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

Hello, everyone, and welcome to the Kernel First Quarter Full Year 2022 Results Conference Call. My name is Victoria, and I'll be coordinating your call today. [Operator Instructions] I will now pass over to your host, Pawel Wieprzowski from Wood & Co. 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 would like to very warmly welcome you to the first quarter conference call with Kernel's management team. Today, the company is represented by Andrii Verevskyi, Chairman of the Board; Anastasiia Usachova, CFO; Yuriy Kovalchuk, Corporate Investment Director. Gentlemen, congrats on the results. Please go ahead.

Dear ladies and gentlemen, we today present Kernel's financial results for the 3 months ending 30th of September 2021, our first quarter of our financial year 2022. So group revenue this reporting period amounted $1.3 billion. EBITDA stood at $315 million, and we generated net profit of $211 million. As of September, our net debt-to-EBITDA is 1.1. So I take you briefly through the segment as usual. So our oil processing segment business generated $15 million of EBITDA in first quarter, which is down 53% year-to-year. The disappointed result was pretty expected given the insufficient carryover stock from the last harvest, in the harvest 2020. We remain cautious regarding our outlook for crushing business in the current season, although we believe that both crush volumes and margins are likely to improve because we have a pretty record strong harvest, 7 -- 16.8 million tons. In Ukraine, we still targeted to process 3.8 million tons of oilseeds, though the visibility of the margins improved limited. Procurement campaign started pretty slow. The season is -- was delay of the sun seeds harvesters and the farmers relatively weak -- I mean, selling pretty slow. Farmers are having very good liquidity position, and they're waiting for the better price. So I would say to predict the future season profitability will be quite complicated. Infrastructure and trading segment secured strong $117 million of EBITDA in the first quarter. Our Avere subsidiary delivered third outstanding quarter in a row, being a major contributor in the segment. In Ukraine, we exported 2.2 million tons of grain and transhipped as well 2.2 million tons through our terminals, which is 5% and 18% year-to-year growth, respectively. The financial performance of the grain export value chain in Ukraine was undermined by low origination margins so far for crops produced, first of all, in the previous season and the full results of the silos segment caused by low intake volumes and the surge in energy costs. Putting aside Avere, the outlook of the full year remains unclear. On the one hand, we maintain intention to export 11 million tons of grain from Ukraine and as well pretty much fully utilize our terminal with 10 million tons of the volume throughput. On another hand, again, same story as the sun seeds, the farmers are extremely slow selling the goods. And we have the corn, significantly delay of the crop, which is all these factors brings a bit of risk of delivering strong margins across the old business lines. EBITDA contribution for our farming segment in the first quarter increased 29% year-to-year, $207 million, including $85 million of net gain from change in fair value of biological assets. As of today, we completed sunflower seeds harvest campaign, achieved 3 tons of yield per hectare. Corn harvesting is delayed this year. We still have 20% acreages still unharvested. As the harvest progress, we anticipate the net yield for corn as 8.9 tons per hectare compared to 8 tons per hectare last year. Corn improved as well year-to-year for all our key crops. On the cost side, we expect 15% year-to-year inflation per hectare, mainly driven by energy prices translated into the higher drying cost of silos, along with the surging cost of outsourced service and the land leases. But full EBITDA adjusted for the net impact from revaluation of biological assets in financial year 2022 is anticipated to exceed the previous year result. Our liquidity position remains strong. We have $334 million of cash and 5 -- sorry, $534 million of cash and $580 million of ready marketable inventories on balance as well over $1 billion of undrawn credit facility. So a quick recap on the CapEx program. We are processing with construction of our oilseeds plant in western of Ukraine, planning to commission the plant in the coming months. We reconfirm initial provided CapEx guidance for 2022, $265 million, which shall cover maintenance costs, maintain CapEx as well. This is pretty much it for my presentation, and we are ready for your questions. Please go ahead.

[Operator Instructions]

If I may, I'll start. Pawel Wieprzowski, Wood & Company. Just 3 quick questions from my side. Could you please tell us whether you have seen any significant changes in terms of the trading activity in the land market? Because following the full year results that were announced 2 months ago, you stated that there was indeed negligible trading happening. Has it changed since then?

So regarding the land market in Ukraine, pretty slow. The total amount of the land traded in the whole country is 66,000. So very, very low compared to the core volume. And I think for the next couple of years, we don't expect any activity -- strong activity on the market. Mainly transactions happened with the existing farmers who is buying land, which they lease at the moment. So -- but I think the process is very slow.

Perfect. As far as your second tranche of the buyback program is concerned, you have not purchased any shares. Will this $15 million that you plan to spend on this tranche be simply postponed and be utilized for further tranches? Or you'll just reduce the total amount that you're going to spend on your buyback program from $250 million to $200 million? So adjusting for this tranche, which has not been completed.

So $250 million total amount announced... [Technical Difficulty]

Sorry. Unfortunately, since we have lost connection, we will pass over to the management team to take over this question.

