Astarta Holding PLC

Good afternoon, ladies and gentlemen. My name is Paweł Wieczorski and I'm meant to welcome you to the third quarter conference call with Startup Management. Today the company is represented by Mr. Wiktor Iwańczyk, CEO, Mr. Wiktor Blaski, CFO, as well as Mrs. Julia Bereszenko, Director for Business Development and Hire. Gentlemen, please go ahead.

Thank you, Paweł. We would like to go quickly through our key results, and we start with discussion of our TMM. On the top line, you can see that we registered an increase in the total revenue, and that was on account of revenue of the sugar, soybean processing, Cattle farming, although in the agriculture there was a dip, which was related to us selling the remains of the last year's harvest, which was a lower number overall for Ukraine and for us. On the profitability side, we can see doubling of our margins on the growth process and EBITDA level. Part of this growth is related to the biological asset revaluation. At the time of issuing our financials, we had our seed crop still in the ground, which is sugar-dead corn. soybeans and sunflower seeds. However, in the agricultural segment, you will also see that we basically harvested the oilseeds, sunflower and soybeans, and we already report our final numbers. This allows us to double our EBITDA from 81 million euros to 189. And if we strip the accounting effect of IF41 of biological assets, we also see our margin widening from 26% to 29% at the EBITDA level. Now, if we switch to the brief overview of our cash flows and balances, Our cash flows, operating cash flows before working capital changes were stable. Same as last year, around 50 million euros. We managed to keep our targets at maintenance level of around 10 million euros. The number which is asterisked in the table, which is a positive number, is a result of us digesting of a few assets related to old sugar plants in the first half of this year. Therefore, this number was positive. Our capex and cash flows allowed us to keep low leverage, which on the net debt to EBITDA level was lower than 1, although our land lease liabilities slightly increased. The financial debt at most events was at the stable level of around 30 million euros. Now, if we go into our segment results, as I just explained, our thumb teeth and soybean We are still registered as biological assets on our account as of nine months. However, we have finished the harvesting the crop, and you can see our final yield of 2.7 for sunflower seeds, and so these are three tons per hectare, which is much higher than last year, and also traditionally higher than the Ukrainian average. We are still in the process of harvesting corn and sugar beets, and we hope that we will report our final numbers later this year. But nine-month results related to the agricultural segment can be seen on the right-hand side of this slide, and it is obviously affected by the cancellation of the biological assets. Slide number six, I'm sure that you follow the soft commodities global development as in detail as we do. We see that the prices remain favorable for us and the temporary situation where corn prices were higher than wheat prices from Ukraine reversed into a more normal situation, and we still see the upside in relation to corn and sunflower, as well as wheat for the next marketing year. In sugar production, as we announced with our six-month results, we will focus on processing sugar, raw cane sugar, which we imported in the amount of 75,000 tons. We produced 73,000 tons of white sugar from raw cane sugar, and this process finished by September, and since Mid-September, we are already producing white sugar from the new harvest of sugar beet, and up to date, the amount is over 152,000 tons. Our financials were affected by the price growth. The average price growth on our revenue line was around 60%. for the key product sugar and that allows us to double our gross profit and EBITDA margins from 17% to 31% and from 15% to 27%. Now looking at the situation in the Ukrainian market, although there was a recent dip in the local prices for sugar in Ukraine, they still remain at a large premium to global benchmark, such as raw sugar and white sugar in London. We expect the harvest of sugar beet to be higher in Ukraine this year. According to public sources, up to 33 sugar mills will be in operation during this season which started in September and the output is forecast at 1.4 million tons, but we also see there might be a potential for a higher number. As of today, the amount of sugar produced by the whole sector was just Soybean processing is the next segment that we saw results for the nine months. Unfortunately, the price rally for soybeans was much higher than the price growth for the seed products soybean meal, 61% versus 27%. And the price growth for soybean oil, which was reaching nearly 1,000 euros per ton, was not sufficient to offset the price growth for raw materials. And that resulted in the margin squeeze, the growth level from 14% to 7%. and a similar squeeze at the EBITDA level for 9.5%. However, we expect a much higher harvest of soybeans in Ukraine this year. As of beginning of November, Ukraine already reported a higher harvested crop on the basis of 90% of the planting area than for entire 12 months of last year. There is a new development in the soybean segment that we have already reported to the market. We included a short slide outlining our investment that we are planning in this area. This is a $50 million plant, which will be an addition to our soybean crushing facilities in Globen of the Poltava region. Currently, the plant produces two key products, which is a meal and oil, and the new line will allow us to fill the process for the meal into higher protein concentrate for food purposes. These new facilities, which will require around two years to build, will allow us to diversify into a higher value added product and also have flexibility between the volumes that we process into the concentrate versus the volume of soybean meal that we are producing now. This facility was started together with a multinational commercial institutions in Ukraine which sponsor detailed technical marketing feasibility studies. The project also falls under the auspices of favorable treatment by Ukraine Invest which is an initiative by the Ukrainian government to give certain tax holidays including on the corporate income tax and duty-free inputs of required equipment. And we are working with the Ukrainian government to make it even a more effective investment from a financial point of view with their assistance. This product is used for Ukraine. It hasn't been produced before. And the biggest market we see for it is in Europe. The feed concentrate can be an addition to the meal for livestock, poultry, and aquaculture. We believe that it has multiple sustainable benefits. If it is used for feeding fish, which is farmed in Europe, It will reduce consumption of fish meal, which is much more favorable for the biodiversity, as well as it has a better calorific value in terms of economic efficiency of aqua farming. Also the byproduct of sodium processing into the concentrate molasses can be used if we blend it with the byproduct of sugar production with our biogas facility, therefore producing green energy for us. The last segment we traditionally discuss is cattle farming. We can see a slightly higher volume of production of milk while the head count of herd remains stable. And this is because we are still focusing on higher productivity of milk production from each cow. which increased from 21 to 22.5 liters per head in the nine months this year compared to last year. And pricing environment for premium quality milk, the one that we produced, also remained favorable to us. What was affecting our results in the nine months was also the cost side fees. Growing costs of seeds, which are affected by the price increases for top commodities, increased our costs, and that resulted in a 2 million euro negative devaluation of the biological assets. But even taking into account this number, which is non-cast in nature, our EBITDA remains stable at 5 million euros. Our strategy and outlook hasn't changed. We regularly update it on a regular basis, so we will be able to discuss it in more detail with our annual results, but we did update it for our new project in 4D processing. This is also our main part of the presentation. Obviously, there are tendencies with more detailed numbers. You are welcome to ask us questions.

