The year 2019 has launched its final countdown and the shares of Ukrainian public agricultural companies joined by losing in price synchronously. One of the leaders in this group is Astarta-Kyiv. Today the value of its shares at the opening of the Warsaw Stock Exchange (WSE) was PLN 15.8 per share. Thus, their value has slightly increased from the minimum level in 10 years, which was recently broken down to PLN 15.65. The price dropped below only in the crisis year of 2008.
The shareholders are also discouraged with the latest company's 9M 2019 financial statements, which recorded a 70% decline in net profit and a 33% decline in EBITDA. Astarta's net debt amounted to EUR 266 mln, including a rental obligation of EUR 102 mln. The debt-to-EBITDA ratio increased from 5.2 to 7.7 (in a healthy financial position of the company it does not exceed 3).
"Astarta's report is disappointing, despite the fact that the key result was provided by a weak income from the revaluation of agricultural products. We understand that this is the result of the recent corn and wheat prices drop, as well as worsening harvest prospects. All this gives us little chance that the company will be able to show a better profit in full 2019 compared to the previous year. The increase in the company's leverage is also frustrating, but it is still no reason for concern," noted Alexander Paraschiy, Head of Research at Concorde Capital.
The agro-industrial holding usually explains its losses by the negative situation in the grain and sugar market. This is hard to deny, especially in the context of the latter as sugar prices have been keeping low for the third season in a row. However, in the last report, the company claims that it has already adapted to the unfavourable market conditions and will reduce sugar production to 300 thou. t by the end of this season.
This year holding did not launch two sugar plants — Savynsky and Kobelyaksky. This is a rather atypical situation for the holding — for the first time, two plants skipped a production season. Previously, the company did not launch no more than one production facility. It is all clear about Savynsky plant since the company has not launched it for several seasons. "The plant's fire engine was sold, and this is a sentence to the plant," says one of the company's employees.
At the same time, the season failure for Kobelyaky is new. And yet the business logic in this decision is clear. According to Latifundist.com sources, the current and former employees of the holding note that it is a forced but justified measure. Sometimes it is better to idle a season rather than to work into the red.
However, this situation in the company is caused not only by the global conjuncture but also by the broken balance of raw materials supply to the plants. In recent seasons, the key sugar assets — Globinsky, Yareskivsky and Novoorzhitsky plants have been supplied with beet at almost half of their capacity (Yareski — 50-60%, Globino and Nova Orzhitsa — about 30%). This is linked to the fact that it is becoming more and more difficult for companies to motivate farmers to produce sugar beets, thus, there is an underload. Another point is that assets that are not supported by the raw material zone. It is Novoorzhitsky Sugar Plant above all.
The press service of the company did not comment on this information, as well as on other issues related to the holding's activities.
"The sugar production cycle was disrupted after the purchase of the plant in Nova Orzhitsa. Due to the fact that there is no company's farmland around this sugar plant, we have to deliver beet from the raw material zone of Globinsky Sugar Plant which is 80 km away. In Nova Orzhitsa, there is no raw material at all, and this is a strategic mistake. When buying this asset, the management overestimated its potential," says one of the current top managers of the company.
According to our sources, a similar situation with the deficit of raw materials appears at Yareskivsky Sugar Plant. As a reminder, this facility was a start of Astarta-Kyiv.
"We brought sugar beet from Globino to accumulate the 500,000 tons of production for Yareski. That is communism. What is the use of plants with such profitability? We do business, not charity. As a result, production problems also affect social policy in the regions. If we do not change it, we will start losing land," says one of the company's managers in Poltava region.
One of the company's former employees says the problem lies not in Novoorzhitsky plant itself. On the contrary, it was a very good deal back then. The asset was bought for EUR 3 mln. The only way to return the investment is to sell the equipment. Originally, according to our source, it was planned to invest USD 15 mln for the purchase of corporate rights for agricultural enterprises near the plant. Apparently, Viktor Ivanchyk initially supported the idea. But after it was rejected by the company's financial director Viktor Gladkyi, arguing on the course of saving, the land cluster was not formed.
