Astarta Holding PLC (AST) Earnings Call Transcript & Summary

Hello, everyone, and a warm welcome to the ASTARTA Second Quarter 2021 Results Call. My name is Simona, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Pawel Wieprzowski to begin. Pawel, please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski. And on behalf of Wood & Company, I'm delighted to welcome you to the second quarter 2021 results conference call with ASTARTA's management. The company is represented today by Viktor Ivanchyk, CEO; Viktor Gladky, CFO; as well as Yuliya Bereshchenko, Business Development and Investor Relations Director. Gentlemen, congrats on the results. Please go ahead.

Thank you, Pawel. I would like to go straight into our P&L. The way we look at our business is on 6 months, 12 months results because we are in a highly seasonal business. So if you look at our first half revenue line, you can see that we have significant growth in the sugar production, soybean processing segment. Our revenues were flat in cattle farming, but much reduced in the agricultural side. The lower result in the agricultural side is explained by the fact that we are still selling last year's harvest, and the lower volume of output last year is feeding through our revenue on the corn side in the first 6 months, but we look at it in more detail when we go to the segmental information. If we look at our profitability, you can see that we are able to book a large change in the biological assets. Our winter crop harvest is very close to completion. In terms of action, grain harvest is in full clean, and we were able to book about EUR 92 million biological assets revaluation surplus, which goes above our growth profit. If we look at our profitability and the growth in EBITDA margin without the impact of IAS standard treatment, our margins still expanded from 26% to 27% on the growth level and to 28% at the EBITDA level. Due to lower leverage, you can see that we also have a lower finance cost, and the currency movement for Ukrainian hryvnia was also favorable to us compared to the previous period of last year. And that's how we book around EUR 90 million bottom line profits in the first 6 months of this year. Going into the cash flows and the balance sheet. Due to the seasonality of our business, and now we are in the harvesting part of the winter crops, we have negative operating cash flows. Also what has impacted our cash flows in the first 6 months is our activities to process raw sugarcane into white sugar for the Ukrainian market. However, our investments are still tightly controlled at maintenance levels and net debt increased due to working capital needs was not significant. Our net debt to total EBITDA ratio still remains at a healthy level of 1. If we drill into our segment results, you can see that the majority of revenues were done on selling of the remaining volumes of corn from last year's harvest. And we have IAS 41 item booked for the crop growing currently in the ground. Our costs remain well controlled. And this can be seen not just on the cost-of-sales basis, but also on the cash flows related to our land lease liabilities. Overall, the market environment for soft commodities remains highly favorable. There was a small dip on the weak side, but we can see that the situation has reversed recently, and we remain optimistic on the pricing environment for us going forward in the second half of this year. On the sugar production side, we are still selling of stocks of -- from our sugar beet processing last year. The pricing environment domestically remains more favorable than international one, although we can see that there is a large sugar price uptick in global markets as well. And this allows us to earn a gross profit margin of 37%, and the EBITDA margins also doubled from 14% to 31%. If we are looking at the situation in the global markets, we can see that white sugar [quotes] were up by 1/5 in the first half of this year, but the Ukrainian market experienced a higher price increase because there was an underproduction of sugar beet last year due to lower harvest. And Ukraine had to import additional volumes of sugar. ASTARTA is one of the biggest players in the market, obviously, the front running of this trend. We imported around 75,000 tonnes of raw cane sugar and we already produced nearly 50,000 tonnes of white sugar for our domestic customers. The local farmers responded to higher price environment by expanding sugar bit planting area, but it is not significant increase, around 5%. Soybean processing, huge value for soybeans and quite significant price increases for the key products such as soybean meal and soybean oil. However, our profitability, of course, was squeezed on higher cost for the input soybeans, and we have a slight margin increase at EBITDA level from 9% to 8%. Likewise, the rally on the soybean product pricing led to Ukrainian farmers expanding the planting area, which is expected plus 6% this year. Capital funding is largely stable. We have a stable livestock herd. However, our production volumes are up as we increased productivity of our herd. Our daily meal yields were 23 liters, which is higher than in the previous 6 months. If we are looking at the average pricing in this sector, it was largely flat on 6 months to 6 months last year. And that has allowed us to keep our gross profit and margin at the same level, although at the EBITDA level, it was a lower. This is probably the end of our review of the 6 months results. The strategy and outlook hasn't been changed. Last year was a COVID year, and it was not -- the key focus of our business was maintaining our profitability, increasing the cash flows rather than expansion, but we are looking at the same target in terms of this year. One of the slides, which I wanted to highlight at the end of our presentation, is our current capital structure. We finally see a big rebound in our enterprise value due to reduced leverage and higher operating results. And we believe that the capital markets now can value our business on a more full picture. So, Pawel, we are ready to take questions from the audience or anything you would like to ask as well.

