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Dear ladies and gentlemen, welcome to the conference call of ROS AGRO PLC regarding the presentation of the financial results of the second quarter of 2020. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Maxim Basov, CEO of ROS AGRO, who will lead you through this conference. Please go ahead.
Thank you very much. Good day, ladies and gentlemen. Today, we released the press release about our financial results for the second quarter and the first half of 2020. We also have a presentation for your information and we issued a recommendation by the Board to pay dividends at the same amount as we did in -- for the first half of last year, which is USD 0.19 per 1 GDR. We are pleased with our financial results. Our revenue, our EBITDA and our net proceeds, both for the second quarter and for the first half exceeded last year's results. For the second quarter, our sales exceeded RUB 38 billion. Our adjusted EBITDA exceeded RUB 6.9 billion and our net income exceeded RUB 4.8 billion. Now I'm referring to the presentation. You can see on the Page #4, that our 2 businesses did better in terms of revenue, which was Oil and Fat and Meat, and 2 businesses did better -- 3 businesses did better in terms of EBITDA. The only business that showed a small EBITDA was Agriculture business. But there was no production in the second quarter of both years, and this is just a reflection of our commercial decisions throughout the agricultural season.Our net debt fall down to about RUB 52 billion. At the moment, it's even lower. So the company is in a relatively good position. And we are on the way to decrease our net debt to below RUB 50 billion. This is, of course, the seasonal -- this is the time of the year where we have the smallest amount of debt. The net debt will organically grow closer to the end of the year as we're building up our inventory of grain, of sunflower seeds, soya and sugar. But no doubt, our financial position is improving. Our cash flow is very strong. Now I would like to give some comments on the performance of the business units. I will start with the description of the situation in the Meat division of the company. In our presentation, this starts on the Page 11. In Meat segment, we have seen also the first quarter have a declining price in the second quarter -- in the second quarter this year compared to the second quarter last year. And we have increase in production based on the improvement in our productivity numbers. Our EBITDA in the Meat division in the first -- in the second quarter of this year reached RUB 1.5 billion. Now what is happening generally in our business in the Meat segment in the second and third quarter? We experienced a continuation and improvement of our production numbers. We are seeing an increase in cost starting August because of increase in the prices for grain. We see an increase in the sales of our consumer products. Sales of our consumer products reached a record, and we are very steadily improving our position on the market. The price for the pork in the third quarter, especially starting June month, is good. At the moment, the price for pork is higher than we anticipated at the beginning of the year. An increase in price, which is coupled with an increase in sales, generally, and you probably know, I can tell you that increase in production of pork in Russia in the first half was around 10%. So increase in price, coupled with the increase in sales is attributable to a very good demand for the core products in all the channels. We experienced a very big increase in demand for pork in modern trade. We see this in the traditional retail, and we also see it from the processes. There are several reasons for this. One reason is that pork meat is gaining competitive position against beef and chicken for the price reason. Second effect is that the producers of pork are investing in improvement of the product quality and communication. And the third reason is that pork price fell more than the beef price and chicken. And so as I said, consumers are choosing pork and pork is gaining market share against chicken and against the beef. Export sales of the company in pork are also increasing. We are actually exporting our products to Hong Kong, Vietnam, Ukraine and Belorussia. But the domestic market, of course, continues to be very important. Now sugar industry also gave us a very good financial result. In the second quarter of the year, we had RUB 2.5 billion of EBITDA. As you can see, we produced more sugar in the second quarter because we're now affiliated to sugar molasses desugarization facilities. These facilities are operating at full capacity. We sold less sugar than last year. We had smaller price, lower price than last year. But we managed to have a better EBITDA as the result of production -- increase in production at low cost. And because the cost of our sugar this year is smaller compared to previous year because we bought sugar beet at very low price last autumn because of favorable sugar price. Sugar price in the Russian market started to grow especially in July. So we'll see it in the third quarter, which we also expect to be quite good. The price for sugar started to go up in