Dekel Agri-Vision plc (DKL) Earnings Call Transcript & Summary

Hello and welcome to the Dekel Agri-Vision shareholders call. My name is Jack, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Lincoln Moore, to begin today's conference. Thank you.

Thanks, Jack, and welcome, everyone, as Jack mentioned, to the Dekel Agri-Vision interim results conference call. My name is Lincoln Moore, as Jack mentioned, Executive Director of Dekel. And I'm joined today by Shai Kol, who's the Deputy CEO and CFO of Dekel.

Hi.

And also, we have -- not on the phone today Youval Rasin. He's the other member of our executive team. He's actually on the cashew processing site today, so he won't join us on this call today. The purpose of the call is to give an overview of our interim results, which were released recently, and try to give some views on what's going on in the business right now and also over what we think will be an exciting next 3 to 6 months. In terms of agenda, what we propose to do is to touch on a few of the slides in the presentation. If you haven't got it open, it's available on the Dekel Agri-Vision website. There's a link on the homepage straight to the presentation, and you can follow us from there. Once we get through those slides, there were a number of questions from shareholders, and I think that will be more -- a longer part of the call. We'll go into a bit of detail on those questions. Okay. So to start things off, Shai, I'll see if -- I think you're best placed to perhaps give a very brief overview of the results through 30 June 2020, and I think I'd best summarize. If people follow on slides 5 and 6.

Yes. Yes, definitely. Thank you very much, yes. Yes, so in terms of the results, despite this challenging period, we managed to improve all metrics presented in Slide 5 of the results and increased our revenue and increased our EBITDA by 35.7% to EUR 1.9 million and come back to a net profit of EUR 0.4 million. The main -- the reasons for that are quite straightforward, and I explained in Slide 6. The 2 main reasons for the improved results are an increase of 19% in the average CPO price -- selling price during the period. Even due to the COVID effect, still the average CPO price was higher. This is the one main reason. The other one is an improved extraction rate during the period from FFB. But further details will be addressed during the Q&A session on that perspective. In terms of the cashew project, I'll just mention now that it's on track and progressing to produce during Q2 2021. Again, further details will be provided during the Q&A session.

Okay. Thanks, Shai. Perhaps I'll take over here and draw your attention to Slide 7, which hopefully gives a helpful background to our results over the last 6 years. I just want to draw your attention mainly to the impact of the CPO price on the prevailing results in each year. If we go back to the best year we had, which was 2017, the CPO price was EUR 700, which at the time equated to about $800. Just for those who don't follow the palm oil price that closely, $800 is really just simply the average price that's been over 10 to 14 years. So throughout that period, actually we've only been operating at average and below average prices, which you can obviously see, in '18 and '19. It's slightly begrudging to us, obviously, this year -- we'll get -- touch it on the next slide -- as we obviously had a chance to trade at prices similar to 2017. So the average price that was achieved in the first half is EUR 602, but it really should have been, excluding COVID, more EUR 700 and above. And so our internal calculations, and we've looked at the price differential on both crude palm oil and the price differential on palm kernel oil, estimate, that although we were disrupted by COVID, we -- it's probably cost us somewhere between EUR 1.4 million to EUR 1.6 million straight net profit. So our results would have otherwise been broadly similar to 2017. I think we would take confidence and positivity out of that. But as conditions are stabilizing, and we'll touch on the prices on the next slide and in the Q&A, that we can get back to those sorts of levels. And this is a very simple guide where we're currently in terms of market cap, trading at less than 3x at 2017 half year EBITDA, let alone the full year EBITDA that year, which was well over 4. So we have a lot of reasons, I think, to be optimistic with palm oil prices. Obviously, in our views, we're being bullish going forward. If you turn to Slide 8, it's just helpful there to demonstrate what did happen. 2019 was a very low period of palm oil prices. And then, towards the back end of the year, stock levels around the world began to tighten. There was a significant amount of outlook from Indonesia and Malaysia of increasing the biodiesel blends. And that speculation, together with the real stock being -- or supplies being at a low, pushed prices up as high as by $875 at the start of January, yes, and local price does lag that. So we didn't capture a huge amount of that as the price quickly moved down as COVID set in particularly from March through May when -- and also through June with effectively markets were shut. So supply of palm oil in the main producing countries started to slowly increase. Unfortunately for us, of course, that coincides with the peak production months of March and April that we had, so we didn't catch that at the highest prices than we would have otherwise had. I think the pleasing thing, and we'll touch on this in the Q&A, is that obviously, if we look at palm oil in its essence, it is an essential food. So as markets have reopened, we'll see demand starting to return. And so prices have already rebounded to well over $700 a tonne. I will touch a bit more on palm oil price in the Q&A. Shai, if we just flip forward to cashews for now on Slide 13, I think that would be helpful.

Yes. Great. Okay. So these are pictures from the site obviously. The pictures may be around 10 days old. The civil work is already completed for the factory area. As you can see now, the erection of the building is taking place. Most of the equipment and the machinery is already on site and -- with the assembly just in part -- part of it in parallel to the assembly and part of it after the assembly of the building. You are welcome to continuing -- following the pictures that we'll try to publish from time to time on the progress on that.

Yes. Those photos will be regularly put on the Twitter account and up on the website, and the link will be contained on the homepage. Just on Slide 15, it really summarizes what we think at the moment. If you look at point 1, normalization of CPO price, which is already happening, and, of course, moving to our high state in -- within 3 months, and to the cashew production coming into play really maybe in 6 to 8 months, that we've -- over the next period, I think we've got a very interesting period in the company's development and growth. And we'll touch on that in the summary at the end.