Okay. Perfect. Thank you so much for delivering the presentation. So if I may ask just a few quick questions. First of all, what is your outlook for the 2021 other? What kind of year-on-year growth in yields do we expect? Is it double-digit mid-teens figure, something like that?

Yes. Thank you for your question. We are in the process of harvesting our winter crops. The 2 key winter crops is wheat and rapeseeds. They have become our key crop from this year, and we can see a much higher yield compared to last year. We hope to report the final numbers to public as early as next week. But currently, we can say that winter wheat is definitely a double-digit growth in yield in terms of percentages. We also expect to see a good harvest for rapeseeds. If we are talking about spring crops, obviously, there is a critical couple of months related to the yield of corn, sunflower, soybeans, but we still do expect it to be 15%, 20% -- at least 20% higher than last year. What we can see from the government statistics is that there is around 15% uptick generally in the yields for the sector. And we believe we can register a similar trend. But again, with the situation for corn and sugar beet, there are still another 2 critical months ahead of us.

Okay. Perfect. So since we've discussed the yields, what fraction of the 2021 harvest have you already sold or hedged prices?

Obviously, we are not disclosing our commercial book, but 2/3 of our crop has been resourced as of now.

Okay. Perfect. And you've mentioned that you reported 5% year-on-year growth in the sugar plant in Korea in your land bank. And since the sugar price in Ukraine has significantly diverted from the world benchmark level, what do you think how sustainable is the current level of the sugar price in Ukraine? Because if it's sustainable, we may see another solid year for the sugar business next year, take into consideration the 5% expansion of the sugar beet land bank.

Yes, the situation with sugar prices in Ukraine is a result of the underproduction last year because of the lower harvest. This year, a larger planting area combined with higher expected yields should result in the output being significantly higher than last year. But in our view, the local players are probably very cautious because weather can be unpredictable. Therefore, the price adjustment does not take place yet until everyone knows what the final harvest is, what the final yield, the sugar content and finally, the output of sugar. From our personal experience since our target volumes of sales is around 300,000 tonnes of sugar and we are 25% below this level last year because of the lower harvest, we imported sugarcane in the amount of 74,000 tonnes to go back to the same level of 300,000. And we believe this is fully sufficient for the needs of the domestic market. However, we will have to see the crop and the sugar content to have more visibility on the output from this year's harvest.

And when it will be? When we'll have the final [indiscernible]

The marketing year for the sugar starts from first of October. So this is when first sugar beet is being collected and processed into sugar. Depending on the weather conditions, there could be a lag for a couple of weeks. And this process lasts 2 or 3 months. So closer to October, we will see if there is a price adjustment because the market participants anticipate a higher harvest.

Okay. So no price adjustments for the next 2 months, essentially, or 1.5 months?

Also, it should be noted that globally, sugar prices also are increasing. And that could create also a certain flow for the domestic prices in Ukraine, even with the higher harvest.

That's clear. Two more questions from me. Shall we expect the negative revaluation of biological assets in the third quarter? And if yes, how material can it be?

