Ros Agro PLC (AGRO) Earnings Call Transcript & Summary

[Foreign Language] Ladies and gentlemen, good day. I'm Konstantin Golota, and I'm going to be your interpreter. This event is going to be simultaneously interpreted, and I'm going to invite you now on how to proceed in your language of preference. I'll do that in both languages, and then we'll switch on the interpretation. And you'll be able to talk barrier free. [Foreign Language]. As soon as we switch on the interpretation, a globe icon will appear at the bottom of your screen. If you're joining from a mobile device such as a smartphone or a tablet, the language interpretation option may be hiding under the More Menu represented by 3 dots. You'll need to click on the globe icon or tap on 3 dots, then select interpretation English [Foreign Language]. [Operator Instructions]. [Foreign Language]. So unless you have any questions on the technical matters, I'll be switching on the simultaneous interpretation.

[Foreign Language].

[Foreign Language].

[Interpreted] In the previous year that is 2021 of 19%. More than that, considering our performance in absolute terms, RusAgro has managed to get more than RUB 35 billion of adjusted EBITDA, it's record high. But net revenue is up by 16% to nearly RUB 25 billion but reached RUB 182 billion in absolute numbers. This is driven by revenue growth across all those segments with the exception of the agriculture. I'm going to comment on this later on. The company's adjusted EBITDA is up by RUB 4.6 billion to RUB 35.4 billion in total. That's a growth of 15%. It's driven mainly by the growth of our Sugar segment. Just like I said, the company's EBITDA margin has reached 19%, which is exactly on par with its level back in 9 months 2021. We can proceed to Page 10 now -- to Page 9 now. Page 9 describes the company's debt profile as of 30th of September 2022. As we can observe, the company's debt is up by RUB 73.5 billion to the number of RUB 246 billion in total. At the same time, net debt to adjusted EBITDA level reached 1.98 while remaining at a comfortable level of less than 2x EBITDA as of 30th of September, albeit it is higher than it was back at the end of 9 months 2021. The increase in our total debt in Q3 is related to short-term borrowings which are on rise. Then government decree [indiscernible] which is about a subsidized interest rate for loans to supply the working capital has been extended. Hence, we brought in additional loans. Now continue to Page [indiscernible] 2021. In 9 months 2021, had the level of finance income of RUB 1.8 billion, while now it's a negative financial expense of minus RUB 17.3 billion. This is due to negative dynamics in ForEx losses in 9 months 2022 as well as interest expenses, a result of high volume of borrowings and higher rates. On top of that, we got additional interest income, which was partially offset by the lower interest income of SolPro loans. In the meantime, we can continue to the following Page #11, to discuss our statement of financial position on the balance sheet. A few points of [ natives game. ] Just like I said earlier, our balances in terms of total debt is up as regard to additional loans with subsidized interest rate. On top of that, as you can observe from the chart, we have seen a major surge of receivables in Q3. This is related to the fact that the company had growing volume of exports operations in Oil and Fats as well as the Agriculture segments. And then effectively trading operations began in the Agriculture segment. I suggest that we proceed to Page 12 now to discuss the cash flows. The positive cash flow -- the positive operating cash flow from operations and cash flow from the financial activities has been offset partly by the devaluation in our FX movements and also the capital investments and working capital investment is [ up ] by RUB 26 billion. This is related mostly to the changes in trade and other receivables and prepayments, then inventories and bio assets as well as other trade and payables. Just like I said, the increase in receivables is related to our launch of trading operations as well as more prepayments received for fertilizers as well as sunflower as feedstock. CapEx in 9 months 2022 reached RUB 7.6 billion in total. These are used to finalize our project in Primorie, procure equipment and also as a source of ongoing financing to maintain our capacities across all the business segments. Now the total cash flow has been adjusted by RUB 17 billion given the negative movement in FX. We are ready to proceed with the second section and let us go smoothly through the deck so that we could have more time for your questions. Now we have business