anticipation of all harvest of sugar beet in Russia. We know that Russians produced -- Russian farmers planted less sugar beet than last year by approximately 18%. In addition to this, the weather conditions -- the weather conditions for the sugar beets are not optimal this year compared to last year. And in addition to the decrease in the area of sugar beets, we anticipate the smaller sugar per hectare than last year. This means that Russia will produce less sugar this year than last year. We expect that production of sugar this year will be from 5.5 million tonnes to 6 million tonnes. This is below consumption in Russia. We do not expect a very high price revenue because there are still large inventories of sugar which Russian industry built up in the past 3 years, even despite a record export numbers. So we had a record inventory of sugar at the beginning of the season, which is already a -- which is first of August. However, because of decrease in production, I think the market will be balanced. Some sugar will continue to go to export. And the share -- the sugar price should not go to a very low level. Additional support for the sugar prices comes from an increase in international sugar price, which is happening as a result of increase in the oil price and also problems at some producing -- sugar-producing countries. So in general, we expect a reasonably good profitability for our Sugar division. This will not be as good as we have 3 or 4 years ago when Russia was a big importer of sugar. But this should be better than we experienced in the past 2 years. In Agriculture, we expect a good season. This season may become the best from a financial point of view, in ruble terms, in our history. We are finishing harvesting the grain crops. We expect the deals to be good. And we'll release the information when we finish the currency. The prices for Russian grain now at a comfortable level. And the profitability of grain business is high. We also expect a good profitability for soya and sunflower. Sugar beet will have less yields than in the year before, as I told before. But because sugar prices are higher than last season, we expect sugar beet also to be profitable growth, although not as profitable as other crops. So we expect good harvest for everything, except for sugar beet, and good profitability in our Agriculture division. Oil and Fat division performed also well in the second quarter. Our EBITDA was RUB 2.3 billion. This is a complex business, which consists of several units. Very well, very good performance was from an extraction business. Not very good performance was from industrial fat business, which is to date, is working -- either worked at 0 margin or even negative, as the result of the shock, demand shock during coronavirus as well as big volatility with exchange rates and prices for palm oil. And we have a good financial performance in our B2C division, though not as good as we want to see it given the current circumstances. But in general, the performance -- the financial performance of this business unit is also good. So as you can see, we have a good performance in all our business lines. The performance of our business units in the second quarter also indicated a good performance of the business units in the third quarter of this year. Our financial position is strong. The Board was pleased today in the financial performance of the company. However, given the uncertainty which is now prevailing in Russian and global markets, the Board decided to pay the same amount of dividends for the first half, understanding that if our financial performance for the full year is as good as it was in the first half, there's a high likelihood that for the whole year, the dividends will be higher than in the previous year. So this finishes my presentation and open -- opens up the floor for the questions. Please go ahead.
[Operator Instructions] And the first question received is from Sergey Beiden of Renaissance Capital.
I have actually 2. The first one relates to the performance of the Sugar business in third quarter. You mentioned that we see and we do see some recovery in sugar prices. But due to expected low harvest of the sugar beet, we also could expect a growth in -- and you also mentioned a growth in sugar beet price. So do you expect that profitability margin in your Sugar business remains basically the same? Or it wasn't, given that the price of sugar beets could go -- could rise higher than the price for sugar due to the demand restriction in the end consumer for sugar? That's the first question. And the second one is -- relates to your Oil and Fat business. In the first -- in the second quarter, I think the exports of the sunflower seeds were kind of restricted, and that's resulted in a very profitable -- very high margins for bottled oil and bulk oil production because the prices on the domestic market was suppressed by that restriction. So that -- I think that restrictions carries till August. And since then, possibly, it could be relaxed. Do you expect, from your point of view, because you have both agriculture and production facility, what do you expect if the restriction is relaxed, how it influences on your profitability in both Oil and Fat and Agro segment?
