Astarta Holding PLC (AST) Earnings Call Transcript & Summary

Hello, and welcome to the ASTARTA 9 Months 2021 Results Call. My name is Brika, and I'll be today's call operator. [Operator Instructions] I would now like to hand the conference over to Pawel Wieprzowski to begin. Sir, Pawel, please go ahead.

Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski, and I'm immensely pleased to welcome you to the third quarter conference call with ASTARTA's management. Today, the company is represented by Mr. Viktor Ivanchyk, CEO; Mr. Viktor Gladky, CFO; as well as Ms. Yuliya Bereshchenko, director for Business Development and IR. Gentlemen, please go ahead.

Thank you, Pawel. We would like to go quickly through our key results, and we start with discussion of our P&L. On the top line, you can see that we registered an increase in the total revenue. And that was on account of revenue growth in the sugar, soybean processing, cattle farming. Although in the agriculture, there was a dip, which was related to us selling the remains of the last year's harvest, which was a lower number overall for Ukraine and for us. On the profitability side, we can see doubling of our margins on the gross profit and EBITDA level. Part of this growth is related to the biological assets revaluation. At the time of issuing our financials, we had our key crops still in the ground, which is sugar beet, corn, soybeans and sunflower seeds. However, in the agricultural segment, you will also see that we basically harvested the oil seeds, sunflower and soybeans, and we already reported our final numbers. This allowed us to double our EBITDA from EUR 81 million to EUR 159 million. And if we strip the accounting effect of IAS 41 on biological assets, we also see our margin widening from 26% to 29% at the EBITDA level. Now if we switch to the brief overview of our cash flows and balance sheet, our cash flow -- operating cash flow before working capital changes were stable, same as last year, around EUR 50 million. We managed to keep our CapEx at maintenance level of around EUR 10 million. The number which is asterisk in the table, which is a positive number, is a result of us divesting of a few assets related to old sugar plants in the first half of this year. Therefore, this number was positive. Our CapEx and cash flows allowed us to keep low leverage, which on the net debt-to-EBITDA level was lower than 1, although our land lease liabilities slightly increased. The financial debt, mostly to banks, was at a stable level of around EUR 30 million. Now if we go into our segment results, as I've just explained, our sun seeds and soybeans were still registered as biological assets on our accounts as of 9 months. However, we have finished harvesting the crop, and you can see our final yield of 2.7 tonnes per hectare for sunflower seeds and soybeans at 3 tonnes per hectare, which is much higher than last year and also traditionally higher than the Ukrainian average. We are still in the process of harvesting corn and sugar beets. And we hope that we will report our final numbers later this year. But 9-month results related to the agricultural segment can be seen on the right-hand side of this slide. And it is basically affected by the compilation of the biological assets. Slide #6, I'm sure that you follow the stock commodities global development as in detail as we do. We see that the prices remain favorable for us, and the temporary situation where corn prices were higher than wheat prices from Ukraine reversed into a more normal situation. And we still see the upside in relation to corn and sunflower as well as wheat for the next marketing year. In sugar production, as we announced with our 6 months results, we will focus on processing sugar, raw cane sugar, which we imported in the amount of 75,000 tonnes. We produced 73,000 tonnes of white sugar from raw cane sugar. And this process finished by September. And since mid-September, we are already producing white sugar from the new harvest of sugar beet. And up to date, the amount is over 152,000 tonnes. Our financials were affected by the price growth. The average price growth on our revenue line was around 60% for the key product, sugar. And that allowed us to double our gross profit and EBITDA margin from 17% to 31% and from 15% to 27%. Now looking at the situation in the Ukrainian market. Although there was a recent dip in the local prices for sugar in Ukraine, they still remain at a large premium to global benchmarks such as raw sugar and white sugar in London. We expect the harvest of sugar beet to be higher in Ukraine this year. According to public sources, up to 33 sugar mills will be in operation during this season, which started in September. And the output is forecast at 1.4 million tonnes, but we also see there might be a potential for a higher number. As of today, the amount of sugar produced by the whole sector was just 0.8 -- 850,000 tonnes. Soybean processing is the next segment that we show results for the 9 months. Unfortunately, the price rally for soybeans was much higher than the price growth for the key product, soybean meal, 51% versus 27%. And the price growth for soybean oil which was reaching nearly EUR 1,000 per tonne was not sufficient to offset the price growth for raw materials. And that resulted in the margin squeeze at the gross level from 14% to 7% and a similar squeeze at the EBITDA level from 9% to 5%. However, we expect a much higher harvest of soybeans in Ukraine this year. As of beginning of November, Ukraine already reported a higher harvested crop on the basis of 90% of the planting area than for the entire 12 months of last year. There is a new development in the soybean segment that we have already reported to the market. We included a short slide outlining our investment that we are planning in this area. This is a $50 million plant, which would be an addition to our soybean crushing facilities in Globyno of the Poltava region. Currently, the plant produces 2 key products, which is a meal and oil. And the new line will allow us to further process for the meal into higher protein concentrate for feed purposes. These new facilities, which will require around 2 years to build, will allow us to diversify into higher value-added product and also have flexibility between the volumes that we process into the concentrate versus the volume of soybean meal that we are producing now. This facility was started together with a multinational financial institutions in Ukraine, which sponsored detailed technical and marketing feasibility studies. The project also falls under the auspices of favorable treatment by Ukrainian investment -- Invest, which is initiative by the Ukrainian government to give certain tax holidays, including on the corporate income tax and duty-free import of required equipment. And we are working the Ukrainian government to make it even a more attractive investment from a financial point of view with their assistance. This project is unique for Ukraine. It hasn't been produced before. And the biggest market we see for it is in Europe. The feed concentrate can be addition to the meal for livestock, poultry and agriculture. We believe that it has a multiple sustainable benefits. If it is used for feeding fish, which is farmed in Europe, it will reduce consumption of fishmeal, which is much more favorable for the biodiversity as well as it has a better calorific value in terms of economic efficiency of aqua farming. Also, the byproduct of soybean processing into the concentrate, molasses, can be used if we blend it with the byproduct of sugar production at our biogas facility, therefore, producing green energy for us. The last segment we traditionally discuss is cattle farming. We can see a slightly higher volume of production of milk while the headcount of herd remained stable. And this we are still focusing on higher productivity of new production from each cow, which increased from 21 to 22.5 liters per head in the 9 months this year compared to last year. And pricing environment for premium quality milk, the one that we produce, also remains favorable to us. What was affecting our results in the 9 months was also the cost side feed -- growing cost of feeds, which are affected by the price increases for soft commodities increased our costs, and we -- that resulted in a EUR 2 million negative revaluation of the biological assets. But even taking into account this number, which is noncash in nature, our EBITDA remained stable at EUR 5 million. Our strategy and outlook hasn't changed. We regularly update it on an annual basis. So will be able to discuss it in more detail with our annual results. But we did update it for our new project in soybean processing. This was for our main part of the presentation. Obviously, there are appendices with more detailed numbers. You are welcome to ask us questions.

