Ros Agro PLC (AGRO) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of ROS AGRO PLC regarding the presentation of the financial results of the first quarter of 2020. At our customer's request, this conference will be recorded. [Operator Instructions] Now I hand you over to Maxim Basov, CEO, Ros Agro, who will review for this conference. Please go ahead.

Good day, ladies and gentlemen. Today, we issued a press release about our first quarter IFRS result. I think that it was quite good. The revenue of the company increased 18% to RUB 33 billion. All businesses, except for Agriculture, shows an increase in revenue. Our EBITDA increased 58% to RUB 5.2 billion. All business units increased EBITDA. And the net profit of the company grew to the level of RUB 3.2 billion. As a result of improvement in revenue -- increase in revenue and improvement in our EBITDA margin, we had good free cash flow. Part of the free cash flow we have to spend on the increased interest payment. Unfortunately, following the disruption in the financial and commodity markets and the development of COVID pandemic, the level of debt increased. We also said at the beginning of the year that the [indiscernible] facility [indiscernible]. So we have to -- we decided to take down this facility in the first quarter. But as a result of balanced devaluation -- of devaluation of the currency, we showed the loss in the first quarter of RUB 1.1 billion. So our results in that net income would have been better, if not this change. Now I would like to say a couple of words about each of our business units. In general, we have [indiscernible] all our [indiscernible] and business units did well. We had the biggest EBITDA [indiscernible] the first quarter of Oil and Fats business, second was agriculture, then we have Meat and then we have Sugar. Let me bring your attention to our presentation, to the Page #10, where we give you a short update on the development in the Meat segment in the first quarter of 2020. In general, you can see that the company significantly increased production of pork, but the prices went down. The prices of live animal went down from RUB 71 to RUB 66, and the prices for the live -- for the industrial fats went down from RUB 133 to RUB 124. The biggest sales category of our company now by far is the industrial fats. The price of our live animals doesn't fully reflect the price on the market for the live animal since they are selling only a small portion of live animals and normally animals of which are not standard quality of -- like for example, sows. So as a result of increased production and decreased prices, the company increased EBITDA to the level of RUB 1.2 billion. So in the first quarter of this year, we also continued to increase production of pork. Increase in production reached around 15%. So since Russia is closed for the major markets of pork at the moment, like China, Japan, Korea, and on the process to export to Vietnam, then in order to find the consumer for the increased supply of pork, we have to decrease the prices. So the prices are falling in Russia. In fact, it's the only market now in the world where industrial fats are -- have been falling. You know that the prices in China, in U.S. and in Vietnam now are quite high. But since we are operating on a growth market, we will continue to decrease the price. In March, the prices started to go up. This is the seasonal development, and now they are at the level of quite steady at the March level. We experienced some disruption in the [indiscernible] channels. In general, the consumption of pork is increasing. We believe that in general, consumption of meat in Russia is not increasing, but consumption of pork is increasing, but because of change in geography and [indiscernible] program, and we have some big changes in distribution channels. We have been quite successful in working in this environment of our production facilities -- are working at full capacity. And we are significantly increasing the sales of B2C products to the discounted chains in Russia. And in general, we believe that Russia will be able not to have conduction disruption at the [indiscernible] of their facilities like we now see in North America and Brazil. And we believe that the business will operate quite well. We expect that [indiscernible] saw as the grain prices increased. We saw that production prices have increased, and we believe the meat prices on the domestic market will continue to go down. So in general, we believe that the marginality of this business will go down. But because of our increase in production volumes, the business will recover steady financial results here. On Page #11, we can see result of the Sugar division. The Sugar division is suffering from very low price internationally for sugar following the collapse in the oil price on the international market. The price of sugar also went down to the level of around RUB 0.10 per pound. However, in Russia, we were quite positively surprised with the level of demand which we started to experience in March and continue to experience even now. The demand for sugar in Russia and on our major markets of [indiscernible] is quite high. So we are now again operating our B2C facilities at 100%. Our strength in B2C market in itself demands to earn money. And we managed to earn a similar amount of EBITDA in the first quarter this year compared to first quarter last year, even though the price is significantly low than -- lower than last year. We continue to see a demand for our sugar sales. And we believe that the second quarter of this year will also be quite strong. The situation globally, Sugar segment continues to be difficult. On the one hand, we see that the low sugar price motivates Brazilian companies to shift from production of pure ethanol into the sugar. So I won't anticipate [indiscernible] in sugar globally now looks like not certain. On the other hand, today, we got from a news [indiscernible] production in March, April, about 15%. So there is a big uncertainty on the whole sugar market. The sugar market continues to do well. But in Russia, we [indiscernible] and this certainty parallels that because of loss of