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Edited Transcript of AGRO.L earnings conference call or presentation 19-Nov-19 2:00pm GMT

Q3 2019 Ros Agro PLC Earnings Call

Nicosia Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Ros Agro PLC earnings conference call or presentation Tuesday, November 19, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Maxim Dmitrievich Basov

Ros Agro PLC - CEO & Executive Director

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Conference Call Participants

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* Alexey Krivoshapko

Prosperity Capital Management (UK) Ltd. - Portfolio Manager

* Artur Galimov

Sova Capital Limited, Research Division - Analyst

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

* Sergey Beiden

Renaissance Capital, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and welcome to today's ROS AGRO PLC Financial Results for the Third Quarter 2019 and First 9 Months. (Operator Instructions) And just to remind you, this is being recorded.

So today, I'm pleased to present Maxim Basov, CEO. Please begin.

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [2]

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Thank you. Good day, ladies and gentlemen. Today, we reported our results for the third quarter 2019. We issued a presentation and the press release. I'll go quickly over the presentation, and then I will answer the questions.

In general, our revenue was much higher than in the third quarter last year. We had a record revenue result. Mostly, this is a result of consolidation of Solnechnye Produkty assets, which we acquired last year. Our revenue in the third quarter increased 74% compared to the third quarter last year.

On the other hand, EBITDA was not higher. It was actually lower. We had EBITDA of RUB 4.4 billion compared to RUB 4.5 billion in the third quarter last year. 2 business units showed better financial results, primarily agriculture. And also on that, 2 business units had weaker results. This is primarily sugar and also meat.

In general, our net income for the third quarter fell down compared to last year by around half. And I think for the third quarter 2019 was RUB 3.8 billion compared to RUB 7.6 billion in the third quarter last year.

Net debt of the company went down compared to net debt at the beginning of the year. Net debt was around RUB 50 billion at the end of the third quarter. We improved our net debt-to-adjusted EBITDA ratio to 2.6.

And now I would like to comment on the performance of various business lines. Meat continues to be the largest segment in terms of EBITDA contribution. The company significantly increased the production of pork in the third quarter this year compared to the third quarter last year. And this is primarily the result of expansion in Tambov region, where all, but 1 farm already producing commercial pigs. The last farm will start producing pigs for the market in December. And then we will only have Belgorod farm, which we are stocking after African flu disease and Far Eastern farms, which we will start to stock in next year.

The volumes went up, but the prices went down. The price for the processed meat went down from RUB 165 to RUB 145. The price for the livestock, live animal went down from RUB 95 to RUB 81. And also, we had a more expensive feed as a result of higher grain prices in the new season which started this summer. So increase in costs and decrease in prices had a big effect on our EBITDA than increase in volumes. Our EBITDA went down from RUB 2.4 billion to RUB 1.7 billion, and EBITDA margin went down from 39% to 24%.

In sugar, we have similar dynamics to the meat division . The volumes of sales were higher in the third quarter this year, but the prices were lower and also the cost was higher as a result of higher than now -- or higher than it was in the third quarter prices in autumn when the cost of sugar beet and therefore, the cost of sugar were formulated. And as a result, we had probably the weakest quarter in the history of sugar in our company. We managed to had a -- have a positive EBITDA, but the EBITDA margin went down from 19% last year to 2%.

Okay. Now agriculture had a good quarter. We have higher revenue, higher EBITDA and higher EBITDA margin. With exception of sugar beet, all products, all crops gave us good return, primarily because of higher prices for the crops. And also exception of soya, sugar beet and soya were cheaper and -- but the volumes which we sold actually were higher for all the volumes with exception of sugar beet, especially higher volumes of sales were in grain. We sold much more wheat and barley than we have sold last year.

In oil and fat segment, we had higher revenue and higher EBITDA. EBITDA margin went down as a result of product mix. We had good result in oil extraction. We had good result in industrial fats and also the consumer products, even though we had weak performance in our Far Eastern factory, where the soya prices are quite high because of Chinese demand. And the soya meal had fallen significantly in Russia as a result of increased supply, especially from Central Russia region.

Now this ends my short presentation and opens the floor to the questions. Please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Alexey Krivoshapko, Prosperity.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [2]

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I'd just like to understand what happened actually with costs of sugar business in Q3 because from what I can see, you actually paid a lower price to sugar beet, which I guess is your biggest own cost, and the prices of -- did not decline so much. So there seems to be something else going on in the actual cost of sales in the sugar business in Q3. Can you elaborate, please?

