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Edited Transcript of AVGR.L earnings conference call or presentation 29-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 AvangardCo Investments Public Ltd Earnings Call

Mar 29, 2017 (Thomson StreetEvents) -- Edited Transcript of AvangardCo Investments Public Ltd earnings conference call or presentation Wednesday, March 29, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Valeriya Nikitina

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Conference Call Participants

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* Natalia Shpygotska

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and the thank you for standing by. Welcome to today's Avangardco Fourth Quarter and Full Year 2016 Financial Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 29th of March, 2017.

I would now like to hand the conference over to your speakers today. Please go ahead.

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Valeriya Nikitina, [2]

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Dear ladies and gentlemen, good afternoon. On behalf of Avangardco Investments Public Limited, I am glad to welcome you at the conference call dedicated to the company's consolidated audited IFRS financial results for the fourth quarter and year ended 31st December 2016.

Today at this call there are (inaudible), deputy Chief Financial Officer; and myself, Valeriya Nikitina, Investor Relations Manager. As usual, we will start the presentation and discuss -- we will start with the presentation and discuss the company's financial and operational performance and the most important development in 2016. The presentation will be followed by a question-and-answer session.

I will now give the floor to (inaudible), who will lead you through the presentation. Thank you.

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Unidentified Company Representative, [3]

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[Foreign Language] I would like to welcome you at the presentation to cover the operational and financial results of the Avangard company for year 2016.

[Foreign Language] Slide 5, please. [Foreign Language] Traditionally, the fourth quarter is demonstrating the positive trends, which is, first and foremost, is connected with the seasonality of the market. [Foreign Language] At the same time, we're seeing the improvement of the macroeconomic situation in the country. [Foreign Language] GDP has demonstrated a stable growth over the -- all fourth quarter of 2016 as -- and the year-end GDP results for growth is 2.3%. [Foreign Language] The inflation has decelerated to 13.9% now per year compared to 48.7% in 2015. [Foreign Language] The positive signals for the market are also the retail turnover growth by 4% in 2016 and growth of the household income.

[Foreign Language] Slide 6, please [Foreign Language] Let's start in more details about the egg market and egg product market. [Foreign Language] In 2016, the trend of the reduction of consumption of eggs has continued, and that's caused additional decline in industrial production of eggs -- and industrial production, eggs. [Foreign Language] And the results for that was the high price volatility that, in 2016, went beyond the regular seasonal variation [Foreign Language] and the market has responded to the changed condition by increasing the dry egg products -- eggs to -- production from eggs to dry eggs products, which made 24% in year-to-year comparison. [Foreign Language] A gradual restoration of the markets for eggs and eggs product is expected based on the stabilization of demand, both on internal, on domestic market and as well as the export market.

[Foreign Language] Slide 7, please. [Foreign Language] The world market for eggs and egg product were, in 2016, was also pretty unstable. [Foreign Language] The export volumes have been reduced due to the following factors: [Foreign Language] Increased shell egg production in the EU after significant reduction based on the directive -- Council Directing 1999 on the conditions of new laying hens meeting, [Foreign Language] further import reductions from MENA region due to political instability and military conflict [Foreign Language] and limitation of imports due to avian influenza and limitations imposed by the number of countries.

[Foreign Language] Slide 9, please. [Foreign Language] Let's move to the review of the company results for the period. [Foreign Language] In order to optimize its activities in the conditions of low demand and low purchasing power of the population, the company has reduced its flock of laying hens by 10% to 10.3 million while maintaining a stable average over the entire year.

[Foreign Language] So the egg production has declined as well and it's made to a number of about 2.5 billion per year. [Foreign Language] The egg sales has reduced by 46% to 1.5 billion as a result of the record-low demand and the price per sell in second and third quarter of 2016. [Foreign Language] The inventory of the eggs have been sent to converting to dry egg product. [Foreign Language] And the average sales price in hryvnia equivalent for the year has grown by 11% and made to an amount of UAH 1.35.

[Foreign Language] Slide 10, please. [Foreign Language] In second and third quarter of 2016, the company, in order to avoid the overstocking of the inventory, the company has sent a significant number to be made into dry egg product in order to avoid overstocking in the warehouses. [Foreign Language] The dry egg products can be held much longer at the warehouse and can be gradually sold over the next period.

[Foreign Language] As a result of that, the production of dry egg products has grown by 35% compared to the similar period of the previous year to the amount of 12,100 tonnes [Foreign Language] and the volume has also reduced by 21% over this period and amounted to 9,000 tonnes. [Foreign Language] Those dynamics is caused mostly by the reduction of volumes of sales on the domestic market due to the very low profitability of such sales.

