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Edited Transcript of KER.WA earnings conference call or presentation 30-Sep-19 1:00pm GMT

Full Year 2019 Kernel Holding SA Earnings Call

Kiev Oct 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Kernel Holding SA earnings conference call or presentation Monday, September 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andriy Verevskyy

Kernel Holding S.A. - Founder & Chairman of the Board

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Conference Call Participants

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* Alexandre Ayoub

Al Waha Capital PJSC - Head of Emerging Markets Research

* Alexey Krivoshapko

Prosperity Capital Management (UK) Ltd. - Portfolio Manager

* Kalim Aziz;KirAdvisory Limited;CEO & Founder

* Marcin Gatarz

UniCredit Research - Analyst

* Natalia Shpygotska

Dragon Capital, Research Division - Research Analyst

* Pawel Wieprzowski

Wood & Company Financial Services, a.s., Research Division - Research Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Full Year 2018/'19 Results Conference Call of Kernel Holding. My name is Charlotte, and I'll be coordinating your call today. (Operator Instructions)

I will now hand 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 conference call of Kernel Holding during which we will discuss financial year 2019 results and the outlook for the current fiscal year. The company is represented by Andriy Verevskyy, Chairman of the Board; Anastasiia Ivanovna, CFO; and Yuriy Kovalchuk, Corporate Investment Director. We will start with the management presentation and then there will be time for your questions.

So now let me hand over to the management for presentation.

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [3]

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Thank you very much. Good afternoon. Thank you for joining the call today. On behalf of the Board of Directors of the Kernel Holding, I am pleased to present the results of the group for financial year '19, which has ended on 30 June 2019.

We generated $346 million of EBITDA, which is 55% higher year-to-year and $189 million of net profit, which is 3.6x higher than last year, and also improved our solid balance sheet position with the net debt-to-EBITDA ratio at 2x as of end of the year June 2019.

Final -- financial year '19 was a great year of achievements. We became an undisputed champion in grain export volumes from Ukraine, outperforming our international and local competitors. Farming segment harvested a record crop. The acquisition -- and acquisition of the grain railcars substantially improved our logistic capability in origination reach.

I would -- as usual, I would like to take you through the segments very quickly.

So the Oilseeds Processing business, the local market fundamental was favorable for our Oilseeds Processing business in financial year '19 compared to the previous year. Ukraine harvested a strong 15.2 million tons of sun seeds crop, which is 13% up year-to-year, which materially bridged the gap to 18.5 million tons of the installed crushing capacity and slightly pushed up crushing margins. However, general weakness of this global sun oil prices. Throughout the season, we faced almost 10 years lower level of sunflower seed oil prices, which has prohibited EBITDA margin from recovering to normalized level. As a result, our EBITDA margin ended up with $67 per ton of oil, which is 25 -- 24% year-to-year higher than last year, but still below the long-term potential. Combined with the record of the 1.6 million tons of sales sunflower seeds oil, it's all translated into the $109 million EBITDA contribution from segment, which is 42% increase year-to-year.

Infrastructure and Trading segment performance in financial year '19 was uneven. On one hand, we delivered the highest volumes across all business lines, became #1 grain exporter from Ukraine with 6.1 million tons of export. This solid early progress towards set the volume targets for our Strategy 2021. On top of that, record volumes were achieved in the silos and export terminal businesses, but on another hand those achievements was dragged down by softening infrastructure margins and negative contribution by Avere in financial year '19. As a result, EBITDA of segment amounted $106 million, pretty much flat to last year.

With the largest crop size in our history, Farming segment generated $182 million EBITDA contribution with pretty much record, supported by, first of all, weather conditions and smooth integration of our farming land bank acquired in 2017, but also very effective use of hedging solutions.

To on our climb to -- climb on Strategy 2021 targets, we completed the major greenfield expansions on our grain storage capacity and commissioned the first stage of our new export terminal in Chornomorsk. Also Kernel, as you know, acquired RTK-Ukraine company, the largest private operator of grain railcars in Ukraine, for $64 million in February '19. No doubt this deal has strong value accretive potential, and we expect EBITDA contribution over $35 million in financial year 2020. This transaction, Kernel cover in-house needs for transportation as well gives us more tools for better procurement.

