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Ros Agro PLC
MOEX:AGRO
Ros Agro PLC
MOEX:AGRO
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Dear ladies and gentlemen, welcome to the conference call of Ros Agro regarding the presentation of the financial results Q4 and 12 Months 2019. At our customers' request, this conference will be recorded. [Operator Instructions]May I now hand you over to Maxim Basov, Chief Executive Officer, who will lead you through this conference. Please go ahead.
Thank you, good day, ladies and gentlemen. Today, we issued the accounts for 2019. Also we posted a presentation on our website. I will give you a short overview of the results and of the situation in each of the business segments, and then I will open the floor to the questions.Overall, the company had one of the best year in terms of EBITDA and net profit. EBITDA reached -- actually exceeded RUB 20 billion and net income reached RUB 9.7 billion. If you look for the whole year, you'll see that all business units improved -- increased the revenue, and the revenue of the company reached RUB 138 billion. Two business units had EBITDA smaller than in the previous year. This was the meat and the sugar divisions. Normally, these are the biggest divisions. But last year, they suffered from weaker prices, and we'll discuss it in more detail in a short bit. The biggest business in terms of EBITDA was agricultural business. This was the second time in the history of our business units. The debt position of the company at the end of the year was RUB 62 billion. Net debt -- again, net debt of the company at the end of last year was RUB 62 billion. The net debt-to-adjusted EBITDA is 3.1. This is higher than is comfortable for the Board of Directors. The comfortable level for the Board is 2x EBITDA, and the company planned to decrease this figure in the coming several years. The cost of debt is not very high, approximately 2%. And most of the debt is long term. So we have no problems and risks from the liquidity point of view, but we'll be working to decrease this figure through EBITDA and through CapEx in the coming 24 months.Now I would like to discuss the situation in each of the business segments, and I will start with the Meat segment. It's for the whole year, Page #12, on our presentation. Basically here, the situation was very simple. We increased the production of meat, but the prices of meat fell. And the prices last year were below the prices 2018. This is the result of increased production of pork, coupled with -- combined with a small increase in consumption and small opportunity for export of our products. We exported some of our products, and we were #2, we believe, exporter of pork products in the country. The biggest markets were Ukraine and Russia as well as Hong Kong. But we could not enjoy the price increase that happened in many places in the world because we're close to main Asian markets. The cost of grain was slightly higher last year. So in fact, though, our sales reached RUB 26 billion in one of the highest results in our history, our EBITDA margin has fallen to 19%, and the EBITDA was RUB 4.9 billion.Sugar segment was in a similar situation, similar to Meat, where Russian companies and Rusagro continue to increase production, but have limited market for the extra products. And as a result, prices have fallen. Sugar has similar situation. In Sugar, we also have limited markets. But what is more important, we do not have the proper infrastructure. Last year, we had big production. We had a record high sugar -- beet sugar production of 881,000 tonnes. Overall, Russia produced this season 7.7 million tonne, which is an absolute record. And Russia, at the moment, has surplus of approximately 1.5 million tonne. And though the pricing rationale is the lowest in the world, it will take us at least 12 months to offload the product from the Russian market to the foreign markets. As a result of over -- of big production, I would say, oversupply of the domestic market, the prices have fallen to the lowest level in the history in dollar terms. In December, the price was RUB 18.6. The EBITDA margin in -- for the full year fell to 13%, and EBITDA fell to one of the lowest level of history for the segment to RUB 4 billion.Agriculture business had one of the best season in its history. The EBITDA reached RUB 6.1 billion. EBITDA margin was 24%. The EBITDA could have been higher if not the loss of the sugar beet as a result of the lower sugar prices. The company had relatively good harvest and managed to sell most of the products at good prices, including export to many countries, to many Asian countries.Oil and Fats segment had a very big increase in revenue. The revenue for this segment was RUB 62 billion, which accounts now for almost half of the whole revenue of the group. EBITDA have increased -- has increased to RUB 3.7 billion. This EBITDA does not include all the financial result of the segments from the revenue because some of the profit is left on the companies formerly a part Solnechnye Produkty Group, which now go through the process of bankruptcy. And this money, which is left there, will be distributed among creditors this year and the year after next year.This is, in short, the results of the previous year. And I'm ready to answer all your questions. Please go ahead.
[Operator Instructions] And we've received the first question from Marat Ibragimov of Gazprombank.
