Astarta Holding PLC (AST) Earnings Call Transcript & Summary

Thank you very much for joining the call today. [Operator Instructions]. We would like to go briefly through our annual results for the last year, and then we can turn to the Q&A session. If it is possible, we would like to address Q&As at the end. And you can type your questions so that we can read them out after we go through the slides. On the third slide, you can see our summary results with the P&L. For the first time since the company's history, it hit EUR 0.5 billion mark on its revenues. The biggest contributor was the agricultural segment at 35% of the total revenues. And we had a very good contribution from soybean products with the revenue up by more than 35%. Obviously, the war situation in Ukraine affected our costs. First of all, selling and distribution costs for export in our products. And that was reflected both at the gross margin and EBITDA margin. Still, the margin compression was rather moderate on the IFRS from 41% to 50% and actually was quite stable if we exclude the impact of IAS 41 on our financial results. Net profit at EUR 65 million, which is half of last year. But given the external environment, it is very respectable result. Looking further at the cash flows, we continue to focus on operating cash flows and keeping our CapEx program under control at the maintenance level. There were additional borrowings from the banks, but nothing major that allowed us to sustain our leverage ratios at very conservative level at 1x net debt to EBITDA. If we drill down our results per segment, we were encouraged by somewhat higher prices on the agricultural revenue side. However, selling and distribution expenses more than doubled because majority of our grains and oilseeds are exported. And that unfortunately lowered our EBITDA margin to 42%. If we look at the primary agriculture of our operations, one can see that in line with the industry, we reduced acreage on the bulk crop, which is corn due to logistical difficulties to export but we increased acreage on the winter wheat, under oilseeds, especially soybeans, which are used for our domestic [indiscernible] crushing. There was also expansion on the sugar beet and rapeseed side. The weather was very favorable for our autumn crops last year, and we can see significantly higher yields for corn, for sugar beet and for other crops. Looking at the market fundamentals. I think the clear picture here is that the grain corridor by the seaports of Greater Odesa agricultural sector. And despite Ukraine region quite high volumes of exports for the sports back in the autumn last year. The price differential between grain prices domestically and internationally is quite wide. The reason is that these logistics is very expensive. Looking at the sugar side. Since we had a higher harvest of sugar than last year, we were able to process a higher amount of sugar beets at 2 million tonnes and more than 80% of this volume both coming from our in-house operations. The amount of sugar was around just under 300,000 tonnes. We retained our domestic market position of more than one-fifth and we also restarted exports. Thanks to the free trade agreement between the EU and Ukraine, which was concluded last year, we were able to export 30,000 tonnes of sugar to the EU markets. The international prices were also rebounding favorably, and we count on our exports to be continued because domestic consumption in Ukraine was reduced because of people which had to immigrate out of the country, and we lost some consumption in Ukraine. On the soybean processing side, we see also very good prices on soybean oil, increase in volumes of production, and exports we managed to increase in-house supply of soybeans at almost 50%. And we also see that Ukrainian farmers are increasing acreage on the soybeans, which also very favorable for our margins. You can see a very good expansion at both the growth and the EBITDA margin. Cattle farming was also performing really well. We managed to increase the milk production on the account of higher milk yields as well as the herd of cows. The pricing outlook as favorable and that allowed us to fix our margins at very good levels, at nearly 50% on the gross margin and EBITDA nearly 50%. We considered our strategy. We call it strategy for sustainable future because we believe that financial soundness of the business as well as businesses efforts on the environmental and climate change front are very important. We are following the European trends on regenerative agriculture. Ukraine was facing severe energy shortages, and there is a big encouragement on the government side to develop alternative energy sources. And that actually is in sync with our strategy for energy independence. Last year, we ramped up production capacity of our bioenergy facility, which supplies not only our soybean crusher, but also sugar mill when it is in operation in the Poltava region. We are working on alternative logistics for our exports. We rely on Europe to retain favorable trade treatment for Ukrainian exporters despite any short-term hiccups, which are currently being discussed between Ukraine, EU and the neighboring countries. We increased our disclosure on the climate corporate governance side. And now our GHG emissions are covered under GHG protocol with Scope 3. And we are considering various projects to build a circular economy, which will promote Ukrainian environmental improvements and Ukraine joining the EU grain deal. The next slide is a summary of all our sustainability efforts, and this is embedded into all spheres of our business activities, whether this is downstream or upstream. Perhaps one of the most important projects of last year on the ESG side was the social responsibility, which start-up took on its shoulders to create a project Common Health Ukraine, which helps Ukrainian people who are suffering from the consequences of the war had to move from their homes and also families of those who serve in the army and communities of our operations. This has become a large-scale project, which started very early during the war and has now grown to a large-scale operation, which was joined by many international partners, and we encourage everyone who can contribute to this effort to join it. For the rest of the slides in our presentation, we have updated data on our financials as well as the capital structure. Perhaps worth also mentioning that we continue to develop an IT solution, which is called Agrichain. This is a in-house, integrated software for managing agricultural businesses. And we see this project not only as digitalization of our operations, but it is also a solution which is offered to other players in the market. With the help of Agrichain, we practice precision agriculture, regenerative farming and various models are still being developed and added. And we can see that other players in Ukraine replicate the tools which are available to them through Agrichain, and now it covers not only over 200,000 hectares of our operations, but several times more due to other agricultural businesses using our tool. This is probably a very brief summary, and we would be very happy to address your questions now.

