Ros Agro PLC (AGRO) Earnings Call Transcript & Summary

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[Interpreted] Our event today is going to be comprised of 2 phases. Maxim Basov is going to start with the presentation first. And then the second part of the presentation, we'll be happy to take your questions. [Operator Instructions] When respading, we'll take oral questions first, and then those received as text messages. [Operator Instructions] I suggest that we begin the presentation over to Mr. Maxim Basov.

[Interpreted] Good afternoon, ladies and gentlemen. Before we proceed with our 2020 results, please be reminded that Ros Agro is still comprised these days of 4 divisions, which are the Agriculture, Oil and Fat, Sugar, and Meat. We have got some nice results, which we are happy to share with you. In 2020, we received the highest revenue in our history with RUB 159 billion. That translated into record high adjusted EBITDA standing at RUB 32 billion. And RUB 24 billion of net income. All of our businesses with the exception of Sugar business, pretty much have demonstrated year-on-year growth across the board. Considering the breakdown of our revenue, the highest contribution comes from the Oil and Fats business, contributing 44%. Next comes the Agriculture business. Now let's consider our EBITDA split, 40% of that comes from the Agriculture division, with 25% coming from the Oil and Fats business. Those of you who have been following our company closely would be aware that our split would vary year-on-year, given the volatility of our external environment. But thanks to the vertical integration of our business, we enjoy some sustainability in growth of our financials year-after-year. Now let's consider our Q4 2020 results. If you compare the situation year-on-year, pretty much all of our businesses, with the exception of the Sugar business, have seen their revenue growing with the Agriculture business growing most of those. Considering our EBITDA, we'll see the same, all the businesses have grown with the exception of Sugar, and Agriculture has grown at most. Now let's consider 12 months results at Page 8 of the presentation. Here, we see that all of our businesses have grown, again, with the exception of Sugar. On the EBITDA side for 12 months. Again, all of our businesses, with no exceptions, have demonstrated a better performance year-on-year. The company also enjoyed a good free cash flow, Page 9 demonstrates exactly that, early in the year, like in the first 6 months, we produced our investments, given the very high uncertainty related to the COVID-19 pandemic, and certain issues with foreign technical experts coming from abroad. But given the situation has been improving and our financials have been quite high as well. We made a reverse decision to compensate for the investments produced in the first half -- in the second half of the year. But not all of that has been compensated, just like I said, and part of the investments, have been pushed down into 2021. But again, we spent RUB 13.5 billion as capital expenditure. As a result, and you can see that on Page 10 of the presentation, the company's net debt stood at RUB 169 billion. While net debt-to-EBITDA -- so the net debt stood at RUB 69 billion. And the net debt-to-EBITDA stands at 2.15%, which is a very comfortable level for us. Please be aware if you are not close -- following the company too closely, please be aware that we have a huge seasonality. And the second half of the year, we normally have a strike. With a particularly high feedstock -- with particularly high soft commodity prices in the second half of the year. And I'm talking first and foremost about sunflower seed. Now let me explain the segment-by-segment breakdown, starting with Agriculture, which demonstrated record high-performance in 2020 and thus boosted our financials at the most. Page 12 explains exactly that. The crop harvest in 2020 in Russia was not particularly record high. But nonetheless, we obtained some good numbers on wheat. We got that second highest in Russia. Then sugar beet was low. Sunflower was low as well, and soybean was not particularly good. Speaking about the production volume, we got on the agricultural side in Russia, that was not particularly high. And we had operated on the same land bank as before. We could not acquire land at a price, which we consider to be feasible to have a good return in agricultural production. Nonetheless, the financial performance was very good, first and foremost, driven by the pricing environment. You can see wheat sales price in Russia at the bottom right-hand chart with nearly RUB 15. That's RUB 14.7 to be precise, plus 10% of VAT. So that's per kilogram. And it's about 40% growth in prices year-on-year because it was as low as RUB 10 in the year before. Now I proceed in to Page 13. Just like I said, the output went down, but the pricing environment was good, hence, some good financial performance. And again, we have introduced digital management of our fields. Thanks to that, the business yielded RUB 15 billion of EBITDA. So it's a 44% margin. About 6 or 7 years ago, we had a similar performance. But in absolute numbers, the number was much, much lower, of course. Now on this page, you can see that in the fourth quarter 2020, we got more soybean. And we are probably the largest manufacturer of soybean in the Russian Federation. Pretty much all of the prices were high, especially in the olive family. And the beetroot went up from RUB 1,600 to a much high number. And Page 14 explains our next segment, which is Oil and Fat. The Oil and Fat business demonstrated extremely good performance. It was an extremely successful business in Russia. In the year before, which was 2019, we had record high production with 7.3 -- like -- sorry, in 2017 through 2018, we made 5.8. Now this year, it's going to be somewhat less. But still, it would be second best in Russia's history with 7.3 million tonnes. So as you can see, in comparison, against the previous season, you can extrapolate that into this year. Russia is increasing production of oil as well as exports of oils given that consumption within the country domestically is not growing pretty much at all. This has been accompanied with a very favorable pricing environment for oils, and we have the prices chart here as well. You can see the prices have nearly doubled. The year before, that was RUB 40, VAT excluded. And last December, it was as high as RUB 78 per tonne. So given -- RUB 1,000 per tonne. So given the fact we used our capacities to the best of their abilities. And like this year, if it's not 100%, then we'll have our capacity utilization, at least at 90%, I think. We're going to see