U.S. Markets closed

Edited Transcript of AGRO.L earnings conference call or presentation 19-Aug-19 1:00pm GMT

Q2 2019 Ros Agro PLC Earnings Call

Nicosia Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Ros Agro PLC earnings conference call or presentation Monday, August 19, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Maxim Dmitrievich Basov

Ros Agro PLC - CEO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Alexander Gnusarev

VTB Capital, Research Division - Equities Analyst

* Alexey Krivoshapko

Prosperity Capital Management (UK) Ltd. - Portfolio Manager

* Andrey Krylov

Sberbank CIB Investment Research - Junior Analyst

* Anna Kurbatova

Joint Stock Company Alfa-Bank, Research Division - Senior Analyst

* Artur Galimov

Sova Capital Limited, Research Division - Analyst

* Elena Jouronova

JP Morgan Chase & Co, Research Division - Research Analyst

* Iryna Tarko;Montpelier Asset Management;Research Analyst

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

* Sergey Beiden

Renaissance Capital, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to ROS AGRO Second Quarter and 6 Months 2019 Financial Results Conference Call.

I will now hand you over to your host, Mr. Maxim Basov, CEO of ROS AGRO. Sir, the floor is yours.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much. Ladies and gentlemen, today, we have published the results for the second quarter and first half of 2019. Also, we've published the decision of the Board of Directors about the dividend payment. The Board of Directors happened in on Friday last week.

I will give you some comments on the business performance and our financial results, and then I will open the floor to questions.

Overall, the company increased the revenue in the first -- in the second quarter of this year quite significantly. Revenue for the second quarter reached RUB 41 billion. The revenue for the first half reached RUB 74 billion. The company increased EBITDA from RUB 4.1 billion to RUB 4.7 billion, and the net income of the company was RUB 1.7 billion compared to RUB 2.1 billion in the second quarter last year.

In terms of revenue, and I follow in our presentation on Page #4. In the first -- in the second quarter of this year, all business units increased revenue. The biggest increase was in the oil and fat division as a result of revenue from Solnechnye Produkty efforts. Also, the increase -- the big increase was in the sugar division and the agricultural division.

In terms of EBITDA, the performance was mixed. In the second quarter, we have the agricultural division, which performed very well, increase EBITDA. And we had the 2 divisions which showed the results lower than in the second quarter last year.

Now the net debt of the company on Page #7 was the RUB 44 billion. The net debt to adjusted EBITDA will continue to fall to 2.3 for an increase in net debt, significant increase in net debt after the -- as a result of Solnechnye Produkty execution, net debt continues to fall.

And now let me give you some comments on how our business units was -- let's start at the beginning of the business units.

Meat on Page #11, you see the results for the second quarter this year. You see that the prices for the imported meat and the main price indicator for our business now is the processed meat since most of the meat, the vast majority of all meat is sold at the moment in the processed -- or meat in industrial cuts and also the carcasses. So the price in the second quarter was RUB 136,000 concentrated compared to RUB 136,000 last year.

The company increased their production volume. As you can see, if we measure it in live animal, their increase in production was more than 20%. However, EBITDA hasn't increased much because the increase in volume was matched by increase in the price of feed, primarily the price of grain. So as a result, we had revenue of RUB 5.6 billion and EBITDA of RUB 1.757 billion, and the EBITDA went down to 29% compared to 33% in the second quarter last year.

Overall, if you look at the results for the first half, we had a larger increase in production, but the EBITDA was below the dollar last year because of results of the first quarter while we had a loss of animals due to the foot-and-mouth disease in Far East Russia.

In sugar, we had a big increase in revenue. An increase was a result of increased -- big increase in sugar and volume of sugar sold. We sold more than 2 times more sugar in the second quarter this year compared to the sugar last year. The price of sugar in the second quarter was lower than the price of sugar in the second half -- in the second quarter last year.

And as you can see on Page #13, we continue to experience a decrease in price in sugar. A decrease in price in sugar has 2 reasons. One is the low price of sugar globally as a result of the increase in production in India and subsidies, which is driven by the Indian government to the sugar producers, and also because Russian government released a steady source of sugar in the beginning of this year, which took the market from the balance and, in turn, as a result, as expected because which we expect to have in the new season starting August.

As a result of, the price at the moment is already 22.8, excluding this year. Actually, at the moment, the price is even lower. The price is 21, which is significantly below last year prices. And though we sold much more sugar, the EBITDA is lower because of the world prices and also because the prices when we bought the sugar beet -- sugar were much higher. And as a result, the prices of sugar beet were higher in September, October, November last year. So sugar division suffered from higher price for raw material in September, October, November last year and lower price of sugar at the moment.

The agricultural business performed very well. We had -- we sold more products in the second quarter than in the second quarter last year. And also, most prices were higher, especially grain prices. You can see that all grain prices were significantly higher. The sunflower price was at the level of last year. And the only big crop, which we plant, soya, was below last second quarter figures. So we have EBITDA RUB 1.3 billion and margin of 35% EBITDA margin which it represents.