In February '19, Kernel purchased 5.8% of interest in ViOil Holding, this is one of our competitors, with 1.1 million tons of crushing capacity, located in the west of Ukraine. Also company has a network of silos. We enter into the customer shareholders' agreement in relation of ViOil, which grants us certain rights making us the frontrunner for the future sale process. This deal is important for us mainly because this is a first step towards the future consolidation of the sector, where we play -- where we to plan to play a leading role.

I also would like to mention that regards the credits, we made a certain important transaction with cooperation with 2 world-class international financial institution supporting us with the long-term project financing. European Investment Bank provided Kernel 10 years loan for -- of $250 million and EBRD together with Clean Technology Fund agreed to finance our green energy projects up to $56 million with 8 years maturity. This is pretty much for financial year '19.

Few words for outlook 2020. The new season seems to be fundamentally stronger for our Oilseeds Processing segment. Sunflower seeds harvest is good, expected 15-plus million tons this year, virtually unchanged, which is very good level. We -- while we see at the moment, the sunflower seeds oil prices are higher compared to last year and building good momentum to stronger profitability with record 3.3 million tons of sunflower seeds crushed in -- planned crush in 2020.

As a part of Strategy 2021, we plan to commission first our green heat and power capacities, which we expect -- in spring 2020, which we expect already start to contribute in oil processing segment in 2020 financial results. And also nearby, we plan to finalize the second stage of grain terminal in Chornomorsk, which will add, as you know, 4 million tons of our annual grain handling capacity. So this will result -- this should result to close us to the -- our target of 8 million tons total export from Ukraine for 2020, 7 million tons this year we plan to pass through our terminals and 1 million from the third parties, but it's all following our strategy to 2021 targets.

Unlike the last year, Farming segment is expecting to face headwinds as normalized -- normalization of the crop yields, especially for the corn -- for corn as our major product, also combined with nearly 7% cost base inflation and the drop in the grain prices in the international market. Also important point to mention that we remain mostly long in the season. We didn't sell yet big part of our own production, which will pretty much add both sides, upside and downside, risks for our Farming segment earning potential this season.

Trading and Infrastructure segment should deliver strong results. We see the good crop size in Ukraine overall, good logistic tools in our hands. Infrastructure margins also remain pretty healthy, and we hope that Avere won't disappoint this year.

Capital expenditures. With the Strategy 2021, we project the peak of our CapEx exposure in financial year 2020, so $300 million to be deployed to cover both CapEx expansion and maintenance needs as part of initially planned CapEx in financial year 2019 moved -- was moved forward to financial year 2020, however, with total investment program remain unchanged. Also important point to mention as outlook for 2020 is a farmland reform, which, as we expect, will be going through this year and this is very important process. And we consider the broad and liberal farmland reform shall unlock the full potential of Ukraine in agriculture contributing to economic development of the country. Obviously, Kernel, with -- we have over 500,000 hectares farmland under cultivation with direct access to the landowners, and we plan to be an active participate (sic) [participant] leveraging our financial stability and good sources of capital to participate in this reform. So let's see how it goes.

So that's pretty much it from my side, and I think we are ready for your questions. Please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Alexey from Prosperity Capital Management.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [2]

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Andriy, just I have few questions, quite basic ones. Can you quantify on your 2020 CapEx this $300 million, what is the breakdown? How much are you planning to invest in which projects?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [3]

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Okay. And the second question?

