Astarta Holding PLC (AST) Earnings Call Transcript & Summary

[Audio Gap] End of the year. What should be noted for the next season, and we show our acreage breakdown on Slide #7 is because of the export bottlenecks and the bulk is export crop is corn, we made a decision to reduce acreage on the corn from 59,000 to 38,000 hectares. We increased our acreage for wheat, and we increased our acreage for oilseed crops such as soybeans and sunflower seeds because these can be processed domestically. And on the soybean side, obviously, we crush it at our own plant. There was a recent change in the market environment since the Ukrainian government introduced licensing for wheat exports. Previously, there was a ban. Now we are allowed to apply for license and export both corn and wheat, the most important crop commodities in Ukraine. However, the export bottleneck means that over land routes capacity is only currently a quarter at what used to be through the seaports in Odessa, Mykolaiv and other smaller ports in Ukraine. Going to the sugar production side. Sugar sales volumes were lower because some of our industrial clients either stopped production or had to reduce it. For example, Coca-Cola plant in Kiev region was severely damaged in the first month of the war. However, we are now focusing in on retail sales of our products. And here, we can see significant demand because sugar is a commodity, which can be stored -- can be kept in storage for a longer period of time. And because of the logistical problems to deliver certain food products across Ukraine, it is easier to transport and distribute for [indiscernible] purposes. So again, lower sales and a lower margin, but quite decent volumes. If we are turning overall to the situation in the market, we can see that the new harvested areas -- sorry, planted area under the sugar beet is down by almost 1/5. This is probably reflective of the amount of people who unfortunately had to temporarily leave Ukraine. So the domestic demand could be lower while the situation continues. But of course, in these circumstances, the prices are still significantly raised. The domestic prices for sugar in Ukraine are higher than international ones. And that is favorable for our P&L. We faced a sugar export ban from Ukraine in March but that was lifted by the Ukrainian government. And recently, the EU announced its intention to remove all trade barriers and quotas for impact from Ukraine, including sugar. And we hope that this decision will come into force very soon, and we will be able to increase our sales, including exports. On soybean side, we had to temporarily suspend operations of our crusher during the first several weeks of the war, but then we restarted productions when we found a way to ensure safety of our operations and of our personnel. And we can see quite good results on the margin side. The reason is because domestic demand for our soybean products is probably higher than before the war because livestock producers in Ukraine lack sunflower mill supply from sunflower seeds crushers, which had to stop their operations. Therefore, there is a higher domestic demand for soybean mill, which is our core product in the soybean crushing site. Very briefly on the cattle farming, prices, revenues and margin doing quite nicely despite the situation. And this is because there is a big push for -- by the Ukrainian government and all large-scale Ukrainian businesses to continue business and earn revenues and tax revenues for the Ukrainian state. Our industrial consumers of milk, such as [indiscernible] and Loostdorf continue to produce dairy products for Ukraine. And our -- the raw milk that is produced by our farms is in high demand. And we can see that our profitability even looks better compared to the first quarter of last year. We would like to say that despite the current environment, we operate business as normal. But of course, this is not true. We are doing most what we can in the current situation. And we hope for the resolution on the seaport side so that we can have certainty with our grain exports, which is something shared by the market in general and by the global community, which demands Ukrainian grain to be released into the global market to calm down the global inflation and food security concerns. Stamping, we always also saw in all our communications with investors and analysts alike. We have a humanitarian project. And because of our operations are located across the Ukraine, we are able to deliver humanitarian aid directly to the most affected areas by military facilities. So if you have anyone who can become a partner, provide such assistance to Ukrainians in kind or via financial means, please do contact us. We will never get tired of doing charity work on top of our day-to-day business operations. And with this, I would like to turn the floor to the Q&As. It would be helpful if you send us questions into the chat box because we know that some lines can be quite noisy.

I don't see any yet. But if -- yes, hello?

This is Pawel Wieprzowski speaking from Wood & Company. If I may start just asking four questions. What is actually the storage capacity of Ukrainian silos and the starter silos? And what is the current utilization of it? And how much can you store in it? So the question basically is if there is a harvest this year, and you cannot export the entire harvest, how much of it will you be able to store until the next season?

