OREANDA-NEWS. Revenues up 13.0% yoy to USD 675.0 million in Q3 FY2014, driven by higher sunflower oil and grain sales volumes in a yoy lower pricing environment.

EBITDA down 33.5% yoy to USD 30.0 million in Q3 FY2014, including a currency devaluation loss of USD 44.8 million.

Sunflower oil sales in bulk up 52.0% yoy to 264.5 thousand tons in Q3 FY2014, with the segment's EBITDA margin increasing to 16.2% in Q3 FY2014 (versus 12.0% in Q3 FY2013) which reflects a healthy supply of sunflower seed in Ukraine.

Sales of bottled sunflower oil continued to show premium profitability, with EBITDA margin of 20.2% in Q3 FY2014 compared to 14.4% in Q2 FY2013.

Grain segment doubled sales volumes yoy and increased EBITDA 6.8x yoy to USD 32.8 million in Q3 FY2014, with EBITDA per ton surging to USD 25.1 in Q3 FY2014, which reflects stronger grain marketing profitability owing to the reinstatement of VAT refunds on grain exports along with the positive reversal of the accounting effect from the previous quarter.

Infrastructure segments performed well, benefitting from a strong harvest in Ukraine, with export terminals' EBITDA up 61.5% yoy to USD 8.2 million and silo services segment's EBITDA growing by 52.9% yoy to USD 8.1 million in Q3 FY2014.

Farming segment's EBITDA contribution continued to be negative, with an EBITDA loss of USD 21.5 million in Q3 FY2014, reflecting mostly an expensing of the non-cash IAS 41 fair value component.

Net loss amounted to USD 25.1 million in Q3 FY2014 (including a USD 64.4 million loss attributable to the hryvnya devaluation) versus USD 3.4 million net loss in Q3 FY2013.

Updated guidance for FY2014 at EBITDA of USD 170 million mostly reflects the unexpected foreign exchange loss as well as poorer than expected farming segment performance.

Hryvnya Devaluation

The Ukrainian hryvnya devalued 27% during the quarter under review (from 7.99 UAH per USD as of 31 December 2013 to 10.95 as of 31 March 2014).

Foreign exchange loss from revaluing VAT receivables on export operations decreased EBITDA by USD 44.8 million in Q3 FY2014.

While the company's export business model benefits from the Ukrainian hryvnya devaluation, primarily in SG&A and the farming segment's costs, paybacks should come gradually and are expected to fully offset the losses from the VAT revaluation within 9-12 months. At the same time, benefits are expected to last longer, as local inflation is likely to lag the devaluation.

Other Highlights

In April, the EU cut import duties for a majority of goods originating from Ukraine. In particular, the import duty on sunflower oil decreased to 0% from 2.9% for unrefined oil and to 0% from 6.1% for refined. Additionally, a material zero-duty import quota was set by the EU for Ukrainian wheat and barley. The regulation is to be effective until 1 November 2014 and could be on a continuous basis should Ukraine sign the Deep and Comprehensive Free Trade Agreement with the EU.

Completed the divestment of the Nevinnomyssk oilseed crushing plant with annual crushing capacity of 100,000 tons in the Stavropol region of the Russian Federation for the enterprise value of USD 10 million.

Renewed USD 80 million of syndicated pre-crop financing.

Since the severe political crisis in Ukraine erupted in November 2013, the Company to date has been operating in a normal course of business both in Ukraine and Russia. None of the Company's production assets are located in the Crimea, Donetsk or Luhansk regions.

Sunflower Oil in Bulk

Bulk oil sales volumes up 52.0% yoy to 264.5 thousand tons in Q3 FY2014, with sales close to production levels. The segment's revenues increased 2.3% yoy to USD 310.0 million, lagging volume growth due to the lower global price environment for edible oils.

Sunflower seed crushing volumes up 4.4% yoy to 708.9 thousand tons on favorable sunflower seed availability resulting in close-to-full capacity utilization.

Segment's EBITDA margin increased to 16.2% in Q3 FY2014 from 12.0% a year ago, reflecting the healthy supply of sunflower seed resulting in lower competition between crushers.

Total segment's EBITDA up 37.3% yoy to USD 50.1 million in Q3 FY2014 as a combination of better profitability, higher volumes and lower global prices for sunflower oil.

