SHAREHOLDERS SUMMARIZE THE RESULTS OF 2014 AND 2015 —THE PICTURE IS GETTING CLEAR
— Having repeatedly failed to gather a quorum, on June 12, Togliattiazot finally held a meeting of shareholders to review the results of the last two years. What is your take on that?
— Indeed the meeting of shareholders for 2014 was not held because the quorum was not present. I do not know why the shareholders did not attend the meeting, this information is not available to me. The company is under an obligation to ensure that conditions are met for holding a meeting. The company had taken all the necessary steps for convening the meeting and making arrangements in this regard. Everything had been running smoothly until the quorum was announced. As for the shareholders' meeting which took place, on that day two meetings were convened, one for 2014 and the other for 2015. The media were saying that allegedly the plant was without management because the annual meeting for 2014 had not been held. But the enterprise is managed not only by shareholders. There is also management that runs the entire operation, including myself. This situation had no impact either on our work or on the plant's operation. This is borne out by the results of 2015. There were certain formal constraints, but we managed to make headway even under those circumstances. I believe that our work is of a high standard. The shareholders have summarized the results of 2014 and 2015, and the picture has become clear. I hope that this will quell further speculation.
— Are you satisfied with the shareholders' decision not to pay dividends?
— As the plant's CEO, I can only be happy that the shareholders have left the funds in the company and decided to use them for further development. The current situation in the world is not particularly good for business, and the prices of our products are dropping. Our expectations for 2016 are being realized. As we have already "set the pace" of our upgrade program, contracts with serious implications have been signed, and we do need funds for developing the plant. By a conservative estimate, as the prices on the global market are declining, the revenue for 2016 may not be enough for implementing the investment program; therefore, the shareholders have made a sensible decision.
— What are the key objectives of your investment program up to 2020?
— The most important thing is increasing the productivity of ammonia units. The essence of the technical solution that we are to introduce can be compared to that of a car. Imagine that a device producing new fuel from exhaust fumes and delivering it to the engine is attached to an exhaust pipe. We want to produce something like that. This will allow to increase the output by about 30% with the amount of raw materials remaining the same. We did slip behind the schedule for project implementation, but that was not critical: we had been looking for a technical solution for a long time. We will be the first Russian enterprise in the industry to introduce such innovations in ammonia production; no one has ever introduced anything like that before. As for carbamide, we are building a new unit, and its capacity is double the level of previous units. This is a long process, and we expect to complete it by 2020.
— The media are reporting that the revenue generated by the plant has increased by 42% in 2015. What is this figure related to?
— Upgrading production facilities which began as early as in 2011 is certainly producing results. Due to a qualitative improvement of the production infrastructure the output has increased. The repairs which have been carried out have also had an impact: the time between repairs, i.e. continuous operation of units, has increased. Some units already operate for two years without interruption and this is a very impressive achievement. But we have been depending greatly on the transport system which is partially in Ukraine. To put it mildly, in 2015 we had problems because the Ukrainian side began to manipulate its transit status at its discretion. The transport via the pipeline even stopped for a while. Nevertheless, as for ammonia, we retained our figures for 2014. There was a sharp increase in carbamide production up to 44%. Besides, we place a high priority on the quality of our staff: we provide them with training and are focused on improving their performance. All these measures have contributed to achieving such a result.
— Most of your products are exported. Therefore, you receive proceeds in foreign currency. Did the ruble-dollar exchange rate which is favourable for importers have any impact on you?
— This helped us; however, there was also a negative impact. It helped us because we export a significant part of our products, you are right. The negative impact of the exchange rate on the upgrades I have mentioned comes down to the fact that we purchase some of our equipment abroad, as well as a huge number of spare parts. Therefore, the situation on the currency market means that we pay a lot more for this than previously. However, the overall balance in 2015 was good for us in general.
— What is the amount of exported products?