Okay. Well, thank you for your questions. The changing balance on the sugar market in Russia. And as I said, the Russian in sugar, Russian market is moving away from the surplus to the balanced market, will, of course, mean higher sugar price and higher prices for the sugar beet. So for Sugar, the business unit that will gain is the Agriculture business unit. For the past couple of years, our business -- our production of sugar beet, in fact, was loss-making, and in general, we are making money vertically, sugar plus sugar beet. But Agriculture business suffered from the loss in our sugar beet, at least for some areas. This year, this will not happen. We expect that the sugar beet price will be good enough to have the profit. So Agriculture business, for sure, we will gain. With the Sugar business, it's a little bit more tricky because it's very difficult -- this is not very difficult, but there is uncertainty in predicting the situation for the balanced market. Because when there is situation -- when the situation is with the surplus, you know that prices will be depressed. When situation is with the deficit, you know that the prices will be elevated. But in the situation of a balanced market, a lot will depend upon the interaction of players and also in the Sugar segment from the demand cycle, which also is psychological, by the consumers. If consumers in autumn will have some problem with COVID and consumers will run to the shops to buy more sugar, then we have one situation. So in my view, given that all the players on the market will be working rationally, the price on the market will be -- will have a normal medium effect. Then profitability of the Sugar division will be similar to the profitability of Sugar division last year. Yes, we will gain because of higher sugar price. But we will probably lose because we will have less sugar beet because of small harvest. So I would say probably the profitability of the Sugar division will be the same. But profitability of Agriculture division in the sugar beet segment will be higher. So in general, our company will gain, but you will not see it as much in Sugar division. But in general, it will be profits, it will be billion rubles of EBITDA. But I wouldn't expect them -- something happen. Of course, there might be surprises. There might be a shock in the global market. You know that yesterday, the sugar price internationally -- international sugar price went up. It exceeded $0.12. It's come in, I think, even exceeded $0.13. There might be spark in oil. We also now -- yesterday, the sugar price in the domestic market started to go up, which I think never happened before. Because this year -- at the beginning of season, normally, the price only can go down because of anticipation of high sugar supply. So again -- but again, I said in the normal situation and the most probable scenario, we expect that the sugar profitability will be similar to what we have in the second quarter. And the Agriculture business will be gaining. Now talking about Oil and Fat. Oil and Fat, together with Agriculture, today, probably are the most successful Russian subsegments of food and agriculture business because these businesses are much less restricted for export. The big win is, of course, Oil and Fat business because in -- for the extracting oil and in general, for oil and fat, there are no restrictions. And there is a huge demand for sunflower oil on the international market. The 3 biggest producers are -- the biggest 3 producers are Ukraine, Russia and Argentina. We can sell as much as we can produce. So in no way we are restricted by the Russian government or by the international demand. So the harvest of sunflower oil last season was the largest in the history. And the capacity utilization of oil extraction plants was the highest also in the history of Russia. This season, the harvest of sunflower seeds will be lower compared to last year. But this will be still quite big. And we expect that compared to this season, which we had a very successful season. We managed to operate at 100% capacity at very good margin. We, at the moment, plan to work at similar capacity. The biggest uncertainty, as you correctly said, is the price of sunflower, which is influenced by the government restriction on the sunflower. At the moment, we understand that there will be an import -- an export duty on the sunflower, starting from the, I think, 1st of February. The Russian government announced this and probably, this will happen. And if this happens, of course, our company is generally will gain because we buy much more sunflower than we produce. So our extraction plants are located in the Volga region. And our -- most of our agricultural land is located in Central Russia. In Volga region, sunflower is the best-performing crop. And there is a huge supply. In Central Russia, sunflower was also good-performing crop, but not so obviously better, not so competitive. So we produce much less sunflower seeds than we consume. Therefore, if the current decision by the government to have an export duty on sunflower seeds of 20% halt, then the company will gain and will have a very good -- another good in extracting oil from sunflower.
[Operator Instructions] And the next question received is from Marat Ibragimov of Gazprombank.
Question, very short, on industrial oil production. You said that the financial performance is not really good, but the prices of industrial fat as far [Technical Difficulty] interim results was -- it has grown quite substantially by 46% year-over-year in the first half. How could that be? Can you please comment on industrial fat business?
The result of the industrial fat segment, and we are the second largest producer in the country, is -- depends upon the price -- the margin between the price of the product, which we sell, and the price of palm oil; and the capacity utilization, which depends upon the demand for the products. We had a very good first quarter in industrial fat. But we had a bad second quarter for these 2 reasons. First of all, the prices of palm oil in rubles increased very quickly, primarily, first because of devaluation of ruble; and second, because of big increase in palm oil on international market. The domestic prices in the second quarter will not increase at the speed of an increase of prices in -- of palm in international market. That's number one reason. Number two is in other volumes. In industrial fat, we are the company #2 in Russia. We are #2 in solid fat in fact and #2 in liquids after cargo. In the second quarter, we experienced a big decrease in demand from medium-sized and smaller producers and also from HoReCa. And most of our liquid industrial fats go into the HoReCa, McDonald's and KFC and so on. So in the second quarter, our margin was almost -- was very low because of an increased -- an increased price of palm oil in rubles. And our capacity utilization, which is 100% most of the time went down to 65%. This situation, of course, is improved and already improved. And in the third and fourth quarter, our results will be better. Thank you.
And then another question, on SolPro. There was a report in media that other creditors are contesting the bankruptcy procedure as it goes now. Can this -- how can we be sure that you will receive the decision you wanted to receive?
