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Good day, and welcome to the ROS AGRO PLC Fourth Quarter and 12 Months 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Maxim Basov. Please go ahead, sir.
Thank you very much. Good day, ladies and gentlemen. We have issued the financial results for the fourth quarter and 12 months of 2018. We also have issued a new annual report and presentation. It shall be available on our site shortly. In general, I will give you a short overview of the situation and then I'll open the floor to the questions. The fourth quarter was quite good for the company. We improved our results in the fourth quarter last year compared to the previous year. All businesses improved the revenue and the EBITDA, with the exception of sugar division. The only reason why sugar division didn't improve the results was the inventory of sugar. They did decided to rollover to the rest of the season in order to sell it at above price. Overall, for the year, we have similar situation with all business units improved their revenue, and all, except for sugar, and all the businesses, except for sugar improved EBITDA.Net revenue of the company all -- was the last year, RUB 83 billion. Adjusted EBITDA was more than RUB 16 billion and our net profit for the period was almost RUB 13 billion, a significant improvement compared to the year before.The most important event of 2018 were mostly the acquisitions. We did 4 major acquisitions. The biggest one on acquisition of the company called -- the debt of the company called Solnechnye Produkty in October, where we invested RUB 20 billion buying the debt and another RUB 9 billion in working capital for operations of this company. We also bought KapitalAgro, a slaughterhouse, some introduction in Belgorod region. We paid off RUB 1.8 billion of -- for the equity. We acquired some land in Tambov area. And we acquired that -- of the cheese producer in Samara region, which helped us to start our first cheese operations last year. We plan to build out of this acquisition, the feeds business unit in cheese and milk.Net debt of the company increased and reached RUB 54 billion [ around that ]last year. This significant increase in debt is attributable only to 2 factors. One is acquisition of Solnechnye Produkty debt and working capital for Solnechnye Produkty, which is almost RUB 30 billion. And another RUB 19 billion is increase in our working capital, primarily in sugar and grain, which we did for the purpose of making more money in the rest of the season. This is a temporary effect and we plan to decrease our working capital by September, by approximately RUB 15 billion. In this respect, the RUB 52 billion -- RUB 54 billion of debt will go down to a level of around RUB 40 billion.And now, I would like to say a couple of words about situation in each of the business units. And I will start with the meat segment, which has become several years ago, our main segment in terms of EBITDA. This was also last year and we believe this will continue to be so in the coming years, only if we don't do a major acquisition in other segments. In the fourth quarter of 2018, the results of the meat division was similar to the results of the previous year. On one hand, we have an increase in prices. But on the other hand, we had a very big increase in the grain prices. So we believe that given the fact that our cost increased by almost RUB 10 because of increase in grain prices and partly because of soy prices, we managed to have similar EBITDA, and we believe this is a good result. Overall, for the year in the meat segment, EBITDA increased. We had reached RUB 7 billion, which is not only one of the best result of history -- among the best. Then on average, the price of live animal last year was lower than the price in 2017. However, because we populated our slaughterhouses at full capacity and managed to change our sales mix in order to sell products with high prices, the EBITDA of the company improved. And as I said, we earned RUB 7 billion of EBITDA in meat last year.Sugar. In sugar, in the fourth quarter last year, we earned RUB 1.3 billion, which is less than RUB 2.6 billion in the fourth quarter 2017. This was the result of more than 50% decrease in the volume of salt -- sugar. Partly, this is because we produced less sugar by around 16%, but mostly because we decided, as I said, to sell more sugar at the second part of the season in the second, primarily, and third quarter of 2019. For the year, EBITDA of the business was also below 2017. EBITDA of that business was RUB 4.9 billion. Average sugar price for the whole year was similar to the price in 2017. So the only big reason was because -- for this decrease was the rollover of sugar in the fourth quarter last year. Agricultural business performed well. This was the result of improved prices. Prices in 2017 were at a very low level. And in 2018, the prices jumped to the level which we saw before, and this improved the performance in the fourth quarter in the division from almost RUB 0 EBITDA to RUB 3.9 billion EBITDA. And for the whole year, EBITDA improved and reached RUB 5 billion. All products, with exception of sunflower, improved -- increased the price. Sugar beet price, increased 37%. And grain prices increased by around 50%.Oil and fat had the best season in its history. Oil business for the whole year had EBITDA of about RUB 2.9 billion and fourth quarter EBITDA of RUB 1.1 billion. All business units showed profits for the whole year, and the main reason for this was the increased harvest of sunflower seeds. We expect that the sunflower harvest will be increasing now almost every year. And as a result of better price environment for the raw material, the EBITDA margin of our extraction facility reached, for the whole year, 10%, which is probably the best performance in Russian industry and most -- so most of the mining by our extraction plant in Samara. EZhk also improved the results as it focused on the originality of our consumer products. So overall, we are pleased with the results of our business units, and we expect that the results of ROS AGRO in 2019 will be even better as we came into this year with a record inventory of sugar, grain and sunflower. Price environment continues to be positive. And we also expect, this year, increase in production from meat division. In June, we will start producing for the market the pork from our 3 new facilities in Tambov area. And also, we expect improved financial results from acquisition of Solnechnye Produkty.Now this ends my short presentation and open the floor to the questions, please?