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [4]

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And the second is on the volatility of the Infrastructure and Trading business. If you look at the quarterly EBITDA contribution, I mean it's been pretty bumpy last year, while one would imagine that the kind of silo spend, port handling should be relatively stable and this means the kind of the real grain trading basically was making some money in Q1 and actually seems to be losing money in Q4. Can you comment on this, what's the capital risk?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [5]

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Okay. So first question is the main and the CapEx breakdown. So overall for 2020, we plan to spend $66 million on a greenfield crushing plant. That's remaining -- that's in 2020 particularly out of $180 million. Electricity cogeneration plants is $90 million in 2020. Final stage of the TransGrainTerminal, $58 million; and silos construction, $10 million. That's the finalization pretty much of the oil program. And that's 200 -- and we end up with $228 million. And maintenance, that's $68 million, so total $300 million. Yes, and one second, I'm missing something, and some railcars, $9 million, so total $300 million.

And for your second question is the fourth quarter, that -- you can see that going down for the profitability of the silos, that's the normal usual thing because that we're making money on the silos mainly for the first half of the year. There, we charge the drying and the receiving and the storage service. And then in fourth quarter, we pretty much don't get any revenues, it's all mainly costs and that's why it's getting negative or flat. Am I -- did I answer your question or I missed something?

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [6]

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No. I guess partially because I guess you also had some positive uplift from incorporating your own railcars into the segment. So we are assuming that you're kind of changing was the kind of -- okay, well, I'll say it like this, you say that Avere was loss making last year. I mean, can we just maybe hear how much of losses were there for the full year...$3 million, $5 million, $10 million... $30 million, 3-0?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [7]

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The full year, $13 million, 1-3.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [8]

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Okay, okay, okay. Just final question, which I would like to understand. Kind of given where you sit right now in terms of your kind of understanding of cost and yields for next year, do you have any idea of your kind of budgeted EBITDA for Farming business? How much lower do you think it will be?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [9]

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I would not comment on this at the moment because unfortunately it pretty did much depends on the farming particularly this year on prices because, as I mentioned in my presentation, we didn't sell most of our products our own products in the farming, and we remain mostly long this season. So we will -- it's going to be both upside and downside.

In terms of yields, I think we're doing fine. We did more wheat and better yield on wheat and pretty flat on the sun seeds. Corn will be normalized, will be lower than last year, of course, because last year the corn was exceptional. Yields this year, we came down, but we're pretty much with our budget in terms of corn yields. But the major things remain the prices. So -- and that's why it's so difficult for me to comment at the moment what kind of EBITDA contribution will be from the Farming. But I think towards the end of the calendar year, December -- November, December, we will have a better visibility.

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Operator [10]

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(Operator Instructions) Our next question comes from Natalia from Dragon Capital.

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Natalia Shpygotska, Dragon Capital, Research Division - Research Analyst [11]

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I would like to clarify a bit on company's view on land reform. What would be company's appetite for purchasing land? And what's your view on the potential pricing?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [12]

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First of all, we are very optimistically looking at the moratorium lift and the land reform. We obviously will be very interested to buy whatever we can buy in terms of the land we -- we have currently -- we currently lease from the landholders, owners. How the price will develop? I don't know, depends on market and it's difficult to say, but I would think that everyone will look at the current lease payments yield and that's how the price for the land will build up, that's how every farmer and every company who has -- doesn't matter big size or small size of the land under the lease agreements, that's how they will look at the prices pretty much. So let's see how it's going to -- how it's going and what the prices the market will set for the land. It's tough to say I would say, but I think the proxy will be more or less looking -- look forward. I mean depends on the yield what the people are looking for and the lease payments.

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Natalia Shpygotska, Dragon Capital, Research Division - Research Analyst [13]

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And what is current average lease payment for company's land bank?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [14]

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I think the average what we're paying right now is between $150 and $170 per hectare.

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Natalia Shpygotska, Dragon Capital, Research Division - Research Analyst [15]

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And what are company's plans for financing this land bank acquisition?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [16]

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It will all depend on the volume what will be available on the market. We think that obviously the -- probably the fastest volume will be in the market as it comes from the government and at our land bank, it's about 10%. I would say maybe around 50,000 hectares will land from the state on the long-term agreement. But this land, we expect will come on the market pretty fast. So let's say, I don't know how -- what the price will be, but maybe $2,000, maybe $1,700 or maybe above $2,000, I don't know. But that's -- we're talking about $100 million, plus we don't expect that the landowners will be very actively selling at the first place, maybe another 10%, maybe another 7% of the first wave, which will come on the market straightaway. So let's say, another 30,000, 50,000 hectares of land for us, another $100 million plus/minus. So we're talking about $200 million. I think we have pretty much capacity to do it. And obviously, we would probably use debt financing or maybe our future bond financing of this -- on land purchasing, but I don't think this is a critical amount which will put us in a difficult position to finance these operations.

