DAMATE Group is a Russian agricultural holding company holding company, involved in three businesses: turkey production and processing, dairy farming and milk processing.

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25 June 2017

"WE DON’T PRODUCE ANYTHING THAT WE DON’T EAT OURSELVES"

Vedomosti, Moscow, May 16, 2017

Naum Babaev tells how Damate is expanding the production of turkey meat in the crisis, assessing export prospects and explaining what the agrarians need from the state.

Businessman Naum Babaev took 10 years to go from the top manager of a large agroholding to the owner of the largest producer of turkey in the country. The cousin of the founder of the group "Cherkizovo" first came to the present production as a student, in the early 90's: at that time the group only purchased a meat processing plant in Penza, and he went there for practice. Then Babaev did not yet suspect that the trip would become fateful. In Penza he got acquainted with the future partner Rashid Khayrov, he started his first major project: he built a large dairy complex - the Russian dairy company (Rusmolco), a control stake of which was acquired by Singaporean Olam International five years ago for $ 75 million. Here, in the Penza region, even before the crisis of 2008, the company Euroservice conceived the idea of ​​building a large turkey enterprise, but because of financial problems it was unable to implement the plan. 

Today Babaev admits: "If everything could be reversed, then we would build the turkey project ourselves and from scratch - it would be cheaper." And then, after long negotiations with the creditor of the project, Rosselkhozbank (RSHB), he bought the debt of Euroservice - a few unfinished foundations and arrested at the customs boxes, which were Israeli sandwich panels, more subtle than the climatic conditions in Russia, the incubator withdrawn from production, and so on. "We used half of it," the businessman continues. Babaev categorically refuses to call the project adventurous: "It was a conscious step - we did not doubt the market."

Later, Babaev bought a milk processing plant in Penza, and then began the milk project in the Tyumen Region after the milk project Rusmolco. Today, these businesses, together with the production of turkeys are united in the group "Damate", which on parity basis are owned by Babaev and Khairov. At the end of 2016, the group's revenue almost reached 12.5 billion rubles, profit before interest, taxes and depreciation (EBITDA) - 1.3 billion rubles. In addition, the last two quarters of the company went into a plus. About the future of the group and industry, state support and sanctions, Babaev tells in an interview with Vedomosti.

- How is "Damate" going through such difficult times?

- All is not bad: we grow both on a gain, and on EBITDA. In addition, in 4th quarter 2016 we received the first net profit and the first quarter of this year also closed with a profit. We also reached the design capacity of 60,000 tons of turkeys per year, and all related production facilities were launched: an incubator, a feed mill, an elevator, a waste disposal plant. The process cycle is closed.

- Last year you announced the expansion of production.

- We signed an agreement with the RSHB and reach 105,000 tons by 2019. The bank approved a loan for 12 billion rubles, some of them have already been selected. Our complex is one of the best in the country to organize production processes, according to the understanding of the market, but we make mistakes. What we are building now will make us the best in all respects, perhaps not only in Russia. At the same time, we will remain true to ourselves and continue to cool meat exclusively with air - this is the key factor affecting the quality of the product.

- How will the expansion of the project reduce the delivery time for finished products to the end user?

- We are building up a processing plant, where we can produce 36 different types of products every minute with a standard order of no more than 14-15 positions. In this way, we will be able to ship [for] two customers simultaneously. In eight hours our product will be delivered to the consumer in the freshest form. There is no such factory in anybody in the country.

- How much time, on average, does it take to deliver the product to the shelf of the store since the carcass was cut?

"It takes us up to 1.5 days, that is, this morning it was scored - tomorrow evening in the store. The products of competitors located further from Moscow can be supplied on the third day after the slaughter. Believe me, for the speed of logistics, the future of meat processing in the next 10 years. In November we will make a test launch of the plant, debug the mechanisms and starting from January we will start working at full strength.

Available protein

- Do not you think that the turkey market is close to saturation? It is unlikely that Russians in the future will consume more than the nowadays 1 kg per year per person (production in 2016 - 226 400 tons).

- We are sure: there is a potential, and we have to work with it. The explosive growth of production will no longer be, but the Russian market will continue to develop, and in the future a breakthrough in terms of exports is possible. In addition, the whole story of the crisis - the water on our mill.

- How?

- Turkey is the second most affordable protein: it is more expensive than chicken, but cheaper than pork, several times cheaper than beef and lamb.

Two owners

The group "Damate" has two owners - Babaev and Khairov. "If first I was sent to the Penza meat processing plant, then the second time I asked to practice there myself," Babaev recalls.