some very good financial performance as a result. Bottled oil production in Russia has been growing as well, which is related to the growth of exports in bottled oil. Mayonnaise went down somewhat vis-à-vis next year to 90% of what we had back last year, there was a spike last year. But margarine production -- margarine is up again, although the level of 2018 has not been reached. This is related to the fact that part of the population has remained within the country. They didn't travel aboard because of the COVID-19 pandemic. Hence, they cooked more in their kitchens. Page 15 explains that we're #1 in sunflower oil production, and we are second in industrial fats. And we are still #1 in margarines, #2 in mayonnaise and #5 in bottled oil. Our financial results are explained on Page 16. As is the case with Agriculture business, Oil and Fat's numbers are record high as well with more than RUB 9 billion of EBITDA. All of our business with the exception of the consumer segment have also demonstrated record high numbers. The consumer segment has not increased as much as the B2B segment, hence, the Oil and Fats business was not as successful in B2C. But generally speaking, for the business, it was still quite good. Now the Meat market. And Meat business, Page 17, we see growth in Russia. In 2020, Russia produced 4.3 million tonnes of slaughtered weight. And we are now fourth globally. I mean the country is #4 globally in terms of pork production. We can say that exports were a record high, and Ros Agro is very actively involved in this growth of excludes Belarus, Ukraine, Vietnam and Hong Kong are our key partners here. We are #3 -- we are producing #3, and we are only behind [indiscernible] production side by about 100 tonnes -- 2000 tonnes, sorry. We intend to -- we become number 2 this year. The prices were rather lower up until July 2020. But after July, the prices were rather high. They started growing in summer. And in July and August, they exceeded the pricing levels of 2019. This is explained to a great degree by the fact that there were some diseases like Avian flu, which resulted in record high poultry prices. And also quite a lot of our competitors were faced with African swine pest, which -- or African swine fever, which resulted in certain losses on their side. We made RUB 6.5 billion of EBITDA. As you can see on the following page, which is a great performance, especially given the fact that in the second half of 2020 the Meat business saw a record high feedstock prices for grain or oil as well as a short of bones leftovers, with our production levels at the record high. we also had record high shipments of B2C products and processed record high volumes of pork at 2 of our slaughter houses. Now let me continue with the Sugar business, starting with the market in Russia. Not last year, but rather last season. This season, there has been much less sugar produced in Russia. Like last year, it was 5.7 million tonnes. So the next year -- next season, it's going to be like 5.2 million tonnes, although, at consumption Russia stands at 6.8 million tonnes. This is related to the fact that beetroot is less popular with the farmers now, hence, they reduced its output because of the lower prices as well as the climate factor, reducing their crops per hectare. And then global prices started growing medium. So from summer onwards in 2020, sugar prices went up. So in July, the prices for the season exceeded prices of the previous season. So it hit RUB 40 in October when the government intervened with their measures to control the pricing growth. So we have been shipping, at less, the global price with RUB 36, wheat included, but nonetheless, the price is higher than it used to be last year. So we have managed to produce some very good numbers, as a result, Page 20 explains that. We did make less money as was the case in Q4 2019, and that is related to the price control measures. But for the full year, we still managed to get some good numbers, which is better than the previous year's numbers. Now let me say a few words about the outlook for 2021 and 2022 season. So we don't make any forecast, given the extreme volatility of the environment in which we operate. The government is also interfering with the pricing. But given the past months, you can see that on the chart, the sugar price did go down to RUB 34. By December, it started growing, in January and February, it's now RUB 38. Now it's even higher. I'm not talking about the shelf price. The shelf price is regulated by the agreement with the government. So it's still RUB 36, VAT included, and it would last until the 1st of April. Wheat prices, as the result of exports duty, which was introduced recently, the price started coming down. Now it's RUB 14, and it's coming down even further. So sunflower seeds price is growing because there would be not enough sunflower seeds in the country, while vegetable oil prices are at the record high level and the history of humankind in the past of 200 years, pork price is growing as well. This is related to some deficit of belting chicken, and that has resulted -- and this had an impact on the pork prices as well because chicken and pork are interchangeable in meat processing and production of meat products. So up until the 1st of April, we have the pricing agreement for bottled vegetable oil, sunflower oil and sugar. It's RUB 36 per kilogram, VAT included. That's less than the global price. And the shelf price cannot exceed RUB 46. So we sell to distribution chains, RUB 36. They sell it RUB 46. With bottled sunflower oil, it's RUB 95 at which we sell, while the shelf price for the consumer cannot exceed RUB 110. Ros Agro definitely meets its side of this agreement. And we're going to do so up until the point in time the agreement expire. We don't expect them to last after the 1st of April. Now as for the grain, starting from the 2nd of June, it's going to be variable duty, with 70% of the difference between the world price and USD 200 per tonne going to the government. So currently, up until the 1st of June, it's EUR 50 per tonne. That's the current exports duty. Now sunflower and wheat seed as well as corn and barley have duties as well. Most likely, this is going to stay for some time. Now the main investment projects of the year would be the Primorye territory project, where we intend to launch our big funds with the local products launched on the local market in September. First, as pilot a production, we have the livestock in place already. So hopefully, by September this year, we'll be in a position to enter the Primorye local markets. This concludes my presentation, and I would like to invite you to ask your questions. Please go ahead.