Thank you.

If you would like to ask a question, please press star followed by one on your telephone keypad now. If you've filled your mind at any time, please press star two to remove the question. As a reminder, it's star followed by one to ask any questions today.

If I may start. I have two quick questions here, Julia. First of all, thank you so much for the presentation and discussion on the report figures. Could you please shed some light on your considerations regarding soft commodity prices in the upcoming season and in 2022? And also, could you please comment on the sugar prices in Ukraine, which seem to stay at a pretty decent level despite the fact that of the news flow regarding this year's sugar big hub. Could you please comment on this?

On the soft commodities pricing outlook, we still believe there is an upside to the current prices. because of this seasonality and we are in need of harvesting in Ukraine for corn the prices traditionally soften a little bit but in the next 12 months we believe that there will be a demand pressure for corn out of Ukraine and the final harvest numbers may not be as they are predicted currently. Globally, there is, because of the energy price spike, there is a higher demand for bioethanol and corn, significant amount of corn stalking, especially in the US, are being congested into energy as opposed to food production. which makes it an attractive environment for Ukrainians to produce corn for food purposes, for human consumption. So we believe that the prices for corn will still be increasing. We also believe that a similar situation related to supply could play out in Ukraine for the next marketing season because of the earlier cold and dry conditions in Ukraine. We believe that the planting area under the interweave perhaps will be smaller next year so the crop, the harvested crop in the next marketing season for winter wheat could be lower which could support the prices. And this is also true for corn in terms of the planting area because Satellizer prices are also increasing quite steeply. Many independent farmers may choose to reduce their planting area under corn in stables, sunflower seeds and sardines. Therefore, corn acreage could be up to 10% lower next year in Ukraine than it is projected now.

And sugar prices?

Sugar prices reversed into growth again and that is not related to the supply side. but on the cost side, because natural gas prices are rather high in Ukraine, the producers have to keep their prices higher to cover the cost, and that determines the pricing trend in the last few weeks.

I see. Since you mentioned the energy cost spike, that we have experienced recently. Could you please elaborate a bit on the expected margins of profitability for the next season, taking into consideration the current level of gas prices, fertilizers, etc.?