[Operator Instructions] And our first question comes from Nikolay Kovalev of VTB Capital.
Hello, hello? Can you hear me?
Yes.
It's Nikolay Kovalev from VTB Capital. Maxim, I have 3 questions. I guess, I'll ask them one by one.My first one is on your Solnechnye Produkty deal. Can you speak more on the terms, how you financed it and how you repaid debt? And better understand as how this cash flows are structured between you and Russian Agricultural Bank, and sort of, financing for you? And also, as part of the question, can you estimate or maybe share with us your view on how many years you will pay this back on the current prices for oil and fat?
We bought the debt of Solnechnye Produkty to Rosevrobank at the face value of RUB 35 billion. We have to pay RUB 35 billion to Rosevrobank in installments in 20 years. The rate -- the credit rate on this RUB 35 billion is around 5%. At the same time, we bought bonds of Rosevrobank worth of RUB 20 billion with an interest rate of 10.5%. So that the proceeds from these bonds would be equal to our payments to repay the debt to Rosevrobank of RUB 35 billion. In other words, we believe that the net present value of that deal, and this is also agreed by our auditor, is equal to RUB 20 billion. We financed this RUB 20 billion from a credit, which we took from the bank at a rate of [Foreign Language] 9.35%. We already repaid part of this debt and we plan to repay most, if not all, of our nonsecuritized debt by September this year.Now we don't do acquisitions and projects if you don't have a 10-year payment with the cost of equity capital of 15%. So in this case, we also believe that we will recover our money less -- in less than 10 years. We also believe that this deal provides us with a strategic improvement, which may add to further consolidation of the industry where we will continue to participate.
Okay. It's very clear. My second question was on your sugar business. We saw last year a decline in the volume side as you think about sales. So can you help us to understand for 2019, how much sales do you estimate for sugar business, in line with previous year? Or return to previous almost 1 million tonnes to sugar?
We increased the capacity of our sugar plants. We do not have plans to increase the capacities of the sugar plants materially further on, with exception of the sugar which will come from the second sugar molasses desugarization plant which we will launch at the end of this year. Overall, we believe that our capacity would be close to 1 million tonne, following the construction of this facility. Now the actual volume depends on the availability of raw material which is sugar beet. Unfortunately -- or fortunately, the past season, there was a big decline in production of sugar beets in Russia generally but also in other areas. And because of this, our production, as I said, fell by around 16%. Now we are waiting to see what will be the planting area and you'll know that in May. And then we'll see -- wait and see what will be the yield of sugar together in our area. And then we'll process all the sugar and we'll get the sugar. We are going to sell all the sugar that we have on our books by the start of the new season. At the moment, we have around 0.5 million tonne of sugar, a little bit even more. Although the sugar will be sold primarily in the second and third quarter this year. So we just need to wait a little bit and see what will be the sugar beet harvest this year.Yes, another thing which -- another thing is the price. As I said, yes, we're going to sell all the sugar. At the moment, the price is close to RUB 31 net of BET. The big question is what will be the price, because the importated price is RUB 43. The exportated price is RUB 27. So we -- and the market is close to the balance. So -- and depending upon their assessment, all of the planting situation in May, the market probably will make a decision on whether we are moving to the deficit or to the surplus of sugar. And then in order to understand our revenue, you just need to multiply the sugar we have in our inventory by the price, and then add to it the number of sugar that we will have for next year. Probably, next season, we are not going to rollover so much sugar for the next season, but we will not know for sure. This may end and this is the question to be discussed probably in autumn. It will depend very much upon the balance of the sugar as a result of the harvesting the sugar beet in August, September, October, November.
Okay. It's very clear. And my final question is on your cash flows. Can you help us estimate how much CapEx is scheduled for 2019? And given your consolidation of Solnechnye Produkty asset, what kind of net debt do you estimate by year-end by '19?