Oil and fat division showed relativity poor results, but these poor results do not reflect the real results of the combined assets. We have 3 reasons why the results were lower than last year. The real -- the one real result was below EBITDA in Far East Russia, which was a result of higher soy price in Far East Russia because of big demand from China and the lower price of soya meal in Russia. But other than that, in the second quarter, we have to take the costs of sold product assets, but we didn't show yet the EBITDA assets on our books. Some of these product assets are going through the process of bankruptcies. This is a quite complex legal procedure. And only starting the third quarter this year, we managed to sign the agreements with the bankruptcy providers that allow us to show EBITDA results, also product on our books. So starting the third quarter, we will be able to show more stock combined to EBITDA of balance of business on our books.

Okay. That, in short, finishes my presentation on the results for the second quarter and opens the call to your questions. Please go ahead.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question's from Nikolay Kovalev, VTB Capital.

--------------------------------------------------------------------------------

Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [2]

--------------------------------------------------------------------------------

I have a couple of questions. My main question is on your sugar business. Given now like the most important months for the year, sugar content going up, so what is the current update from your crops and the farmers that you're -- who will be buying? And to what refining are you anticipating? Like is it going to like 6 or like above? And what does it mean for oversupply concerns on the market for sugar?

And my second question is on your booking of interest income, basically, I'm quite puzzled by the dynamics between first and the second quarter. In the first quarter, it was almost RUB 3 billion income, and it was at below RUB 1 billion in the second quarter. Can you explain like what's happening about these deposits and how you're -- what's the approach to booking the interest income?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The cost of sugar beet have already started in Russia. Overall, we expect a very big cost of sugar beet. Sugar content is a little bit early to assess, but it looks like the overall sugar production in the current season will be watched. We expect that the sugar production will be in above -- will be exceeding 6.2 million tons of sugar, which will definitely create the surplus on the sugar market. So the sugar market surplus from the next season, coupled with already a surplus, which is in the market from the previous couple of years, is such that in order to keep the post-season balance on a level, let's say, that will come on 2, 3, 4 years ago. We are at least to expect at least 0.5 million tons of sugar. From 0.5 million, maybe to 800 million, this is manageable, but that's a big volume. And in order to export this volume, we would need to have a price in the domestic market close to the export parity price. At the moment, in fact, the price is below export parity price since companies need cash. And the price -- therefore, the price will continue to be on a relatively low level. And the international price is also not very high. The price went down from 0.12, 0.125 per pound to a level of 11.5. The ruble is underrepresented and [a bit bigger], but overall, we should be expecting beginning of season starting at the current price, so maybe a little bit lower.

Okay, now the interest rate. The difference between interest rates in the first half -- in the first quarter and second quarter is a different approach that we took. I think it will be more fair to look at this income result combined for the first half. We charged more interest to Solnechnye Produkty assets in the first quarter. And due to various legal limitations, we couldn't do this in the second quarter. So in other words, it would be prudent to take the figure for the first half and divide it by 2 to get the quarterly results.

But as I said, starting the third quarter of this year, we'll have different legal documents, legal arrangements with Solnechnye Produkty assets. We will be -- we'll be selling EBITDA on our books, and the books I will be glad to give. And we will not have the interest payment from this asset since most of them are already in the process of bankruptcy, and we'll have to change the way how we will present.

--------------------------------------------------------------------------------

Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [4]

--------------------------------------------------------------------------------

Okay, it's very clear. Maybe as a follow-up, if you are applying this approach already in the first half or the second quarter, can you share with us how much EBITDA will come from these Solnechnye Produkty assets?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Do you mean for the second half?

--------------------------------------------------------------------------------

Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [6]

--------------------------------------------------------------------------------

No. I mean like if you apply -- I mean, maybe you have an estimation that if you apply the approach of consolidating EBITDA from Solpro assets in the second quarter or in the first half, how much EBITDA that would be?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [7]

--------------------------------------------------------------------------------

So the question is, in other words, what was EBITDA of Solnechnye Produkty assets in the first half, right?

--------------------------------------------------------------------------------

Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [9]

--------------------------------------------------------------------------------

Solpro, yes, RUB 1.5 billion approximately, plus, minus if -- but let's take into account that this is assets, which do not, again, owned via directly as there are some other creditors, but answering the question's around RUB 1.5 billion.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question's from Alexey Krivoshapko, Prosperity.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [11]

--------------------------------------------------------------------------------

Listen, I have a question on sugar costs. I mean you covered the volumes and prices quite extensively. If I look at kind of at quarter evolution of costs, I can see that simply if we cannot divide cash costs by volumes of sugar sold, I mean, cost reached as high as RUB 25, which seems a pretty high number. Is there something inside the quarter which was kind of one-off or kind of -- can you explain this kind of pretty serious uptick in costs between Q1 and Q2?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [12]

--------------------------------------------------------------------------------

Yes. We can send you monthly figures, but the general answer is that we are selling sugar, which technically are coming from 3 different sources. First of all, it's sugar that we produce ourselves. The cost of the sugar in general is very easy to understand because it's the price of sugar beet multiplied by a certain number of sugar beet tons to produce 1 ton of sugar, plus the processing costs. So it's more or less stable. Of course, depending upon which is going to be developed because, first, we sell the -- we use.

