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Edited Transcript of AST.WA earnings conference call or presentation 19-Aug-19 1:00pm GMT

Half Year 2019 ASTARTA Holding NV Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Astarta Holding NV earnings conference call or presentation Monday, August 19, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Yuliya Bereshchenko

ASTARTA Holding N.V. - Business Development & IR Director

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Conference Call Participants

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* Marcin Gatarz

UniCredit Research - Analyst

* Marcin Nowak

IPOPEMA Securities S.A., Research Division - Analyst

* Natalia Shpygotska

Dragon Capital, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the ASTARTA Holding 1H '19 Results Conference Call. My name is Charlotte. And I will be coordinating your call today. (Operator Instructions)

I will now hand you over to your host, Marcin Gatarz to begin. Marcin, please go ahead.

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Marcin Gatarz, UniCredit Research - Analyst [2]

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Good afternoon. I am happy to welcome you to ASTARTA first half results conference call. The results were published on Friday evening. And today, we will have the company's presentation followed by the Q&A session.

ASTARTA is represented by Mr. Ivanchyk, CEO; Mr. Viktor Gladkyi, CFO; and Ms. Yuliya Bereshchenko, Business Development and IR Director.

So now let's move to the company's presentation with no further delay.

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [3]

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Thank you, Marcin. Just -- we've opened our presentation with the highlights for the first 6 months of this year. As you are aware, the second quarter is driven by our farming segment as we sell stocks from the previous year's harvest. We were able to capitalize on corn price growth earlier in the year. And we pushed about 0.5 million ton of corn stocks, which is 2.5x higher than last year in the first 6 months.

That gave us an increase in the overall revenue by 1/3, and overall, the farming segment contributed about half of total consolidated revenues for the first 6 months. Accordingly, the share of exports increased to 64% versus 52% last year.

Now switching to the sugar segment. While the world prices and local prices in Ukraine remain depressed, we are focusing on our profitability. We reduced our sugar production. And our revenues were down by 20% approximately to EUR 55 million. We also have positive top line growth on -- in the soybean segment as well as dairy segment where the product prices for milk were quite favorable to us.

Our gross margin was still subdued. It went down from 39% to 30%. Although in -- on an absolute basis, it was flat at EUR 89 million. That was influenced by the sugar segments and a higher share of fair value measurement of agricultural produce in our cost of sales.

From this year, we try to single out our fair value gain on both sides of the P&L, on the income side before gross profit, but you can also see this effect in our cost of sales. Excluding the impact of IAS 41, you can see our gross profit on a cash basis, which increased significantly together with the margin, which is in line with our efforts to sell higher volumes of corn.

We also show our EBITDA trend on cash basis without the accounting treatment, which you can also see on Slide #2 (sic) [Slide #3].

As we noted before, we -- while the sugar segment is negatively affected by the global pricing environment for quite a long period, our focus was on our balance sheet and maximization of the cash flow. So we released working capital through selling down our inventories, that allows us to repay about EUR 95 million of our debt facilities in the first year, offsetting it with refinancing. The net reduction was EUR 49 million. We reduced our CapEx compared to the previous period significantly. The only significant amounts are related to the agricultural segment, which is finalizing our silo construction project, which was a 5-year investment program, finalizing this year [and the other] CapEx is negligible.

You can also see that we started singling out regularly marketable inventories, currently conservatively presented equal to finished goods on our balance sheet. So you can view our leverage from 2 levels, overall as well as on adjusted basis, where we subtract finished goods from our net debt.

On last month -- on the last 12 months EBITDA basis, our leverage was 4.2. On adjusted basis, 3.4 as of 6 months 2019, which is a slight improvement from -- compared to 31st of December. We also reported in our 6-month report that the covenant breach is still in place, but we are reducing our leverage ratios and management doesn't have expectation of any move from the lender.

Going into each segment. On Slide 4, (sic) [Slide 5,] you can see the results of our agricultural sales. Just a reminder that we are selling our stocks from previous year's harvest, which we also report here, repeat the numbers for the last 3 years. Our G&A expenses declined very favorably from 11% to 6% of the segment revenue because we increased our volumes of sales. And selling, distribution costs went down from 16% to 11% on higher sales volumes as well as change of delivery terms.

