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 very warmly welcome you to the third quarter results conference call with Kernel's management. Today, the company is represented by Andrii Verevskyi, Chairman of the Board; Anastasiia Usachova, CFO; Yuriy Kovalchuk, Corporate Investment Director. Gentlemen, congrats with the results. Please go ahead.

Thank you very much. Good afternoon, everyone. Thank you for joining us today. I'm presenting to you Kernel financial results of the 3 months ended in March 2021. This is our third quarter of financial year 2021. Group revenue over reporting period stood at $1.7 billion. EBITDA reached $111 million, and net profit was $16 million. The financial leverage continued to reduce and reaching 1.4 net debt-to-EBITDA as of the end of March 2021. I start it, as usual, from oilseed processing segment. So we generated $7 million of EBITDA in the third quarter, down 73% year-to-year. Although sales volumes in January, March, virtually unchanged, EBITDA margin declined to $19 per ton of oil. We discussed the major drivers during the several calls before this year and the poor performance is the main reason of the low harvest of the sun seeds in Ukraine in season 2021. We estimate that right now that the harvest is 13.6 million tons, which resulted the huge gap between processing capacity and supply of seeds and the competition this season was very, very strong. And more over the strong global sunflower seeds oil prices made farmers in Ukraine reluctant to sell sun seeds actively and the situation escalated even more. As a result, we reestimate our potential volumes for the financial year 2021 to 3.2 million tons of sunflower seeds. While we're keeping the margin guidance for the full year unchanged between $45 and $55 per ton of sunflower seeds oil. This is also including some minor contribution from renewable energy. Infrastructure and Trading segment delivered third in a row quarter strong performance with $122 million of EBITDA. The major portion of earnings was contributed by Avere and the grain value chain delivered solid operating numbers with 1.8 million tons of the grain exported from Ukraine and 2.1 we transshipped through our facility in the Chornomorsk port. But margin-wise, the performance was undermined by low supply of grain for export in Ukraine. I would like to also stress that despite the challenging fundamentals for the grain export business in Ukraine, this season, Kernel increased its shares in grain export from Ukraine from 12.3% to 16.2%, securing our position as the largest grain exporter from the country. This achievement, I believe, a very good demonstration that the team is building a solid infrastructure and trading platform in Ukraine. Our outlook for infrastructure and trading segment, so we keep target for the export 8.5 million tons. And EBITDA for the full financial year 2021, we expect well above $400 million, given the very stable performance in June. Now farming. Farming business delivered 3 million tons -- $3 million of EBITDA only. This includes -- this result includes a sizable negative $58 million net effect from revaluation of biological assets, which is quite typical for this part of the agriculture season. Nine months basis, we generated $270 million of EBITDA, which is 2.6x increase year-to-year. And the full year 2021, we expect to deliver $300 million of EBITDA for the Farming segment, but this is excluding impact of revaluation of the biological assets. Kernel successfully completed planting campaign with 254,000 hectares under the corn and 154 under the sunflower seeds. As of date of this report, weather conditions so far are generally favorable for the both winter and spring crops. Outlook for the next year for the farming quite positive. At the date of the report, we forward contracted a significant portion of grain and oilseeds for upcoming 2021 harvest securing in a such way, a big part of the financial year 2022 farming earnings. Prices for remain long position at the moment stay quite high and assuming also recovering and the crop yields, the segment performance for financial year 2021 -- 2022 might be even better than the current season. CapEx program. Our strategy 2021 is approaching to completion. New oilseeds processing plant in the western of Ukraine expected to be constructed at the end of the year 2021. Free cogeneration heate and power plants with renewable energy investment projects are already finishing, but they are commissioning slightly delay. The 3 remaining green facilities are to be commissioning in the financial year 2022. This is pretty much it from my side, and we are ready for your questions. Please go ahead.

[Operator Instructions]

Pawel Wieprzowski, if I may start. I have 3 questions. First, what part of 2021 harvest have you already sold? Because in the presentation, you just -- you only mentioned that you have sold significant part. Could you please elaborate a little bit more in details of the fraction?

