Ros Agro PLC (AGRO) Earnings Call Transcript & Summary

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[Operator Instructions] The call is being recorded in both Russian and English and it will be available during a couple of days after the call. With that said, with my introductory part, and over to Maxim.

Good afternoon, ladies and gentlemen. Let me tell you about our operating highlights for the second quarter and the first half, you can see the presentation in the English language on your screen. I will be telling you about the results of the second quarter, primarily, and I will be also talking about the current situation, after which I will be happy to take your questions. On Page 4, you can see that the results were quite robust. Our revenue in the second quarter grew to RUB 54 billion. All the businesses, but for Sugar segment, increased their revenue. And you can see that in EBITDA, our results are also better. We earned almost RUB 11 billion. 2 businesses earned a major share, that is Agriculture and Oil and Fat. Meat segment retained its revenue and Sugar segment decreased in terms of its performance. We will discuss it with you why it happened. Now over to Page 6. Here, you can see the exact results behind the reduction of our net debt. The net debt of the company amounted to almost RUB 67 million as at 30th of June 2021. But as for EBITDA, we reduced the debt to quite a comfortable level. We earned quite a lot in our financial block. And first of all, it is due to our active management of our debt and borrowings. Now over to Page 10. So let me tell you about the Agriculture business, that is #1 business with our company. EBITDA amounted to RUB 2.8 billion, the margin is 8%, quite a high level. In the second quarter we showed quite good dynamics. And all the activities were linked to the sales of the products that we produced last year. And so these products were sold in the second quarter 2021 accordingly. Now we have harvest in progress of winter wheat. We have harvested almost 95%. As for spring wheat, 85% has been gathered. And soon, we will start harvesting soya, sunflower and other crops. What else we can say, in terms of early crops this year, the production rate will be lower than previous year. But generally, the performance is expected to be quite high. Let us see what happened with Oil and Fat in the second quarter, Page #12. It also improved its results year-on-year in the second quarter. And currently, we have all the 4 oil extraction and oil and fat facilities working, 100% capacity utilization. Margin is 15%. It is better than in the previous 13%. It is better than the previous year, and it was supported by higher sales prices. You can see higher prices for meal, oil, industrial fat, whey mixes and consumer products, almost across the board, the prices were higher and the margins were quite strong accordingly. If we take a look at Page 14, which is Meat, you can see that despite the fact that the meat prices in the second quarter this year were much higher year-on-year, the margins fell down from 18% to 14%. There are 3 reasons behind it. First of all, higher prices for production factors, that is our cost turned to be quite high year-on-year, high prices for grain, meal, oil, almost all the ingredients. The second thing, we are launching our production in Primorie. We haven't seen any revenue from the Primorie facility yet, but some of the costs are fixed already and a part of our product, quite a significant part is sold as a consumer product due to a number of reasons. The prices for consumer products were not as high as compared to prices in the P2P market. Due to a number of reasons today, consumer products are loss-making to an extent. But upon the whole, the results are better than in 2020 due to higher production volumes. And so we expect the margins of this business to go up in the second half of the year. After the grain duties were introduced, the prices for meat keep growing. On Page 16, we can see our Sugar business. Sugar business is the only business of our company that earned less than last year in absolute terms, in relative terms. And the reason is pricing limit currently is active in the market. We can see that the price in the second quarter as compared to quarter 1 started falling down. Let me remind you that the price for raw materials, that is raw beet is formed in the third and fourth quarter based on the first half of the year. And in the second quarter, the price for sugar beet was lower than in fourth quarter 2020. Hence, the effect you can see, we buy feedstock at high prices due to the reasons out of the company's control. We have to shelf our products that are a bit lower than those that we had seen in quarter 4. And the second reason was volume, we sold less sugar, but it is due to the factors that last year, the sugar production was 30% less than in 2019 due to climate-related reasons. And again, there is a certain pricing gap, hence less revenue. EBITDA is RUB 2 billion here. Our plants and facilities are now being prepared for a new season. We will launch new ones in late August or early September. We expect that the sugar production this year will be balanced against sugar consumption. We expect the production to be a bit more than 6 million tonnes. And this year, our company is planning to produce more sugar than in 2020. So that's why we can expect the prices to be quite stable amidst the growth in production volumes. So our company showed quite good net profit in second quarter. As I told you, RUB 9 billion -- RUB 10.950 billion. In second half, there was a record half result in the first half in the company's history, RUB 22 billion as the Board of Directors taking into account the successful investment projects and high margins in the first half and also quite good prices in global markets. And domestically, we expect them to sustain at least in the coming 6 months. So the Board of Directors made the resolution to pay out 50% of the net profit earned as dividend. It is a record-high dividend in the first half through the company's history. And the dividend will be paid out in September accordingly. So that's basically it in my part. This is about our operating results for first half, and now I'm happy to take your questions. Over to you.

