Statement by the Chairman of the Board of Directors of ROS AGRO PLC
Dear Shareholders
The Board of Directors commends Rusagro’s performance in 2021. Despite trade restrictions and retail price regulation in Russia, the Company achieved its highest ever revenue and earnings before interest, tax, depreciation and amortisation, resulting in a 71% increase in net profit to RUB 41.4 bn.
Rusagro’s senior management demonstrated excellent performance in achieving the Company’s strategic goals in 2021. During the year, Rusagro consolidated its status as the largest vertically integrated and diversified Russian agricultural holding, launched a pig-breeding cluster in the Primorye Territory, boosted exports of a range of product categories, retained its position in the retail market, upgraded its human capital assets and significantly advanced the automation and digitalisation of all business processes. During the reporting period, Rusagro issued its first ESG report after international standards and started the work on its first sustainability strategy.
Today Rusagro is the largest national producer of sunflower oil and consumer margarine, second largest producer of industrial fats and mayonnaise, third largest producer of sugar and fourth largest producer of pork (with a very small difference with the third largest company of 0.6 ths tonnes). Rusagro also ranks fourth among Russia’s top landholders in terms of its agricultural land bank size.
The Company is a successful player not only in the industrial goods market, but also in the retail segment. For example, Rusagro’s sugar brands (Russkii Sakhar, Chaikofsky, Khoroshiy and Mon Café) account for 48% of the Russian white cube sugar market, while the Brauni brand holds 28% of the brown cube sugar market. The brands of oil and fats products occupy a significant share of local markets: in the Urals, the No.1 mayonnaise brand with a 42% share is Provansal EZhK, and the No.1 margarine brand with a 59% share is Schedroe Leto (Generous Summer). The Slovo Myasnika (Butcher’s Word) brand is still only fifth in the Russian market, but is increasing its share every year (9% in 2021).
In order to gain its competitive edge, Rusagro commits significant resources to deliver on a digital transformation strategy and to find high-end innovative solutions. For better management of these resources, the Company established Rusagro-Technology and a unified Mathematical Simulation Service in 2021 to centralise its IT services. In pursuit of innovative solutions the Company held a Rusagro Tech Challenge competition together with the Skolkovo Foundation. As results, five projects were selected to launch joint pilots.
With well-targeted increase in investments into the development of human capital (from RUB 2.6m to RUB 17.1m over the past five years), Rusagro enjoyed successful results in this essential for business continuity component in 2021. The investments covered various projects aimed at the improvement of staff training and development system and at its automation. For example, the number of man-courses taken doubled and more employees were recruited as mentors and internal instructors in the last year
In an effort to share Rusagro’s success, the Board of Directors recommended record dividends of RUB 8.8 bn (USD 119.7 mn) for 1H 2021 (USD 119.7 mn), or RUB 65.0 per GDR (USD 0.89 per GDR). In September 2021, the Board of Directors also resolved to increase the minimum level of dividend payments from 25% to 50% of the Company’s net profit.
Vadim Moshkovich Chairman of the Board of Directors of ROS AGRO PLC until 10 March 2022
Statement by the CEO of Rusagro Group of Companies
Rusagro's core business segments recorded the following adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) in the reporting period.
- The year-end results showed that the Agriculture Business was the most profitable business, generating 48% of Rusagro's EBITDA before intersegment eliminations and other operating income and reaching RUB 23.3 bn (+53% from 2020). Revenue growth of 22% (to RUB 41.9 bn) against relatively stable production costs enabled the Group to achieve a profit margin of 56% year-on-year (44% in 2020). The positive changes in market prices for agricultural products and increased sales volumes of sugar beet and wheat were the key revenue drivers.
- The Oil and Fats Business, the Company's largest business by revenue size (51% of Rusagro's revenue before intersegment eliminations and other operating income), posted a 36% increase in EBITDA to RUB 12.8 bn. This was favoured by a 57% rise in revenues (to RUB 125.2 bn) from the sale of bulk oil, industrial fats and dairy products, the positive effect of which was partially offset by a higher growth rate in raw material costs. Adjusted EBITDA margin decreased by 2 p.p. and stood at 10%.