Right. There was a quite lively debate on this topic at the grain conference taking place today actually in Switzerland. And the Ukrainian government, the Ukrainian side pointed out to a range of numbers. Some market participants count the total Ukrainian grain storage capacity at 50 million tonnes, but some believe it is 65 million tonnes. It all depends on whether the storage capacity is stationary, well equipped with all handling, drying and other services or this is just a floor storage with less conditions for longer storage. Also, there is a range which the market was voice in today, which storage capacities are within the occupied areas. And the number also ranges from 7 million to 12 million tonnes out of 50 million to 65 million tonnes. The -- if we are talking about a starter, we have invested heavily in our storage network, and this is more than 550,000 tonnes. And we also have capacity to store some grain in so-called sealed sleeves or bags. This is the storage technique, which is very widely used in South America whereby treated corn can be stored in this long plastic bags, not in ordinary silage facilities. So for us, we believe that we are fully self-sufficient for the grain storage. Also, we pointed out today that our acreage and corn, which is much bulkier than wheat will be lower. So we need less capacity for corn. And some of corn harvest will be stored in these sleeved bags.

Okay. So if I correctly understand, there should be no problem with storing the upcoming harvest when it's contracted until the next year, right?

According to our traders, if grain is properly treated, wheat can be stored for several years. Corn can be stored for 2 seasons. The only problematic crop is some sunflower seeds, which is 12 months. So from this point of view, Ukraine does not have much of a problem of storing grain stocks but, of course, sunflower seeds and crushing activity needs to be at a larger scale to not waste sunflower seed harvest.

Okay. So it's not about the storage capacity. It's more about the sunflower seeds that needs to be crushed within 12 months, correct?

Yes, correct. Grain -- there is no problem with storing grain. There is problem with storing oilseeds, and this is mainly about sunflower seeds because soybeans are crushed immediately and domestically.

That's perfect. Could you please remind us what's the current export capacity of Ukraine in terms of the grain exports through the Western Border? You've mentioned during the last conference call that it was 0.5 million tonnes compared to 5 million, 7 million tonnes in the prewar period. What's the current export capacity? And when do you expect it to be increased? We are speaking only about the Western Border railroads and roads.

Well, this is still a big question mark. According to the Ukrainian railway, the first 2 weeks of May, they were able to transport 1 million tonnes of grain. And this is only 2/3 of potential capacity. And also, one should bear in mind that grain volumes is only up to 15% of the total rail cargo crossing the border. The rest of the cargo is coal, iron ore and metals exported to historical clients to Europe from Ukraine. So to increase volumes of grain exports, there will be a bigger push to increase the share of agricultural produce in the total freight, but this is a highly political issue. So we do not know how it will be resolved. But also, Ukrainian always believe that even at current share of the [indiscernible] produced, it can be increased by 1/3, if on the EU side, there is more urgency and communication between the two sites to reach a higher capacity. With regards to the road transport, this is still work in progress. And it is very difficult to estimate what the capacity could be because neither on the Ukrainian side or European side, there is any monopoly -- is a rail monopoly operating in Ukraine. It is much more centralized and can plan its activities with higher precision. But on the road truck side, there are various standards which are different between the border states. For example, there are ecological standards for the trucks. And in Romania, the ecological standards were -- for Ukrainian truck drivers were accepted lower than in Poland. And we know that the Ukrainian government is talking to the governments of all four countries with which Ukraine borders so that there is a lower ecological standard and higher capacity for the road transportation. But there is no public estimate of the maximum capacity that we have come across yet.

If I may clarify, first weeks of May, 1 million tonnes of grain has been exported through the western border, 2/3 of the export capacity through the railroads as far as the crops are concerned. And in fact, that's only half of the entire export capacity because the other half is for the metals, correct? Because this would mean -- because if the first 2 weeks Ukraine managed to export 1 million tonnes of grain, by proportion, that would mean that within a month, you should be able to export 2 million tonnes. And that's only 2/3 of the railroad export capacity. That's correct, right?

Again, 15% of the rail cargo is related to agricultural produce. And it can be increased by 1/3 just by being more efficient, between more efficient communication between the railways on two sides. And this is what we understand the message from Ukrzalysnytsya at the moment.