[Operator Instructions] Alexey Krivoshapko, over to you.

Okay. So colleagues, the question is, could you share your plans for the remaining part of the year and next year in terms of CapEx?

This year, we are planning just as before to invest RUB 18 billion to RUB 20 billion. It will be a record high in terms of investment for our company. As I told you at the previous call, this is the plan. Nothing much has changed. The largest investments will be in the Meat business. We are completing the construction of our Primorie assets. We are expecting the launch and commissioning in September, that is in a month from now. We also keep investing in our other activities. For example, in Tambov region, this is the key area of investment. And besides, we have won all the tenders for main assets of SolPro. We are buying the terminal, and we are starting investment to expand these facilities. The design work is at the stage of completion. So we are starting investment in expanding our oil extraction plants. Maybe not all the expenses will be incurred this year. As for Sugar business, as I mentioned, there is virtually no investment, but a minor amount. And in the Agriculture segment, our investments are associated with the work in the Saratov region, about 40,000 hectares. We are planning to buy the land out until the end of the year. So this is the CapEx for this year. For the next year, we will be updating our budget soon. But I assume the figures will be approximately at the same level. I think next year, the total CapEx will be from RUB 15 billion to RUB 20 billion. That is if we do not buy any new assets and if we do not start construction of large assets. This is not the plan today. So the CapEx is RUB 18 billion to RUB 20 billion this year and RUB 15 billion to RUB 20 billion or maybe RUB 15 billion to RUB 18 billion next year. And after that, let me reiterate, we are completing our strategy. So unless we have any acquisitions or confirm any major construction projects that are under discussion now, then we expect our CapEx will be reduced to about RUB 10 billion, and this is where we expect to stay.

Okay. Understood. If I may, another question. As for the excess of our peak products to international markets, what's the status now?

Regrettably or fortunately, we do not have any news on that. At present, out of large markets, we have the Vietnamese market open for us. Our position there is quite high. If I'm not mistaken, we are #1 importer to Vietnam. You may know that -- let me tell you anyway, the exports from Russia of meat isn't actually taking part because the Russian domestic market is really high prices for pig products and poultry. Instead of an incremental growth in production, the production stays on the same level. As in the year 2020, companies are launching new production assets. But on the other hand, large companies have reduced their production because of diseases, first of all, African plug of pigs, there are problems in poultry, there is concentration of chemicals in poultry and we also have seen a very hot summer. So in July, instead of growth in production that was anticipated to be quite high, we actually saw a fall in production of pig meat. Effectively, the meat production has remained flat, and the price for pig meat, for pork in the wholesale market has grown. You cannot see it in the consumer market because the prices are restricted, limited by the government. So actually, the price for meat in the Russian market is now higher than the price for meat in Asian markets. That's why we are only exporting products that do not enjoy a high demand in Russia. The bulk of the meat is consumed in the domestic market. In the coming 12 months, we expect no major exports to Japan, China and Korea. I think the situation will be quite stable and the price is quite high by the end of the year. Our company has made an investment decision to invest in a shop for serial processing of pork in the Far East of Russia. The amount of the investment is not that big, but potentially, together with our partners, it will open up attractive markets of Asian countries for us for the thermally processed products. We do not expect any new countries to open anytime soon.

Okay. Understood. And yet another question, if I may. Could you summarize all those government initiatives regarding the regulation of prices and export duties? What the government has introduced over the recent period?

Alexey, apologies. We have lost you. There is some evil power interfering, but anyway.

Yes. So let me reiterate my question. It may have not been politically correct. But anyway, could you somehow comment on and summarize the recent government initiatives in Russia as to regulating prices and introducing export duties?

