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

Ladies and gentlemen, welcome to the Kernel Q1 FY 2021 Results Conference Call. My name is Abby and I will be coordinating your call today. [Operator Instructions] I will now hand you over to our Wood & Co. host, Pawel. Pawel, please go ahead.

Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski on behalf of Wood & Company. I have the great pleasure to welcome you to the first quarter 2021 conference call with Kernel's management. The company is represented today by Andrii Verevskyi, Chairman of the Board; Anastasiia Usachova, CFO; and Yuriy Kovalchuk, Corporate Investment Director. Gentlemen, congrats for the record-high results and the floor is yours.

Thank you very much. Good afternoon, everyone. Today, we present the financial results for the first quarter ended 30th of September. We tried to make the detailed presentation and I hope all of you have a chance to look at it. So I will be pretty quick, so we'll spend more time on the Q&A. Group revenue reached $940 million, EBITDA tripled to $290 million and net profit, 3.4x for $204 million. And the financial leverage reduced to 1.6x net debt-to-EBITDA as of 30th of September 2020. I'll take you as usual through the -- our segments. First, I'll start with the oil processing. Generally speaking, it was a good quarter for oil processing business. We generated $31 million, higher than the year-to-year 39%. And also, the margins was pretty strong, $104 per ton of oil, which is 41%, up year-to-year but mainly it was driven by high global sunflower seeds oil prices. And we mainly crushed some seeds coming from the last harvest 2019 so we had a sufficient carryover stock going to the first quarter. At the same time, outlook for the crushing business in the current season is quite difficult. We estimate that 2020 sun seeds harvest will be reduced, we believe even below 14 million tons. This is down to -- from 16.4 million tons of last year. At the same time, we see the global sunflower seeds oil prices remain at the peak since 2015. Farmers slow-sellers in Ukraine, of course, they're expecting future revaluation of the sunflower seeds prices. Under stark circumstances, we still aim to get utilization of our plants as high as possible level. But of course, we understand that we'll keep downward pressure on our crushing margin, especially towards third quarter and the fourth quarter of current financial year 2021. I believe the whole industry will feel pain this season. Number one, working capital needs of crushers dramatically increased. They have to pay higher sunflower seeds prices. Secondly, the gap between 19.2 million tons of installed capacity and 14 million tons of the sunflower seeds supply obviously will be very difficult to operate for every crusher. And of course, the season will be extremely difficult for the crushers operating with the high debt level, high cost and limited access to the working capital. So as I already mentioned, despite the challenging environment, we maintained our initial target to process 3.5 million tons of sun seeds for this season. Of course, we expect that profitability of crushing oilseeds processing business will be lower than $100 per ton of oil, which we had in financial year 2020. Infrastructure and trading. We generated $111 million of EBITDA, which is almost triple. So growth in infrastructure and trading was preliminary driven by Avere performance, betting on a recent soft commodity rallies. So the guide was actually taking absolutely the right position and made quite a bit of money for us. Ukraine grain export also demonstrated a solid result with 2.1 million tons of grain export from Ukraine and 1.9 million tons of transshipment volume on our terminal, driven by earnings growth as well, at the same time, the weaker contribution from railway cars in the silos business we also faced in the first quarter. So I need to also mention that we continued to increase our market share on the grain export in Ukraine. In the first quarter, we reached 15%. This is up from 14% achieved in the full year of 2020. We are generally optimistic for outlook for the segment of the current season. On the one hand, grain export value chain in Ukraine will definitely suffer because we would be missing 10 million tons of crop size in Ukraine. And of course, it will squeeze margin on all our business lines while the growth by the terminal in the port of Chornomorsk does not likely compensate such a weakness. On another hand, our Avere subsidiary is still performing incredibly strong year-to-date. And this gives us a good chance that the whole segment will exceed the result of financial year 2020, where we generated $216 million. Farming. EBITDA contributed $161 million, that's including $41 million of implementation of the IFRS 16. The major growth came from very high soft commodity prices. We almost completed the harvesting campaign of the 500,000 hectares. Our yields suffered across the board without any exception: corn and sun seeds and wheat. We outperformed the Ukraine crops but it's still quite difficult situation with harvest this year. But at the same time, we can see that the drops of the yields is more than compensated by the strong prices. And we still remained long, around 700,000 tons of corn of our own production. But we have a good chance at saying that we should generate around $200 million EBITDA net of IFRS 16 in the financial year 2021. To summarize, farming together with infrastructure and trading segment will drive our performance this year and covering the weak performance of the oilseeds processing business. I mean it's quite early to say, but I think the information, what we have right now, and if it's not a bad surprise, we think we should -- we have a good chance to outperform the -- in terms of the total EBITDA for the current financial year compared to last 2020. Our liquidity position remains strong. We have a $395 million of cash, $489 million of them are readily marketable inventories and almost $1 billion of undrawn lines. As you know, Board of Directors decided to recommend shareholders to increase the dividend for financial year 2020 to $0.42. And the last one, the execution of our Strategy 2021. We deployed $53 million of the capital expenditures and we reconfirmed that originally guided CapEx of $270 million, including maintenance CapEx, which will be then practically the final CapEx we spent in the financial year 2021. This is pretty much it from my side. Please go ahead with your questions.