overview by division, starting with the Sugar segment. I'm referring to Page 14 and 15. Considering our key indicators in the third quarter, 9 months 2022, you have seen growth in both sales and production across the Sugar business. Thanks to the favorable market environment and facilitated by a rather low -- relatively low production cash cost, the earnings of this particular segment clearly benefited. Sales volumes of sugar went up by 19,000 tonnes or 11% to reach 200,000 (sic) [ 199,000 ] tonnes in third quarter, while production volumes of sugar reached 174,000 tonnes, which is 3% higher than in the third quarter 2021. Now let's consider Sugar business performance in 9 months. Sales volumes of Sugar is up by 95,000 tonnes or 18%, reached 636,000 tonnes as compared to 9 months 2021, while production volumes -- excuse me, sales volume were up thanks to higher harvest of beetroot in the season of 2021, 2022. Production volume of Sugar in 9 months 2022 reached 278,000 tonnes, which is by 34% more than in the same period of the previous year. The current season [indiscernible] started on the 28th of August. We have all the 9 processing plants in operation as compared to the previous season, the harvest to beetroot in our procurement areas is estimated to be higher, while the quality metrics represents a less share than the previous year. We can proceed to Page 16 to discuss our Oil and Fats division. Sales volume -- production volume of Sunflower oil are down across other categories that [ trades well ] with a few exceptions. Sales volume of Oil and Fats and dairy products in the third quarter 2022 decreased by 4% to 407,000 tonnes in comparison to the third quarter of 2021. Sales of consumer products reached 76,000 tonnes, which is 1% less than the same quarter of the previous year. Sales of industrial products declined by 4%, and that is mostly driven by crude vegetable oil sales drop and industrial fat sales drop by 14%. Meanwhile, meal sales volume grew by 24%. Page 17, please. The same business segment but across 9 months 2022. In the 9 months, this business demonstrated the similar dynamics. However, higher profitability than in the third quarter alone. That is explained mostly by the fact that -- sorry, H1 sales, saw sales of cheaper cash cost products because of the feedstocks, which we achieved in the previous year. Now I don't think I need to reiterate all the numbers, everyone can read from the deck, but let's proceed with the meat business segment on the Meat division. Now the Meat division, considering its performance for the third quarter in '22, sales volumes of pork products increased by 17% or plus 10,000 tonnes to reach 72,000 tonnes in total. This growth was mostly attributable to the launch of the pork production cluster in the Russian Far East [indiscernible]. Production volume of pork in the third quarter 2022 reached 85,000 tonnes in the live weight for slaughtering, rising by 13% in comparison to the same quarter of the previous year. Now the Meat business and its key indicators in 9 months, sales volumes of pork products in 9 months 2022 increased by 12% as compared to 9 months of 2021. The growth was mostly the same. The launch of our production cluster in the Russian Far East, while production volumes are up by 8% to reach 245,000 tonnes in total. Let's continue with the fourth business division, Agriculture, Page 20. Starting with the third quarter first. Sales volumes of Agricultural products in the third quarter 2022 decreased by 9% that's minus 83,000 tonnes to 808 -- nearly 900,000 tonnes as compared to the third quarter 2021. The fall of sales volume is attributable to lower sales of wheat that's minus 56% or 125,000 tonnes for that matter. As at on the 30th of September 2022, Rusagro’s area of controlled land stands at nearly 660,000 hectares. 85% of Rusagro's total land bank is located in Central Russia including 45% in Belgorod region. Russian Far East accounts for another 15%. Considering the same segment across 9 months while sales volumes are lower by 155,000 tonnes or 10% as compared to the previous year's 9 months. The fall of sales volumes is attributable to lower sales of wheat and soybean, which was partially compensated by high sales of sugar beet, that's plus 70,000 (sic) [ plus 68,000 ] tonnes and corn 77,000 tonnes as well as Sunflower 13,000 tonnes. These are the [indiscernible] it you from the deck. And now we're ready to take your questions.

[Interpreted] Now we're ready to take your questions and have a Q&A session. And it starts from those of you who would like to ask their question orally, [Operator Instructions] The first question is coming from Mr. [indiscernible].

