Director of Novorossiysk Grain Plant: Russian grain is the brand alike "Kalashnikov" or ballet

Novorossiysk Grain Company, which owns one of the largest Russian grain transshipment terminal, officially announced an initial public offering in November. In the current economic environment IPO is a rare phenomenon for Russian companies, especially for those of the agricultural sector. The CEO of the Company - Alexey Chemerichko – has been interviewed by Anton Mescheryakov, the Russian state news agency RIA Novosti, about the reasons why NGP may be attractive for investors, about the Company’s plans for the next year and whether there is enough flour in Russia.

—  Alexey Vladimirovich, what are the difficulties in doing business in the grain market? Is there a necessity in state aid and in legal developments?

— As they say, the main thing is noninterference. All unforeseen moments and difficulties that arose recently have been associated with restrictions introduced in the market by the Russian Government, although the reasons for these decisions were clear to us. This year, due to a sharp rise in the dollar one tried to minimize the loss of domestic consumers with a protective export duty. As consumers, we understand it, but in business terms, of course, for us it was a limitation, the consequences of which we had to neutralize.

—  How do you assess the situation in Russia with flour? Is there enough quantity of it in the country? isn’t there a supply shortage?

— I think we have enough flour in Russia. Except perhaps the capacities are not distributed evenly enough. As far as I know there is the oversupply of it in Altai, and in our Krasnodar region there is also a very strong competition among processing companies. This was the reason why we started looking for an export access: having the most expensive grain in Novorossiysk – being a terminal point – the competition with our processing colleagues in the region is not very successful. They have lesser grain production cost, but we have the possibility of flour export.

—  The NGP shareholder plans IPO on Moscow Exchange, offering at least 10% of the shares. Why is the share offering planned right now? In your opinion, is it a good time for the IPO?

— The decision of the IPO was made by the shareholder. The task of the Management is to ensure a maximum effectiveness of the Company's business, to prepare it for offering in order to make it attractive to investors. I think that for our Company the situation is now more than suitable for the activity in capital markets, including the IPO.

Over the years, the Company shows positive financial results and increase in figures. Thus, if the IAS-based earnings of the NGP in the first half of 2014 amounted to 983 million rubles, then this indicator increased to 1,942 billion rubles for six months in 2015.

At the end of nine months of 2015 the RAS-based earnings amounted to 7,396 billion rubles. The volume of transshipment in January-September amounted to 2.31 million tons. The NGP has no debt burden, at least 70% of net profit of the NGP is spent on the dividends.

Furthermore, the market of grain handling is quite attractive. Currently there are five deep-sea operating terminals in the Azov and Black Sea basin, including ours. We do not plan the construction of new ones in the nearest future. The entry price is too high. It includes the construction of marine infrastructure, road and rail access, which, by all means, involves key investment. Therefore, in our opinion, there are sufficient conditions to ensure that the profit from continued growth in exports of grain was distributed between the existing terminals.

—  In which way did the export duty on wheat affect the business of the NGP in transshipment?

— The duty had a negative impact on the market of grain transshipment in general, reaching the objective for which it was introduced, in other words to reduce the volume of wheat export. Now, after the formula of the duty has been changed, the export began to gather pace again.

Several solutions were implemented in order to minimize the losses incurred by the NGP. Firstly, we have shifted the focus to transshipment of other crops, mainly barley and maize, for which the duty was not introduced. Secondly, we actively conducted trading operations, which, although are low-margin ones, but they allow exporting companies to ensure full shipload by the time of berthing, which stimulates the development of core business of the NGP, i.e. the transshipment of grain for export.

We bought a small amount of grain in the market and offer it to our trading customers, when they do not have the appropriate amount to form the shipload, so that they do not miss the shipping dates. As a result, our market share in deepwater transshipment of grain for export increased by almost 30%.

—  What countries is the main volume of Russian grain exported to?

— Africa, Turkey, Saudi Arabia, Middle East and Africa are the main buyers of Russian grain today. The volume of grain export from Russia increased by almost 20 times since 2000. And in some regions of the world Russian grain is nearly the brand alike, figuratively speaking, the Kalashnikov gun or ballet.

—  What is the situation with mill business of the NGP?

— The maximum capacity amounts to 45 thousand tons of flour per year, while today the capacities are occupied up to 90%. But we have changed the sales pattern of flour. Now shipping for export comprises almost 36% of sales, whereas previously the percentage was less than 15%, and the rest were supplied to the nearest bread factories. But this market in the Krasnodar region is saturated enough; it is difficult for us, being the terminal at the port, to compete on price with other millers.

So we began to consider the flour export and achieved good results. Our main buyer today is South Korea. A small share of the supply is shipped to Armenia, we have single shipments to Asia, but compared with shipments to Korea, they are not too big. We aim to increase the share of exports to 50% of our flour production.

—  In other words, you negotiate for the expansion of the supply of flour for export?

— Yes, at the moment we are negotiating with a company from South Korea. We have already performed two contracts concluded with them, and for the moment we are switching to the long-term relations. Besides, the negotiations on the supply of flour to China are in progress, they are at an earlier stage.

—  Do you plan to expand the mill business?

— For the time being we are studying the possibilities at the Company's management. Now we are regarding the cost proposals for additional equipment. We possess premises that we can use to expand the production and increase our capacities twice without significant capital expenditures. But everything will depend on the signing of new contracts.

If the sales market is clearly understood, and long-term relations are built with customers, it will be already possible to expand production according to them. Moreover, one has to understand clearly the scope of investment, of course, and its payback periods. If we find the optimal variant of the project for the expansion of our milling business, I think we can try to bring this matter for the consideration of the shareholders. But for now we have a rather conservative budget, which includes the above amounts of flour.

—  And what is the plan of the Company concerning capital expenditures for the next year?

— For the year 2016 our capital expenditures will comprise about 2.7 billion rubles, excluding VAT.

—  Do you plant to reduce it in connection with the general economic situation?

— No, we see a great need for new facilities for the transshipment of grain, which we plan to construct.

—  Is it the investment in the framework of the reconstruction program, which NGP is now implementing?

— Yes. The implementation of this program is long overdue, based on it we will be able to operate simultaneously with several crops. We separate wheat for four or six different types, depending on purchasing country and quality specifications.

In peak season, we are having difficulty in shipment of wheat in order to accept orders for transshipment of other crops. With additional capacities we will be able to work more actively with corn and barley, regardless of the season. Summarizing the results of the program implementation, the amount of the transshipment at the terminal will increase from the current 3.5 million tons to 6.1 million tons per year by 2018.

It is very important that the program includes modernization of railway approaches: rail transport with grain will be able to enter the terminal without sorting at the station of the Novorossiysk port, which will increase the speed of shipments.

—  What are the Company plans particularly for 2016 in the framework of this program?

— We expect to increase the volume of transshipment at the terminal to 4.5 million tons in 2016. In particular, next year we have to finish the first phase of the reconstruction of existing facilities. All the equipment is fully available; we still have to assemble it.

Moreover, in October 2015, we held a tender for suppliers of equipment for the construction of a new grain elevator, in November we plan to hold a tender for construction and installation works and in December-January - to begin the construction of new facilities. The project is divided into two stages; the first stage is a capacity increase for 50 thousand tons of single storage. Next year, we plan to launch the first stage, bringing therewith our capacities of single storage of up to 200 thousand tons.