We expect that the CapEx this year will be around RUB 20 billion. Most of it will go to the meat industry with some going on second recipient, probably will be sugar industry, is our second plant of the sugarization. We expect that, of course, the level of debt will depend upon the working capital, which we will have by the end of the year, CapEx, we will have by the end of the year and EBITDA that we will have this year. But overall, we believe that our net debt level will go down by around RUB 10 billion. And then, RUB 10 billion to RUB 20 billion, this will depend upon many decisions but in situation, yes, I would say my estimate, personal, is more likely it will be RUB 10 million. So you'll probably come to the end of the year with RUB 40 billion net debt. But again, this will depend upon many things, including our EBITDA, our CapEx, and the decision about working capital at the end of this year.
And there are currently no further questions in the queue. [Operator Instructions] And we have another question from Elena Jouronova of JPMorgan.
First of all, can I ask about the Solpro acquisition once again? And I'm interested to understand what can be the EBITDA uplift for ROS AGRO this year and next year. I remember you mentioned that overall, you think that you can add about RUB 4 billion EBITDA after the transaction, but not in the first year of operation. Maybe you can give us a better idea of time line?
At the moment, we target for the combined entity of Solnechnye Produkty and ROS AGRO, which means that combined all of the business that we will have, we target RUB 5 billion, RUB 6 billion of EBITDA.We will see these figures only starting 2020 because this year, only part of this EBITDA will come as EBITDA to our books, because all the assets of Solnechnye Produkty will go through the bankruptcy. We need to be very careful with doing everything according to the Russian legality. We will see definitely a lot of money coming to us in terms of net income through the interest rate and repayment of the debt. But how much EBITDA will come to our books is unclear at this moment, because it depends very much upon the timing of the legal processes on all of these entities.
But to be clear, you do expect some uplift to your oil and fat position EBITDA?
Yes, we do. Yes, we do. Yes, we do. I can tell you RUB 1 billion, but this will be, like finger in the air, because the legal process is just -- it's a multiparty thing. And they will determine how much of EBITDA of Solpro will be shown on our books and how much of this EBITDA will be shown on the books of existing legal entities, which are not consolidated in our accounts.
Okay. Then I had one small question on your numbers. In the sugar division, I saw a surprisingly a RUB 2.9 billion number relating to other operating income, and I wasn't sure what this actually means. Can you explain to us what this was? And if that is a new recurring item? Around RUB 3 billion other additional income. Not in the revenue but below the gross profit line.
[Foreign Language]
Just a second. Let me just check. [Foreign Language]
[Foreign Language]
Okay. It is consolidated -- to RUB 0 at the group level. This is just the payment of the dividend -- technical payment of dividend of -- from 1 agricultural asset to the sugar asset. So technically, in your analysis, you shouldn't pay attention to it. On a consolidated level, it is eliminated. But since it's a movement from one thing to another, we have to show it.
I see. Then my other question was relating to the meat division in Q4 and the margin. So apparently, the EBITDA margin went down slightly. And I found that quite surprising because your competitor in this business, Cherkizovo, reported an increase of their margins in Q4 in the pork division, and actually, quite a substantial increase. So I was struggling to understand why ROS AGRO didn't have that increase. Maybe you can help me understand this?
Well, it's difficult for me to compare because I do not know the results of Cherkizovo. But depends on 3 factors that can -- this one factor is the grain price. So each company buys grain at different time, but one thing that happened that the grain price significantly increased. Since we buy the grain on the market prices, I can only say that the prices of grain, as you can see in our books, increased by around 50%. That was one of the thing. The second thing is the product mix. So probably, we may have different price between processing division and non-processing division in our stations consolidated. And in our products, we did not see so huge increase. But it might be also because now we sell some of our products in terms of B2C product, and there was no increase in price on the retail chain for the business B2C products. And we sell around 2,000 tonnes of B2C product now per month. So that may be second explanation. The third explanation, as I understand, Cherkizovo increased the production in the second half of the year after its new investment, new complexes came online. We didn't have any increase in our production. That's probably the third reason.But I think that you can compare better than us, we can provide you all information about the costs, the prices and the volumes. And then, I think the -- you can find them easier -- the answer.Also, another fourth factor is the way when we -- what we do with our annual...
Write-offs.
Write-offs. Annual write-offs. For example, in December, we do the inventories and maybe we had some write-offs for the whole year. So again, it's very difficult for me to compare our results, which is good, because I do not know the exact figures, I just give them.
