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

Hello and welcome to the Kernel Fiscal Year 2021 Results Conference Call. My name is Lauren, and I will be coordinating your call. [Operator Instructions] I will now hand you over to your host, Pawel, to begin. Pawel, please go ahead.

Thank you. Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski, and on behalf of Wood & Company, I am delighted to welcome you to the fourth quarter conference call with Kernel's management. Today, the company is represented by Mr. Anastasiia Usachova, CFO; and Mr. Yuriy Kovalchuk, Corporate Investment Director. Gentlemen, congrats on the stellar set of results. Please go ahead.

Good afternoon, ladies and gentlemen. My name is Yuriy Kovalchuk. First of all, I would like to apologize for Mr. Andrii Verevskyi. Chairman of the Board could not make it today to the call. He's got his seasonal cold, and he feels unwell. So he apologizes for not being -- to be with us on this call. So in this regard, we changed a little bit the format of our traditional annual call. So we will not go ahead with the general overview and presentation of the Chairman. I hope you had a good chance to look into the Chairman's statement of our annual report, and it was well covered and highlighted by analysts. So we would skip this part on today's call, and we would go straight ahead with a Q&A session, and I pass back to operator to open the lines for a Q&A session.

[Operator Instructions]

Hello again, if I may start, Pawel Wieprzowski, Wood & Company. I have a few questions. So first of all, could you please remind us when do you expect to launch the new crusher? And if it is to process significant volumes of sun seeds seasons, which seems to be all-time high season for sun seeds harvest?

Yes. Thank you, Pawel. We plan to complete the construction of the facility in winter, in a couple of months from now. But effectively, the commission of the plant should happen in early spring. And we do plan to have some crushing volumes processed in newly built crushing facility in fiscal year 2022. But the quantity, the volume which we'll process, would depend pretty much on the commission end date. So some minor volumes you should expect, yes.

Okay. Perfect. My next question is what kind of results do you expect in case of a [indiscernible] because you are guiding for normalization of the profit there? Shall we assume it will be close to 0? Or do you still have some position in the market?

Well, considering the nature of other operations, yes, it's very difficult to broach what result it might achieve for the full year result. So far, we are doing good in the first quarter of fiscal year '22. So it's very positive. But how positive they are, you will see at the end of November when we publish first quarter results.

Okay. Perfect. My third question concerns the crushing capacity's expansion plans. Do you intend to materially increase them over the next 5 years? Will it be by means of merger and acquisitions? Or you rather consider reaching some third parties and commissioning some crushing operations for them?

Well, yes, unlike Strategy 2021, Strategy 2026 is predominantly built around M&A expansion, brownfield expansion. And we target expansion in crushing facilities to consolidate the market. It has been for a while a part of our strategy also 2021, but we didn't find any common ground on valuations. Now we believe crushing margin normalized. And as Chairman put into statement, we do not envisage them materially fluctuate going forward. So we don't expect much downside from where we are at the moment, and we don't expect much upside if you speak about midterm, long-term perspective. So that would enable us to have better bargaining power when we will speak to potential acquisition targets. Similar theme is -- holds true for infrastructure. We believe that Ukraine has a potential to increase its production of different grains and oilseeds in the future, with any excess going to the export market, and we believe we will also have the ability to expand into transshipment facilities acquisitions during the next 5-year cycle. So the general answer is yes, it's mostly brownfield.

Fair enough. Quick question about the buyback program. Is Mr. Verevskyi participating in the program or has participated in the latest tranche? And is he planning to participate in the following tranches of the buyback? And what will happen to the repurchase stocks? Are you going to use them to pay for some assets that you're going to acquire? Or are you planning to cancel them?

Well, the buyback program has been voted by the shareholders. It's $250 million share buyback program, up to PLN 65 per share. It's 2-year loan program, which was -- [indiscernible] was granted to the Board, and Board decides basically in which way it wants to conduct this buyback program, a; and b, decides what to do with the shares repurchased via buyback program. At the moment, Board did not make any decision regarding the shares, which were bought back in the tranche, which has been conducted just recently. So the shares would be recorded in treasury stock until any further decision of the Board. And in terms of the variety of decisions the Board might take, its full spectrum basically, it might be retained at the treasury, it might be canceled, it might be paid for whatever future acquisitions, it might be paid as a compensation or whatsoever. So for the time being around, there is no any decision on that. In terms of whether Mr. Verevskyi participated in the first buyback program, the answer is not. He did not participated, along with -- none of the [indiscernible] some of the management team participated in this buyback. Whether he will be participating in any future buybacks, I have no knowledge attempt. So I cannot comment whether he will be doing that or not.

Okay. Fair enough. My last question is that you mentioned in your financial statement that you suffered from some losses on farmers' default on pre-crop forward. Do we expect it to happen as well in 2022? And if yes, will they be material positions in your or P&L? Or it's just like some low single-digit figures, which can be neglected?