- After a period of declining earnings from 2017 to 2019, the Sugar Business showed a recovery in this indicator for the second consecutive year. EBITDA rose by 41% in 2021 to RUB 9.0 bn thanks to a 29% increase in revenue (to RUB 36.4 bn) and a 2 p.p. improvement in EBITDA margin (to 25%) on the back of slower rise in sugar beet procurement cost as compared to revenue growth.
- The Meat Business was the only business of the Company to experience a decline in profits in 2021. This was mainly due to higher feed and veterinary costs and the cost of launching the pig-breeding cluster in the Primorye Territory, which would only reach full production capacity in the next few years. As a result, despite revenue growth of 22% (to RUB 39.6 bn), EBITDA fell by 9% (to RUB 5.9 bn) and EBITDA margin — by 5 p.p. (to 15%).
In 2021, Rusagro continued the expansion of its export areas, generating RUB 65.6 bn in export revenues, but was forced to reduce the share of revenues from export operations from 32% to 29%. This had to do with export restrictions on agricultural products and sunflower oil during the year, as well as high local demand for sugar and its by-products due to reduced sugar production in Russia. As a result, export revenues from the Agriculture Business went down by 83% (to RUB 1.1 bn) and those from the Sugar Business — by 34% (to RUB 3.7 bn). Meanwhile, the Company managed to increase export revenues from the Oil and Fats Business and Meat Business by 59% and 47%, respectively. Despite export quotas for crude sunflower oil and lower demand for consumer oil products in key purchasing countries, the Oil and Fats Segment again accounted for the highest share of export revenue among the Company's other businesses (44%).
Rusagro invested RUB 13.8 bn to implement its growth strategy and maintain its existing business in 2021. With no new major projects, capital expenditure was down 2% year-on-year. More than half of the allocated funds (58%) were absorbed by the Meat Business, where the Company continued to invest in the construction of a pork production cluster in the Primorye Territory, with facilities launched during 2021. Investments in the Agricultural Business totalled RUB 2.7 bn, the bulk of which was spent for the purchase of machinery and vehicles to work on a new land plot in the Saratov Region and to deliver a batching plant project in the Central Region. Investments in the Oil and Fats Business and Sugar Business amounted to RUB 2.1 bn and RUB 1.0 bn, respectively.
To deliver on our strategic priorities and business development, we projected an increase in capital expenditure in 2022 to cover the further construction of a pig-breeding cluster in the Primorye Territory, expand the capacity of our oil extraction plants and increase our agricultural fleet. However, at the end of February 2022, Russia faced unprecedented sanctions, the effects of which necessitated a review of the Company's further investment programme and strategic plans.
MaximBasov CEO of LLC Rusagro Group of Companies until 31 December 2021, Chairman of the Board of Directors of ROS AGRO PLC since 10 March 2022
Development strategy
The Company's mission: "Let's make people's lives longer and better"
The strategic business goal of Rusagro is to increase returns for shareholders while adhering to the mission of "Making people’s lives better and longer". In order to achieve this goal in 2008, the Board of Directors approved a strategic concept "From Field to Shelf", which implementation is based on the Company's vertically integrated business model in the area of food production.
The strategy of the Company and its business units covers a period of five years and is annually reviewed by the Board of Directors to redirect the efforts in order to address the changes in the external environment and to effectively manage financial and human resources. The success of the Company’s strategy rests upon a careful selection of long-term priorities and the exceptional quality of the investment process that ensures a high return on equity.
In 2021, Rusagro decided to develop a sustainable development strategy, which aims towards maintaining stable growth, adding more value for all stakeholders and enhancing the transparency of non-financial information about the Company's activities. The Company plans to complete this strategy in 2022, and consequently extend the list of its strategic priorities and tailor the corporate governance system accordingly for their successful accomplishment.