It relates to sugar, your strategy on sugar market. In fourth quarter, you've been actively selling down your stock of inventory sugar. And according to the average price, it is much -- it was -- you reached much higher price than the current market price. So the question, did you distend that -- did you realize that the sugar prices will be going down, and that was your decision to sell down the white sugar? Or you wanted to generate cash to convert inventory into cash in order to comply with financial restriction, I mean net debt-to-EBITDA to make it not that high as it could be?
Yes. This year, our strategy is, given that we do not expect a large increase in prices -- of course, this was happening before the fluctuation of the ruble and, today, the prices went up because of the exchange. But at the beginning of this season, we did not anticipate increase in the prices in the Russian market. So we were selling sugar more or less linearly, so that we will not have to rent the third-party storage and will -- in end of December, you have moved, at least -- almost all our sugar in our warehouses. So we sold all extra sugar in the fourth quarter. And at the moment, we have more than 400,000 tonnes of sugar still to be sold before the new season. Our price normally is higher than the average price of the market because we sell to several channels, which provide us additional margin. Most of this is the B2C channel and also the big quality factory channels. At some moment, export prices are also higher than the domestic prices and we sell. So this season, we just said, whatever we think we can maximize the price of the product.
Given the ruble weakening loss to date, do you expect the sugar price will go up because of that? The action will be with some lag, with some delay...
Now what -- normally the market is quite efficient. What happened on Monday, yesterday, is that the international sugar price, which has some correlation with the oil price, has fallen from RUB 0.13 per pound to RUB 0.125 per pound. On the other hand, ruble, as you know, weakened. And today, the price of the Russian market for sugar went up. We hope that -- well, we don't know what the price will be because the -- currently, there is a very big volatility. There is a big deficit of sugar on the international market. So we believe that the sugar price will not go down more, maybe when we'll start going up. And if ruble will continue to be weak, the sugar segment will benefit from it, and the sugar price will be higher.
Another reason I believe why the sugar margins should be higher, I think, is because the sugar beet prices during the harvest season was also low, as I guess. Am I correct or not? Because in fourth quarter...
Of course. The sugar price -- the sugar beet price in the past, in the season, is a function of the sugar price, approximately 8% to 8.5%. So why the sugar price in the fourth quarter was low? It was, on average, around RUB 18. As a result, the sugar beet price was also very low. As a result, in the agricultural segment, we lost some money on the sugar beet harvesting and selling. So the cost of the sugar segment is already there. It will not change much. It's already in the inventory, and all increase in price will now go to the product.
And last question on Sugar segment. I heard there are some incentives from local governments to make local sugar beet producers to reduce the crop and sugar beet in order to reduce production and to support sugar prices. Have you heard anything on that? Or what's your outlook on sugar harvest in this year and, as a result, on sugar prices?
Yes. The Russian government is advising the farmers not to plant sugar beet this season, that's true. I think that the influence of the Russian government on these farmers is very limited, and the farmers will be doing what they believe is right. From a rational point of view, probably it makes sense to decrease the volume of sugar. On the other hand, as we discussed many times, many farmers think that everybody else will decrease the farming area. But they will not, as a result, the price will go up, and they will earn a lot of money. This is one obstacle to the big decrease in sugar area. The second obstacle is the fact that for the vertically integrated companies, like the biggest 6 companies or 7 companies in Russia, even with these prices, it makes sense to produce sugar beet because if you calculate the vertically integrated economics, it's better to produce -- continue to produce sugar until you can utilize the plants at least 120 days. And this is, of course, true only for the efficient producers in good areas, which includes Central Russia and south of Russia. So in my view, the area under sugar beet will decrease. But this decrease will not be very big. My estimation is around 10%. The biggest factor which influences the sugar beet production is actually the weather. Last year, we had the record high sugar per hectare because of improving weather and also because of improving technologies. If weather continues to be good for agriculture in Russia, we'll continue to have big sugar harvest, and we'll continue to be a net exporter [ of it ].
Well, there are still a lot of sugar players who have production costs much higher than current market price, I give the -- leave the market. So what's your view on that? And how many...
I agree with you. I agree absolutely with you, but this will take several years. And I think -- I hope, and I also think that the current oversupply of -- overproduction of 1.7 -- surplus production of 1.7 million tonne will never happen in Russia again. This is the result of a combination of very unique factors. But in general, I still believe that Russia will be producing around 0.5 million sugar more than it consumes.