Today, as the company's employees say, Globinsky Sugar Plant has worked a little more than a month during the 2019/20 sugar season, which is a poor result for such a powerful enterprise. According to our sources, the company is considering selling this asset. One of its disadvantages is the lack of capacities for sugar beet storage (the plant has only floor storage facilities). There is nowhere to store up to 50% of the produce.
A similar fate will be met by Kharkiv sugar plants and largely agricultural enterprises of the holding. Currently, Astarta is selling one of its Kharkiv assets.
Besides, the holding also put up for sale of the corporate rights for 2600 hectares in Cherkasy region, the Chernobayevsky district to be exact.
Not long ago, Valery Sokolenko was appointed Executive Director of Astarta-Kyiv. According to our sources in the company, this decision was made due to the fact that the holding has had a horizontal structure in the top management for a long time. Since Viktor Ivanchyk strayed from management, it was hard to find the responsible one in a number of situations.
"According to Jim Collins, the most successful are Level 5 leaders who delegate management functions to executives. I am glad that I can completely let go of the routine and focus on strategy. I try not to interfere without having to," Viktor Ivanchyk commented on his managerial approaches for Forbes back in 2013.
Most of Latifundist.com sources claim that, in fact, the aforementioned CFO Viktor Gladkyi has most of the levers of influence on the founder of the sugar holding. Former top managers of agricultural companies in Poltava region, Aleksandr Kovalenko and Viktor Skochko, also mentioned this in their interviews with Latifundist.com.
Both left Astarta two years ago with a scandal. They are still suing the company today because of their shares, which should have been repaid during the settling process. Kovalenko and Skochko told that at a certain point the company went through bureaucratization and centralization of management processes.
Learn more: The Payback for Dobrobut: Astarta-Kyiv vs. Kovalenko
“A new management came to the company, and the holding set a course for centralizing management, according to which all strategic, financial and organizational decisions should be made only in Kyiv. And the directors of enterprises should implement these decisions, inasmuch as we were one team. In practice, the distance between enterprise managers and top management began increasing. The management's vision of relations with the villagers changed a lot. Actually, it came down to the fact that people should get only the rent. I understood that if the new team of managers of the holding had lived and worked in the village and had not just observed the process during business trips, the management might have changed the views on Astarta's development. As a result, it became difficult for them to understand us, and also the other way around,” stated Aleksandr Kovalenko.
Centralization led to ridiculous situations when an elevator director could not be subject to the head of an agricultural company, but only to the head of the elevator business of the holding. Likewise, the agronomist reported to the head of the corresponding direction. This often led to confusion. Things turned even worse when after numerous mistakes 500 ha of sugar beet were destroyed by a misused herbicide at one of the Poltava branches. Several company employees told us about it in Poltava region.
Learn more: "Divorce" Case in Agribusiness: Skochko vs. Astarta-Kyiv
There was growing dissatisfaction with the increasing staff numbers in the Kyiv office, which today amounts to half a thousand people. One of the ex-employees says that he had to collect more than 30 signatures to complete his resignation.
Round of layoffs
In the meantime, key top managers left the holding. This process was not a one-step one, as in the "outflow of personnel" from Kernel when most of the top managers left the company all at once. But the general message is exactly the same — the owner decided to get rid of the "old guard" who were building the company. Only the head of sugar sales, Anatoliy Rusnak, remained in the Board.
"Before 2000, when the company consolidated about 40 thou. ha, we formed a good team. At that time it was recruited in a different way than it is now, there were no good specialists in agriculture, especially managers. Therefore, people were recruited according to the criteria of devotion, desire to develop, sharing the company's ideology and ability to lead people. Many came from the aircraft factory, where Viktor Ivanchyk worked. This team formed the company in its present shape, prepared Astarta for IPO, established cooperation with international financial organizations. But at a certain point, Viktor Petrovich said that the company needed professionals. A new course has been taken," says one of the former top managers.
