Ros Agro PLC (AGRO) Earnings Call Transcript & Summary

[Foreign Language] Ladies and gentlemen, good day. I'm Irina Popova, and I'm your interpreter. [Operator Instructions].

[Foreign Language] Which took place some time ago. So several events to mention. The first one is a start of our project to introduce digital platform in oil and fat business and digital transformation, which is one of the company priority in its long-term strategy. We started the project with oil and fat business and it is an important event for us, which will improve the efficiency in this business long-term. Some other positive events that happened in our Meat business, Tambovsky Bekon, which is a part of Ros Agro Meat business segment, got a license to export pork to China. And besides Otradinsky Sugar plant was also certified for compliance with [indiscernible] requirements for exports to China, and we have started exporting the product at a bigger 1.9000 tonnes. A key event I would like -- that's it with key events over to Anna to comment on our financials.

Thank you very much, Alexander. Colleagues, good day. Please take a look at the next page, which is #6. Key highlights for Quarter 1, 2024, our revenue grew by 44% and it is RUB 68 billion. EBITDA also increased at RUB 7.3 billion net profit went down year-on-year, and it was RUB 1.7 billion we can comment on it, mainly it is a so-called paper effect because of FX differences and changes in our bio assets. Our net debt reduced by 6% and amounted to RUB 60.2 billion. Accordingly, net debt-to-EBITDA has also changed, which is now at 1.1%. Now over to the next page; to discuss the numbers in revenue and EBITDA in more detail. Revenue growth here, 2 major contributors. The first is the growth of volumes of production of bulk oil and meat in Oil and Fats business. And besides, we acquired NMGK and in the first quarter last year, we didn't have it as part of the group. So it is a net plus to our figures. Yet another factor is higher revenue in Sugar business, supported by higher sales volumes of sugar. It happened because of the higher volumes of beet harvested and higher processing volumes accordingly. As for other business lines, in the Meat segment, the revenue remained almost flat year-on-year. On the one hand, there is a reduction in volumes of sales, but it was compensated by higher sales prices for both cut products and livestock. As for Agriculture business, here, the key difference in the revenue year-on-year is explained by a big difference in carryover stocks. In 2022, there was a prolonged harvesting season. And so the inventories were carried over to the first quarter of 2023. They were much higher than the inventories we have this year, hence, the difference in revenue because of the carryover balances. As for EBITDA, all the businesses faced growing costs in Quarter 1, 2024 year-on-year. And accordingly, it was compensated by higher margins in our Meat business and consolidation of the new asset, which is NMGK. Now over to Alexander.

Colleagues, let me continue telling you about our metrics by business line. Traditionally, I will start with the Sugar business. It is Page 9 of the presentation. In Sugar business, what is worth talking about? You can see that the revenue grew by 32% here, and it amounted to RUB 12.5 billion, mainly on the back of higher sales volumes, higher sales of sugar is due to the increase in sugar beet processing volume and production of sugar in the 2023, 2024 season. In this season, we processed about 7 million tonnes of sugar beet versus 5.3 million tonnes the year before and an additional support was provided by the favorable pricing environment in the Sugar market. The EBITDA here went down somewhat to RUB 0.8 billion. First of all, it reflects the growing prices for sugar beet and the cost as compared to the pace of sugar prices growth that we saw. Next meat business. The revenue of the Meat business has remained almost flat in Quarter 1 2024, it was RUB 10.600 billion and a lower sales volumes was compensated by higher prices, supported by positive development in the poultry and chicken market and generally good dynamics in the central part of Russia. Our EBITDA grew quite a lot year-on-year. You can see 3.6x due to higher prices, overall. And the margins here added 7 percentage points and reached 11% in the first quarter of 2024. Now over to Agriculture. The revenue in our Agriculture business in first quarter 2024 went down by 27%, mainly due to the lower sales volumes of all the crops that for wheat. And Anna has just mentioned the factor of carryover stocks that also made its influence. We had a different base at the beginning of 2023, reasons that early in 2024, as for volumes, wheat volumes grew due to sales of inventories against the depreciating Ruble, which increased the demand. And besides in Quarter 1, 2024, as compared to the same period 2023, no beet sales and there was a decrease in soybean due to transition in the schedule for harvesting from 2024 to 2023 due to unfavorable weather conditions back then. EBITDA went down quite considerably as well against the lower revenue. That upon the whole, over the year, we can see the dynamics getting more positive. And here the key factors the one-off carryover stocks. In Oil and Fats business, it is the next page. You can see the results of Quarter 1, in the difference year-on-year, you can see that because of the acquisition of NMGK that was completed in mid-2023. It made the difference only for the first quarter 2024. We didn't have this business back in first quarter 2023. And the revenue of Oil and Fats business in Quarter 1, 2024, mainly grew on the back of higher sales volumes of bulk oil and meal due to increased processing capacity of Balakovo Oil Extraction Plant after modernization. Besides I should say that there are higher sales of consumer products. We are better presented in national retail chains now. And besides, we have expanded our exports. EBITDA in Oils and Fats business grew by 18%, taking into account NMGK metrics and net of NMGK. The EBITDA in Oil and Fats business showed a decrease, which was mainly due to higher cost of sales in production of industrial fats and higher prices for palm oil, it was the key factor and additional pressure was made by lower prices for bulk oil and meal in the key markets. In addition -- well, let me take it to the next page. It is a traditional page on the Agriculture business schedule. I will not elaborate on that. But the only thing I can say is that in April, we completed the sowing of early crops including spring, wheat, peas and sugar beet. And in May, we are sowing soybean and sunflower and also corn. Now over to Anna to comment on our cash flow and debt profile.

