Ros Agro PLC (AGRO) Earnings Call Transcript & Summary

[Foreign Language] Ladies and gentlemen, good day. I'm Irina Popova and I'm your interpreter. This event is going to be interpreted simultaneously. I'm going to advise you now how to proceed in your language of preference. I'm going to say that in both languages, then we will 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, it isn't there yet, but it's going to show up soon. If you're joining from a mobile device, such as an iPhone or a tablet, the Language Interpretation option may be hiding under the More menu represented by 3 dots. Please click or tap on the globe icon or 3 dots first and then the Language Interpretation option, choose English and also turn off the original audio. [Foreign Language] Also, please be reminded not to use the loud speaker mode when you're talking, and please don't forget to mute your mic when you listen. The use of a headset, not the built-in microphone of your device is, strongly advisable. [Foreign Language] [Operator Instructions].

[Interpreted] Today's call will be moderated by myself, Alexey Kulchitskiy, Director for M&As and IR. And let me introduce you the CFO, Alexander Tarasov, who is going to run you through the presentation today. [Operator Instructions] Please be reminded that we are recording the call, but it will not be published. Over to Alexander. Alexander, over to you.

[Interpreted] Alexey, thank you very much. Dear colleagues, good day. Let me start our today's presentation of Ros Agro results for the second quarter. Let me start upfront with Page 5 of the presentation. This is the first page with some meaningful information. This page is dedicated to key events that made an impact on Ros Agro business in the second quarter 2023. There are several events that we treat as major. The key major event and very positive, as we believe, was closing the transaction to buy 50% stake and control over NMZhK Group, this deal will enable Ros Agro to take key positions in the key segments of B2C market. We will become #1 producer of mayonnaise and mayonnaise sauces in Russia, for example. Besides, the company will be able to benefit from a number of synergies that is optimizing logistics, reducing of purchase pricing -- prices, and we also expect quite a lot of economies of scale in Oil and Fats. We also hope to strengthen this business due to the team of NMZhK, we value them high, and we are also going to exchange best practices with them. The second piece of positive -- or not so positive news, of course, an African swine fever in Primorsky Krai, but we were generally able to overcome it successfully due to our timely efforts. We were able to remedy the situation with minimum costs and to meet all our obligations to counterparties. The third event worth mentioning is modernization of our Balakovo oil extraction plant. Since the 23rd of May, the operations there were suspended to modernize the plant. In the course of modernization, we will be increasing our production capacity more than by 30% and starting -- after the completion, it will enable us to produce larger volumes. Now Alexey, over to the next page, please. Let me take you to key results to highlight for the quarter. Our net revenue and EBITDA of the group in the second quarter reduced year-on-year, the revenue was at RUB 59.2 billion and EBITDA at RUB 8.5 billion. At the same time, the net profit of the group grew to RUB 7.8 billion. And I will elaborate on it a little bit later in the respective part of the presentation. Let me take you to Page 7 now. In the second quarter, the revenue of our Agricultural and Meat segment grew, as you can see, the sales growth in Agriculture, first of all, is associated with transfer of sales from preceding periods. It happened at the background of growing prices and depreciating U.S. dollar and it is also due to our harvesting timing. Meat segment also kept showing an increase in volumes because there was production capacity growth in Primorsky Krai after we launched our pig farming cluster there. And besides, there was an increase due to our production efficiency improvement in the Central Federal District. The revenue of Oil and Fat and Sugar segments decreased. In Oil and Fat, it was mainly due to the decrease in prices, and you will see the dynamics a bit later. It was partially offset by higher sales of industrial fats and bottled oil. I should say that the results of the Oil and Fats segment in NMZhK are not reflected here because the