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Operator [17]

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Our next question comes from Kalim Aziz from KirAdvisory.

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Kalim Aziz;KirAdvisory Limited;CEO & Founder, [18]

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Congratulations, you have delivered fantastically on the business since we started looking at it in, I think, 2007 and '08, I guess. A couple of questions. One question I have is regarding the sunflower oil price regime. I think when we look at the past and we look at the current levels, I mean there is a systemic decline in the price trend. Do you think we will ever see the highs that we saw earlier pre-2016 or do you think this is the stable level from now on due to certain or some form of dynamics in the market?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [19]

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I'll answer your first question regarding the oil, first of all, the sun oil, as every oil, vegetable oil in the world is pretty much interconnected and somehow was a substitution, depends on the premium what the oil buyer pays. Unfortunately, in the last 3 years we had perfect and pretty ideal production everywhere in the world, United States, soybeans and rapeseeds and palm oil was also very good production overall in the world, all in the world so that's all put a huge pressure on sun oil. This year, we see -- I'll give you the numbers. For example, the last year we finished with the price of $660 per ton on an FOB basis, Black Sea, which is at, as I mentioned already, 10 years low price, level of prices what we have seen. Right now we recover it. We trade above $700. Let's see how the price will develop for the year. But I think the sun oil prices will depend on how the overall production in the world is going. If we see some disruption in the production of palm oil or maybe soybeans in Latin America, whatever, then we will see the spike on the sun oil prices. So it all depends on the oil companies in the world. Very difficult to say.

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Kalim Aziz;KirAdvisory Limited;CEO & Founder, [20]

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So if I understand it correctly, on balance of probability, the stuff we saw between '10 and '11 when the oil went up crazy like $1,500, $1,600, that's nonsensical. So we are looking at a range -- I mean the bottom we have seen already at about $660. So we're looking at somewhere between $700 to $850, probably $700 to $900 as the normalized range for the next few years. Is that how you are budgeting your...

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [21]

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I mean everything above $800 will be the dream, but I think if we would normalize on a level of $770, $750 and towards $800, that would be a pretty good level for us. We can see -- if Ukraine has a decent harvest between 15 -- around 15 million tons of the crop production, and we see the prices around $750, $770, we can see how we manage to produce better margins, way better margins. So we need the 2 components to come back to the normalized level of margins. First of all, it's crop, of course. We have to be in the range of 15 million plus; and the prices, because when the prices go really, really down, like $650, $660, farmers are really screaming. They don't like the prices because they don't really make a lot of money on that on the sun seeds. So that's all making difficulties to squeeze -- I mean the margins are really squeezed in this respect.

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Kalim Aziz;KirAdvisory Limited;CEO & Founder, [22]

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Okay. So the last question I have is, once you have completed your CapEx strategy or expansion when we have about $8 million throughput for the terminals, we have done the grain car. Excluding buying out the leasehold land, exclude that scenario, what kind of normalized CapEx we are looking at running in terms of maintenance and expansion -- sort of expansion or tinkering beyond 2020?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [23]

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Yes. So going forward, let's say 2021, 2022, we don't have at the moment on our table, we don't have any plan on organic or organic growth CapEx except, once again, as you mentioned the land things. So normal maintenance CapEx at the moment we have around $60 million, $65 million. So I think it will be probably once we commissioned on all assets, which we are building right now, the maintenance CapEx will be higher, but I don't think that much, maybe around $75 million, max $80 million. So -- and the rest will depend on M&A activity. If we have any good deals in terms of the crushing, buy a facility to consolidate the market or maybe port infrastructure. So that's -- but that's at the moment pretty much unknown. So we can't really say right now when we're going to make these deals. But except that, that's how we look at the -- our CapEx program and investments.