Okay. So in total per month, you can export at this stage 2 million tonnes of grain, if in the first 2 weeks, 1 million tonne was exported. And this 2 million tonnes can be increased further by 1/3 if the efficiency gains come?

This is not a question to us. I'm sorry. This is a question to Ukrzalysnytsya.

Okay. Okay. Cool. My last question is regarding your financing. Until when have you secured your financing? So in terms of your liquidity position, how confident do you feel? Are you considering any measures aims at boosting your liquidity as Kernel has done recently by selling 1/4 of its land bank?

I will start replying and then I will also ask if our CFO would like to add. We have a very healthy balance sheet. So we don't need to divest any assets to tackle any problems on the balance sheet. And also, if you look at our disclosure note in the financial statement for the first quarter, we stated that we have secured financing for the second quarter and partially some financing for the third quarter. And maybe, Mr. Gladky can add to this.

I would emphasize that ASTARTA demonstrated strong liquidity in this very difficult environment. And I would say that we probably, one of the few Ukrainian companies and this situation who received immediately support from local and Western banks in the amount we needed. We have cushion of liquidity at the moment from bank's limit. However, at the moment, we don't use them because it's not needed. And we build it for the stress scenario, as you asked, what will be in case if logistics will not allow export. So we are preparing for this scenario as well. And so far, we're quite sure that we will be able to mitigate visible risks, which appears from this part of the business side.

I'm just -- I've just opened the chat box. There is well, several questions, four questions from one gentleman. The first one, could you comment on the risk if grain exports were basically difficult longer than until autumn 2022? Market sources say that then Ukraine will have to deal with a limited amount of storage space. What does it look like for you? Do you have enough warehouses to accommodate for currently stored grains and harvest? I think we actually replied to this question. We have a large storage capacity, which we previously built, and we were planning to use it for our in-house stocks as well as for third-party stocks, but it is ample storage with reduced acreage on the corn, we feel comfortable. And additionally -- or specifically for corn, we will be purchasing sealed bags in which corn can be stored outside stationary storage for more than 12 months. Second question, what is your ability to finance working capital of grain exports by sea are not possible if in the fall, you need additional working capital finance sugar campaign? I think Mr. Gladky has just answered this question. In the soybean oil production segment, I understand that currently, it is not possible to export the oil overseas. It is possible to export oil, same transient route with oil systems by rail. But unfortunately Ukrzalysnytsya is still finding out how to increase this tank capacity. The amount of oil -- sunflower oil and soybean oil leaving Ukraine in the last months was very low, but they are looking at increasing the oil passage along with grains. How does look currently found of overpaid VAT on exported products, VAT reimbursement? I will pass this question to Mr. Gladky, please.

Yes. Since the beginning of the work, VAT was not refunded. However, at the moment, there is a draft of the [indiscernible] Parliament, which you foresee that it will be restored in June and it's waiting for the signature of the President. So we will see how it will happen. But at least there is expectation that will be renewed.