- I liked Rashid's approach, he is so calm and thoroug. "However, as a result, Babaev was not allowed to Penza, but was sent to Novgorod, but with his mentor he is, by his own admission, still friendly." In Damate, Babaev is engaged in strategy, Khairov controls operational management. "A large shareholder agreement has been signed between the partners, where every detail is stipulated for all cases, up to the least pleasant." Now they are thinking about an option program for the company's employees. "Two or three key employees will be able to obtain shares in the company upon reaching certain resulta we will proportionally reduce our shares, "Babaev said.

- Russia a year ago reached full self-sufficiency in chicken, in the country, in fact, there was an overproduction with a weakly growing export. Other types of protein are increasingly difficult to compete with chicken - people do not add money.

- You can eat chicken every day, but, firstly, I would not exaggerate. In fact, the economy is not so bad. Secondly, the consumer from the chicken is tired - it is the same, monotonous, specific quality. Therefore, if someone has problems, it is more likely with pork, beef and mutton producers, but not with us. On the shelf, we are exactly between the chicken and the pork, and this completely suits us.

Chinese perspectives

- In recent months, the ruble has strengthened strongly, many poultry farmers complain that exports are unprofitable.

- Absolutely so. We also shipped several lots. While the money has reached, the ruble has strengthened - we are suffering losses, because in fact the sale is in negative territory. The hedging instrument in the country does not work, although the export potential is huge, especially after the scandal with Brazil (Europe limited the supply of meat from this country due to problems with veterinary certification - Vedomosti.) 

But the biggest market - the Chinese one - is still closed and is unlikely to open tomorrow.

- This is the business of the nearest future.

- The nearest future? What does it mean?

- Year. However, there are other markets: the Middle East, Asia, and Africa. We hope that Europe will soon be reopened. We already deliver products to the EU countries, Serbia, Vietnam, Hong Kong, Gabon, and the United Arab Emirates, and on March 30 the first plane flew to the Emirates.

- Do you bring a turkey by airplane? It's the gold one. 

- It turns out chilled. You can carry it by sea, but then it will be another product. Emirates want a fresh and ready to pay for it.

- How much more? 

- "We try to maintain transparent prices, but we do not sell less for the sake of selling." Now we are negotiating with a large turkey consumer from the Middle East about selling 60-70 tons of meat products per month. This is a landmark client for us, which, perhaps, will turn our view on exports.

Milk without state support

- "Damate" is building milk complexes in Tyumen and Bashkortostan. In what stage are they ready?

- Recently sold the first ton of milk from the Tyumen farm. Now there are 320 cows, every month we will add 150 heads. By July we will produce 20 tons of milk per day with a design capacity of 47,000 tons per year. 

- Because of the crisis and delays in subsidies, the project has risen in price significantly?

- Not much, 2-3%. More he went up because of the devaluation.

Group of companies "Damate"

  • Producer of agricultural products
  • Owners: Naum Babaev and Rashid Khairov in equal parts.
  • Financial indicators (consolidated management accounts, 2016):
  • Revenues - 12.5 billion rubles.,
  • EBITDA - 1.3 billion rubles.

It was created in June 2012. It produces natural and chopped semifinished products from turkey under the brand name "Indilight", dairy products under the brand "Molcom", as well as raw milk. Group enterprises are located in the Penza and Tyumen regions.

- Have you received subsidies for it?

- I've been waiting for this question. We started the construction of a dairy complex in Tyumen two years ago, have already started it, gave the first milk - and did not receive a ruble from the federal budget.

There are chances, some funds have already been received, but only in May: a mistake in the order of the government, then regulatory documentation is not ready, then changes are needed, but they are not ready yet. Unfortunately, officials do not have a practical understanding of the processes. The money is needed to start the sowing campaign to pay for fertilizers, seeds, fuel. The whole agribusiness is built on the fact that everything needs to be done correctly and on time, this is the key to success. Subsidies in May - it's already late. I recently held a meeting on one of our facilities, where exactly there are problems with obtaining subsidies, we had to allocate additional resources. The director should be engaged in manufacture - on fields to go, for cows to watch, instead of to persuade suppliers of fertilizers, solar oil and seeds to do a delay on payments.

- What about the Bashkirian farms?

- Initially, we really thought to develop two projects, provided that the state supports us. We were told: "We'll give everything, just come." The situation has changed. Now we first want to see the promised subsidies, although it is clear that the amounts have decreased on the way. Therefore, it is decided to be consistent: first we finish one, and then we will return to the discussion of the project in Bashkiria. Alas.

No money

- Because of interruptions with the payment of subsidies, is there any desire to quit everything?

