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

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 fourth quarter conference call with Kernel's representatives. Today, the company is represented by Andrii Verevskyi, Chairman of the Board; Anastasiia Usachova, CFO; and Yuriy Kovalchuk, Corporate Investment Director. Now I would like to pass the floor to the company's representatives.

Thank you. Thank you very much. Today, we represent -- we present the annual report so thank you for -- to take place in our call today. I'm pleased to present the results of the group for the year ended 30 June 2020. Our EBITDA increased to $440 million, net profit amounted $118 million and leverage ended up at 2.2x net debt-to-EBITDA as of June 2020. We are happy with resilient business performance of this challenging season. We have lots of problem last season, African swine fever, continuing U.S.-China trade tension, production oversupply all over the world, political instability and finally COVID-19 pandemic, all these factors have made agriculture markets very turbulent. At the same time, our results are ahead of our initial expectation. We achieved several operational records and progressed on execution of our Strategy 2021. Diversity of our business model paid off this season, relatively weak farming business results was offset with strong performance of oilseeds processing and infrastructure and trading segments. First, I start with oilseeds processing. So all external factors were supportive for our oilseeds processing business in financial year 2020. Despite significant volatility of the -- global prices for the sun oil for financial year 2020 were generally higher than last -- than a year ago, which positively impacted profit captured by also Ukrainian farmers and crushers. And given the records of the production, 16.5 million tons of the sun seeds in Ukraine, this actually makes the competition among the crushers easier. And obviously, we don't have -- we didn't have a crushing capacity growth this season, so all this allowed Kernel to secure strong $100 per ton of oil EBITDA margin. With 1.5 million tons of the sunflower seed sales, the segment generated $152 million of EBITDA, which is up 39% year-to-year. Quite outstanding results were achieved by infrastructure and trading segment, which doubled EBITDA compared to financial year '19, reaching this historical high number of $216 million. We increased grain export volume from Ukraine by 30% year-to-year. 7.9 million tons give us a position of the largest grain exporter from Ukraine. Grain export achievement was also reflected in grain transshipment volume dynamics, our terminal handled 6.7 million tons, which is 45% up, to compare last year. It's also helped by launch the new operation of our new TransGrainTerminal. Thirdly, we benefit from our last year investments in grain railcars. We optimized and saved $38 million of transportation costs, which fully justify our investments in the railcar business last year. And finally, the strong results of the -- have been delivered by Avere subsidiary, which has turned last year loss into the profit in financial year 2020, securing large share of segment EBITDA growth. Farming segment. Farming segment dropped to $134 million EBITDA and excluding -- and the number excluding IFRS 16 impact is $83 million, which is down 54% year-to-year. So key factors for decline were lower yields for corn, lower grain prices, growing production costs as well by appreciation of the hryvnia against the U.S. So to finalize, once again, strong performance of oilseeds processing and infrastructure and trading and quite weak performance of the farming. Considering the financial year 2020 results and the CapEx pipeline of the current year, the Board of Directors proposed shareholders to approve dividends of $0.25 per share. Give you a few words of outlook financial year 2021. So the new season seems to be important test for the resilience of our platform against the external factors. At the current stage of the season, we envisage harvest size reduction for the -- all key crops in Ukraine. Sunflower seeds harvest in financial year 2021, we expect a decline by 14% year-to-year to 14.2 million tons. And the grain harvest is likely to reduce 8% to 67 million tons, major crops, obviously crop (sic) [ corn ], wheat and barley. This all means that competition among crushers and competitors will be stronger, and everyone will fight for assets utilization. At the same time, we believe that uptrend of the soft commodity prices should help us with the margins. Despite the low crop, we still plan to deliver record volumes in financial year 2021. We targeted 3.5 million tons of sun seeds crushing and 9.5 million tons of grain exports from Ukraine. Pretty much this is the scale Kernel never achieved before. For our CapEx program, it will be finished in current financial year 2021. We expect to finalize all our greenfield expansion by investing $270 million. This number is including our regular annual maintenance. We plan to finally commission our oilseeds processing plant in Western Ukraine and finish for renewable energy assets and also along with increased intake capacity for the -- our new grain export terminal. So finally, a few words about future growth opportunities. Within our business lines in Ukraine, we will be looking for potential M&A to consolidate the few remaining independent players in crushing and infrastructure business to secure our leadership position. Still this opportunity, we believe, will not require a material deploy of the capital and timing of such acquisition is hard to predict at the moment. We already discussed several time the agriculture land market reform, so which is -- de facto is postponed. So we don't -- we also don't plan to deploy any capital in this direction. As a result, we expect material reduction of the capital redeployment beyond financial year 2021 and, we hope, positively will impact our net cash generation capacity. To address it, we developed a new capital allocation policy, which we plan to present to you, to our shareholders into the next annual report after we finish our CapEx program in 2021. This is pretty much it from my side, and we're ready for your questions. Please go ahead.