And the first question is coming from Mikhail. Unknown Analyst My apologies for the sound.

Mikhail, can you type you question in?

Next one Mr. Alexey Krivoshapko.

I have a few questions, if I may. And the first one is as follows. What's your most recent CapEx guidance for 2020 -- 2021. What are the projects and how much do you intend to invest?

Just a second. Let me start answering, and we'll have the details on screen. By the way, yes, I also wanted to mention that the Board of Directors has made a decision on the dividends. The decision is to distribute 15% of net income, which is RUB 19 billion for the full year, and given the interim dividend paid, it's going to be actually RUB 10 billion. But it's still record high for our history. Now CapEx in 2021, our current plan is to have RUB 18 billion in total, and the majority, the bulk of that would be focused on the Meat business. I'm talking about RUB 8 billion. First and foremost, we'll be finalizing our Primorye territory project and also expanding the Tambov facility and also improving the genetics across our breed. Next comes the Oil and Fat segment with RUB 4 billion. I'm talking about capacity expansion at [indiscernible] sites in [indiscernible] as well as transfer of our capacities from elsewhere to [indiscernible], the cash cost of production. Next comes the Agriculture business. But in Agriculture, we have most of the projects related to land plot acquisition, which may not happen. And then comes to the Sugar business. So actually, I would expect the CapEx to be less than RUB 17 billion.

