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

Good afternoon, ladies and gentlemen. My name is [ Pawel Wieprzowski ], and I represent Wood & Company. Today, I have a pleasure to welcome you to the conference call, followed by a Q&A session to discuss current's half year 2021 results. Our state speakers are Andrii Verevsky, Chairman of the Board; Anastasiia Ivanovna, Chief Financial Officer; and Yuriy Kovalchuk, Corporate Investment Director. Now I'd like to leave the floor to our speakers. Please begin the presentation.

Thank you very much. Good afternoon, everyone, and welcome to the Kernel First Half Financial Year 2021 Earnings Call. My pleasure to present to you the Kernel financial results, first, for the 3 months ended in December 31, 2020, which is the second quarter for our financial year 2021. The company revenue for reporting period exceeded $1.3 billion. EBITDA reached $269 million; and net profit, $128 million. Strong earnings resulted deleveraging the company as well, the net debt-to-EBITDA standing at 1.6 as of December 31. And as well, our liquidity position remains solid with more than $250 million in cash and almost $900 million of ready marketable inventories. Now I would like to take you shortly through the segment performance in second quarter 2021. First, I start with, as usual, oilseed processing. Segment generated EBITDA of $24 million, representing a margin of $52 per ton of oil, which is down 39% year-to-year. Ukraine production of the sunflower seeds in the current season was 2.4 million tons lower compared to the previous level, which is a 15% decline year-to-year. And as a result, it's a gap between industrial crushing capacity installed and the harvest of the sun seeds in Ukraine. And currencies almost doubled, so reaching 5.2 million tons of deficit. It's intensified competition for the sun seeds, contracting severely the crushing margins. And at the same time, we see that farmers remain slow sellers in Ukraine, expecting future raising of the sunflower seeds prices. This season will be probably one of the worst in our history for the crushing segment. We expect to process 3.3 million tons of the sun seeds, down to what we already guided previously of 3.5 million. Full year crushing margins, we expect on a level of between $45 and $55 EBITDA per ton of oil. And on top of that, our renewable energy business line is expected to generate around $10 million EBITDA in financial year 2021. Infrastructure and trading segment delivered just another quarter of outstanding performance, contributing $161 million of EBITDA to the group results. Very obviously was a booster of the total segment earnings, taking the right position in the period of growing of soft commodity prices. At the same time, we can see that the contribution of our Ukrainian trading and grain export infrastructure business reduced year-to-year due to the margin construction, given the low grain harvest in Ukraine in the current season. Outlook for the segment remains positive. For first half, we generated $272 million EBITDA and expecting to add another $100 million in the second half of the year. The guidance includes already a reduction of our expectation for the grain export volumes from Ukraine to -- of 8.5 million tons full year 2021, down from 9.5 million tons initially announced. And obviously, we take an assumption that Avere trading results would not decrease much from the current level. And farming segment reported $107 million in EBITDA level in second quarter or $99 million, excluding IFRS 16 impact. We have contracted all grain of our own production for the harvest 2020, so the result is pretty much locked up. And full year, we expect -- full year financial year 2021, we expect to report $230 million EBITDA net of IFRS 16 impact and revaluation of biological assets, and this is up from our $200 million previous guidance. CapEx. CapEx program under the Strategy 2021 is approaching to the completion. Our new oilseeds processing plant in Western Ukraine is expecting to be commissioned by the end of 2021. The 3 cogeneration plants with our renewable energy investment project has been already constructed and completed, and 3 remaining facility has to be commissioned -- will be commissioned in the next financial year 2022. So this is a short presentation, and we're ready for your questions. Please go ahead.

[Operator Instructions] I can see our first question is from Michal from PTE Allianz Poland.

Michal Majerski from Allianz Poland. I just want to clarify 2 things what Andrii just said. First of all, you said that you expect additional $100 million of EBITDA. But is it for the infrastructure and trading segment or the whole group in the second half of the financial year? And the second question is, you said that this new facility in Western Ukraine, the oil facility will be commissioned until the end of the year '21. Is it the financial year or the calendar year?

Thank you for the question. The $100 million additional EBITDA contribution in the second half, we're expecting in infrastructure and trading segment. So the total, we believe, we should generate around $370 million for the segment. And the crushing plant for the Western Ukraine, we plan it will be commissioned in the financial year 2022.

Okay. So by the end of June?

Not by the end of June. It's going to be in -- within the financial year 2022. We expect in October, November.

Our next question comes from Catherine Stronach from Columbia Threadneedle.

Just wondering, could you clarify a little bit more on in terms of your CapEx? I know the majority of your CapEx is coming [ to an end ] sort of this year and carry on. But in terms of how much are you planning to spend on CapEx, please?

So for the financial year 2021, I'm talking about total numbers, we're expecting to spend total $179 million, plus $88 million of the maintenance CapEx. So the total amount, including maintenance CapEx, should be $267 million in financial year 2021, and this is pretty much the completion of all our projects for the last 4 years.

Okay. So then as an average CapEx going forward, you'd expect this to drop off to what sort of level?

Pretty much, at the moment, we don't have any plans for the CapEx for 2022, just a minor one, to finalize the maybe crushing plants, et cetera. So I'm talking about $10 million and our normal maintenance CapEx of the $60 million for the 2021.

Our next question comes from [ Christian Farlos ] from Adamant Capital.

Just a couple of questions on my side. I think you mentioned in the report that your trading and transshipment margin has gone down this year versus last year. Could you sort of give us a ballpark estimate of that figure where it is roughly, if you could? Is it around $10, $15 and where was it last year? So the whole sort of chain? That's one question. Yes. Maybe I'll just start with one.