what the -- by the farmers in sugar reconsideration. This is the decrease in planting of sugar beet. The planting is still ongoing, and it's still around 3 weeks to go. But we expect that the planting will be below last year planting by 15% to 20%, which together with not so good climate situation like last year, will lead to lower sugar in -- sugar production -- sugar beet production in sugar [indiscernible] production overall in Russia. This means that the -- that probably they don't know -- that no big [indiscernible] of sugar this season. I think that the market of sugar in next season -- coming season from August will be down. We still have some excessive inventory from last season. But less inventory fairly quickly going down because of very quick export from Russia to Central Asia. So we believe that the sugar prices might even go higher, and we expect that business to generate a return, which would be better than probably results of last year. Page #12, we have Agriculture segment. This segment in the first quarter was not producing, and we think it was just selling some of [indiscernible] from last season. This [indiscernible] is a decrease usually of devaluation if the Russian government allows us to export. So Russian government stopped export of soya in April, but we expect that the export of soya will resume after the 1st of July, which is, of course, a very right and rational decision by the Russian government. The Russian government stopped allowing export of grain, but we already exported [indiscernible] before this embargo. And now [indiscernible] in the second quarter. And we expect the result of this segment to be very good this year, but we will see for maybe the third and fourth quarter after we start to harvest our -- our harvest. There's one thing [indiscernible]. And you have some soya left to plant, both in Central Russia and Far East. We experience now a very unusual climate situation in Central Russia. We have very strong winds, and we have extremely cold weather, which does not mean good harvest for soya, for corn and for sugar beet. But wheat and barley, probably it will not be affected by the situation. So in general, we expect [indiscernible] 2 ways, to say for certain. But at the moment, we expect relatively weak yields in soya, in sugar beet, in corn in terms of Russia. And we expect good yields at the moment for barley and wheat. On Page #13, you can see the numbers for the Oil and Fat segment. Oil and Fat segment became the biggest segment, not only in terms of revenue but in terms of EBITDA for our company. This -- in the first quarter this year, we also reflected -- the results reflect -- the results from Solnechnye Produkty efforts, which now -- which have been leased by our company. And now this business result -- improved most of the results by this asset. All [ our 3 ] segments evolved well, and all operation segment, which -- similar to Agriculture [indiscernible] export. So in fact, this segment in Russia became #1 in terms of export sales increase. And that's because there's a huge demand today for sunflower oil globally and also the Russian government allows storage of [indiscernible] restrictions. We also had good results in industrial fats subdivision of Oil and Fat, and we also had good result in our B2C segment in Oil and Fat. So there, the business is doing quite well. We expect also good results in the second and third quarter. We believe that the harvest of sunflower in our region will be also good compared to -- similar to last year. We experienced slightly the decrease in demand for some B2C products and products in industrial fat, especially from [indiscernible] consumers. But we believe that the [indiscernible] segments will not be as much as high as last year. We believe that in a month's time, some [indiscernible] demand -- we will see [ begin ]. But this such segment probably will not give us good revenue and profit this year. But overall, we expect that Oil and Fat division will give us very good results this year. So as a result of this development, our net debt increased, our EBITDA increased. So our net debt-to-EBITDA ratio improved. We are still committed -- so it's now 2.8. We are still committed to bring this net debt-to-EBITDA ratio to 2. We will ration our CapEx in order to have net debt-to-EBITDA below RUB 60 billion by end of the year. But given our prior anticipation of our EBITDA this year, probably we will be able to reach a level of 2x net debt-to-EBITDA quicker, assume that we don't do any acquisitions. In this respect, we identified several interesting targets around, but all those targets, which we see this year -- coming into this year, will not be large. So our preference for this year would be not to make large acquisitions to ration our capital expenditure and to decrease -- so we could decrease the level of net debt-to-EBITDA by the end of the year with acceptable payment of dividends to our shareholders and the Board of Directors. And I just want to say a couple of words about the COVID situation. Of course, our company in the following [indiscernible] was seriously affected by the changes in the situation globally. COVID has influenced some of our consumers, both in Russia and in Central Asia and in other parts of the world. We see that China now is picking up, and we now see an increased interest for agricultural crops from China. We had several cases of COVID sickness among our employees. We manage to keep this situation in a relatively controlled manner. All our facilities are working on full capacity. We had to stop almost for 1 -- for a week. But it didn't have a material effect on our sales and production. We are now working very closely with the governments of regions. We're helping to build the necessary infrastructure for safety. And we believe that we are meet all necessary steps in order to: first of all, decrease the transmission of the disease at our factories and among our employees; to increase safety environment for our employees; and improve the medical infrastructure in the main regions of our production. So that ends my short presentation and open the floor to the questions. Let's go with the questions.

