very new facility, we do not need to invest heavily in it and CapEx is only EUR 0.5 million. We see soybean segment as one of the areas for further expansion and constantly looking at other opportunities in the sector. Slide 12 very briefly on the Dairy. This is when revaluation of the local currency was beneficial to us. The price of milk went up from EUR 258 to EUR 326. Of course, this is something which is not the case since beginning of 2020. But nonetheless, we achieved a high productivity per cow, our herd was optimized. We produced 96,000 tons of milk. And we had a record EBITDA of EUR 16 million. In terms of our strategy and outlook, we will provide a short update on the first quarter and situation of quarantine currently. But looking on a strategic basis long term, we are working on our financial goals to reduce some leverage, getting within our covenants by actively managing working capital, managing our CapEx at maintenance levels until we see a higher margin and cash flow coming from the sugar segment. We will continue to manage a land lease bank of over 230,000 hectares. We are looking for more opportunities to work with the farmers in our region. And we can still look at opportunities for expansion when our resources will allow us. Slide 14, we thought that since the situation in the global market is changing very fast because of the pandemic and all investors are very anxious about how the restrictions might affect every business, we believe it will be beneficial to disclose our first quarter trading results earlier than we anticipated by several weeks, so that we can show our most recent developments quicker to the market. As you can see, we already sold the majority of our grain and oilseed harvest. So the volumes for wheat and sunflower in the first quarter of this year were not significant. We continue to sell sugar at healthy volumes, although the prices are still quite low. And we still see a positive pricing picture on the milk compared to the first quarter of last year. In terms of our forecast for the first quarter, it was the new planting season. Our crop structure did not change significantly. You can see that we slightly reduced soybean planting area on crop rotation rationale, but we increased planting for sunflower. We replaced some of our obsolete agricultural machinery with modern one, freeing up resources. And because of the mild winter and early spring this year, we managed to complete plantings for sugar beet already and sunflower, and we are moving on to corn and soya. Also as a small update, which we already made public, we have a new financing facility with DEG, a German development bank, and we also received a first $10 million tranche for our working capital needs recently. Slide 15, 16 and 17, we outline in detail our response to the pandemic. We believe that the agricultural sector is a key engine to the Ukrainian economy. And not just the Ukrainian economy. So this is the sector which is considered to be operating without any restrictions during the quarantine. So we continue our operations per usual. We expect potential volatility in the global soft commodity prices. But we see domestic demand for sugar and milk still holding up, although the local currency movement can affect the pricing. We do highlight risk related to our -- to the farming industry in Ukraine relying on transportation with state-owned rail network, Ukrzalysnytsya. But so far, it has been operating seamlessly, and we did not encounter any difficulties with logistics and our exports. As already mentioned, the farmland law has been adopted, but there is a quite lengthy adjustment period for the industry and staged opening, with the opening for individuals to own land lifting only in July next year and legal entities being able to purchase land only from 2024. In the current situation, we have enhanced business risk monitoring. We updated our risk metrics. We hold our daily boardroom meeting. And we monitor the situation in the market on a daily basis, especially in terms of our liquidity. We operate across 8 regions, but more -- about half of our agricultural land resources are located in the Poltava region. So we are in close contact with communities there. We help out local hospitals, and we spent almost EUR 1 million with urgent medical supplies to assist fighting the epidemic. Slide 16, we follow all quarantine recommended measures for our employees. Although the numbers in Ukraine remain relatively low compared to other countries, we introduced very strict hygiene standards. And so far, our sick leave absences are within the seasonal 2% to date. On our operations, we don't see any significant impact here. Our operations are across 8 regions, as I mentioned. The new IT software platform, Agrichain, in the appendix you can see a more detailed description, which allowed us to organize our field works on a remote basis long before the quarantine measure. So this is something that we have been practicing before the situation occurred. And our sugar plants are currently undergoing repair work. They will come into operation in the autumn. 17, we do not see so far any changes in our supply and customer relationships and logistics still intact. On the financial side, we are fully -- we have sufficient liquidity and cash reserves to complete our planting season until June. We are in continued dialogue with financing banks. As you know, about 2/3 of our committed credit resources are coming from development banks, such as EBRD, IFC, EIB. We have been cooperating with them for decades. So we believe that if we need additional liquidity, we can always rely on them. There is also the EBRD facility, which has recently been launched to provide pandemic-related support facility for the client. We have been cooperating with EBRD on numerous occasions as well. So we believe that if need to, there is a dedicated facility that we can tap. This is our summary. On Slide 19, you can see our key leverage and other ratios. We updated our 15-year track record on Slide 20, 21, 23 on a segmental basis. Just to highlight, on Slide 29, you can see our enterprise value structure and how land lease liabilities changed our leverage. And on Slide 30, we provide more breakdown of our finance debt. You can see that it is mostly dollar denominated. It's coming from development banks. And regardless of majority of our debt classified as short term because of the breach of covenants in IFRS accounts, the fact is that almost 3/4 of our facilities are long term. On Slide 31, you can see details of our IT solution for the agricultural segment. And the rest of the presentation is details on ESG policy and statistics. This year, we elevated our ESG issues to the Board level. We formed an ESG committee, which will take an overall supervision of our activities. And we are actively looking at the details of our ESG policy going forward. Thank you very much. We are happy to take your questions.