[Operator Instructions] The first question we have from the phone lines comes from Daniel Zaczkiewicz of Barclays.

Just with the different dynamics that you see affecting the outlook for 2021. Where are you currently planning to land for full year EBITDA? Do you have an expectation of how next year will compare to this year? And then are you able to comment on what portion of the $216 million result from the infrastructure and trading business came from Avere?

Thank you for your questions. First of all, regarding the dynamic of the 2021 season. So obviously, it will be a challenging environment because, as you know, the size of the crop is one of the key factor for us, which works positive if we have a record crop, and it's also putting pressure on the supply and on the farmers. And we, usually, in this environment, able to make better margins. This season, it's not the case. We definitely see the low crop on major obviously sun seeds and also the grain as well. Season already started, and we see, at the moment, quite strong margins on the sunflower seeds oil. But I would not be very optimistic at the moment because obviously strong price is helping generating healthy margins, but the question is, how are we going to go through the whole season? And we definitely see that if prices hold high at the moment, until the end of the year, it will be probably strong margins, and then the fight for asset utilization after this, in the second part of the year might be quite -- then quite difficult and then it's quite difficult as well to predict what kind of margins we will have in the second half of the year. So I would -- so to answer your question, it will be very difficult right now to give you outlook and how the margin will look for the whole season because this season will be definitely volatile and full of surprises. But as usual, we try to manage it to the best. In terms of Avere contribution, what I can say is Avere, it's done positive, quite good results. We're very happy of the Avere performance this season. It's played pretty important role in our infrastructure and trading. But unfortunately, we decided, as a policy, not to disclose then exact number of contribution. This is within the infrastructure and trading segment. So that's why I would probably stay silent about the exact number, but I can tell you that, the results, we're happy and the company performed pretty well. Thank you very much.

We now have a question from Alexandre Ayoub from [ Wulhalaha ].

Congrats for these results. And it's Alexandre from Al Waha, not Wulhalaha. Can you hear me, by the way?

Yes, yes. Just if you can speak a bit louder, it will be great. But yes, I can hear you.

Of course, yes. I just want to follow up on the question from the first [ investor ]. I understand that it's very volatile this year compared to last year and harder to forecast. But can you just tell us a bit roughly? I think infrastructure and trading, it is fair to say that should be more or less between 2019 and 2020 results or shouldn't have like really weak results. I'm just trying to go by each of the 3 divisions. So the infrastructure and trading, I think you had EBITDA between $100 million and $220 million. Is it fair to assume that you'd still be able to generate the revenue and EBITDA within this range? And then same question for oil processing, do you think there the EBITDA could be between $100 million and $150 million? Or maybe it could be even more challenging in 2021. And then the farming. I think in farming we have seen years where EBITDA was around $90 million, do you think it could go even lower than that or not really?