[Operator Instructions] The first question is from Nikolay Kovalev of VTB Capital.

I have 3 questions. I'll probably start with one on your becoming the most important segment, which is Oil and Fats. So we saw a very, very good margin of 12%, which is a bit higher than we usually consider for crushing and consumer business in this division. So my question is this kind of result, is it high level for you? Or is it something that we should take as a mid-cycle results for the Oil and Fats? My second question is on your Far East project. Can you update us of the steps of the project and how much of volumes in the port we should expect this and next year? And also, given your top-down EBITDA CapEx estimate for this year, what is the figure you're currently keeping in mind?

Okay. Well, frankly speaking, we were also quite pleased and surprised with the strong performance of our Oil and Fat segment. We now are doing our strategic updates, and we see that our Oil and Fat division, with a new management team, will probably give us better financial results than we expected even 1 year ago. I would caution you from having such a big margin as a mid-cycle or mid-performance level. I think that there are several objective and subjective reasons while we manage to have such a good result in the first quarter. In general, I would think that our EBITDA margin in this segment should be lower than this number in all of the subsegments. But in general, we expect that this season, Oil and Fat division will compete with Agriculture division for EBITDA. And the main reason for that is the opportunity to export our products since in Russia, we experience the demand limitation because I know population is still not growing. It's probably becoming less wealthy or more poor as well as we have some local disruptions. So there are some segments which do not -- cannot export the product now, have a pressure for the margin and have no opportunity to grow. On the other hand, the businesses that can export the products, given the ruble rate of RUB 70 to RUB 80, [ will be key ]. So let's look at our results of the second quarter and third quarter and only then I think we can, with a big level of comfort, see what the margins there would be. In -- now Far East -- in Far East of Russia, we are finishing -- finished, I would say in general, [indiscernible] and several plants. We had some problem now with putting these facilities online in times where we expected because of difficulty in bringing the foreign experts who improved the [indiscernible] with facilities, especially [indiscernible], in operation. And we would like to have [indiscernible] operating before we start bringing the animals to the big farms. My current expectation is that in June, we'll manage to resolve this problem with the Russian government. We will bring the necessary specialists to start production of our feed mill. In June and July, our feed mill will start operating. And in July -- from July to September, we plan to bring all the animals to all big farms but one. And for the last big farm, we'll bring many, most probably at the end of the year or beginning of next year. So these animals will start growing, but we will see the revenue from this project only next year when in first quarter, we will start our slaughtering. So we -- our animals will start growing in Samara, and then they will grow to the necessary age and weight in the first quarter. And at the first quarter, we'll start our slaughtering and use that our production. I'd say exact production figures, we will probably give you -- we plan to e-mail you in maybe in a month's time because I want just to be sure that we bring our specialists to our construction site. So after we bring the specialists to the construction site, all then this will be certain and we will e-mail you or maybe we'll provide you with somewhat press release on the figures of the Far East project. But otherwise, all our big farms in Central Russia are now -- are ready. And you can see that our production numbers are growing significantly. The third question was around...

CapEx.