I would say the situation today is as follows: Let us start with the basic segment, that is Agriculture. The restrictions are there for all crops across the board. Let us start with the crops that suffered most, that is sunflower. There is a duty for sunflower at 70% recently introduced, and we expect all the sunflower to be sold in the domestic market because this duty is there. Of course, Russian producers and processing companies can offer higher prices than those. That would be good for exports with this export duty of 70%. As for soybean, for example, the export duty was decreased, and it is now about 20% -- or that is exactly 20%. But this year, we have seen a lot of demand for soybeans in the domestic market. So this will not influence a lot the soybean price in my opinion. The Russian processing companies will be ready to pay for soybean more than any export alternatives. The export duties for sunflower and soybean do not have an impact on the exports because there is huge demand in Russia and our processing capacities are more than production capacities for these crops. Next, grain. In grains, they introduced duties for 3 crops: barley, wheat and corn, 70% above the price. The price for wheat is $200 and for 2 other crops, it is at about $180. Of course, it makes a negative impact on the economics in the Agriculture segment, but this is something we have to live with. Now the global grain prices are growing. For example, the wheat price at FOB is USD 280 to USD 300. And so the price that would be received by the Russian exporting producer is USD 200, 30% of 80. So the final price would be about USD 200, USD 230. That's it with agriculture and crops. And as for Oil and Fat, today, there are 2 government limits. The first one, starting the first of September, there will be a duty for exports of sunflower oil. It is 70% to anything in excess of USD 1,000. It makes a significant impact on the price of sunflower oil. The duty would be USD 165 in September. It makes an impact on the economics, of course, because the processing capacities will not suffer that much. The factories and plants have a lower price for oil, and they will pay less for sunflower. There's a negative impact on oil, it will be borne by the Agriculture segment, first of all. That is why the sunflower price will be lower than in 2020. It was 40,000 to 60,000 in the second half of the season last year. And this year, I believe it will be somewhere between 30,000 and 40,000, that is actually 20,000 less year-on-year. And there are also restrictions for oil price. These restrictions will be effective till the end of September. As for Sugar, formerly, there is a limit. There is no limit in place. We have government grants in our supplies, RUB 5, effective till the end of September. And despite the fact that the global sugar prices are higher now in the domestic market, the prices have been more or less flat. RUB 43 with VAT and for retail chains, RUB 36 as agreed, and this is subsidized by the government. As for pork, not limits. Meat producers are the beneficiaries of the new government policy because they can buy grain at lower prices. So this is how we operate. Of course, we comply with all the government limits and regulations. But we have a high efficiency of our operations. We see growth in volumes resulting from our investments, and we can still earn good money.

Maxim, a question to clarify on sugar, RUB 36 is quite clear. As for refined sunflower oil that they sold to retail chains, is there any vehicle of compensation of the gap in prices?

Yes, it is RUB 5. We haven't received this money yet. To be more exact, it is RUB 10.

And what about the retail price -- retail chain price?

We cannot sell at higher than RUB 95. And if all goes well, in addition, we will get RUB 10 of subsidies on top. We haven't received some yet, but we are planning to soon.

And what is the B2B price for oil, just for us to understand?

It depends on when exactly. Starting the first of September, you will see the global price for sunflower oil. It is now USD 1,250. Let us remove the duty of USD 165. So effectively, it is USD 1,085 to be multiplied by the rate of 73. So it would be USD 80,000, taking into account the export duty for oil input introduced, the bottled oil price in retail chains at RUB 95 does seem quite attractive. And we also need to convert tonnes into litters.

Yes, I agree.

And they sell not 1-liter bottles, but 0.9. So RUB 95 taken into account the subsidies is okay for everyone. And even with the subsidy, it is quite a well-weighed price. For sugar, it is $0.95 in the global market. It is the highest price in the most recent 7 years, the import alternative, even without subsidies, even if Russia didn't have any subsidies, it is about RUB 49. Yes, that's right, RUB 49. Currently, the market price is RUB 43. So generally, the sugar price in Russia is the lowest in CIS. And sugar is now at a lower level domestically as compared to the import alternative, but we need to see what will be further happening in the global sugar market. Taking into account the new government policies, the prices that are there in the market for sugar and oil seen are quite stable.

Okay. Got it. And the last question, if I may. Do you have an understanding of the potential harvest of 2021? It will be finally gathered and quantified some time closer to November. But on a comparable basis, what would the inflation be like taking into account your fuel costs, fertilizer costs and so on?

If we look at the yield, we will most likely be at -- Russia seeing bigger covers this year than in 2020, we believe that the production volume of sugar this year will be from 6 million to 6.3 million tonnes. But this is an increase. And last year, there was a record-low volume. As for the yield of sugar beet, it will be almost flat compared to 2020 or a little bit higher. Sugar volumes may be less. So the growth will be through more sugar beet planted by now. In sunflower, we expect a record-high yield. We believe that the yield ratio will be less as compared to expectations we had some time in the past, first of all, due to the extremely hot weather. But anyway, the production volumes will be really high. As for soybean, we expect the yield ratio to be lower or flat year-on-year, but the volumes will be a bit more. So we expect the harvest in soybean will be quite good. As for grains across our land, we expect a higher yield in wheat by about 10% year-on-year. And there is less land taken by grains. It is due to the rotation. So a part of lands are now used for soybean, and sunflower will have less grain, outgrows our growth than last year. The spot prices, they will depend on the global environment and on the government initiatives, of course.

