Ros Agro PLC (AGRO) Earnings Call Transcript & Summary

We have repaid quite a lot of loans in Q2. And that is related to the fact that these were due for repayment. We definitely keep our commitments and that's exactly what we did, thus repaying the debt. In the future, we'll be looking at the market. We'll be looking at the key rate and making our decision how to structure the company's net debt.

So that was not a particular decision from your side at this point in time?

No, no. Just a regular commitments that we're maturing.

Okay. Next question goes to Alexander to discuss future investment projects. Obviously, as we carry on this discussion over from the key rate to the next subject, we understand that bringing in financing is a challenge in the current market. Please explain what's the situation in the company is? And obviously, your synergy within NMGK giving some positive results, right?

Yes, we keep investing quite effectively despite the high cost of financing due to the increased key rate. But obviously, we factor that in when assessing our investment projects, large or small. So that's why we are more conservative about those investments that we currently have because of their asset and requirements when it comes to the return of such investments. Speaking at large about our transactions, we can only announce successful integration of NMGK Group, which has been a superb exercise in terms of efficiency, an extremely beneficial transaction for the Group and the shareholders. We have managed to benefit from multibillion synergies and we can count on further growth of the business. We keep considering potential targets. Our divisions, be it Oil and Fats or the Meats division, and if we take a look at our Agriculture business and they consider the stats available over the past 5 years, we'll see that the growth of our land bank has sustainably been about 5% per annum. So that's a continuous investment exercise that brings a quick return because, as we expand the land bank, we normally do it in current regions of presence so we can move over agriculture equipment and we can move people who are already employed in the region. We know in great detail every nuance of operating in those areas. So that's the right way to invest for us and we'll keep going forward along that street. Speaking of the Oil and Fats division, Anna has mentioned the results of 2024, and namely that we are effectively benefiting from the [indiscernible] plant expansion. And we have another major expansion project at Atkarsk in Suratov region. We have increased the capacity by 50%. And on top of the Oil and Fat division, we also have within the Group projects in Primorye where we operate the meat cluster. So our objective is to bring the capacity up to reach 75,000 tons. And one other comment on the Oil and Fats business, an important initiative that we recently approved and we are implementing now, it's about acquiring a major fleet of [indiscernible] because that would allow us to reduce the operating lease expense on the one hand, at the same time, ensuring stabler shipments in terms of exports with those [indiscernible]. And on top of that, we are upgrading our agricultural equipment in the Agriculture division. It's definitely bringing good efficiencies, well calculated through. And that investment process is well established in the company. We run this analysis on a regular basis. And we are confident that the majority of projects that we invest in do generate a good added value for the Group and its shareholders.

And you suggest that Rusagro Group uses any preferential treatment may be beneficial financing, reduced rates, for example, because the agriculture is a systemic industry, backbone industry for the country? Yes. We're definitely keeping track of the legislation to consider what the Ministry of Finance or the Ministry of Agriculture have to offer, and we try to use of all those benefits to the extent we can to develop and expand our production. While we end up in a unique situation when many companies can get special benefits on the one hand, but on the regulatory side, we see some harsher terms, for example, higher profit taxes of the first of January 2025, all the export duties. Can you comment on the current situation in your industry? Are there any particular mechanisms that you are enjoying already and that are affecting your financials?

In these times, we have some individual decisions of the Russian government that limit exports of particular products. And that is explained by the fact that the government is monitoring the balance of supply and demand to maintain prices in the domestic market. For example, sugar is currently banned for export, which this ban would last until September, which is a temporary thing. But nonetheless, the idea behind it is to limit sugar exports. And if we consider how that affects Rusagro's operations and numbers, well, we believe that has a limited impact only because this particular measure does not extend -- does not cover export of byproducts such as [indiscernible] which is used as product of beet root. So beet root after producing sugar can be used as further. And we expect sugar to restart in terms of exports as of September. And giving a broader answer to your question, well, we don't see any particularly harsher terms from the government. Instead, we rather have certain objectives by the President -- the President has addressed the federal assembly and he suggested that our production is to increase by 25% by the year of 2030. So the government is definitely doing their job in stimulating that industry, supporting the industry. Well, not everything has been done as yet, but generally speaking, we do not see any particular hurdles. And all of the major programs that we benefit from, speaking of Decree 512 or 528, through which agricultural producers can get preferential loans, well, that these are available for the whole industry and we are definitely using those.