In terms of the questions, thanks, everyone, for the questions that we've gotten. I think we're actually able to address all of them. So we'll -- we can try to put it in some sort of logical order. The first one is on CPO price. Understandably, it's such a critical path to our existing business. The question is, do we think it will rally further? As things stand today on the Malaysia side, which are used as the major proxy for addressing or assessing palm oil supply, the supply in Malaysia is still significantly lower in terms of stock on hand than it was at this time last year, when you'll recall I mentioned there was a later run up in prices, which I think is quite positive. And Malaysia and Indonesia are now actually in their low season. So there is quite a tight stock position at the moment, which has driven that increase in prices back over EUR 700. If you look through the major buyers of palm oil and data on China or India being the major consumers, China data at the moment is still showing stock levels well below what they traditionally hold. Given China has been one country to stabilize post COVID, that does also give some cause for optimism that continued restocking out of China will be a positive impact. India is obviously is holding stocks similar to slightly below, and probably more affected by COVID, but operating markets are open, so probably neutral there. I think if you're going to be -- look at the downside at the moment, I think if your view is that the total global economies will go back into total shutdown, that would be the main risk to palm oil prices over the next 6 months. But if we continue in the same situation as we have now and Malaysia stocks are tight as they are and China is restocking, I think we can be positive about prices at least maintaining at these levels and perhaps moving up from here as we move into the -- for us our high season and for Asia their low season. Now Shai -- so that probably covers the short-term view on palm oil price. The next question related to the improving extraction rates this year compared to last year and whether we think those are sustainable.

Yes. Yes, definitely. So in terms of the extraction rates and actually oil losses in the factory, we are tracking it on a daily basis, of course. The reason for the change is the quality of the fruit, which is like -- which varies like any other agriculture business between seasons and periods in the season. The extraction returns to average on a longer run of around 22.5%. Last year, we faced a lower extraction rate of -- or lower-than-average extraction rate of around 21.5%. This year, we see that it is expected to be higher than the average. Hopefully, it will continue in this direction, but it tends to even at the average rate. Hopefully, this year's will be higher. So it all comes from the fruits. The changes -- we didn't do any significant or at all changes in the factory. We are tracking it on a daily basis in order to assess it. And we hope that this year, it will be higher. And we see that this year, it will be higher than the average.

Yes. They'll certainly be higher than the last year. It's probably tracking to be around 22.3-ish this year, which is about average over the last 5 years with the -- I think a few years ago, I think it was, -- Shai, it was 23.61%, yes?

Yes.

I mean something like this. So there -- it is sustainable to keep rates at 22.5% given the track history at those levels. The next question, Shai, relates back to fruit and the -- our market share of the fruit that's coming to our mill average in terms of farmers. What's our view in terms of our position in terms of market share? We maintained it this year.

Yes. We did maintain the market share this year. This year, we improved our logistics in terms of centralizing all the control over the trucks and the truck fleet, including our subcontractor that transfer for most of the fruits from the logistics centers, which enable us to make it more efficient. Doing that, together with continuing with our own policy of strengthening the relationship with the smallholder, with fertilizer, selling assistance and in the methodologies, in the plantation and, of course, continuing to pay on time to the smallholders, these efforts resulted in maintaining our market share in the region.

Okay. Thanks, Shai. I think -- yes, so I think we found it challenging to increase the market share that over the last few years we've been able to maintain it. So the next question is quite important because the other effect as obviously an increase in the amount of fruits in the region itself. So there's a statement in our Chairman's [indiscernible] interims which said that there's been a major multiyear planting program in the region since 2012 and what does this mean in terms of fruit moving forward. The statistics that we have at the moment is that there's approximately 170,000 hectares of smallholders within reach of a number of logistics centers. Now over the last 8 years, on average in our region, we -- with the data we have, it's -- there's been about approximately 6,000 hectares planted. So some of that would be replanting. So to simply go that we've got 170,000 now and 7 years times 6,000 per year, moving back to 110,000 number of years ago didn't -- isn't quite correct, but it is reasonable to assume that fruit levels will in time increase by at least 30% to 50% in our region. Now at least half of that planting had taken place since 2015 and would just now be entering its first phase of maturity. So we should sort of see more of that fruit coming through over the coming years. And if we're going to continue to get our reasonable market share, it will be obviously important for us where we sort of stagnated around 40,000 tonnes of production, so really push past 40,000 and towards 50,000 over the next 3 years on the back of fruit increasing in the region. Shai, just moving to some ESG aspects. We also mentioned in the Chairman's report that we're implementing and we're finalizing the traceability program. It's part of our ESG action plan, and also it's a part of our RSPO certification preparation. Just explain what that program is and where we're at.

Yes. Yes, definitely, Lincoln. Basically, we're working with a few thousands of smallholders. We currently have in our system all the details of each farmer and the details on his plantation, the location, the size and the quality of it. And whenever the smallholder comes with a plaque himself, we are a transporter, which includes the details of the smallholder, we can place exactly where it came from, either if it's coming directly to the mill or to the logistics centers. And so we can assess exactly the source of the fruits and of that delivery. This is basically the essence on the -- of placing the source of each one of the fruits.

Thanks, Shai. And anything else on that or do we move to the next one?

No. No, we can -- I think we can -- the next one was, I think, on the RSPO certification.