transaction has been closed really recently. In Sugar segment, as the decrease was mainly due to the decrease of sugar production volumes, and besides sugar beet didn't yield as much sugar in the last season. I spoke about it in quarter 1 and in quarter 2, we see the continuation of these factors' impact. So you can see that because of these factors, EBITDA decreased quarter-on-quarter, but you can see the increase in Agricultural segment. Now let me take you through the results segment by segment or division by division, let us start with Sugar. Here, we are showing the dynamics of EBITDA and sales and production volumes and we also show the prices performance for your reference. What you can see is the revenue decreased by 8%. As I told you, it is due to lower volumes of sugar production in the current season. Market prices, well, yes, and another factor to mention, it was due to lower sugar content in sugar beet because of poor weather conditions. As you can see, the sales remained more or less the same. EBITDA decreased because of the lower sales volumes and also because of the growth of cost per unit due to the lower quality of sugar beet, as I've just mentioned. Now let me take you to the next page. This is about our Meat segment. In Meat segment, thanks to launching new capacities in the Far East and increase in efficiency in the Central Federal District, we managed to achieve a growth in operational and financial results, but the growth of revenue here is by 5%, and it is mainly due to an increase in sales volumes that is about a 2% plus 1,000 tonnes as we launched our pig farming cluster in Primorsky Krai, and it reached the plant capacity. And besides, we've had a number of projects to increase production efficiency in Central Federal District of the Central region, including expansion of deboning capacities there. Market prices grew quarter-on-quarter by 4% on average. And they are growing following the dynamics in the poultry market. There is a correlation between pig and -- pork and poultry, which is confirmed once again. EBITDA in Meat segment decreased, but slightly. And in Central regions, this indicator has improved. In the Far East region, it's decreased in Primorsky Krai. The negative dynamics due to costs associated with remitting the impact of African swine fever, as I mentioned, and besides EBITDA was influenced by higher costs associated with taking our production to the design capacity -- the plant capacity. And EBITDA in Central region grew because of lower costs for feeds, we have just started seeing the effect due to the longer production cycle in Meat business. Now let me take you to the next page, that is about Agriculture. Here, the structure is the same. You can see a significant negative dynamics in prices year-on-year. At the same time, if you take a look at our metrics, the revenue grew, it almost doubled, and it is now almost RUB 5.7 billion in agriculture. And at the same time, it had a number of impact factors both positive and negative. There was a growth in sales volumes in soybean and sunflower because we transferred harvesting to a later time because of unfavorable weather at the end of 2022. Another positive factor was sale of corn in Primorsky Krai. And then there was a higher sales price because of the [ appreciating ] U.S. dollar and the FX component of our corn contracts. These are the positive drivers. And as for the negative factors, prices for grains that were lower for wheat due to a lot of inventories in the market. And besides lower sales prices for soybean, which was due to the lower quality of the product associated with unfavorable weather conditions. Lower prices for sunflower in 2023 is due to drop of prices in the global market and the quality of sunflower. EBITDA is more or less flat, and at the same time, we see a decrease in revenue. The key driver behind it was lower sales prices, as I mentioned, across the board, but for corn, which was offset by a significant growth of sales volumes. The reason -- the key reason behind lower prices is the global price performance and a decline in the prices in the global market. Another positive factor in agriculture that made an impact on EBITDA was getting a subsidy, the key effect is for grain crop sales, support of [indiscernible] and [indiscernible] usage. That's it with Agriculture and now over to Oil and Fats. Oil and Fats is one of our major segments and here, you can see that the revenue declined by 24% to RUB 28 billion because of