NIS: Company’s Performance in the First Quarter of 2011

Kirill KravchenkoInterview with Kirill Kravchenko, CEO of NIS

May 2011, Blitz newspaper

In May, large companies traditionally sum up the results of their work during the first quarter. We spoke to the CEO of NIS, Kirill Kravchenko, about how the company began 2011.

— What was the company’s performance like in the first quarter of 2011? Did NIS manage to maintain the pace of growth it set last year?

— In general, we are content with the company’s performance in the first quarter. The severe diagnosis of 2009 has been left in the past. Now we are recovering steadily. NIS’ EBITDA for the first quarter of 2011 was 7.8 billion dinars, which is almost 50 percent higher than last year. The main positive factors behind the growth in EBITDA were the increase in oil production, cost cutting and improvements in sales.

In the first quarter of 2011, we not only kept with last year’s pace, but also substantially improved the company’s profitability. NIS’ operating profit was more than 5 billion dinars or, to be more precise, 5.26 billion dinars, which is double the figure for the same period last year.

Similarly, collection of payments from large customers improved as we changed the dynamics of payments for oil deliveries; operational cash flow is 64 percent up on the first quarter of 2010.

— How does the current market situation affect the company’s operations?

— I can say that the market’s macroeconomic factors are having a range of effects. For example, we can certainly feel the positive effects of the domestic currency’s stable exchange rate, but the 19-percent rise in the price of oil and the 7-percent rise in the price of petroleum products since the start of the year are damaging our business.

Because of the fairly stable rate for the dinar, with no significant fluctuations in its value in the first half of 2011 — the dollar fell against the dinar by 7 percent and the euro fell by nearly 2 percent — we felt the effect of positive exchange rate differences. I’d like to remind you that the substantial fall in the dinar against the world’s main currencies (the dollar and the euro) was the major reason for our losses during the first quarter of the previous year — the loss of more than 6 billion dinars from exchange rate differences “gobbled up” the whole of our admittedly small operating profit.

This year, the positive exchange rate differences gave us 4.57 billion dinars in addition to the operating profit. But this is more likely to be a paper profit which could be offset before the year end if the dinar falls. We regard these funds as a kind of “financial cushion”, a reserve in case there are severe fluctuations in the dinar’s exchange rate. Amid the complex financial realities, it is very difficult to predict the situation on the currency markets.

Besides the possible exchange rate fluctuations I have mentioned, the long-term trend towards rising oil prices on the global markets is another disturbing factor. In the first quarter of 2011, the oil price exceeded $100, and the price now is 36 percent higher than it was during the first quarter last year. For us, an oil company which buys pretty large volumes of oil for its own refining capacities, over 50 percent, this fact inevitably has negative consequences. We aim to maintain competitive prices for our products and to ensure that they don’t exceed the average prices in the regional market. The rise in the price of petroleum products is currently somewhat behind the rise in oil prices; hence our margin is falling. Regrettably, the decline in the oil price we have seen in the past few days is more to do with political influence than objective economic factors. We predict that growth will return very soon.

— What were NIS’ main production figures in the first quarter of 2011?

— The volume of oil and gas produced in Serbia totaled 357,900 tons of oil equivalent, which is more than a third up on last year.

Due to scheduled maintenance at our oil refinery in Pancevo in March, we refined 513,000 tons of oil in the first quarter, which is 23 percent lower than last year’s figure. However, the maintenance shutdown of our FCC installation, which is vital for producing euro diesel fuel, didn’t affect fuel supplies to the domestic market. We stocked up on petroleum products at our depots so that our customers would not experience any disruption to supplies, while our second refinery, in Novi Sad, increased its refining by 6 percent after starting to produce raffinates.

Overall, we will undoubtedly meet the targets for oil refining set out in our business plan.

If we take a closer look at the segment of our business that is most subject to negative market influence, namely sales, we have grounds for moderate and very cautious optimism.

We increased retail sales by 8 percent, despite the fact that the total volume of petroleum products sales fell by 7 percent year-on-year. In general, the decline primarily affected the low-margin sales channels, while in high-margin retail, our position became more stable and we are gaining ground.