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Kalim Aziz;KirAdvisory Limited;CEO & Founder, [24]

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Last thing. I guess your experience with the brown market has been quite positive, say, with respect to the notes that we have issued, I guess, in 2017/'18, that's the one we did -- you did and we bought as well a long time ago, I remember. So 2022 expiry, do you want to repeat the experience or was it too painful? Or is that how you're looking at refi-ing it?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [25]

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Let's see. I mean, as you know, we already -- we have it out on the news that we plan to issue a new bond in the coming days and it's going to be slightly less amount. I think the bond market is pretty good right now and we see the appetite for the yields. And the bonds is clearly is competing right now with our banks lines 100%. So -- and obviously it's a longer tenor, has more flexibility having the bonds rather than sometimes even trade finance lines. So we're actively looking at the new bonds, let's see what we can do. But towards the 2020, we will see how we're going to -- maybe we're going to do a new round. Depends on the market how we're going to somehow refinance it, with a debt structure or whatever. So I think we are pretty much looking at the cost of the debts and that's how our decision depends on.

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Kalim Aziz;KirAdvisory Limited;CEO & Founder, [26]

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I mean I am sure you have seen that MHP did a note quite recently at 6.25%. That's a very good price, isn't it?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [27]

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Yes. Yes, it's good. I mean, that's what I am saying, that the bonds market right now is very competitive. And we likely -- and...

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Kalim Aziz;KirAdvisory Limited;CEO & Founder, [28]

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It's cheaper than the bank borrowing, I guess.

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [29]

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So why not?

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Kalim Aziz;KirAdvisory Limited;CEO & Founder, [30]

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Yes. So are you planning this year or next year?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [31]

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We are planning this week.

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Operator [32]

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Our next question comes from Alex Ayoub from Waha Capital.

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Alexandre Ayoub, Al Waha Capital PJSC - Head of Emerging Markets Research [33]

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Two questions, the first one I think you just touched about it on the bond you're planning to issue. I guess that's most likely to be used to refi the excess and general corporate purpose as opposed to partially refi the 2022 bond. That's the first question.

Second question is, how do you look at leverage? So I think if you have CapEx of $300 million next year and your EBITDA is close to $300 million, you're going to be negative free cash flow. Wondering like to which extent you're keen to stretch your leverage and how much of the CapEx is committed? I understand the maintenance CapEx is only $60 million, $70 million, but how much of the $300 million is committed next year?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [34]

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So regarding the bonds, we look at bonds as a total basket of the debt. We don't expand -- expect raising -- right now if we were to do deal with the bonds, we don't expect that our net debt level towards the end of the year will be different. So that's going to be pretty much the same level of the debt towards the end of the financial year. So the whole purpose of the bonds, if we do the deal, is just to get a competitive rate and refinance bank lines with more preferable rates, but to keep the same level of the total debt in the company. And in terms of the CapEx, yes, CapEx is committed and this is already on the way, we can't really stop it and we don't plan to stop it.

In terms of leverage, we don't breach any covenants. The financial year 2020 as the CapEx program will be at the peak at $300 million, we might do a little bit -- we might end up with slightly higher than we would like to see because our leverage net debt-to-EBITDA, we don't like when it's exceeded 2.5. We might be slightly higher than this. Let's see what kind of results we will produce. We're pretty confident with the oil process -- Oilseeds business and Infrastructure. Obviously, the farmland remains a little bit uncertain because we -- as I mentioned already, we're still long and let's see how the prices will develop. So I don't want to comment right now how much EBITDA we will produce in the financial year '20, but I -- what I see right now, we should not go too much above the 2.5 with our leverage and I hope it will be below than this. So we feel pretty okay with our leverage for financial year 2020.