Going to the next slide on the agricultural segment, we just wanted to underline how efficient we are in terms of reaching yields in harvest which are above average in Ukraine. We highlight that we remain one of the top agricultural land banks in Ukraine. We reached our record crops last year. And from a strategic point of view, we will remain a strong player in this segment and are working on increasing our crops and our yields. The infrastructure project, which we are finalizing this year is an evidence of our commitment as well as purchase of 200 grain hoppers that will help us to push the volumes of grain for exports in the future.

On the market outlook, Slide 6 (sic) [Slide 7,] I'm sure that you have your own views on the price performance. But generally, we are in a favorable part of this cycle in terms of the grain and oilseeds. However, the volatility of the first 6 months of this year was related to developments in the biggest producing and consuming market, the U.S. and China, which you are aware of the development.

On Slide 7 (sic) [Slide 8,] we summarized our cash flows related to the agricultural segment since the company has become public. This is our core segment. And we are focusing on developing and increasing our free cash flows.

Sugar segment is next on Slide 8 (sic) [Slide 9.] There was no big development or change in the market. The prices remain subdued. This is why we decided that we will keep our market share. However, we are also focused on our profitability. So we reduced our production and sales this year. At EBITDA level, we are still positive, even in such a low-pricing environment.

On Slide 9 (sic) [Slide 10,] we go into more detail of what is going on in the local market. The market is still working through 0.5 million tons oversupply of sugar since 2016. And Ukraine would have exported these volumes if the global prices were not as low as they are now. What we are seeing from other global sugar producers, public support, there's still an expectation that globally, the sector should turn around and the prices should go up. And -- but this, of course, has to be -- remain to be seen in the next marketing season.

While the prices remained lower, on Slide 10 (sic) [Slide 11,] we have just outlined what type of measures we undertake in order to not to lose marginal profitability. We did put 1 sugar plant out of operations last year, when we saw the markets going down. And we also stopped another this year, taking out about 1/4 of our capacity. However, strategically, we believe we are the largest player. And we do want to preserve our market share, between 25% and 30% of the local market, because we do believe that the market will turn around.

Just as a reminder why this segment is the core segment for us. On Slide 11 (sic) [Slide 12,] you can see our 15 -- 13-year track record since we became public. We've since seen the last 3 years downturns in the market back in 2007 and '08. We are in year 3 of the current cycle, and we are due to go in the reverse direction, we hope.

Just very briefly on the soybean and dairy. Soybean is relatively new segment, but we can see that we have consistently good results. Our sales and revenue volumes were up by 20% in the first 6 months. Our margin is performing also quite well. And we export around 90% of our produce. We do believe that this segment could have potential for further expansion, and we will be looking very carefully at such opportunities.

On Slide 13 (sic) [Slide 14,] we show our track record in the soybean processing segment since the plant was built in 2013.

The dairy segment is not new. It has been part of the business from the start. It exists in conjunction with our agricultural activities as our feedstock coming from our own fields.

Similarly to the sugar market, the dairy market was undergoing transformation last year. A lot of sugar -- sorry, new producers were suffering losses. Finally, the market has restructured, and we registered milk price growth, which allowed us to achieve EUR 3.5 million EBITDA.

On Slide 15, (sic) [Slide 16] again, we show our 13-year track record in the dairy segment. And despite its volatility, it was quite significant generator of free cash flow for us.

On Slide 16 (sic) [Slide 17,] we did see that our financial goals remain working on our balance sheet, keeping steady cash flow and CapEx at maintenance levels, until the sugar market turns around. We are, of course, working on our leverage. And we are focusing on our costs across the board.

On the operational goals, they remain as they were several years ago. However, we'd like to emphasize that our land bank, we would like to keep it for the moment as it is and just focus on increasing yields. We finished our storage silo capacities project in order to reduce dependency on third-parties. We're working on reducing our logistics cost. And you can see some of it were reflected in lower selling, distribution cost in relation to our revenues.

In the sugar market, despite the downturn, we still would like to occupy significant share. We will pursue selective projects in the oilseed soybean processing area. And generally, we are working with careful expansion of our product mix towards higher value-added products or direct customer access.