Yes, yes, I can. So corn, we sold 64%; sunflower seeds oil, we sold 80%; and wheat, we sold almost 80%.

Okay. 80%. Perfect. Next question. Year-to-date results are really impressive, stellar, indeed, leverage at 2-year low. There is indeed room for higher dividends. So will you consider more than $0.42 per share dividend to be paid out from 2021 profit?

No, we don't. We will -- for this year, we'll definitely stay for $0.42 per share as we approved recently.

Okay. So last question from my side. Could you please update us on how the purchase of CascadeAgro landbank is proceeding? When shall we hear about the details of the deal?

CascadeAgro, at the moment, the deal is not happening, and I think the seller decided to keep it at the moment. I mean, again, given the results what the oil farmers are doing at the moment in Ukraine, you try to revise the price. We don't want to be very aggressive to raise the price for the deal because we believe that the soft commodity prices won't be sustainable on that level. So let's see. I guess, at the moment, there is no deal.

[Operator Instructions] So we currently have a question from [ Mylos Swislo ] from IRSM.

Okay. And again, I would like to congratulate for very good results that the company continued to realize. So I have 3 questions. I will ask one by one. So we know that the company already contracted some significant volumes as well from the third parties for the new season when it comes to sunflower. For example, IMC sold you 60,000 tons. What range of margins do you see for this new volumes in the new harvest when it comes to crushing...

You're talking about the forward contracts with the third parties?

Yes. Yes. Yes.

I think it's about $70, $75 per ton of oil.

Okay. So this is really good. Okay. And then the next question. So in the last 3 years, when it comes to quarter 3, we see booked increased losses on biological asset revaluation. Is it connected only to the reduction of the planting acreage of the winter wheat and rape? Or there are some other significant factors there?

Anastasiia, can you comment, please?

Yes. Yes, I can comment on this. It's a mathematical exercise. Biological evaluation depends on the size by end of the period and also on the acreage and expected yield. So that's just a quarterly fluctuation, and we will revise this amount by the end of the next quarter.

Okay. So the next question is connected. Should we expect a positive effect in the fourth quarter when it comes to biological assets in farming, just in the fourth quarter?

It pretty much depends on the level of the prices by end of the next quarter. So we shall see what kind of prices we have by -- at 30th of June 2021.

Okay. So it's based really at the end of the quarter, the price?

Yes.

We now have a question from Mike Ludwin.

I have only one topic, which I would like to discuss. I would like to know your opinion about the military conflict between Ukraine and Russia, an impact for your business and potential risks?

I mean it's a hard question to answer. At the moment, since 2014, we haven't been exposed with our assets to the conflict so neither Crimea or East of Ukraine. So we hope that any escalation won't go too far, and we won't be exposed in the future as well.

We now have a question from Jakub Szkopek from mBank.

Congratulations with the results. I've got a few questions. The first one is regarding the crushing plant in Western Ukraine, how it's going? How is the progress? And when do you plan to start it? What are the changes in this progress?

Thank you for your question. So as I said towards the calendar year 2021, we plan to finish that construction. Obviously, it's slightly delayed and during this -- because of the COVID, et cetera, because of engineers and supply, et cetera. So it wasn't an easy year for the construction as well. So you can see this generally speaking, the commodity, everything is going up and the constructors try to revise the prices, et cetera. So -- but the visibility is pretty good to finish it in 2021 and towards the end. We would already -- we're already planning to start to buy sun seeds at the new year starting September, October for the new plan, even if it's not finished. And we hope from January, February, March onwards, we would be able to already crush some volumes.

Okay. I've got another question about this renewable energy units. What is the -- why the weather impact from this unit is so low this year with -- because of that, that some investments were delayed or there is a structural change in the law in Ukraine? What the cost...

No. Nothing changed. It's a pure our internal, I would say, issue. It's same story because the old equipment installed on the cogeneration plants is the European production, et cetera. So -- and it was just simply delay from our side and -- mainly constructors and suppliers, but the 3 of them already done. We're just working with commissioning and the next year, 2, 3 of them should work 100% for the whole year and 3 others in financial year 2022. So it's a pure delay. Nothing structured in the market.