Astarta Holding PLC

Good afternoon, ladies and gentlemen. My name is Paweł Wieczorski, and on behalf of Wooden Company, I'm delighted to welcome you to the second quarter 2021 results conference call with Astartes Management. The company is represented today by Wiktor Iwańczyk, CEO, Wiktor Glacki, CFO, as well as Yulia Bershenko, Business Development and Investor Relations Director. Gentlemen, congrats on the results. Please go ahead.

Thank you, Pavel. I would like to go straight into our T&A. The way we look at our business is on six-month, 12-month results because we are a highly seasonal business. So if you look at our first half, Revenue line, you can see that we have significant growth in the sugar production, soybean processing segments. Our revenues were flat in cattle farming, but much reduced in the agricultural side. The lower result in the agricultural side is explained by the fact that we are still selling last year's harvest. and the lower volume of output last year is feeding through our revenue on the corn side in the first six months, but we'll look at it in more detail when we go to the segmental information. If we look at our profitability, You can see that we are able to book a large change in the biological assets. Our winter crop harvest is very close to completion in terms of action. Spring harvest is in full swing. and we were able to book about 92 million Euro biological assets revaluation surplus, which goes above our gross profit. If we look at our profitability at the growth and EBITDA margin without the impact of IAS standard treatment, Our margin still expanded from 26% to 27% on the growth level and to 28% at the EBITDA level. Due to low leverage, you can see that we also have low finance costs and the currency movements for Ukrainian hryvnia was also favorable to us compared to the previous period of last year. And that's about around 90 million online profits in the first six months this year. Going into the tax laws and the balance sheets. Due to the seasonality of our business, and now we are in the harvesting part of the winter crops, we have negative operating cash flows. Also, what has impacted our cash flows in the first six months is our activities to process raw sugar came into white sugar for the Ukrainian market. However, our investments are still tightly controlled at maintenance level, and net debt increased due to working capital needs was not significant. Our net debt totals in BDA ratio still remains at a healthy level of 1. If we drill into our segment results, you can see that the majority of readiness were done on selling off the remaining volumes of corn from last year's harvest. And we have IS-41 item booked for the crop growing currently in the ground. Our costs remain well controlled, and this can be seen not just on the cost of sales basis, but also on the cash flows related to our land use liabilities. Overall, the market environment for soft commodities remains highly favorable. There was a small dip on the wheat side, but we can see that the situation has reversed recently and we remain optimistic on the pricing environment for us going forward in the second half of this year. On the sugar production side, we are still selling off stocks from our sugar deprocessing last year. This pricing environment domestically remains more favorable than international one, although we can see that there is a large sugar price uptick in global markets as well. And this allows us to earn a gross profit margin of 37%, and the EBITDA margin also doubles from 14% to 31%. If we are looking at the situation in the global market, we can see that white sugar foods were up by one fifth in the first half of this year, but the Ukrainian market experienced a higher price increase because there was an under production of sugar beet last year due to lower harvest. And Ukraine had to import additional volumes of sugar Astarte is one of the biggest players in the market, obviously at the front running of this trend. We imported around 75,000 tons of raw cane sugar and we already produced nearly 50,000 tons of white sugar for our domestic customers. The local farmers responded to higher pricing environment by expanding sugar de-planting area but it is not significant increase around five percent. Soybean processing, huge value for soybeans and quite significant price increases for the key products such as soybean meal and soybean oil. However, our profitability, of course, was squeezed on higher costs for the input sold-ins, and we have a slight margin increase at the data level from 9% to 8%. Likewise, the rally on the sold-ins product pricing led to Ukrainian farmers expanding the planting area, which is expected, plus 6% this year. Cattle farming is largely stable. We have a stable life of herds. However, our production volumes are up as we increase productivity of our herd. Our daily milk yields were 23 liters, which is higher than in the previous six months. If we are looking at the average pricing In this sector, it was largely flat on six months to six months last year, and that has allowed us to keep our growth, profit and margin at the same level, although at the EPA level it was lower. This is probably The end of our six month results, the strategy outlook hasn't been changed. Last year was a COVID year and it was not, the focus of our business was maintaining our profitability and keeping the cash flows rather than expansion. But we are looking at the same target in terms of this year. One of the slides which I wanted to highlight at the end of our presentation is our current capital structure. We finally see a big rebound in our enterprise value due to reduced leverage and higher operating results. And we believe that the capital markets now can value our business on a more full picture. So, Pavel, we are ready to take questions from the audience or anything you would like to ask as well.