— In terms of revenue, exports account for about 70%, while the share of domestic market is 30%. The figures change every year. Besides, at present the balance may also change slightly due to the changes in prices. Domestic sales may turn out to be even more profitable. We are keeping this situation under review.
— And what about Ukraine? Why did the Ukrainian party block the ammonia pipeline? Were these decisions made at the government level?
— No, that was a dispute between two businesses — Ukrkhimtransammiak and JSC Transammiak, which has been our strategic partner for a long time. The issue is trivial— an increase in prices for transportation and ammonia transit. I think that this was done to make Transammiak agree to their conditions. We had to shut down the units because we just could not sell our products. The thing is that it is very easy to turn off the tap, whereas redirecting the flows on the railway is a slower process. Of course, we did all this, but not so quickly. That is why in January we incurred a large loss.
— Did you finally accepted a new tariff?
— As far as I know, our counterparts from Transammiak had been bargaining as long as they could, but we had to accept the conditions of the Ukrainian side. Obviously, this had a negative impact on the costs of JSC Transammiak, and consequently on our costs. Incidentally, the dispute is still running, but it has been brought before a court.
— In this situation your project for constructing a terminal in Taman is especially important...
— Yes. When we were starting to build the terminal in 1999, we anticipated all these difficulties. Although the Ukraine at the time was quite unlike Ukraine these days, similar developments were also taking place at that time. At the start of the construction we were quite successful, but in 2005 the work was suspended. Since 2014, a lot has been done to resume this project. At present, a great number of agreements are in place and a lot of important documents related to project implementation have been adopted at a very high level. For instance, we were included in the road map for sea ports development approved by the government, as well as in the Federal target program "Development of the Transport System of Russia (2010-2020)". Currently the primary goal is to register ownership of the land; this was the reason for a shutdown in 2005. This is the key issue which we are mainly dealing with now. Of course, we maintain the facilities which have already been built. In the last two years the government of the Samara Region has been very helpful in assisting us. I would like to thank the government of the region, namely its Governor Nikolay Merkushkin and the Minister of Industry Sergey Bezrukov. The administration of the region is communicating both with our counterparts from the Krasnodar Region and with federal agencies regarding this issue. Their assistance was especially significant in 2016.
— At what stage is the project now? Is there any way of telling when it will be implemented?
— According to plans, 2017 is the key year for the project: we hope that in 2017 ownership of the land where the facilities of the terminal are built will be re-instated. Less than a month ago the Russian Ministry of Industry and Trade (Minpromtorg) held a meeting at which it was reported that about 90% of documents for the project are ready. The project has the support of all the key federal agencies including Minpromtorg, the Ministry of Transport (Mintrans), Rosmorrechflot and the Ministry of Economic Development. Now a lot will depend on the position of the administration of the Krasnodar Region. We would like them to come to an amicable settlement of the disputes which have arisen. They are thinking about this, but there has been no progress yet.
— Do you mean land - related issues?
— The dispute is about the following: the administration of the Krasnodar Region is trying to sue us in order to get the rights to several key facilities of the terminal built at our expense. We have the backing of Federal authorities and are urging both parties to reach an amicable settlement in order to ensure a successful implementation of the project. We are hoping very much that the administration of the Region will take a constructive approach. And we are reasonably optimistic about this, as the implementation of this project will be useful not only for an investor but also for the Krasnodar Region and the Samara Region, as well as for the country in general. Commissioning the terminal alone will increase the budget revenue of the Krasnodar Region and the Samara Region by about two billion rubles and 2.8 billion rubles respectively. In addition, about 1,500 new jobs will be created in the Krasnodar Region. The benefit for everyone is obvious, not to mention being independent of export via Ukraine which has already been mentioned.
Besides, there are issues related to the title to the land for which we were granted a long-term lease some time ago and on which the infrastructure facilities of the terminal were built. The construction stopped in 2005 because the lease on this land was somehow obtained by third parties. We did not know about that and were not involved in those developments. We also hope that the Krasnodar Region will assist us in settling these issues.
