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 third quarter of 2020. At our customer's request, this conference will be recorded. [Operator Instructions] I'll now hand you over to Maxim Basov, CEO of ROS AGRO Group, who will lead you to this conference. Please go ahead.

Good day, ladies and gentlemen. Today, we reported our financial results for the third quarter. We had good financial results. EBITDA for the third quarter was RUB 8.6 billion. Net profit for the third quarter was RUB 11 billion, and 9 months EBITDA is almost RUB 21 billion, and the 9 months net income is RUB 19 billion. These results are better than the results for the last year. Now I will quickly go through the presentation which is on our site, and I hope that you have it in front of you. All our businesses increased EBITDA in the third quarter compared to last year. The largest increase was in our Oil and Fats. Almost RUB 2 billion, but all 3 large other business units also improved EBITDA from RUB 1.2 billion to RUB 1.5 billion each. All businesses increased revenue, except for the Sugar business or big businesses. As a result, our operational cash flow was very strong, and our net debt went down to the level of RUB 53 billion, which is 9 -- or RUB 8 billion smaller than at the end of last year. Our net debt-to-EBITDA went down below 2, which is a very good and comfortable zone as the Board sees it. Let me go through quickly situation in each of the business line. The Meat segment had EBITDA of [ RUB 2.8 billion ]. This is a good improvement compared to the last quarter. EBITDA margin reached 32%, which is a high number. The main reason -- well, there are 2 reasons for this. One reason is that we continue to increase our production on the Tambov Bacon facility as a result of improving yields and technological improvements at our curve. The second reason was the increase in production and sales of our industrial cuts and B2C products and the improvement in pricing. The price actually in the third quarter in Russian market was better in rubles than in the third quarter last year. This is a change from the first half year results where we were talking about lower price in Russia compared to last year. In the third quarter of this year, the price was stronger as a result of strong -- strong demand from Russian consumers, good demand from export destinations and, of course, lower ruble. The cost of production of pork in Russia is increasing because of increase in grain, oil and meal prices. But in the third quarter, we were partially operating on the previous season crop. But partially, we were operating already on crop from the season which had higher cost. So in general, management of this business was quite good. And we managed to earn good money. We are in the process of populating the 3 farms in the Far East. And we are now populating the genetic farm into commercial farms. In the fourth quarter, we plan to populate 2 more farms and start the production of it at our Far East facility. The Sugar segment, it's Page #12, also had a good result. And here, we also had good price movement in the third quarter, where you can see on Page #12 that price on the sugar in Russia started to increase from July. In July, August, September, the price in the Russian market was better than last year, and the difference is increasing. The price continued to go up on the Russian market this year, while last year, the price went down. And this is a function of the demand balance of the market. Last year, if you remember, we had the record harvest and, as a result, a huge stock of sugar pressed the prices to the level of being the lowest price internationally. And now given that the inventory of sugar is not as big -- an expectation of the inventory is not as big as last year, price came to a more balanced -- balanced number. At the moment, the price net of VAT actually is Russia is RUB 39. So in fact, in the fourth quarter, the price for the sugar at the moment, at least today, is better than in the third quarter. The production and sales number was smaller. We started operation of our plants later than last year. And the price, as I said, and as a result of low inventory of sugar, we also have less sugar to sell to the market. So in terms of volume, we saw some produce left, but price -- but higher price returned to the profitability to the Sugar division. And our profitability went up from 2% in the third quarter last year to 21% in the third quarter this year. Agricultural division also did well. We returned toward high profitability. The profit margin was 41%. This -- in the third quarter, the Agricultural division had the highest EBITDA among all our divisions. In fact, this was anticipated. We discussed it on the last call. The main reason for this are the prices. The prices for the crops now are very good internationally. And also the prices in the Russian market, given lower rubles, was also very good. We have the highest in history prices for sunflower. We have good prices, the highest in the past several years for soya and grain. And of course, we have rebound on the sugar beet price as a function of the sugar price. In Oil and Fat, we had a margin of 17%. The Oil and Fat business, or I'm sorry, the Oil and Fat business gave us the high EBITDA slightly by around by RUB 100 million. So we have continued to be like in the first half of the year the largest contributor to the Ros Agro EBITDA. If I touch on the second, so we had a very good performance and extraction facility. The consumer and industrial that -- well, consumer business still give us as high EBITDA as we anticipated, but still it's the highest EBITDA, I think, in our history for the third quarter. The retail chains did not accept all the price increases which we had from the record prices for the vegetable oil in the world. Still, we have very good results. And also our industrial division contributed to the profit, but the third quarter was not as large as the previous quarters. But overall, the -- this business performed very well, and we continue to expect good performance from Oil and Fat division in the fourth quarter as well. So as I said, we had a very good quarter. I think we have record results in our history in rubles for 9 months. And we are looking forward also to a good fourth quarter and very good financial results for this year. This -- this is what I wanted to say on our presentation. And now I'm opening the floor to questions, please.