And what about the production cost?

Our cost across the board have grown. Across all the expense items, maybe there is the largest increase in the prices for fuel. It is more than 20%, for sure. And as for fertilizers. There are various fertilizers, in fact, but the prices for fertilizers grew by about 20% in rubles year-on-year. Crop protection agents, their prices also grew, but not as much. The seeds prices also went up. So I would say basically is the production cost like-for-like because we've got different rotation year-on-year and different technologies are used. But actually, overall, the production cost like-for-like was at least 20%.

Hello, hello.

Yes, we can hear you.

This is Nikolay from VTB Capital. And I would also like to ask a couple of questions. The first one is about the yields in the new agricultural year. Could you comment on the company's strategy as regards the speed of sales in the Agriculture and Sugar segments. I'm trying to understand whether you will be switching to 2021 or will you be deferring your sales to the year 2022, depending on your understanding of the prices. We would like to better understand the volumes of sales and the changes year-on-year. This is the remaining uncertainty as to the financial performance for the year. But could you share your guidance on EBITDA in 2021 overall? It would be really helpful. And my second question is on your performance in the second quarter. We saw quite a lot of volatility in margins in the Meat segment. The margins went down by 6 percentage points to 14%, and we can see continuing growth in the Oil and Fat segment. Correct me if I'm wrong, looks like this performance is quite remote from the fair levels. I would like to understand the drivers behind it in the second quarter. And where do you think the fair level of these 2 segments is in the current agricultural year that has just started?

Well, I would like someone to answer the last part of your question, too. Of course, we are guided by the outside world and of course, volatility, as regards the risk associated with it, is growing because of the government policy. That results in a lack of flexibility for us. So let me take the first part of your question. And it's premature to speak about the yield up on the whole. But what I can say so far, as for grains, I have already told you that basically we are completing the harvesting of winter wheat at least. We are completing the winter spring wheat together that we can see the yield ratio is down 10%. And we understand Russia will produce less grain, less wheat than in 2020. And there is also great uncertainty with the global prices for wheat. Now the price is as high as USD 300, which is quite unexpected for us, of course. We can see that Russian producers are not in a hurry to sell their goods. It is due to some anxiety regarding the news from abroad. And besides, we have had a very dry season, farmers and small producers do not have the need to dry their wheat, so they do not need to sell their grain to -- their wheat to those who have dryers. They just stock it and that's it. So they have this possibility not to rush with their sales. On the other hand, we can say that wheat consumers, such as meat or poultry companies, so they now see very high meat prices, they have an ongoing demand for wheat. Their inventories were really low by the beginning of the season. And as a result, we are facing a weird situation when grain producers are stocking it up, waiting for the end of harvesting. And by the way, there is quite a lot of high-quality grain and it increases the certain anxiety in the market. So the grain prices are now quite high. And right now, our Meat business is trying to buy wheat at RUB 16 with duty, and they can't do it at this price. So the Meat business strategy will be to buy more grain. We are expanding the business and we have to feed our animals. And the strategy of the Agriculture business is to complete the harvesting. It is another 10 days, I think. And after that, we will start selling. The key uncertainty for me is the global environment that I believe that the prices now are at a level from which they will hardly go up. And I believe that this year, we'll be selling grain in about the same volumes. That is each quarter, we will fill about 1/4, 1 quarter that is. But again, we are guided by the algorithm that is based on global prices that prompt us what to sell and when. As for Sugar, we will be sticking to our traditional strategy regarding production volumes. We've took up our warehouses, that is about 700,000 tonnes at the end of the year, and the rest will be sold to the market. What we think about the harvest this year? We are planning to produce 900,000 tonnes or 800,000 or maybe even 600,000 tonnes. So depending on how much we will sell. This quarter, we will draw up our plans for quarter 4. By the end of the year, our stocks will be about 600,000 with an opportunity to further balance it. We will sell the bulk of our sugar in quarter 3 and quarter 4 traditionally and about 500,000 will be left to be sold in the year 2022. We will not be confusing you with our EBITDA figures because our EBITDA keeps changing quite a lot. We will not make any guidance as of today, but I can say that I personally expect record-high performance this year. Last year, we also had a record-high performance. But this year, we are going to be even higher in rubles, I believe, based on the current production volumes and the prices that we can see in the market. It will be another record-high year, I believe. Have I answered all your questions? Okay. Nikolay, do you have any follow-up questions?

Yes. My first questions have been answered. Could you comment on the second quarter? And the second part of my question, that is, if you are not in a position to, then please say so. That is about Meat and Oil. We can see less than 15% EBITDA in Meat but 13% EBITDA in Oil and, intuitively for me, it is very far from fair levels. Are you of the same opinion?