[Operator Instructions]

If I may start. I have 2 quick questions to you, Yuliya. First of all, thank you so much for presentation, discussion on the reported figures. Could you please shed some light on your considerations regarding soft commodity prices in the upcoming season and in 2022? And also, could you please comment on the sugar prices in Ukraine, which seems to stay at a pretty decent level despite the fact of the news flow regarding this year's sugar beet harvest. Could you please comment on these?

On the soft commodities pricing outlook, we still believe there is an upside to the current prices. Because of the seasonality and we are in the middle of harvesting in Ukraine for corn, the prices traditionally soften a little bit. But in the next 12 months, we believe that there will be a demand pressure for corn out of Ukraine. And the final harvest numbers may not be as they are predicted currently. Globally, there is -- because of the energy price spikes, there is a higher demand for bioethanol and corn -- significant amount of corn stocks, especially in the U.S. being converted into energy as opposed to food production, which makes it an attractive environment for Ukrainian-produced corn for food purposes for human consumption. So we believe that the prices for corn will still be increasing. We also believe that a similar situation related to supply could play out in Ukraine for the next marketing season. Because of the early cold and dry conditions in Ukraine, we believe that the planting area on the winter wheat perhaps will be smaller next year. So the crop -- the harvested crop in the next marketing season for winter wheat could be lower, which could support the prices. And this is also true for corn in terms of the planting area because fertilizer prices are also increasing quite steeply. Many independent farmers may choose to reduce their planting area on their corn in favor of sunflower seeds and soybeans. Therefore, the corn acreage could be up to 10% lower next year in Ukraine than it is projected now.

And sugar prices?

Sugar prices reversed -- they are reversing to growth again. And that is not related to the supply side but on the cost side because natural gas prices are rather high in Ukraine. The producers have to keep their prices higher to cover the cost. And that determines the pricing trend in the last few weeks.

I see. So since you mentioned the energy costs spike that we have experienced recently, could you please elaborate a bit on the expected margins or profitability for the next season, taking into consideration the current level of gas prices, fertilizers, et cetera?