[Operator Instructions] Our first question of today comes from Jakub Szkopek from mBanku.

I have 2 questions. The first question is about the sugar beet acreage in 2020. Do you see that the acreage is shrinking another year? Or how does it shape right now? And the second question is about the sugar market. Do you expect that this Ukrainian sugar price could go up from this level? Right now I know that in second quarter the prices are like 20% higher than in the last quarter of 2019.

Thank you for your question. I will start answering, and perhaps my colleagues will also add. ASTARTA will keep its sugar beet acreage at the same level as last year. But yes, that happened after 13% reduction in 2008 (sic) [ 2018 ], and we can see that the whole market also adjusted sugar plantings downward. Officially, the projection which was provided by the industry association that it will be down by 5%. However, we are watching now the planting levels, and we have already completed our sugar beet planting season, and most of the plants already completed. So we believe the acreage will be in the region between 180,000 or 185,000 maximum. And on the sugar prices locally, yes, we believe that this is the third year of the adjustment for the local market. And we finally should see production and consumption match. This potentially can create a positive impact on the local sugar price. But of course, we would like to see it happening before we can say confidently that this will happen because we see the reduced sugar plantings, but the output of sugar will depend on the yield and the sugar content, which is beyond our control to some extent, it is weather dependent. Last year yields in sugar beet were suboptimal because of unfavorable climate conditions. So we need to see through this year.

Our next question comes from Marcin Nowak from IPOPEMA.

First, I have 2 questions. First would be about sugar as well, but from the consumption point of view. Do you see any risk that the domestic consumption expected to deteriorate in the coming years from 1.3 million tons even downwards? And what would be the possible drivers? And on topic of sugar, also could you comment about export opportunities as of now with sugar volumes given the depressed global benchmarks and in relation to domestic price?

We see a mixed picture on the consumption level. We did believe that consumption at the level of 1.3 million is probably the bottom line. But of course, now with quarantine in place, we see that the industrial consumption is going down. However, consumption through retail is going up because people buy less readymade confectionery in shops, but they do more own cooking at home. So how these 2 trends will mix is still to be seen. Also, on a general trend, obviously, sugar consumption was going down in the last several years and putting health concerns aside, that was connected to the loss of the number of consumers. One, loss of consumers happened because of Donbass and Crimea loss of population. But another one was immigration from Ukraine by Ukrainian laborers. What we have seen in the past months, specifically, that at least 0.5 million people, which is an official number, came back from Europe to Ukraine. And this is obviously positive for the consumption levels. However, we do not know whether -- for how long people will stay in Ukraine, whether the trend will reverse, it will depend on the quarantine measures by other countries. On the export benchmarks, we saw 70,000 tons of exports of sugar during this marketing season. And we believe by the end of the marketing season, we will see at least 100,000 tons of exports. At the current global prices, we do not believe that there is room for growth of sugar exports for us. Specifically, this is not the price that would motivate us to export. But we do see others doing small volumes.

Okay. And also, could you please comment on the weather outlook for the next few months given that do you think that there is any risk given recent dry conditions across the region?

This has been a concern for quite a while. It was not just the mild winter. It was a dry winter. And similarly, dry beginning of spring. And we were very excited yesterday when we saw heavy rain coming. Actually, rain came together with wet snow, and we believe that, that addressed majority of concerns everyone has regarding the planting season. We were happy to pause our planting works during the rain, and we will resume tomorrow, and there is an expectation of another couple rainfalls in the next week or so. I -- we do not want to rely on weather forecast 2 or 3 months ahead, but the recent rainfall actually makes us quite optimistic.

Okay. And the last question from my side. During the presentation, you mentioned that you plan to extend the cooperation with independent farmers with -- not only with sugar beet, but also with grain and oilseeds. Does ASTARTA consider change in business model to become more trader of grain and oilseeds? And what is the potential scale of this project?