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Alexandre Ayoub, Al Waha Capital PJSC - Head of Emerging Markets Research [35]

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Got it. And if, I mean markets get tough and you have a bad harvest, is then there any chance you can delay some of the CapEx to adjust and ensure your leverage remains, say, around below 3x?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [36]

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But I don't think we need it.

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Alexandre Ayoub, Al Waha Capital PJSC - Head of Emerging Markets Research [37]

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Or are you just committed for the reported...

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [38]

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I don't think we need it. And if we would need a little bit of more working capital, we might have a little bit of peak in December or January, maybe February, buying more actively bigger volumes. But the model we run at the moment, even with the peak volumes what we can buy right now, we're still fine with our leverage. We don't need to stop or delay or extend our CapEx program.

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Operator [39]

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Our next question is a follow-up question from Alexey from Prosperity Capital Management.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [40]

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Can you just clarify, kind of, are there any other acquisitions which you did last year other than 5% in ViOil, like 5% or something; and RTK? Is it largely it?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [41]

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Alexey, we don't have at the moment anything planned for any M&A activity in financial year 2020.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [42]

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No, no. I mean -- Andriy, sorry, just a clarification of last year. So the $66 million which you spent, is it just RTK and ViOil or is there anything else there?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [43]

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No. That $64 million, this is railway wagons RTK plus 5.8%, I don't remember how much we paid 6% or 7%, I don't -- that's it.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [44]

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Okay, okay. And that -- so I was actually getting to ViOil. So how does it look like? Is there any kind of time line or you just got some basically the ability to buy once they come up for sale? How does it look like?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [45]

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Look, it's pretty simple. We don't -- there's no time line. We have a 5 -- in 5 years, I don't know, 1 year has already gone. We have 5 years. In 5 years, we can drag the company to the sale process. So that's the only deadline we have. During the 5 years, it's totally seller's option. If he wants to keep it, he keeps the company. We keep negotiate. At the moment, we're far away with the valuation levels between us. So we can't find a common ground at the moment. So Vi is operating the company and if we will not reach any deals during these 4 years, then in 4 years, we're going to drag the company for the sales process. That's it. And we have the right of first refusal, of course, to buy.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [46]

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I see. And my other question, I guess, is maybe a bit provocative or forward thinking. Given what -- kind of how fast kind of the new government with different initiatives around taxation and things like this, what is your base case scenario for kind of taxes maybe 2 to 3 years down the road? Do you think that agriculture will keep its favorable tax rate or do you think there is going to be something else?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [47]

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It's -- I think what concerning agriculture, we might see some changes. I don't think the effective taxes will change -- will be changed in terms of the percentages or whatever system will be. At the moment, as you know, we pay different taxes, but we don't pay corporate taxes as farmers. The rest of our business, we maintain on a same tax regime as everyone in the country, except the Farming operation. So we'll have several talks in the government how to put the effective tax regime, new tax regime. Maybe some fixed amount per hectare or whatever, I don't know. I don't think it's going to be way high or really substantially higher effective tax rates compared with what we pay right now; maybe it will be different form of payment of the taxes by agriculture companies. But at the moment, I don't see that the government is really focusing on this. I don't see any kind of initiative, which is planned to change any taxation in the agriculture sector at the moment. Right now the hot topic for the government is, obviously, land reform and that's what they want to kick it off. But taxes at the moment, we don't see any changes.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [48]

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And follow-up question is around when do you think you will be in the position to formulate more kind of profit of free cash flow base dividend policy?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [49]

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I would think my view is, we need to finish our CapEx program. That's number one. Number two, I have my own view how the land reform will develop. I don't see the big supply at the moment on the market of the land. I think this all hype about the land reform is a little bit overdone, I would say. So I see it's a -- as I mentioned already, answering the question that the state land will be sold pretty fast, but the landowners will not be in a hurry to sell them their land on the market. So that's also important element in terms of -- but maybe I'm wrong, maybe it will be totally different, maybe it will be huge supply on the market of the land. So that's why it will depend on our financial situation, so how much we want to really reserve the cash and also the leverage capacity for future land acquisition. So plus, we would need to think about couple of M&A -- potential M&A activities going forward within next 2, 3 years. But the rest, we plan to increase our dividends then. So we don't plan to sit on cash.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [50]