So first, we sell the September -- sugar from September sugar beet and so on, so it's easy to calculate. But this year, okay, the second part of sugar, smaller amount of sugar, and you'll probably see them in the third quarter, is the result of production of sugar from sugar molasses. And this is a lower-cost sugar. But in this season, we made a decision last year to try to do speculations, and we bought some sugar from the market. The volume of the sugar, of course, is not as big as our own production, but we bought a sizable amount of sugar. We will buy in different months, and the cost of the sugar is higher than the cost of our own sugar. And this cost was more or less equal to the price of sugar and the months where we were buying.

So we made this particular decision, and we are making loss in the sugar -- on most of the sugar since the price went down while we thought that it would be going up. So the difference -- the big difference in the cost of sugar in my understanding is the result of cost of sugar from different sources. And the third part of sugar, which we bought for trading purposes, disrupts the clear picture, but we can -- if you're interested, we can send you more exactly the figures for the month for the second quarter.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [13]

--------------------------------------------------------------------------------

That's clear. And just from the like-for-like perspectives, I mean, do you sell any kind of the speculative sugar in Q1? Or was it your own volumes largely?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's largely our own volumes. We are selling the third-party sugar mostly in second quarter and third quarter because of price. Because -- yes, because of price. Because all sugar that we produce was in -- was all in December. And of course, some sugar that we bought in October, November were part of it, but some sugar, which we bought, let's say, in December is coming at the end.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [15]

--------------------------------------------------------------------------------

I see. I see. And kind of if you would take aside this kind of surplus to sugar, do you think there was some kind of increase in costs in your own sugar between Q1 or Q2? Or should that have been more or less stable given the fact that, I mean, it's something that was produced already during the last year?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [16]

--------------------------------------------------------------------------------

Just a second. No, no, I think -- yes, I mean, we'll give you more of that information. From what I remember, it should be more of the same. But again, there are 2 things. First of all that, as I said, the cost of sugar depends upon the cost of sugar beet. So normally, the price of sugar beet increases from August to December. That means that there's no sugar to be sold is the sugar from the first -- from earlier more cheaper sugar beet. So I would say, normally, the cost of first quarter sugar beet, sugar should be below the cost of the second quarter sugar.

In addition to that, there are certain fixed cost which I do not exactly remember how we charge them, but maybe we charge them on a periodic basis, which includes, for example, the cost of our sales team because they have B2C. And so there is a B2C segment with. And also, we have -- don't forget that we also have B2C sugar, which also has cost -- which has a higher cost because of processing and also the packaging. And all of this gives you this picture, but, again, we will send you more -- we will send you an explanation of the difference between our cost of sugar in the second quarter versus cost of sugar in the first quarter, and if I remember it was meat, and we can discuss it also in detail.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [17]

--------------------------------------------------------------------------------

Clear. And may I ask this? And I know cost of range. Perhaps if you can allow us. Can you give us an estimation of how much do you plan to invest in 2019 kind of Russia speaking, and if you can just break this down by segments, if that's possible.

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [18]

--------------------------------------------------------------------------------

Yes. We had the Board of Directors on Friday. We decided to change a little bit our scheduled appointments. And generally, we postponed some of our meat investments, which we have not started at the second stage at the beginning of next year, but, overall, the picture would be the following. This year, we plan to invest from RUB 21 billion to RUB 24 billion. The question is which part will fall in December and which part will fall in January, out of which the signals are the following. We are investing RUB 5 billion this year into the sugar division. This is the biggest investment in rubles and the investment in the sugar division. This is the last big sugar investment in the sugar -- in molasses desugarisation plant in Belgorod region, which we'll start to work at the end of this year.

In agriculture, the investments would be closer to RUB 2 billion, slightly more than RUB 2 billion. In all in fact the investments, we will be below RUB 2 billion. And in meat, we plan to invest from RUB 11 billion to RUB 14 billion. Our business continues our Tambov expansion, which we are already finishing. And this is to continue investment in the products.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [19]

--------------------------------------------------------------------------------

And if you can just break down these, profit figures, how are you thinking both Far East this year, how this level to continue?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [20]

--------------------------------------------------------------------------------

Far East, we plan to invest from RUB 5 billion to RUB 7 billion, closer to RUB 5 billion, I think, around RUB 5 billion.

--------------------------------------------------------------------------------

Alexey Krivoshapko, Prosperity Capital Management (UK) Ltd. - Portfolio Manager [21]

--------------------------------------------------------------------------------

So the rest between RUB 11 billion and RUB 14 billion, and RUB 5 billion will be going to completion of Tambov, yes?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Tambov, and we also do some reconstruction of Belgorod facilities since we have not completed this in Belgorod. We've had a temporary time hook at both sides without any months. So we are doing the renovation of these facilities as well.