Well, in the current world, you never can be sure in anything. But at the moment, the situation is good. There are -- there is a -- we are working on these facilities. We see no scenario in which we will not be able to operate these assets. The argument between different creditors, which includes our company, is how to distribute proceeds, which these all legal entities get from sale of these assets. And there is a debate. It's always a debate. But at the moment, we won all the courts. All the important -- we have all the court decisions to -- that would allow us to proceed as we think is right according to the Russian law. So I don't see a risk for the performance of Rusagro on these assets.
Okay. My final question, on Far East. Because there was, a few days ago, there was a press release that you started supply of sow to this facility. Can you please comment on that? When can we -- when shall we expect the first volumes from Far East? As far as I remember, in the beginning of next year, at least we can be sure of this, right?
All our pig farms except for one will be finished by the end of this year. In fact, they are almost all finished already, except for one. One will be finished next year. Our feed mill is -- will be working this autumn. Our slaughterhouse is in the process of being constructed and will start operating next year. We started bringing the pigs to the farms. And all the pigs farms will be populated except for one by the end of the year. And next year, after the slaughterhouse starts to operate, we'll see our product on the shelf in the Far East market.
[Operator Instructions] And the next question we received is from Artur Galimov of Sova Capital.
And congratulations with the strong quarter. First of all, a clarification question with regards to your selling prices for wheat. I'm looking at market prices which show pretty solid growth year-on-year throughout the quarter, whereas your selling prices are actually going down, looking at your figures at trading dates. Why is that? And what could be the difference, where it may stem from?
I'm absolutely sure that our prices fully reflect the market prices. The prices that you saw, they were the prices for the second quarter. And our prices for the second quarter, I'm sure, absolutely market. At the moment, the prices are different. And you can see them because we did not report the third quarter. At the moment, the prices for wheat are quite good. The prices are exceeding RUB 12. And if you will clarify which report and which price do you mean, maybe I can give you a better comment.
Okay. Right. I'm just looking at monthly prices provided by ICAR, which could be slightly different prices. But overall, I would guess that the dynamics should be pretty much similar to -- regardless of the grade of wheat.
Well, first of all, there are different regions. The prices for grain in the regions which are closer to the ports, like, let's say, Krasnodar are higher, that's for sure, in Rostov, because they are higher by the logistics to the ports. But in general, all the grain is sold through the auction, and we are the largest, I think, producer, maybe probably, of grain already in Russia. And the currency prices are very good. And in fact, we are not going to sell a lot of grain quickly. So we believe that the prices of grain will go in ruble further on, given, of course, the current exchange rate.
Okay. And I guess that's the reason why we should expect production costs for pork also to grow going forward?
That's right. That's right. That's right.
Is it -- I guess it hasn't yet been reflected in your pork margins for the second quarter. So for Q3, for --
Not yet. Not yet.
We'll obviously lower margins at high price.
In my view, I think -- you see, I think that the margin in pork business should go down and the margins in Agriculture business should go up. The margins in pork business generally should go down because of higher grain prices and lower pork prices. However, at the moment, pork prices also remain to be good, quite high, better than we thought. And also, we continue to expand our more profitable consumer business. So in general, our margins on Agriculture should go up. And the margins in pork business should go down. But as a management, we are trying to make sure that Agriculture margins go up, and the pork margins will not go down significantly.
Right. And maybe the final one from my side is about dividends. I guess a pretty strong financial performance that we saw in the second quarter seems to be carrying over into Q3, which, all in all, create an upside for the second half of the year. That -- your dividend -- interim dividend for the first half of the year was pretty much in line with year ago level, as mentioned. Speaking of upside for dividend for the second half of the year or final dividend for the year, however you call it. What sort of upside do you think is possible for the shareholders in terms of the final aggregate dividend for 2020? And what sort of payout you could be targeting, taking into consideration your CapEx program for this year and for 2021 as well? Maybe some other considerations, too?
Well, I will not give you the number, of course. First of all, because it's not me who decides this. It's the Board, and I'm only one of the Board members. We had a debate today. But as you correctly said, the financial performance is good. The third quarter, at least, should be also very good. So probably, we'll have a very good cash flow. The investment projects that we are doing are going more or less in line, and we do not have many huge new investment projects, with exception of oil extraction. We plan to increase our oil extraction plants, but the size of CapEx there is not very large. We are waiting to acquire these assets legally through this bankruptcy procedure. And after we do it, we plan to expand significantly both of our extraction plants. So given that our -- we reached the maximum CapEx in our history and we'll have a very strong free cash flow going forward, of course, the company management is ready at the request of the shareholders to pay as much dividends as it will be required. The current dividend policy of the company is to pay at least 25%. If you look at our several past years, you saw that we paid more than 50%. So if we don't see an imminent opportunity to buy, to make a big acquisition in a way that creates value for the current shareholders, the dividend payout ratio for the whole year, in my view, should be similar to the dividend payout ratios for the past couple of years, which, if I'm not mistaken, is close or exceeds 50%.