Over the past few years, among those who resigned are Deputy Commercial Director Valeriy Laskov, Head of Legal Department Sergei Kanteruk, Director for Marketing and Communications Nikolai Kovalsky, most managers of agricultural companies and other top managers. Many were particularly surprised by the quiet resignation of Deputy CEO Petr Rybin. It is with him, along with Viktor Ivanchyk, that many people associate the key company's accomplishments. In particular, he was the one who had been running the company for many years, expanding the land bank and purchasing core assets.
One of the top managers who has recently left the company stresses that it is not worth idealizing the old team: "If we had such prices for sugar and general market conditions, we would be heroes too."
Personnel and structural changes in the company were largely influenced by the recommendations of international financial institutions, in particular, the EBRD and IFC, as well as consultants from the International Management Institute. The holding demonstrated all features of manual control.
"It was like this: the director of agricultural company phones a subordinate: "Vasyl, buy three tons of diesel." Nowhere was it recorded, it was all over the phone and verbally," says the current employee of the company.
Under the influence of international financial organizations, the company also decided to start the biogas business at the Globinsky Sugar Plant. In practice, however, it did not prove to be successful.
"Biogas production was an emotional decision. The EBRD promoted alternative energy, offered money. But economic calculations did not come true, expectations of the green tariff were overstated. And the main thing is that the technology of processing sugar beet pulp turned out to be complex and it was not possible to reach the design capacity. They thought that we would fully supply the plant with gas, and in the off-season, we would build a 12 MW power plant that would sell electricity at the green tariff. But the plant could only supply 50% of it," says one of the former top managers.
It is noteworthy that in the last two years, a fresh generation of top managers quit including Commercial Director Cezary Maciborski, HR Director Olga Kovalchuk and, eventually, Operations Director Zeljko Erceg.
According to the company employees, Olga Kovalchuk left Astarta because of the conflict with Viktor Gladkyi. The resignation of Zeljko Erceg surprised many in the holding, as he had a valid contract with the company. Our sources say that he was irritated by set-ups in the company.
"Being a pure pragmatist and a technical person, he was engaged in production and he was not interested in all these schemes. In addition, Viktor Petrovich stepped down from the management, ignored his suggestions to discuss production plans, results. He did not like it, because nothing was properly controlled, the company did not develop. At the same time, he did not share the tastes of Viktor Ivanchyk and his surrounding, he was not trying to get people to like him," says the company employee.
Notably that even during Zeljko's work at the Serbian holding Agro Invest Ukraine, Ivanchyk tried to headhunt him by all means for over two years. After Erceg joined the sugar holding, the CEO warmly welcomed him. But after a while, he lost interest. Many people explain it as a phenomenon of Ivanchyk's character — he easily brings people closer and grows cool with the same ease. A similar situation occurred with Olga Kovalchuk.
Back in 2013, Forbes wrote that in the 80s Viktor Ivanchyk worked for the KGB. Our sources, who worked with him during that time, confirm this information. This had an agreeable impact on his character — he surrounded the company with a network of informants, on whose opinion he often relied the most.
An employee of the company told about a case when Ivanchyk, having learned that one of the farm managers disposed of the old machinery as of scrap, immediately ordered to fire him without sorting the situation out. The colleagues of Viktor Ivanchyk advised him to contact that director first. It turned out that everything he did was planned and the money was accounted as it should have been.
The Company’s future
Latifundist.com sources in the company say that the Canadian fund Fairfax is dissatisfied with the financial results and the situation inside the holding. Canadians are increasingly arranging visits and inspections in Kyiv.
As for the personnel policy, according to our information, in the near future, the company intends to dismiss a number of employees in the regions. In particular, on January 1, 2020, the director of Globinsky Sugar Plant Yuri Matsak will resign from the holding.
In any case, personnel, production and any other decisions are up to the business owner. The same is applicable to the company's development strategy, the right to error, or vice versa.
In its latest reports, Astarta-Kyiv stresses that its focus on the business diversification. Perhaps, this course, as well as the sale of risk assets, will help the holding to get out of the challenging circumstances. However, it seems that sugar is not the only thing dragging the company down.
Konstantin Tkachenko, Latifundist.com