Astarta Holding PLC (AST) Earnings Call Transcript & Summary

It is 5 minutes past 2, so I suggest we start the presentation. [Operator Instructions] So I'm putting our presentation on a full screen. If there is any issue with viewing it, please let me know. Very briefly, Slide #3 provides a general overview of our consolidated P&L. As you can see, there was a decrease in the revenues in the Agricultural segment, but that was well explained. Also, with our previous results, we decided to sell our last year's harvest much earlier in the season. Therefore, the results of the first half of this year reflect the sale of Romanian crops, and that is mainly corn. Sugar production was slightly up, helped by a slight increase in the prices. The volumes, they are steady. Soybean processing revenues were down slightly on lower sales volume, and the cattle farming revenues held nicely up. The gross margin expanded both on -- together with IAS 41 or without it, if you look in the lower hand corner, by excluding IAS 41, we can show you our margins on cash basis. Gross margin was also up from 24% to 26%, and the EBITDA margin was also nicely up from 23% to 27%. If we look at the main contributors of EBITDA this year compared to the previous period, we see decrease in the agriculture, and that's related to our more conservative assumptions for the biological assets, the harvest which is currently grow in our fields. Sugar production was a 100% increase in EBITDA from EUR 4 million to EUR 8 million. Soybean processing EBITDA was down on decreased margins because of the regulatory change in the sector. And cattle farming was stable at nearly EUR 4 million. What is worth noting on this slide is our efforts. Decrease in our leverage resulted in -- half in our finance costs from EUR 10 million to EUR 5 million. But of course, a ForEx loss had to be booked on the account of weakening of the local currency. Going into the cash flow statement. Our operating cash flows were down after the change in the working capital, but before changes in the working capital, there was an increase. Excluding IAS 41, it was stable at above last year's level, EUR 67 million. We continue to tightly control our CapEx at EUR 10 million for the first 6 months, and that is all aimed at further deleveraging, bringing our bank down. EUR 20 million were paid out on a cash flow basis. And our net debt-to-EBITDA coefficient is now at 3.2, which is much more comfortable compared to 3.8 just 12 months ago. We are still technically in reach of certain covenants, so there is no change on how our debt is presented on the balance sheet. Going into more details into the agriculture. We were mainly selling corn in the first half of this year. Wheat, sunseeds, soybeans, everything was sold much earlier. And 96% of our revenues are coming from exports, no change from -- in that. We invested heavily, but still in a very controlled way, in terms of maintenance CapEx before the spring sowing campaign and replaced our machinery. We reported it during the first quarter. By today, we harvested early crops, such as winter wheat and rapeseeds. And the yield stood at 4.8 tons versus 5.1, which is a 6% decrease on account of weather conditions. What our expectations in terms of harvest for this year, obviously, we'll know everything for sure when we finish harvesting. But the weather conditions remain quite challenging in Ukraine. I paused because someone joining in. Just to repeat the last sentence, to provide our expectations for this year's harvest, we saw a 6% decline in our winter wheat yields, and the weather remains challenging. We do hope that our corn and sunflower harvest and yields will be at the level of last year, but we could not exclude that the weather conditions could lower our expectations. On the sugar beet and soybeans, we expect a higher yield than last year. How we address these weather challenges, again, coming back to our spring plantings, we replaced some of our machinery. We introduced rapeseeds in the crop rotation. Currently, this is a modest planting area at 1,500 tons of hectares. But we'll see the yields, the results, and we will probably expand our planting area next year. We introduced specialty sunseeds into our crop rotation on the sunflower side. This is high oleic oil, which sells a significant premium to ordinary sunseeds, and about 1/4 of our planting acreage is under this type of oil. And we are selectively looking at irrigation projects at -- and precision farming, and that was, of course, something that we started utilizing a while ago, but it is also achieved with the new machinery that we purchased in the first quarter this year. In terms of the pricing outlook, I believe that every agency has a diversion in terms of the market trends. It was a fresh USDA report published yesterday, which actually contradicts the estimates by the agencies working locally in the Black Sea region. Nonetheless, such reports support or negatively impact the prices. We've seen a speculative hike in the wheat, but now prices for wheat are going down. And we know that the global prices for corn were significantly down because of the situation with biofuels in the U.S., the interconnecting fuel market. However, for Ukrainian corn specifically, we saw that the prices were held in largely up, which was favorable for us. On the sugar, Slide 8, our sales volumes are steady. The prices were slightly up, but exports are not going on out of Ukraine on any meaningful scale because on a FOB basis, there is not much of a differential between domestic and international benchmarks. However, we put an effort into optimizing our costs, and that allowed us to expand our gross profit margin from 9% to 17%. And that resulted in our EBITDA doubling to EUR 8 million, which is still quite a small number. But compared to previous year, we see it as a significant achievement. The outlook for the global and domestic prices remain uncertain. And for Ukraine, much will depend on the new harvest of sugar. The marketing year for the sugar will start several months later than for grains. So we are eagerly waiting for the harvest during this season, but it's not possible currently to estimate the full effect until we see the yields. But at the moment, the prices are flattish. And as we announced before, we keep our target for this year to take 1 more small sugar mill out of operation, so that we have a higher capacity utilization and lower cost. Until the sugar price recovers domestically as well as internationally, we are focusing on our cost rather than increase in the volumes. Soybean processing. This is a market which saw a very disruptive regulatory changes -- legislative changes, which very much influenced the behavior of the farmers. We saw soybean planting area decreased by 15% last year, and that resulted in shortage of supply of raw materials for the local crushers, but that also helped to push the prices for the raw materials, the meal and the soybean oil up. So once this VAT refund issue is over, and it is over now, we believe that the farmers will be incentivized given the new price levels to increase the acreage under soybeans for next year and, hopefully, to come back to the levels seen in the past several years above 4 million hectares. But until this happens, we can see that our margin is down. And on EBITDA level, it is decreased from 11% to 9%. Cattle farming is steady. We believe that the prices are bottoming out very much like every season. In summer, we can see the prices going down, but we see that our off-takers are ready to accept higher prices for contracting further out during the year. The volumes are down as we focus on productivities of our milk and herd. We see the prices, although decreasing from beginning of the year but still at very much acceptable levels, and that helped us to keep our EBITDA margin steady at above 20%. Strategy and outlook. There isn't much change since we discussed these items with our annual results. We live in a very uncertain conditions at the moment, difficult macroeconomic environment, although Ukraine is faring better than more developed markets. And we are happy to operate in one of the most resilient sectors connected to food products. However, we closely watch consumption and demand for our key products. We watch the situation with virus containment in Ukraine. We are pleased to report that we have not seen any outbreaks, small or bigger, and we are also in a good position in terms of access and additional financing if the situation worsens. As an example, we already reported that we received the first tranche of an earlier approved USD 20 million loan from the German development bank, DEG. But we also recently announced that we have access to a new EUR 10 million -- or sorry, $10 million working capital facility from the EBRD. So we're fully prepared to face any challenges as they come in the second half of this year. This is all for our presentation. Let me turn the screen to any questions you might have.