Yes, in Tambov, we also have a slaughterhouse expansion, which we're finishing in a couple of months. That includes in December, okay?

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question's from Sergey Beiden, Renaissance Capital.

--------------------------------------------------------------------------------

Sergey Beiden, Renaissance Capital, Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

I have one technical question, and that's -- and 2 others. So the first one relates to how you book how your impairment charges not related to the revaluation of the agricultural -- in agricultural segment. Because it's a little bit puzzled -- puzzling for me why you have booked quite significant impairments in second quarter. So I just wanted to confirm that when you are -- apply these impairments, you kind of priced the -- you revalue only the volumes which you sold in the quarter or you mark-to-market the whole volume and talk for the agricultural commodities. Is that...

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [25]

--------------------------------------------------------------------------------

Yes, yes, yes, one second. Okay. Now the answer or, first of all, we do have this revaluation in most of 2 segments in agriculture and in meat. If you are asking about agriculture, then, yes, we show the revaluation only for the products that we sold during this quarter. So if you have the big consignment, it means that we have sold all our products which we show as a part of EBITDA. On the other hand, we subtract this -- the revaluation number from the previous number which we booked in the third quarter last year because it was sold as separates.

--------------------------------------------------------------------------------

Sergey Beiden, Renaissance Capital, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Okay. So you dump the mark-to-market for the whole...

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [27]

--------------------------------------------------------------------------------

We don't mark-to-market. We only work with the goods sold, yes, this quarter.

--------------------------------------------------------------------------------

Sergey Beiden, Renaissance Capital, Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Okay, okay, okay. That's great. And the second question that's like a general one. We saw some news for -- in press, (inaudible) for example, that he hopes that the Chinese market for corn could be opened by the end of the year, so that there is -- the question is how do you see this possibility that, from your point of view, is it real or it's still kind of talk?

And the second question is, what do you expect for the agricultural commodity pricing and for the meat pricing on the domestic market? Because we have some contradictory report from different sources. They look at them long term level. Mark-to-market prices are going to develop. They do see some squeeze on the meat production in China and the -- as a result, the growth in meat prices there. So do they -- are we going to feel that? That's the first question.

And the second, we potentially could have like weak harvest in the U.S. Perhaps on the other hand, we could have some good figures in Europe and Australia. So how do you see that kind of world situation that's going influence on your commodities in agriculture in the second half?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [29]

--------------------------------------------------------------------------------

Okay. I'll review also the sugar division. In oil and fat division, we do not expect much volatility, though the oil prices are going down, and the meat prices will follow the situation with the agricultural crops.

Let me then answer your question, let me start with the agricultural crops. In general, we're going through a process of huge volatility because primarily of trade war between China and U.S., but also because of African flu disease in China and also because of many other factors, including the weather shocks and the exchange rate. Overall, this year, harvest of grain in Russia is more a directed one, but there is quite a lot of grain. Unfortunately, because of continuation of rainy season, the harvest is not over yet and probably will continue for some time, but we understand that we see that already there is a lot of grain. We plan to finish our harvesting in a week or 2 in Central Russia for grains.

We, at the moment, see that price is for grain globally probably under pressure to go down, and this primarily because the expectation of decreasing demand for corn from China, and also not as bad as expected harvest in the U.S. Though nobody knows for sure what is the harvest in U.S.

So we expect that the corn prices -- we saw that the corn price is already down since the peak a couple months ago. The prices are down more than 10%. As a result, the prices for wheat and barley are also down, especially price for barley globally. However, we do not hear utility problem because in Central Russia, because of prolonged harvesting, the price continues to be strong. Since they're increasing demand for grain from the meat producers could not be satisfied because of the prolonged harvesting. So in fact, at the moment, the price for grain in Central Russia is higher than the actual parity price. And we believe that the price will continue to be more or less stable. Mainly, they will fall in dollar terms 5% to 10%. But overall, this is a good situation. In soya and also no increase in export to Iran of barley also keeps the prices at a relatively stable, good level.

Along with you, I will argue the prices for grain would go more likely down, but then go up as a result of decreased demand in China.

On the other hand, and here the trade war starts to play, as we now will see meat rate go on, there is a clear distinction of prices between those who can deploy to China and those who cannot deploy to China. If Russia will start to deploy in China, wheat, for example, which is not yet open for most of Russia, then the prices for Russian grain will be okay. So I will say that the prices for grain in general will stay the same or go down, and the prices for grain or for SAGRA will probably stay at the current level.

The soya prices, again, globally, probably will be going down as a result of the African flu disease in China. On the other hand, if Russia is able to supply China, and China now is open for soya from Russia, they will be able to have enough market to sell our products at the same price, so maybe with a decrease of 10%, which is also more or less comfortable for the soya.