[Operator Instructions]

So let me start. Pawel Wieprzowski, Wood & Company. You've just mentioned that you have decided to increase your dividend proposal from $0.25 initially to $0.42 per share. It seems that we have the beginning of the new dividend policy already. Could you please comment on your approach to future dividends in terms of what would be your way of thinking given the size of this year, we should have record-high EBITDA potentially reaching $500 million? And you are deleveraging at a faster pace than I expected, so what can we potentially expect next year in terms of dividends?

So the decision of the dividends, of the $0.42, wasn't really related to finance these results of the financial year of 2021. Of course, we're also very happy that the results are quite strong and we feel confident that 2021 should be a strong year for us. But we also have to keep in mind that a big part coming from Avere, which is not sustainable and have the speculative position -- I mean the nature, as well we were pretty lucky with farming business because, I mean, the whole-world situation with the prices helped Ukraine. And we compensated the bad weather conditions and the drop of yields by the prices. So eventually, we -- it seems like we are coming out with the farming even stronger. But once again, it was quite lucky part for Kernel as well. So we perfectly realized that the financial year 2021 have some subjective results and -- but we increased the dividend to $0.42 because we believe that we are finishing our CapEx program and our earnings should came up to the different level in the future years. And at the moment, you know that we were keeping $0.25 for a long period of time. Right now, we plan to keep at least $0.42 for a long period of time as well. And then, as we discussed already several times, we will finish our CapEx program, we will see the integration of the new assets into the business, then we need to see then the land reform and the potential M&A, if anything will be available for us, anything interesting will be for us in Ukraine. And then we might come up again with some new dividend policy.

So it seems that at this stage, the base case scenario for next year's dividend, I mean the dividend to be paid from 2021 profit, is $0.42 per share, correct?

Yes. Yes. We -- that's what we plan at least to be stable for the next years.

Okay. And my next question regards the crushing margin. At this stage, you have $100-plus margin in the first quarter. If you were to name the average level for the entire year, that would be $70-plus level or $80-plus level?

I would not -- honestly, I know you all want to hear from me that what kind of margin will be. And I -- trust me, I want this probably more than you, but this season is completely different and difficult. And we bought, I think, right now, 1.8 million tons of the sun seeds from the market. We also have around 400,000 in our own production, so 2.2 million. We still have to buy quite a bit. And I don't want right now to say what kind of margin we will finish the year and -- because I might make a mistake, honestly speaking. I just simply don't know. We have a big gap between, as I said, between the capacity installed and the production, unfortunately. So the competition is high and quite difficult here.

Okay. Last question from my side. You have now 1.6x net debt-to-EBITDA ratio. If you were to guess estimate what might be the level of leverage for end of this year, what would that be?

Anastasiia, help me if -- please. I mean we plan to keep the -- at least not increase our net debt level. EBITDA should be higher. So we might be even lower than 1.6. Anastasiia, correct me if I'm wrong.

Yes. We can just confirm that in terms of gross debt. We should be more right at the level of 30th of June 2020. And then, yes, it depends on EBITDA level.

Yes. We expect more or less the same, even higher the operational cash flow. But we -- as you know, we plan to spend $270 million on a CapEx program. Plus, we would probably have to -- working capital -- change in working capital will be more because we would -- the inventories cost more, so our inventories level will be higher. So I think, more or less, we will be on the same level, maybe slightly lower, 1.5 maybe.

Our first question is from Marcin Nowak from IPOPEMA Securities.

I have a few questions. The first one, could you please explain more a bit the rationale behind increasing the dividend portfolio for this year? Because the condition was changed after 1 month after initial recommendation. And could you please comment more color what has changed over this month to -- besides for -- what has changed behind this -- what was the change behind the decision?