The next question is from Alexander Gnusarev.
I just had a couple of questions. I'll ask them one by one. Perhaps, you have answered some of my questions because I had to skip part of the call. The first question, what are your capital expenditures planned for 2020? And what is your net debt-to-EBITDA projected by the year-end '20?
Our CapEx projection for this year is RUB 15 billion, 1-5. And we expect that we would have similar net debt level at the end of the year since we will have a positive free cash flow, but we plan to continue paying dividends. So our estimate would be have similar net debt position. And we expect that in 2021, our free cash flow will be much more positive. As a result, we'll manage to start decreasing debt in 2021. This, of course, is -- this was our estimate before the fluctuation of the prices and -- of ruble. This may change the situation, but at the moment, difficult to say how because there is a big uncertainty. But overall, I think if the ruble continues to be weaker than originally expected and the prices of grain and sugar and oil will stay at current level, then probably our financial results will be better. And the net debt position will be smaller.
Okay. And the second question, it relates to the Sugar segment. What are the current estimations on the beet planting area? And what's the dynamics of prices for sugar, if it's possible, on a quarterly basis on your estimates?
Okay. I answer part of those questions before, but I'll just be very quick. I expect that area under sugar will go down, but this decrease will not be very significant. Probably, it will be around 10%. The biggest uncertainty would be the sugar per hectare, which will depend much upon the weather conditions. If weather conditions are as good as they were last season, which were the best, I think, in our history for sugar beet, then we'll have another huge harvest. At the moment, Russia had approximately 1.5 million tonne of extra sugar in Russia, which needs to be taken away. Because in the long term, given that there is no drought, I expect that Russia will now be export-oriented sugar country. This sugar was [ carried ]. There is a problem of the efficient logistics. I believe that it is efficient -- cost-efficient to ship no more than 100,000, 120,000 tonnes of sugar from Russia. So it means that we'll have enough sugar to ship until this season. So it means that the sugar price in Russia probably will stay at today's level, given that ruble and international sugar price will also be at the similar level. As I said, today the price went up, but today is a very stretched day. We will see what will happen next week. We have around 400,000 tonnes -- 400,000 to 500,000 tonnes of sugar to be sold in the first, second and third quarters. So if ruble -- an increase in the price means 1 more ruble in terms of our profit.
There are no further questions. No, we received another question. The first one is a follow-up question of Marat Ibragimov of Gazprombank.
Your CapEx is usually a function of ruble lower exchange rate. Your RUB 15 billion guidance is at what exchange rate? Can you provide us...
Well, RUB 15 billion was calculated at last week's ruble rate. And it is difficult to say what it will be now, given the volatility. But given the current ruble rate, CapEx will be bigger, but not all the CapEx is tied to dollars. I think that my rough estimate that probably approximately 30% of CapEx will be -- will depend upon the international rate. But again, now we are not in the balanced decision needs, but essentially, we need to also understand what happens to construction cost, what happens to other things. But RUB 15 billion again was last week's ruble rate.
And of this RUB 15 billion, how much accounts for Far East meat cluster? Have you acquired all the equipment, which, I guess, is dollar-denominated, or not?
Around RUB 5 billion. We bought most of the equipment already last year, but we need still -- this season, we will have to buy animals, which we will ship to Far East. But again, it's difficult to say what will happen to the animal price. Since Russia is not open to China yet, I think that the animal price will be the same. So I don't think there will be big changes.
But the pork prices in Far East are a bit higher than European part of Russia, am I right?
Yes, yes. But we have to buy the animals, not in the Far East because they don't exist there. We have to buy it in the -- by local producers in Central Russia. These are animals that we have to buy to put to the farms, which need to start growing. And then if another animals, which next year will be sold to the market.
On your China expansion policy, you have established at least 2 legal entities in Hong Kong, what's your view there? What's your plans for China? How the progress with China regulating authorities is going on?
We established 2 companies in Hong Kong. One company, which is called Ros Agro Trading, will be used for the trading activities. This will replace the existing trade of the company called Limeniko [ NBDI ]. So this has nothing to do with China investment per se. The next company, which we call Ros Agro China and that have subsidiaries, was created for the 4 projects. We are in the process of discussion with the banks and agreeing on the land price. We currently decided to invest. We will be -- we are rediscussing at the Board level. And if we decide to go ahead, we'll announce it.