Well, we did experience farmers defaults on forward contracts in fiscal year 2021, and that was a result of abnormally high volatility in soft commodity prices. When those things are happening, it's very difficult to rework defaults. Having said that, we, I believe, navigated pretty well in terms of those defaults because most of the defaults were restructured and all the liabilities of the farmers, which emerged, will carry forward to the fiscal year 2022, when we expect them to basically settle their outstanding debt. So there was not material impact on our P&L, except for indirect losses on unearned profit, to put it this way. But there was not any significant direct loss on our P&L. In regards to 2022, you can never expect for those then to happen because you expect your current third parties to respect the contractual obligations they are entering into, the same way as to -- and respect its contractual obligations when we view under the contract, regardless whether it's profitable or loss-making for us. But it's pretty much -- is a function of any significant volatility of commodity prices. So if we do not have any significant material swings in commodity prices, then the default rate would be at normal low level. But if we have any few swings regarding upwards or downwards, mostly upwards, yes, but definitely not downwards. If we will expect any -- if we will see any upwards price movements, then defaults are possible.

Okay. Last question from my side. You are guiding for the landbank expansion of roughly 0.2 million hectares within the next 5 years. I assume that this must be associated with acquisitions of some large landbanks, not single plots of land. Around 6 months ago, you were considering acquiring something like 40,000 hectares from one of the minority shareholders as far as I remember. Do you have any similar targets on the table at this stage? Or you're just looking around and checking what possibly -- what can be possibly purchased?

Yes. Thank you, Pawel. Well, if you look at Kernel, we have been growing since foundation pretty much through brownfield expansion. And today, we are #1 farming business in Ukraine with 500,000 hectares of farmland under the management. And we obviously are constantly monitoring the market. We are constantly speaking to different targets. It's our general appetite. It's our general stomach, what we believe would be a good size for us to acquire as part of execution of Strategy 2026. But it will all depend whether we will find the common grounds with a number of targets on valuation. Whether it would materialize or not on timing, it all depends on external factors, which is beyond our control. So this is our inspiration, this is our target. But whether it would be eventually consumed or not will depend pretty much on external factors beyond our control.

That's good. And are you speaking to anyone at this stage? So do you have any kind of proposal at this stage that you are considering? Or you're just starting and looking around?

Today, it's very difficult to speak to farmers. It's slightly resembles the situation in crushing business a couple of years ago, we were trying to secure certain mandates, certain deals. Today, it's high cycle. And as we warned our stakeholders, we believe this super cycle in soft commodities would end rather sooner than later. And when it happens, it would be the right time to come back to the negotiation table and speak to the prospective targets on valuation metrics. Because today, if you look at the screen, if you look on our peers in the market, pure farming businesses, the valuations are just crazy.

Our next question comes from [indiscernible] from [indiscernible]

I'm [indiscernible] from [indiscernible]. Obviously, I would like to congratulate stellar performance in the past financial year. I do have several questions. I'll go one by one. The first will -- the first one will concern the buyback program. Does the company plan to spend the whole budget designated for the buyback within the 2 years as in -- as it was specified in the resolution? And if yes, what are the intentions if the shares of the Kernel appreciate significantly above the thresholds, which will indicate that it's very unlikely to actually be able to purchase the shares?

Okay. So regarding buyback program, as I already mentioned, the Board would authorization for $250 million, up to PLN 65 per share. But on eventual tranches for buyback, it's Board to decide, and there is no any indication from the Board as of now regarding the next steps in that direction. And if the price appreciates above PLN 65 threshold, which would make a buyback program not possible to conduct based on the authorization of the Board, then it would at the hands of the shareholders to decide whether any higher levels of buyback are reasonable or not. So -- and this is an uncertainty. For the time being, it's at the Board level, PLN 65, $250 million. If it goes beyond that, shareholders to decide, if they decide on that.

Okay. So another question is from the operational perspective. So it seems that the current crop harvest will be records in the Ukraine history. And it obviously gives some relief for the margins, from the infrastructure and trading operations. Can we expect margins similar to 2019? Obviously, if we will exclude the Avere operations or the risks from the increased costs may be a significant danger here.

Yes. Thank you very much. This is a really good question. We are very cautious with forward-looking statements at the moment because so many unknowns, which we face. Yes, generally, we expect a larger record crop for Ukraine. But at the same time, where unknowns are is cost based. Cost base in farming business is a big question mark because we see now what is happening with pretty much, call it, energy crisis around the globe. With surging energy prices, Ukraine is a heavy importer of energy in different sources. And as a matter of fact, for us, energy is a key component of pretty much everything. On farming side, fertilizers, seeds, logistics, both truck logistics, rail logistics, seaborne logistics, it all depends on cost of fuel. And if we will see this as a not short-term lived phenomenon, high -- record high energy prices, but something which would be same for a while, then this inflationary pressure would basically make a toll, not only on energy side of the business, but also on labor inflation. And in this regard, we remain pretty much elusive and cautious with the outlook despite good, strong price environment and better yields year-on-year. We face challenges on the cost side.