Yes, yes, thank you for your questions. So I can give you my view. I mean, infrastructure and trading segment, we're not that much worried. We -- despite the crop production, we still believe that we should deliver the good volume. And I think it will be more or less similar to 2020. Just with the one remark is then Avere performance. This is still there's kind of a speculation involved and I hope the guys will go through this season again quite positive and quite successful. So if there is no bad surprises from Avere, I think we should be in the level of 2020. In terms of oilseeds processing, it's quite hard. I don't think we're going to go much lower, but it might be challenging to get $150 million as we did last year. Last year was a 16.5 million production, was really good environment, obviously, no crushing capacity. Prices were quite low but still okay. And this season, I quite -- I'm a bit worried about utilization. So -- and I would not comment that right now. I think, at the end of this year, in December, we will have better clarity for oilseeds processing. For farming, I can tell you as well. So crop, we haven't sold yet all production, which -- I mean we sold a little bit, and it was probably not the right move because we predicted at the beginning super high crop. And suddenly, we came out with the lower numbers. So the farming will definitely suffer some yield numbers. The yield, especially corn, will be probably even lower than financial -- than last year, 2020. But prices are recovered and obviously help farmers, farming department as well. I hope we would be able to do the same level as the last year. But once again, everything -- game will be about the prices. If prices hold well, I think we should be able to deliver the same number. If prices will come off again, it would be difficult.

Got it. But it's unlikely that we're in a situation where farming has like just $50 million EBITDA or close to 0 EBITDA, or that could maybe happen. Or is there…

No, no, no. We don't see this. We don't see this. I think we might be lower than last year, of course, but it still should be quite okay.

Got it. Super. And when you say last year, do you mean 2020 or 2019…

2020.

2020, [ okay ]. Super. And then just on Avere as well, is it possible to tell us a bit more why it was loss-making before? How come this year performance was so good, what are the drivers? How they are able to make so much money?

I mean the Avere purpose is quite, I mean, the trading platform. And I mean sometimes traders are successful, sometimes not. And obviously, last year was difficult and a trade war. And the guys was especially -- like the oil trading desk was quite hammered by the COVID and by the China and the U.S. relationship, was quite difficult to operate and read the market. But it -- I mean I'm talking about 2019. But 2020, I mean pretty much all directions what they were trading was good and pretty much right, I would say. So they [ traded ] very well. And I can tell you they started first quarter very positively as well. So they see them -- they saw this bold move, and they took the right positions. And I think at the moment, they are the -- actually performing pretty well. If you ask me, would it be for the whole year, I can't tell you. I mean it's quite difficult, but we hope that Avere will at least maintain this good results through the 2021.

And sorry. Just to understand. So do they take some -- where do they -- how do they make the money, just by making bets on…

[ They trading prop and they ] taking risks, and this risk is limited by drawdown and the VAR. And of course, they can make money and they can lose money. It's a pure trading house.

Okay. What is then -- just for us to get a feel. Like what is the maximum EBITDA? Are you seeing negative EBITDA if they could lose in a single year?

I don't think that they can lose more than $20 million, $25 million. That's max, max.

Million euros.

Dollars.

Okay, dollars. Okay, that's really helpful. Great.

We now have the next question from Jakub Szkopek from mBanku.

Congratulations with very good results for the last quarter. I've got 2 questions. The first one is to clarify. How much crops of your own production did you already sold? How much is [ cash flow ] right now? And the second question is about the Avere. If you could -- I remember that, last year, you limited the Avere like, I will say, operations only for hedging, they were speculating class. So after these good results from last year, would you allow them to speculate a bit more? What is your attitudes on that?

Thank you for the questions. So for the farming, for the grain, I think we sold around 25%. And once again, this move wasn't very successful because the prices went up since then. So it wasn't the perfect trade for us. In terms of Avere: Avere, we are not planning -- despite the good results in 2020, we are not planning to increase their risk envelope. So they will stay in the same limits and -- as of 2020. And just to make it clear, we still work with Avere for the program of the oil sales, but the grain is -- they're totally independent. So they trade screen on grain. They pretty much not that much buying from Kernel physically except, of course, oil program, we have an intensive program between Avere and Kernel.