Yuriy, do you want to continue? Okay then, I will take over. Yes. Yes, I will continue. This is Anastasiia Usachova. Now the size of the program should be still the same as announced, $250 million.

Okay. So you will just simply spend this $50 million that you had not spent on the second tranche later on, simply. Okay. Perfect. Last question in regards to the statement about the cost inflation. The Chairman stated that you expect 60% year-on-year cost inflation in the farming segment per hectare. Does it refer to all -- to the entire cost base or just only the dollar-based items or energy part? Could you please elaborate a bit about this?

Well, the main contributed -- yes, the main contribution is definitely the energy crisis. Energy part is important, but this is the whole dollar based.

Okay. So this 60% inflation -- cost inflation refers to only the U.S. dollar-denominated...

The dollar based, yes.

Okay. So it's roughly out of the total cost per hectare, right, this dollar part?

This is 60% of the total costs denominated in the -- of the total cost, not only denominated in dollars but on the total cost.

Okay. So the entire cost per hectare...

Yes. Absolutely.

Is up -- jumps up by 60% year-on-year this year? Okay. Perfect.

We will now move on to the first question, which comes from [ Philippe Voak ] from the [ GI Hedge Group. ]

Kernel team, so congrats, first of all, for the great result. I have a couple of questions. Let's start off first with infrastructure. How to understand the impact of gas prices on silos. You mentioned that in the presentation. Is this a short-term effect that arises due to previously signed contracts and we can expect that the higher gas prices will be then naturally transferred to customers? Or is it something that will endure on that side? And the other question regarding infrastructure is can you provide any kind of guidance on how it's going so far in Q2?

Sorry, the second question is about what, is about the structure?

It's about infrastructure, so the physical infrastructure that...

Oh, about infra. Oh, okay. Okay. I can start with infrastructure. We definitely expect high volumes, and we are quite aggressive in our procurement campaign. So we do believe we will fulfill our program in terms of volumes. In terms of the margins, still remain to be seen. Okay for now, but it's just the beginning of the season. But overall, taking into consideration extremely good harvest of grain in Ukraine, we expect, I would say, a normal profitability in this segment this year. Definitely, silos suffering from energy crisis, but the weather conditions are favorable in terms of cost of their services. So overall, should be like a normal year and good in terms of volumes.

Okay. But just to understand the economics of the impact of gas prices on silos, will you pass over -- are you able to pass over this cost to customers in the midterm? So I mean higher gas prices, higher storage prices, in the end, higher end-user prices? Or why is the impact -- it seems to be that in Q1, the impact has been quite negative of this. Is this because of previously contracted storage capacity at lower prices before the gas price increased? Or what gives rise to that?

Yes. That's a combination of 2 factors. Indeed, some contracts were signed with lower prices. Then during the year, we increased gradually the prices for our service. And we -- as you mentioned, we actually translated this gross prices increase into cost or into price for our service. The second reason for low profitability of silos in the first quarter was low volume because, as Andrii mentioned, the harvesting campaign was delayed. So silos just -- it didn't receive enough volumes in the first quarter, and that was the main driver. So the -- actually, the farmers will pay for the energy prices. But our farming business and as well as other farmers in Ukraine definitely will benefit from the current level of the commodity prices. So overall, I think the impact is not significant -- is not that significant.

Okay. Explains it very much on that part. About the farming, I have like 2 related questions regarding that. So you mentioned that you have 20% left in the field as of end of Q1. And is this -- if I would like to estimate the long position, as you mentioned in previous reports, can this be considered that you are like 20% long with respect to corn prices?

There is no correlation between how much we harvested and how much we just sold. We have a position. It's not big. I would say it's like close to 15%.

The final question that I have on the farming business is, any kind of -- previously, you were like providing guidelines in the presentations on end-of-year results. Anything you're able to predict right now? Or is that -- not yet the time?

Not yet the time, still too early.

And we will now move on to [indiscernible] from [ IRSM. ]

Once again, I would like to also congratulate the strong results for the Q1. The first question that I have is connected to the buyback program. And recently, we saw some weakening of the Polish zloty, which gives a possible headwind for the buyback in relation to how many shares for the dollar can be bought for a certain price. Does the company take into account the exchange rate of Polish zloty in regard to U.S. dollar when it plans the tranches and possible evolution, like in December, we'll likely have some hike of the interest rates? Or this is not a factor in your planning?

It's definitely one of the factors. And we take this into consideration as well. We are not ready to say whether we will be back to the market soon. But as soon as we decide, we will announce the next tranche.

Okay. In regards to the crushing, we could see that in the first quarter, despite that harvest last year, the company already managed to get back with the margin up to about $60 a ton. Do -- could we expect to have further improvement in the second quarter of the financial year?

Anastasiia, I can take it. I'm back on line, sorry. So as I mentioned...

Thank you.