To answer these questions, we also have a full ASTARTA team. Courtesy to Microsoft Teams, we can have a much bigger team to answer any specifics you might be interested. And this is, of course, includes our CEO and a major shareholder, Viktor Ivanchyk; our CFO, Viktor Gladkyi. And we have also a team on our commercial side, IFRS reporting site, and all other team members here who are ready to answer your questions. I can see the first one. You mentioned that you plan to idle another small sugar mill this year. Is it feasible to restart idled sugar mills again in the future? Is there a risk they will need to be scrapped? Viktor, [Foreign Language]

[Foreign Language]

[Interpreted] Yes, it is possible to idle a sugar mill for 1 or 2 years. But talking specifically about this small capacity, which is only 5% of our capacities, we believe it is subscale for restarting it unless we have plentiful raw materials. Sugar beet is growing in the area. We don't see it at the moment. Therefore, we don't believe it will make a big difference to us in terms of expansion, but it does make a difference to our cost at the moment. Therefore, we believe it will be idled probably for the next couple of years. Now going back to a question from [ Aneep ]. With regards to the dairy segment, has there been any impact on demand for milk from the coronavirus pandemic? In the U.K. and the Netherlands, there have been issues caused by the closure of coffee shops. Yes, [ Aneep ]. Thank you very much for this question. We actually did see demand from HORECA and coffee shops very much cushioning the demand in the first -- after the first quarter of this year. But Ukraine is in a controlled social distance here now. And traditionally, compared to the U.K., which I can really compare to, there are many coffee shops, which are on wheels just outside, not in the buildings. And that really helped during the most stringent social distancing months when HORECA was not operating indoors. But also, we see it coming back. And certainly, it is coming back during this summer -- during the summer period because Ukraine allowed most of their restaurants to reopen their doors as long as everyone is dining al fresco. And maybe our staff, our Commercial Director, can also comment -- add comments to mine. Probably Ostap is not...