Next question, what is the price inflation for the seeds for the next season, especially for sugar beet and corn? We are talking about general input inflation, and this is for all inputs, seeds, pesticides, fuel, fertilizers. Seeds is something that Ukraine actually is very well supplied, at least for the spring planting, which is close to finishing in Ukraine. The biggest concern on the input side is not about the seeds, but about fuel. Next, from Marcin. Sugar export, is it logistically possible as of now to export sugar from Ukraine? Is there any demand for Ukrainian sugar abroad, given relatively high cost of production in '21 campaign? We -- again, Ukraine did not -- Ukraine never had sugar exports into the EU without import quotas and any free trade. So this will be a new environment for us. And we hope that it will be favorable for Ukraine. Logistics is the same but truck transportation is probably easier for sugar than by rail. And we have to see how the prices develop. So this question is not practically relevant yet, but we hope that in a couple of weeks' time, there will be free trade with the EU, and we will do all our calculations. Grain export. Was ASTARTA able to sell any grain volume since start of the invasion? Yes, of course, we are able to sell our grain. March was a logistical shock months for everyone. And also the Ukrainian government, in a not very helpful way, introduced bans and then licenses. So the market is only starting to get on its feet in April. So we believe that in the next couple of months, we have higher volumes of sales of grain. Sunflower, could you please clarify as I might have not catched that earlier whether sunflower can be crushed in your soybean facility? No, we don't have a multi-seed crusher. Ours is mono-seeds, soybeans only. So we only crush soybeans. And sunflowers that we grow can be crushed by third parties and that could be on a commercial purchase arrangement or we can try to do pooling processing for us. This is something which is subject to calculations for the new harvest. Next, from Natalia. Could you please comment on volumes of crop sold exported to date in April, May? Natalia, I would rather -- to be honest, I would rather hope that we have firm numbers in the second quarter. Once we announce them, we will have firm numbers. So it's not very productive to comment on something which is work in progress, and we are in the middle of May. Have you already considered contracting gas for sugar refining season in the fall? Yes, of course. We typically start contracting gas in advance. This is a time when we are doing it already. And we also would like to point out that one of our sugar mills is running on coal rather than gas. So we are in a relatively safe position. How much transport capacity by truck can be utilized today in the next few months to transport grains? Yes, we are still in the discovery process. As I mentioned, certain standards for drivers need to be lowered by all border countries of Ukraine, which is Hungary, Slovakia, Poland and Romania for the drivers to enter and also -- or for transit through other countries. And this is on Euro standards. This is on the -- standards. Also, on weight standards because trucks is about -- road trucks is about road safety. And here, the situation is resolving on a slower pace than with rail. What is your view/expectation when the rail support will be reopened for grain transport? This is obviously a very big question. What we hear publicly that Ukrainian government is talking to United Nations and other countries trying to find a solution for some humanitarian export of grains out of Ukrainian ports. The amount of grain currently stocked in seaports is more than 4 million tonnes, which is a big amount of grain for the global trade. So question is whether politically anything can be agreed with the blocking site. And also the question, if there is a political agreement to do escort of green exports out of -- how long the demanding process takes place because the area around ports has been mined by both sides, Ukraine and Russia, and that may take some time. Are you considering any CapEx needs? We put all development CapEx projects on hold very naturally in current environment. So our CapEx is mostly maintenance-related, which is crucial for our operations. And you can see in our first quarter results, these are very modest. We highlighted during our previous calls that CapEx in the agricultural area was mainly replacement of the agricultural machinery and that was a 5-year program, and it's not massive. Our soybean crusher is a new plant, which doesn't require much maintenance CapEx. And in the sugar production, we also spent quite significant CapEx in the past years on upgrading our operations. Cattle farming is not capital intensive. So the chunky CapEx that we previously planned was related to our development projects such as soybean concentrate plant. But we had to put it on hold for obvious reasons. So currently, our CapEx is very small. And in the first quarter '22, it's even negative given that we sold small assets in the first quarter. Another question from Marcin. In the export logistics chain via land borders, how the split of additional cost looks like between farmers and traders? How large is this additional cost? To be honest, I would not give some different numbers because question is whether this is a transit to Constanta and then it goes to the Asian market or we found consumers and off-takers in the Spanish market for corn, for example, or in the Netherlands. So this is something that will be better reflected in the second quarter results. You will see our S&D cost on the agricultural side, and this will be something verifiable. But at the moment, we don't have an entire picture. With the current export rail capacity in place, how much cash burn do you estimate to incur for months roughly excluding working capital swings? To be honest, I don't understand the question. We -- I think excluding working capital swings is not very good approach because starters operations are all seasonal. For soybean crush and milk, both sugar and agricultural operations are highly seasonal. So working capital swings are very significant. So trying to exclude working capital swings is like excluding our two major business segments out of calculation. I don't think this exercise is useful. Are your current exports enough to cover your fixed cost today? You can see from the first quarter results, there are and we will see how we finish the second quarter. We are still in the middle of the second quarter. So let's just leave for the next 6 weeks, please. Unless Mr. Gladky would like to add anything to this?

Yes, we have, as we mentioned, last investment call that we completely cover our fixed costs by our local sales from sugar and milk. So from point of view of this perspective, we have enough liquidity from local sales.

Well, thank you very much, everyone, for your questions. I can see that the chat box is now complete. If you have any additional questions, please feel free to drop us an e-mail, and we will arrange for a separate call or answer in writing. Thank you very much again, and have a nice afternoon. Bye-bye.