Company management speeches

«In major projects we will always try to work with a foreign partner»

PJSC "EMAlliance", the largest Russian manufacturer of boiler equipment for the power generating sector, has adopted a new development strategy till the year of 2012. This happened after the main shareholder of "EMAlliance", Yevgeny Tugolukov, became a member of the State Duma and gave up the office of Company President in favour of the ex-banker Timur Avdeenko. Timur Avdeenko discusses his new position and his ideas for the conversion of "EMAlliance" into a world market player of the power-plant industry with the "KommersantЪ".

- This is your first interview in the capacity of President of "EMAlliance". Tell us why you joined the company.

- The decision to come to the "EMAlliance" was not an easy one.

Previously I worked in the banking business for 15 years, in particular in Alfa-bank and MDM-bank. There I worked mainly with corporate clients and I initiated many new fields. By the middle of the last year I realized that it was time to change my sphere of business and started to look for something new, not only in the finance sector but in industry as well.

"EMAlliance" was and is ranked among the big corporate clients of MDM-bank, that’s why I have known the company for a long time. So it is easy for me to see its potential. Plus I am personally acquainted with the major shareholder of "EMAlliance", Yevgeny Tugolukov, since he worked in the MDM group and our understanding of the goals and opportunities coincides. Finally, a condition of my joining the company was the acquisition of a minority shareholding in "EMAlliance" which gives me new opportunities for self-fulfillment. The amount of my shareholding is confidential.

- Do you, as a banker, have sufficient relevant experience to manage a power-plant engineering company?

- The higher the level of decision-making, the higher is the importance of global vision, understanding the market and the place of the company in it. From this point of view a banker from a major investment bank can be more useful than a manufacturing professional. As for routine matters, there is a team of professionals in "EMAlliance" which can be relied on.

Is there an overlap of responsibilities with the "EMAlliance" General Director Oleg Golikov?

- No. The president’s position existed in the company before I arrived. There is a strict segregation of duties. I am responsible for the strategy and relationship between major Divisions. Additionally, the selection of methods of business optimization (disposal of non-core assets, efficiency of staffing) and “EMAlliance” corporate culture development are under my supervision, whereas Oleg is in charge of day to day management the company, including sales.

- What is your new strategy and what period does it cover?

- The strategy is to cover the period until 2012. Our intent is to convert “EMAlliance” from the national leader in power-plant engineering into a global player, with a view to entering the markets of Europe, South-East Asia, Kazakhstan, Byelorussia and Ukraine, which are new for us. Our goal by 2012 is to have from 10 to 70% of various segments of the Russian and CIS markets and up to 7% of the European market in general. We will diversify business by separating engineering - its share in the "EMAlliance" income structure will be increased to 60%, whereas it is currently 25%. We will actively develop the field of EPC contracts (“turn-key” construction of power projects - "KommersantЪ"). Income from this field will be increased to 10% of the overall.

As a result, we forecast that the capitalization of "EMAlliance" will be increased to $2.5-3 billion. Currently, we estimate our value at bln. These are the broad outlines of the strategy and they will be adjusted as business develops.

- What are the details of different areas. What is of interest for you as far as new markets are concerned?

- The Russian market remains the priority for us: its demand for boiler equipment up to 2020 according to our estimates will amount to $40-70 bln. At the same time now is the best opportunity to enter the European market. The share of boiler equipment in the European investment program up to 2020 will amount to about $90 bln, with the general market capacity of $320 bln.

Even now in Europe, a deficit of power-plant engineering capacity can be seen, as in Russia. The demand peak in Europe hits the year 2012, a deficit will be observed both in manufacturing and in engineering. That’s why we will consolidate our position in manufacturing and create partnerships with European engineering companies.

As far as the CIS markets are concerned, we see several potential projects, the cumulative cost of which is estimated in several hundred million dollars.

- Why do you put accent on engineering in particular?

- Engineering creates the basic cost of equipment. Also, the engineering market as compared to equipment manufacturing is less cyclic. Within the period of the next 15 to 20 years, a high demand for the power equipment will be followed by a rather serious long-term decline. There is a permanent demand for engineering, i.e. for new design development and upgrading of existing equipment. For us it means the business diversification in the long term.

Not only will we be acquiring the licenses for new technologies, but will purchase European engineering companies as well. Currently we have four or five prospects for acquisition. Contracts will be signed within the next eighteen months to two years. I also do not preclude the fact that certain assets could be purchased in partnership with western companies. It is paramount for us to get the access to the newest design developments and to enter the European market expeditiously.

- Is engineering more interesting than production of ready-made equipment from the cost efficiency point of view?

- Three years ago the target for profitability of major western companies was 8-10%, now it has already reached 10-15%. This augurs well for 2012, when the market hits the peak and engineering profitability could reach 30-40%. For comparison: the profitability of the entire "EMAlliance" Group in 2007, according to EBITDA, was 14.5%.

- What is the estimated amount to be spent on the strategy realization and what will be the money spent for?