[Operator Instructions] Our first question comes from the line of [ Alexey ] [indiscernible].

How much in previous totality [Foreign Language]?

Okay. Well, thank you, [ Alexey ]. The question is about our CapEx plans for next year. This year, in the first half of the year, we decreased our CapEx because we have a large uncertainty. But given the current situation, several months ago, we decided to increase some of the good investments. But altogether, we expect that this year, our CapEx expenditure will be from RUB 18 billion to RUB 19 billion. So in fact, this is the first year in the past 6 years when the company had a positive free cash flow. Now we're working on the budget at the moment. We expect to have another good year. Also quite a good year next year. And the CapEx for next year, we expect -- we expect at a level closer to RUB 15 billion. In fact, given the current situation, the only large investments we have remaining, which we have already started, so it's the goal, is the Far East. So we plan to complete our Far East project. As I said, we plan more or less to finish 4 farms, 1 genetic farm and feed plants. So the only thing we have for left is the slaughter house and 2 farms. Then we will have some CapEx for the agriculture to improve and to change our equipment, I would say that no more than RUB 4 billion. And then the only new big CapEx projects that we have relatively large are the expansion of our Oil and Fat facilities. We plan to expand the facility in Atkarsk, and we plan to expand facility in Balakovo, but probably we will only start construction at Balakovo. So this is several billion rubles. So in fact, as I said, probably the CapEx is around EUR 15 billion. Now definitely, we will have a strong cash flow. And so the Board of Directors, we had a Board of Directors last week, we discussed this issue, and we decided to postpone all the major decisions in terms of dividends until the discussion of the year-end. So in April, we will have the Board of Directors to discuss our CapEx plan for next year, the possible M&A deals and our results. If, as I see it, I don't think that we will do major acquisitions in the coming 3 to 6 months. And I expect that there will be a stronger flow. So I think that the company -- at this time, as a manager, I have suggested to the Board to increase the dividends. But again, this will depend upon the outlook for our operational performance, the possibility for acquisition deals and the results of last year -- or this year, I'm sorry, this year.

I see you. Okay. Can you remind us this? Like this year 2020, this kind of RUB 18 billion to RUB 19 billion, which I guess will be same this year. I mean would it possible to break it down like by segment? How much is going into where?

You mean next year or this year?

No. This year, this year, 2020.

Okay. No. It's not a problem. [indiscernible] Okay, okay, okay. If you look -- okay, given this year in our presentation on the Page #8, you -- in fact, you see the division among the segment. You see that RUB 6 billion was invested to Meat, RUB 2 billion was invested in Agriculture, RUB 1.4 billion to Sugar, and RUB 1.2 billion to Oil and Fat. This is the actual results. If you look at the next year, I would say that we will -- again, Meat division will account probably for around 40% of the remaining CapEx because we have to finish the first project. And then probably the second largest will be Agriculture. Then it will be on Sugar since we finished -- we finished already our major investment project in Sugar, so I don't expect any large CapEx in Sugar at all. So probably this should be Meat, maybe even 50% of Capex. And then I would say, agriculture, probably around 30%, 35% of Capex. And the remaining is Oil and Fat. That's rough figures.

I see. And those kind of capacity expansion in Oil and Fat which you plan to carry on, what kind of capacity increases are you targeting? And what kind of payback levels are you looking to get?

In terms of payback, we're looking -- well, we are not considering any project strategic that gives us a payback -- discounted payback, given a 50% equity debt -- I'm sorry, equity financing no more than 10. At the moment, we are considering the project mostly less than 7. So for Balakovo, which is very close to [ 2 billion ] in [ sub debt ], we expect the payback is around 7 years. The increase in capacity in Balakovo, I would roughly say would be probably around 15%, and the capacity increase...

[Foreign Language]

Okay. I'm sorry, the Balakovo is actually around 30% increase in capacity. And Atkarsk is around 15% capacity.

And the next question comes from the line of Marat Ibragimov from Gazprom.

Could you please update us on the situation with sugar beet harvest, and in general, the situation at the sugar market? Because if the market is not balanced again, like it was last year, then i.e. production will exceed consumption. Then next year, prices will go down, but your costs will be very high because you acquired sugar beet at really high price. So could you please give us guidance on what we should expect in sugar beet segment -- in Sugar segment?