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [3]

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In the third quarter of 2019, we sold to the market 274,000 tonnes of sugar, some of which came from the new season, but most of which came from the previous season. So with the cost of this season, it's clear that price of the sugar beet is normally 8 -- around 8% as a result of sugar. But this year, actually, the sugar price formula changed a little bit. So now probably, it's not 8%, it's 8.5%. So the only -- if talking about this season, the only factor which doesn't coincide with this formula is that, actually, the prices for sugar were declining.

Our plant started to work in early September, but they were selling sugar also in October. And in October, the price of sugar was below price of September, meaning that if the sugar business -- bought sugar beet in September on the formula price and sold sugar products in October. So the margin is very small because the price was declining. But the production and the sales of this season production is not as large as or maybe similar size compared to the sugar that we have from the previous season. And of course, at the previous season, the cost of sugar was higher.

In addition to that, we had some volume of third-party sugar, which we had on our books in the beginning of August, and which was sold in August, which had also higher costs because this sugar was bought from the market at the end of last year. So the cost of the sugar that you can see in the accounts is a combination of 3 different sugars: sugar produced this season from September on; sugar, which was produced last year; and sugar, which was bought from the market and sold during the third quarter.

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Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [4]

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I guess, Maxim, what percentage roughly of this 270,000 tonnes is third-party sales? So sort of position which you formulated as a sort of speculation? Just...

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [5]

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Around 80,000. 80,000 was third-party sugar.

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Operator [6]

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So the next question is of the line of Nikolay Kovalev at VTB Capital.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [7]

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I basically have 2 questions. The first one is on sugar segment. Can you share with us your estimates, how much of sugar do you plan to produce in the current season? And how do you want to structure sales between the quarters as last year? I mean last season, they were quite volatile.

And the second question is on meat. You disclosed the acquisition price for 22.5% stake in Agro-Belogorye. And basically, we can arrive to the valuation of the company. But can you share with us what the valuation multiple for the transaction or maybe share financial metrics of the company? And overall, like what is your plan for this stake?

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [8]

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This year, we have a crisis situation in the sugar industry because of the weather and the improvement in technology. Russia will be producing a lot of sugar beet, which also contains a lot of sugar in the sugar beet. So at the moment, it's hard to say what will be the overall production because the plants will be working on long days. But looks like the sugar production, this season may reach 7 million tonnes, and this will be an absolute record in the history of Russia. As a result, the prices for sugar now reached the very low level, which is, in fact even below cost, I think, vertically integrated cost of sugar companies. And probably, Russia is now the place with the lowest price of sugar in the world.

We believe that at the moment, the sugar price already is at the level where we can export sugar long distance because the sugar price in the global market, in fact is increasing and the global sugar market expects the first deficit of sugar in the past 5 years in the coming season. So exports from Russia now has started to increase, and we estimate the monthly volume of sugar exports from Russia at the level of 80,000 to 100,000 tonnes per month.

However, again, the expectation for the supply is very big. At the moment, we have seasonal oversupply. The factories in Russia will probably work until end of January, which means that the pressure on the market continues since the factories have limited storage, especially for such big volumes. So we expect the price continue to be weak for the -- for several months. We have some increase in price for the past 3 days, but from a very low level. In this situation, the company is interested to sell in the fourth quarter this season, only sugar for which it doesn't have enough storage area. And for the sugar, which we have the free storage area, we plan to roll over for the remaining of the season.

Factories, all factories at the moment are working, and most of the factories will work until the end of January. The conditions for storage sugar beet on the fields now are good. And also, we expect, in fact, we already have our second molasses desugarization plant operating in a testing mode. So this year, we will have sugar produced from sugar beet through the normal process. And also, we'll have 2 sugar molasses desugarization plants operating in desugarization, 100% of molasses that we produce in our company.

So probably, again, we cannot be certain, as always, but we expect that this year, our company will produce close to 1 million tonnes of sugar in this season. We'll have probably -- I think, together with sugar produced after New Year, we'll have around -- around 0.5 million tonnes to be sold in -- after the new year. So I would expect that around 450,000 to 500,000 tonnes of sugar will be sold by the end of this year, including part of sugar which already was sold in the third quarter this year from the new harvest. And then we will have around 0.5 million tonnes, which will be produced after the new year or will be produced this year, but kept as inventory for the rest of the year. Okay. This is sugar.

Now the meat. Yes, okay. We have disclosure. So what -- Okay. Okay. So we disclosed actually the price which we paid for 24% -- oh, I'm sorry, 22.5% in Agro-Belogorye, which is RUB 8.5 billion. Agro-Belogorye is not a public company. It does not have consolidated IFRS accounts. But I can just say that we are sure that we paid for this company, the price, which equals less than 5x EBITDA for the last year results.