I'm here. I'm here. Thanks a lot for the comment. Indeed, you are absolutely right, what you have just said regarding demand for the milk during circumstances that unfortunately we experienced -- we have been experiencing in the recent couple of months. And the only thing I would like to add that, currently, within the last, I would say, 1 to 2 months is we clearly see the revival of the demand on the milk market. And at the moment, we are quite positive with prospects in further price increase. What we have been experienced within the last 3 weeks, we clearly see good improvement on the demand side, especially in the HORECA sector. And we are increasing our price each month within the last, I would say, 2 to 3 months is like that. So we are -- we believe that we have already passed the bottom in this. Thank you.

Thank you, Ostap. I believe we can go to the next questions from Jakub. Could you comment on current weather conditions regarding corn and soybean planting? Is drought to wheats for corn and sunflower? I did comment it during the presentation, but just to repeat ourselves, yes, the weather conditions are not favorable for corn, and we are very cautious about any guidance. However, we do believe that last year, the weather conditions were also quite difficult, so we do believe that we probably could achieve same yields for corn as last year. This is our hope. And also, this also concerns sunflower. Sunflower is more drought-resistant crop. And we hope that the yields will be same as last year. On soybeans, also, there is a risk, but we do hope to have soybean and sugar beet yields better than last year because we believe they were severely hit last year. You...

Yuliya, [Foreign Language]

[Interpreted] Just to add some color to what we just mentioned. Viktor was inspecting the fields in the Poltava region, where a majority of our assets are located, yesterday. And he see a very fragmented picture, during which the situation actually differs from field-to-field. It depends on the underground water supply under the fields and also depends on precipitation, which can also vary widely within a very narrow part of the region. So it is very difficult to estimate given the fragmented and no clear picture. It's not uniform. However, the next couple of weeks will tell whether we can see yields at last year's level. Depending on the amount of rain we get, it might be better or lower. We'll have to see. This is just a matter of another couple of weeks.

[Foreign Language]

[Interpreted] Just to remind where our assets located, especially for agriculture, it is very important that there is a diversification and some risk mitigation due to plantings in different parts of Ukraine. The distance between our western and eastern -- most eastern parts of our plantings is about 1,000 kilometers. The spread between northern and southern is 400 kilometers. And that creates actually a good risk mitigation. Therefore, on the average, we do hope to match or exceed last year's harvest. Going to the next question from Mr. Khmelnitski. Do you expect the pace of net debt to reduction to continue at same pace in second half? And what is the ultimate normalized level you would be comfortable with? I think that is a question to our CFO, Viktor Gladkyi.

Yes. We expect -- thank you for the question. We expect that net debt will be flat by the end of the year. And the net debt-to-EBITDA ratio will be less than 3, closer to 2.

Next question from Dawid. Could you elaborate a little more what were the main areas of cost control in the agriculture segment in second quarter? Viktor, [Foreign Language].

[Foreign Language].

Well, first of all, this is a new machinery that we purchased for planting. I believe in our presentation, we have just a few figures to demonstrate that it frees up our resources. So given the productivity, we were able to replace 47 units, such as tractors, with 31 with exact -- replacing the same productivity. But it also allowed us to free up 30 employees for other jobs within our sector. And also this machinery is capable of performing precision planting at an amazing 3-centimeter distance. So for example, if this John Deere unit started planting and the driver wants to have a lunch break and get off the field, this unit will get him back to the same spot within 3-centimeter difference. So this is, of course, something that probably not noticeable in the aggregated financials, but we did complete our planted season within a much shorter period of time. And for Agricultural segment, it is quite important that you correctly choose the timing of the plantings with the optimal temperature, precipitation, humidity and the moisture. So we believe that we have a much more optimal planting season this year compared to last year, which will allow us to achieve better yields. And of course, you might see other cost savings in other areas. Some are under our control, such as purchasing of fuel and fertilizers. They were cheaper this year on account of lower oil prices. But of course, a bulk of them, we had to purchase before the planting season. But for additional works, which we are doing in between planting and harvesting, and also for harvesting, we do enjoy savings on the fuel costs. And last but not the least, the local currency depreciated by double-digit numbers this year. And that also creates some savings, which are beyond our control, but nonetheless favorable to us on the local cost side, such as labor and taxes. Viktor, [Foreign Language]

[Foreign Language]

[Interpreted] Just to add and illustrate the efforts that we have been making. Operational efficiency, specifically in the agricultural sector, was the point of our focus for several years. And we believe that we are now approaching it in a systematic way, which involves of -- all top to bottom management and employees. But also, we are in line with ag tech, agricultural technology implementation. We believe we are in the forefront in implementation in Ukraine. The project, which is called Agrichain, it would take too much time to devote it on this call, but we obviously can share publicly. We already did it before the presentation, which covers the integrated IT solutions, which cover everything from managing the land bank, planting, plantings monitoring, storage and sales in one IT solution, which we are actively introducing at ASTARTA. And this product will also be available for other agricultural partners in Ukraine. So we will -- perhaps, Pavel, I will ask you to share the link to this presentation in this chat.