- The problems have become sharper, the rules of the game are more incomprehensible every year. We are waiting every year for the government's decree on the distribution of subsidies, and each time in it something new, not very clear and not very working. Of course, all this reduces the investment activity in general in agriculture. It seems to me that the state needs to decide whether they support the agricultural sector further or not. So far, everything looks like the state does not invest more. For ourselves, we take into account in the calculations only subsidies for loans that have passed the commission [of the Ministry of Agriculture], that is, those that we receive, may be with a delay of 6-9 months. In the rest we rely only on ourselves and consider loans at full interest rate.

- If subsidies are canceled, how much longer is the payback period of the project?

- If we consider construction from scratch, then in the meat industry, and even more so in dairy cattle breeding, the project is not redeemable in principle. If some of it has already been implemented, it simply becomes expensive and pays off not for eight, but for 12 years.

Advanced industry

- You listed a lot of problems, but after all, we have a minister - he must have a good understanding in agribusiness.

- The minister has bosses, there are subordinates in the ministry, there are regions. Last year, a new mechanism for allocating subsidies was approved. He, maybe, and good, if he worked. After all, what's the problem? Let's be honest: last year, first reduced the cost of agriculture, i.e., created a shortage of cash. The Ministry of Agriculture started a panic – it is not enough. Then they added money with efforts. Absolutely accounting approach: we cut all by 10%, it does not matter whether you grow up or not. A financial approach is that it is necessary to cut it where it is inefficient, and add even more where there is a result, so that next year there will be more money in the budget. 

- If there is nowhere to add?

- We are talking about 0.3% of the budget, not even GDP, so I do not think that it is not possible to find. Declarations from the series "Agrarians are already rich - they have enough" - this is self-deception, because the state does not help agrarians, but banks, let's admit it. The central bank has lifted the key rate, hence the expensive loans, respectively, the lion's share of state support is spent on subsidizing the interest rate. Then how exactly is agriculture one of the fundamental branches, behind it are mechanical engineering, chemical industry, and retail ... 

- The main thing is the village.

- It is in the agrarian and industrial complex that the highest employment is. I will say more: in the near future we will become the most advanced, innovative industry.

- Why?

- Rashid is obsessed with management systems. At the head office in Penza, we created a special situation center, where 38 monitors are located in a huge room, receiving various data from cameras, sensors, navigation systems at enterprises and agricultural transport. Over the next three years, we will be able to give the majority of processes and production control to the management of artificial intelligence. Now we have 12 programmers in the state. We teach machines to recognize deviations and see sharp jumps in the consumption of water or feed, understand the image from the chambers - this is not found anywhere in the world. 

- Will it help to optimize personnel costs?

- In our business, the main thing is total control over production processes.

- Is it hard for a Russian person to be trained?

- We have a very good team. It's just that not everyone understands what needs to be done: people need to be trained, monitored and paid well. If these three aspects coincide, then people will both learn and work.

- Total control does not discourage the desire to work?

- The average salary in "Damate" is twice higher, than on region, - about 30 000 rbl. for poultry farmers to 50 000 rbl. a month. And if the husband and wife work together, then the family earns 100 000 rubles. This is even good for Moscow.

The cognitive dissonance

- You remain a minority shareholder and chairman of the board of directors in another large milk producer, Rusmolco, where your partner is Singapore's Olam International. It also does not receive state support?

- Yes. That is why they still can not make decisions about new investments - due to a lack of understanding of the situation with subsidies. This whole story is very annoying to my partners. When they entered Rusmolco, they planned to invest about $ 800 million in Russian dairy farming. In addition, a year ago the shareholder of global Olam was Japanese Mitsubishi, which is also interested in developing business in Russia.

- How much is a debt of  the Government to "Rusmolco"?

- There is no debt on subsidies to the company, but Rusmolco projects did not pass the commission of the Ministry of Agriculture concerning selection of investment projects.

- Apparently, there are more important enterprises from the Krasnodar Territory.

- It's not a question for me, I do not know what's more important. The governor of the Penza region, Ivan Belozertsev, together with the representative of "Rusmolco" went to the minister of agriculture Alexander Tkachev, and he promised to take the situation under personal control so that in summer the company's project was necessarily approved at the next commission. The problem is different: honestly, they have no money.

- But this is the task of the minister, including setting priorities and supporting.

- Everything is correct, but, I assure you, not everything is decided by the minister.

- Olam does not consider the option to leave Russia?

- No, but Olam will be very attentive to the situation. If we do not stop doing this nonsense, then they definitely will not develop, and if they do not, then probably they can sell the business. 

- You have an option for 25% of Rusmolco. When can you implement it?

- In 2019, I must leave the business. 

- Because of uncertainty with the support of the industry and the plans of Olam, they won’t crumb the deal?