[Interpreted] I have 2 questions about your numbers in the accounts. I have a model to calculate net income and dividends in the times of yield. But now I have a question. Could you please disclose at least partially your profitability across the segments? My model demonstrates that your EBITDA in the third quarter would suggest a lower margin for Sugar to about 15% and that dividend would be about 5%, that's my calculation. And another question. Net debt to EBITDA, can we expect that this ratio will not exceed [indiscernible] or do you have your own target for the future?

[Interpreted] Thank you for your question [indiscernible]. Let me handle the second question. RusAgro Group is rather conservative in its approach, [indiscernible] financing. So if you can see the short-term forecast or expectations, well, no, we do not expect any increase -- any significant increase on the company's debt burden. Moreover, we do have a target to further optimize our debt portfolio subject to some special investment projects, which we currently are not planning at all other than the organic growth of our portfolio. Now getting back to your question, are you asking about Q3 or 9 months, which period?

[Interpreted] The third quarter because I think I have a good understanding for the preceding quarters. My model produced the same numbers as yours, but it's not the case for the third quarter. Can you please explain?

[Interpreted] I normally take [ prices ] from a dedicated industry website which disclosures wholesale process. And that's the calculation [indiscernible]. Okay. Let me give an answer. We do not disclose our segmental breakdown at the end of the third quarter. But generally speaking, you are more or less correct. The core business, which was under pressure and which saw a decline in our EBITDA margin, that was Meat business in 9 months. Now the Oil and Fats division, well, here we have the profitability levels very too much in par with the previous year, more or less. The Sugar division. The margin has improved there, while the Agriculture segment that has really faced an downward turn but not as significant as is the case with the Meat business.

[Interpreted] Our next question goes to [indiscernible].

[Interpreted] I have a traditional question more or less. Whether you can provide any comment on the pricing trends, all of the business segments in Q4. Do I get it right? That part of your production is stocked as inventories as you are waiting for better prices in Q4 this year or Q1 next year possibly. What are your expectations of the operating cost inflation, the production cash cost? Because clearly, you have a negative impact like in the Meat segment, as you said.

[Interpreted] Thank you for your question [indiscernible] The inflation dynamics on the cost side, well, we believe that's a one-effect in 2022. That's [indiscernible] in this year because of the events we all know. This comes as a shock and a certain degree of volatility and uncertainty. Now considering our further planning in the [ midterm, ] we do not expect any significant surge on the cost side? We are planning for 2023. And we are using more or less the same indicators that come from the Ministry of Economic Development, so we are not expecting any significant cost inflation looking forward -- at some of the inflation -- on the cost inflation side. And if you would remind me of the third question of yours?

[Interpreted] I wanted to ask about the market trends as you see them, price intensity and also stocking of production as inventories. What's your short-term sales policy? [ negative price ] that you have increased in [indiscernible] expecting for better pricing environment to come?

[Interpreted] Okay. You have seen the numbers in -- considering the Agricultural segment and certain shift has been observed in sales from Q3 over to Q4. This is explained by our sales also, which are but we do not expect to be able to build any significant inventories before the end. It's rather going to happen in Q4. But again, that will depend on the commercial developments in the market. We'll see. You should speak about the trends more globally, they are pretty much [indiscernible] see some pricing pressure but we do keep track of that. And [indiscernible] further commercial decisions from our side.

[Interpreted] And a quick follow up, if I may. Now considering the production cash cost [indiscernible] the needs of the business. Could you describe somewhat the pressure that you feel, you're saying there will be no further pressure, but which are the most troubled items? Like order or retain [indiscernible], something that you don't see or do see for the future?

[Interpreted] Well, we do see [indiscernible] That is probably the highest inflation cost item in the year 2022 as the last year that we launched our Primorie cluster. It's the first year when we are launching it and getting the numbers. And overall, I don't think it's valid to look at its window separately. So there's clearly some growth on the cost side ahead of the revenue top line. We're going to see more numbers in 2023 and 2024, once we have ramped up.

[Interpreted] I'm happy to give the floor to Mr. [indiscernible].

[Interpreted] I have the following question. Does the company plan to delist from foreign exchanges and move over to Moscow Exchange listing only. Ms. Kuznetsova has suggested this is an option, but it has some downside. Could you clarify which downside the company does observe? And why a delisting exercise would not be favorable for you?