Okay. Will do.

I think there was another question. Do you expect further gas price decrease year-on-year in the fourth quarter as the prices hit multiyear low in Europe? I think I'll start. This is, of course, a billion-dollar question. Fourth quarter this year and the gas prices will depend on the oil price performance, of course, but it would be great because fourth quarter this year is when we are running our sugar plants and we use natural gas in our production. But certainly, the volumes that we already started contracting for the processing season, we can see that the prices are lower, at least by 1/3. If I'm mistaken, Viktor will correct me.

[Foreign Language]

[Interpreted] Just to add, this has been our long-term practice that we purchase or contract at least 2/3 of our gas needs for sugar beet processing before the planting season. And this year, the situation is the same. 60% was purchased during the bottom of the gas prices this year. And we do hope that the remaining 40%, we will be able to achieve prices, which are favorable for our cost. There was one more question, which I probably scrolled down unnoticed, and my team let me know that I need to address it. You mentioned selective capacity expansion in soybean processing. Do you plan to construct another plant? This is something that we put in our presentation actually one -- several quarters ago before the COVID situation. Yes, we believe that soybean processing is one of the most successful segments within our business mix. And we are looking at expansion but in a careful way. We probably will be looking at further value-added and further processing of the soybeans. But of course, this year, we are now in a very uncertain period. And that's something we are not jumping into. And therefore, it's still on our list, but we wouldn't commit to provide much detail at this stage because we need to see how the second half of this year develops. Ladies and gentlemen, if you don't have any further questions, we may -- okay. There was a question. Thank you, Jakub. Natalia?

Yes. May I speak now?

Yes, you're already speaking.

Two questions from my side, please. First of all, to sum up your comments on corn yield outlook and comments that local corn prices in Ukraine remained comparatively stable this year as compared to international prices. I would just ask if the lower [ manufacturer evaluation ] of the corn plantings the [ CJS Company ] reported at the end of June this year reflect company's cautious stance, at this point, I mean, in view of uncertain yield outlook and price outlook? Or is this some like preparation for quite adverse profitability scenarios this year?

I believe, Natalia, we are being more cautious because we saw the situation unfolding last year. However, as we mentioned, the next couple of weeks will be critical for the more definite outlook on corn. Viktor, [Foreign Language]

[Foreign Language]

And then the second question, I would like to check what is current company's liquidity position. As I saw, compares cash balance as a fund of June declined to a bit more than EUR 2 million. What is the current company's liquidity position?

I'm passing the floor to Viktor Gladkyi, our CFO.

We are -- as you saw from our numbers on net debt and comments, which gave Yuliya with regards to available lines, we have quite strong position on liquidity currently. And as I told on corresponding -- the previous question, we see flat situation by the end of the year if we don't have any stress scenarios.

Viktor, I believe the question was about the cash balance, which was unusually low as of 30th of June. But, Natalia, we...

I'm sorry. I'm sorry. Sorry. Cash position, which is -- this doesn't reflect the liquidity of the company. So it's cash balance, yes.

Okay. Natalia, we have committed working capital credit lines. We obtained a new one. This is tens millions of dollars and euros. So I believe the number on the balance sheet should not be in any way worrying. Viktor, [Foreign Language]

[Foreign Language]

[Interpreted] I'm trying to be brief here, which is not entirely possible, but we're really, really grateful for your questions, for your interest in our company. And we are going through a very difficult period. And these are the risks, which are general for companies in Ukraine, such as political risk, but we also additionally face climate change, adverse weather conditions. And specifically, for us, the sugar market is not very favorable at the moment. But we do believe that we are doing -- we provide measured responses to such downturns. And yes, we are idling excess sugar capacities. And one of the plants that we stopped -- idled 2 years ago, this year, we will probably shut it down forever. But we do believe that, that will increase our profitability, optimize our costs. And all our efforts, such as building our own storage capacities or grain, hopes are also aimed at achieving this. So we believe that together, we will go through this difficult period and the main theme for everyone. And I wish everyone to stay healthy. Again, thank you very much. And if you have any further questions, don't hesitate to drop a line to Investor Relations e-mail, and we will answer it. Thank you. Have a nice day. Bye-bye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]