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So we're talking about like 2021, '22 kind of decision?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [51]

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Yes, exactly. So 2020 -- I would say, 2022, it's definitely -- I mean end of 2021 as a financial year, we will have a -- first of all, we will have more or less clarity how big supply of the land on the market and we're going to be towards the end of our CapEx program. And visibility of the M&A will be also, I guess, more clear. So then, we will set up a more clear strategy for dividends.

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Operator [52]

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(Operator Instructions) Our next question comes from Pawel from Wood & Company.

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Pawel Wieprzowski, Wood & Company Financial Services, a.s., Research Division - Research Associate [53]

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Just wanted to confirm that you may think about the update of your dividend policy in end of 2021 fiscal year, not 2022. Is it correct? Did I hear it correctly?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [54]

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I don't want to take any commitments right now regarding the dividend policy. As I mentioned already just to Alexey, answer the previous question, there are several elements and several assumptions we would need to see before we come up -- come to the market and say, this is how we see the development and that's what's the dividend policy will be. I personally believe that and towards the 2021, we will have more clarity and better visibility to discuss the dividend policy -- new dividend policy.

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Pawel Wieprzowski, Wood & Company Financial Services, a.s., Research Division - Research Associate [55]

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My second question was just to confirm that 10% of your land bank is leased from the state, 90% from private landowners. And assuming that 20% is being sold and you would like to buy it, you would probably spend on it roughly $200 million.

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [56]

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Pretty much. Roughly. This is my expectation of the price plus/minus. I don't know what the price market will set, but maybe a little bit more, maybe a little bit less. We don't know, but that's kind of the scenario we draw for ourselves.

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Operator [57]

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(Operator Instructions) The next question is a follow-up question from Alex Ayoub from Waha Capital.

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Alexandre Ayoub, Al Waha Capital PJSC - Head of Emerging Markets Research [58]

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So just a follow-up question on the potential CapEx related to land acquisition. Do you think you would have to spend all of that within few quarters or it could take few years? Just wonder whether that land scenario could increase your CapEx next year from $300 million to maybe $400 million or more?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [59]

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Thank you for the question. Tough call. Difficult to say. Let's say, I mean, if they will manage to release the moratorium towards the end of the year and also it depends when they really press the button for the -- the government would definitely need my view after the law is passed by Parliament. For the Parliament, the government will need at least 6 -- 70 months to make the total inventorization of the land registrations and all these paperwork needs to be done before the auctions will set up. So I think we have time. We don't think it's going to be tomorrow. We think at least 12 months from now before actively auctions will be functioning, maybe even longer. I don't know, it's tough to say at the moment. Let's see the first stage, how the law will pass the Parliament and that's what we expect towards the end of the calendar year. And then the program and the schedule how the government plan to finish the whole paperwork, to set up auctions and really start to sell the land on the market.

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Alexandre Ayoub, Al Waha Capital PJSC - Head of Emerging Markets Research [60]

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Got it. And if you decide not to buy the land, what do you think would happen, someone else would buy it and they may increase your leases?

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [61]

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Yes and no. If we don't buy, for example, and someone else will buy the land, we have already long-term agreements, which fix the payment for the lease. So they can't increase it. There's inflation elements in it, but that's it. So -- but that's potentially possible. If someone is hunting super low yield and very, very optimistic on a land acquisition, he can buy the land, but he will be receiving the fixed amount according to the contract on the lease payments.

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Operator [62]

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

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Andriy Verevskyy, Kernel Holding S.A. - Founder & Chairman of the Board [63]

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Ladies and gentlemen, thank you. Thank you very much for your questions. I hope I answered most of them. Anyway, we're always open. If you have any additional ones, so please send us e-mail or whatever you need, we will try to answer. Thank you very much for your call. Bye-bye.

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Operator [64]

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