Yes, colleagues, it is Page 17 now, cash flow, apologies. Page 16, that profile -- and we would like to say that the level of net debt went down by 6%. It is RUB 3.7 billion and RUB 63 billion all in all. Net debt-to-EBITDA also changed accordingly, and it is now at 1.1. And here on this page, you can see the breakdown of our debt portfolio, more than half of our debt is short-term borrowings. Over to Page 17 now, cash flows. I would like to take -- to draw your attention to the positive operating cash flow. As a result of our positive EBITDA of about RUB 7 billion and changes in the working capital -- it was reduced, first of all, primarily to a release of provisions, and it made an additional positive impact on our operating cash flow. There is some decrease year-on-year in operating cash flow, and it is explained by one of receivables from one of our customers in the first quarter of 2023. It was a one-off, a high base, which looks like a weaker result Quarter 1 2024. Over to net changes in cash, we can see that our cash went down year-on-year. But on the page, we can see that cash flows from borrowings year-on-year changed quite a lot. Last year, in the first quarter, they were at RUB 17 billion. And in first quarter 2024, we did not raise that much. And it is a key contributor to the reduction year-on-year. And as for CapEx, this RUB 6.3 billion in first quarter 2024 against RUB 2 billion a year before. That's it on my part.

[Operator Instructions] The first question comes from Yuri.

My question. When I looked into your IFRS statement, I saw immediately your net income that went down by 68% year-on-year. When I take a look at your 5 businesses, I can see that your revenue has grown but as for ROE in your key businesses, has gone down from 15% to 11%. And my question is, what kind of measures are you going to take to increase this metric to bring it up? What is your target over the year? And what steps will you be making to make your ROE higher and to grow your net income?

Yuri let me comment on the figures. There are 2 key effects from making an impact on our net income year-on-year. First is revaluation of cash assets and liabilities. Let me remind you that in Quarter 1 last year, the rate grew by RUB 7 that in this first quarter, it grew by RUB 2.7 and so the mathematical revaluation of cash assets cannot make the same effect as last year. And the second component, as we put it, income on paper it is revaluation of bio assets that we make according to IFRS standards. And as Alexander said, when commenting on our business result, sugar beet got more expensive as compared to 2023, and the same effect was carried over to our net income seemingly negative dynamics in net profit, net income. Okay, there is nothing much to add. In the longer-term, you will see the stable margins that Ros Agro has usually demonstrated. Quarter-on-quarter -- quarter-by-quarter, it is difficult to judge given the price volatility in the commodity segment where we operate. Some deviations are quite possible. There is specifics of accounting related to bio assets and those who have attended our calls for quite a while, know about this specific feature.

Okay. And still one more question. what is your margin target that we for the year to come? And what steps -- what specific steps are you going to take?

Well, it depends. On the prices of raw materials. I understand the margins in the Sugar segment was lower due to the prices for the raw material, I can give you a very general answer because we -- I understand so we cannot make any specific forecast given the format we have for this investable. We took -- made an ambitious business plan for this year. The group is seeking to implement it, and we have all the levers.

And the next question is coming from Anna Kurbatova Alpha Bank.

You hear me now?

Yes. We can.

Thank you very much. Apologies for the connection.

Anna can you do something to improve your connection, maybe we can hardly hear you.

Anna let me give the floor to you a bit later. Unfortunately, we can't hear you yet. So the next question is coming from Marat Ibragimov. Well, over to Alex Gnusarev.