No, that's fine. Fair enough. Maybe you have the number right now handy regarding your cost per live weight of live weight pork. Because in your -- if I just try to calculate the cost -- production cost per tonne of meat, I'm not -- I would not get to a correct number because you sell live weight and processed pork. So maybe you can give us what was your last year's cost of production of live weight pork.
Yes. The cost of production before the -- in the first part of the year, with the grain prices for the previous year, was around RUB 54. RUB 54 was the cash cost. And now given the new prices of soy and grain, our cash cost is around RUB 64.
Okay. Yes, makes sense. And can you please remind us by how much you plan to increase production volume of pork next year -- no, sorry, not next year, this year, 2019?
Yes. And by the way, I'm just looking on the -- at the prices. You can see that actually price of live animal in the fourth quarter last year increased only by RUB 5, and the grain price increased by much bigger number. So if you just took volume -- for volume, I just don't understand how can -- how could the marginality of the business increase, technically speaking. So probably the volume, probably the volume and also the product mix. But live animal could not -- given the prices and given the costs, I don't see how the marginality could have improved. I'm sorry, what was -- again, what was your next question?
The question about planned increase of sales volumes in meat in 2019.
[Foreign Language] Okay. This year, we plan to produce more than 250,000 tonnes compared to 200,000 tonnes last year. And the production from our 3 new plants will start in June.
Okay. Yes and just to give you numbers for Cherkizov, by the way, I opened the press release. So for -- I noticed for full year 2017, they've earned 36% EBITDA margin in the pork division. And in 2018, it was 46%. So a pretty substantial increase in EBITDA margin for the full year, even though they basically had the same trends as you did with the grain costs and pricing.
Well, I'm happy they did it. I don't understand how, but in our situation, you can see, we earned a similar margin. It was 31% in 2017 and 31% in 2018. And looking just at the pricing level and the cost level, I just don't understand how is it possible. But again, this is not a question to us, it's a question to them.
[Operator Instructions] And we have a question from Anna Kurbatova of Alfa-Bank.
My question is related to Solnechnye Produkty. In your presentation, you indicate that the company currently operates under the tolling scheme. And I wonder, should -- are you expect to make some effort to restructure and to change the scheme as far as you are consolidate this asset? So as far as the legal process proceeds in respect to this asset? And how -- or so would you elaborate a bit on what you expect to do with regards to this Solnechnye Produkty plants operationally? And how it would affect your revenue?
Okay. All of this, all Solnechnye Produkty assets are now working, with exception of our Mariinsk in Krasnodar. All of them are working now on the balance of the old legal entities, which are not consolidated. In almost all legal entities, the procedure of liquidation have started. Some of the assets will been sold to the market and some of them are already almost sold, and we are not going to buy a Mariinsk extraction plant in Krasnodar. We are not going to buy real estate and we are not going to buy agricultural assets. All other assets we are going to buy, they will be the procedure of liquidation and bankruptcy. All these assets are pledged to the debt of RUB 35 billion, which we bought. So we are going to participate in the auction and we're going to pay for these assets, the price that will be needed to acquire them on our balance sheet. We expect that some of that will be acquired at the end of the year and some of the assets will be acquired at the beginning of next year.
So it would be correct to understand that the positive effect on your EBITDA from the Solnechnye Produkty assets will mostly come from the consolidation effect? Or you also expect some positive effect from kind of restructuring and optimization that you can -- you will do as soon as you consolidate?
Okay. From legal and accounting point of view, we'll have the revenue on our books starting some -- for some accounts is already happening. For some assets, it will be happening from the second quarter. So we'll have the revenue coming on our books, part of EBITDA will also come on our books. But part of EBITDA will continue to be in the other assets. And EBITDA, which will be on the other assets after the end of the bankruptcy, will come to us as a result of the payment of the debt. In terms of operating the joint oil and fat assets and optimizing the performance, we will do that. We are going to decrease number of entities working there, but this will only be done next year when we will become the legal owners of these assets.
[Operator Instructions] As there are no further questions in the queue, I would like to turn the call back to our host for any additional or closing remarks. Mr. Basov, over to you.
Thank you. Well, ladies and gentlemen, thank you for your participation. We got a good year. We believe that this is the new trends, the trend which will create the positive results in our company for the coming 2 or 3 years, based on the increased volumes of production and especially meat division, following acquisition of some assets that we bought.And this year, I believe, it was not only good year last year, but also activities of last year created a good potential for the record financial results in 2019. Thank you, and talk to you later. Bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.