I'm just looking at the chat box. A couple of questions. Transportation costs turning 3, 3.5x in the fourth quarter '22. What contributes to such high cost dynamics? Will such cost to tonne continue in 2023 I suppose. The next -- this is at least a question. So I will probably do one question at a time. Passing the floor to Viacheslav Chuk, who is our Commercial Director.

Yuliya, thank you very much. Jakob, thanks for your question. I would like to clarify that this increase is not constant. It depends on the movement via grain corridor and via Western borders. The more it's conjunted so the more the traffic, it could be higher. So in the fourth quarter, it was kind of very slow pace of movements via corridors. That's why increase the cost for this logistics.

[ Slav ], can you address the following question about the breakdown of our volumes over land versus Black Sea please?

Yes. I think that I will mention the numbers that starting from the beginning of the season when the grain deal started to work. We exported till December 31, 270,000 tonnes of grains via Black Sea. The rest was exported via Western borders.

The next question, the means of agriculture expecting increase in sugar beets what are our estimates and why such optimism on the part of the ministry? I will address this issue because last week, we participated in a major sugar conference by S&P. And in general, it is acknowledged that the EU markets specifically might be facing shortages of sugar in the next several years coupled with possible El Nina, the last one was in 2016, there is a higher probability of this weather event happening this year or next year. So certain sugar deficits will probably be expected it not just in Europe but also globally. We know that the major global sugar producers volumes such as Brazil, Thailand and India are also -- the volumes are quite uncertain at the moment, also because India, for example, started blending bioethanol, and this program might potentially decrease exports from this important country producer. So overall, we see a longer-term future of the Ukrainian sugar in the European markets. And global prices are also increasing. And it is no surprise that Ukrainian farmers are increasing acreage under sugar beet. The estimates by the Ministry were over 225,000 hectares expansion, but it should be noted that we are still at the beginning of the planting season and only 1/4 of acreage has been done. So this kind of projections are currently not very reliable. Unit sugar production cost in fourth quarter over 20,000 [ grain ] per tonne. Is this a benchmark for course for 2023. Obviously, the numbers in the local currency are also dependent on ForEx movement. But generally, it is accepted that the cost of sugar production in Ukraine is just north of $600 per tonne between $600 and $650. I will move to questions from Martin. In agriculture, have all 2021 harvest volumes being sold in 2022? Yes, it has been, but if Viacheslav wants to add anything I can pause for a moment.

Yuliya, thank you very much. It has been sold.

Okay. Okay. Could you comment, please, on cost inflation in farming for 2022 and 2023 harvest? Is trading business with agriculture continued currently? Let me address the easiest questions first. The trading business in agriculture, yes, it is continued currently. You can see also we put notes in our financial statements that certain amount of revenues is due to the trading activity. So this is continuing, but obviously, the scale of such trading activity very much depends on the seaborne corridor. Cost inflation in farming '22,/'23 harvest. Vadym Skrypnyk is Head of Agriculture, and I will ask him to comment on this.

