Black Earth Farming's (BLERF) CEO Richard Warburton on Q1 2016 Results - Earnings Call Transcript

| About: Black Earth (BLERF)

Black Earth Farming (OTC:BLERF) Q1 2016 Earnings Conference Call May 19, 2016 3:00 AM ET

Executives

Richard Warburton – Chief Executive Officer

Rostislav Samotsvetov – Chief Financial Officer

Analysts

Operator

Good day and welcome to the Black Earth Farming Webcast on First Quarter 2016 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Warburton. Please go ahead, sir.

Richard Warburton

Thanks, good morning everybody, and welcome to the Black Earth Farming 2016 Q1 report webcast. I’m Richard Warburton, the CEO of the company. With me is Rostislav Samotsvetov, our CFO. We’ll shortly be running through our normal agenda where we consider the financials, operational and market matters before we summarize and take questions. But before I hand over to Rostislav Samotsvetov, I just want to state a few words to put Q1 into context perhaps for those, who are less familiar with the company and the agri sector.

Our business is very seasonal. From a production perspective almost nothing happens in Q1. We are covered in the snow. So, the only factors that really affect our Q1 financials are the sale of inventory, which has been valued – inventory from the previous year, which has been valued at year-end, our G&A costs and development and foreign exchange. Q1 is therefore typically loss making. We have never been profitable in Q1. For the people who like to look at the business in terms of quarter performance is just important to understand the seasonality aspects and have to have the impact of the business and the quarters.

With that I’ll hand over to Rostislav to take you through the financials.

Rostislav Samotsvetov

Good morning, let me start at the regions four on quarter one specific target was trending. By the beginning of quarter one, we have already harvested most of crops and we delivered to the market. Meaning when the sales in quarter one, we have cost of market prices. Normally, if you don’t have significant price moves in the first quarter, the gross profit less distribution, you will be close to breakeven. A part of the development is driven primarily by G&A and by foreign exchange movement.

Now few words about foreign exchange. In the quarter one, we have ruble appreciation. We averaged – ruble decreased versus previous quarter and previous year by 18%. However, closing rate appreciated versus end of December. So in December we have closing rates 72.9 ruble per dollar, now at the end of quarter one we have 67.6 and ruble – we also strengthened against Swedish Krona.

As you know we have gain Krona denominated debt and most of our cash is in dollars. Here, we have positive effect from both on balance relation and negative effect from cash. In quarter one of 2016, we have positive effect of $0.4 million. However, if you compare it to positive revaluation effect from previous year the difference is significant. Last year, we kept our FX gain of $2.8 million. And this gets us to $2.4 million difference as a result.

Our revenue gains in the first quarter 2016, we have sales revenue increase of 42% behind higher sales volume and slightly a higher price. We have very minor loss of inventory revaluation of $0.1 million, since we did experience significant price moves and really down inventory price. Last year, we had negative effect of $0.6 million.

Gross profit in quarter one 2016 is $4.9 million, which is a significant increase versus previous year, it was $2.3 million, and this is due to increased share of export sales. We have 49% of our sales in 2016 in exports versus 22% in 2015. But at the same time, as we see gross profit increase, our distribution costs increase reflects higher share of exports. Distribution costs increased from $2.3 million to $5.1 million. On the balance, gross profit less distribution is close to zero, it’s minus $0.2 million this year versus minus $0.1 million last year.

On overheads, we have encouraging dynamics on G&A. We are 25% better $1.1 million better versus previous year. We have positive effects on fixed but also on our cost saving initiatives namely Moscow office closure, which happened in fourth quarter of 2015. We have shortened other income and expenses of multiple items, but mostly in difference on grain hedge income. Net – our operating results, our EBIT has improved to minus $3.6 million versus minus $3.9 million in the previous year. However, the key development which drives financial results this quarter is different – difference in foreign exchange income versus quarter one in previous year. As we discussed, we have $2.8 million gain versus only $0.4 million gain in this quarter. Finally, we end up first quarter 2016 with a net loss of minus $4.6 million, which is $2.5 million difference – negative difference versus previous year and basically the key effect was foreign exchange gain.

Now, let’s go to our balance sheet. On balance sheet, we have – now the key asset for our company is our land. We have 256,000 hectares controlled, 89% in full ownership and it’s available at an average price of $149 per hectare. We have – our buildings balance is $27.3 million, machinery and equipment at $24.5 million. We see that our balance sheet value has declined since previous year, again the key effects here is foreign exchange because our assets are valued at historical ruble costs. Obviously, when we have ruble devaluation, we experienced a decrease in our assets. However, we cannot say the same about fair market value. So, our recent views show much higher price for land [indiscernible].

