Astarta Holding PLC

Good afternoon, ladies and gentlemen. My name is Paweł Wieprzowski, and on behalf of Wooden Company, I would like to very warmly welcome you to the first quarter conference call with a startup management. Today, the company is represented by Viktor Ivanczyk, CEO, Viktor Blavky, CFO, and Yulia Baryshenko, Business Development and IR Director. Now, I'd like to pass the floor to the management board. Gentlemen, the floor is yours.

Thank you very much, Pavel, and thank you everyone who dialed in today's call. Yesterday we published our first quarter results, and we would like to briefly go through them. As it was expected, our revenues for the first quarter are slightly lower compared to the same period of last year. and this is on account of the agricultural performance revenues, which were lower on lower harvest in Ukraine, and specifically for us, this amount is largely explained by lower volume sales of corn. The revenues in the sugar segment were largely flat. We had an improvement in the soybean processing site and flat revenue numbers for the cattle farming. If we look at our EBITDA and cash flow position on a segment basis, we see a lower number for the agricultural segment, again, largely due to the lower harvest of last year. We are testing our remaining stocks. There was a good turnaround of our margin on the sugar side due to higher prices, small uplift on the sodium processing, and a negative number in the cattle farming segment on account of lower revaluation of biological assets. If we strip out the impact of biological assets on our P&M, You can see that our margin largely improved, and this is both on the gross margin and EBITDA level. The bottom line is positive in the first quarter at almost 4 million euros, so we are quite happy with our results. If we go further into looking at our balance sheet position, it has become even stronger. After we recorded higher operating cash flows in this quarter, this allowed us to pay down the debt as we also have a positive cash flow from investing cash flows. This allowed us to lower our net debt position further down to €117 million, which translates into 1.1 net debt EBITDA multiple. Going into more details on the segment side, the results we see in this segmental reporting are largely explained by lower volumes of corn sales and other crops were largely sold before the first quarter of this year. However, we see a much better picture on the pricing side. We will see on a later slide what was the latest development on the pricing side, but one of the surprising pictures we see for many years is when corn prices outstrip wheat prices with the origin in Ukraine. With regards to our this year's harvest, the acreage area did not change significantly. The crop mix is largely stable, safe for the lower acreage under sunflower seeds. And on the other side, we are growing more red seeds. Red seeds is the crop that we introduced for the first time last year. We had encouraging results. Therefore, we increased the acreage. What also should be noted on the crop mix side because of the changing weather patterns in Ukraine, we are expanding our winter crop acreage. So winter wheat and red seeds are the first crops that we are going to harvest this year and in more significant quantities. As I already mentioned, this is a surprising picture. There is a big diversion between the prices for corn and wheat. And this is explained by the appetite, high appetite, one of the key global consumers, China. And there are some weather concerns in other corn producing regions, especially in America. On the sugar side, we have lower sales volume because of the lower sugar beet harvest last year. However, this was largely offset by higher prices. 478 if translated into euros versus 352 last year. And this allowed us to expand our gross profit margin from 14% to 39% and more than double our EBITDA margin to 34%. If we are looking into this year's situation, there is still upward pressure on the sugar prices because of the lower sugar beet harvest in Ukraine and much lower stocks. The government of Ukraine initiated imports of raw sugar cane into the country under WTO quarter. This is something that hasn't happened in Ukraine for a decade. However, given the low availability of the sugar in the market, we consider this move as wise. We were one of the major players who has technical capabilities to process raw cane sugar. So we also started importing and processing sugar cane into white sugar. And for this year, we contracted 60,000 tons. At the same time, we can see that the farmers are increasing acreage under sugar beet. This cannot be increased radically because of the crop rotation requirements. So the increase of acreage is expected to be modest at 5% year on year. On the soybean processing side, we are pleased to present our results. There was a price value for soybean oil. However, the prices for soybean meal, which is the main product of soybean crusher, did not keep pace at the same level as soybeans. So we can see a decrease in our crushing margin, which also translated into a squeeze on the EBITDA side from 13 to 11%. However, we do believe that given the current situation in the market, our margins are quite respectable. Our soybean crafting facilities are one of the most utilized ones in Ukraine. And this is largely due to our own crop growing efforts. We process one-third of total intake of soybeans at our crafting facilities. from our own fields. Also this year, according to the government forecast, there is an expectation of a 5% increase in the acreage under soybeans. So we believe the margins should recover with the wider availability of soybeans in the market. Cattle farming, we can see higher milk production with the same size of herd and this is because we increase the yields to each of our cows. The amount of milk sales volumes are flat but the prices lowered from 370 to 348 euros. This is the situation which is likely explained by the delay between the price growth and the cost base growth on the feed side. Key crops and feedstock prices are growing at a faster pace now than milk prices in Ukraine, but we do believe that the situation with milk prices will catch up with the soft commodity rally. One of the other factors which contributed to the negative number on the biological assets evaluation site is simply of technical nature. This is the structure of our herd. If we have a slightly higher churn within our herd or a slightly higher average age of the herd, The fair value of biological assets is lower because the discount period is shorter. But this is largely of a technical matter, and we believe that six-month results will be more representative of our efforts. With regards to strategy and outlook, we discussed it in more detail just a month ago when we presented our annual results. There is no change here. We continue to focus on our profitability and we would like to maintain our massive share in all the segments. Thank you very much for your attention during the presentation. I'm happy to take your questions.

Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. And for those who have joined online, please press the flag icon. When preparing to ask your question, please ensure that your phone is unmuted locally.

If I may, I'll start. Thank you, Ria, for the presentation. Very insightful indeed. Two questions from my side. First one, what kind of yields do you expect in just normalization for the long-term? Average or shall we expect above average harvest? And the second question regards the sugar price, your considerations over the sugar price. in the second half of this year. It seems that at this stage, the scriptwriting screen is well above the worldwide benchmark, the London one I'm thinking of.

Do you think that the situation of... Sorry, Pavel, can we take questions one by one? Because the second question is so long that I forgot the first one, sorry.

Absolutely, sorry. Please, go ahead with the first question.

At the moment, we do not see, basically it is very early to judge about the yields in Ukraine. Winter crops are growing nicely and we do not anticipate any problems with our first harvest of the winter crops. However, it is too early to judge about spring crops as I forgot to mention on this slide in agriculture. The key difference between our first quarter results and the previous year is the absence of the same value of biological assets of crops growing in the ground because spring crops have not been planted before the end of the first quarter we have just finished our planting season literally two days ago so currently the yields is very highly speculative issue because we just put them into the ground but obviously Compared to last year, the ground is much more moist, there is a very favorable amount of moisture for growing crops, but the temperatures were subdued for a long period of time, and this is why planting had to be started much later, and the period for planting was much more truncated. We as one of the top farmers in the country managed to do it within optimal period. But we need to see whether the rest of the country managed to finish planting within this very short period. According to the Ukrainian government, they see the country's key crop corn going back to 35 million tons, and this estimate has not been revised. So I guess we have confidence on the winter crop, but it is too early to judge on the spring one.

Mm-hmm. Thank you. So the second question concerns the sugar price. At this stage, as you have shown in your presentation, the Ukrainian sugar price is well above the global benchmark. And my question is what are your thoughts about the sugar price in the second half of this year, taking into consideration that the planting average of sugar seems to be 5% higher year-on-year. Yields should, I'm sure, probably will normalize as well. do you think that in the second half of this year we may see some pressure on the sugar price in Ukraine taking into consideration the current level or do you think it may be suspended at this level?