I agree with you. As for the fair levels, what has been happening? In quarter 2, it is a challenging business for us. It consists of 3 parts, and the situations across the board are different. There is oil extraction, there are industrial fats and there are consumer products. Maybe there's a bit more on oil extraction, but all the 3 segments are significant for us. In the second quarter, our consumer segment earned really little profit, very little, next to none. On the other hand, they have very really good oil prices in the export market and our oil extraction also made quite a good profit. Industrial fats, especially in the first half of the quarter, also earned a lot because we managed to introduce palm oil very successfully. So I agree that 13% of EBITDA is a record-high figure, but last year, it was 12%. Our Oil and Fat business over the recent years has been showing really good performance, but the combined margin has been at over 10%. In the long-term planning, I would be of a more cautious position in terms of our margins in this segment. But I think the margins in this segment will be from 10% to 15% going forward, closer to 10%, of course. As for our Meat segment, I can agree that the margins are a bit too low. And in the long-term plan, the margins must be closer to 20% in my opinion or even above that. Low margins in Meat, I told you about the factors behind it. The first factor is really high prices for feed for grain. For Oil, really high and the stable margin of the Meat business was somewhat undermined by it. The second issue was lower volumes than we would have seen, but for the hot weather. The weather at the beginning of the summer was really hot, and it made an impact on our production performance. It was worse than the target because this hot weather is not favorable for the Meat business. And the third factor, we produce consumer products, and the prices for consumer products have not been growing. The retail teams cannot buy meat products at higher prices. That's why we can't increase them as the consumer products' share increased in our Meat segment. In our sales, there is a certain gap like the prices for grain and oil have been growing while the prices for meat sold to retail chains remained flat. And as I told you, most of our production facilities now have livestock and a part of expenses is cost of goods sold. You cannot see that it will be deducted from revenue starting quarter 4. However, a part of fixed costs will still be there, most associated with projects. It is but a regular situation. When we launch a project at the very beginning, the margins are lower because of the fixed costs associated with the project. So I should expect the margins in this segment will get back to standard 20% to 25%.

Now I would like to give the floor to Maxim.

[ Maxim Krutko ] here. A couple of questions on my part. As for M&A, it is understood that going forward, Ros Agro will be still an important player in the M&A market in Russia. Are there any large targets that you're looking at these days, in particular, oil extraction plants in Solnechnye, for example, what's going on there? And a related question -- do you -- would you like to consolidate it? Can you consolidate Agro-Belogorye completely?

We believe M&As are an important tool of the company's growth. The company has been growing recently, among other things, due to M&As, and we would like to be. The other part of this process, it is quite challenging. And in my opinion, the opportunities in this area, given the continued technology development and investment in existing projects, I mean it creates more value. There is a lot of capital in the country. There is a lot of demand for these assets because it is one of the few private sectors remaining. There is a competition for those assets amongst the market players. We have been always quite cautious about our M&As and we are still cautious. Of course, we are interested in some potential large targets. We are looking at some targets in the Meat segment and Oil and Fat segment, agriculture as well. But we cannot actually see any assets on sale today, the price for which would be satisfactory for us. Of course, we are interested in the assets in the south of Siberia. We have indicated this interest, and we have filed 2 bids. But unfortunately, the assets are not on sale yet. If the tender is announced for a third time, then we will submit a third bid, and we are really keen to buy new plant. There are other assets that we are looking at. And if we manage to buy something, we will be happy to do it. I mean if there is a chance, we will be happy to take the opportunity. You can see that net debt-to-EBITDA is at about 1.5x, and it gives us a good position to buy assets. We have a strong free cash flow. What we lack is, we believe, in turn of interesting projects, in terms of our cash flow. With Belogorye, we believe there is quite a high level of synergies. We are keen to expand the cooperation and to merge the company. But the transaction depends on the intention of the majority shareholder. According to our information, the majority shareholder is not going to sell the company so far. So we are now working with the other owners of the company to make sure there are even more synergies materialized. And if the company is eventually on sale, then of course, we will take part in buying it.

Okay. And as for south of Siberia, could you elaborate, please? There were 2 tenders. As I understand, there were 2 attempts to sell the asset, but why did it fail?

They didn't actually fail. They announced 2 tenders. And for both tenders, companies started submitting their bids. The asset is of interest to many players in the market, and I believe there will be a lot of competition for this asset going forward. It will be eventually sold in a tender, but in the 2 times the tender was announced, it was terminated sometime soon or canceled. So when the bank decides to sell this asset, it will be sold at a good price.