We're getting some questions from our viewers already and as part of our dialogue, let me try to fire those as well. So let me put this question to Anna. Why the profitability of the Oil and Fats remains flat year-on-year, although you have consolidated a higher margin, higher profitability business of NGMK?

Thank you for this question. We can start with considering the FX rates because we export, and obviously, if the FX rate goes down, as it was the case in Q2, there's definitely an effect on our revenues. And secondly, if we consider the price of oil we had in Q2 last year and this year in dollar terms, I mean that has been reduced. That has fallen because of the market. So even though we had a downturn on the price, we still managed to integrate NMGK and increase the internal efficiency, maintaining flat numbers overall.

Okay. And another question from [indiscernible]. Regarding your reduced profitability -- well, reduced profitability in the Oil and Fats is one question. And another question, why are your margins that high in the Meat division?

We have touched upon that today already. I believe we need to factor in 3 drivers. First of all, it's about growing prices year-on-year. And then the assortment mix, which the business unit managed very well and because of 2024. Another thing is about comparing the periods, we had an issue last year with a big blow in 2023. So obviously, this has resulted in some costs which were not there in 2024.

Question on the mix of the segment. Can you name just a few things that you've managed in terms of your product mix?

Well, we understand that our revenue is defined by various products, and the market situation changes. The profitability of each product changes as well. So we need to monitor the market on a regular basis and do the right decisions, what's the best thing to sell. And judging by the numbers, the business has really managed it.

Yes, that is quite clearly some adaptive decision-making on the go. Okay. And how about your joint efforts with China? What's the current relationship with China? Do you have any strong points or growth drivers?

Well, let me comment on China then. We have received permission and have already had some deliveries -- some of the deliveries to China from our facilities in Tambov that are part of the Meat division, obviously. We are expecting to get similar permits or licenses to export from Primorye that is expected to happen before the end of the year. Speaking of the numbers in general. Well, being cautious here, we would expect to have up to 10,000 tons that will have been exported before the end of the year to China. The market in China offers a premium price. Prices are about 30%, 40% higher than the Russian domestic prices. So that is definitely the key driver behind our motivation to export more. On top of Meat proper, we are also hoping or expecting that fodder -- combined fodder will be allowed for exports soon. And Rusagro facilities are uniquely located in terms of access to Chinese exports. I'm talking about Primorye that minimizes our logistical costs. So if we get a country permit, so if there is an agreement on the intergovernmental level, then we'll kick off those exports, obviously.

Okay. But then has a point, you have mentioned 10,000 tons, that's exactly what you'd like to achieve in terms of operating numbers, but how much is that in terms of your revenue structure? What kind of an effect can it have? Like 10,000 tons, what financial number does it translate into?

That's a very good question. I believe that today, this year, it could be up to 10%. But as we grow, looking forward, it will be more. I think we have commented on that during one of the most recent calls, together with Anna, we responded to that question. And we mentioned a certain target in the midterm and that target is 30% of our Meat business. That's the export potential that the Meat division has for Southeast Asia and China.

Okay. Another question from [ Nikolas ]. And let me combine this question with mine because Mr. Robert has this question. Which division, which segment will be in the lead looking forward? I understand that you have an adapting business and each segment would be happy to offset certain challenges or difficulties elsewhere in different segments. So let me rephrase this. What's your vision of the current market? Which segment will be giving most support to your revenue looking forward?