[Interpreted] Thank you for your question. RusAgro is considering and studying out the options it has on the table. But at this point in time, we are not ready to disclose any solution because that's where we can progress. Our key objective is to understand further clarity of the scenario that we would like to pursue. I cannot provide any particular time line for you at this point in time. It is our priority. And we do expect that in the nearest future, we'll be able to understand which path we take. But generally speaking, yes, we do have this as a plan.

[Interpreted] And how about the delisting, will have complete delisting, is the company considering a full delisting.

[Interpreted] Well, that is a related subject. It all depends on the pathway we take. And then we'll decide on whether it's a complete delisting or an additional listing would be required.

[Interpreted]. And our next question is coming from Mr. [indiscernible].

[Interpreted] I would like to have more details about your asset debt. The debt is growing. It's plus RUB 50 million in Q3 alone. Could you please be more specific about the targets? Why did you bring in the money? And what are the rates? I hear they are subsidized, but by what degree? And that's one question. And then there would be a tender offer for [indiscernible] Siberia. Like do you intend to bid for that? And who are the potential bidders?

[Interpreted] thank you for your question, [ Maxim. ] Considering the debt. Well, we have brought in this debt as part of the government support programs. The average rate is disclosed -- average interest rate is disclosed in our accounts, it's no secret. And we haven't seen that changed since our last encounter. And since Q3 saw additional financing, we have submitted applications for subsidized rates. This money is normally used to procure sunflower given it's the high season for its procurement. Generally, Q3 and Q4, we see more intensive use of our working capital, so we do take this opportunity to bring in additional loans for working capital. And this is not used up by [indiscernible] one-off. It's not that we bring in the money and spend it all completely. So some of the money does remain in our accounts as balances within the course of Q4, that's going to be our working capital. Considering the average interest rate across our debt portfolio, it hasn't changed much, standing at about 2.5%.

[Interpreted] That's understood. And how about the processing [indiscernible] in Siberia.

[Interpreted] Thanks, speaking, [ Maxim. ] I don't think I can comment on any details. I definitely cannot suggest which are the bidders would be bidding for processing facilities in question. I know quite a few have looked into the asset and considered its valuation, we did as well, but there is no final decision from our side yet.

[Interpreted] Our next question is coming from [indiscernible] should I be wrong in asking you your names [indiscernible] and it would be great if you could name the fund you are representing.

[Interpreted] Can you hear me? Yes, Konstantin. Please advise that if you are a [indiscernible] private investor and I'm a shareholder of RusAgro and on other assets, of course. I'm not going to ask any further questions on your exchange moves -- but I do have a question about the debt as a follow-up. As far as I get most of that debt is now registered a short-term investments, that's plus RUB 50 billion, but what are the short-term investments?

[Interpreted] Yes. Let me comment upfront. More effective the [indiscernible] deposits.

[Interpreted] Short-term deposits for future years is working capital, correct?

[Interpreted] Absolutely.

[Interpreted] And my other question relates to your FX devaluation rates. You're saying minus RUB 18 billion is not yet registered, but is it registered now for the RUB 18 billion? And are we to expect for any further FX variation before the year-end?

[Interpreted] Okay. And that's going to depend a lot on the FX moves. Whether that has been registered or not? No, that's not registered, should the FX rate be improved, the loss will be reduced. We do not expect the ruble to be much stronger from the current level. So I believe it's going to stay there to the end of the year at about this level unless there is anything particular happens.

[Interpreted]. Our next question is coming from [indiscernible] representing the [indiscernible].

[Interpreted] Yes. I believe last time my questions have been answered. That's about receivables and the short-term investments. A few further questions, however. What's your 9 months [indiscernible] what's the interest? Was it really favorable to keep that money deposits? Or could you have done with a low debt?

[Interpreted] Has not increased back in Q3. That's a neutral operation, so we didn't get any loss based on that.

[Interpreted] Okay. That's understood. How about your exports. Have you seen the geographies of your export changing in any way? And which is the currency that you are using? Did you have any problems in getting the monies over here?