Look, nothing -- it's not -- nothing's substantially changed. I mean you know that many shareholders is quite, I mean, demanding in terms -- was in terms of the dividend. And we were hesitating a little bit in terms of timing when we should implement the new dividend policy. We decided to do it now. Once again, a 68% growth of the dividend compared, I mean, our $0.25. But at the same time, I think we feel more confident that we can be sure that we can put this growth -- dividend growth for this -- at least a sustainable level. Investments coming to the end. So it wasn't any particular things, but maybe we were a little bit in a rush. But at the end of the day, we decided to announce the new dividend policy.

Okay. And with regards to the potential additions to a decline in the future, your main investments are to be concluded this year. So for the next year, there should be mainly maintenance CapEx. So you plan to -- do you consider that you might change as well in November, October next year your approach to dividend payments? You're saying that there's nothing potentially new in the pipeline in regards to the dividend because you said that you expect to pay export cost, approximately [ $0.02 ], next year?

I don't think that next November, the dividend policy will substantially change. I don't see it in next November. As you know, as I mentioned already, 2021, we should finish the old CapEx and will just carry on with the maintenance CapEx, as you correctly mentioned. We're actively looking, obviously, on an opportunity of M&A deals. Of course, at the moment, there's nothing on the table which we can announce and not even close, I can tell you. So don't expect any big check writing from us in financial year 2021. And I really doubt maybe what we can see in 2022. But in terms of the dividend policy, I don't think the next year, we will come up with a new policy. Give us a bit of time to look around because we still have the -- we still need to figure out the land reform and finalize the CapEx. And give us a bit of time to think.

Okay. And my last question is concerning Avere. I remembered that the last -- during the last quarterly call, you said that there will be no further comments regarding the actual quarterly contribution of Avere to the result. But given the size of the estimated contribution this quarter, can you comment on exact contribution to this quarterly results? Or is my estimate for -- of at least $100 million of year-on-year contribution from Avere a correct one?

In terms of Avere, I can only comment that it's less than $100 million. I read your report. And yes, it's not $100 million. It's less than $100 million. So what else -- was it about the very...

No. My question was about the estimated quarterly contribution of Avere.

Yes. Less than $100 million.

And maybe one follow-up. Was this position already liquidated in Avere? Or we may see...

They reduced the position, but they still have some. And -- but what I can assure you that the drawdown limits are not increased. And of course, if the prices are set back, they might lose but -- a little bit. But the drawdown limits and discipline remains in place and they would not lose more than $25 million. But as far as I know right now, they're slowly reducing their positions because the market for -- their view is reaching a top. So -- but they still have some positions.

Our next question is from Daniel Zaczkiewicz from Barclays.

Can I just ask about the -- so in the crushing industry, I mean do you see any potential for some of the excess capacity to potentially go off-line given the challenging conditions that you expect? And you mentioned about M&A. I mean is it crushing where you would like to be active on M&A? Or are there any other parts of the business where you see a strategic potential for growth?

Thank you. Regarding the crushing industry, in general, after this year, we hope and we believe that small players will suffer a lot. And let's see. And I personally believe we will see some guys who has a net debt and high cost will shut down their operation. How many? Difficult to say. But definitely, at the moment, they are negative. And especially the working capital requirements are high. So they just simply has no access to this. And we would see some market structure change going forward. Of course, we also right now see some, I would say, good capacity already on the market, I mean discussions to sell the business. Unfortunately, it's still not the level what we would like to see in terms of valuation. But I guess it's a process. But we're slowly coming to the level which I think will be interesting to do the deals. In terms of M&A, generally speaking, we interested pretty much in all our lines. We're looking at the farmland. If it's really next to our operation and interesting land, this is -- this year, it's definitely not for the deals because our farmers are across the board making a lot of money. And I think the expectations, what the farmers have right now, forget it, to make any deals right now. But we will still -- like we're still looking around. We would be interesting -- interested to look at infrastructure assets as well. Obviously, if it's the right valuation, the same as for the crushing business, to consolidate the market as well. So -- but once again, we're not in a rush and we're generating cash. And these businesses, I'm talking about infrastructure and the crushing business, has -- for small players, has potentially no big upside. So I think this time has worked for us, so I think we will be slowly looking around and if anything comes up, we go ahead.

We now have a question from [ Milosh Vislosh ] from [ IRSM ].

Okay. So obviously, the level of the profit from the agriculture operation depends at the end on the difference between the evaluation of the biological assets, which is done prior to harvesting and selling the crops, and the realization prices. So I have a question concerning -- is it possible to get some information about what were the assumptions for the prices that were used to -- and report to evaluate the prices for corn, for example?