We now have another question from Marcin Nowak from IPOPEMA.

Two questions from me. First one, could you comment a little bit more about your planned update of capital management policy for the next annual results? What should we expect? What will be the criteria of potential distribution to shareholders? And the second question would be an update on the ViOil situation. How much likely is the potential purchase of ViOil?

Marcin, thank you very much. So for the capital, honestly, I wouldn't say much today regarding the capital allocation policy. Give us 1 more year, please. And we want to finish the CapEx. And I hope everything goes according to the plan. I don't see we will spend any more than we just announced for 2021. I don't think any M&A will take place during the 2021. And definitely, as I said already with my -- at the beginning, we will definitely come up with a concrete policy for -- policy of capital allocation at the same time when we're going to present the results of 2021. In terms of the ViOil. Honestly, not much going on. You know we acquired the minority shares. I'd -- if I'm not mistaken, in 3 years -- and at the moment, we can't agree about price at all. So I mean it was a positive year even for them as well for last year. They also generate some profit, not much but still. And the guy -- the owners are not really keen to sell on a low price, on a low valuation, which is absolutely understandable. And we are pretty passive on this investment at the moment. We have the shareholders agreement. In 5 years, they have to put the company in the market. 2 years already passed, where they have still 3 years for this. And let's see what's going on. I don't see anymore this year big development, unless, obviously, the season turns really tough and they're not going to make money. And then at the end of this season, they might come back on the table and say, okay, let's discuss the acquisition opportunity. But at the moment, it's not on the table.

Okay. And maybe one more question regarding the hedging policy in farming because you said that already around 25% of crops have been -- or grains have been hedged. How it looked like in previous years. I mean how much percent of the crop harvest was already sold at the same point of the year?

Yes. Last year, we sold more. And I think last trade -- last year, trade was more successful than this year. I mean the specific of this season is the following. I mean, in April, May, the crops looks really, really good, honestly. Like I haven't honestly seen this turnaround for such a period of time since I don't know, I don't really remember, this case that May and -- April, May, we had such -- even June, I mean. We had a lot of rain and the prospective and forecast of the both crop grain and sun seeds was really, really good. And both our team and Avere team was very, very bearish in terms of pricing. So luckily, we sell not that much. We sell only like up to 25%. And then suddenly, the weather changed and it was big hit and no rainfall at all. So we lost this pollination period for the quarter and the sun seed as well suffered a lot. So especially, obviously, not all parts of Ukraine, but South and Central and East was really hammered by the weather conditions. So we still have a pretty good results in North and West, but definitely country will get less. So back to your question: Last year was we sold more and was more successful trade. This year, we saw certainly less but definitely was not the right move. But was impossible to predict, honestly speaking.

We have no further questions registered at this time. [Operator Instructions] We now have some more questions registered. And the first one comes from Konstantin Fastovets from Adamant Capital.

I have a couple of questions. Well, the first one I'd like to ask is regarding Avere also. So you mentioned that you have decided to not disclose the exact results. Could you sort of give us the thinking behind that? Because these are very different sort of businesses. What you trade and what you sort of -- in your financial -- the financial derivatives that you do are very different, right? And the results are very volatile on that front, yes. So maybe let's just start with that.

Yes. I don't know. I mean this is the management decision. We decide not to because -- I mean it's obviously we're not really afraid much of disclosing, but I think it's -- I mean that's what the management decision to do it. And we give you a direction but not the exact number. And that was a management decision. I don't know. Anastasiia, maybe you can add from technical point of view. Did we have some reason to do it? But…

No, that's a general decision. We disclose 3 segments. We don't disclose any significant details inside those segments, and we don't see any reason to disclose very specifically. But as Andrii mentioned, we provide the guidance in respect of overall trends. And Andrii already disclosed the maximum possible loss of this company. So you can understand the size of the risk of the company.

Okay. Yes. So like I…