So the true is that the infrastructure and grain trading segment in Ukraine is also under pressure because we have less crop size in Ukraine. And for example, on the trading margins, pure trading margin on the grain, we almost have the 0 margins compared to the $4, $5 last year. And also the terminal and railway wagons as well under the pressure. So we have less earnings on our railway wagons business because the supply is really low this year. And for example, right now, we already almost parked like a 30% of our railway cars. And obviously, every terminal in Ukraine is also fighting for utilization and throughput and putting fees, transshipment fees down. So the margins also came off as well. So I would say, generally speaking, for the whole line of the grain and infrastructure segment starting from grain trading, railway cars, terminal fees, we have the construction of the margins compared to the last.

Okay. Could you give us maybe a figure or -- I mean, if you're willing to disclose on where it is right now, is it $10, $15?

We don't disclose the margins by particular lines. So we -- because we look at it pretty much on a whole chain altogether. So -- but I can tell you that we see this margin is under pressure this season just because of -- mainly because of volume of supply in Ukraine.

Okay. And then also, could you say on the farming segment where you expect the IFRS 16 impact for the year as a whole? I believe it's around $49 -- $49 million at the moment. Is this going to go up from this level, do you think?

Anastasiia, correct me. It's a bit higher than $46 million. Anastasiia , could you please give the exact number of 16 effect?

Yes. It's a little bit higher, close to $70 million, but we have a special disclosure on this. Just a second. Yes, this is $49 million for the first half and should be close to $70 million to $75 million for the whole year.

Okay. Got it. And then final question on unallocated expenses. So it's up to $23 million at the moment. Is this sort of a one-time thing that we should be expecting here? Or is this something that will be recurring?

So the allocating expenses, we expect around $65 million, but that's the salaries and all administrative expenses plus, including some bonuses because of the strong earnings this year. So the unallocated expenses will be slightly higher this year compared to last year just because of the -- we paid some bonuses to the management for the performance.

Our next question comes from [ Mylos ] from [ IRSM ].

First of all, I congratulate for the very strong performance. I do have several questions. So I think I will go one by one so there is not any confusion. So the first question is, when should we expect some information about the potential results of the bid for the purchase of the gas cut Agro?

So for the gas cut, it's pretty, I mean, short. I mean at the moment, we are in the process of completing the deal. We got the approval from the antitrust, et cetera. But at the moment, as of now, we haven't done a completion. The deal is not done yet. So once we've done -- once the deal is finished and completed and signed, we definitely make the whole announcement, et cetera. But at the moment, deal is not completed.

Okay. The other question is, does the Kernel plan to contract some more crops for the new season before the harvesting? Or what's contracted now it's basically all the plan?

Thank you. That's a good question. So we are actively selling next harvest, so 2021 harvest, so the next season already. So we sold at the moment almost 1.4 million tons of the grain for the next season and some sun seeds, some oil -- sun oil as well. So we believe that the level of the prices are good and the margins are strong because we pretty much already know our cost. So we would like to carry on to sell more to try to lock up the margin for the farming for the next year.

Okay. So the other question, at this season we are dealing with a low amount of the sunflower ships on the market. So does the company have a capacity or maybe some plans to crush some other seeds like rapeseeds during the summer in order to increase the utilization of the plant?

Yes. We are currently working to try to crush some rape seeds at the beginning of the season, so in the summer. But unfortunately, we don't expect a huge volume coming from this, but maybe some volumes will be crushed. The margins will make sense, so of course, we will do it. Normally, we can buy rapeseeds from farmers and sell it as the raw materials and make the same margins without any crushing. So we will see where we'll make the arbitrage between farming and trading.

Okay. So another question, does the company expect significant increase of the farming cost in 2021? I know that there is some increase in the fertilizer prices, steel, maybe salaries as well.

2021, we don't see big spike. The budget already approved for next season. We already bought all fertilizers, et cetera. So it might be slight of increase of the land lease, but also not really material. So we believe that the budget will be more or less comparable to the 2020. So -- and that's why we're also actively selling 2021 just to make sure we locked up the margin for the farming for the next season.

Okay. And for the last question, how much time it takes between commissioning the power plants that you are in process of and achieving its 100% production capacity? I know that in case of competition, it can take 3, 4 months even. How does it work with Kernel?

It's not about competition, but 3 already done. So it's started to work almost on a full capacity. And next 3 will be in the financial year 2022. During financial year 2022, we will finalize the rest. The last one will come from the new crushing plant of the -- on the Western Ukraine. So that will be the last one, probably will be in the second half of this financial year 2022.

And power plants, they will be having full utilization even when there will not be enough sunflower due to the stockpiling before?

Yes. We hope that the next season, we're not going to have this issue. I mean there's a few reasons for this. First of all, we believe that the very high -- for example, right now, the sun oil price is on a peak of level, not historically, but maybe even historically high. And obviously, the margins, what the farmers make on sun seeds is enormous. So -- and what we see, the farmers are planning to plant, as much as they can, acreages of the sun seeds, same like a corn as well. So we believe if weather will allow us and will not bring the bad surprises, we should have a good crop next season, with good fundamentals for this.

Our next question comes from Michal, again, from PTE Allianz Poland.

Yes, I have the question, which comes back in the period of low crushing margins. Should we expect further market consolidation from Kernel, I mean from the perspective of market watchdog? Do you think it is possible to deals like [ All Seeds ] or [ BFI ] in the past or rather small deals, smaller deals? Or you'd rather let the weakest supplier to go bankrupt?

Yes. Thank you for your question.