[Foreign Language] Export sales of the dry egg products in 2016 have been reduced by 8% due to a reduction of volumes in the Far East. [Foreign Language] And in 2016, that market was under the influence of deepening efforts by the United States and the EU countries, which established an overstock of the products for a very low price.

[Foreign Language] At the same time, sales to the EU and MENA regions has grown by 32% and 31%, responded. [Foreign Language] The EU market is the key interest for the company. [Foreign Language] Over the period, the sales to the EU market has amounted to 57% of export sales of the dry products of the company. [Foreign Language] The average sale price of the dry egg products amounted to $5.57 per kilo, which is 2% lower than in 2015.

[Foreign Language] Slide 12, please. [Foreign Language] Consolidated revenue over the period has declined by 17% to $191 million. [Foreign Language] The main factors for the negative impact are the following: The reduction of volume of sales for eggs and dry egg products; [Foreign Language] the further devaluation of hryvnia, national currency; [Foreign Language] and the reduction of average prices for dry eggs products.

[Foreign Language] The positive impact on the revenue was the increase of price for eggs in hryvnia and also growth of revenues in the segment called other activity. [Foreign Language] The sharp growth of revenue in the other activities segment is reflecting the grain trade operations that the company has done in the third and fourth quarters of 2016. [Foreign Language] The total revenue from these operations amounted to $50 million. [Foreign Language] The margin of trade operations with grain did not went beyond -- did not go beyond 5%, that's why it's impact of the operational profit and of profits, EBITDA and net profit is minimal, [Foreign Language] so EBITDA indicator for 2016 is $1.5 million.

[Foreign Language] Slide 13, please. [Foreign Language] So export revenues in the 2 key segments of the company amounted to $66.7 million or 47% of revenue, not counting the trade operations -- grain trade operation. [Foreign Language] A number of countries -- as of today, number of countries that are markets for the company has introduced a ban for imports due to avian influenza. [Foreign Language] Although avian influenza was not detected or discovered at the company enterprises, at the moment, we have limited access to the markets of Iraq, Jordan, United Arab Emirates and EU.

[Foreign Language] Slide 15, please. [Foreign Language] In the fourth quarter of 2016, the market has gone back for the egg market, which was reflected in growth of average price by 40% in hryvnia equivalent and 36% in dollar equivalent compared to the third quarter of 2016. [Foreign Language] At the same time, the cost per egg remained practically the same. [Foreign Language] Such dynamics has a positive reflection of the annual results of the company.

[Foreign Language] The average sale price for the dry egg product were reduced by 6% compared to the previous quarter, which is connected to the different sales structure, both in terms of the product and in terms of the market. [Foreign Language] The cost of the kilo for dry egg product both in fourth quarter compared to the third quarter as well as year-to-year compared to year 2015 practically did not change. [Foreign Language] So the revenue minus the results with the grain trade operation in fourth quarter of 2016 has grown by 44% compared to the previous quarter and the cost has grown by 32%. [Foreign Language] It has a positive impact on the increase of EBITDA to $11 million in the fourth quarter of 2016 and EBITDA margin by 25%.

[Foreign Language] Slide 16, please. [Foreign Language] Cash by the end of the period has declined and amounted to $20.6 million [Foreign Language] so the company has got a net cash outflow from all types of this activity: $3.2 million there as a result of the operation activities, $9.4 million from investment activities and $7 million from the financial activity.

[Foreign Language] Slide 17, please. [Foreign Language] So the total debt by December 31, 2016, is $344.1 million, and the majority of that debt is Eurobond, 64% of the total (inaudible) in October 2018. [Foreign Language] So the company is conducting negotiations with the ad hoc committee of bondholders in terms of Eurobonds for the amount of $200 million for annual 10%, which it expects to share with bondholders in 2018.

[Foreign Language] To finish up our presentation, we would like to mention the key areas of the business development in 2017. [Foreign Language] The company will be reacted by some insignificant growth of the laying hens flock, and some growth -- some moderate growth of production, sales of eggs due to demand -- to the restoration of the consumer demand in Ukraine.

[Foreign Language] So the main emphasis will be made on the further diversification of the expert -- export of sales and further optimization of the structure of the sales of the company. [Foreign Language] So the restoration of exports into the Far East and the lift of the ban on poultry import by the number of countries will allow the company to expand its export products, and including gradual sales of the inventory dry egg products which accumulated in 2016.