I think we should look at Ukraine also in the global context because sugar prices are growing globally as well the two benchmarks in London and New York were also going up significantly recently it was not as steep rise as in the Ukrainian market but still they were growing so it it has become possible to process raw sugar into white sugar in Ukraine this year only because of this delta, the differential between the local prices and the raw sugar prices. So assuming that the global prices do not fall significantly and we don't see them falling yet, here that Brazil cuts sugar but increases ethanol production and reduced stocks. We are still quite optimistic about the sugar prices in Ukraine for several reasons. First, it takes several years for any significant stocks to be worked out and Last year's situation was not just about a lower harvest of sugar beets because of the weather, but there was also a delay in starting of the new sugar beet season. The shortage in the market appeared because the old stocks ran out and the new sugar beet processing season started. One month later, so the industry was operating on much lower stocks. So the surprise was not just the lower harvest, but also lower level of stocks. To replenish stocks on any significant level, it really takes several years. So even with sugar deep planting season by 5%, last year was supposed to be a balanced market, meaning that if the sugar deep yield was at the normalized level, the production would match the demand. However, as soon as the harvest appeared to be lower, it appeared that there was not enough cushion in the market to keep providing the volumes of sugar that the customers are accustomed to. So this year we will see a higher acreage But because the stocks were so low in the previous season, it takes more than a good harvest to replenish the stocks and to affect the pricing environment.

Okay, so the bottom line is that in the second half of this year, according to your considerations, the sugar price should still be strong. And it seems that 2021 may not be the year when we reach the peak of the cycle, of the sugar price cycle.

Right? We'll see. Definitely with normalized yields. It's probably not the year when the stocks will be high. And, of course, we don't know the weather conditions yet.

Okay. But assuming that it's the case, the sugar price should still be high in the third quarter of next year. So we'll be entering the next year with still strong prices of sugar. That's the key takeaway, right?

We hope so, yes.

Okay, perfect. That's all from me. Thank you so much.

Can I ask the operator if there are any other questions? Yes, so our first question comes from Jacob Kosek from MBank. Jacob, please go ahead.

Good evening. Thank you a lot. I've got a few questions, so I will ask one by one, like Pavel did. The first question is about the sugar cane processing. I noticed that there were some gossip rumors on the market that if even we translate this sugar cane to the white sugar, the price for processing this cane sugar is something above 22,000 hryvnias per ton, which means that it was like on the on the bulk market price, so I'm just wondering if you could earn any money on processing this 60,000 ton of cane sugar in 2021 year?

We definitely don't import raw canes just to satisfy the needs of our customers without any additional margins. So we will be, we do believe we will be earning an incremental margin on processing sugar cane, raw sugar cane. And we believe that it will be several million dollars on our EBITDA at our EBITDA level. So there will be incremental profitability from the impulse of 60,000 tons.

Okay, thank you. I'm just wondering also about this revolution on the biological assets in agricultural segments. You mentioned that you did not plan any spring cross till the end of the first quarter. I understand that taking that into consideration, the second quarter of 2021 and this pricing of the range that we've got right now, this technological access revolution in the second quarter should be substantial, yeah?

Indeed, yes, you're right.

Okay, and just a last question about the hedging, because one of your competitors on the market, Kernel Holding, they already have, I think, more than 80% of the 2021 production of brands, and the pricing levels are very favorable right now, and just I'm asking if you're already hedging the production from 2021, or do you plan to do that in the coming weeks?

We touched upon this topic after our annual results. One month ago, we said that we pre-sold half of our harvest already. So we provided this answer one month ago. I don't believe we should be following it every month, but we already pre-sold half of the harvest.

Okay, thank you a lot. Thank you for all the answers.

Our next question comes from Martyn Novak of Iperema Securities. Martyn, please go ahead. Martyn's line has disconnected, so our next question comes from Radim Kramila of Ursa Management. Radim, please go ahead.

Yes, good afternoon. Just a question on your balance sheet and let's say the capital allocation. Let's say the net debt is slowly, when I exclude the leasing obligations, basically going to almost close to zero. I think the net debt level is around 20 million euros on your balance sheet. So is the strategy of the company to completely deliver it? let's say within, probably it looks like you should be able to do it during, I don't know, within the next two quarters. Or do you plan to build up some kind of a cash buffer for the company? Or what would you consider, let's say, with, let's say, leverage versus dividend payments or buybacks?

