Astarta Holding PLC

Good afternoon everyone, it's Marcin Dąsacz from PECAO. I'm happy to welcome you to today's call. We will discuss ASTARTUS 2019 results. The company is represented today by Mr. Wiktor Iwanczyk, CEO, Mr. Wiktor Glacki, CFO, and Mrs. Julia Berezchenko, Business Development and IR Director. There is presentation for annual results available at ASTARTUS investor relations website. We will start with presentation and then there will be time for your questions. Now, let me hand over to the company for presentation. Thank you.

Thank you, Marcin. Everyone received the link to our presentation. So, I would like to turn straight to slide number three where we provide an overview of our PML results for 2019. and compare them to 2018. The company led to increases revenue significantly due to strong harvest in 2019 and that reflected in the strong volume sales growth in agricultural segments which also contributed about half of the total revenue. The sugar segments were basically flat as the prices for sugar were slightly up, but the volumes were slightly down. The soybean and dairy segments demonstrated good performance with 18 and 18% revenue growth. More than half of our revenues are generated by sales to overseas markets. and out of 253 million euro exports, 150 is done through the EU market. The gross profit margin went down from 26 to 20%, although there is always an impact from I have 41 standards related to the changes in fair value of biological assets in agricultural produce. If we exclude those and you have a look at the lower right hand corner, there is a table which shows our growth and EBDA margin excluding the impact of the biological assets. The EBDA increased on some results from the dairy segment, from higher margin in the soybean processing, and the bottom line turned from negative 18 million euros to nearly 2 million euros. Now moving on to the cash flows and our balance sheet. As we highlighted in our last results, In 2019, we focused on maximizing our operating cash flows. We started selling our 2019 harvest on a much higher pace compared to the previous year. We managed our working capital much better and we reduced our days of inventory turnover as well as receivables turnover and that allowed us to generate 170 million euro of operating cash flows compared to just 16 in 2008. Since our margins in the sugar segment remain very low, we preserve our cash by also managing our copies. So our copies were limited just to 20 2 million euro of which significant amount is related to finalizing these storage facility copies which is now totally completed Since we were in brief in our provenance.

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Hello? Can I continue now? Okay.

To continue, our efforts allowed us to repay about 100 million Euro of finance debt from financial cash flows, and the reduction on the balance sheet was about 83 million, and this allowed to reduce the key leverage ratios, including net debt to UBDA from 4.8 in 2018 to three and a half as of year end 2019. Also for everyone's ease of understanding of our leverage, most of our debt is related to working capital facilities. So if we adjust our net debt for regularly marketable inventories, which are equal to finished goods, the leverage ratio is below two. Since we are still in a bit of covenants, we highlight it on this page, but we remain convinced that the banks will not accelerate repayment of the loan. Moving to more granular analysis of our segment performance, on the agricultural side, slide number five, you can see our harvest yields and the sales volume as well as the prices. For everyone's benefit we also highlighted the change of ICRS 16 standards related to the land leases on our TNL in the agricultural segment. As you know the standard requires to the related amounts into two parts. One is related to depreciation, another to interest and lease liability. On a cash flow basis, the numbers are low and you can see the cash flow land lease liability payment at the bottom of the table as a memo item. The revenues were up by 60% because we accelerated sales of our harvest from 2019 and also in the first half of 2019 we were still selling bulk of our corn from 2018 harvest. The unfavorable weather and lower than expected yields led to our growth profit margin contraction because of the lower contribution of the biological assets of agricultural produce. And that also was reflected in EBDAs, which was down from 70 to 53 million. corresponding to 26% EBITDA margin in 2019. Of course, our costs were heavily influenced by depreciation of the local currency, which took a reversing trend at the beginning of 2020, but 17% appreciation of Euro against hryvnia also had its impact on our costs. Nonetheless, we focused on reducing of our fixed costs. First and foremost, general and administrative costs reduced from 9% of revenue to 7%. and our selling distribution force were also down from 16 to 13 percent of readiness on change of delivery terms. Back to the helicopter picture of how we performed in the agricultural segment in terms of our yield and productivity in 2019 and the previous three years. Specifically, we would like to keep number five position in terms of the overall land bank that we have in operation. For the last two years, this land bank yielded one million tons of grain and oilseed harvest for us. And we are the largest sugar-beet grower in the country with 1.7 million harvest. The storage capacities, which was a five-year investment project, given their approval to us from this year, essentially all of our harvest is going to our in-house storage facilities and also we have room to do large-scale services to third parties. On the land bank, we continue to optimize our land resources by rolling over or disseminating these contracts depending on the quality of land. The question on the land reform in Ukraine, we believe that the current version of the legislation is not going to change our business model. We will rely on long-term land lease contracts in the future as we did in the past. We also look for other opportunities in the agricultural segment. We started an organic crop growing project on soybeans recently and we introduced an integrated IT software solution for the agricultural segment which helps us to manage and digitalize operations not just in the field but also at the stage of planning, monitoring the crops and all stages to the sales. In What we also would like to highlight today is that we have been working with independent farmers for quite a long time on sugar beet growing. 20% of the sugar beet which is processed by our sugar mill is coming from farmers that we have been cooperating for a long period of time. These are our key suppliers. And now because we build sizable storage and handling capacities, we would like to extend this cooperation from sugar beets to other crops, grains and oilseeds. So we are actively working on expanding our network of farmers cooperate in the regions of our operation. Slide number seven, obviously we don't control the prices but we watch the developments in the global markets and how they affect us. The recent events are such that corn and oilseeds are coming under pressure from bioethanol and oil markets. However, we do see potential in the wind because in the current pandemic situation, many governments globally are reclaiming their strategic reserve and we believe that this situation will be better than with other drain pools. Moving on to show the segments on slide eight. No surprises here. The market, the pricing for sugar is still suboptimal both at global and local markets. However, we focus on rationalizing our operations. We produce 300,000 tons of sugar by using two left sugar mills. We recorded marginal but positive EBITDA in this segment and our topics have been reduced to maintenance levels of 1 million euro. And of course we focus on cost cutting. Our SG&A cost in total went down from 19% to 15% of readiness in 2019. As you know, there has been an uptick in the global sugar prices at the end of the year, but that was very short-lived, and now the global prices are going down. The Ukrainian sugar prices are staying slight to the moment. We do believe that we are in the third year of the adjustment of the local sugar producers in Ukraine. And the level of production is going down with consumption.