[Operator Instructions] And we received a further question. It's from Anna Kurbatova from Alfa Bank.
Could you update us on your strategy in the milk segment long term? Because we see that -- and you explained that 2020 is busy with developing products, improving profitability and improving also distribution channel. But my question is like long term -- as kind of a long -- from the long-term perspective. When you launched the milk operations, you had quite -- announced quite ambitious targets of entering top 3 Russian producers of cheese. So what's your view on this business and your market opportunities now? Whether you may reconsider your strategy? And if you reconsider, when you will take these decisions? So if you will have a kind of update on the strategy in this segment.
Our initial hypothesis on this segment is no longer, we believe, valid, for 2 reasons. First of all, the cheese market, as we see it in Russia, is not going to grow significantly. And the profitability of this segment will not be high enough to justify the size of the opportunity. It means that even if we become the third company in this segment, then it will still be business much smaller than today, our portfolio strategy requires. And for management of the company, it would make much more -- much more sense to continue to expand in the 4 business lines in which we are successful. The second reason why our initial hypothesis doesn't hold is because is that there is over-investment as in many sectors of our industry. Here, we have over-investment. A lot of companies investing a huge amount of money given low government-sponsored debt to build capacities in this segment. And in my view, they already destroy value in the segment. So we have now a little bit different strategy. This strategy is more based on the vegetable products. I'm sorry, plant -- I'm sorry, plant products, plant fat and plant protein products. We will wait for 12 to 18 months to prove our hypothesis or not. If this hypothesis will not be proved, then -- and of course, there are several options what the management will do with these business units. We can match this business unit with another one. We can acquire a bigger company in the new segment which we like, and there will be merger, or this will be the sale of this asset. So we have a new hypothesis and the management -- the new management of this business unit is trying to prove it. But at the moment, the performance of this business is not material for the group. The financial performance -- well, the EBITDA of this business is less than RUB 200 million. So it's from 0 to RUB 200 million. And at the moment, it's one experiment for us and hypothesis then something that creates a real significant opportunity and profit for our shareholders.
And we received a follow-up question of Marat Ibragimov of Gazprombank.
Can you please update us on your [Audio Gap] for the whole group?
I'm sorry, we missed the middle part of your question. Can you repeat again, please?
I need a CapEx figure, total CapEx for the group for this year and probably if you have it for the next year. By giving -- if I may.
Yes, yes, yes/ Okay. Well, in the beginning of -- in the second quarter of the year when we saw a lot of uncertainty and a lot of risks to our business, we've decided to decrease the CapEx this year to RUB 15 billion. And taken from 20 -- 15 -- from RUB 20 billion to RUB 15 billion and bringing the RUB 5 billion to the new year. At the moment, given the fact that we are in a very good liquidity position, we have RUB 10 billion in our accounts now. So we are now relaxing a little bit our investment pressure on the management. And we believe that probably, given that, the CapEx this year will be from RUB 15 billion to RUB 20 billion. Now what -- okay, in Sugar, in Sugar division, the only important CapEx is the payment -- for the final payments for the already working the sugar -- desugarization plant, and this is around, I think, RUB 1 billion, if I'm not mistaken. So there is not important there. In Oil and Fat division, there is not much CapEx. The only CapEx is bringing the production of mayonnaise from Moscow to the Volga region. But this is also not a very significant amount. The big CapEx is in Meat. In Meat, the number -- the amount to be invested probably will be around RUB 10 billion this year. And in Agriculture, also amount is very small. I think from RUB 1 billion to RUB 2 billion because we are -- we see an improvement in our operations as a result of digitalization. And in general -- so in general, answering your question, it's RUB 15 billion to RUB 20 billion, of which, RUB 10 billion will be for the Meat division.
[Operator Instructions] As we received no further questions, I'll hand back for closing remarks.
Okay. Ladies and gentlemen, thank you for your time. We are excited about the opportunities. We are seeing a good opportunity to continue to improve our cash flow. And we will be happy to meet you again in 3 months. Bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.