Okay. So no comments so far how is it going in Q1? I don't mean numbers. But...

Well, our outlook, at least at the beginning of the year, is slightly positive compared to last year, yes. But whether it would translate into the full year 2022 contribution at better margins, it's a question mark at the moment.

Okay. Great. So then as well, another question from the operational side. We note that the wheat yields were quite good. Can we expect the yields from corn and sunflower from the in-house Kernel farms to be at similar level to 2019 as well?

Well, we expect yields might be slightly better compared to last year. And the reason for that not very aggressive expectation is that we had -- some of our clusters suffered from not ideal weather conditions during the summertime. And now we have pretty much rain. So the stock from field to silos was becoming quite wet, which translates into higher energy costs. And considering energy inflation at the moment, gas prices -- and this is coming back to your first question regards cost inflation, yes? So we remain here, again, cautious in regards of what we will see in terms of this impact on our farming side. So yields at the moment, look slightly better. But on the cost side, we might have some impact and rebalancing between silo business and farming business, because of substantial inflation of gas prices.

Okay. Yes. I do understand. So does the company already harvested most of its own sunflower?

Excuse me, can you repeat that?

So I believe that given the schedule for the harvesting can even -- though it was delayed about 2 weeks, I can understand that the big chunk of the sunflower was already harvested. But in case of corn, it's later. And from what I see, the weather is relatively supportive. So can you give some idea about what share of the corn was already harvested that had these problems with the content of the humidity, of the water?

I can't give -- I don't have this number at hand because it's work in progress. But normally, we harvest it throughout November. So it's quite a long period of time yet to harvest, yes, for corn.

Okay. So basically, if we have a nice weather like it seems now like in Poltava [indiscernible], then it's a chance that it will not be so bad cost-wise with the drying?

Yes, yes, yes. So basically -- exactly. Corn is -- for us is a major crop, yes? Corn for us is a major crop, and corn requires most of the energy consumption in terms of drying if it becomes wet. And at the moment, the weather is not supportive because of rainfall. But if it improves, it will definitely be some tailwind for us.

Okay. Great. Sorry to have the last question. So there was already some guidance about what was already on when it comes to the power plants. But then we know as well that the big power plant from the Western Ukraine should be operational in the 2022 calendar year. But what about the rest? Should we expect it to be commissioned until the end of this year or in the beginning of 2022?

Yes. So basically -- thank you once again for this question. So at the moment, we have commissioned like 17 of -- out of planned 94 megawatts of green energy facilities. The remaining part will be commissioned in fiscal year 2022. So starting from fiscal year 2023, all our facilities would be up and running. We had certain delays with the commissioning because we had some disruptions on logistics side and some delays because of COVID-related stuff. But now we are again up to the speed, with the aim to complete before the end of fiscal year 2022.

Can you tell us what is the difference now between the prices of electricity that are guaranteed by the government and the spot prices in Ukraine?

Well, we are still selling at the tariffs prescribed by law. So -- and frankly speaking, I don't know what is the spread between guaranteed prices and market prices. But it's clear for everybody, it's pretty much politically-driven theme. And if legislation would change in that respect, that would definitely negatively impact on our investment in greenfield power plant.

Our next question comes from Natalia Shpygotska from Dragon Capital.

Congratulations on extraordinary results. And a couple of questions from my side, please. I have more follow-up questions on the company's Strategy 2026. As it was mentioned in the company's report, current loss CapEx for 2022 financial year seen at $265 million. I would like to check if this number mainly includes completion of the greenfield, oil crushing facility and the power plants and basically did not include any new M&As company foresees for the next 5 years.

Yes. Thank you very much. You're absolutely right. $265 million, which includes maintenance CapEx and residual CapEx of Strategy 2021. Strategy 2026, we do not forecast any CapEx outflows for very simple reason, because it's mostly driven by M&As and cannot forecast for that.

Okay. And given you're mostly focused on brownfield, would it be fair to assume like maintenance CapEx going forward of around like $70 million, $80 million as it was guided previously plus M&A subject to opportunity to close any deal?

Well, in terms of maintenance CapEx, what we have for fiscal year 2022, it's roughly $58 million. So I would say the assumption beyond that would be around $60 million as a maintenance CapEx for us. And M&As would be -- would not be forecasted. It would be -- once anything emerges, we will communicate to the market and disclose all the numbers, and it's going to be kind of surprise CapEx outflow rather than planned CapEx outflow.