Our strategy is to facilitate a dialogue with this company, which we already did to work -- to look for the synergies, which might have in agriculture and pork production. And also to -- we have a long-term wish to consolidate this company, either through merger or through acquisition. At the moment, we cannot be sure at the timing of this process. But we already started to work in a very productive manner with the -- with other owners of the company.

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Operator [9]

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Before going on to the next question, which is Sergey Beiden of Renaissance Capital. (Operator Instructions)

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Sergey Beiden, Renaissance Capital, Research Division - Research Analyst [10]

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I actually have several questions. First one is related to the first asked question. Could we expect -- given your composition of the 3 different kind of sugar being sold in 3Q, could we expect that 4Q margin in sugar business could be kind of better, because that carry-on sugar basically, the volume of carry-on sugar and third-party sugar despaired. That's the first one.

The second one, given what we see in the sugar business, could you maybe disclose what your expectation for the sugar beet harvest in a year? So what kind of -- are you going to change it to -- or you're basically having a flat amount of sugar beet being expected to be produced in the next season? And the third one is that when approximately can we expect some disclosure on your possible Chinese project?

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [11]

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The sugar business is a business which is processing this business. And in normal circumstances, when the price of sugar doesn't change much throughout the season, the margin in the sugar division should be from 15% to 25%. So it is -- I think we also expect that the margin in the sugar business will be -- jump to this level, and we'll see it already in the fourth quarter.

In fact, I think the margin on sugar business should be slightly better going ahead because of effect from the desugarization plant, which we now have 2 of them. And this is a higher-margin business than a normal processing of sugar beet.

It is -- we can only speculate on what will happen next as the sugar industry is a -- an oligopolistic industry in terms of production with a lot of farmers who produce sugar beet and supply the plants in addition to our own production. And it's not always easy to predict the farmers' behavior. As the farmers normally have an approach not to maximize profit [faster] but looking on average through the cycle and also maximizing profit over the crop rotation.

The sugar beet at the moment is a loss-making product. In fact, it's the only loss-making product among the big crops in Russia. All other crops, as we know, are doing very well. We did experience a big drop in prices of soya this year. We also experienced a drop in the price of sunflower seeds. However, all these crops are profitable in comparison with the sugar beet. It is rational to assume that at least, some sugar producers or sugar beet producers for independent farmers will stop producing sugar beet. At the moment, there are different -- we use on the market. Some people believe that 15% of third-party farmers will stop producing, and some people believe that there will be even higher number of 30% to 40%.

What we cannot at the moment, no is what will be the response of the big players in the market, because understanding the way how game really works. We can unfortunately expect that some people would think that the farmers will stop producing sugar beet, the price will significantly go up. So they will decide to increase the production of sugar beet. So we need to wait and see until May next year, trying to understand what's happening. In addition to that, the fertilizers, which are quite expensive, we already put in the soil in autumn in preparation for the sugar beet planting. So in my view, we'll have a decrease in sugar beet area next year of 10% to 15%.

The biggest uncertainty is in the yield because this factor is also very dependent upon the weather condition. But in general, I expect -- and we all expect, I think the whole industry expects that the sugar production will go down. And the question is will the decrease in sugar production for the next season coupled with export of sugar from Russia at the level of 80 to 100 or maybe even higher to export markets. It'll be enough to decrease the stocks in Russia to the normal level because in addition to more than 1 million tonnes surplus sugar produced this season, we have also have around 0.5 million tonnes of sugar, which is in the inventory of Russian companies. At the end of the last -- sugar which also is excessive compared to the normal level. So again, we need to see. Again, I'm sure that the production of sugar beet next season will be lower. But at the moment, we cannot be sure what will be the situation, what will be the balance of sugar at the end of the season.

So there are many things we need to watch, also the sugar price in the world, which started to increase. Some banks now estimate that the price of sugar will go up to $0.14 per pound, which is a fairly high number, which, of course, will make export even more interesting for Russian companies, and we will provide even more incentives. So there are large Russian sugar companies to keep sugar on the inventory on the books and will not sell the sugar. So many uncertainties, no doubt. Now we have the crisis moment, the low price and then we will need to see what will be an influence on -- and effect on the structure of the industry.

Okay. Now your last question about China, we have -- we do not have a decision by the Board on this project. We are debating this issue. And at the moment, we expect that the Board, probably, we will have an extraordinary Board meeting in December. And maybe in December, the Board will decide on the fate of this project or projects because we have several. And as soon as it happens, we'll inform the market about the situation.

