Astarta Holding PLC (AST) Earnings Call Transcript & Summary

Hello, everyone. Sorry for the technical trouble. We had unstable Internet. Pavel, are you still letting people in? I can see 18 people in... [Technical Difficulty] Okay. So let me go back to sharing my screen for conveniences. First, here, I will share my screen now. I'm in a full screen mode. Can you hear me and see me?

Yes, we can hear you, and see you.

Okay. Great. Again, apologies for the technical difficulties, and we have many people on this call today. We will be presenting our first quarter results. We can see that the company was able to slightly increase its revenues. And this is on account of the sugar segment, which performed really well compared to the first quarter last year. We have reduced profitability on the gross margin side and EBITDA. However, this is explained by the higher share of exports that we achieved this year compared to the previous year and logistical costs, getting crops and sugar out of Ukraine are quite significant. We continue to disclose our gross profit and EBITDA on net of IAS 41 basis. So here, we can see a margin squeeze from 37% to 27%. Nonetheless, the cash flows remains strong. Our operating cash flow totaled EUR 70 million compared to EUR 45 million last year. And cash flows before working capital were also significant at EUR 42 million. Our investment program for the first quarter is only EUR 6 million, but this is doubled from last year because we announced investments into further soybean processing. And also, we have extra investments going into the sugar segment. This did not affect our leverage position. In fact, as of first of quarter, the company is in a net positive cash situation. But including land lease liabilities, leverage remains below 1x net debt-to-EBITDA. If we are going to segment performance, we start with agriculture. There was lowering of prices for corn, sunflower seeds and rapeseeds. But wheat held up compared to last year and continues to increase currently. There are some trading volumes in these results, especially for corn. We disclosed this number for the annual results at EUR 56 million. For the first quarter, we don't have the precise number, but it is over 100,000 tonnes. Now the company already finished spring sowing. The crop mix is changing in line with the last 2 years. We keep reducing acreage for corn. And we increased acreage under soybeans because we would like to increase our sales efficiency for own crushing, and we see better margins in soybeans compared to corn and wheat. Our acreage under sugar beet remains at last year's level. And there is a minor change in rapeseeds. Sunflower seeds also at 18,000 hectares. Our commercial director is online to answer questions. But generally, one can see that the pricing differential between global prices and domestic prices for key commodities such as wheat and corn remains, but it is much more narrow compared to last year since Ukraine is able to export via Odesa ports. In fact, since reopening of this route, the exports for agricultural commodities reached pre-war levels in the recent months. But generally, there is a global price decline. At the same scale as in Ukraine, if corn was down by 34% globally, Ukrainian corn was down by 28%. And same goes for wheat if we are talking about first quarter, but there is a small uptick recently in the wheat price. Sugar production. We've just finished planting sugar beet for this season. The acreage remains the same at 38,000 hectares. And last year's sugars volumes are sold well. There is a slight price decline compared to the first quarter of last year, but we still have quite strong results at gross margin of 23%. EBITDA margin was squeezed much more intensively on the account of selling and distribution expenses because we exported about half of our produce and exporting is associated with higher logistical costs. Europe was the main destination for sugar exports for Ukraine and for us, but we also diversified our supplies to other markets, including Middle East and North Africa. If we are looking at the general situation, this sugar industry in Ukraine this year, the farmers would like to keep the acreage under sugar beet same as last year at 250,000 hectares. Ukraine actively exported sugar this year. And the first quarter, volumes at over 200,000 tonnes, actually close to the quarter, which was negotiated with the EU. The annual 2024 quarter is 263,000 tonnes. So we are hitting the ceiling and it is going to be restarted from January '25. So the domestic prices dipped by 21%. However, global prices remain quite robust. So this is why we are focusing on exports and especially exports outside the EU since we are hitting the overall ceiling with EU. Soybean processing largely stable, except for the soybean oil, which was down by more than 42% compared to last year. However, we manage our margin well and the gross margin is still 30%. EBITDA margin, 24% is quite a good result. Since there is a general trade in Ukraine of decreasing acreage under grains and increase in acreage under oilseeds. We see other farmers also increasing production of soybeans and rapeseeds. For soybeans, this year, the harvest is expected to hit 6 million tonnes, which is all-time high for Ukraine. Generally, in the environment where raw materials are abundant, which we expect this year, we expect to enjoy a pretty good crush in margin. Cattle farming increase in production. We increase in our herd. So the increase is not just on the milk side, but on byproduct meat, which we sell. The prices for premium quality milk, which Astarta specializing in, is also holding up quite nicely at above EUR 400 per tonne. And that allowed us to hold gross and EBITDA margin at above 40% this year. There is a general trend that small households, which keep livestock reducing their output and industrial agricultural producers such as Astarta increased production of raw milk. And this trend remains intact. So we believe that dairy product processes in Ukraine, are very much focusing on consistent premium quality milk, which we supply to them. This is it for the main part of the presentation. So we welcome your questions, please.