Thank you for the question. Yes, the cost inflation in '23 is increased. And we have more than 30% increased cost in harvest '23 for the '22. But markets also depends from time to time. And some products is more cheaper now than in last year. So we think that it will be not so much. Thank you.

Within sugar segment, how many stocks were like at the beginning of the current 2023 season? I believe this question relates to Ukraine specifically. If I'm not mistaken, that was about 900 tonnes, but with exports continuing by May, it should be down to 400 tonnes.

Yes, I think it was about the marketing here. So at the end of the marketing here, this year, the stocks is projected on the same level previous around 400,000 tonnes in the Ukraine market.

Okay sugar import in Poland is possible and finance -- is it financially viable to sell sugar to the EU? I would like to make the first comment and then which probably continue. What we learned from participating in the global sugar conference last week, Poland is a producer of sugar out of sugar beet at a similar scale than Ukraine, and they are ramping up production, specifically for the reason that overall, EU is expecting some shortages of the product. So the ban to Poland specifically is probably a part of this picture. And Poland is not our key markets. It is producer at the same level as Ukraine. And now we'll pass the floor to Viacheslav on other markets.

Thank you, Yuliya. The Ukraine is allowed to make transit through -- via these countries. And we see that we have Western European countries as a market, including also southern countries such as Spain, Italy, Greece, Croatia. So I think that in this scenario, we have these markets as our target -- targeted markets, and we are ban just to import to Poland part.

Okay. How much Indian stock left on the entire market? How many you had left from '21, '22 to sugar after fourth quarter? Viacheslav, I believe we answered the first half of the question for the entire market. Would you like to comment how many tonnes of sugar we now have on our books.

I think that on the beginning of the 2022, 2023, we did not have stocks from the previous season. So as of today, we are selling the stocks of the current season without remaining stocks from the previous one.

Is there a risk of inventory write-off if we do not operate, how long the inventory can be kept? I believe that this question was probably relevant last year because we had a much higher harvest and a different composition of the harvest, by which I mean the volume of corn and wheat versus oilseeds. This year, the situation is much better. First of all, the grain corridor is operating. There is obviously uncertainty and high risk, but by and large, the market sees disruptions in the operations of the grain corridor is coming from Russia trying to negotiate something better for themselves. But we do not foresee a complete closure. Also Ukrainian railways and the automotive routes will develop significantly over the last 12 months. The farmers reduced acreage and the most bulkier crop, corn, so we do not see the risk of inventory write-off to be as high as last year. This is much more manageable and actually not a big risk this year. The next question from Yuri, is company impacted by recent closures from EU countries like Poland and Hungary? What percentage of revenue can be at risk if the situation repeats and becomes permanent? If we are talking about -- if corridor in this question, you mean transit. The transit actually was not closed. What was closed is imports for certain specific products in each of the neighboring countries of Ukraine. Also, each country assessed its own product range. And also, that was the unilateral action on behalf of these countries, which is not in line with the overall policy by the EU. So the transit has restarted within days of the first ban. The imports to the nearest neighboring markets in Ukraine negotiations are still taking place this week. Therefore, we actually do not see a big risk to our revenue. Obviously, any difficulty or any longer transit can increase the cost of delivering products. But by and large, our core clients are not in Poland, are not in the nearest markets, but which is pointed out, these are bigger, more western markets of the EU. Viacheslav, would like to add anything on that, please?

Yuliya, thank you very much. I think you gave an extended answer. So I think in transit is allowed, so we can reach Polish ports, Romanian ports and go by trains in deeper into Europe.

Yes. It's a matter of cost, fortunately or unfortunately. Martin has a follow-up on sugar balance. Do you expect pressure on local sugar price with such high stocks, 400,000 tonnes by the year '22 to '23.

Yuliya, can I comment?

Yes, of course, yes.