Okay. Let me start, and Anna will join in to help me. Let me reiterate. The management team believes that we enjoy a well-balanced portfolio, first and foremost. There is no particular individual division or business that drives the Group. We definitely see the high number from the Oil and Fats division, but at the same time, the margins there are relatively higher -- lower, sorry, as compared to the other segments. So speaking of the EBITDA, the contribution of all divisions or every division is comparable. So we don't expect any major price fluctuation. In the nearest future, there is no reason to believe this will happen. Like on the sugar side, the market is well balanced. As the export reopens, the additional volumes will be available internationally. So that will support the prices. On the Agriculture business, well, there was a bad harvest -- no, no, let me put it differently, bad harvest is not the word. There had been climatic challenges back in spring. So that exerted certain pressure on the supply side. And the global prices are likely to move up according to the market consensus, then down. We are not at all pessimistic about the oil prices due to prices are pretty flat, if not growing, I think they are. And on the Meat side, there was a local minimum that we hit. And now the prices are back on the growing track. So we are back on the growth.

Okay.

And let me quickly follow up. When we discuss quarterly results, it's always important to consider seasonality because the structure of our revenue and the structure of our EBITDA is something very relevant. We manage all the 4 divisions, offsetting each -- when needed, but within each quarter, there is definitely a seasonality factor, which was the case in Q2 as the sugar went down and the Agriculture business as well -- well, clearly that's seasonality.

And a quick follow-up, maybe for our viewers, that will be of interest. Many analysts, including those at [ T Investments ] and other investment houses are forecasting certain downturn in the ruble. So the ruble will be weakened and this could be a benefit for you as an exporting business. And then another question from our viewer, which sounds like a final question, but it's not the final question. So loose your hopes please in this stance. So what's your strategy for 10 years ahead? Well, yes, that sounds like a final question, but trust me, it's not the final one.

Our discussion in terms of its format does not envisage any forward-looking statements. So as a public company, we have to focus on the actual results in the previous periods and just general comments about the market. I believe it would be relevant to consider historical dynamics of the Group's growth. We do know very well how to grow organically on the one hand and improve our efficiency on the other, which is represented by stellar results in NMGK integration and operational improvements across all the divisions. We are increasing capacity utilization from our 120 to 140 days on the Sugar division. That's very important. We are increasing the utilization of our Primorye capacities. So we know very well how to acquire integrated companies and we will keep doing so. Our ambition in general is to grow sustainably. And we definitely have some very vast plans in this regard. So the cash flow, sufficient. And despite the high cost of financing, we are nonetheless in a position to do efficient transaction looking forward. Anna, we'll definitely would like to have your comment as CFO.

Yes, fully supportive of what Alexander has said. As said and there is one thing I'd like to draw your attention to. Our leverage ratio of net debt to EBITDA is 1.1%, which represents a huge potential for the company looking forward in terms of its expansion plans.

And as a quick word from my side, you are not there on the bond market. So in the current market situation, this seems like a positive factor because you don't have the need to get the interest risk and underwrite those. So you have just mentioned that you're benefiting from your current cash position in terms of the deposits. But do you have some statistics? How have your cash and cash equivalents increased? You have mentioned that you're benefiting from this opportunity of the present day trying to make money?

Okay. Let's compare the numbers year-on-year. Our cash balances are down year-on-year, but this is explained by the fact that we have repaid a significant portion of our debt back in the second quarter this year, which has taken off some of the cash flow, obviously. So in the second half of the year, we'll see our cash position growing and our net debt-to-EBITDA ratio is going to improve or come down.

That's superb. Dear friends, please be reminded that this is a live broadcast. So if you have any further questions, please type them in the chat box of this Zoom webcast. We have discussed pretty much everything, your businesses, your segments, which are rather plenty, and the financial position. I would like to ask you one other basic question. Well, the market is -- does not seem very favorable for investors. We seem to be going through yet another market correction. So a question about your shares. I understand that you're not in a position to provide any recommendation or outlook, which Alexander is always happy to reinforce the message, you're only commenting on the financial results. But nonetheless, dear guests, we'd like to hear from you the investment highlights of the company's shares, because an indication understand that the Agricultural business is very important for Russia as an industry. If there is anything particularly valuable for investors, like what should catch an eye -- or what could catch their eye in this market?