On current assets, we increased our cash balance from $33.9 million at the end of quarter one of 2015 to $35.2 million. And we have bought more than twice and thrice finished goods – from US$9.1 million valued to $20.3 million. On cash flow, we have positive net operating cash flow of $6.1 million. We had spent less CapEx than in previous year because we have less investment in the irrigated crop project, root crop. And finally on net debt also our net debt figure has increased to $27.6 million from $21.5 million. Net debt adjusted for finished goods inventory has excellent growth. So, we have net debt less finished good inventory growth of $12.4 million after deducting finished goods now to $7.3 million. So, basically, we can say that our balance sheet and vegetable company has improved significantly this year.

Thank you, Richard. I will ask Richard to continue.

Richard Warburton

Thank you, Rostislav. And moving onto operational matters firstly our 2015 autumn sown winter wheat crops, we have been reporting that they are looking very good for sometime now and that continues to be the case. This is because we got them seeded early, they established well. This winter was relatively mild and we had almost no winter kill, it’s about 5% is the normal level, this year virtually nil. And now we have plenty moisture. The graph on the slide shows the vegetative index from satellite imagery of our wheat crops between 2008 and 2016.

The vegetative index is indicative of yields. It’s not precise, but it’s indicative. You can see the broken line is 2016 and it is significantly higher than all prior years, including 2014, which was our previous best net yield of 4.17 tons. So, this is positive. A challenge in this wet season is to hit all our spray timings, so that we keep these crops standing and disease free.

For 2016, our plans are to seed just over 150,000 hectares with a similar crop mix to 2015. It’s however been an extremely wet spring. The graph to the top right of the slide is the rainfall in millimeters to the end of April on our farms. You can see that it’s about double that of the previous three years. Some of our farms, most of this rain actually fell in April as well. And I think on one farm, by mid May, we’ve had the full-year average rainfall on that farm already.

So, unusually wet conditions affecting, in particular, the Voronezh and Lipetsk oblast at the central region of Russia. This has inevitably affected our planting. We're about 71% through at the moment, which is a little later than usual. We expect to get our 150,000 hectares [indiscernible] or close to it, but we haven’t changed cropping between farms and regions, and do some switching between crops. So, this unusual – unusually wet weather is of course a double-edged sword. It means that we are a little late planted than perhaps normal, but anything that is planted is growing very well and with high potential.

Turning to the markets, many of you will be aware that both old crop stock estimates of the 2015 harvest and new crop predictions for the 2016 harvest have been adjusted upwards all grains. So supply likely to exceed demand again for a third year running. Three global record harvests, quite an unusual set of events. And this means predictions of record high wheat stocks and consequently relatively weak prices at the current time. The position for oil seeds somewhat more bullish.

In Russia, 2015 was a big grain harvest close to 104 million tons, close to the record, and 2016 looking good so far. There's been quite a bit of activity on the futures’ markets recently. Soya futures spiked a few weeks ago. Grains followed albeit to a lesser extent, and that allowed us to get some hedges on. The fiscal market didn't really follow. The situation in Russia, there is the old crop prices have been relatively resilient despite the strengthening ruble. The new crop prices look lower as an old crop. Sunflowers however look likely to benefit again from a supply shortage versus the crush capacity in country.

With regard to the company's sales, we're now 98% priced on the 2015 and harvest few sunflowers and potatoes still to sell. No hedges left on the 2015 – with regards to 2015 crop. As Rostislav said, a large export program 190,000 tons of our 2015 crop went to export. For 2016, harvested crop, as we said several times, we don’t like to sell forward long in ruble. And the only positions we have are some peaches hedges on Chicago. We’re 50% hedged on wheat with a mix of costs and flat sales with 44% hedged on corn, again mixture of costs and flat sales.

So to summarize, our Q1 net loss of $4.6 million, please remember my comments about seasonality. This is mostly be attributed to a less positive FOREX translation. A deep reduction in G&A costs and some of this is currency, so as efficiencies in particular the Moscow office closure. Sales prices consistent with the end of year valuation, excellent prospects for winter wheat crops and certainly plenty moisture around for this time of year, which is meaning seeding is later, but good potential for the crops we have in the ground.

So far the pricing environment is looking relatively weak for grains. We announced an increase in our ruble credit facility from – in dollar terms, an increase from $11 million to $36 million. This is significant and it puts us in a better position to manage our FOREX position, it’s also a better way from you know working capital and it’s cheaper. We intend to maintain our strong balance sheet and well funded position. Russian geopolitics as I am sure we all the way remain relatively volatile. And I think, overall, what we can see at this stage of the year its net low priced background again bought good prospects in terms of productivity, I think that’s all I will say on the presentation and at this point we will hand over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] There is currently no question over the phone.

Richard Warburton

Okay. We will give it 10 seconds if I don’t think there were any submitted questions on – send by mail, if there were no questions coming forward then we will close the webcast.

Operator

[Operator Instructions]

Richard Warburton

Okay, if there are no questions. Thank you all for joining in and at this point, we will close the webcast. Thank you.

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