Rusagro's strategy is a classified document, and its targets are exempt from public disclosure, as this entails significant risks and may prejudice the Company's success. For the demonstration of the Company's success in implementing key priorities, the Annual Report contains an assessment of the results over a five-year strategic planning period.
Key priorities of Rusagro’s growth strategy
Rusagro aims to ramp up the production and expand its regional presence across all four business segments in order to maintain the market leadership. Below are the ways to achievethis aim:
Organic growth — building new production facilities, expanding the land bank, modernising and expanding the existing assets;
Inorganic growth — acquiring additional companies and assets, in particular in previously unexplored business areas;
Increasing the share in the current regions of presence and expanding to new regions of Russia and to new countries through the export development.
In an era of technological revolution, the development and introduction of innovative solutions in IT, automation, and biotechnologies are becoming increasingly important in the terms of costs reduction, product quality improvement and additional revenue generation. The key areas of the Company’s activities related to this strategic priority include as follows:
introduction of precision farming technology;
automation of business-processes;
use of advanced biotechnology methods;
higher yields and soil fertility.
Sticking by "From Field to shelf" concept, Rusagro strives to develop its retail products through:
Deeper processing of products;
Wider product mix;
Better representation in retail channels;
Stronger private brands and their promotion on the consumer market.
Development of human capital is a crucial instrument in ensuring the Company’s sustainable growth. The main goals in this area are:
Labour efficiency and productivity management;
Strengthening of the employer brand appeal;
Faster and better recruitment;
Improved quality of staff and increased internal hiring.
Investments
In 2021, Rusagro invested RUB 13.8 bn in achieving the desired goals – the projects to maintain and to develop existing assets. The volume of investment dipped marginally – by 2% year-on-year. The largest share of funds (58%, or RUB 8.1 bn) in the reporting period was allocated to the Meat Business, which still continued the construction of a cluster in the Primorye Territory. Rusagro invested 19% of the total budget (RUB 2.7 bn) in the Agriculture Business – down RUB 0.7 bn from the year earlier as the expansion of the land bank necessitated the purchase of additional equipment and vehicles. The reporting period also recorded higher investments in the Oil and Fats Segment – from RUB 1.8 bn to RUB 2.1 bn – due to the projects for the relocation and expansion of oil extraction capacities. As all major investment projects in the Sugar Business were completed, the investment to this segment was cut by 33% and stood at RUB 1.0 bn.
Strategy achievements for 2017–2021
Business expansion
Agriculture Business
In 2021, Rusagro reached a record 689 ths hectares of agricultural land. The key objectives of the business expansion priority over the past five years, in addition to the direct expansion of the land bank, have been to preserve efficient arable land and reduce land unsuitable for cultivation. Arable land accounted for 88% of Rusagro's land in 2021, compared to 84% in 2017.
Oil and Fats Business
Over the past five years, Rusagro has significantly expanded its oil and fats production capacity and has occupied leading positions in Russia. In 2019, the Company leased and gradually bought out two oil extraction plants and one oil and fats plant owned by Solnechnye Produkty, thus stepping up the output of vegetable oil four-fold, industrial fats thirteen-fold and bottled oil eleven-fold.
Meat Business
Seeking out to maintain market share in a growing market and to lay the groundwork for the promotion of pork products exports, between 2017–2021 Rusagro invested in the expansion of pork production in the Tambov Region, the creation of a vertically integrated cluster in Primorye Territory and the acquisition of the Kapital-Agro assets in the Belgorod Region. This drove up live-weight pork production by 49% – from 207 ths to 309 ths tonnes.
Sugar Business
Amid limited opportunities to expand its Sugar Business over the past five years, Rusagro has focused on improving the productivity of its plants and reducing sugar losses. 2018 saw the upgrade of two sugar plants, resulting in a 8% increase in their capacity. In 2017 and 2019, Rusagro launched two molasses desugarisation facilities, which allowed an extra sugar production of over 100 ths tonnes from the same volume of beet.