Sunflower seeds probably will go down as a result of slightly lower prices for oil, but it's not a major crop for us. And here we'll probably gain more.

Okay. Now coming to the biggest question about our results, and this is the prices for meat. We have around -- composed a very complex situation with meat on the Russian market because on one hand, the production of some meat continues to go up. Generally, production of meat continues to go up, especially the production of pork. Production of pork continues to go up from 4% to 6%, and will continue to go up just as a result of already made investments and improving results at the big farms. And as a result, the consumption of meat in Russia is not growing.

I will say that probably consumption of pork continues to grow, but at a very low level for the consumption of chicken and beef are falling. As a result, there is a pressure, there is a surplus of meat. We should now have to export. And here, the uncertainty is quite big because clearly, the market divides into 2 parts: those who can supply to China, and Russia is not part of these producers to pay the biggest suppliers to China, European companies that don't have African flu disease, Canada and U.S. And for the price in China of pork started to go up significantly in the past months and reached their record figures. Unfortunately, we cannot directly resource there.

On the other hand, the markets where we can sell our products are also sourced by the companies and producers which are also cannot felt to China. As a result, the prices of these markets actually are not going up but going down. Therefore, at the moment, the prices in Russia for pork is not growing unlike for chicken, which actually goes to China. And in our model, we expect that the prices for pork for the rest of the season probably will stay at today's level, maybe even go a little bit down.

Now we all want China to start buying pork from Russia. It's in interest of China; it's in interest of Russia. However, and we see an increased interest from Chinese companies now to come and to see our slaughterhouses, to discuss with our -- the potential volumes. However, we cannot be sure unless the document is signed. So this is a political question, and I believe that eventually, Russia will be supplying pork to China. But similar to you, I do not know when it exactly happens.

There is also now a discussion of supplying the live animals, especially of high genetic value to China. And I heard that probably, that the first pork to go to China will be the live animals from Russian genetic farms, which might happen by the end of this year. Of course, it would happen then it opens the door for the frozen and chilled pork also to be supplied to China. But again, we do not know when and -- whether it happens and when it happens. As you know, Russia is open now for Hong Kong. This, of course, couldn't have happened without the Chinese authority has agreed to this. Hong Kong market is very small for the pork, but it was a symbolic moment to which we, of course, have high interest.

--------------------------------------------------------------------------------

Sergey Beiden, Renaissance Capital, Research Division - Research Analyst [30]

--------------------------------------------------------------------------------

Okay. But potentially, you don't -- I mean, currently, you don't see that -- all that news flow about possible openness of Chinese market attract any kind of domestic market for pork, so you're [expecting] domestic market a little bit...

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [31]

--------------------------------------------------------------------------------

As I said, this is not because the news are not important, it's important at what price do we sell. You do sell -- we do -- Russia exports meat and then we're also one of the biggest exporter. Most of our meat curbing to European crop. We, of course, also supply some products to Vietnam. We supply some products to Hong Kong. But the really big price is the situation on the Chinese market. Because on the Chinese market, 40% of animals are [debt]. And as I said, the price increased by more than 50% in the coming 1 or 2 months because such huge market has very high price. But we just need to wait and see.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Our next question is from Elena Jouronova, JPMorgan.

--------------------------------------------------------------------------------

Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

I have a small clarification on the sugar price expectations for the second half of the year. Can you please share where do you think the sugar price will average in the second half for ROS AGRO? And also remind us what is, right now, the export parity price.

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [34]

--------------------------------------------------------------------------------

Yes. At the moment, there -- export parity price would be at RUB 23 -- yes, RUB 23, RUB 24 net of VAT and this is the export parity price to Kazakhstan and to -- most of Pakistan and also Uzbekistan and Azerbaijan. The price didn't stop at this export parity price because there is a lot of trading, and their buyers do not want to buy unless the price will reach the floor. And when price will reach the floor on the declining market, they suddenly started to buy.

So as I said at the moment, the price is around RUB 21, RUB 21.5. We do not know at which level the price will be. In my view, this will not fall significantly lower. So my expectation would be that the price will be at the level of RUB 21 net of VAT for probably August, September, October. And then November and December, this will go to export parity price. That's my most likely scenario.

--------------------------------------------------------------------------------

Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

Okay. I think this is a slightly softer outlook compared to what we discussed at the beginning of the year, and the company has made some losses on the speculators' trading with sugar. Do you think that this is something that can affect -- seriously affect the full year results of ROS AGRO in 2019? I am slightly worried that on average, the analyst expectations for the company's EBITDA this year are over RUB 20 billion and I want to make sure that still looks feasible to you given the soft sugar prices. Can you please maybe comment on that consensus expectation? Do you think it's reasonable and achievable?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [36]

--------------------------------------------------------------------------------

Well, I cannot -- I don't know, of course, because we do not give forward-looking statements just because there is so much uncertainty. Clearly, we have the first half results. And you have to compare your first half results with what we have. And clearly, what we -- we have earned more compared to what was planned from the first half is already the factual number. As far as the second half results, we can only make our judgment and assumptions because they gave -- I said that there is so much uncertainty in sugar. And sugar looks like, what I said, is a nice scenario. I think it's more likely to happen, but anything can happen to the ruble rate. Anything can cripple to the sugar price globally.