CapEx, yes. Well, a couple -- 3 months ago, we decided that we are -- we plan to cut the net debt-to-EBITDA at the end of this year no more than RUB 60 billion given that we will pay a similar dividend in dollars compared to last year. We have not updated our figure since then, and I think that we should use these numbers. At that time, the balancing number of CapEx in order to achieve these financial goals was RUB 15 billion in CapEx. And I have no more exact figure at the moment to tell you. We are doing the revision of our budget in July and so -- in July and August in order to have the Board of Directors review the numbers. And if situation develops in a good way for our company, our EBITDA would exceed our preliminary figure. And then -- and our CapEx probably will not exceed to that extent. We'll be making a decision what to do with this additional free cash flow. We have several options. We can pay dividends. We can increase CapEx. At the moment, we cut our CapEx only to the essential projects and to projects which have a discounted [ table ] for 5 years. So in general, we see that we have some sort of free cash flow. We can increase the CapEx or we can use this figure to buy one or another company. So we will be deciding this in summer -- in the summer.

[Operator Instructions] The next question is from Marat Ibragimov of Gazprombank.

On the Meat business, you said that you're expecting the margins will go down until the end of the year. Can you explain why you are expecting the prices and the margins will be going down from April and March?

I think we have 3 important factors. The -- or 4, I would say, 4 important factors. 2 factors, in general, should be positive for our company and for the Meat segment, and 2 factors will influence the marginality in negative way. So I believe that the influence of the worse of 2 factors exceeds the influence of the positive factors. So positive factors for the segment is increasing production of live animal and also increase in production and sales of B2C products. We are quite certain, unless some [indiscernible] unexpected to have happened, but we'll manage to continue to increase production probably year-on-year, and we will be increasing sales of our B2C products, which gives us additional marginality. On the other hand, we have 2 negative factors. The 1 negative factor is an increase in price of grain and increase in price of medicine. This, of course, was partly reflected in the first quarter of this year. So this factor is more important year-on-year and not quarter-on-quarter. So the higher prices of grain and the higher prices of imported -- of [indiscernible] related prices already is included in the results of the first quarter. So this record will again influence that we have decreased marginality year-on-year and not quarter-on-quarter. The second factor is the meat price. We believe that since production of pork will continue to grow -- and they have to continue to grow because of the investments that had been done and management improvements that had been done for the whole industry, not only for our company, but for other companies as well. So as a result, the production will continue to go up. In the first quarter, the price managed to go up in March compared to January and February partly because Russia stopped altogether import of meats. But since we already have no import of meats, we have to find the market for additional increase of production. And this year, an additional increase of production yields were estimated at a level of 150,000 to 200,000. So if this increase of production materializes, then Russia have to find the market, and it can be via export. But unfortunately, we don't have enough market open for Russian meat to be able to export all these additional products. Of course, some pork will go to Belorussia, some will go to Hong Kong, some will go to Vietnam. But still, we have to sell such a big amount of meat in the first year. And the second option is to sell more to the Russian consumer. But in order to sell more to the Russian consumer, we have to make the pork meat more interesting for the Russian consumer, which will be done both through marketing, through advertisement and distribution improvement of the product and through the decrease of price. So this is why we believe that the lower-than-today price for pork will be needed to balance and increase supply and demand for pork in Russia.

Okay. To clarify, you say that grain prices are going up. But why do you think the grain prices are going up given the export ban? I was expecting the -- to go down, not to go up.

Well, export ban happened when most of grain was already exported from Russia. Not much grain is left in the country. And those grain which is left, the farmers just waiting. It is expected that the grain market will open, and Russia will be able to export grain from 1st of probably August to the 1st of February. So there is a [indiscernible] for export, and we expect that the price of grain in this period will be equal to export-quality price, which is more or less at today's level. So I'm talking now not again quarter-on-quarter. So on the first quarter, we already had also high grain price. I'm talking more on comparison of margin of year-to-year. So for example, in the third quarter this year, we believe that the grain price will be higher than the grain price in the third quarter last year because the international wheat price is higher and because the ruble is weaker.

Okay. Now to elaborate on meat prices, you said that there is oversupply, surplus of 150,000 to 100,000 tonnes of meat -- of pork. How do you assess the potential of Russia to get exposure on the Chinese market? And more broadly, how do you assess that the chances for Russia to get the export there are higher due to COVID or lower? How did this situation overall -- pandemic situation affected your ability to start operations there?