Development of retail sales and brands
Oil and Fats Business
The main objectives of Rusagro's Oil and Fats Business are to maintain leading brand positions in home regions. In 2021 in the Urals, the Provansal EZhK brand ranked first in the mayonnaise market and the Schedroe Leto (Generous Summer) brand – in the consumer margarine market. In Moscow, second place in the mayonnaise market went to the Moscovsky Provansal brand, which appeared in Rusagro's brand portfolio in 2019.
Position of Rusagro's oil and fats brands in the Russian market
Source: AC Nielsen for January–December 2021
Meat Business
After the launch of its own brand at the end of 2016, Rusagro has been steadily upping the production of its own-branded consumer pork products. Based on the 2021 results, sales volume of chilled semi-finished products under the Slovo Myasnika (Butcher's Word) brand have risen from 3 ths to 23 ths tonnes over the last five years, and the market share of semi-finished pork products (including those with the addition of other meats) – from 2% to 9%Based on results for January to December 2021, according to AC Nielsen research..
Position of the Slovo Myasnika brand in the Russian market
Source: AC Nielsen for January–December 2021
Sugar Business
Rusagro has been dominating the Russian retail sugar market for many years. The Russkii Sakhar and Chaikofsky brands rank first and second in the white cube sugar market, while Brauni captured first place in the brown cube sugar market. The brands have a combined market share of 48% in the white cube sugar market, while Brauni holds a 28% share in the brown cube sugar marketBased on results for November 2021, according to AC Nielsen research..
Share of Rusagro’s sugar product brands in the Russian market
DIGITAL TRANSFORMATION AND INNOVATIONS
Rusagro approved the digital transformation strategy to introduce automation systems and develop innovative solutions for process optimisation in each business segment. This strategy is an integral part of the overall development strategy of each business. Higher profits from cost reductions, improved risk control and enhanced productivity against lower human errors and better decision-making are the shared objectives of the digital transformation strategy for all of the Company's business segments.
For the next phases of the strategies to be successfully implemented in 2021, it was decided to centralise the IT service and create a company called Rusagro-Technology. A Mathematical Simulation Service was also set up to support the Company's objectives in working with technologies such as computer vision – at the end of the year there were 10 people in the team with 22 projects in the pipeline.
Rusagro's key digital projects
Agriculture Business
Optimum routing of vehicles on the field
Lower influence of human error in determining the vehicles direction of travel in the field, POL savings and higher productivity on the back of optimised distances travelled
Planning algorithm for own and hired trucks
Better turnaround and optimised logistics services
Oil and Fats Business
Intelligent management system for raw material procurement and delivery
Reduced costs by optimising the sunflower transport cost and timing, as well as its storage and processing locations
Integrated business planning for sales
Lower production costs by reducing overstocked producer goods and improving the accuracy of sales forecasting
Meat Business
Logistics optimisation project team
Reduced logistics costs for feed, livestock, personnel, and improved logistics services
Video analytics and mobile application projects team
Improved production performance in livestock production against prompter and more accurate management data
Sugar BUSINESS
Instrumental condition monitoring of equipment
Obtaining objective digital information on ongoing processes
Introduction of machine learning, computer vision and artificial intelligence tools
Higher labour productivity
Development of human capital
Human capital development is central to the sustainable growth of all Rusagro's business segments. Between 2017 and 2021, the Company increased investments in training and development seven-fold, from RUB 2.6 mn to RUB 17.1 mn, having built an effective system to support employees at all levels and positions every step of their way.
The institute of internal instructors established in 2017 already had 585 employees in 2021 (+13% from 2020), and the number of mentors grew to 1,133 (+23% from 2020). The distance learning system enabled Rusagro to markedly improve its training performance: the number of employees trained almost tripled over the past five years – from 7,581 to 19,673. Moreover, there was a significant increase in the number of man-courses after the launch of the SAP SuccessFactors platform in 2020. For example, in 2017 this figure stood at only 5,214 man-courses, whereas in 2020 it was already at 42,808. In 2021, we hit a record high of 87,344 man-courses completed.
Key blocks of the training and development system
Transfer of best practices and affirmation from mentors
Training and sharing of best practices between employees
Electronic information educational environment
Academic training and short-time courses