— Is Togliattiazot the only investor in this project?
— In Taman, there are several terminals, but we are the only investor in the terminal we are talking about. The degree of its readiness is high. The most labour intensive thing is the trestlework built in the sea which is almost 2.5 kilometres long with the possibility of vehicles running on both sides. It is ready. Besides, the tanks for ammonia storage are also ready.
— Will the products be delivered to this terminal via the existing ammonia pipeline? Will you build a new line?
— The press has reported that we have announced the construction of this "line". But this is actually not quite true. We have been considering all possible options for transporting our products to the port. However, the construction of the ammonia pipeline which is 800 kilometres long is a mammoth task for any enterprise, as the costs are enormous. This is to be tackled by the state, as issues related to land arise. Currently, using railways to deliver the freight to Taman is a preferred option. Anyway, first of all, the project for the construction of the terminal is to be implemented.
— What is the cost of constructing the terminal?
— Initially, ten years ago it was 200 million U.S. dollars, and now the figure is higher. This included ammonia only, and now trans- shipment of urea is also to be taken into account. We are re-evaluating the project and expect the costs to go up.
— What is the position of Togliattiazot on the global market?
— According to statistics, our share in the global ammonia market is about 10%, but this figure ranges between 8% and 12% depending on whether new enterprises emerge or old ones are shut down. As for carbamide, currently there are also considerable changes taking place. For instance, despite the low profitability of carbamide plants, they have not been shut down in China for a long time. Now there is a trend towards closing them. However, we will not curtail this line. Our output will remain unchanged, but the proportion on the global market will increase.
— Last year in November, a group of individuals held an alternative meeting of shareholders which was later deemed to be illegal by the arbitration court. Do you know who these people are?
— I can say that this outrageous thing was inspired by a minority shareholder Evgeny Sedykin. To put it mildly, his share is very modest (0.000195 %). During this meeting they elected their own board of directors, and a certain Sergey Chelyshev was elected CEO. I received papers stating that I must give them almost the keys from the plant within twelve hours. The most surprising thing for me is how quickly they have managed to organize all this. Under the current legislation, changes to the Unified State Register of Legal Entities may be made within at least two weeks, but they did it in one day. To put it into perspective: when I was taking up the post, we waited three weeks. But it took them just several hours to make changes related to tax authorities. It is beyond me how they have managed to do that. The strangest thing is that despite the fact that the Arbitration Court of the Samara Region adjudged that the shareholders' meeting and all its resolutions were illegal, still no one was punished for that. In fact, this may be qualified as an attempted illegal takeover of the enterprise. Moreover, Mr. Sedykin is still involved in illegal activity. But I can see no reaction. There is no reaction even to the fact that the court ruling is not being implemented. People are required not to do certain things, but they get away with this.
— Can this situation have anything to do with a long-running corporate dispute with Uralkhim, your largest minority shareholder?
— Everything is possible, I would not like to speculate about that. The intentions of Mr Sedykin are clear: while they are proving that he is wrong, he will take ownership of half of the plant. But our services have acted quickly to put a stop to this within one day, and he has not managed to take anything. However, the potential implications are not clear. Although he is claiming to be a shareholder who is caring about the plant, he has never worked for Togliattiazot.
—Is the situation with Uralkhim having a negative impact on your company?
— Yes, it has an overall impact, both emotionally and physically. This is because when you get negative publicity with the press running a smear campaign against you saying things that are not true and you attend certain events, you can tell that you are seen as not trustworthy and are made to feel that you are not someone nice. It takes our specialists a long time to deal with the enquiries from supervisory bodies and courts. I would very much prefer to spend this time developing the plant. There is constant pressure from the outside, and it certainly is disruptive for the operation. I am confident that we would have been able to launch more projects if it wasn't for this pressure.