Bottled Oil

Bottled oil sales volumes down 2.5% yoy to 22.6 million liters in Q3 FY2014, with revenues decreasing 19.1% yoy to USD 32.7 million in Q3 FY2014 due to yoy lower global edible oils prices and the Ukrainian currency devaluation.

The segment's EBITDA up 13.5% yoy to USD 6.6 million in Q3 FY2014 with EBITDA margin increasing to 20.2% in Q3 FY2014 compared to 14.4% in Q3 FY2013, with premium profitability due to the relative stickiness of the branded bottled oil price following the decline of the global sunflower oil price.

Grain

Grain sales volumes up 2x yoy to 1.3 million tons in Q3 FY2014 benefiting from record-high production and export volumes out of Ukraine along with farmers actively selling corn as the government renewed refunds of the VAT on corn exports which increased farm-level prices. Wheat exports from the Russian Federation also continued well. As

a combination of doubling volumes and the significant yoy decline in global grain prices, the segment's revenues increased by 29.0% yoy to USD 308.5 million in Q3 FY2014.

The segment's EBITDA up to USD 32.8 million in Q3 FY2014 versus USD 4.8 million in Q3 FY2013, with an EBITDA margin per ton increasing to USD 25.1/ton in Q3 FY2014 from USD 7.4/ton a year ago. The abnormally high profitability reflects some of the profits carried over from Q2 FY2014 due to a mismatch between the trading book and physical delivery margins as well as to the overall stronger profitability in grain marketing fueled by the reinstatement of VAT refunds.

Export Terminals

Export terminals throughput up 66.0% yoy to 1.0 million tons in Q3 FY2014 on higher grain exports through both Ukrainian and Russian facilities.

Revenues from export terminals services, including intra-group, amounted to USD 13.2 million in Q3 FY2014, up 46.3% yoy.

The segment's EBITDA increased 61.5% yoy to USD 8.2 million, reflecting growth in Ukrainian volumes and the EBITDA per ton margin rising to USD 10.0/ton in Q3 FY2014 from USD 8.5/ton in Q3 FY2013.

Silo Services

The segment's revenues, including intra-group, increased 23.5% yoy to USD 13.1 million in Q3 FY2014, which corresponds to higher intake of the Group's inland grain storage facilities in FY2014.

EBITDA from providing silo services increased 52.9% yoy to USD 8.1 million in Q3 FY2014. Farming

Farming segment's sales amounted to USD 34.9 million, up 2.9x yoy, comprised of sales of the crop harvested in autumn 2013.

The segment's EBITDA loss amounted to USD 21.5 million in Q3 FY2014 (USD 3.5 million loss in Q3 FY2013), which primarily reflects expensing of a non-cash IAS 41 fair value component of USD 15.3 million booked in the previous financial year.

Spring planting campaign was completed in mid-May with 339 thousand hectares sown with spring crops (corn, sunflower seed, soybean) in addition to 34 thousand of winter crops. All crops are reported to be in good condition.

Sugar

Sugar segment generated USD 9.2 million in revenues in Q3 FY2014, up 17.9% yoy. This represents earnings on the sale of carry-over stock of sugar produced in FY2013, as the company ceased sugar production since FY2014.

The segment's EBITDA amounted to USD 0.5 million in Q3 FY2014 compared to USD 1.1 million in Q3 FY2013.

Financial Highlights for 3 months ended 31 March 2014

Income Statement Highlights

Revenue increased 13.0% yoy to USD 675.0 million in Q3 FY2014, driven by higher sunflower oil and grain sales volumes yoy albeit lower global price environment.

Net change in fair value of biological assets and agricultural produce amounted to negative USD 15.3 million in Q3 FY2014 and reflects expensing of the IAS 41 fair value component booked in the previous financial year. The company primarily produces the spring variety of crops; as a result, most of the positive gain from the change in fair value is usually booked in the fourth quarter of the financial year and is thereafter expensed gradually over the course of the next financial year.

Gross profit increased 30.8% yoy to USD 138.9 million in Q3 FY2014, owing to strong performance of the company's sunflower oil and grain marketing segments. The gross margin was 20.6% in Q3 FY2014 versus 17.8% in Q3 FY2013.