Understood. And my other question, now on the budgeting side, again. What's your understanding of the inflation, the cost inflation and the Agriculture business, what are your expectations?

Okay. We proceed from the ruble rate -- ruble FX rate, which we expect to be improving somewhat, and we expect the global soft commodity prices to come down on the majority of our output, but still remain quite high. So we are going to base our judgment on the forecast we see in Bloomberg. Based on that, the Agriculture business is going to be a profitable division for our business. According to our forecast, well, we expect the Agriculture business to show less, our performance, as was the case last year, but still it would be second best in our history. In order to do that and achieve it, we need to ensure the best approach to crop rotation, we have reduced the seeding of wheat, but given the fact most of our volumes are related to follow into wheat. We had not expected the government policy of the kind. Well, we still expect soybean share to grow, and the sunflower seed share to grow as well, but mostly it's soybean. And once again, the Agriculture business is going to be developing further and be profitable.

That's understood. And now I have a question about pricing mechanisms in the meat, pork market. How is the current domestic price different from the netback price of your sales to Belarus, Ukraine and other countries?

Okay, thank you. Now the main thing happening in the pork market is related to actual chicken. It's a very high chicken price. As you may know, starting from November last year, the company has seen -- the country. The country has seen Avian flu expanding, and that resulted in chicken production sinking by 6% according to the Russian statistical agency, and Russian State Statistical Agency, Rosstat. This has resulted in chicken prices soaring. That's one thing. And another thing, if we see growth in chicken production -- growth in pork production last year, that was rather significant at 4%, 5% or 6%. And now we're a little bit surprised about January. The whole industry is looking into the numbers. I'm trying to understand why the growth is only 1%. So whether it's the African swine fever or other factors, the growth in January has demonstrated less of a performance than expected. So both prices are still growing. This is not visible to the customers because of the high competition for shelf space, and we have long-term contracts because of that. So we saw a 40% or 50% growth in the previous year. So the customers are lucky because of the price competition. But nonetheless, prices went -- have gone up. But given the fasting, which is starting now, there has been some adjustments in prices. We believe that the limited availability of chicken in the market is going to remain until the end of the summer this year. So I'm going to be cautious in my statements, given the sensitivity of all these issues. We believe that the pork prices will be on a good level, at least, up until autumn this year. Although, I do not expect the pork price to come up any further. I don't expect it to come down either. The current pricing is rather comfortable. Ros Agro is currently operates in the markets of half carcass or large piece. And Russia is the main supplier -- for Belarus and Ukraine, Russia, is the main supplier of frozen pork. So it's going to remain that way. And currently, we export some products and less popular parts of the carcass. Selling meat in say Vietnam and Hong Kong, with the current domestic prices is not feasible. And I think it's going to stay like that until the end of the year. With some of our buying products are still quite popular. Russia is very competitive in that regard. This is related to the fact that Russia has the most favorable terms in terms of market access. We have -- we enjoy even better conditions than Europe, the EU or the United States. It may not last long, but over that time, we'll gain some good access to the Vietnamese market. Russian companies are very active there.

Understood. Across the board with one question so remaining to clarify about the market of China. I understand it started closed for the Russian products other than by products. Is that the case?

Yes. That is quite unfortunate with the exception of Hong Kong, we have not got clearance from the Chinese authorities as is not the case for poultry, let's say. The Hong Kong market is still open for us for us, for -- as well as meat and pork. But the high domestic prices do not incentivize us to do so. There is a certain exports from Hong Kong to China, Mainland China, but it's not that significant. The prices are still high for both pork and chicken, and that is related to the fact that Avian flu is very active, not only in Russia, but also in other countries.

Marat Ibragimov, next question please.

Yes. I have a question about the working capital. Your inventories is up by RUB 15 billion, which is the main reason behind your operating cash flow coming down by 1/3. Why is that? Is that because of high inventories or higher inventories of sugar or sunflower seed? Is that because you're expecting the prices to be high in the first 6 months of 2021?