[Foreign Language] Thank you very much for your attention. And I am ready to answer all of the questions that are of interest to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of [ Andrew Berde ].

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Unidentified Analyst, [2]

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I have a question about your plan of egg production in 2017. It will be flat, or rise some percent?

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Unidentified Company Representative, [3]

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[Foreign Language] Thank you very much for your question. [Foreign Language] So the company -- thank you very much for your question. The company is planning to maintain a flock of laying hens, about 10 million to 10.5 million. So the egg production is planned to be the same, more or less, depending obviously on the factors, some factors that may have some impact on that, in particular, the consumer demand -- domestic consumer demand and also the situation with the export markets and the changes in the export market depends on the list of the ban for the imports of poultry product.

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Unidentified Analyst, [4]

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And I have another question. What do you expect, when the ban will end on export?

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Unidentified Company Representative, [5]

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[Foreign Language] So we are monitoring the situation very closely. In March, there was no outbreak of avian influenza in Ukraine at all. So in April, we're hoping that in the first half of April, we will get some positive result.

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Unidentified Analyst, [6]

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And last one question about working capital investments and CapEx plan in 2017.

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Unidentified Company Representative, [7]

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[Foreign Language] Regarding the CapEx plan, in 2018 we're -- '16, we were planning to invest $28 million, but it turned out that there was neither necessity nor the possibility to make those investments. So if the facilities and production facilities will remain the same, then we will maintain this plan for CapEx this year.

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Operator [8]

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The next question comes from the line of [ Sameer Mache ].

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Unidentified Analyst, [9]

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Just wanted to ask you, are there any plans to pay or not pay the coupon payment that is due on the Avangardco bonds this upcoming payment?

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Unidentified Company Representative, [10]

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[Foreign Language] We thank you very much for your question. We cannot comment on such situation -- on the situation because we're now in the active process of negotiations with the committee of bondholders.

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Unidentified Analyst, [11]

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Okay, that's understood. We actually hold large position in Avangardco. Is there a way that we could join this discussion in any way?

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Unidentified Company Representative, [12]

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[Foreign Language] Thank you very much. Please get in touch with the company. We're prepared to discuss this, not at this phone call, individually with you. Separately.

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Operator [13]

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The next question comes from the line of [ Konstantin Fostavets ].

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Unidentified Analyst, [14]

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Had a couple of questions. One, with regard to the market in Ukraine right now, I see from the consumption chart that you have on Page 6 of slide, that shell egg consumption has fallen dramatically in 2016, much more so than for meat and bread and the other commodities that you have there. Could you -- do you have an explanation of why you think this is happening?

Hello?

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Operator [15]

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Konstantin, please stay on the line. The speaker will be with you just shortly.

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Unidentified Company Representative, [16]

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[Foreign Language] Konstantin, thank you very much for your question. [Foreign Language] So the main reason is probably -- I do think that the first main reason is the currency devaluation. Because for instance, in fourth quarter of 2016, we have seen a very, very high price for eggs, right, which we have never seen before. So it's main -- it's a major -- and eggs are a major replacement, for instance, a major replacement for chicken meat. So if you are comparing the price in the supermarket, the consumer is paying UAH 25 to UAH 30 for the 10 eggs and its cost, comparing it to the protein, give it -- the eggs are the main replacement for -- of protein. So when they're, say, seeing these prices and they're comparing it, obviously, they would give preference to chicken meat. That's what I think happened.

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Unidentified Analyst, [17]

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Okay, that's -- but you're just referring to pricing in 1 quarter, and we're looking from over 2 years, I think consumption, according to your chart for shell eggs, is down by like 20% almost, which is huge. But okay, I just wanted to hear that. And then a question I have is that when I look at production, industrial production, I see that Avangard has lost market share from 2015 to 2016. If I'm calculating correctly, in 2015, your share in production was about 29% and now it's 19%. That tells me that, when compared to the competition, your cost of production has to be higher than of your competitors. Is that the reason why you're losing production share?

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Operator [18]

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Konstantin, please stay on the line. The speaker will be with you just shortly.