Thank you so much for delivering the presentation. So if I may ask a few quick questions. First of all, what is your outlook for the 2021 harvest? What kind of year-on-year growth do you expect? Is it double-digit?

Thank you for your question. We are in the process of harvesting our winter crops. The two key winter crops is wheat and red seeds, which has become our key crop from this year. And we can see a much higher yield compared to last year. We hope to report the final numbers to public as early as next week, but currently we can say that the length of it is definitely a double-digit growth in yields in terms of percentages. We also expect to see a good harvest for rapeseed. If we are talking about spring crops, Obviously, there is a critical couple months related to the yields of corn, sunflower, soybeans, but we still do expect it to be 15-20%, at least 20% higher than last year. What we can see from the government statistics is that there is around 15% uptick, generally, in the yields for this sector. And we believe we can register a similar trend. But again, with the for corn and there are still another two critical months ahead of us.

Okay, so since we've discussed yields, what fraction of the 2021 harvest have you already sold or asked prices?

Obviously, we are not disclosing our commercial book, but two-thirds of our crop has been refilled as of now. Okay, perfect.

You've mentioned that you reported 5% yield in the sugar-planting area in your land bank. And since the sugar price in Ukraine has significantly diverted from the world benchmark level, would you think how sustainable is the current level of the sugar price in Ukraine? Because if it's sustainable, we may see another solid year for the sugar business next year if we take into consideration the 5% expansion of the sugar deep land bank.

Yes, the situation with sugar practice in Ukraine is a result of the under-production last year because of the lower harvest. This year, a larger planting area combined with higher expected yields should result in the output being significantly higher than last year. But in our view, the local players are probably very cautious because weather can be unpredictable. Therefore, the price adjustment does not take place yet until everyone knows what the final harvest is, what the final yield, the sugar content And finally, the output of sugar. From our personal experience, since our target volumes of sales is around 300,000 tons of sugar, and we are 25% below this level last year because of the lower harvest, we imported sugar cane in the amount of 74,000 tons to go back to the same level of 300,000 and we believe this is fully sufficient for the needs of the domestic market. However, we will have to see the crop and the sugar content to have more visibility on the output from this year's harvest.

When it will be? And when we'll have to find information about

The marketing year for the sugar starts from 1st of October. So this is when first sugar beet is being collected and processed into sugar. Depending on the weather conditions, there could be a lag for a couple of weeks. And this process lasts two or three months. So closer to Asoba, we will see if there is a price adjustment because the market participants anticipate a higher harvest.

Okay, so no price adjustment for the next two months, essentially, or one and a half months.

Also, it should be noted that globally, sugar prices also are increasing. and that could create also certain flaws for the domestic prices in Ukraine even with a higher harvest.

That's good. Two more questions from me. Shall we expect the negative evaluation of biological labs in the third quarter? And if yes, how material can it be?

We are trying to estimate our yields on the basis of the current weather and growth of crops. However, as I mentioned, for key crops such as corn and sugar beet, the situation is still in progress for the next two months. If we were to adjust our estimates with nine months, we do not expect it to be more than 10% of the level that we currently estimate. Plus or minus 10% is generally considered to be a good adjustment at the current state of the harvest.

Okay, so we have another question. investment opportunity or M&A, will you, in such a case, downsize the buyback program?

Yes, of course. The purpose of every business is to profitably grow or return cash flows to the shareholders in the form of dividends of fair buybacks. We still would like to see how the market for trading some lending Ukraine is unfolding, whether there are attractive opportunities. If we come across one, we obviously will have a look and adjust our capital allocation program.