Okay. Just to give you a very simple math. We have 0.55 million ton storage capacity and the average turnover for such capacity is 2.5 in Ukraine and that gives the annual capacity of 1.4 million tons for grain and oilseeds. Our harvest for last year was 1 million tons. So potentially, we have room to provide storage and handling services for up to 400,000 tons to other farmers. So in the areas we operate and we have our storage capacities, we actively market our newly formed services to the farmers in this region.

Next, we have a question from Natalia Shpygotska from Dragon Capital.

Could you please update us on the company's CapEx plans for 2020 and where the company sees its leverage at the end of the year?

The first question is easier. Our budgeted CapEx is roughly EUR 20 million. We reiterate our position that until we see higher cash flows from the sugar segment, we will only spend money on maintenance CapEx such as replacing obsolete machinery in agriculture that we did in the first quarter of this year. On the leverage, obviously, that will depend on our EBITDA forecast, and we do not make such focus public, unfortunately, because the situation this year remains very volatile. We are at 3.5x net debt-to-EBITDA as of end 2019. And we would like to come within our covenants in the near future. But we cannot say what we will be able to achieve at the current rapidly changing situation.

[Operator Instructions] Next question comes from Anton Khmelnitski from Elbrus Capital Management.

First, congratulation for the relatively good results in this difficult time. My question is related to -- it's a follow-up question from the previous one on the net debt dynamic. But I understand you cannot give a number, but do you expect the sort of the same magnitude of net debt reduction during this year? And second question is, what do you expect the total interest cost to be over the coming quarters for debt-related payments of interest? And I have a third question that's related to the milk division. As this has been a good contributor in the overall EBITDA result, do you expect to -- do you see this as just a cyclical contribution? Or do you believe -- maybe you can explain a bit what is behind the improvement?

Okay. I will just ask my colleague.

Okay, Anton, thank you for your question. And I'm very glad to hear you again. You're right. We are planning and budgeting decrease of net debt by the end of the year according to the initial budget forecast, which we have done at the beginning of the year. Now we have some changes in environment. So it will have some impact. However, we're still targeting initial level. And second, with regards to your question about interest rates, we are managing to decrease interest rates locally. We have working capital line from local bank at a much, much lower levels than even from the development banks right now. So we expect that our total interest expense will be less than last year, so you currently could adjust for 4 quarters and see that will be less than it was last year.

Now turning to...

Do you have a number in mind? I mean, how lower -- how much lower is the interest payments than last year, given the new interest level?

Look, look, first of all -- first of all, we have -- as you see from our numbers, we are decreasing our total debt. So you saw that at the beginning of the year, we had net debt at EUR 143 million or year-end at EUR 136 million. However, at the moment, I would say we have less debt, more than EUR 10 million than at the beginning of the year, even in the middle of the sowing season. So overall, interest expense will be lower.

Okay. For the milk division?

Yes. For the milk division, if we go into our results now, you can see that the prices were up, and that was held by the local currency appreciation last year. This year, the currency is down, which is not supportive of the milk prices. However, one must bear in mind that our prices -- premium milk price is even higher than what we show on our slide because we produce milk of higher quality in much higher demand by the milk processors. So our prices are much higher than of those household producers who still supply 3/4 of total milk in Ukraine. Overall, the market is reducing. The appreciation of hryvnia resulted in the trend when the head count of milk herd was reduced in last year, and that helped with the pricing as well. This year, we need to closely monitor demand because the industrial producers' demand is holding up. However, demand from [indiscernible] places is obviously going down during the lockdown period.

Okay. So you don't expect any changes there in terms of investment levels within that division, just maintenance as well?

Well, I believe that it is unfair to put much expectation in the current circumstances because we do not know when the lockdown will finish. And that directly impacts consumption of milk.

[Operator Instructions] It seems we have no further questions, so I'll hand it back over to you, Yuliya.

[Foreign Language]

[Interpreted] Thank you very much, everyone, for participating in this call. This is concluding remarks from our CEO, Mr. Ivanchyk, who is saying that in this difficult and challenging time, our focus is on optimization, on cost management, and we will achieve it through what we focused in the past with the help of IT technologies. And hopefully, we will become -- we will come through this altogether stronger. Yes. Thank you very much. We would like to conclude the call. But also we are -- we remain open for one-on-one meetings, calls, e-mails, you can always contact me directly. As well as on the 20 and 21st of April, we participate in Wood Consumer Investor Conference and would be available for one-on-ones during this conference, if you would like to register. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you very much for joining us. You may disconnect your lines now.