THE INTERVIEW OF THE CHIEF FINANCIAL OFFICER OF TOAZ NIKOLAI NEPLUYEV

Deputy CEO, Director of Economic and Financial Affairs of ZAO TogliattiAzot corporation N.Neplyuev:

TogliattiAzot gives up on non-core investments focusing on strategic projects.

In April, TogliattiAzot, one of the world’s largest manufacturers of ammonia, announced about the attraction of financing as part of the project for the construction of the third carbamide unit, the launching of which will almost double the plant’s capacity for this type of mineral fertilizers. Deputy CEO, Director of Economic and Financial Affairs of ZAO TogliattiAzot corporation N.Neplyuev, in his interview shared with Interfax the plans of the company for the next several years and its strategy in the conditions of highly volatile mineral fertilizer market.

- 2017 was the worst for the mineral fertilizer market in the past several years. Prices for nitrogen fertilizers are always the most volatile, how did it influence the financial indexes of TogliattiAzot?

- The actual revenue of the company decreased slightly - by 5% compared to 2016. The reason is that the shipments of ammonia through Togliatti-Odessa ammonia pipeline were suspended for almost two months due to the fact that the Ukrainian company serving the Ukrainian part of the gas pipeline blocked the transit. As a result, the production fell by 8%, down to 2.6 million tonnes, and sales - by 14% compared to 2016.

Nevertheless, the financial result was slightly offset by the increasing sales of ammonia and carbamide in the domestic market by 2.3%, as well as due to the saving on variable costs and optimizing other costs.

- How do you assess the situation in the mineral fertilizer market in 2018 and the company's position on it?

- According to Fertecon analytical agency, the average world prices for ammonia and carbamide in 2017 increased by 11% compared to the average price in 2016. At the same time, the first quarter of 2017 began with a recovery in prices due to a shortage in ammonia supply.

Following a growth in the first quarter, in the second and in the third quarter of 2017 there was a decrease in the price caused by an increase in supply in the ammonia market. However, already in the fourth quarter, ammonia prices increased significantly.

According to analysts, the average price for ammonia in 2018 will remain at the level of 2017. For our part, we predict that the share of TogliattiAzot in the ammonia export market will increase by approximately 2% in 2018 compared to 2017.

- Is the preference for cutting on expenditures preserved in the Company for 2017?

- We understand that in current conditions, staying competitive in the world market of mineral fertilizers is possible at the expense of constant reduction in the cost of production. Therefore, some daily actions on the cost reduction are really essential to maintain high financial stability of the enterprise. Besides, unstable market situation forces an enterprise to form several budget options with different scenarios. At the same time, the execution of the adopted version of the budget, in its turn, is always at the forefront of the management team’s mind and is monitored on a monthly basis.

The key areas for cost optimization in 2017 were investments in the main production as part of the equipment modernization program to reduce the gas flow rate factor in the first place, as well as turning to the wholesale market in terms of purchase of electrical power. The implemented changes have already allowed TOAZ to save millions of rubles.

- Did the cost optimization policy have any effect on the TogliattiAzot investment program?

- A lot depends on the market which is, obviously, very unstable. The selling price of ammonia and carbamide is often equal to the net cost. Sure enough, in the given situation, the financial models of many projects do not show the desired economic effect and that very effectiveness which we are trying to achieve.

Based on the results of investment program update, part of the projects was temporarily frozen, but this does not mean that TogliattiAzot renounces their implementation. We will look at the market dynamics. The goal of the whole management team and especially the financial unit is to ensure stability and sustainability of our business.

First of all, we will not invest in non-core and non-production facilities anymore, focusing on strategic projects. We have already spent more than 28 billion rubles on the upgrade and overhaul program, and we do not plan to cancel it: it is a guarantee of stable and safe work, as well as development of the company. One of the main projects for 2018-2020 is the construction of the third carbamide unit. The project will let TogliattiAzot increase the share of ammonia processed into a product with higher added value.

- The company has indeed announced a major contract for the construction of a carbamide unit that you have just mentioned. How is it planned to finance the project?

- We have signed a loan contract with the international syndicate of banks (Commerzbank AG (Zurich, Switzerland) and Landesbank Baden-Wuerttemberg (Stuttgart, Germany)) for 180 million euros for a period of 9 years. Under the terms of the loan contract, the interest of 2% APR is paid upon expiration of a two-year grace period. The Swiss Export Risk Insurance (SERV) shall act as a guarantor. The given funds are intended for financing of the design and supply of construction equipment and building method.

It should be noted that obtaining the given funding was possible only on condition that a thoroughly elaborated project implementation program is available for the unit construction with clear and transparent terms for the selection of loan funds and regular reports to the bank on the use of the given funds.

- What is the amount of debt of TogliattiAzot by the end of 2017? And who are the main creditors of the enterprise?

- The share of borrowed capital as compared to the equity funds is one of the lowest among the competitors in the industry. As of the end of 2017, the given figure amounted to 6% only. As of the end of last year, there were only Russian banks among the creditors of TogliattiAzot: Sberbank, Promsvyazbank and Togliattikhimbank.

- What is the amount of investment planned for 2018?

- The investment program for 2018 amounts to 9.4 bln rubles. 83% of the investment budget will be spent on the implementation of key projects: construction of the third carbamide unit, the revamping of ammonia units and treatment facilities, as well as the railway infrastructure development.

- What is the investment plan for 2019-2021?

- The majority of funds in the given period will be spent on the construction of the third carbamide unit, upgrade of the waste treatment facilities and the chemical water treatment installations. The given projects are a priority for the enterprise and will enable to increase the volume of ammonia derivatives on the one hand, and on the other - to increase the environmental friendliness and safety of production. Given that putting the carbamide unit and the chemical water treatment installation to operation is scheduled for 2020-2021, the largest amount of investments will take place in the given years.

- Does the investment program include any projects aimed at expanding the company’s product line?

- One of the main goals of the strategic upgrade program of TogliattiAzot until 2022 is to increase the stability of operation and efficiency of existing ammonia units by reducing the coefficient of raw material consumption among other things. In fact, what is meant here is that the units should demonstrate stable operation at the designed capacity and consume fewer resources than before. At the same time, the situation in the global liquid ammonia market makes the company increasingly think about optimization of the depth of processing of this product, and as a result, about expanding the product line thanks to ammonia derivatives.

In this sense, we, in TogliattiAzot, do not lag behind and are currently seeking funding for the projects that have been approved by the company and the investment committees. We believe that an increasing number of processing stages will let the company increase its competitive edge and enter the new product markets.

20.01.20212021

30.12.20202020

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