Okay, that's all from us. Thank you so much.

Thank you. If you would like to ask a question please press star followed by 1 on your telephone keypad now. If you change your mind please press star followed by 2 to remove your request. When preparing to ask your question please ensure your phone is unmuted locally. We have a question from Milos Cislo from LRFM. Milos, the line is open.

Please go ahead. Hello. Congratulations for the good state of the business and bright perspectives for the future. I do have two questions, as Paweł asked most of those that I prepared already. So the first one is, Is it possible for you to disclose what were the assumptions for the yields and I mean the tons per hectare for the evaluation of biological assets for the current reports?

The biological ethics is our commercial book, which we don't disclose, but we can provide guidance. And also, as I mentioned, among our core crops, we interleave and raise seeds, harvest, final harvest, will be known early next week because we are in the final stages. So you can have, for these two crops, you can have not just the estimates but the firm numbers as soon as early next week. And we expect it to be much higher than last year. If we compare the situation to the previous year, we do expect should be above the levels in the past previous three years, above 50. How much above 50 again has to be seen because we still have two months ahead of us. Sunflower seeds, we expect the yield to be closer to the levels of 2018 and 19. Then we go to corn, we expect it to be significantly higher than last year, but probably not as high as 2018, so maybe closer to 2019 levels.

Okay, so obviously I didn't ask for the prices that were used, so there is no possibility to get the numbers that were used in making the position of the biological assets, because obviously what I want to see is the potential difference and the increase. When you say that it's much higher, for example, in wheat, and in rate sheet than last year, I understand this, but does it mean that it will be higher as well than what was booked or it was already predicted in the books through this evaluation of biological assets?

We provide our comparisons on a six-month or six-month basis. And again, we cannot disclose our commercial book. I know where you're coming from because you asked this question before. At the moment, we can only provide the guidance on our estimates. On the pricing, our estimates for as of 30th of June this year compared to last year, our pricing expectations are by one feeds higher for winter wheat, up around 50% on sugar beet and between 40 and 50% up for sunflower, corn and soybeans.

Okay, thank you. I'm listening.

Yes, I just wanted to – the pricing increases were the biggest component of the biological asset revaluation. So if you were looking for an explanation, what was the biggest driver of our growth in biological asset revaluation, this is mostly on the soft commodity rally part.

Okay, thank you. So I have another question. The question concerns the moisture of the soil. What is the current state? Is it satisfactory for those late crops currently?

Yes, we wouldn't be able to provide good estimates for our yields if if the moisture level were unsatisfactory. However, it should also be noted that we have a very large farmland area, over 215,000 hectares of land is a large area, and it is It can be divided into western and eastern parts. And each year the weather pattern can greatly vary between the two. But generally the levels of moisture for the western part of Ukraine now is much higher than for the eastern one. So when we do our estimates for biological assets, we obviously have the averages, but these averages do take into account the precipitation level on all our land banks.

And how long dry period would have to be required to damage significantly the crops at the current stage of development?

Well, in the previous years, it was two to three months of drought in order to affect. And it also depends on the crop, because sunflower is much more heat resistant crop compared to corn or sardines, for example.

So two, three weeks, it's not a big problem in general?

No.

Okay, great. And the last question would be, do the company already started to book some sales for the 2022 season?

No, the general practice in Ukraine that harvest is being started to be pre-sold at the time of the planting. So we haven't started planting, new planting, and this has not been on our agenda yet.

Okay, great. Thank you. That's all from my side.

You're welcome.

Thank you, Miloš. As a final reminder, everyone, if you would like to ask a question, please press star followed by one on your telephone keypad now. Or if you've joined us online, you can press the Request to Speak flag icon to register your question. Our next question is from Martin Novak of Epothema Security. Martin, your line is open. Please go ahead.