Other operating loss totaled USD 28.6 million in Q3 FY2014 compared to income of USD 8.6 million in Q3 FY2013. The amount in Q3 FY2014 includes a foreign exchange loss of USD 44.8 million caused by the revaluation of VAT receivables following a sharp hryvnya devaluation during the quarter under review (from 7.99 UAH per USD as of 31 December 2013 to 10.95 UAH per USD as of 31 March 2014). Other key components of other operating income include subsidies on farming operations and foreign exchange gains on the discrepancy between the official and market exchange rate.

Distribution costs amounted to USD 80.0 million in Q3 FY2014, up 14.6% yoy. As a percentage of revenues, distribution costs equaled 11.9% in Q3 FY2014 versus 11.7% in Q3 FY2013, with dynamics reflecting a combination of a decrease in railway tariffs due to the hryvnya depreciation and higher share of lower priced grain in the revenue mix.

General and administrative expenses amounted to USD 20.7 million in Q3 FY2014 compared to USD 19.0 million in Q3 FY2013. Relative to revenues, G&A amounted to 3.1% in Q3 FY2014 compared to 3.2% a year ago.

Profit from operating activities fell to USD 9.6 million in Q3 FY2014 from USD 25.8 million a year ago, with a loss of USD 44.8 million from the hryvnya devaluation and losses in the farming segment being key negative factors, while improved profitability and volumes in sunflower oil, grain marketing and infrastructure were the positive contributors. The operating profit margin fell to 1.4% in Q3 FY2014 compared to 4.3% in Q3 FY2013.

Finance cost decreased 11.2% yoy to USD 20.4 million in Q3 FY2014, as the Company's gross indebtedness decreased from the previous year.

Foreign exchange loss amounted to USD 19.6 million in Q3 FY2014 compared to USD 0.2 million a year ago. The loss in Q3 FY2014 reflected a 27% devaluation of the Ukrainian hryvnya in the quarter under review and the respective debt-related losses booked by several of the Group's subsidiaries which have Ukrainian hryvnya as their functional currency.

Net loss attributable to the shareholders of Kernel Holding S.A. amounted to USD 25.1 million in Q3 FY2014 compared to USD 3.4 million a year ago.

Cash Flow Highlights

Operating profit before working capital changes decreased to USD 25.9 million in Q3 FY2014 from USD 49.0 million in Q3 FY2013, with a swing following the EBITDA movement.

Net cash obtained from operations was seasonally high at USD 134.4 million in Q3 FY2014 (USD 294.4 million in Q3 FY2014), as the company procures most of its inputs in the first half of the financial year, while its sales are less volatile, which results in the decrease of working capital during the second half of the financial year.

Net cash used in investing activities was USD 26.4 million in Q3 FY2014 (USD 50.4 million in Q3 FY2013) and mostly reflects the payment for the farming entities acquired in previous years and USD 7.6 million in capital expenditures for farming machinery, as well as proceeds from the sale of the Nevinnomyssk oilseed crushing plant in the Russian Federation which the Group sold in February 2014 for the enterprise value of USD 10.0 million.

Credit Metrics Highlights

Net debt continued to decrease yoy, amounting to USD 916.4 million as of 31 March 2014 versus USD 943.3 million as of 31 March 2013, which primarily reflects the effect of lower soft commodity prices.

Adjusted net financial debt, which excludes the value of readily marketable inventories, increased to USD 470.0 million as of 31 March 2014 from USD 294.2 million a year ago, which is due to larger crop farming operations with a respective increase in working capital requirements and the acquisition of the Druzhba Nova farming company.

Net debt to 12-months trailing EBITDA increased to 5.2x as of 31 March 2014 from 3.1x as of 31 March 2013. Adjusted for readily marketable inventories, net debt to 12-months trailing EBITDA increased to 2.6x as of 31 March 2014 versus 1.0x as of 31 March 2013. The increase in both ratios reflects the lower EBITDA due to the negative impact of the Ukrainian hryvnya devaluation in Q3 FY2014, farming segment losses, and a tight sunflower seed crushing margin in Q4 FY2013 and Q1 FY2014, as well as the acquisition of the Druzhba Nova farming company.