— According to Chairman of the Board of Directors of JSC Togliattiazot Sergey Makhlay, the dispute with Uralkhim is an attempted illegal takeover. Would you agree with this?
— There were all signs of that. I have worked at the plant for a long time, and I have observed the how this dispute has evolved. Uralkhim is the last active element in numerous attempts to change ownership of the enterprise. Prior to this, the same had been done to other entities. A stake of 9.97% currently owned by Uralkhim is handed over from one person to another and repurchased. If a particular person is not successful, the stake is handed over to another one. Our opponents are trying to tarnish our reputation. They say that we are inefficient, almost like a rusty bucket, and that the plant is falling apart. But let us think logically: if this is such a bad asset, why fight so hard for it for over ten years? Our performance in 2015 shows that everything is good and it could be even better but for the dispute.
— But is there any way out now? We see that there is too much information about ToAZ, statements made by Uralkhim, certain alternative shareholders' meetings...
— Yes, both employees and managers are regularly questioned as witnesses, and their documents are seized, and they are asked to provide some certificates and estimates...At present, the pressure is unrelenting. I do not think that this dispute is about to be settled.
— During the St. Petersburg International Economic Forum which has recently been held, Vladimir Putin said rather negative things about those employees of law enforcement agencies who are involved in schemes aiming at redistributing property and warned them that such employees will be held liable for that, this will include criminal liability...
— It feels like those people have not heard his words (the words of V. Putin — „Ъ“). We have seen no changes yet. There has been no appropriate response to the actions of Mr. Sedykin which I think should follow. I cannot judge how people perceive the President's words and how they respond to them, but I see that in our case the response is inappropriate.
— You have said that at the regional level you have established good relations with the administration of the Samara Region and the Togliatti Mayor Office. Apart from building the terminal, what else does their support consist in?
— During the entire period of the plant's operation, we have never asked for money. We have only asked for assistance in lifting the administrative barriers, but not often. As for the port, we had not resorted to them as long as possible. When we realised that our resources were insufficient, we asked them to support us. We pay a high tax, and the region is satisfied. In 2015 we were among the three leaders in the industry in terms of taxes paid. There are not so many sustainable enterprises in the Samara Region. The situation at AVTOVAZ is difficult. We do not ask for financial assistance and cope with everything ourselves, everything is stable at our side.
— How many employees are there at ToAZ now?
— There are just over five thousand people at the plant, and I think that with the subsidiaries, there are about ten thousand employees. The average salary at the plant is among the highest in the region. But now our efforts are aimed at ensuring optimization and quality so as to gain maximum commitment of employees and achieve an increase in labour productivity. We will not retain those who fail to meet our new terms and requirements.
— Many enterprises are currently reducing costs due to the new economic situation in Russia. For instance, social infrastructure has been signed off to subordinate entities of the Federation, to municipal administrations. Have you got many such objects? What are you doing in this respect?
— Cultural centre, kindergarten, medical centre, health resort "Nadezhda". For the time being, we are not going to re-assign ownership or sell anything. Our social package hasn't decreased, it is still of the same high standard. This year we took a very serious step: the plant started to cover 100% of voluntary medical insurance for all the five thousand employees. We have our own base, a fine medical centre at the plant, and health resort "Nadezhda", but now it’s also voluntary medical insurance. The cultural centre works, the health resort treats not only our employees, but other people too. At the beginning of the year we purchased modern medical equipment for it, which is unique in the Samara region. Our collective agreement has been acknowledged as one of the best in the industry. In 2017 it will be carried forward again, and I can say that things are not going to get worse.
Russian nitrogen fertilizer major Togliattiazot on Monday revealed the centrepiece of its new urea plant - a 107 metre tall granulation tower - had been installed and the project is 38% complete. Due for commissioning in 2021, the 2,200 tonne/day unit will reinforce the company's presence as the largest supplier of urea to the domestic market.