lower prices across the board, that for margarine. You can see the sales volumes going down in meal, crude oil, margarine, [ dry whey ], but it increased in industrial fats, bottled oil and mayonnaise. The key factors I would like to speak about are as follows. The first is I mentioned we suspended Balakovo production to modernize the plant and we plan to resume its operations in September. So gradually, it will be brought to new performance indicators in the next quarter, besides in the second quarter 2023, there was a decrease in global prices for sunflower oil as compared to the second quarter of 2022, the base was really high, and it was partially offset by appreciating U.S. dollar to the ruble, that is by 22% in the second quarter of 2023. Another important factor is a decrease in sales prices for bottled oil and industrial fats, this is due to lower global prices for sunflower and tropical oil. A decrease in revenue was partially offset by growth in sales volumes in industrial fats. Now over to EBITDA. EBITDA in Oil and Fats decreased to RUB 2 billion with the EBITDA margin of 7%. The key decrease was in industrial fats where there was an extraordinary market performance in the second quarter of 2022. And due to lower sales prices that we saw in the second quarter of 2023 following the decline in global prices for tropical oil, hence the dynamics of industrial fats. And this segment is now in a kind of an average normal profitability for second quarters generally. As for consumer products, let me highlight that there has been some growth. Decrease in prices year-on-year was offset by a higher decrease in costs due to lower global prices for sunflower and tropical oil, and as for meal and crude oils, the growth of EBITDA is associated with lower prices for sunflower seed year-on-year, which compensated the negative effect from reducing prices and sales volumes in this segment. Next page, let me mention just briefly. We added this page. It's new for those participants who are joining us today, for the first time, let me explain here, we show the calendar of agricultural works by 2023 by crop. Here, you can see some average data in August, there is active growth, when we started harvesting early grains, and we are basically in line with the time line. Maybe there is a delay of 7 to 10 days due to longer vegetation and quite lower temperature and precipitation above the standard. But at the same time, we can already see some first results of early harvesting and we can see the harvest -- the yield is a bit better than the plan by about 10% or 15%. A couple of words on the land bank, 674,000 hectares under management of Ros Agro as you can see in the pie chart, and you can see the split there as well. Let me take you now to the third section, Page 16. Alexey, will you take us there, please. This is a page dedicated to our debt profile. Here, you can see that the gross debt of Ros Agro reduced by RUB 870 million. At the same time, cash and cash equivalents grew by 14% or 18 billion, and the company managed to decrease its net debt by 20%, which is about RUB 20 billion to RUB 80 billion. You can see net debt to EBITDA growing slightly to 2.6%, but it is mainly associated with the calculation methodology over the last 4 quarters. They were lower than the annual average quarterly values. And I expect that this indicator will change when we meet during our next call. Here, you can see the structure of our debt portfolio, our key. That is short term, but there is also some CapEx associated borrowings about 1/3 in the company's debt profile. The banks are the same, Sberbank, Rosselkhozbank, Alfa-Bank, Gazprombank, [indiscernible] and others. Now over to cash flows. It is the final page of my presentation. After that, we will proceed with questions, if any. And what I should like to mention here for the second quarter, you can see that Ros Agro generated quite a significant cash flow from operations which was at over RUB 32 billion. There was positive cash flow from operating activities due to EBITDA and lower working capital as the key reason behind the improvements in our working capital can be called 2 factors jointly, lower receivables from trading and lower prepayments, we also spent cash on CapEx, as you can see. And as for financing activities, you can see an outflow associated with repayment of loans but on the other hand, it was offset by inflow from deposits. That's it with the presentation, and now I'll be happy to take your questions.