Yes. As I mentioned already in the presentation that we have, at one hand, pretty good, I mean, fundamentals on our crushing business. We have the good harvest, 16.8, high prices. And we should be normally deliver a quite good margin over the whole season in the first and how we started, we already showed and produced a good margin. The only problem what we have is a slow pace on the farming sales. And there is practically no pressure and quite low coverage of the sun seeds inventories, not only us but also the other crushers. So everyone is pretty much working on low inventories, pretty much worried about to stop the plant and that's why rushing to buy sun seeds and farmers at the moment winning a little bit game against the crushers. So he's selling better and he makes more money, of course. And crushers are a little bit under pressure, which should be completely opposite right now given the season. So let's see. We still expect pressure comes February, March and -- which should reflect positively the margin. And we really hope that the crushing segment should show the -- overall the good results over the year. The only problem is to predict, it's quite difficult. So that's why we take quite conservative approach, but there is a good fundamental for this year.

Okay. So given this evolution, do you maybe plan this year to change the habit of selling your own sunflower seeds at the end of the season?

Yes. But we still -- we don't really take a big position in sun seeds except our own production and farming. Whatever we buy from farmers, we try to sell it pretty much same time. So we don't really play positions here.

Okay. And the last question from my side, from what I remember, the precontracting for the corn and for the wheat in the spring this year, you gave prices of about USD 2,010, USD 2,015 right now. For the futures, we see that we can be contracted in MATIF, for example, for almost $300 and in relation to corn for the next season, obviously, already. That's about $260. Does this hike in the [ placebo ] to realize prices would cover the increase of the costs?

There are 2 separate issues. First of all, we're also looking for the next season already, and we also believe the prices for wheat and corn are pretty high. And we start already selling some parts, not very actively, but we're already selling the next crop. Of course, we're also taking into consideration the higher costs. We already try to forecast and anticipate the cost for the next season, cost of production in the farming. But still, it looks like margins are quite decent anyway with the cost increase and the prices which we can really book for the next year. So we're slowly moving forward.

Okay. Do you have some maybe schedule in regards to contracting? Or it will be just depending on the market situation?

It will depend on the market.

And lastly, is Avere still doing well so far in this quarter?

Not at first quarter, but doing well.

And our next question comes from Dmitry Ivanov from Jefferies.

Maybe we'll ask several questions. The first one, Kernel already announced early redemption on '22 bonds. Could you please kind of provide more color which sources of funds will be used to redeem these bonds? Will you use cash on hand? Or will you kind of attract a new loan from commercial banks on new potential bonds? So any color would be much appreciated. That's the first question.

Anastasiia, would you comment, please?

Yes. It's relatively easy. It's cash on hand. We will not raise additional money.

Understood. Understood. So you would just use current cash on hand. Second question, I guess, on Avere business. So correct me if I'm wrong, but I think that if you look at the EBITDA of the infrastructure and trading business, more than like 90 -- more than 90% of contribution was from Avere business to the trading and infrastructure EBITDA. Does it mean that kind of other like non-Avere trading performance was quite kind of mediocre? So I'm just curious because this contribution of Avere business is quite significant. Should we expect such contribution going forward -- much bigger contribution from Avere business and from your non-Avere business? So just any color also would be appreciated.

So I mean, Avere, as always, would be difficult to predict what they will produce and -- because that's a pure trading arm of the Kernel. And there's always -- I mean, for the last season, it was a positive surprise. And first quarter, obviously very supportive. But going forward, it will be very difficult, honestly, to say if the Avere will perform same pace. So we would -- we never counted on Avere pretty much.

Understood. Understood. So much more of a surprise for you than like something going forward. Understood.

Exactly.

Understood. And my last question -- so I read your comments with regards to some uncertainties with regard to infrastructure and trading business in [ Kernel. ] So just a small question. You mentioned that there is some delay in harvesting of corn and resulting complications with honoring of some of your contracts to deliver corn. Should we be concerned about this situation? I mean like, are there any penalties, fines in the contracts that you will have to pay because of some issues with delivering this corn? So maybe any color also would be helpful.

Not at all. So we're absolutely fine with our logistic and execution. What I'm saying about delay corn, generally speaking about Ukraine, which mean it's just less pressure. And so farmers are more relaxed, and then they are more managing -- better managing their infrastructure, their own storage, et cetera. So they're not really under the pressure to sell and less volume on the market and less margins. That's simple as that. So -- but it's not really concerned our contracts of delivery and supply. We're absolutely fine and planning what we're doing is not really affecting our 20% spending, our own corn spending in the field. So it's just a general perception of the market.

Understood. Understood. And just one small follow-up question on the first one. I understand that considering the current like volatility like markets, it's difficult just to come to the market. But do you have any plans just to come to the capital markets sometime, maybe next year when volatility fades away and maybe just to replenish your cash position with longer-dated bonds, something like this or something -- any plans at this stage?