Kernel Holding S.A. (KER) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Kernel 3Q FY 2020 Results Call. My name is Maxine, and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Pawel, to begin. Please go ahead when you're ready.

Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski, and on behalf of Wood & Company, I would like to very warmly welcome you at the Kernel third quarter conference call. The company is represented today by 3 managers: Andrii Verevskyi, Chairman of the Board; Anastasiia Usachova, CFO; and Yuriy Kovalchuk, Corporate Investment Director. Gentlemen, the floor is yours.

Thank you very much. Good afternoon, everyone, and welcome to Kernel Third Quarter and Financial Year 2020 Earnings Conference. It's my pleasure to present to you Kernel financial results today for the 3 months ended the 31st of March 2020, which is the third quarter for us in our financial year 2020. I will start with overview of the business performance for the reporting period. The company revenues for the reporting period slightly exceeded $1 billion. EBITDA stood at $104 million, and the net loss attributable to shareholders amounted for $25 million. The negative bottom line results in the third quarter stems from the one-off $46 million loss on Taman stake divestment and $15 million net ForEx loss due to the strong depreciation of the Ukrainian local currency in the third quarter. Financial leverage reduced to 3.5 net debt to EBITDA as of March 30 -- 31st of March from 5x measured at 31st of December 2019 driven mostly by working capital relief. Our liquidity position remains strong with more than $180 million cash and $671 million of RMI on the balance and over $1 billion of undrawn borrowings as of 31st of March 2020. Liquidity was also supported by divesting our 50% stake in Taman for $65 million paid in cash in March 2020. As a result, we fully exited from Russia. Now I would like to present segment performance. So start from Oilseeds Processing segment, which generated $26 million, down 15% year-to-year. On the back of the crushing margin decline, sunflower seed oil prices touched historical low in March 2020 after seasonal peak reached in December '19, mainly caused by slowdown commodity demand across the board on the COVID concerns. It negatively impacted profitability for our whole sunflower seed oil production value chain, although supply of sun seeds in Ukraine remain quite strong this season. As a result, our EBITDA margin on Oilseeds business was $68 per ton of oil this quarter, but we might face quite a unique situation when the margin in the fourth quarter of the year is higher than margin in the third quarter as prices for sun oil bounced back in the fourth quarter 2020. Therefore, we maintain our initial crushing margins outlook for $85 per ton of oil while we upgraded our sun seeds processing volumes to 3.4 million tons. Ukraine has completed sunflower seeds sowing campaign. And preliminary updates from the fields mix are expecting growth in acreages around 3% year-to-year. With normalization of the crop yields following the last season record, our initial view that sun seeds supply shall be pretty much flat year-to-year. Infrastructure and Trading. EBITDA in the third quarter totaled $65 million, 3.6x more than previous quarter, including Avere contribution of $11 million. We exported 2.2 million tons from Ukraine and 1.9 million tons through our terminal. We remain the largest grain exporter from Ukraine with 13% market share during 9 months of financial year 2020. There is no major surprise expected in Infrastructure and Trading segment performance in remaining fourth quarter. Only exception maybe, we might be slightly slow paced on the grain export for our terminals in the fourth quarter. During the 9 months of financial year 2020, Farming segment generated $102 million of EBITDA or $17 million adjusted for gain from revaluation of biological assets of IFRS 16. Also, a recent devaluation of the local currency translated into some unexpected upside potential for our Farming business in financial year 2020. So we guide full year EBITDA guidance slightly over $100 million, but this $100 million is net of IFRS 14 effect and revaluation of the biological assets, which we will have more visibility in, obviously, fourth quarter. We successfully completed the sowing campaign for 257,000 hectares under corn and 149,000 hectares under sun seeds. As of today, spring crops, corn and sunflower oilseeds, are in a good condition supported by substantial rainfall through May. Vice versa situation, slightly worse with the winter wheat. Unfortunately, we expect slightly lower yields on wheat this season. To sum up, strong performance on Infrastructure and Trading as well Oilseeds Processing business supported -- and with unexpected tailwind for the Farming division should translate into upbeat -- better increase of EBITDA year-to-year [ prior ] IFRS 16 adjustment. So we remain fully focused on execution of our CapEx program. Our new grain export terminal in the [ port ] was -- completed test stage, and we are approaching full capacity utilization facility. For the green energy project and for the new Oilseeds Processing plant, we might have several months delay with commissioning of the assets due to virus business restriction caused by COVID like inability of our constructors to deliver equipment in time and launch pre-commissioning installation process due to the imposing travel restriction. We expect total investments of $288 million for the financial year 2020, $215 million of CapEx and maintenance, $73 million. Slight portion of initially guided CapEx has moved to financial year 2021, which will be our last year of the capital -- CapEx program, with remaining $234 million, including $86 million of maintenance and CapEx. Important to mention that Ukraine fully adopted a land reform market. The reform assume no corporate investments in land acquisition until 2024. Wherefore, we don't envisage any CapEx in land purchasing until 2024. Finally, I would like to say a few words to address the COVID situation. First, I would like to say that our business model has not suffered from lockdown. All our production assets are operating as usual. Logistics works well. Spring campaign was completed without any extraordinary complications. We successfully tested a new work model where the administrative stuff was -- has been performing their duties remotely. We also introduced numerous initiatives to protect our teams. With all measures taken, only a few of our employees out of 13,000 has been tested positive, luckily no fatalities among our employees. Additionally, we donated $6 million to support local hospitals in the regions of operation -- of our operation to fight with the virus. I would like to take the chance also to thank to all our team efforts, making the operation running smoothly in this difficult times. This is pretty much it from me. We're ready for your questions, please.