It's still difficult to predict because natural gas prices in Ukraine are extremely volatile. Recently, the costs were approaching [UAH 38,000]. Now they almost halved. So a lot depends on the timing of procurement and the [indiscernible]. Overall, for the sugar producing sector, there was a public article yesterday, Association of Sugar Producers calculated that the average cost increase for sugar production in Ukraine could be as high as 40% higher than previous year. However, taking into account that we are the largest producer in Ukraine, we can control our cost much tighter, our increase will be lower.

Lower, you mean like 20%, 30% year-on-year spike or just the spike?

Well, we -- obviously, we'll have the final numbers after we finish production of sugar, but definitely not 40%, closer to 20%, 30% range that you indicated.

We now have a question on the line from Marcin Nowak from IPOPEMA Securities.

Just maybe a quick follow-up for the gas prices impact on sugar prices. Do you see a difficulty from sugar producers in transferring higher gas prices onto sugar price given still the local price being at the premium -- a significant premium to the global benchmarks as of now?

Yes. We believe that the sugar beet processes will be passed in along the cost of the higher natural gas price. In fact, the sugar producers in Ukraine collectively wrote a letter to the government of Ukraine asking for assistance in relation to higher natural gas price situation in Ukraine. And obviously, although the government may not have the financial means to subsidize every sector, which depends on natural gas in Ukraine, they certainly should be accommodative in their policies and understanding why the sugar prices in Ukraine are quite high. And we do look at the cost of production, they do -- we do have a dialogue with appropriate government officials regarding the reasons why the sugar price is high in Ukraine.

Okay. Great. And aside natural gas prices, do you see any other cost inflation in the sugar production segment, for instance, the cost of third-party sugar beet?

Sugar beet prices are linked to the end product prices. Because some of the sugar mills and some of the sugar beet growers in Ukraine still do noncash tolling processing of sugar beets into sugar, there is always a direct link between the sugar price and the price of the sugar beet related to it.

Okay. So taking into consideration jointly gas prices, sugar beet, can you -- could you quantify the potential increase in sugar production cost base on a relative basis versus last year?

We are not through -- Marcin, we are not through the production season yet. So all we can say that our results both in the agricultural segment and in the sugar processing segment are recorded on as-announced basis. So the EBITDA that we get from growing sugar beets will be fully reflected in our agricultural results. While EBITDA which is related just to pressing of sugar beet at unplanned prices will be reported in the sugar production segment. So once we finish sugar making season in the next few weeks, there will be final results. But as indicated before, the impact of higher natural gas prices may lead to -- together with higher sugar beet prices may lead to a cost increase by 20% to 30%. And we'll see what the final number is soon.

Okay. And in terms -- regarding fertilizers, has ASTARTA already secured fertilizers for 2020 campaign?

As one of the largest companies, we obviously procure higher volumes, and we have to do it earlier. So by -- as of to date, we secured sufficient volumes for the spring planting and also for additional fertilizer application for our winter crops, rapeseeds and winter wheat.

Okay. And last question from my side. Could you please comment on trading operations and how much of quarter reported volume originated from own volumes and how much from trading volumes? And what was the margin in trading?

Just 1 second. Around 120,000 tonnes were purchased from third-party farmers and our forward and trading program this year so far. But obviously, we are still in the middle of harvesting.

And margin-wise, the positive margin on these third-party volumes? You mentioned current and said...

Yes, we have a positive margin, but it's in the single digits in terms of U.S. dollar per tonne.

We now have our next question from Jakub Szkopek from Erste Bank (sic) [mBanku].

Congratulations with the results. I've got a few questions. The first one is, what I see from the news so from Ukraine that some of the players, like 4 sugar plants, they already switched off. Do you think that these numbers that you put in the presentation of the supply of sugar for 2022 season would be in danger? What is your figure? What is more probable figure for the supply of sugar in 2022?

Just 1 second, we are translating your question into Ukrainian and then we'll see you back, sorry.

To repeat the question or...

No, no, it's fine. We just seek time to discuss it internally in Ukrainian, and I will come back, just a second.

Yes. Sure.

We still believe that the amount of sugar production this year will be north of 1.4 million tonnes because the largest processes of sugar beets such as our sales are still in the full swing. So those sugar plants which already finished processing, they are small scale. The largest players are still at full operation.

Okay. And the question is, could you just tell us what's your like purchase price of natural gas? Like till now, what have you contracted? And what I understand, you did not bought the natural gas like before, like it was in the last season that you were banking the first half of the year.