And this year we believe that these two should match.

Moving on to slide 10, in terms of our strategic positioning, we are number one sugar player in the market. regardless of the level of consumption in the country, we would like to keep 20-25% market share, but focus on our core. Last year, our high quality sugar production was at 90% of total, and we now have a product share mix approximately on a 50-60% basis between industrial consumers and retail consumers. Due to the quality of our sugar we retained our key relationship with industrial consumers such as Coca-Cola, Danone. On the cost-cutting front we put to sugar milk out of operations in 2018 and 2019 and that was together 20, about a quarter of our capacity and this year we would like to keep the same amount of sugar produced but we will not utilize one of our smaller sugar milk in order to have a better cost. Sugar beets planting area last year was reduced by 13% from 40,000 hectares and this year our planting area for sugar beets will stay the same. Moving on to soybean procession and why they thin. We are one of the top sodium crushers in the country. Number two with 14% market share. We operate at full capacity. The crush margin was widening last year and that allowed us to have a profit margin of 15% just in 2018. and this is translated into EBITDA of 7 million euros. Since this is a very new facility, we do not need to invest heavily in it and the carpet is only half a million euros. This is still being a segment as one of the areas for further expansion and constantly looking at other opportunities in this sector. Slide 12, very briefly on the daily. This is when revaluation of the local currency was beneficial to us. The price of milk went up from 256 euros to 326. Of course, this is something which is not the case since the beginning of 2020. But nonetheless, we achieved a higher productivity in Sokhao. Our herd was optimized. We produced 96,000 tons of milk. and we had a record EBITDA of 16 million euros. In terms of our strategy and outlook, we will provide a short update on the first quarter and situation of quarantine currently but looking on a strategic basis long term We are working on our financial goals, reducing leverage, getting within our covenants by actively managing working capital, managing our topics at maintenance levels until we see a higher margin and cash flow coming from the sugar segment. We will continue to manage a land-leave bank of over 230,000 hectares. We are looking for more opportunities to work with the farmers in our region. And we can still look at opportunities for expansion when our resources will allow us. Slide 14, we thought that since the situation in the global market is changing very fast because of the pandemics, and all investors are very anxious about how the restrictions might affect every business. We believe it would be beneficial to disclose our first quarter trading results earlier than we anticipated, back several weeks, so that we can show our most recent developments closer to the market. As you can see, we already sold the majority of our grain in all seed harvest, so the volumes for wheat and sunflower in the first quarter of this year were not significant. We continue to sell sugar. at healthy volumes, although the prices are still quite low. And we still see a positive pricing picture on the meals compared to the first quarter of last year. In terms of our focus for the first quarter, it was the new planting season our crop structure did not change significantly you can see that we slightly reduced sodium planting area on crop rotation rationale but we increased planting for sunflower we replaced some of our off-road agricultural machinery with more than one peanut resources and because of the mild winter and early spring this year we managed to complete planting for sugar beets already and sunflowers and we are moving on to corn and soy also As a small update, which we already made public, we have a new financing facility with GED, a German development bank, and we also received a first $10 million transfer for our working capital needs recently. Slide 15, 16, 17, we outline in detail our response to the pandemic. We believe that the agricultural sector is a key engine to the Ukrainian economy, and not just the Ukrainian economy, so this is the sector which is considered to be operating without any