My name is Alex Gnusarev, Investment. I have a number of questions, if I may. Could you give a brief comment? First, commercial expenses grew almost twice. What was the increase due to was it the seasonal factor of the first quarter? Or is it some stable dynamics that you envisage? The second question is about OpEx. We can also see significant growth year-on-year, RUB 1.2 billion. And my question is, what it is connected to us? And to the third question, noncontrolling interest has seen quite a lot of changes. Do I get it right that it is due to 25% given to Agro Belgorod, you have RUB 0.465. And so the noncontrolling interest went up. And the share of the majority of Agro shareholders were down. And one more question. There was a very cold spring, and there's a lot of rumor in the market as to wheat prices. Can you give your comments, please? How will it impact your results, prices, volumes and so on?

Yes, Alexey, thank you very much for your questions. As for the increase in commercial expenses, we increased our sales of bulk oil considerably in Quarter 1, 2024. It was one of the drivers behind growing transportation expenses and our commercial expenses accordingly. And yet another component is a considerable harvest of sugar beet, which we also mentioned. And this year, I mean, we didn't have the time to take all the sugar beet of the fields in 2023, and we were transporting it in January and February this year to sugar plants. And it also gave an increase of close to RUB 1 billion in our expenses associated with transportation. As part of commercial expenses, these are the key factors. And besides, you can take a look at Page 20 and 21, and you can see the additional commercial expenses associated with NMGK RUB 2.7 billion. So if you want these values to be comparable, then make a net of NMGK. As for operating expenses and income, let me give you the major comment. Well, it was mainly due to FX differences. And we can see positive operating income over the year 2023. We can't see the same dynamics this year, unfortunately. So the same comment is as on the same -- the same comment as on FX differences. And yet another question you had about the noncontrolling interest, the share didn't really change, and you can see the effect because of consolidation of NMGK, a Agro Belgorod doesn't have anything to do with it.

And one more question on Agro Belgorod, if I may, once a news, they said something about this 25% stake. What about the structure of the transaction?

We are not commenting on this transaction now.

And the final question was about the cold spring and probably the impact on the future harvest in wheat.

Yes, a quick answer is -- well, there is this weather situation that we all can observe in Tambov region and in other regions where we operate that we do not see a considerable impact on our business. It is like 1% or less than a 1% as to the impact on the volumes of additional sowing. And anyway, we will be able to sow it again in this month. So to put it briefly, there will not be a considerable impact. So mainly, it will be like a 0 impact due to the growing prices.

What do you mean 0?

So if the volume goes down, well, there are higher prices anyway, and it will cut to say for the decrease in the volume. That's what I mean to say. So we do not expect any decrease in volumes because what Alexander is saying, the volume of the negative dynamics is negligible. And besides, we will re-sow some wheat, so we'll have the same volumes as projected. Thank you.

And the next question is coming from Marat Ibragimov from Gazprombank.

It grew by almost 3x from RUB 2.1 billion to RUB 6 billion CapEx? And what is it due to? And what are your CapEx projections over the year?

Thank you very much, Marat, for your question. Our CapEx, it is about the first quarter 2024, 2 major contributors renewal of equipment in agriculture business. We have renewed our fleet quite a lot. This is the first component, quite a considerable one. And the second part is modernization of one of our Oil and Fat business plants. We renewed quite a lot of equipment, and it was bought for the modernization in the first quarter. These are the 2 major contributors to our CapEx. As for the year, we wouldn't like to give you any specific figures right now. But our expectation is that CapEx will be almost the same as in 2023.

Could you comment on your debt and cash, there is a dedicated page. There is long-term cash and short-term cash. The overall volume is about RUB 65 million and RUB 31 million is short-term and theoretically, if you have a technical possibility, you can pay that out as a dividend. Do I get it right? And RUB 34 million, the remaining RUB 34 million is long-term cash, and it is constrained because you have some funding -- financing programs in place.

Well, Marat, the difference here is only about the terms of these cash deposits in the banks. So 1 to 3 months deposit is our short-term cash, and we also have deposits longer than that. And according to the accounting rules, this is treated as long-term cash. It is not restrained or constrained. It is just the deposits.

Okay, got it. Do you have any clarity on when your re-domiciliation to Russia will be completed?

Right now, we can't give you any update because like a half a quarter ago -- well, we have been in our re-domiciliation process, including the Cyprus regulator actions. We are waiting for their decisions. We have filed all the required documents. And as soon as we get the decision from the regulator, we will update you accordingly. But right now, there's nothing new to say.

And one more question. Can you shed some light on the process? You filed the documents and then after you filed then what stage comes next?

We reported it on the previous call that is in Quarter 4 2023, if I remember it correctly, there are no law-based terms for review of the documents by the Cyprus regulator, especially in our current situation. So unfortunately, we cannot make any impact on that. Of course, we do our best in terms of administrating the process. But anyway, the timeline is not something that depends on us.