Anastasiia, can you comment on this, please?

No. I don't have the figures in front of me. But that's, let's say, September -- yes, September prices.

September prices. Okay. Fine. Okay. So that -- and when it comes to the sunflower, I believe some of the crops were gathered already as of the end of the September. So the prices that were used to evaluate the biological assets, I can assume that they were the average quarterly prices of sunflower, yes, or the September prices?

The September prices.

We now have a question from [ Nadid Anabib ] from [ Bearings ].

Question is on the outlook of the infrastructure business, both the silo and the grain exports. I'm just trying to understand, if the yield -- crop yields are lower in Ukraine, why do you have a positive outlook for the grain business -- the grain export business there? And the silo business, I think you said it was neutral. And then the second question is on the soft commodity rally. Obviously, there's been a lot of research out. But what is your take on it? Like what's driving it so much? And when do you think the prices on some of these grains might stabilize?

Thank you. First, infrastructure segment. As I mentioned earlier, so we definitely -- Ukraine is losing 10 million tons of harvest. I'm talking about wheat and corn and barley but -- which, of course, will put the pressure on margins from the whole line of infrastructure: silos, trading margins and the ports. But we still believe that we will be outperforming in terms of volume compared to the 2020 year. So in absolute terms, we should be better. And on another hand is Avere. Avere is doing extremely well at the moment and not only in the first quarter but carried on to do the good job. And once again, if not a disaster happens, so we believe that the infrastructure and trading line will outperform the last year results. In terms of the soft commodity prices, there's many factors. I mean Latin America, not the best conditions. China, building big reserves and the big buyers. So generally, sentiment is -- was very, very positive for the soft commodity prices. In terms of -- I mean where the end -- I mean God knows where the end. But we -- I mean as far as I understand from our trading guys, they would believe that we are already approaching a kind of -- I mean top level. But the rest -- I mean the new development will depend on the Latin America weather, and then there's going to be new game again. So I mean it's quite tough to understand. It's -- I mean where it would go, but that's the view of what we have right now.

And just a follow-up on those 2 questions. On China, why is China building inventory, do you know? And then on the infrastructure side, you said you expect your volumes to be higher than 2020. Why are you expecting your volumes to be higher than 2020?

First of all, for infrastructure, volume will be bigger, we expect, because we're commissioning them -- fully commissioned our terminal last year. And this year, we fully operate with the full volume. Obviously, we are #1 in Ukraine in terms of the infrastructure, railway cars, silos. And we are build -- and we are increasing our market share, having the old tools in our hands and that's -- so we have the infrastructure in place. So that's why we believe that we would outperform the volume compared to the 2020. In terms of China, I mean, China had a low level of stock. And I mean it's -- I don't know the China policy, but what I see there buying across the board in soy, protein and corn and the soya beans and corn. And right now, they slowed down a little bit, but for the last 3 months, it was super actively buying.

We now have a question from Natalia Shpygotska from Dragon Capital.

Congratulations on the strong results. I have 2 questions, please. First of all, I would like to ask how the situation with the frequent default on crop forward contracts in Ukraine can affect the company's 2021 results? Because we saw that company's other operating income grew in the first quarter of this year on account of washouts. And should we expect more of that going forward this year? And what should we expect overall results of the situation on company's operating and financial results?

Thank you for your questions. I think the whole market faced difficulties, not only Ukraine, I think the whole, globally speaking, because the many farmers and many multinational companies enter into the contract and the price difference was extremely, extremely high. And we have default as well. And at moment, that amount of -- what is the total amount is around $20 million, $25 million. That's what we are working at the moment. But I don't think this all will be materialized as a default because, I mean, we try to find the solutions with the farmers, which will be, I mean, both-side solutions. Of course, some amounts will be definitely write-offs but not write off completely where we would be postponed, this amount, for the next year and maybe a couple of more years because it depends on the farmers. But for this year, yes, we will have some amount of them not getting some profit because of the defaults and the market difference. But I can tell you this is not very material for financial results of Kernel.

Just to check, $20 million, $25 million, you mean million dollars of contracts in question?

Yes. Million dollars, million dollars, which is not the fixed amount. That's what we identified as a potential default from the farmers and that we're working at the moment right now with every farmer separately, try to find the solution. And we definitely will have the amount way, way smaller in terms of the missing profit this year. But it's not going to be totally growing profits. So we're going to find the solution to postpone this money for the next year or maybe a couple of next years.

Okay. So not before but not postponing contract, so to say?