Obviously, we don't contract the whole volume at the same price, you may appreciate, especially in today's situation when the prices are really volatile. As I mentioned, the growth were as high as [UAH 38,000] per 1,000 cubic meters, and that's not the price that we would contract. We would time and fine quote at a lower level. Also, we managed to contract lower-price volumes earlier this season because the volume that we need is much higher than for other players. So different volumes were at different price. But generally, everything was below UAH 30,000, closer UAH 20,000. And what the blended result will be, we will see only after we finish all the processing.

Okay. And the last like technical question. When do you plan to stop the sugar campaign? When do you want to switch off the sugar plants? In December?

Out of 5 sugar mills, 2 will finish production only at the end of December. Yes, we will finish earlier.

Okay. And the last question about this unit cost in the crops segment in third quarter. It went up like much from the second quarter and year-to-year basis. Could you explain a little bit on that? What was happening? Is it a thing of certain crop or rather the whole basket is growing in terms of the costs?

Are we talking about agricultural segment results or which segments are we...

Exactly.

Agriculture?

Agriculture. I mean the unit cost was above UAH 7,000 as per tonne. While last year, it was a little bit higher than UAH 5,000. So quite a big, like 50% increase in unit costs.

See, if we are looking at the screen now, can you pinpoint which particular number you would like us to explain? Is the cost on screen?

Just -- yes, when I divide the cost of this segment, the agriculture segment by the volume that you sold in this quarter, the number is like much higher than it was last year and in the previous quarter. And that's why I'm asking what happened? Did you trade much more by third-party grains? Or you suffered from increase in the inputs to this agriculture?

Majority of increase is related to the biological assets. We sold volumes. If we are talking about corn, the volumes related to the previous year's harvest and the previous year's costs. Wheat is already this year's harvest. And the remaining costs are still accounted for as noncash items in our P&L and related to this year's cost. And this year's costs were slightly higher. This is true, but not by much. Just to give you an example, for example, for soybeans, which we already harvested, but it's still registered as nonharvest crop on the biological assets, the costs were up by 7%. The cost estimate -- for example, corn, the cost -- estimated costs are up by 6%. So there is a blend of some costs from the previous harvest and increased cost from the new harvest, which are registered in the same P&L line. But overall costs for 9 months related to the new harvest in relation to last year are up by less than 10%.

The next question from [indiscernible] from Erste Asset Management.

Just to clarify a couple of things. Maybe can you just comment on the operating cash flow from year-to-year 2020 versus 2021 because there is a major change in working capital. So what actually happened last year versus this year that there is such a difference in the working capital changes?

We -- there was a change in our financial sales policy. I think we mentioned this before. So the amount of stocks that we had on our balance sheet at the end of 2020 was much lower. So right now, we sell our harvest faster. And we have a working capital movement, which reflects it.

Okay. And when I look at the average prices that you have realized, it is the average for 9 months. But could you comment on the current prices? Are they close to, let's say, the -- let's say, if I look at Page #5, you show average corn prices, EUR 160 per tonne. And on the other Page #6, the price is around EUR 200. So is it still that you will be reaching these prices only for fourth quarter next year? Or when should we expect these realized prices to move up?

There is always a timing delay between the spot prices and forward prices. Customary to Ukraine, agricultural producers presell half of their harvest at the time of planting to have flexibility to sell at higher or other spot prices later during the season. So yes, we expect our prices to be higher for corn and other harvest that we are still in the process of harvesting at the moment. And we still have flexibility in terms of prices.

Okay. So and -- or did the fourth quarter again should see an increase in the average price?

Yes, absolutely. Yes. The realized prices for the 9 months reflects our corn sales related to last year's harvest rather than this year's harvest.

Yes, I see. And this relatively large biological asset, let's say, revenue or income, does this incorporate, let's say, the full expected harvest for 2021? Or you still have to wait for it to be finished, and this number going to possible change? Is it a risk that it could go down? Or is it more likely it should go up?

Right. Biological asset is a noncash estimate of the entire harvest at expected prices minus cost of sales and the cost of production. So our estimates for 4 key crops which are grown in the ground, namely sugar beet, sunflower, corn and soy, these are calculated at expected yields and prices in cost. However, we can already say that this calculation was based on the estimate of sunflower and soybean yields, which already has become effect. So we do not expect any change from our estimate because we already harvested, and we reported the exact yields that we reflect on Slide #5. With regards to sugar beet and in relation to corn, these 2 crops still remain in the ground. We are in the process of harvesting, and these are still estimates. We expect them to be much higher than last year's harvest. We expect corn yields to be north of 8 tonnes per hectare. We expect sugar beet harvest to be much higher than last year. But the final numbers will follow in December.