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Operator [12]

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Our next question is over to the line of [Mikhail Borges] of [QBS Investment Company].

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Unidentified Analyst, [13]

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I have several questions about the meat segment. So could you say some information about China? I mean do you interact with your partners? And do you see the desire to export meat -- pork meat to China from Russia? And the second one is about Agro-Belogorye. I've heard about your desire long-term to consolidate this company. But can you say that the Agro-Belogorye management have a desire to be consolidated?

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [14]

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Okay. Let me start with the second question. There is no transaction, so I cannot -- I do not know. I cannot comment, and I don't know the desires of the owners of Agro-Belogorye. I can only repeat again that we're interested to increase our stake in this company. And when our desire will coincide with the desire to sell and the price will be the same, then the transaction will happen. At the moment, we do not expect any transaction with the shares of Agro-Belogorye to happen in the nearest future. So we'll continue to be a minority shareholder.

As far as China, you probably know, some of you that in China, there was a very big loss of the sows, and it is expected that the production of pork in China will dramatically fall from more than 40 million tonnes to slightly more than 20 million tonnes. The whole world is not enough to supply China with the pork. Unfortunately, Russian pork is not allowed at the moment to China. We can only export to Hong Kong. The problem is that until very, very recently, also Canadian pork and U.S. pork was also restricted towards the Chinese market. As a result, the Hong Kong market was flooded with pork from U.S., Canada, partly Russia. So the price there was quite low, below the price of meat in the Russian market.

We do work with Hong Kong, we sell our products. We also sell some products to Vietnam because not only we had a loss of pork life in China, we also had death of sows in Vietnam, and also African flu disease now is in most of either Asian countries.

The situation on the Russian market in pork, in some way, is similar to the sugar as we see the over -- the supply is growing because of improvement productivity because of technology and also because an increase in production of pork from the farms that we started to build several years ago. We see the supply of pork grow in Russia every year of more than 5%, and this will be happening for the coming 3 years. The consumption of meat by Russian population is not growing. Pork is the winning market share, again, well, from beef, of course, and also even from chickens. But the supply is growing faster than the demand. Price is going down, and more and more pork will be leaving for the export market.

We are, of course, are looking forward to increase in pork price all over the world. And we see it already in Europe. We see in the U.S., we're starting to see in Canada. And we only hope that China will open the market. The Chinese market already is open for chicken. We expect that the market will be open for beef relatively soon. And we, of course, hope that we will start supplying Chinese market in next year, but cannot guarantee for that. The price in the Chinese market has reached $6 per kilogram of pork. There is some import duty, of course, which is 15%. But in Russia, now the price at the moment for pork is at the low level. And at the moment, it reached the level of $1.30. So there's huge difference and this, of course, if this happens, then a lot of Russian pork will go to China, and we will make a lot of money. But again, this is -- we cannot be sure that this happens at all, and we cannot be sure, especially that it will happen very soon.

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Operator [15]

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Our next question is over to the line of Artur Galimov, Sova Capital.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [16]

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Maxim, just a follow-up question on potential opening of China market for pork. Should it happen, let's say, next year, early next year or whenever? I guess your current design on the Far East project is not enough to channel a significant amount of export volumes to China. So are you going to redirect some of your pork production volumes from Tambov and key regions to China? Or rather, you would change the current capacity of your Far East project?

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [17]

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Well, if China opens, then, I think, all the Russian pork will go to China. Because there is a big price difference, of course, not all but all -- which from the big slaughterhouses, which will be certified for China. It's, of course, not all. Then in terms of capacity, our strategy, as we understand the situation in China and the position of the Chinese industry and Chinese government, we believe that China will be in deficit for at least 5 years. But it's the intention of the Chinese government, of the communist party of China, is to build the farms inside China. So I believe that this will happen. And eventually, the market will be closed, and all additional capacities which will be built during this time, we'll have nowhere to go. Of course, again, as the Chinese market open, not only we will direct our export there, but we'll build new capacities, which will have the payback period of less than 4 years.

We have an opportunity to build additional capacity very quickly in Far East. And it's around, I would say, but not more than 40,000 tonnes, and we have additional capacity to be quickly built in Tambov area, also around 40,000 tonnes of pork capacity. We will only be building the pork capacity larger than this, in case, if we have the partnership with Chinese companies and especially Far East. We do have some negotiations with the Chinese -- big Chinese companies to increase the production of pork in Far East up to 1 million tonnes, which is very significant. But this can only happen only after the China opens the market and again, the Chinese companies will decide to invest in Russia. And without the long-term Chinese partners who will take most of the risk, we're not going to invest a lot of money in this industry outside of China, at least.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [18]

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Okay. Right. And maybe a final one. Again, hypothetically, if you assume that China market is opened, would you expect Russian government, maybe to step in at some point to avoid significant price growth in Russia for domestic prices, maybe improving some quotas, export quotas or taking another steps for the next price inflation?