It's... It's still difficult to predict because natural gas prices in Ukraine are extremely volatile. Recently, the costs were approaching 38,000 grivna. Now, they are almost half. So, a lot depends on the timing of procurement and the procurement. Overall for the sugar producing sector, there was a public article yesterday, Association of Sugar Producers calculated that the average cost increase for sugar production in Ukraine could be as high as 40% higher than previous year. However, taking into account that we are the largest producer in Ukraine, we can control our costs much tighter, our increase will be lower.

Lower, like 20-30% in your spike?

Well, obviously, we'll have the final numbers after we finish production of sugar, but definitely not 40% closer to 20-30% range that you indicated.

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

Thank you. We now have a question on the line from Martin Millock from OPMR Security. So, Martin, please go ahead.

Good afternoon. Thank you for taking my question and for the presentation. Just maybe a quick follow-up for the gas prices, impact on the sugar prices. Do you see a difficulty from sugar producers in transferring higher gas prices onto sugar price, given still the local price being at the premium, at the significant premium to the global benchmark as of now?

Yes, we believe that the sugar deep processes will be passing along the course of the higher natural gas price. In fact, the sugar producers in Ukraine collectively wrote a letter to the government of Ukraine asking for assistance in relation to higher natural gas prices in Ukraine. And obviously, although the government may not have the financial means to subsidize every sector which depends on natural gas in Ukraine, they certainly should be accommodative in their policies and understanding why the sugar prices in Ukraine are quite high. And they do look at the cost of production. We do have a dialogue with appropriate government officials regarding the reasons why the sugar price is high in Ukraine.

Okay, great. And besides natural gas prices, do you see any other co-equation in the sugar production segment? For instance, the cost of third-party sugar beet.

Sugar beet prices are linked to the end product prices. Because some of the sugar mills and some of the sugar beet growers in Ukraine still do non-cash tolling processing of sugar beet into sugar, there is always a direct link between the sugar price and the price of the sugar beet related to it.

Okay, so taking into consideration jointly gas prices, sugar beet, could you quantify the potential increase in sugar production cost base in relative basis

We are not through the production season yet, so all we can say is that Our results, both in the agricultural segment and in the sugar processing segment, are recorded on an economic basis. So the EBITDA that we get from growing sugar beet will be fully reflected in our agricultural results, while EBITDA, which is related just to processing of sugar beet at un-planned prices, will be recorded in the sugar production segment. So once we finish sugar making season, in the next few weeks, there will be final results. But as indicated before, the impact of higher natural gas prices may lead to, together with higher sugar dip prices, may lead to cost increase by 20 to 30%. And we'll see what the final number is soon.

Okay, thanks. And regarding fertilizers, has Ostrac already secured fertilizers for 2020 campaign?

Okay.

As one of the largest companies, we obviously procure higher volumes, and we have to do it earlier. So, as of today, we secured sufficient volumes for the spring planting, and also for additional fertilizer application for our winter crops, red season winter leaves.

And last question from my side. Could you please comment on trading operations and how much of a quarter reported volume originated from own volumes and how much from trading volume? And what was the margin in trading?

Just want to check on...

around 120,000 tons were purchased from third party farmers under our forward and trading program this year so far but obviously we are still in the middle of harvesting and margin wise do you see positive margin on these third party volumes Yes, we have a positive margin, but it's in the single digits in terms of US dollar per ton.

Okay, great. Thank you very much.

Thank you. We now have our next question from Jakub Sinepek from EarthBank. So, Jakub, please go ahead.

Hi, congratulations with the results. I've got two questions. The first one is what I see from the news from Ukraine that some of the players, like four sugar plants, they already switched off. Do you think that these numbers that you put in the presentation of the supply of sugar for 2022 season would be in danger? What is your figure? What is more probable? figure for the supply of sugar in 2022.

Just one second, we are translating your question into Ukrainian and then we will do the back story.

To repeat the question?

No, no, it's fine. We just take time to discuss it internally in Ukrainian level someday. Just a second.

Yeah.

Sure. Okay. We still believe that the amount of sugar production this year will be north of 1.4 million tons because the largest processes of sugar beets, that is our cells, are still in the full screen. So those sugar plants which already finished processing, they are small scale. The largest plays are still at full operation.

Okay. And the question is, could you just tell us what's your, like, purchase price of natural gas? Like, till now, what have you contracted? And what I understand, you did not bought the natural gas, like, before. Like, it was in the last season that you were, like, banking the first half of the year.