As you know, most of our global trading houses however believe that the sugar price would go higher. In fact, most of them felt that the sugar price would be $0.14 per pound at the end of the year but at the moment, the price even fell down. So it's very hard to say. And as my point of view and again, it's very difficult. We, of course, have own -- our own projections but we do not share them because we don't want to misjudge and create false expectations.

--------------------------------------------------------------------------------

Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

Okay. That's fair. And my final question is with regards to the Far East project. Can you remind us, please, when are you completing the first stage? And when do you expect to start production?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [38]

--------------------------------------------------------------------------------

We plan to finish most pig farms by the end of this year. And the biggest facility that we will need to construct, and the construction will be happening by the year and next year, it will be the slaughterhouse. This is the bottleneck. We do not plan to ship animals to farms unless we have a clear understanding of the date of the slaughterhouse.

The biggest one, the big problem is that we do not yet have the [gastro] commitment, legal commitment to supply us with gas next fall. So probably, we'll be starting the project if gastro has given gas -- with liquid gas that requires some change in engineering for the slaughterhouse. But once, in short, the first thing that was generally announced the plan to ship to farms at the end of this year, and this is the beginning of production. But most of pig farms at the moment, I believe, will be populated with animals in the middle of next year. And the full year of production will be happening in 2021.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question is from Krylov, Andrey of Sberbank CIB.

--------------------------------------------------------------------------------

Andrey Krylov, Sberbank CIB Investment Research - Junior Analyst [40]

--------------------------------------------------------------------------------

I have 1 question on meat segment stability. So compared to first quarter 2019, the pork price is really just slightly up while further costs have risen significantly. Meanwhile, the stability of this segment falled 13% [net points] to 29% in second quarter. So part of it is explained by a loss in pork disease. And my question is what were other drivers behind increasing stability.

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [41]

--------------------------------------------------------------------------------

Except for 1 of loss in the Far East, the biggest question -- okay. One is the feed cost, as you currently said. Also, it's their production, but we'll look at our production. We have -- in the first -- in the second quarter, we have [62]. In the first quarter, we have slightly less. So another one is the increase in the second quarter. We have bigger production than in the first quarter. That's probably the next big factor, and I think that's probably the most important one.

There is another one, which sometimes plays our role. And this is that because we are now operating in the broader -- in several products, which is the consumer product, the industrial crops, which is the main product at the moment and slaughter and the carcasses, which is the second biggest products for sale. Sometimes when the market allow us, we also buy additional sample from the market and sell this pork as a processed industrial cuts or as carcasses. So maybe this was the case, but I do not know exactly. So I would say that probably, the main reason was the increase in production in the second quarter compared to the first quarter.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

And we have a follow-up question from Nikolay Kovalev, VTB Capital.

--------------------------------------------------------------------------------

Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [43]

--------------------------------------------------------------------------------

Yes. I just wanted to clarify a couple of points based on the previous comments today. It seems like you have low utility at some commodities at the moment. Can you mention what percent of your grain, meats and beet mix for the next season are already being presecured? And what kind of a change in costs this year for these commodities that are being presecured? And also, I wanted to clarify on the cash flows. I mean like last time, you mentioned the guidance for RUB 45 billion net debt by year-end '19, but apparently, that leverage is already lower. So can you update us from risk target?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [44]

--------------------------------------------------------------------------------

Okay. For the next 12 months, in this segment, we've made an estimate of how much grains do we need and let's say, I do not know -- I don't remember the exact figure but more or less, this will be 550,000 tons of grain. Of these grains, at the moment, the meat segment bought, I think, around 350 or less than 300. And almost all of the grain was bought from our own agricultural division. It doesn't happen all the time. Each division has its own commercial signature, but this year happens all that the interests coincided. So the meat division have to buy 200,000 to 250,000 tons of more grain. Probably, it's already -- everything's fine so I would -- it would be fair to say that probably around 200,000 tons is left.

The agriculture business, although we haven't finished the production of grain, as I said, in Central Russia, we expect it to finish in a couple weeks. And in the products of Russia, we haven't even started. We started to harvest corn in September. Out of -- and let's say, this year, we expect that the grain business will -- the agriculture business will produce closer to 1 million ton of grain. So out of this 1 million ton of grain, as we discussed, we already sold 300,000 tons to 350,000 tons of grain to agriculture division. We've been sold some grain to China and Japan about no more than 50,000. And we also sold for (inaudible) on also around 50,000 to 100,000. So I would say that around half of all grain was sold by agriculture division.