- We have planned to spend 3 bln roubles (20mln) by 2012 for the development of existing production. This amount is not astronomic. On the other hand, last year we invested 200 mln roubles and that was sufficient for the creation of an engineering centers network in Russia (in Taganrog, Podolsk, Ivanovo and Barnaul). The costs included rental of premises, purchase of PCs and software and training of personnel. We have also purchased a steam-and-gas combined cycle equipment manufacturing line, this being entirely new trend for us. Also we have commenced the renewal and increase in capacity of the "Krasniy kotelschik" Plant. The funds which will be invested by us up to 2012 will be used mainly for further increase in capacity of the manufacturing plant.

The demand of the Russian market for power equipment is forecast to be 14 GW per year and we will increase equipment manufacturing at "Krasniy kotelschik" to 8 GW per year (output plan for 2008 – 1.3 GW). This is the design capacity of the plant since Soviet times when it was the biggest boiler manufacturer in Europe. We will fully load "Krasniy kotelschik", and also order equipment from the western subcontractors.

- What about purchasing engineering companies in Europe?

- I think that the new acquisitions would require additional $300-350 mln. This would be the total of funds from the shareholders plus borrowed funds.

- From what sources will purchases be financed?

- As you know, the shareholder of "EMAlliance" indirectly owns 25% of shares of PJSC REMCO (former PJSC "EMAlliance-atom"), which controls the manufacturing plant "ZiO-Podolsk" (manufacturer of boiler equipment for the atomic sector). Currently the negotiations are being held as regards the sale of the share in REMCO (potential buyer – “Renova” group of companies.- "KommersantЪ"). The funds derived from this sale will be earmarked for the purchasing of engineering companies.

- What is your estimate of the value of the share in REMCO?

- It is very difficult to give estimates of non-marketable assets ("ZiO-Podolsk" shares are not traded on exchanges.- "KommersantЪ"). Power-plant engineering has been developed poorly for the last 15 years and we are trying to form an adequate estimate of its value. I would say this: it would be perfect if we sold this asset for 00 mln. But only a strategist could give a fair estimate of the asset now.

- Even if you sell the share in REMCO for 00 mln, you will have to borrow major funds for purchases in Europe.

- Yes, but I see no problem in it. We are currently closely cooperating with a number of banks, jointly working out approaches to the risk assessment, which I have already mentioned before. Apart from MDM-bank, these include Sberbank and UniCredit bank and Sobinbank and of course VTB and VEB.

- Are you the author of the "EMAlliance" new strategy?

- The development of the strategy was started before my arrival. The things which have been done recently have been done with my participation, for instance, the identification of new markets where "EMAlliance", specifying new types of business and new skills which will be developed by us.

- Why do you leave nuclear manufacturing engineering when ROSATOM intends to spend up to $50 bln for new equipment by 2012.

- As we have already said the market for us, both in Russia and in Europe, is intrinsically boundless. In due course the coming of “EMAlliance" to "ZiO-Podolsk" has enabled the enterprise to preserve and develop its potential. Now the strategic investor has come (REMCO is under control of the state-owned PJSC "Atomenergomash".- "KommersantЪ") which sees in a better way this segment of the branch, the perspectives of the enterprise development. Today the ownership of REMCO shares means the financial investment for us. It is more expedient for us to depart from the capital of REMCO and to invest into own projects.

- Is it confusing for you that after the sale of the share in REMCO you will be left with only one manufacturing asset?

- Not at all. "Krasniy kotelschik" possesses substantial potential for increase in production volumes and development of new trends. Besides, as I have already mentioned, in prospect manufacturing will bring not more than 30% of income whereas engineering will be the major part.

- Does this mean you will not buy additional industrial capacities?

- Not for the time being. It is more important for us to invest into the development of the existing enterprises.

- How do you intend to develop the EPC contracts trend?

- In future we intend to run up to three ЕPС contracts simultaneously. Currently, we have one such project – turn-key construction of a new power generating unit for TPP-26 of PJSC "Mosenergo", where the French company Alstom is our partner (the contract value is 300 mln EURO). We will also take part in a Tender for the turn-key construction of a new power generating unit for Novocherkasskaya GRES.

- Is it profitable for “EMAlliance” to deal with EPC contracts in principle, the latter being a risky type of business?

- The risks and responsibility in EPC contracts are really high, especially in Russia. The EPC executor as the general contractor is responsible for the construction of the entire power generating unit. The major risk is the failure to meet the power unit construction deadline. If any subcontractor fails to meet the schedule this could lead to delay of all the works under the project. Nevertheless it’s a strategic objective for us. It is of importance for us from the point of view of introducing our technologies and product into the market.

Nowadays, not all power producers are ready to purchase only the boiler island of the plant or all the more so, a separate boiler. They need a total solution for the power generating unit.

"EMAlliance" is not intending to participate in all bids and has defined priority regions where we have competence in the contract execution.

The priority regions for us are the central, north-west and south of Russia. We will certainly find the assemblers, supervising engineers, project managers because we know the local market very well.