Well, I believe there are a few highlights to mention. First and foremost, Rusagro is one of the largest players in the Agri business, which operates in 4 divisions that have been discussed at length during this call. Each of those has a great upside potential through consolidating the market, buying other players or through improving efficiency. And our results from 2023 represent that quite well when we had our highest EBITDA, please be reminded. And one other highlight from my side, we are one of the largest exporters, which will further drive our growth looking forward. We have certain objectives to increase exports from the country. We are well involved in growing our exports, not only in the Oil and Fats division, which has the largest share, but also in the Meat business. I have outlined our prospects in China and also in the Agricultural segment. So this is definitely going to boost revenue and the profitability of the Group, thus enabling investors to be more attracted in Rusagro shares. I believe Anna can follow up on that.

Indeed. Rusagro is a group that never stops in its strive for efficiency. Despite certain challenges with the high gear rates in the country, we're nonetheless not reducing our CapEx plan, which Alexander has explained at length. We have a vast number of investment projects or CapEx projects that target optimization of our business. At the same time, we are looking to improve operation efficiency with a vast number of projects, again, within each business division, to reduce the cost, to improve the profitability, and so on and so forth. That's exactly the point. Every day, we move forward. I get it right, that these investment projects that we have just discussed and projects that help you improve operation efficiency is exactly they can bring in some good effects in 2024. But not only this effect will be retained in 2025 onwards, exactly how our projects have a very short payback period and the additional EBITDA is there before the end of this year, but most of the effect will be seen in 2025.

Okay. And I see more questions. Why is the working capital growth in the first 6 months several times less than in the first 6 months last year?

Well, if you consider 6 months and 6 months last year and this year, then you'll see we have a reduction of the working capital. We are keeping close track on our receivables. We monitor the number of days. We make sure it doesn't go into [ deferrals ]. So we are very stringent on that. And further to that, we keep track of our inventories. So it's either feedstock inventories or the finished goods. We try not to store what we don't need in order not to freeze the funds.

Yes, we can get a feel of that operating efficiency. Friends, I don't think we have any further questions in the chat room. So let me sum up this discussion, if you would like to follow up on that, please don't hesitate. So we have discussed the financial results of the company. And I'm particularly glad to hear Anna saying that net debt is down in the current circumstances. That's extremely important for the company. On top of that, I particularly -- I have particularly enjoyed the idea from Alexander. Your CapEx plan is not stopping, it's rather expanding and you're considering how to have a quick win on the one hand and you're also considering major M&A transactions. So everything is in focus. And one other comment. All of your business areas are important and we understand at this point that the current market situation is well understood by Rusagro, the situation with prices, the limitations that are there on the market, you know how to handle those. So some seasonality that was observed in the first 6 months are going to translate into more positive results in the second half of the year. We don't have any further questions. So if you have a follow-up, please don't hesitate. I have made some major conclusions. But please don't hesitate to follow up.

You have done that greater than we could.

Alexander, Anna, thank you for coming.

We'll be happy to do that again. It's our first interview in the studio. And I believe this has been a good one. And the questions have been very diverse. Thank you for handling them so well.

Thank you for your open, frank and fair position. That's very important for investors. Thank you so much. Friends, we're going to wind down this point. So if you're investor, please push the like button. If you have questions, don't hesitate to type us in.

Well, and again, all questions that we get will definitely be handled by our IR Department. We have the e-mail inbox and Telegram and group. And the Pulse group is the most important thing, like account within our group because now we have so many various social media.

So friends, don't hesitate to reach out, don't hesitate to reach out through the Pulse account with Rusagro Group or here in the comments section below and share this video with your friends. Thank you so much. We are finishing. Thank you. Bye-bye.