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [19]

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Well, I don't think it will happen because the Russian government, in general, is trying to have a liberal policy in terms of prices. There will be, of course, some discussion. But if the market is open, the prices will go up for some products and pork. I think that the quick response to that will be an increase in production and consumption of chicken because there is spare capacity in chicken, which can be quite quickly put in line unlike in pork.

And -- but in general, of course, there is a better -- much better way to manage the situation. I'm sure that because also the quality issue and because of regionalization -- if Russia -- if Russian produced -- if Russia is open as an export to China, this will not be in all regions. And by far, this will not be all companies. Chinese certification agencies are very strict, and we expect that only a limited number of regions and limited number of big slaughterhouses in these regions will be certified for the Chinese market by Chinese authorities. So in China, I think that there will be not -- so in the sales, on the prices will be limited. And a right response by the market will be very quick, especially from the poultry.

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Operator [20]

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Before going on to the next question, which is Nikolay Kovalev of VTB Capital. (Operator Instructions)

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [21]

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Yes. I just wanted to clarify a couple of points. On capital expenditures, we already saw in 9 months, the record high figure of RUB 21 billion for CapEx. So can you update us what is your total plan for 2019 and '20? And also, a bit more on the strategy side. Given how challenged the situation is in sugar and how low prices are, do you see there's some players in the industry could be in the financial distress this season? And if that happens, could they be -- could they become potentially interesting to you in terms of consolidation further in the sugar segment?

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [22]

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In fact, we are decreasing our capital expenditures. This is our response to the current situation. Yes, you saw in our cash flow, the amount of RUB 21 billion, but it includes RUB 8.5 billion, RUB 8.5 billion in shares acquisition. Our original plan for this year in terms of CapEx was more than RUB 20 billion. At the moment, I believe that we will lessen CapEx of less than RUB 18 billion. So I think that we already -- we almost finished our CapEx program in our sugar industry. Now even more so, I think that there will be no more major projects that we are going to do. And we are just going to make the money and using as a cash cow.

Also in pork, we -- as I said, we will finish this year our Tambov construction, the only small money left to be paid in the first quarter, I think, next year. We are finishing our reconstruction of the farms in Belgorod region. We already finished the increase in capacity in our slaughterhouse in Tambov. We do plan some well-paid projects, a small amount in Tambov to -- for the export market and also for increase of the production of consumer products.

As now given that we have such situation in the pork, the -- actually, the slaughtering and the meat packing or the processing part of our business started to generate good margins, and we expect a big decrease in price over the live animal going forward than for the price of processed meat. So I believe that in general, the investment phase in the industry is coming to an end. The only thing which we just discussed is the question of the opening up of the Chinese market. If China, again, is open, maybe we'll invest in some very quickly paid projects. The biggest industry, the biggest segment in our company, which will take some investments will be oil and fat. With some investments, which have a very good payback period, but they are much smaller, these investments than we have in our business units.

So my -- we are now in the budgeting period. We are rethinking some of our strategic assumptions, and we expect that -- I would say that probably, the CapEx for next year will be smaller than I thought a couple of months ago. So our response for this situation will be to limit our CapEx in order to keep our dividends and dividend policy. We will limit our CapEx. We may improve our working capital position in order to decrease our net debt level and also to be able to buy the companies, which will fall in the stress situation. There -- no doubt, there will be companies which will fall in the stress situation, both -- in all the segments we operate at. But we should be very careful and only buy the companies at a very cheap price with a new assumptions on the pricing in all our segments.

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Operator [23]

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As there are currently no further questions in the queue, can I please pass it back to you for any closing comments at this stage.

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Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [24]

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Yes. Again, as I -- and I forgot to say also, of course, we are waiting for the decision by the Board on our Chinese strategy, and this may change our general approach to the investments in Russia and on our strategy on the capital markets.

Okay, ladies and gentlemen, thank you very much for listening. We are looking forward to the fourth quarter, and we expect that fourth quarter should be better than the third quarter, and the company will go through the period of decrease of -- weak and decrease in prices in sugar and pork stronger, using this opportunity to increase its market share. Thank you very much. Bye.

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Operator [25]

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This does now concludes today's call. So thank you all very much for attending, and you can now disconnect.