That's correct. Absolutely. The key factor here is, sunflower seed, we're buying that at RUB 50-plus or RUB 50-plus. I do recollect the times when the prices were as low as RUB 6. But in the recent years, it still was like RUB 15 to RUB 20. Now the prices are extremely high for sunflower seeds. And the volumes, the volumes are high as well. We have 3 of our plants operating at full capacity. Hence, we have built up some inventories to last us until the end of the season. We proceed from the assumption that the government is likely to introduce an exports duty. For sunflower oil, starting with the new agricultural season, but -- up until the current season, we'll be able to operate as is we nearly have sufficient sunflower feedstock up until the end of the season, and we intend to make some good money with the price of RUB 52 for sunflower seed, which included the price -- high price for oil, like $1,600. We still can make some good money. Sugar has not been a plenty, like 450,000 tonnes. But again, given the fact we were buying beetroot at the price twice higher than we had the previous year. We still saw increase in the working cap. Grain. Grain is pretty much flat on the average. Our net position was like plus 200,000 tonnes of grain early in the year. And then we had recurred volumes and unsold volumes at the Agricultural business, but the prices went up that affected. But the main driver here is sunflower, of course. We intend to make some good money across the board. And with the exception of grain, where the government regulated the price down, we expect to have a very good first half of the year. That's exactly so. And we expect quite a lot of money to be released from the working capital. So by mid-year, we expect the situation to improve, but at the same time, we'll pay a record high dividend. This situation is going to improve, of course, but not drastically, given the billions of rubles paid as dividend.

And I have a question about dividend. I understand you have your debt either subsidized or at an off-market trade at a lower rate, and there is no point in repaying that debt. So you're free to pay high dividend in the future. Is that correct?

That's correct, absolutely right. We have subsidized rates across all of our debt with the rates -- with interest rate less than 2%. It's all in rubles. So it doesn't make sense for us at all to repay the debt. If we have some free cash available, we would place that as a deposit. And again, we expect some good numbers in the first half of the year. And most of our investment projects expected to deliver good results as well. So far, we don't have any agreement to -- by any major assets at a favorable price. Hence, the Board of Directors decided it would be right for us to share the profits with our shareholders, given the income we made last year.

I have another question, Page 18 of the presentation about the Meat business with RUB 114 million as additional payroll. I understand you're talking here about more personnel in your Primorye project. Is that correct?

Yes, absolutely right. We haven't launched some major projects for quite a while. It's going to bring a loss this year and possibly next year because we have hired people already, but sales have not kicked off already. It's a certain production cycle now. So early sales are expected to start in autumn this year. And I expect us to reach full capacity by the end of next year.

Am I right in expecting you to sell about 40,000 tonnes this year?

It's difficult for me to say our plans change on a regular basis. Well, no, I don't think we'll manage to sell 40,000 this year. With the total capacity of 75,000 to 80,000 tonnes, and we only launch in fall, and not at full capacity. So I don't expect this year to yield some good volumes. It's tough for me to say because it depends on the product here. We are ready to make a decision now to have some consumer products made there as well. So I would not expect more than 10,000 this year, and most of that would be in Q4. So definitely less than 20,000. I would rather look up to 10,000.

I recollect a press release that you have started bringing in the livestock.

Yes. That's correct. We have started bringing in hogs for the breeding. And then we'll feed those to the actual farms. But in order to fast track that, we have started bringing them in this year, and we bring them in on planes. So they're mostly young to save on the weight and also live through the flight better. So they need some time to acclimatize. It's a rather long cycle, but we launched it last year. And we're doing that on purpose because there are no capacities in Primorye for slaughtering. So we don't need the livestock up until the point in time when we have the slaughtering in place. And once slaughtering is in place, we need to have meat processing as well. So in September, we'll start commissioning. And September, some early livestock will be processed.

Do I get it right? Yes, shipping of the breeding pigs by planes.

That's correct.

That's interesting. And going to understand how much this pork business has been negatively affected by the fact it's going to perform at less the design capacity. In other words, if you didn't have the Primorye project, how much higher would the EBITDA margin be?