Thanks. Thank you for your question. Well, the first quarter is not representative of our leverage position because we are just at the beginning of our agricultural cycle. However, we do want to have as low leverage as possible. We believe that it will not be an efficient balance sheet without some form of financial debt. Also, as you know, in the past, most of the bank debt which we did have on our balance sheet came from multinational institutions like KFC, BRZ, EIB. So, there is an excess liquidity in the market in Ukraine and that is widely available. However, until we see a good growth opportunity that we can capitalize upon and which will bring us returns higher than the interest that we currently pay on debt, we will certainly be looking at such growth opportunities. Last year, because of COVID, because of other things, and perhaps in the third half of this year, is not the time to embark on any aggressive growth. Therefore, we believe that we have good margins. There was a good turnaround on the cash flow side, on the sugar segment, which has been underperforming for the last several years now we believe that we earn good cash flows we pay down our debt and we start paying the dividends so we would like to demonstrate to our shareholders that they are questions about our dividend policies were heard. We were hearing it for several years and now we are in a position to establish our debut dividend.

Do you plan to introduce some kind of a dividend policy?

You're welcome to suggest to us. We know that since we announced this item on our ADM agenda, some of investors wanted to suggest their idea for the dividend policy. If you have those, you're welcome to send it through to us.

Okay. Thank you.

You're welcome. In the chat box, I can see three messages. One from Grzegorz Skowronski. I can see slides. I cannot hear the call. Only music in the background. Then a message from Hanna. Okay, Hanna is probably the operator. And then a message from Darius. That doesn't work. I don't see any other questions. Pavel, do you see any other questions?

No, I do not see. Luckily, I can hear you. So I will take the opportunity to ask some more questions from my side. Okay, I can...

I can see, could you please clarify which line of the P&L statement contains the total gain loss on disposal of subsidiaries in the amount of 3.6 million euro during first quarter? It's not, to answer this question, this is not it's not the line in the presentation but if you look at our full report on the website you will see full disclosure of this amount

If there are no other questions at this stage, maybe I'll just ask a few from my side. About four months ago, Kernel announced that it's going to purchase 40,000 hectares from one of its minority shareholders. It's roughly 9% of their current land bank. Do you happen to have likewise plans or do you consider expanding your land bank at this stage? That's my first question.

Thank you. If you compare our land bank for the last several years, there is a 2% to 3% churn, and this is largely as we operate land. Normally, we identify which assets we would like to continue operating on the long-term basis and which ones are not performing well. We also try to optimize our costs. Therefore, when something becomes available in the close vicinity to our operations, we try to acquire such a leasehold drive. At the same time, we may dispose some land plots purely on logistical basis. And this is actually what happened in the first quarter of this year. When we disposed leaseholds rights in our smaller subsidiaries, one was related to the land which was adjacent to the sugar mill that we eventually sold. If we are selling a sugar mill, in most cases, we don't need a land bank which is adjacent to it. So, at the moment, we continue to watch the situation and development with the liberalization of the land market in Ukraine, which should start on the 1st of July. However, any change in our acreage currently is about our optimization of logistics and focusing on the most productive assets.

Okay, fair enough. So as a follow-up to this question, In your full-year report, you mentioned that you are not going to expand at this stage the acreage of the sugar beet in your land bank. Taking into consideration that the sugar price rally seems to be quite solid this term and you expect it to stay so in the second half of this year, would you consider amending your policy regarding the size of your sugar beet land bank or the land area? No changes.

At the moment, we did not anticipate the change until we see a sustainable pricing environment for sugar in Ukraine. As we explained before, our core customer base are industrial consumers of sugar and beverage companies, confectionery companies, so our level, more or less stable level of demand from our key customers is around 300,000 tons that we were producing and selling in the previous years. However, if there is a major uplift in the sugar prices globally, and we can also rely not just on the domestic market, but to have meaningful exports, we would consider expanding the sugabit area. But it is not a clear picture yet on the global market or in the Ukrainian market to make significant changes. Therefore, we keep our acreage stable and from a technological point of view, it also should be noted that you cannot do significant runoff increases in the acreage because of the crop rotation. So 5% which we see locally in the market is probably what can be done by the industry as a whole. But it's not an industrial process that you can just turn the tap on and increase several times.