Good afternoon. Two questions from my side. The first one is about your trading operations plans announced last year. What is the current plan for 2020, 2021 year? And the second question would be regarding the output and more color about the domestic solar consumption. You are not in the presentation, but it is staying at the level of more or less 1.3 million tons over the last year. But the local sugar association published a statement to the government in which it implied that the monthly domestic consumption is around 80,000 tons, which multiplied by the number of months gives more than 1 million tons a year. And why the local sugar association is estimated for domestic consumption is

such a law in my opinion okay thank you for your questions I think on the trading side it would be difficult for us to make progress after such a law harvest in Ukraine so our as we explained this form we are We have a new land silo network so our focus is on cooperating with farmers which operate in the regions of our operations and purchasing volumes of grain analysis from them and offering them our services in terms of the storage and handling of grains as well as trading. However, we were not able to fully start utilizing our capabilities last year because of the low harvest. Now we are in the process of gearing up for winter crop volumes and then in the autumn we hope to handle spring crops. So our annual target, depending on the harvest, could be between 400,000 to 600,000 tons of handling third-party volumes. And this is something we hope to achieve this year if the harvest proves to be as good as it is currently projected. On the consumption of sugar, obviously statistics in Ukraine is very unreliable, and this does not relate not only to consumption of a particular food item in Ukraine, but even for the general population. There hasn't been a proper census since 2000 for 20 years. And we can only estimate the true consumption. We can also follow consumption from our industrial consumers. All we can say is that last year when production in Ukraine of sugar beet was at the level of 1.15 million tons, there was a significant shortage in the market, which still sustains the price rally. Therefore, consumption level at one million ton, maybe on the basis of Ukrainian statistics, one can make such a conclusion. But if it were the case, there wouldn't be a shortage in the market and us importing raw sugar cane. There is obviously a question of the stocks which needs to be at the end of the marketing period, but generally we do not think that consumption is below 1.2 million tons on the basis of what we see in terms of industrial sugar consumption by confectionery and beverage industries in Ukraine.

Okay, great. Just one follow-up question. With how much ending stocks of sugar do you expect the market, the Ukrainian market, will end the current season? Around 1.5 months of consumption, 1 month of consumption, given that around 130 tons of raw cane sugar was imported and is going to be processed.

Generally, the stocks are around 100,000 tons, which is usually, you know, one month's consumption, if you assume the consumption is 1.2 million tons.

Okay. Thank you, Martin. Our next question comes from Aragim Kamula of Aster Asset Management. Eric, your line is open. Please proceed.

Yes, hello. Good afternoon. Can I just ask you about the cash flow? So there is this big difference between last year and the first half where actually there was a positive contribution from the working capital and this year there's like a big negative contribution from the working capital. So what actually changed in the year-on-year? Is it just this purchase of sugar cane that you're recommending or what's standing behind it?

Yes, two items. One is obviously sugar cane purchases. The other item can be seen here, the amount of corn we sold. So in the first month of this year, we sold 150,000 tons of corn. Last year, the amount was double of that.

So was it actually the fact that you were trying to kind of improve your net debt position that you were selling maybe more and you were like cleaning the storages?

No, we simply collected less corn last year because the yields were lower and we sold less corn this year. So this is 150,000 tons versus 300,000 tons of corn in the first six months last year. In the first half of the year, we sell previous year's harvest and previous year's harvest was much lower. If you look at our harvest volume, that was more than 100,000 tons lower.

Okay. And on this, let's say, hurricanes for crashing, so you expect to generate positive, let's say, profit from being purchased? Or is it just to, I don't know, supply your customers that you needed to actually import these sugar canes?

No, we would not engage into contracting vessels and huge amounts of sugar cane if it were not profitable. Currently, the difference between sugar cane prices in the global market and white sugar in Ukraine is enough for us to make a profit. This is why we are doing it. Obviously, also, we would like to replenish our stores. for safety reasons, therefore the volumes that we contracted could be slightly higher than we anticipated. as a total consumption of our customers. But we do would like to carry some stores. This is why we imported 74,000 tons. Again, to go back to the level of consumption that was in the previous year, around 300,000 tons.

Okay. I was reading about some... issues or weather patterns in Brazil, damaging their crops, especially, I think, the corn and sugar cane. How big impact could it be on the global, let's say, balances?