restrictions during the quarantine. So, we continue our operations as usual. We've spent a potential volatility in the global soft commodity prices, but we see domestic demand for sugar and milk still holding up, although the local currency movement can affect the pricing. We do highlight a risk related to our, to the family industry in Ukraine relying on transportation, the state-owned rail network . But so far, it has been operating seamlessly and we did not encounter any difficulties with logistics and our . As already mentioned the farmland law has been adopted but there is a quite lengthy adjustment period for the industry and staged opening with the opening for individuals to own land lifting only in July next year and legal entities being able to purchase land only from 2024. In the current situation, we have enhanced business risk monitoring. We updated our risk matrix. We hold our daily war room meetings. And we monitor the situation in the market on a daily basis, especially in terms of our liquidity. We operate across eight regions, but about half of our agricultural land resources are located in the Poltava region, so we are in close contact with communities there. We help out local hospitals and we spent almost 1 million euro with urgent medical supplies to assist fighting the epidemic. Slide 16, we follow all quarantine recommended measures for our employees. Although the numbers in Ukraine remain relatively low compared to other countries, we introduce very strict hygiene standards And so far, our sick leave absences are within the seasonal 2% to date. On our alterations, we don't see any significant impact here. Our operations are across eight regions, as I mentioned. The new IT software platform, ID-Retain, in the appendix you can see a more detailed description of it, allowed us to organize our field works on a remote basis, long before the current in-measure. This is something that we have been practicing before the situation occurred. And our sugar plants are currently undergoing repair work. They will come into operation in the autumn. Seventeen, we do not see so far any changes in our supply and customer relationships and logistics still intact. On the financial side, we have sufficient liquidity and cash reserves to complete our planting season until June. We are in continuous dialogue with financing banks. As you know, about two-thirds of our committed credit resources are coming from development banks such as EBRD, ISP, EID. We have been cooperating with them for decades so we believe that if we need additional liquidity we can always rely on them. There is also the EBRD facility which has recently been launched to provide pandemic related support facility for the clients. We have been cooperating with EBRD on numerous occasions as well. So we believe that it needs to, there is a dedicated facility that we can set. This is our summary. On slide 19 you can see our key leverage and other ratios. We updated our 15-year track record on slide 20, 21, 23 on a segmental basis. Just to highlight on slide 29 you can see our enterprise value structure and how these liabilities changed our leverage and on slide 13 we provide more breakdown of our finance debt you can see that it is mostly is over denominated it's coming from development banks And regardless of majority of our data classified as short term because of the breach of governance in IFRS accounts, the fact is that almost three quarters of our facilities are long term. On slide 31 you can see details of our IT solution for the agricultural segment. And the rest of the presentation is details on ENT policy and statistics. This year we elevated our ENT issues to the board level. We formed an ENT committee which will take an overall supervision of our activities. And we are actively looking at the details of our ESG policy going forward.

Thank you very much.

We are happy to take your questions.

Ladies and gentlemen, if you would like to place a question on today's call, please press star 1 on your telephone keypad now. or if you're connected through the web browser, please use the flag icon on your screen. If you'd like to interrupt your question, please press star 2. When preparing to ask a question, please remember to unmute yourself vocally. Our first question of the day comes from Jacob Schubbeck from MBank. Jacob, please go ahead, your line is open.