Fair enough. My next question will refer to, in fact, the question that's been already asked two minutes ago. Dividend policy. Is it certain you're taking into consideration the strength of your balance sheet, lack of material investment on the horizon, and overall structural and positive changes in the Ukrainian sugar market, i.e., roughly production capacity equaling to the demand? that you will not be eager to offer lower dividend per share than this 0.5 euro per share. So the bottom line question is, is the 0.5 euro per share dividend a starting point for further discussions in the coming years for the dividend payment, taking into consideration all the things I have just named?

We will have to see. We are operating in extremely volatile market environment and we believe that we are now much better placed to distribute any excess cash flows to our shareholders since we delivered it. In terms of our cash flows, we can allocate a better share of cash flows to our equity holders as opposed to debt holders. However, we are in extremely volatile market environments, and we will be reviewing our cash flow position every year. And also something I mentioned today, we need to watch the developments in the agricultural liberalization with regards to the farmland in Ukraine and see whether there are any special changes in the market that would demand our resources.

Last question from my side. Do you happen to have any kind of figure that would describe the potential cost savings that you are going to introduce this year? I mean, it can be in terms of percentage of margins. It can be millions of euros. Any kind of tangible figure?

We constantly work on optimizing our course base, especially if it can be demonstrated in our agricultural segment, which does more precise farming, meaning less resource application, we replace our machinery. But these are all incremental cost savings with each on its own not significant but overall should be more visible in our results. So you can look at our cost of sales Hector and look at this. We believe that we demonstrated wider margins in previous years and last year because of our cost management but this year we are enjoying the soft commodities rally and we believe that we can have higher margins as a combination of our optimization efforts as well as higher pricing environment. So just look at our widening margin and this is the result of both.

Okay, perfect. Ilya, do you happen to see any questions asked on the chat?

Yes, I can see many questions from margin. one second in volume terms how much is reasonable ending sugar stock volume as of end of this season it should be enough of 100 000 tons definitely but we believe that ukrainian cities it is not very reliable When this 100,000 tons raw sugar input volume may enter the local market, well, it depends on what point of time we are talking about. We can practice 60,000 tons. There is another local sugar producer which also physically imported and started processing raw sugar into white sugar so we are already doing it now whether the entire 100 volume entered Ukraine obviously probably not that important we are already processing raw sugar into white sugar and we will be selling it soon Does ASCAP see currently sugar export opportunities with current local sugar price and its premium over global benchmark? No, with the difference between global white sugar, sorry, if we go into this graph with such a difference between white sugar London and Ukrainian sugar it's not feasible to export it's much better to work with a domestic market next question with regards sugar price it was mentioned that a startup hopes sugar price next year to be as high. This comparison was to current market price or realized sugar price in third quarter 21. If we're talking about calendar years, the price should stay definitely high until the start of the new sugar beet processing season. which starts in autumn and we do not know what the harvest is going to be in Ukraine for sugar beet but given the acreage increase by 5% and unknown yields we don't think that situation can change so radically On slide 11, okay, let me go to slide 11. The last operational goal says careful expansion of product mix. Could you please elaborate on the possible direction for future investment? For the last two years, your practice is very low. Yes, indeed. Yes, indeed. We, as I mentioned, last year and this year, COVID years everywhere. So it is not the period for any major expansion, but we always were looking at products to get closer to the end customer. One of these offers efforts before we entered the coded regime globally was selling higher sugar into retail networks and packaging it, branding it with a startup logo and we are looking at other branding or other opportunities but nothing radical at this stage and we are still in the difficult macroeconomic environment and obviously because of commodity prices are so high at the moment we focus on trying to capitalise as much as possible while they are high and our focus is on producing raw crop basically this year. I believe all the questions were answered and it's probably time to wrap up the call as it is already past, one minute past hour.

Sure. Ladies and gentlemen, it's been a pleasure to moderate today's call. Thank you so much for your participation. Julia, thank you so much for delivering the presentation and answering all of the questions that were asked. Have a great afternoon, everyone, and speak to you after the next results. Thank you so much. Take care.

Thank you. Have a good afternoon, everyone.