Understood. But do you -- when you do the estimates, do you approach it conservatively? Or let's say, the final numbers could differ, I mean, especially, is there a big risk that there could be like a downward revision? Or do you think that you're pretty safe with these, let's say, fair values?

We believe that we are pretty safe right now because, as I said, out of 4 crops, 2, sunflower and soybean already harvested, and they already transferred to the stocks on our balance sheet. It didn't happen as of 9 months. But in reality, they already moved. So there is only uncertainty related to the crop which is sugar beet and corn, and the yields end price estimates are already quite reliable at this stage of harvesting. So usually, when we have a change in the estimates, it usually happens between 6 months and 9 months results. After 9 months, we don't have significant changes because we're very close to the final harvest numbers.

Understand. Understand. Last question. Your CapEx levels still remain pretty low. And you announced this USD 50 million investment. Can you maybe comment on that? Like, I mean, what kind of investment, how long or when it should be done? And what should be the CapEx for, I don't know, next 2, 3 years? And what could be the financial impact of this investment, this $50 million, let's say, on your EBITDA level?

The maintenance CapEx is at the level of $20 million, give or take, per year. That also includes the replacement of the machinery in the agricultural segment, which is a 5-year replacement program we started last year. So we are in year 2 and 3 years more to go. The remaining assets do not require extensive maintenance for the reason that soybean plant is relatively new. But there is an additional investment of $50 million, and it goes into the new plant, the plant which was built in 2016 does not require big investments. This is still the case. The plant is still 5 years old. Cattle farming is not a very capital-intensive industry. And most of the livestock well-being and other projects in this area are related, mostly can be expensed. This is about the housing conditions for cows. This is about air-conditioning or special matrices for the animals to feel comfortable and feed, the quality of feed. Most of these items are related to costs were expensed as they occur. They are not CapEx items in a big sense. So this is a couple of millions per year. Our sugar production facilities, although they are not new, there was a significant CapEx in the previous years. Last couple of years, CapEx was manageable, a couple of million euros. But back in 2018, that was around EUR 10 million. We may have to invest a little bit more in the upgrade, but these are not double-digit numbers that may affect your projections.

But this $50 million, for how long -- is it -- the CapEx plan will be spread out?

2 years. 2 years.

2 years. So it's starting next year?

We have to finish our design work, which might take some time. It would be safer to see these investments over 2 years, starting from beginning of next year.

And your estimate in terms of, let's say, EBITDA contribution from this new investment?

Obviously, this is difficult to make projections, which are 3 years away from production. At the current assumption for cost and the product prices, we believe that we can double our EBITDA margin by switching partially or entirely to the new product, which will be concentrate. But we are still 3 years away from the actual production. So it's difficult to give any firm numbers here.

We now have questions from Natalia Shpygotska from Dragon Capital.

Congratulations on the great results. I have a couple of questions on the farming operations. You've just mentioned company expects -- assumes at least for this year's corn yield of about 8 tonne per hectare, if I understood correctly. At the same time, company is still optimistic about the corn price outlook for Ukraine as Ukraine's harvest may come up not as big as expected. Could you please elaborate a little bit if you have any concerns with regards to current yield assumptions or company is safe about its own projections, but other regions of Ukraine may suffer with lower-than-expected yields?

We expect our yields to be higher than 8 million tonnes. That is true. But since we are also involved not only in growing our crops in-house, but also purchasing corn and other crops from third-parties and offering grain and also storage and handling services to certain farmers. We have a slightly less optimistic view on the total amount of corn produced by Ukraine. We think that 38 million tonnes is probably very optimistic, and it should be closer to 35 million tonnes. Therefore, the exports out of Ukraine will be slightly higher than 20 million tonnes. And given that more and more U.S. corn is being processed for ethanol purposes, we believe that the pricing environment will remain favorable for Ukrainian corn.

Understood. And also one follow-up on these winter crops, please. Could you please comment if company has completed its winter sowing for next year's harvest? And what are conditions of the winter crops given the drought observed in October in Ukraine?

Our winter planting area is around 56,000 hectares. And we believe that current condition is quite good.

[Operator Instructions] We have had no further questions registered, so I hand it back to the management team to close.

Well, on behalf of ASTARTA and Wood & Company, I want to thank you for your participation in today's call and hope to speak to you next year during the fourth quarter conference call. Have a great afternoon. Stay safe. Thank you.

Thank you. That does conclude today's call. You may now disconnect your lines, and enjoy the rest of your day.