But your best scenario will be establishing production facilities, creating production facilities there and then selling your products there, am I right?
Well, this is a possibility as this one of the project that has been under consideration now.
But if you manage to do that, will you be doing that in preparation with some local partner? Or you will be doing that on your own?
Well, we will have the partner. The question is what kind of a partner? And we're also now negotiating with -- we have several partners, possible financial partners and strategic partners, and we are still discussing. Since we have time, the coronavirus situation delayed some decisions at the China level for at least 3 months. We took away our team at the moment. They are in Northern China. So there is a delay. And now we are looking, at the moment -- since there's very -- a lot of uncertainties, we are looking at the situation with coronavirus. We are looking at the situation with African flu. We are understanding what will be the new policy of the Chinese government in terms of rates -- credit rates for the construction. There are many, many uncertainties, which we now go through. We have not progressed as we planned because all activity in China was seriously impacted for the 3 months -- for the past 3 months because of coronavirus.
The next question is from Alexey Philippov of JPMorgan.
Could you please explain what are the implications of weaker ruble for other segments, except for Sugar segment? And what percentage of revenue and costs are dollar-dominated on the group level?
Okay. Our company is quite big now and complex, and there are many changes going around us. Today, it's not only the ruble, euro or dollar exchange rate, that's also the situation with the commodities. As I said, for example, last day, we saw the grain price didn't fall, almost increased. But oil price and sugar prices went down. But today, in the morning, they went up. But answering your questions. So there are many, many things that are interconnected and influenced each other. But answering your question, I would say that is before the company gained significantly from weakening ruble, at the moment, we believe that the company is still gaining from weakening ruble, but this gain is not that big as before. And we are now considering -- we are now thinking whether it's natural or it's slightly positive. So as we discussed with you, Sugar segment is a clear beneficiary of ruble weakening, so is the agricultural unit. Agriculture unit is also a big beneficiary of ruble weakening. With other segments, the story is not so simple. In Oil and Fat, which is now the biggest unit we have in terms of revenue and second biggest probably this year in terms of EBITDA, we have several parts. One part, which is extraction, is gaining. Another part, which is B2C, is also gaining. But the third part, which is industrial fat, is losing because it imports a lot of products. And probably, we will not be able to pass over the price to the customers right away. So we need to see how situation will do also then.Meat segment, at the moment, we believe, given there is oversupply -- overproduction of pork in Russia, which will continue for the coming several years, each year, we'll produce more and more pork, unless China opens the market for us. Then probably this segment now is becoming the loser from the ruble weakening because some of components, especially the soya, sunflower meal and also the white grains, which is now becoming a bigger cost than before, this -- what is used to fight disease in the animals is dollar connected. So it means, probably, as I said, that we will be winning, but not as much. Also, I -- we still have some CapEx, which we will need to finish and some CapEx, which we will need to start with the hybrid, but especially in Oil and Fats segment. And some of this CapEx is also linked to the U.S. dollar because it's European equipment normally. So if you look at the whole balance of the company, in the long term, I would say that we are slightly gaining from ruble weakening. But this year, it's not very big anymore.
The next question is from Sergey Beiden of Renaissance Capital.
I just have a technical question. Given the volatility we have seen in the market, do you expect -- or do you see any possibility for a shift in the launch of the pork cluster in the Far East to the right of -- from 2021? Are you pretty committed to launch it next year?
Well, we are very committed. And in fact, we are very committed to launch it this year. But because of the construction problems, delays, we will launch it next year. But everything, except for the slaughterhouse and one big farm will be built, we'll be constructing this year. As I said, we plan to start shipping animals there in summer. And of course, even though the prices of pork now are much weaker than they were several years ago, it makes sense to populate the farms and start production. And we plan to do it, no doubt.
There are no further questions.
Okay. Ladies and gentlemen, thank you very much. I also -- we also released now information that there was a decision on the dividends, right, it was also issued?
[Foreign Language]
Yes. I forgot to say, now all these accounts -- is also on the accounts. Please feel free to ask any questions, if you have, to Svetlana Kuznetsova, which is our Director for International Relations. Thank you very much.
Ladies and gentlemen, thank you for your attendance. This call has been concluded, you may disconnect.