Let me just go into the chat box to check. Okay. So first question from Carol. Do you have any plans to increase land area used for crops production, including sugar beet? And -- yes. So let us reply, let us do the first question because the second one is actually different. At the moment, we are happy with the acreage we have. As -- coming back from the history of Astarta, it was primarily an agricultural and sugar producing company. And our acreage is very much affected by the crop rotation process related specifically to sugar beet. According to agronomic science, sugar beet should be sown once in 5 years. So at 40,000 hectares of land under sugar beet, for the crop rotation, we need over 200,000 hectares overall. And this is exactly what we have at the moment. But we will continue to monitor situation in the market and see how the land market develops in Ukraine, if there is any opportunity to expand in the medium-term. Current outlook for buying land that are leasing in area where company is operating. Unfortunately, under the current law on the land market, companies which have foreign beneficial owners are not allowed to purchase land. And this has been our business model from the start. We are a large-scale operator of land. We operate land on the basis of leases. We focus on having long-term leases in place. And since we have foreign shareholders, we are not allowed to purchase land. The land market in general was opened up to -- for an ownership -- sorry, to corporate ownership from this year, but we did not observe a significant turnover in this respect. So for the moment, the Ukrainian agriculture continues to operate on the basis of long-term leases. Marcin, why farmers have shown similar acreage with beet in '24 if the export destinations outside EU squeezes margin by that much? Viacheslav, maybe you have more idea about other farmers. I will start replying regarding Astarta, since we are one of the largest sugar producers in Ukraine, we would continue to produce the amount of sugar that we produced last year. We see opportunities in the other markets. And the question about other farmers, I will pass on to Viacheslav.

Thank you, Yuliya. Marcin, thank you for your question. I think that -- as you may know, that the preparation to cultivate the sugar beet is in place before -- much more before the actual decision. So to sow in March, we need to do something at least -- already in summer and in autumn. And I think that quite a lot of farmers already prepared the land when the prices still were higher and the price and the quarters were not still decided. However, still, as of now, the -- also the crop rotation for them with the sugar beet, it's still sufficient.

So there is a time lag between -- within the agricultural cycle, definitely. And I think one of the considerations for sugar beet is because corn and wheat is also much less profitable at the moment, but this may change. Next question, did Astarta had positive EBITDA on sugar volumes exported in first quarter '24? Or simply considering all cost, financing, CapEx allocation proportionately, did sugar export generated cash in the first quarter '24? I think if we are talking about general, first quarter on sugar volumes, as you can see in our first quarter results, I'm going into -- go back to this slide. The margin contraction on EBITDA was from 32% to 10%, but it is still quite positive. Given that half of the revenues were done by exports. So perhaps Viacheslav or our CFO, Liliia, would like to add anything to this answer.

Yuliya, I like just to confirm that our -- the cash generated was positive in the first quarter.

Yes. Next question, given very limited visibility of origin of reported volume sold, do you plan to split reported sales volumes into own proprietary on regular quarterly basis? And if not, why not? Is proprietary trading right now profitable for Astarta? I will start answering this question and then also pass the floor to Viacheslav and Liliia. As I mentioned during the main part of the presentation, we did disclose our revenues from trade in the annual results. We did not do it for the quarter because you may appreciate that the logistics of delivery of grain is quite complicated. But trading grain is not just about pocketing trading profit it is also about leveraging on the inland infrastructure, which Astarta has, which is over 0.5 million tonne at any one time. So our silos -- grain silos offer storage services third-party farmers. We procure grain from them, we treat dry grain. And this is also part of the agricultural P&L. I don't know if Liliia or Viacheslav would like to add anything to my answer.

Yuliya, I think I would like to add. We will decide, I think when the new marketing year starts after the first of July. In case the volumes and profitability will be substantial for our total profitability. And in case if it is, we will, of course, split the sales of volumes and our profitability. But now we think that it is not so substantial to be a separate segment. You can see it inside the agriculture segment. And the second answer, was the trading is right now profitable, yes, it is profitable.

Yes, it is profitable and it affects profitability for silo operations, which are consolidated into the agricultural segment. Why is the constant year-by-year decrease of overall sowing acreage in use? Is the company going to increase the sowing acreage in the future? If not, why? This is true. We had a churn of a couple of percentage points every year in our overall acreage if we're looking at the long-term trend. This is because we were focusing on the efficiency of our operations. And as I explained before, we really need 5x sugar beet acreage overall. Anything on top of it is something that we have to justify in terms of profitability. For example, we have 2,000 hectares of land under organic crops. Despite being 1% of our total acreage, it is not part of the conventional crop rotation. It's a separate business with separate margins and technologies. And we do it on a -- we work with these crops in different markets. To increase acreage under grains or sugar beet would require overall, understanding where we are going to process. Currently our sugar beet processing plants operating at quite high capacity. And the same goes for other crops. So we do monitor the land market situation in Ukraine. Obviously, it is very much affected by the war situation. About 20% of the land bank is currently occupied. And about extra 10% of the land acreage is adjacent to the battlefield situations. So from this point of view, it probably would be not very timely to look at the acreage expansion in this particular year. We focus on putting our investments into soybean processing. This is where we believe we have higher returns than land bank expansion at this particular point of time. And next question, potential targets with land lease rights to be acquired to boost land bank. Marcin, I think I mentioned it that this year, in the current situation, it would probably be quite difficult decision. Unless there is some attractive target comes along, which we're always happy to look at. But currently, we are focusing on the processing side of the business. What is the expected sugar export tonnage in 2024 considering quotas? Viacheslav, I think this question relates to us and maybe you can comment on the general industry.

Yes. Yuliya, thank you very much. I would suggest -- I would confirm that quotas, which we know is 162,000 tonnes, EU. But we still have opportunity to export to the Mediterranean regions and North Africa. And we target that we will have more than 100,000 tonnes of sugar plus [indiscernible].

Okay. 100,000 tonnes just of Astarta.