Do you have any estimates? we are not a major global sugar producer. Our specialty is the domestic market and supplying our industrial customers in confectionery and beverage sector. So we follow closely the domestic market, but the levels of the global pricing for sugar ensures there is a bottom line price for our product in Ukraine. So if The global prices keep rising. That just means that even with increased harvest and planting area, the prices are not expected to fall significantly for us domestically.

So you don't have a strong view on the global balance at the moment for these communities?

We wish we were a significant contributor to the global balances, but we are not. Obviously, there are, you know, sugar-producing countries globally, much bigger than us, Brazil, Thailand, India, and we are the market makers. We are the price chasers globally, but we are significant player domestically.

Yep. Maybe the other part of the cash flow, there's also interest in the lease liability, which you mentioned is mainly land. Why there's a year-end change? Because I would assume that the prices for land would be more or less stable, or is it ethics kind of effect?

It is ethics, discount rates, and all other things that go into the calculation. If you look on... The balance sheet item is a discounted liability, but if you look at our cash flow outlay on the land lease liability, it is largely stable. Last year, it was 20 million euros. This year, it's 10 million euros. So in euro terms, there is a slight decrease, but this is a forex movement because currently the land lease rates in Ukraine are 16 grigners.

Maybe the last question from my side, because I looked at your realized prices for corn in the first half 2020 and 2021 and they were basically flat or even slightly down and actually on the other slides you showed that the global prices were going up, so it means that actually all these volumes that you sold the corn this year, the prices were fixed from last year?

That is correct. Last year was COVID-dominated year. So it was important for us to pre-sell our harvest earlier, given the uncertainty with the global and macroeconomic environment in Ukraine. So we missed that rally for corn.

Okay. And so... Should we assume that for example this year you might change strategy that you don't sell everything or you think you will again sell the whole harvest this year?

Obviously, I think we have a much more stable macroeconomic environment and The pandemic situation is better handled globally. The economy starts growing. So we are much more confident in our commercial policy. And what we currently do, we are much more careful in terms of pre-selling our harvest. also we have higher confidence in our youth this year. And to add, we also have a new commercial director in charge of the policies this year. So we believe that we will ride the rally this year.

Okay, very much. Thank you.

Thank you, Elgin. As a quick reminder, everyone, if you have any follow-up questions, please press star followed by one on your telephone keypad now or the flag icon if you've joined us online. We have a question from Natalia Szpikowska of Dragon Capital. Natalia, please go ahead with your question. Your line is open.

Good evening and congratulations on the great results. A couple of questions from my side, please. First of all, I have a follow-up question on the raw cane sugar. As you mentioned, the company imported 34,000 tons of raw cane sugar and already processed 48. And my question is if some portion of this raw cane sugar was already sold in the second quarter of this year, or we will see the sales of this sugar already in the second half of the year? Thank you.

Yes, Natalia, we just checked our numbers. We sold part of the processed rockin' sugar in the first half of this year, and our expectation is to sell most of the processed volumes by mid-September.

Perfect. Thank you very much. Also, I have a question on the company's debt policy. As you've mentioned, the company's debt level increased from the Q1 due to high working capital needs, and what are the company plans? Do you plan to repay all this debt as soon as sugar and new harvest of crops is sold, or would you like to keep some cash cushion going forward?

This is seasonal in case which will be largely gone by year end. So by the end of the year, you will see similar levels of indebtedness compared to the beginning of the year.

Great. Thank you very much. And the final question would be on the dividend policy. Last year, a company debited with the first dividend payment and if you have developed any kind of dividend policy so we could anticipate what the level of distribution could be going forward.

Thank you. Natalia, you would appreciate that this is a highly volatile sector and generally the environment. We are able to reduce our indebtedness and generate dividend cash flow for our shareholders after a bad harvest last year, but obviously the soft commodities price value helped us to generate the first dividend. We would like the dividend scheme to go forward, but the level of it will depend on our annual results, and this still will depend on this year's harvest.

Understood. Thank you very much.

Thank you, Natalia. We currently have no further questions at this time, so this does conclude today's call.