The first question is about the sugar-based acreage in 2020. Do you see that the acreage is shrinking another year or how does it shape right now? And the second question is about the sugar market. Do you expect that this Ukrainian sugar price could go up from this level? I know that in the second quarter the prices are like 20% higher than in the last quarter of 2019.

Thank you for your question. I will start answering and perhaps my colleagues will also add. will keep its sugar deep acres at the same level as last year. But yes, that happened after 13% reduction on 2008. And we can see that the whole market also adjusted sugar plantings downwards. officially the projection which was provided by the industry association that it will be down by 5% however we are watching now the planting the planting levels and we have already completed our sugar de-planting season and most of the players already completed So we believe the acreage will be in the region between 180,000 or 185,000 maximum. And on the sugar prices locally, yes, we believe that this is the third year of the adjustment. for the local market and we finally should see production and consumption match. This potentially can create a positive impact on the local sugar price but of course we would like to see it happening before we can say confidently that this will happen because We see the reduced sugar plantings, but the output of sugar will depend on the yield and the sugar content, which is beyond our control to some extent. It is weather dependent. Last year yields in sugar beets were suboptimal because of unfavorable climate conditions. We need to see through this year.

Our next question comes from Martin Novak from Ipotema.

Good afternoon. I have two questions. First would be about sugar as well, but from the consumption point of view. Do you see any risk that the domestic consumption may further deteriorate in the coming years from 1.3 million tons even downwards? And what would be the possible drivers? And on the topic of sugar also, could you comment about export opportunities as well or sugar volumes given the depressed global benchmark and in relation to domestic price.

Do you see a mixed picture on the consumption level? We did believe that consumption at the level of 1.3 million is probably the bottom line, but of course now with quarantine in place, we see that the industrial consumption is going down. However, consumption through retail is going up because people buy less readymade confectionery shops but they do more all cooking at home so how this trend will mix is still to be seen also on a general trend obviously sugar consumption was going down in the last several years and putting health concerns aside, that was connected to the loss of the number of consumers. One loss of consumers happened because of Donbass and Crimea loss of population. But another one was immigration from Ukraine by Ukrainian laborers. What we have seen in the past month specifically that at least half a million people, which is an official number, came back from Europe to Ukraine. And this is obviously policies for the consumption level. However, we do not know whether for how long people will stay in Ukraine, whether the trend will reverse. It will depend on the current seeing measures by other countries. On the export benchmarks, We saw 70,000 tons of exports of sugar during this marketing season and we believe by the end of the marketing season we will see at least 100,000 tons of exports. At the current global prices, we do not believe that there is room for growth. for the exports. For us, specifically, this is not the price that would motivate us to export, but we do see others doing small volumes.

Okay, thank you.

Could you please comment on the weather outlook for the next few months, given that Do you think that there is any risk given to dry conditions across the region?

This has been a concern for quite a while. It was not just the mild winter, it was a dry winter and similarly dry beginning of spring and we were very excited yesterday when we saw heavy rain coming actually rain came together with wet snow and we believe that that addressed majority of concerns everyone had regarding the planting season we were happy to pause our planting work during the rain and we will resume tomorrow and there is an expectation of another couple of rainfalls in the next week or so. We do not want to rely on weather forecast two or three months ahead but the recent rainfall actually makes us quite optimistic.

Okay, thank you. And the last question from my side. During the presentation you mentioned that you plan to extend cooperation with independent farmers not only with sugar beet but also with grain and oilseeds. Does OSTASA consider change in business model to become more shredder of grain and oilseeds and what is the potential scale of this project?

Okay, just to give you a very simple math we have 0.55 million tons storage capacity and The average turnover for such capacities is 2.5 in Ukraine, and that gives the annual capacity of 1.4 million tons for grain and oilseed. Our harvest for last year was 1 million tons, so potentially we have room to provide storage and handling services for up to 400,000 tons. to other farmers. So in the areas we operate and we have our storage capacities, we actively market our newly formed services to the farmers in this region. Okay, thank you.

Next, we have a question from Natalia Vygotska from Dragon Capital. Natalia, please go ahead. Your line is now open. Good evening.

Thank you very much for the presentation. Could you please update us on the company's cap expense for 2020 and where this company sees its leverage at the end of the year? Thank you very much.