In major projects we will try to work with a foreign partner. EPC contract means the managing of heavy workloads which has specifics and technologies of its own and only few have such experience. From our part we will offer knowledge of the local market, the suppliers and Russian standards.

- Will Alstom be your partner in future EPC contracts?

- We believe that there should not be any exclusivity in relationships with western partners. We work with Alstom, Foster Wheeler, Siemens, AE&E, carry on negotiations with a number of others companies.

- They say in "Mosenergo" that you had schedule problems with Alstom on the TPP-26 project. What is it all about?

- The difficulties there arose in the area of correlation of the western with the Russian technical standards: reading of drawings, conversion of indices, adapting of design documentation, etc. One of our sub-contractors is responsible for this work - institute "Mosenergoproyect" (a subsidiary of PJSC "Mosenergo") which unfortunately led to delays. The final check of documentation will take place some time in June-August.

For such a large-scale project, several months shift of a separate stage is permissible. It could be compensated for by speeding up either design development or equipment manufacturing. All the more so the project we are talking about is to some extent a trial one, that’s why such difficulties are explainable. But we and Alstom are confident that the contract will be completed in due time.

- They say in "Mosenergo" that there was a wish to introduce into the project a certain “proprietary organization” for rendering “assistance” to you. Does that mean that you could lose the status of the general contractor of TPP-26?

- No it doesn’t. There was no discussion about the introduction of an external general subcontracting organization. We will settle all issues with "Моsenergo" within the framework of meetings at the working level, as is normal.

- Will this situation influence the project cost?

- No. It won’t specifically influence the cost: we will not diverge from the contract. There are global influences, for example the metal price increase. It is normal worldwide to hedge price risks and the formula of the general contract cost increase is established based on raw materials cost increase.

- The issue of strategic partnerships is currently popular in Russian manufacturing engineering. Does “EMAlliance" need a strategic investor to share its capital?

- The sale of a share of the company to an investor is not an end in itself. Interesting partnership could be related to new ventures.

Currently, we consider several such fields, for instance fuel gas purification. I am sure that environment protection standards will be introduced in Russia, the requirements for emissions will get more rigorous, that’s why it is necessary to deal with gas purification now. Also of interest to us is the recycling of waste and manufacturing of boilers operating on bio-fuel, especially as we have the basis for production of such units. We also consider the solar energy usage. Germany is not that sunny country, but there, the amount of solar energy usage increases annually by 25-35%.

Such projects require partnership and we are ready to act not only as the equipment manufacturer but also as a co-investor.

- What do you think about creation in Russia of an integrated power-plant engineering corporation?

- Nobody has discussed this issue with us. Speaking in general about the creation of such an integrated company, the main issue is what product it will offer. The product line will not get renewed by a simple merger of the market participants. Currently the power equipment market is increasing. That’s why we have an opportune moment for the renewal of capacities and product line and the creation of modern production.

Later, when this process is over it will be possible to think about some integrated national player.

To our mind, currently co-operation between production branch participants will be most effective. An example of such cooperation may be the package agreement of "EMAlliance" with "Technopromexport" or "Inter RAO UES" in accordance with which we will be acting as the guaranteed supplier of the boiler island for construction of various power generating units. We are now preparing a number of agreements with other market participants.

We could also offer certain solutions for power plants in consortium with the other manufacturers.

For instance, we could possibly manufacture a typical boiler and "Power machines" including the turbine. After first trying this out in Russia, we could then go on to market it worldwide.

How could Russia catch up with western companies - with reference to new technologies?

- Improvement in Russian manufacturing could be achieved by acquisition of know-how from world leaders by creation of Joint Ventures with Russian manufacturers. Precisely in this manner the foreign companies should enter our market. Until now there is no unified branch policy in power-plant engineering products. One customer buys Italian power equipment, another one – Korean, the third one – Chinese. It is not clear who will perform the maintenance in 20 years. The situation with Chinese manufacturers is also not clear. Chinese parts and components are not certified in Russia due to their low quality, that’s why we could not use them for assembly of Russian equipment although it may mean significant decrease in prime cost. At the same time their products manufactured in compliance with old European licenses using the same components are imported and certified in Russia without any problem. The government as it seems to us should fight for the Russian market of power-plant engineering. After all, it’s a matter of national power security.

- Supposedly, would you like to get guaranteed orders for equipment?

- I am talking about a sane policy in general, a balanced strategy for division development, market protection, custom duties for equipment which has equivalent types in the RF, approaches to localization of the equipment used. Here we are ready to actively cooperate with the government.

We have an approximate understanding of market supply and demand structure on our own. The investment program for power capacities renewal which has been compiled by RAO UES is changing with the arrival of private investors in Territorial Generating Companies (TGC) and Wholesale Generating Companies (WGC). They have their own vision of the renewal plans but it’s not difficult to foresee their logic. The other thing is that the new owners of the TGC and WGC will have to take time to revise the RAO UES program and to adopt plans of their own.

It means for us that the design development and construction of the new power generating units will be executed in accordance with tighter schedules.

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