[Operator Instructions] We have a question from Nikolay from Insight Investment.

Just a couple of questions from me. You mentioned that in the fourth quarter, you expect higher margins in the crushing business. Do you see -- do you expect to see the same in like first quarter next year? Is it a sustainable trend? And then second question I wanted to ask is on the effect from COVID. Do you expect that potentially in next year, financial year '21, COVID may in any way affect the farming industry, I don't know, for example, in work -- less work and being able to travel, to harvest or sowing and so on? Any effects like that?

Thank you very much. So the fourth quarter is -- we have obviously more visibility, and we can see that the margins are better than the third quarter. I'm talking about current financial year. First quarter '21, we are still buying right now sun seeds and selling oil. I guess the margins will be less than the fourth quarter. But obviously, it's -- I mean it's still early to say what kind of margins average will be in the first quarter 2021. In terms of COVID, next year, honestly, it's very difficult to predict. This time, we've -- we had no interruption and pretty much no restriction or any difficulties to do the business as usual. Let's see. We're going to deal with the situation as -- and the problem as it comes. I hope we will be able to manage it again well.

[Operator Instructions] We have a question from Konstantin from Adamant Capital.

I have 2 questions. One, with regard to the Infrastructure and Trading segment. So I was wondering, could you specify what the silo segment contribution was? Because -- well, it was probably smaller than the second quarter. And connected to that, given that Avere -- the Avere situation was also smaller, could you talk about the reasons why margins went up significantly from the second quarter to the third quarter?

Anastasiia, can you give us the breakdown, please, for the Infrastructure segment, please?

Yes. Konstantin, we cannot really provide breakdown of -- inside the segment itself, but we can confirm that Infrastructure was performing well as well as Avere. So altogether, resulted in strong margin through this segment.

But compared to the second quarter, your -- the silo segment contribution is usually smaller in the third quarter than it is in the second quarter. And Avere, I believe, last quarter was $15 million, and this quarter, it's $11 million.

Yes.

But the average EBITDA per ton traded is actually higher in this quarter than in the previous quarter. So I was wondering why...

Yes, absolutely. But then you have also contribution from terminals, and those -- trading was quite profitable, but also railway cars. Don't forget about this asset. And for inland silos, the quarter was still strong because we had significant volume of own crop struggle there.

Normally speaking, fourth quarter for silos is pretty weak. But third quarter, this particularly, because we still -- we storage our own crop until this moment -- until -- during the third quarter. So that's why silos still performing in the third quarter pretty strongly.

So you would say that this year, the contribution from the silos was probably higher than last year? Because it'll be...

It will be higher than last year, but also, we increased the capacity of the silos as well. So we -- I mean it's more detailed if you really want to compare last year and this year because it's more capacity as well.

Okay. Okay. And for the Farming segment, a similar question there because excluding revaluation, the margin went up significantly from the second quarter. Was it like -- yes, could you talk about that as well?

Anastasiia, can you comment on it?

Yes. The -- yes. As we always say, it's difficult to follow margin quarter-by-quarter, especially in this segment. We would recommend you to follow the average margin per year. Overall, profitability of this business in the current year is below profitability of 2019.

We have a question from Joana Felício from Banco Finantia.

I have 2 questions. The first one is, have you applied for any government schemes such as layoff, debt moratorium or any other? And the second one is are you planning to distribute more dividends this year or any other type of equity payments?

Thank you for your questions. I'm not quite understand the first one. Can you please say again?

Yes. So I'm talking about layoff schemes, so workers that are put on some kind of government support.

Unfortunately not. Unfortunately not. We are dealing with all this by ourselves, and there is no government support in this respect in Ukraine. In terms of the second, dividends, this year and next year, probably not until we're still having the CapEx program. But after we finish the CapEx program, we'll definitely come back with the new dividend policy.

We have a question from [ Patrick Serd ].

If you could provide some color on the net gain and loss arising from financial assets from the cash flow statement. I think it was about $14.6 million in the third quarter. If you could just provide some color on that to help us sort of for the forecasting.

Thank you. Anastasiia, can you comment on that, please? We have this echo. Hello? Anastasiia?

Yes, yes. Sorry, I...

Is it better now?

Yes. Yes, better. Thank you.

Yes, it's better.

Okay. Sorry. Should I repeat the question?

Yes, please.

Okay. Sorry. Could you give -- provide some color on the $14.6 million net gain on -- arising from financial assets plus provide a fair value on the cash flow statement? I think in the previous period last year, it was a loss of $24 million. So if you could just help us out sort of from a forecasting standpoint, that would be great.

It's really -- it's difficult to forecast this line, I would say, because it's related partly to Avere activity but also to Kernel activity related to hedging of our assets and also transaction with the financial papers here in Ukraine. So in terms of predictability of this line, it's not easier. Difficult to comment.

But the components of financial assets, is that just short-term sort of government securities? [indiscernible]

That's -- yes, absolutely. That's a combination of government securities and derivatives, yes, on the [ variable ].

We have a question from Natalia from Dragon Capital.

A couple of questions from my side. Can you please ask if you have already some visibility on the Avere results for the fourth quarter of this year? And the second one, should we expect a bit lower debt level for the end of this financial year due to some CapEx delays?

Thank you very much. For Avere, I wouldn't give any number, but the season so far looks good, looks strong. It's still like 30 days to go. So I would I would wait before we see the total results of Avere for financial -- contribution for financial year 2020. But as of today, it's -- I would say, we're pretty satisfied of the Avere contribution. In terms of the net debt to -- for the end of the year, Anastasiia, can you please give some information?