We are trying to estimate our yields on the basis of the current weather and growth of crop. However, as I mentioned, for key crops such as corn and sugar beet, the situation is still in progress for the next 2 months. If we were to adjust our estimates with 9 months, we do not expect it to be more than 10% of the level that we currently estimate. Plus or minus 10% is generally considered to be a good adjustment at the current stage of the harvest.

Okay. So one last question. What are your considerations over the conclusion of the buyback program, if there is an attractive investment opportunity or M&A, will you, in such a case, downsize the buyback program?

Yes, of course, the purpose of every business is to profitably grow, return cash flows to the shareholders in the form of dividends of share buybacks. We still see -- we still would like to see how the market for trading farm land in Ukraine is unfolding, whether there are attractive opportunities. If we come across one, we obviously will have a look and adjust our capital allocation program.

[Operator Instructions] We have a question from [indiscernible] from [ IRSN ].

Congratulations for the good state of the business and bright perspectives for the future. I do have 2 questions as Pawel asked most of those that I prepared already. So the first one is, is it possible for you to disclose what were the assumptions for the yields and I mean the tonnes per hectare for the evaluation of biological assets for the current report?

Generally, the biological assets is our commercial book, which we don't disclose, but we can provide guidance. And also, as I mentioned, among our core crops, winter wheat and rapeseeds harvest -- final harvest will be known early next week because we are in the final stages. So you can have -- for these 2 crops, you can have not just the estimates but the firm numbers as soon as early next week, and we expect it to be much higher than last year. If we compare situation to the previous year, we do expect sugar beets to be above the levels in the past -- previous 3 years, above 50. How much above 50 again has to be seen because we still have 2 months ahead of us. Sunflower seeds we expect the yields to be closer to the levels of 2018 and '19. Then we go to corn, we expect it to be significantly higher than last year, but probably not as high as 2018, so maybe closer to 2019 levels.

Okay. So obviously, I didn't ask for the prices, but were you -- so there is no possibility to get the numbers what were used in making the position of the biological assets, because obviously, what I want to see is the potential difference and the increased results. When you say that it's much higher, for example, in wheat and in rapeseed than last year, I understand this. But does it mean that it will be higher as well than what was booked or it was already predicted in the books through this evaluation of biological assets?

We provide our comparisons on a 6-month to 6-month basis. And again, we cannot disclose our commercial book. I know where you're coming from because you asked this question before. At the moment, we can only provide the guidance on our estimates. And on the pricing, our estimates for -- as of 30th of June this year compared to last year, our pricing expectations are by 1/5 higher for winter wheat, up around 50% on sugar beet and between 40% and 50% up for sunflower, corn and soybeans.

Okay. I'm listening.

Yes, I just wanted to -- the pricing increases were the biggest component of the biological asset revaluation. So if you were looking for an explanation what was the biggest driver of our growth in biological asset revaluation, this is mostly on the soft commodity rally part.

Okay. So I have another question. It's -- the question concerns the moisture of the soil, what is the current state? Is it satisfactory for these late crops currently?

Yes, we wouldn't be able to provide good estimates for our yields if the moisture level were unsatisfactory. However, it should also be noted that we have a very large farm land area, over 215,000 hectares of land is a large area. And it is -- it can be divided into Western and Eastern parts. And each year, the weather pattern can greatly vary between the 2. But generally, the levels of moisture for the Western part of Ukraine now is much higher than for the Eastern one. So when we do our estimates for biological assets, we obviously have the averages, but these averages do take into account the precipitation level on all our land bank.

And how long dry period would have to be required to damage significantly the crops at the current stage of development?

Well, in the previous year, it was 2 to 3 months of drought in order to effect. And it also depends on the crop because sunflower is much more heat resistant crop compared to corn or soybean, for example.

So 2, 3 weeks, it's not a big problem in general?

No.

Okay. Great. And the last question would be, do the company already started to book some sales for the 2022 season?