Okay, cash flow. Okay. Again, it's -- as we all understand, it's not easy to estimate the net debt at the end of the year because it's a fact that also how much money we'll going to loan in the second half of the year, for which we don't give you the guidance. I will say that at the moment, our net debt has fallen to a level probably below RUB 40 billion and for some time, it will continue to fall. We will be buying -- we have a seasonal increase in the working capital goal at the end of the year. This seasonal increase will be the factor of the number of volume of sunflower seeds that we're going to buy, volume of sugar that we're going to sell and not to go for next season. And also volume of grain, which will divide from each division and be selling for the agricultural division, and most of them will cut it.

So I, at the moment, I wouldn't change my guidance for this, but I would say that there is some uncertainty on this question. In addition, there is some that was -- some activity on the market at the moment, maybe for some possible mergers and acquisitions. And all the numbers that we're discussing right now is result of the potential acquisitions or mergers.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Our next question is from Artur Galimov, Sova Capital.

--------------------------------------------------------------------------------

Artur Galimov, Sova Capital Limited, Research Division - Analyst [46]

--------------------------------------------------------------------------------

Right. And so my first question is about production cost in the pork segment. So when I look at aggregate numbers, it looks like production costs fell down by almost like 15% quarter-on-quarter. So did I understand it correctly that it was -- it had to do something with the [sale] exchanges in Q2 relative to Q1, which basically explains lower production costs in the pork business in Q2?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [47]

--------------------------------------------------------------------------------

Okay. Answering your question, actually the previous one about [majority] of pork, I need to add that there was a correction in our segment of accounting where RUB 235 million was incorrectly booked. So in other words, we have that it was additionally -- okay. We should subtract RUB 235 million from the first quarter and add it to the second quarter's costs. So probably, if you look at the cost in the second quarter and first quarter, this would be closer to each other than at the moment that is shown.

But overall, I would say that there is some difference, and the difference is the -- first of all, the cost is a factor of feed price, and the feed price in [June] is the factor of grain. So if you buy grain at the beginning of the season where the price is cheaper, then the cost is smaller. And if you buy grain in the middle of the season where possibly the grain is more expensive, then the cost is higher. That's probably the number 1 factor. Number 2 factor is the volume of production. And as we discussed, the volume of production in the second quarter is higher than in the first quarter. Now we all hope that now and since our investment projects are starting to produce pork then each quarter, we'll be increasing the production from quarter-to-quarter. And the higher volume means normally, other things equal the lower cost.

Then, of course, we also -- as a part of cost, we have the cost of the facilities, which are still, for example, they'll construct it but don't yet give us the production. So there is some fixed cost on these facilities, which is also part of our operational cost structure. It's also -- might be a clearer picture and a little bit clear. And also, if you look at the cost, don't forget that oil and animal division was only 1 division that we have. We also have the meat processing division, which also employ a lot of people and have quite big costs. So the regularities also can be attributed to the different, let's say, slaughterhouse utilization rate and on various operational issues in the slaughterhouse. So these are basically -- there are many factors.

--------------------------------------------------------------------------------

Artur Galimov, Sova Capital Limited, Research Division - Analyst [48]

--------------------------------------------------------------------------------

Okay. Just to clarify, RUB 235 million should be subtracted from cost of production in Q1 and added back to Q2, right?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [49]

--------------------------------------------------------------------------------

Yes. So the RUB 235 million of cost in the second quarter showed in the first quarter, right?

--------------------------------------------------------------------------------

Unidentified Company Representative, [50]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [51]

--------------------------------------------------------------------------------

Yes. Yes. The RUB 235 million cost in the first quarter should have been accounted for cost in the second quarter. But since we accounted for them in the first quarter, we do not show it in the second quarter.

--------------------------------------------------------------------------------

Artur Galimov, Sova Capital Limited, Research Division - Analyst [52]

--------------------------------------------------------------------------------

Okay. Okay. Right. The second question about sugar. I mean given the price environment for sugar at the moment and probably until the end of Q3, what do you think that sugar margin may even drop below the Q2 level of 11% in Q3, before probably recovering slightly in Q4 as cost should go down, reflecting lower sugar prices?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [53]

--------------------------------------------------------------------------------

Yes. That's possible. That's possible. But again, that happened already in July. But we don't know the results of September. Maybe the results of September will be very good because that depends upon the sugar content and many other factors. But this is possible, yes.

--------------------------------------------------------------------------------

Artur Galimov, Sova Capital Limited, Research Division - Analyst [54]

--------------------------------------------------------------------------------

The third one, this isn't just out of curiosity. I was just wondering why -- what was behind your decision to buy sugar in Q2? Because I remember during the last conference call, your notion was that sugar prices were looking down, and that's exactly what's happening in Q2. So why would you buy sugar and expect speculatively in Q2 from...

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [55]

--------------------------------------------------------------------------------

So probably, I think I didn't communicate well enough. We did not buy sugar in Q2. All sugar that we bought was bought there from last year. But since -- and we were selling -- unfortunately, many players and also us thought that because of -- because the market will be in the balance and we went in a small deficit and most of sugar is in the hands of big companies. And we made a speculative decision to buy some sugar and then sell it at a higher price because we saw that the market would be high because it will be tight.