In our -- the rest of the presentation is appendices. We know that some research analysts are picking up coverage on the stock. So we highlighted and presented our summary financials since we went public in 2006 as well as our cash flow for 2017, '18 on Slide 21 (sic) [Slide 22]. And the rest is an appendix for people who don't know or haven't followed the company up until now.

This is a quick summary of the presentation. You're welcome to ask questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Marcin Nowak from IPOPEMA Securities.

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Marcin Nowak, IPOPEMA Securities S.A., Research Division - Analyst [2]

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I have a few questions. Starting with sugar, I am wondering whether the launching again this 1 facility -- 1 sugar facility that you closed for season 2019 will be without any difficulties for the next campaign. Or this -- or do you expect this facility to be closed for the longer period? Or how long do you expect it to be closed?

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [3]

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I am really sorry. The line is not that great. Can you repeat the question?

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Marcin Nowak, IPOPEMA Securities S.A., Research Division - Analyst [4]

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Okay. With regards to the sugar plant facility that you closed for season 2019, how long do you expect it to be closed? For 1 season or more?

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [5]

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We believe that the market could turn around as soon as the next year. So we potentially will be looking at relaunching this facility next year.

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Marcin Nowak, IPOPEMA Securities S.A., Research Division - Analyst [6]

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Okay. And for current season, 2019, '20, what sugar balance on domestic basis do we expect to happen on Ukraine? With consumption of 1.3 million tons, do you expect production to be at 1.3 million or maybe lower for sugar?

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Unidentified Company Representative, [7]

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Thank you very much for your question, Marcin. (foreign language)

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [8]

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[Interpreted] For this year, we believe that the local production will be in the range between 1.1 million to 1.3 million tons depending on the weather conditions.

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Unidentified Company Representative, [9]

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(foreign language)

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [10]

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[Interpreted] We believe that this number, 1.3 million is very close to an estimated local consumption. Therefore, the

(technical difficulty)

by second quarter 2020. And by 1st of September, the start of the next marketing season, we will have minimum sugar stock that will push the local sugar prices up.

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Marcin Nowak, IPOPEMA Securities S.A., Research Division - Analyst [11]

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Okay. But just to clarify because I didn't catch it. Do you expect this ending stocks as of 1st September of 2019 or 2020 to be very low? 1st September of this year or the following year?

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [12]

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It is for next -- for next year, not for 1st September this year.

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Marcin Nowak, IPOPEMA Securities S.A., Research Division - Analyst [13]

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Okay. So you do not expect to export any sugar out of Ukraine in the season 2019, 2020?

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Unidentified Company Representative, [14]

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(foreign language)

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [15]

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[Interpreted] We do expect the export to still go out of Ukraine. It is a case now and it will continue.

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Marcin Nowak, IPOPEMA Securities S.A., Research Division - Analyst [16]

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Okay. And the last question, could you please comment about the current weather conditions on Ukraine in the context of limited amount of rain over the last few weeks? And what is the current crop condition of ASTARTA's crops? And maybe you can comment on the domestic -- in the domestic context.

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Unidentified Company Representative, [17]

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(foreign language)

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [18]

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[Interpreted] We think that the weather conditions remain satisfactory, and the yields are expected to be at the level of last year for some crops such as corn, even higher.

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Operator [19]

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(Operator Instructions) We have a second question from Natalia from Dragon Capital.

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Natalia Shpygotska, Dragon Capital, Research Division - Research Analyst [20]

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Couple of questions from my side. Can you please update us on 2019 CapEx plan for the company, please?

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [21]

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Our CapEx for 2019 remain as budgeted at EUR 23 million.

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Natalia Shpygotska, Dragon Capital, Research Division - Research Analyst [22]

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And what is company's target net debt level for the end of current year?

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [23]

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For financial debt, we target $200 million for year-end.

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Operator [24]

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(Operator Instructions) We have no further questions. I will hand back to you.

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Marcin Gatarz, UniCredit Research - Analyst [25]

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Okay. So thank you, everyone, for participation in the call. Yuliya, would you like to have some final comments?

Okay. If not, then thank you very much until the next call. Thank you.

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Operator [26]

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Ladies and gentlemen, this...

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Yuliya Bereshchenko, ASTARTA Holding N.V. - Business Development & IR Director [27]

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I just want...

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Operator [28]

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Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]