Okay. Obviously, we don't contract the whole volume at the same price, you may appreciate, especially in today's situation when the prices are really volatile. As I mentioned, the quotes were as high as 38,000 hryvnia per 1,000 cubic meters, and that's not the price that we would contract. we would time and find scores at a lower level. Also, we managed to contract lower price volumes earlier this season because the volume that we need is much higher than for other players. So, it's different volumes were at different price, but generally everything was below 30,000, was closer to 20, and what the blended results will be, we will see only after we finish all the processing.

Okay, and the last technical question, when do you plan to stop the sugar campaign? When do you want to switch off all the sugar plants? In December?

Out of five sugar mills, two will finish production only at the end of December.

Okay.

The other three will finish early.

Okay. And the last question about this unit cost in the crops fragment in third quarter. It went up like... much from the second quarter and year to year basis. Could you explain a little bit on that? What was happening? Is it a thing of certain crop or rather the whole basket is growing in terms of the costs?

Are we talking about agricultural segment results? Exactly. Agriculture.

Agriculture. I mean, the unit cost was above 7,000 hryvnias per ton. Last year, it was a little bit higher than 5,000, so quite a big, like, 50% increase in unit cost.

If we are looking at the screen now, can you pinpoint which particular number you would like us to explain? It's just a question.

When I divide the costs of this segment, the agriculture segment, by the volume that you sold in this quarter, the number is much higher than it was last year and in the previous quarter. That's why I'm asking, what happened? Did you trade much more by third-party grains or you suffered from increase in the in the inputs to this agriculture?

Majority of increase is related to the biological assets. You see, we sold volumes. If we are talking about corn, the volumes related to the previous year's harvest and the previous year's cost. this is already this year's harvest and the remaining costs are still accounted for as non-cash items in our PML and related to this year's costs. And this year's costs were slightly higher, this is true, but not by much. Just to give you an example, For example, for soybeans, which we already harvested, but it's still registered as a non-harvested crop under biological assets, the costs were up by 70%. The cost estimate for, for example, corn, the estimated costs are up by 6%. So, there is a blend of sunk costs from the previous harvest and increased costs from the new harvest, which are registered in the same P&L line, but overall costs for nine months related to the new harvest in relation to last year are up by less than 10%.

Okay. Okay, thank you. Thank you a lot for the answer.

Thank you. We now have the next question from Ragin Karuz from Ernst Asset Management. Hi, Ragin. Please go ahead when you're ready. I'll just open the line.

Hello. Good afternoon. Just to clarify a couple of things, maybe can you just comment on the operating cash flow from year to year, 2020 versus 2021, because there is a major change in working capital. So what actually happened last year versus this year? There's such a difference in the working capital changes. Thanks.

Thank you.

There was a change in our commercial sales policy. I think we mentioned it before. So the amount of stocks that we had on our balance sheet at the end of 2020 was much lower. So right now we sell our harvest faster. and we have a working capital movement which reflects this.

Okay. And when I look at the average prices that you have realized, it's the average for nine months, but... Could you comment on the current prices? Are they close to, let's say, if I look at page number 5, the initial average corn price is €160 per tonne and on the other page number 6, the price is around €200. Is it still that you will be reaching these prices only for fourth quarter next year or when should we expect these real-life prices to move up?

There is always a timing delay between these spot prices and forward prices. Customary to Ukraine agricultural producers pre-sell half of their harvest at the time of planting to have flexibility to sell at higher or other spot prices later during the season so yes We expect our prices to be higher for corn and other harvest that we are still in the process of harvesting at the moment. And we still have flexibility in terms of prices.

Okay, so an order in the fourth quarter again should see an increase in average prices?

Yes, absolutely. Yes. The realized prices for the nine months reflect our corn sales related to last year's harvest rather than this year's harvest.

Yeah, I see. And this relatively large bill dialogically assessed, let's say, revenue or income, Does it incorporate, let's say, the full expected harvest for already 2021 or you still have to wait for it to be finished and this number is going to possibly change? Is it a risk that it could go down or is it more likely it should go up?

Right. The biological asset is a non-cash estimate of the entire harvest at expected prices minus cost of sales and the cost of production. So our estimates for 4T crops which are growing in the ground, namely sugar beet, sunflower, corn, and soy. These are calculated at expected yields and prices and costs. However, we can already say that this calculation was based on the estimate of sunflower and soybean yields, which already has become a fact. So we do not expect any any change from our estimate because we already harvested and we reported the exact yield that we reflect on slide number five. With regards to sugar beet and in relation to corn, these two crops still remain in the ground We are in the process of harvesting and these are still estimates. We expect them to be much higher than last year's harvest. We expect corn yields to be north of 8 tons per hectare. We expect sugar beet harvest to be much higher than last year. But the final numbers will follow in December.