Unfortunately, as I said, we were wrong. And after Russian government sold the state resource, which was a very good decision for the government, but this destabilizes the balance situation. And also once we saw that there is a surplus in the new season, we'll be very, very deep in production, so the market decided to go down. So the second quarter lower marginality just resembles the fact that we sold in the second quarter more sugar that we bought in the [end] of last year compared to the first quarter. And this is pure accounting issue.

--------------------------------------------------------------------------------

Artur Galimov, Sova Capital Limited, Research Division - Analyst [56]

--------------------------------------------------------------------------------

Right. Got it. And finally, could I just also ask you to send me this sugar cost breakdown, which we [discussed] in the beginning of the call, okay?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [57]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Our next question is from Alexander Gnusarev, VTB Capital.

--------------------------------------------------------------------------------

Alexander Gnusarev, VTB Capital, Research Division - Equities Analyst [59]

--------------------------------------------------------------------------------

So I just wanted to clarify if all the figures of the CapEx were including VAT or excluding VAT?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [60]

--------------------------------------------------------------------------------

This will be excluding VAT, normally, we do that all the time. Let me check. Normally, we always exclude VAT, and these are the figures excluding VAT.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

Thank you. We have no other questions. Dear speakers, back to you -- we have a question from Iryna Tarko.

--------------------------------------------------------------------------------

Iryna Tarko;Montpelier Asset Management;Research Analyst, [62]

--------------------------------------------------------------------------------

Many of my questions have been answered already. I just have a quick one. You obviously process your own animals in your pork division. But as far as I remember, you have a spare capacity in your slaughterhouse. I was just wondering whether you purchase third-party animals or not?

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [63]

--------------------------------------------------------------------------------

Yes. We have capacity in the first half, and we bought -- sometimes, we buy the animals. The share of purchased animals is not more than I would say, 15 -- 10% to 15%. But already now, starting September, we'll have very limited capacity because our new farms started to work, all except for one. However, we'll probably have still transfer capacity if the slaughterhouse continues to grow slowly by the end of the year. But the spare capacity will not exceed 10%.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

Our next question is from Anna Kurbatova, Alfa-Bank.

--------------------------------------------------------------------------------

Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [65]

--------------------------------------------------------------------------------

Basically, my question is not about the operating side of the business but about the corporate development and very short ones. First of all, could you give us some of the progress of investigation from the [sector] authorities of Solpro transaction? And the second one, whether you have to restructure refinance the debt to RosEvroBank with regards to those developments. And yes, I'm sorry, the third one, whether you might resume SPO plans by the end of this year or maybe next year. So any update would be very much appreciated.

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [66]

--------------------------------------------------------------------------------

Since we didn't give any official statement, there is nothing -- there is no exact answer I can tell you. I can only say that at the moment, there is no -- the company has no problem, no result of this investigation. Again, nothing was established. We cleared all the questions with the United Kingdom. And now I can tell you as we wait -- what I can say is that we are waiting for the final document very soon that would 100% free us from any consequences or problems. We haven't yet received the final document, and we are waiting for it already for some time. Unfortunately, it's all this time in cycles, and I cannot know what exact date will we receive this document. That's all I can unfortunately tell you at this time. We also -- we have a plan to go to the market and raise some capital. We're now reviewing our strategy and waiting for this Cyprus development. And once we do it, then -- and if the market is open, we'll look for some capital.

I'll also comment that in general, as we look at our financial models and review our strategy, we saw that generally, Russia -- Russian food markets are becoming very mature. And it's becoming difficult to find the investments that would provide us with the required rate of capital. So we -- now, we will be focused on finishing our existing investments. And reviewing some opportunities, we control mostly meat in all of our division in the coming -- couple of months. We're also looking at some opportunities including China, as you may know from press, but no decision has been made.

So the investment cycles, which company goes through, will be mostly finished by the end of next year. We felt that maximum CapEx throughout this year, so probably this year, there will be some CapEx -- significant CapEx next year. But after that, we do not have much CapEx, and we can get it from our free cash flow. On the other hand, at the moment, we are discussing some mergers and acquisitions. And now a decision to make an SPO probably will be influenced by the decisions, which might happen relatively soon. So that's what actually I can say, but I think probably there will be some news in September.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

No other questions at this moment. Dear speakers, back to you for the conclusion remarks.

--------------------------------------------------------------------------------

Maxim Dmitrievich Basov, Ros Agro PLC - CEO & Executive Director [68]

--------------------------------------------------------------------------------

Okay. Ladies and gentlemen, thank you for your questions. Please write us what you think and ask your questions. Svetlana will wait for you. And I'm looking forward to see some of you soon and to talking to you again at our next conference calls. Bye-bye.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

This concludes our conference call. Thank you for your participation. You may now disconnect.