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Timur Gasiyev: White Frigate ran into a perfect storm

15 October 2018

The agroholding White Frigate - once one of the largest importers and producers of poultry meat in Russia - could have ceased to exist in 2009. Then the company experienced a technical default and filed an application for its own bankruptcy. The total debt exceeded 2 billion rubles. The value of assets was estimated at about half as much. However, the company was able to negotiate with creditors and pay off its debts. In 2016, it became known that it again had financial problems. Miratorg accused White Frigate of not being able to pay for mixed fodder, which was provided by Miratorg. Similar complaints were issued by the companies Megamix and Provimi. The amount of overdue debt was estimated at more than 1 billion rubles. White Frigate had no money, and the most likely scenario was bankruptcy. This scenario was actually demanded by Miratorg and other contractors of the White Frigate. But this time the holding managed to solve its problems although it had to get rid of some important assets to be able to repay debts. It sold one of its sugar factories as well as 60,000 hectares of farmland to KDV Group, a Russian sweets and snacks producer. interviewed Timur Gasiev, the director general of White Frigate, to get insights into how the company is operating today.

How could it happen that a successful holding such as White Frigate was on the verge of extinction?

The crisis was caused by certain failures in our agricultural segment as well as by inefficient management and expensive finance. There was a perfect storm on the market at that time. The costs of production increased while sales prices decreased, and the company covered losses mainly at the expense of loans and shareholder’s money. Management could not solve these problems successfully. Therefore, the owner (the main owner with a 99% stake is Anatoly Butorin) appointed a new management team. Former top managers had enough time to improve the situation but, apparently, they simply did not know what to do. In the past four to five months we managed to become profitable again.

However, you had to sell the assets…

Yes, unfortunately, some parts of the business - the sugar factory and the farmland - had to be sold to KDV Group to provide the possibility to pay off our debts. Today we have two poultry farms in Bryansk and Volgograd regions, a feed mill, an elevator, and a meat processing plant. But we have no farmland at all.

Considering the current production volumes, you probably do not think about exporting your products.

We supply our products to the domestic market. We are active in the Bryansk, Volgograd, Rostov, Ryazan, Astrakhan, Vladimir, and Yaroslavl regions, as well as in Adygea and Moscow. We do not export anything yet, but plan to do so soon. We work with the Russian Export Center to become able to export products to the CIS countries, the UAE, Syria, Iran, Iraq, etc. But the problem is that we have not yet found reliable international partners. Starting to exporttoday when we are recovering from crisis is a big risk due topayment delays in export operations. Furthermore, if buyers were not satisfied with our products for some reason, they would want to get price reductions of some 20-30%. We would not be able to provide such discounts and would have to bear the cost of taking the goods back. Of course, in the domestic market such situations are also possible, but here the cost of reverse logistics is much lower due to shorter distances. If I return a truck from the neighboring area, I lose 20,000 rubles. And if I send acontainer to China, it costs much more to take it back while the products may lose quality on their way back.

One of your businessesis the import of different types of meat. Given overproduction of poultry and pork in Russia, do you still need to import these products?

When I joined the company, I was not sure that we need this business either.But then I learnedthat in our pool of customers there are buyers who prefer to buyexclusively imported meat. The American ham and broiler legs are taken at any price. We offered them our own chilled poultry meat for 5 rubles per kilogram cheaper. Butthey wantedonly imported frozen poultry meat. So we still import it. Absolutely incomprehensible logic and I have no explanation why it is so. Theyarewholesalerswhothenresellthegoodsinretail.

The market of the center of the country and, in particular, of the capital region is very saturated. There is a lot of broiler meat from different manufacturers on the shelves. How do you compete with them?

We can say that globally there is no unique trade offerin the poultry meat segment. There are investments in advertising and marketing, in promoting the brand, so that people at a subconscious level would like to buy this or that product. We almost do not invest in advertising but, at the same time, we are on the way to creating a unique offer - this is a line of baby food. With the help of Dutch specialists, we developed a formula for feeding the poultry, so that the meat would be obtained with a different ratio of protein, fat and carbohydrates. We will promote this product as it is our concept food that helps us achieve higher added value and earn profit. In the production of a conventional broiler, we try to minimize the components used for growing the birds. Most industrial poultry farms have to use antibiotics because of the high risks of diseases exacerbated by large concentrations of birds in the hulls. Our priority is to provide biological safety and vaccinate chickens. We thus try not to use antibiotics, although there are cases where we are compelled to use them but, in general, we try to avoid them. This is one of the purely administrative ways to reduce production costs, and there is no need for large investments. This is our competitive advantage. If the product is of high quality, then it will be bought again and again.

But today a buyer often makes a choice based on price. Have you faced the case when a retail chain asks you to reduce the price?

It happens, but Iam not inclined to blame retail chains and say they are all bad, and producers are good. Retailers adjust themselves to the market. Only if a person makes more than $ 5 a day, then he or she can afford to buy poultry meat - the cheapest animal protein. Ifa person earns more than $ 50 a day, he or she can buy concept foods such as healthy food, steamed food, chicken meat grown in alpine meadows and so on. Unfortunately, in Russia, the average earnings are such that most consumers simply cannot afford to buy food of high quality. This is also a global social problem. Soretailerssimply adjust to the demand that they have.

You also produce semi-finished products and boiled sausages. Are there plans to expand the line of deeply processed products?

We are not ready to create additional capacity yet, because we do not have the funding for it. At the same time, we do not plan to bet on sausage: the demand for it has declined while people are increasingly choosing to buy meat. Besides, there are a lot of strong players on the market. But the segment of semi-finished convenience products continues to grow as the ready-to-cook products are demanded. This is a profitable and interesting direction for us.

Do you plan to build new facilities or buy enterprises?

Our main priority is the purchase of poultry farms from other companies, which stopped functioning for different reasons. We know how much it costs to build new buildings on existing sites. So we carefully assess what is more profitable - to build or to buy. We think that it is not economically reasonable to build new facilities without concessional financing. Therefore, for us it is more logical to acquire businesses.

What criteria do you use to evaluate potential assets for purchase?

We look at the price-quality ratio. The hulls must be automated to produce a quality bird so that we can even remotely control the climate regime, etc. Another criterion is location - the purchased enterprises should be close to ours. We plan to stay in the regions where we are present now - in the Oryol, Bryansk and Volgograd regions - except that we can move a little more toward Moscow. We are not yet ready to buy in the Far East.

What are your company's plans for the future? Do you considerexpanding production volume, investing in the modernization of farms or buying farmland again?

Our current volume of poultry meat production is 45,000 tonnes per year in slaughter weight. We have plans to increase production to at least 100,000 tonnes, and possibly even more if we achieve necessary management capacity. We will begin to expand not earlier than in a year: such a step would be premature now that we still must pay off old debts.
Our enterprises are quite modernized. For example, Victory is one of the most automated enterprises in Bryansk. The facility in Volgograd is less modernized than that in Bryansk but we are carrying out the necessary modernization at the moment. The volume of the needed investments amounts to tens of millions of rubles. Our major shareholder wants to produce own feedstuffs vertically integrate to establish own network of retail stores. But at the moment, our primary task is to focus on our core competence - meat processing - and continue automation of production while maintaining our unique trade offer to access shelves in retail.