- No. At us all is registered initially. The question is different. Olam wants to develop, and they have everything for this: team, money, desire. The only thing they need from the state are clear transparent conditions. Olam is a company that needs to write clearly on a piece of paper: "They did so much - they received so much or nothing," and they will do everything on time, pay salaries to people and pay taxes to the state. When you promise then say: "Sorry, but there is no money", they have a cognitive dissonance. We simply need to understand: either the state helps, as it is done all over the world, or agricultural producers raise prices for products in order to work with a comfortable margin, then investors will come again. There is no third option.

"Give the laws the opportunity to work"

- Except turkey, the Damate milk products produced by Molcom are not represented on the shelves of federal networks outside the Penza region. Why?

- Alas, the product that we do is not necessary either for networks or for the consumer. It is difficult for us to explain to the consumer that our product is 10 rubles. expensive because it is really good. We have a principle: we do not produce anything that we do not eat ourselves. And we will not play with quality, we will not add palm oil, we will not play with the price in order to enter the Moscow market. At the same time, we have been manufacturing dairy products for «Vkusvil» and «Izbenka» for several years now, their share in our sales is about 10%. Over time, we will be more widely represented in the capital, but this will not happen quickly, just in stages. 

- "Damate" has a small cheese production in the Penza region. Will you expand it?

- Perhaps we will sell this plant. There are several companies with whom we are negotiating.

- But sanctions have opened up enormous prospects in this sector.

- It turned out to be another business. The production of dairy products and cheese production are two different things. Even milk is purchased of different quality, since cheese production requires cheese with high protein. Therefore, cheese is our third and very complex, troublesome business, the share of which in the total revenue of the group is too small. It should be either actively developed or sold. We decided to sell. 

Necessary pause

- At the end of 2016, Damate became the largest producer of turkey in the country. What are the tasks for this year?

- We did not set ourselves the task to become the first, our task is to become the best, and it turns out so. The task for this year is to arrange the production processes and consolidate the results, complete the project to increase capacity to 100,000 tons, and then it will be seen. Maybe we'll go to 150 000 tons or we will expand in the regions, we'll look at exports. If we realize everything conceived in the first place from the point of view of internal business processes, we will necessarily be the first, and not only in Russia. Nobody will stop us.

- And the milk?

- In August, we are completing the construction work, and by the middle of next year we will reach full production capacity, and so far nothing more. I want everything to be fixed, I want to see how the built-in system works, and then we will make decisions. We have grown dramatically, so we need to stop to realize this growth.

- How long will the pause last?

- Approximately until 2019, do not forget that the business must be generated by a good cash flow - we must pay off the loans. In 2016 we paid 990 million rubles. This year we will pay about a billion more. 

-Can you invest in other industries?

- Rashid and I looked at the gardens, vegetables and so on. As a result, we decided in the next two years to concentrate on the existing production facilities.

- Did not foreign investors offer to get a share in any of Damate's projects or in the whole company?

- Investors come, we communicate, but the problem is that we do not need money yet. There will be new global projects - we will again communicate with investors. 

- And if it is a strategic foreign partner, for example, someone from Japan or South-East Asia, maybe the state will support more?

- We already have a strategic partner - Olam, its president is a member of the foreign investment commission under the Russian prime minister. 

- I will ask the question in another way: any business is sold and bought. How much do you need to sell the business? 

- Now I'm not ready to sell. What for? We grow, develop and have not reached a peak to be sold. I agree that everything is sold, but it's also important for me, like for Rashid, to remain in the process. Therefore, if we have an idea that will enchant us, and we will understand that there is not enough time to implement it, we will sell this business. Now there is no new global interesting idea.

- Speaking of corruption. Has the situation changed? Did you have to deal with corruption?

- A few years ago one general came to us: you will pay me so much per month, and if you do not ... he took some papers in his hands ... I'll lock you up ". We decided not to pay anyone and fight to the last, because we have absolutely nothing to hide. The war began: there were mask shows, checks, threats ... In parallel, we turned to the business ombudsman Boris Titov. His lawyers then said: "Unfortunately, 70% of businessmen who apply to us, we would lock up." However, having understood our business, they began to protect us zealously. Fortunately, our story had a happy end for us and very bad for that general. I mean that corruption always has two sides - those who ask, and those who offer, it all depends on the mutual desire of the two sides. We did not agree to pay, but I know others who offered to pay themselves.

- You are in agribusiness for 20 years - first worked as a hired manager, now a businessman. Do not you think that there would be fewer problems in another sector?

- It is difficult to judge. I have been connected with agricultural production since 16 years, so I did not even have time to think about it, I did not have enough knowledge. In addition, in agriculture it is time to apply innovative solutions and high technologies, which I really like. Now I definitely would not change anything.