This is happening in a rather difficult market situation, against the backdrop of the continuing contraction of the Serbian fuel market (of about 3-4 percent) and the rising oil price, which leads to rising prices for petroleum products. The increase in retail sales is the result of efforts that began last year to increase efficiency in this business area. The development of sales is also a focus for 2011; the gas station chain modernization program will result in the construction of 4 new gas stations and the full or partial reconstruction of 44 others. We will continue equipping our chain of stations with devices for fuelling vehicles with liquefied petroleum gas; the plans for 2011 cover 34 facilities.

Generally speaking, I can say that the first results of the company’s operations amid market liberalization show that NIS can be a full-fledged player in a competitive market. We have an integrated approach to sales development — not only are we improving the quality of our gas stations, we are also paying special attention to increasing the transparency and automation of business processes, product quality control and staff training and incentivization.

In general, I believe that market liberalization is a further stimulus for us not only to catch our rivals, which is what we have been doing in recent years, but to pull ahead.

— What is happening to the company’s bank debt?

— We are continuing to work to reduce NIS’ bank debt; the volume of this debt was critical for the company in 2009. Compared to the first quarter of 2010, NIS’ total debt to creditor banks decreased by 30 percent and now stands at 726 million dollars. The debt/EBITDA ratio has improved; it now stands at 2, which is a sign of improvement in the company’s financial health and indicates that NIS can fund investment projects both in Serbia and abroad.

— How much tax did you pay in the first quarter of 2011?

— The amount of tax we paid in the first quarter of 2011 increased in all areas. Profit tax increased by 44 percent compared to the first quarter of last year and totaled 403.5 million dinars. The amount of tax payments for mineral extraction grew by 73 percent year-on-year. We transferred 464 million dinars in mineral extraction tax to the budget for the first three months of 2011.

The amount of excise tax payments also grew by 8 percent and totaled 12.4 billion dinars. Social tax payments are slightly higher than the year before; they rose by 2 percent.

— Earlier, you said that the company’s business plan for 2011 was fully coordinated with NIS’ strategic growth target. How would you assess the performance in the first quarter of 2011 from this point of view?

— We regard 2011 as a year of preparation for a stage of active growth and business expansion. In the past two years we took emergency measures to lead the company out of the crisis, by improving the efficiency of production processes and improving our financial health. Now, we can use that energy to build a stable platform to implement the strategy. However, efficiency growth in all areas will undoubtedly remain our mantra for many years to come.

As you know, our strategy involves substantial growth in our major production and financial indices, as well as the transformation of NIS into an energy company. The volumes of extraction, oil refining and sales should reach 5 million tons in each segment by 2020. We are planning to invest about 1 billion euro by 2013.

But let’s return to the present. All the company’s main operating figures for 2011 were projected with regard to our long-term targets. Besides the increase in production volume, we will this year continue to implement our investment program using funds from our majority shareholder, Gazprom Neft, as well as our own funds. This year, we are going to invest over 17 billion dinars in investment projects, and that doesn’t include the capital investments in the modernization of the Pancevo oil refining complex.

Another important area this year will be the start of intensive regional expansion. Currently, we are searching for and evaluating potentially interesting production and sales assets in regions where NIS has logistical advantages. These are primarily Romania, Bulgaria, Bosnia-Hercegovina and Hungary. The commercial negotiations have made headway and that will soon be visible. At the moment, we are starting to form the teams that will be working on new foreign projects.

— What are the principal criteria you are using to draw up the teams that will work on foreign assets?

— Undoubtedly, the principal criteria are the required professional skills and knowledge of foreign languages.

In general, we began training staff for foreign projects back in 2009. The company is implementing programs to provide staff with advanced training in all areas. Our experts are playing an active part in industry conferences and have the opportunity to acquire advanced experience at first hand by visiting the facilities of large oil companies and taking up internships at Gazprom Neft’s businesses.

Educational language courses are being held at NIS for the third year running. Staff can learn English, Russian and Serbian. Collaboration with Serbian universities is continuing.

So we have everything we need to use internal resources to fill the teams that will be working on foreign assets. If specific professional skills are needed and our company doesn’t have the necessary candidates, we go to the market. Anyway, the basic principle of our personnel policy, and not only in respect of foreign assets, is to recruit the best.