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Unidentified Company Representative, [19]

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[Foreign Language] Konstanin, thank you very much for your question. [Foreign Language] So basically, thanks for your question, and my response would be the following. First of all, the share of egg that is produced by household, I mean people growing chickens, so -- has increased significantly. That's why the industrial eggs production share has declined. Regarding the share of our company, we cannot really comment on the share of our company and the -- whether the cost of production for our competitors is lower or higher because companies are not disclosing their cost of production. However, I can tell you that our cost of production is minimal, and as far as we're aware, most of our competitors have a higher cost of production than ours. However, there is also following consideration that we are not prepared just for the share -- basically, share of the market. We're not prepared to go below our cost. Because for instance in the last year in the second and third quarter, we did not go below our cost to regain our share. We -- rather than that, we made more dry egg products because we're not so -- over 9 months, in a period of 9 months, we were not prepared to regain our share just to -- I mean, to go below our cost in order to just regain our share of the market. This is not the way our company does business.

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Unidentified Analyst, [20]

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Okay. So what you're basically saying is that your competitors, who have a higher cost of production, are staying in the market and losing money while you, as the biggest producer of eggs on the market, you're leading the market. That seems like a very strange market to me. All right. And then I had 2 more questions. One on trade accounts receivable. I remember that you have those, you have these debts from supermarkets carrying over from period-to-period. Could you update us on that? And also on the short-term loans, I believe you have about $30 million of those that are due in 2017. Do you plan to refinance those? And whether talks are ongoing.

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Operator [21]

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(Operator Instructions) .

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Unidentified Company Representative, [22]

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[Foreign Language] Konstantin, thank you for your question. Regarding our receivables, we were receiving about $3 million to $6 million per quarter over the last 2 quarters. And also, we're being -- this is regarding the receivables from supermarkets. So we were receiving $3 million to $6 million per quarter of receivables, and we're now being paid basically within 90 days. So the current receivables, we're being paid within 90 days. So our receivables in fourth quarter, if you look at it, you can see what kind of receivables we have in fourth quarter. Regarding our short-term debt with the banks, we are continuing our dialogue with them. And it's too early to say what would be the exact results, but we're basically in discussions with the banks to move the short-term debt to the next period.

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Operator [23]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Unidentified Company Representative, [24]

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[Foreign Language] We will accept one more question, please.

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Operator [25]

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The last question comes from the line of [ Giana Anikina ].

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Unidentified Analyst, [26]

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My question is about bans in terms of avian flu. You said that in March, there was no outbreaks. And how many usually, months or days, normally is waited in order to lift the bans? Is it like a month or more? Just kind of like to clarify when it may be going away.

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Unidentified Company Representative, [27]

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[Foreign Language] So in previous times, when we had the avian influenza outbreak, the situation got resolved within 1 to 1.5 months after the last outbreak. Did we answer your question, Giana?

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Unidentified Analyst, [28]

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Yes. I said thank you very much. I think you didn't hear me.

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Operator [29]

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There are no more further questions at this time.

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Unidentified Company Representative, [30]

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[Foreign Language]

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Operator [31]

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Another question come from the line of Natalia Shpygotska.

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Natalia Shpygotska, [32]

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This is really the last one probably for today. Just a short one. What would you say is main difference between Avangardco and Ovostar at this moment especially in regards of probable profitability? Because we -- like, you can see that the flock, the total flock of the hens, is almost the same now. So what's the reason for such losses with Avangardco and normal profitability versus Ovostar?

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Unidentified Company Representative, [33]

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[Foreign Language] Natalia, thank you very much for your question. [Foreign Language] A popular question. [Foreign Language] Regarding Ovostar, they have a different structure of sales because, first of all, they are at a higher -- at a premium segment, in particular, in supermarket; and their main market is the Kiev region, Kiev Oblast, which is basically already monopolized by Ovostar. And their income, household income in Kiev region, is much higher than in the rest of Ukraine. So this is one of the reasons. And this is really the high-end, high-volume sales. And from the public data that we can see, they're basically selling at the higher price. But we are also making efforts to increase our share in the supermarket sales. So this is one thing that I wanted to say. Second thing is that -- regarding the flock. When the problem increased in the problem period, we -- our strategy was to remake eggs into dry egg products. Their strategy was that, rather than doing that in order to avoid overstocking -- their strategy was, rather than doing that, they basically had access to a smaller -- small export markets which are of no interest for us. And their sales at those small export markets were roughly at the same price as domestic egg price in Ukraine or even lower. Regarding the cost for Ovostar, our -- it's roughly the same. And it's basically roughly the same both for us and for them.

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Operator [34]

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There are no further questions at this time. Please continue.

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Unidentified Company Representative, [35]

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[Foreign Language] Always, thank you very much for joining us on this conference call on the financial and operational results. And we will hear from us -- you will hear from us and we will hear from you on the conference call on the financial results of the first quarter of 2017. Thank you very much.

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Operator [36]

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That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.