Martin, thank you very much for the question. The ending stock was mentioned, considering the export of 400,000 tonnes. But in case of the licensing we'll be allowed further. The ending stocks will be less because we observed the demand for the export, and the export will absorb these stocks.

Just moving to Natalie's question on company CapEx spend. Everyone has seen that we kept our CapEx at a maintenance level in the last several years. This year, CapEx will be higher but more significantly higher. Also focused on maintenance, but also some modernization in terms of our efforts on the energy side, which we highlighted in our annual report such as higher production of biogas and similar type of energy-related projects. what is the progress level in percent of work on bulk sugar storage in sugar plant, the in and new technological line for advanced processing of soybeans? Okay. I will start with the last point, [indiscernible] of soybeans is one of our core projects. As we announced before, the soybean processing is our key development area, and we designed the project to produce soybean concentrate for the European markets. Unfortunately, this project is very large scale. And before the war we estimated the cost north of $50 million with cost inflation, everything, it is north of $60 million. However, during the war times, it is difficult to do the logistics of delivering the equipment from the manufacturers of equipment. Also, as you probably know, Ukrainian government is investigating together with multinational institutions war type insurance on new investment projects in Ukraine. So we don't have specific timing in our mind. This is the first project that we would like to go back to. But given the restrictions from the equipment manufacturers and also on the insurance side, we need to take time on this project. So the our Head of Downstream Operations will probably comment on our projects on [indiscernible] and [indiscernible]. Can I pass you the floor, please?

All of these are great projects, which would like to come back as soon as the war is over. At the moment, they all unfold, as Yuliya just explained, due to a lack of war insurance and also there is apparently a problem of foreign specialists to visit and the [indiscernible].

The last question I can see in the box is regarding share buyback. ASTARTA has a buyback program in place for, I would say, many years. The scale of such buybacks was quite moderate. And we would like to keep this as an option. However, the topic of buybacks is considered on an annual basis by the Board and by the shareholders. And soon, we will have a shareholder meeting and the agenda to each will be published shortly. Any M&A opportunities? I think, in general, M&A opportunities are quite difficult given the circumstances in Ukraine, and also given that we have several development projects, which were designed by the management for increasing our value chain recently. So our first priority will be on spending CapEx on our own projects such as within processing. But of course, if there is anything attractive comes our way, we will look at such opportunities. But under the circumstances in Ukraine, this is probably not -- something we are not planning in advance. Dividend possible this year? As you know, we started our dividend 1 year before the war, and we started the payout with an intention to continue. However, the war interrupted our plans. This is something that our shareholders and the Board will discuss in the upcoming AGM meeting considering all pros and cons of the company's business continuing to operate under extremely difficult circumstances. Would you care to comment on plans? Are you committed to your status as a listed company? Yes. In a private call, I can comment a lot about [indiscernible] but we generally do not comment on other companies. We can only say that we are in the same peer group. We received questions. But as a company, we are not aware of any such moves. If we become aware, it is our obligation to disclose it publicly. Therefore, no change on our side. Committed to a status a listed company is always a question to our shareholders. As far as we are aware, there is no change. Seeing we're done with all the questions. Nothing else is coming out. Yes, G&A expenses are steady. Maintenance CapEx is approximately 13. Does the company expect maintenance CapEx will increase in 3, 5, 10 years up to G&A expenses? It is a very specific accounting item, [indiscernible]. I can see you would like to go into some technical details. But generally, G&A is higher during the expansion phase of the business. And as you know, we finished our network construction just a few years ago. So we have quite an increase from G&A on this side. Also since 2018, part of G&A is amortization of land lease liabilities. This is why we are singling them out as a separate line in our presentation. So you know which part of G&A is related to the production core assets and which ones to the land assets. But generally, if we increase our investments, and we expect to increase our CapEx somewhat this year, G&A will increase slightly as well. I think if you have any other technical issues of such nature, we could have a separate call with our finance department also online, and we can discuss the details of our depreciation policies. With this, I would like to thank everyone on participating in this call. We would be happy to address any other issues separately, drop us an e-mail or give us a ring. Thank you very much.