[Interpreted] Alexander, thank you very much for your presentation. [Operator Instructions].

[Interpreted] Marat Ibragimov. Thank you very much. Over to you. Please go ahead with your question.

[Interpreted] Marat Ibragimov, Gazprombank. As for the African swine fever in the Far East, what kind of losses did you get there, direct or indirect as missing profits? And when will they be recognized? As [indiscernible] the end of the year, right?

[Interpreted] All the losses associated with African swine fever have already been recognized in our 6 months results. Of course, we are speaking about direct losses here that are associated with this fever outbreak. Besides, we are finalizing our measures on interaction with insurance companies and insurance payments for this case. Have I answered your question?

[Interpreted] Can you just quote the figure of your losses, please? Or in tonnes, like...

[Interpreted] I will not be able to disclose it as accurately as to millions of rubles, we may disclose it in more detail in our annual results, but we are talking about several hundred millions of rubles here.

[Interpreted] Okay. And another question, everybody is concerned about redomiciliation. I understand you cannot say anything either about the terms or time lines or scenarios, but could you shed more light on what's going on? And maybe you will be able to do it or to give us some news until the end of summer or until the end of the year.

[Interpreted] Yes, Marat, this question was thought to be expected. And I'm afraid I will not be able to share any significant news at this call. The only thing, like I said last time we met, we are into it. We are working on this project pretty actively. It is being more slow than we initially expected. But we believe that Ros Agro Group companies will do the redomiciliation. I wouldn't like to create any false expectations here in terms of the timing saying when exactly it would happen. As soon as we see the first positive news, we will share it with investors immediately.

[Interpreted] And when you completed, I mean, your redomiciliation, could you give us some guidance on potential amount of dividends that shareholders may get after that for the year 2022 or 2023.

[Interpreted] I will be able to say something based on our today's situation, we haven't changed our dividend policy, that the 50% of net profit is supposed to be paid out as dividend unless a force majeure event happens, and we will give this opportunity to gain dividends to all investors. This is what you can be guided by.

[Interpreted] And one more question. Last year, a part of your FX assets in cash in Switzerland banks was suspended. Have you managed to return the cash on to your accounts?

[Interpreted] Yes, mainly we have, there is one case which is still in progress, and I hope it will be resolved to our benefit by the end of the year.

[Interpreted] Thank you very much. That's it with my questions so far.

[Interpreted] Thank you very much, Marat. Over to [ Anna Balkova ], the floor is yours.

[Interpreted] Hello. Can you hear me?

[Interpreted] Yes, we can, Anna. Go ahead please.

[Interpreted] Could you comment on your acquisition of NMZhK in terms of the impact on your financials?

[Interpreted] Anna, could you represent -- could you name your company, please?

[Interpreted] Yes, apologies. Finam.

[Interpreted] Yes, it is easy to answer your question so far. I spoke about it in the presentation. Since the transaction was closed at the very end of June, it didn't make any impact on our P&L for the second quarter. At the same time, it did make an impact on our balance sheet. We consolidated the balance sheet as of the 30th of June. And in this regard, we can see some positive effects, including the effect on our net debt.

[Interpreted] Could you tell us your guidance on the annual revenue and profit?

[Interpreted] We did not disclose this information yet. We will disclose it following the end of the year.

[Interpreted] All right, then a more general question. Could you comment on your vision of prospects of M&A transactions in the market? Are there any opportunities to pursue inorganic growth? Or are you more focused on organic development these days?

[Interpreted] We are focused on both organic development, too, as well as inorganic, we can see CapEx projects that would enable us to increase efficiency in our current assets and the organic CapEx will be at the level of the previous year or maybe a bit more. And as for M&As, we made a big strategic acquisition in Oil and Fats, that is NMZhK. And generally, we have quite an extensive pipeline. We keep looking into new projects all the time, and we will keep this focus going forward. You can see that historically Rusagro Group has been developing to quite a big extent through transactions, we are able to do it. We've got the necessary resources and competencies.

[Interpreted] All right. And yet another question, if I may. I would like to find out what performance can be expected in your financials by the end of the year? What dynamics can you see? Do you mean -- I mean feed prices or agricultural products prices.

[Interpreted] It will be more positive by the end of the year or I can only give you a very general answer to this question. I'm not in a position to make any forecast. But here in the presentation, we consolidated the page with price dynamics for each crop, for each segment, Alexey can show it. This is the actual dynamics for the first 6 months across the board -- across the segments where we have business, historic data for 2022, and you can use this space for your models. As for feeds, as I mentioned, we have started seeing a positive effect in our Meat business because of the expansion of the feed base. And we expect that this effect will be fully materialized in the second half of 2023.

[Interpreted] Thank you for your comments.

[Interpreted] Anna, thank you very much for your questions. Over to the next participant, [ Constantin Codrescu ]. [ Constantin ], the floor is yours.

[Interpreted] Hello, colleagues. Good day, once again, [ Constantin Codrescu ], private investor. I have a couple of questions to ask you. First, about your acquisition of NMZhK. A follow-up question, do I get it right that in CapEx, you already recognize the amount you spent on the acquisition?