Tariffs in on sugar beet is not over yet. We plan to finish harvesting sugar beet in the coming week or 2. And I understand that Russia will also finish even based on regions or finish the harvesting by the end of the year. So it's difficult to say what the exact production of beet sugar. At the moment, the union of sugar companies expect that the production of sugar or beet sugar should not be higher than 5.1, together with the production from [indiscernible]. So 5.1 is the production. There is also the consumption of sugar in Russia which normally is estimated at a level of 5.8 to 6 million tons. So in general, production of beet sugar in Russia, together with the inventory of sugar from last season, would be sufficient for the industry not to import sugarcane. The balance is achieved through the import of sugarcane to Kazakhstan market. So I would say that the sugar market is balanced. There is an import parity price, as always, an export parity price, export tariff given that the sugar price internationally increased to the level of almost RUB 0.15 per pound, which is a large increase in the past 3 months. So the current Russian price is at the level of export parity price to [indiscernible]. The import parity price is higher. It's around RUB 10 higher. So the sugar price may stay at the same level. This will depend upon the information that we will receive in the coming 60 days -- 30 days from the regions in terms of sugar production. So sugar -- we have enough sugar in the country to fully fill out the import cane sugar. And then the biggest -- the big question would be already not this season, but next season. The big question will be how much sugar farmers will plan. And how -- and what will be the harvest given the current situation. So everybody is making seasonal decision. At Ros Agro, we, at the moment, plan to increase the area under sugar beet. But the final decision will be made in spring given all these circumstances around us, like the international sugar price, the expected price of soya, of wheat, of corn or sunflower and sugar beet. So I think the question on the sugar market will be stable.

Okay. So if you -- from what you are saying that at least in the first half of the year, the prices should not go up significantly or down significantly unless ruble strengthens or international prices go down. Am I right?

Well, we're living in an uncertainty. I already received the recommendation from the Federal [ Ultimo ] Committee not to make predictions. So I will say that the market is balanced. And as you know, the price of sugar -- or sugar beet depends upon the price of sugar. And also I would say that on the balanced market, given that the price of sugar beet is already set, it is -- it was not very likely that the price will go down. So my bet is that the market was balanced and the price would be at similar level throughout the season.

Then the question on the stable condition, the prices will not go down or up significantly. What's your normal EBITDA margin in this segment? I guess it should be around 20%, 25%. Am I right?

Yes, right. Yes, you're absolutely right.

[Operator Instructions] The next question comes from the line of Nikolay Kovalev from VTB Capital.

Congratulations on such results, and nice start to the following year. I also wanted to clarify some points on the sugar market. You give a lot of details already, but can you tell us what is the current price for you to acquire bit? And as a result, what kind of cash cost for the new season you see in sugar at the moment? And my second question is on the farming division. What will be your strategy with respect to inventories by the end of the year? And how aggressively you plan to distribute sales from the farming division this quarter versus the first quarter of 2020?

Okay. Well, the price for the sugar beet on the market is, I would say -- the price of sugar beet depends upon the normalized price of sugar beet, which is the function of the sugar price, and also the content of sugar in the sugar beet. If the content of sugar in sugar beet is higher, then the price of the sugar beet is higher. And at the moment, we have very low yield in Russia for the sugar beet [indiscernible], but we have very high sugar content in the sugar beet. So the main question, of course, I understand for you is not what is our price of sugar beet, but the main question, what should be the cost -- the cash cost of sugar? And I will tell you in a couple of minutes that this is a very easy calculation. We will just need to find the price for the sugar beet. The current price of sugar beet, which is at the moment, let's say, is RUB 38. We can take RUB 38 net of VAT. And then we will add the cost of processing. And we will give you a number in a couple of minutes. Now let me go to the second question. The -- at the moment, we sell and we will sell all the -- we will sell all our sunflower by the end of the year. We will -- we already sold all our form. And we sold approximately -- and by the end of this year, we will sell approximately 60% of our grain. And this is much lower agreement goes to our own pork production because the farmers are not very active in selling the products because they earned a lot of money. And we still have to sell most of soya. And I expect that we will sell half of our soy by the end of this year. So probably, and again, we do not know if that -- we are making our trading decisions every day, but currently, I expect that we will probably have around 100,000 tons of soya for our -- for next year. And we'll probably have around 300,000 tons of grain left for next year. The rest of the harvest will be sold this year.

So very clear. If you can update us on the cash cost for sugar, will be also very helpful.

Yes. Yes, we will...

If not, I mean, we can follow up [indiscernible].

No. I just don't want to create -- to give you incorrect number. But one second, let me -- [indiscernible] [Foreign Language] Okay. RUB 26, net of VAT, because cost is also to be -- but just for clarification.

And we have one more question from the line of Sergey Beiden from Renaissance.

Yes. Thank you for the presentation. I have actually probably 3 questions. So try to be brief. So the first one on Sugar segment. You mentioned that the management took a decision to postpone sales in 3Q '20 because you expect higher sugar prices in fourth quarter. And actually for the same intention, management's intention last year, right, when you bought additional beet, but the prices reversed the trend. So do you expect to sell the sugar mostly in the fourth quarter? Or you would like to wait until, let's say, the first quarter of next year? That's the first question. The second question is about that -- your inventory things. Does it mean that if you basically sell off your inventory in terms of grain, does it mean that potentially we would not see a very strong contribution to one-off from revaluation of the agricultural produced in the fourth quarter? And the third question is that, if I remember correctly, you mentioned that if the net debt-to-EBITDA gets below 2, which we already have, management could consider increase of dividends. So the question is are you talking about the change in dividend policy? Or you're just talking about the upward value of the dividends for this particular year and later?