Understood, but when you do the estimates, do you approach it conservatively, or let's say the fine numbers could differ? I mean, especially, is there a big risk that there could be like a downward revision, or you think that you're pretty safe with these, let's say, fair values?

We believe that we are pretty safe right now because, as I said, out of four crops, two sunflower and sardines already harvested and they already conserved to the stock on our balance sheet. It didn't happen as of nine months, but in reality, they already moved. So there is only uncertainty related to two crops, which is sugar beet and corn. and the yield and price estimates are already quite reliable at this stage of harvesting. So, usually when we have a change in the estimates, it usually happens between six months and nine months results. After nine months, we don't have significant changes because we are very close to the final harvest numbers.

I understand, I understand. Just last question. Your CapEx levels still remain pretty low. And you announced this 15 million USD investment. Can you maybe comment on that? Like, I mean... what kind of investment, how long or when it should be done, and what should be the capex for, I don't know, next two or three years, and what could be the financial impact of this investment, this $50 million, let's say, on your EBITDA level? Thanks.

The maintenance capex is at the level of $20 million give or take per year. That also includes the replacement of the machinery in the agricultural segment, which is a five-year replacement program we started last year. So we are in year two and three years in Portugal. The remaining assets do not require extensive maintenance for the reason that Sardine plant is relatively new, but there is an additional investment of $50 million and it goes into the new plant. The plant which was built in 2016 does not require big investment. This is still the case. The plant is still five years old. Cattle farming is not a very capital intensive industry. And most of the livestock well-being and other projects in this area are related, mostly can be expensed. This is about the housing conditions for cows, this is about air conditioning or special mattresses for the animals to feel comfortable and the quality of the feed. Most of these items are related to cost. They are expensive and they are not perfect items in a big sense. So this is a couple of million per year. Our sugar production facilities, although they are not new, there was a significant cut in the previous years. Last couple years, CapEx was manageable at a couple million euros, but back in 2018, that was around 10 million euros. We may have to invest a little bit more in the upgrade, but these are not double-digit numbers that may affect your projections.

Yep, thanks for the explanation. But this 50 million, for how long is it, the CAPEX plan will be spread out? Two years. So it's starting next year?

We have to finish our design work, which might take some time. It would be safe to see this investment over two years, starting from beginning of next year.

Mm-hmm. And your estimate in terms of the EBITDA contribution for this new investment?

Obviously, this is difficult to make projections which are three years away from production. At the current assumptions for costs, And the product prices, we believe that we can double our design margin by switching partially or entirely to the new product, the sodium concentrate. But we are still three years away from the actual production, so it's difficult to give any firm numbers here.

Okay. Thanks very much for the answers.

Thank you. We now have a question for Natalia Spiskotsa from Dragon Capital. Hello, Natalia.

I've opened your line. Good afternoon. Congratulations on the great results, and thank you for the presentation. I have a couple of questions on the farming operations. You've just mentioned company expectations. assumes at least this year's corn yields of about 8 ton per sector, if I understood correctly. At the same time, the company is still optimistic about the corn price outlook for Ukraine as Ukraine's harvest may come up not as big as expected. Could you please elaborate a little bit if you have any concerns with regards to current yield assumptions or companies say, about its own projections, but other regions of Ukraine may suffer with lower than expected yields.

Thank you. We expect our yields to be higher than 8 million tons, that is true, but since we are also involved not only in growing our crops in-house, but also purchasing corn and other crops from third parties and also in grain and also storage and handling services to third farmers, we have a slightly less optimistic view on the total amount of corn produced by Ukraine. We think that 38 million tons is probably very optimistic and it should be closer to 35. Therefore, the exports out of Ukraine will be slightly higher than 20 million tons, and given that more and more U.S. corn is being processed for ethanol purposes, we believe that the pricing environment will remain favorable for Ukrainian corn.

Understood. Thank you very much. And also, one follow-up on the winter crops please click this command if company has completed winter solving for next year's harvest and what are conditions of the winter crops given the drought observed in October in Ukraine.

Thank you.

Okay, thank you very much.

Thank you. As a reminder, to ask any further questions, please press star 1 on your telephone keypad now. We have had no questions registered, so we'll hand it back to the management team to close.

Well, on behalf of Starter and Wooden Company, I wanted to thank you for your participation in today's call. And I hope to speak to you next year during the fourth quarter conference call. Have a great afternoon. Bye-bye.