The first question is easy. Our budgeted carpets is roughly 20 million euros. We reiterate our position that until we see higher cash flows from the sugar segments, we will only spend money on maintenance carpets such as replacing obsolete machinery in agriculture that we did in the first quarter of this year. On the leverage, obviously that will depend on our EBITDA focus and we do not make such focus public unfortunately because the situation this year remains very volatile. We are at 3.5 times net EBITDA as of end 2019. And we would like to come within our covenants in the near future, but we cannot say what we will be able to achieve at the current rapidly changing situation.

I'm just listening very much.

As a reminder, ladies and gentlemen, to place a question on today's call, please press star 1 on your telephone keypad now or use the flag icon on your web browser. Okay, next question comes from Anton Smelnitsky from Alboros Capital Management. Anton, please go ahead. Your line is now open.

Yes, hello. First, congratulations for the relatively good results in these difficult times. My question is related to a follow-up question from the previous one on the net debt dynamic. But I understand you cannot give a number, but you expect sort of the same magnitude of net debt reduction during the year. And the second question is, what you expect the total interest cost to be for the coming quarter for debt related payments of interest. And I have a third question that's related to the milk division. This has been a good contributor in the overall EBITDA results. Do you expect to, do you see this as just a cyclical or do you believe maybe you can explain a bit what is behind the improvement?

Thank you. Okay. I will just ask my question.

Okay, Anton, thank you for your question. I'm very glad to hear you again. You're right, we are planning and budgeting the decrease of net debt by the end of the year. According to the initial budget forecast, which we have done at the beginning of the year, now we have some changes in the environment, so it will have some impacts. We're still targeting the initial level. And second, with regards to your question about interest rates, we are managing to decrease interest rates locally. We have working capital lines from local banks at very much lower levels than even from the development banks right now. So we expect that our total interest expense will be less than last year, so you could adjust for quarters and see that it will be less than it was last year. Now, turning to... Do you have a number in mind?

How much lower is the interest payment than last year? Given the new interest level?

Look, first of all, we have, as you see from our numbers, we are decreasing our total debt. So, you saw that at the beginning of the year, we had net debt at 143 million dollars, or 0.136 in euro. However, at the moment, I would say we have less debt, more than 10 million than at the beginning of the year, even in the middle of the sowing season.

So, overall, it's going to expand further. Okay. For the milk division?

Yes. Yes. For the milk... For the milk division, if we go into our results now, you can see that the prices were up, and that was helped by the local currency appreciation last year. This year, the currency is down, which is not supportive of the milk prices. However, one must bear in mind that our prices are premium milk prices even higher than what we show on our slide because we produce milk of higher quality in much higher demand by the milk processors so Our prices are much higher than of those household producers who still supply three quarters of total milk in Ukraine. Overall, the market is reducing. The depreciation of hryvnia resulted in the trend when they had count of milk herd was reducing last year. And that helped with the pricing as well. This year we need to close the market demand because the industrial producers demand is holding up. However, demand from Holika, Coffee place is obviously going down during the lockdown period.

Okay, so we don't expect any changes there in terms of investment levels within that division. Just maintenance as well.

Well, I believe that it is unfair to put mass expectation in the current circumstances because we do not know when the lockdown will finish and that directly impacts consumption of milk. Okay.

Thank you very much.

As a final reminder, ladies and gentlemen, for today's call, if you would like to register a question, please press star 1 on your telephone keypad now. It seems we have no further questions, so I'll hand it back over to you, Julia.

Thank you very much for participating in our conference call. Yulia, we would like to thank the participants. We hope that in this situation we fully understand and react to the challenges that we faced. And we do everything possible and everything that depends on us. to optimize our costs and increase the efficiency of our business. The whole team is aimed at this, and all our efforts are aimed at this, on the modernization of the company, on the implementation of IT technologies, on the implementation of waste, on the improvement of operational efficiency. Therefore, I believe in the ability of the company

Thank you very much everyone for participating in this call. This is concluding remarks from our COO, Mr. Vanchik, who is saying that in this difficult and challenging time, our focus is on optimization, on course management, And we will achieve it through what we focused in the past with the help of IT technologies. And hopefully we will come through this all together stronger.

Thank you very much, Linda.

Yes, thank you very much. We would like to conclude the call, but also we remain open for one-on-one meetings, calls, emails. You can always contact me directly. As well as on the 20th and 23rd of April, we participate in Wood's consumer investor conference and would be available for one-on-one during this conference if you would like to register.