Corum Group CEO Yakov Sidlyarenko: It is not easy to operate in the Russian market, but we do this and have a result
In 2014 Corum Group lost three of six its plants due to military operations in the East of the country. The Company managed to move a part of the employees to Kryvy Rog, Druzhkivka and Kharkiv; and we had to part with others having indemnified the allowance payable on early termination of contracts. Also, because of the military operations, the company has significantly dropped sales in the domestic market. Then in 2014, the company management saw a way out of a difficult situation in increasing exports, thereby offsetting the drop in the domestic sales.
In addition, in 2014 the Company began to create a joint project with the Chinese partners.
2014 was hard for the entire country. And for the enterprises operating in the Donetsk and Luhansk Regions it was much harder. We lost three of six plants. Our non-produced assets were left at these plants. About 3 thousand people were employed over there. We moved a part of them to Kryvy Rog, Druzhkivka and Kharkiv. We parted with those who refused to leave. We acted in a lawful manner, and parted with the workers according to Ukrainian legislation, providing standard benefits payable upon termination of contracts.
Besides plants, we lost part of our Ukrainian customers, since half of the mines are located in the anti-terrorist operation zone. In such circumstances, you can talk only about the loss. 2014 was a very challenging, transformational, it may be said, we were forced to attach the wings to the aircraft in flight. But I believe that we have coped with this task. And if the results of 2014 left much to be desired, then in 2015, 2016, 2017 we expect to improve our performance.
- After the rapid fall of the economy in 2014 and early 2015, now there is a period of some stagnation. This gave us the opportunity to look around, regroup, and work both on our costs and on a slight increase in sales. For example, whereas in 2014 our sales totalled to UAH 1.6 billion, in 2015 we plan to increase this amount above UAH 2 billion. At the same time we are working to increase efficiency. We do the impossible in the working capital management. We are focusing on our current liquidity. Therefore, I think that we will end 2015 with a slight profit. And, according to the current available premises, we will start growing in 2016.
- There are several vectors over here: firstly, we are developing new business lines. One of them is after-sales servicing for open-pit mining. At the turn of 2014-2015, we launched five pilot projects with our key customer - "Metinvest Holding". These projects have shown very good results, we expect significant growth in this area. We also actively promote the "turn-key winning" service. Secondly, we plan to continue developing our sales in the export markets: Kazakhstan, China, Poland, Russia, and Vietnam. In 2014, there was uncertainty for the players in these markets, which could not but affected their attitude to the businesses that operate in Ukraine. Nevertheless, today we have managed to convince our key partners in Corum's reliability as a supplier. In 2015 we have restored our reputation and are increasing our sales: this year our revenues have increased by almost a quarter compared to the previous one. I would like to note separately that we are working on the expenditures as well. We have greatly optimized existing functions and reduced overhead costs. We learn to be more mobile, work more efficiently and quickly.
- Today, we understand that one of the solutions to the existing situation is the development of our export potential. This involves placing repair and maintenance facilities and services in the customer's country or region. Many customers require localization. Chinese market is for us one of the most promising. Here we have entered into a strategic partnership and are working to create a joint venture with a local player. Together we plan to organize an assembly and repair production facility in China. Our partner is interested in the intellectual capital of Corum, while it has good commercial relations, knows the market of components and the buyers' market. I am sure it will be an effective partnership.
- We will organize production where it is economically feasible. If the region is promising, we are trying to organize sales there, then we create a consignment warehouse of spare parts and components and arrange repair service facilities. The final step of this process may be the local content in manufacturing. We take into account the consumer's geographical remoteness from the existing production facilities, logistics and customs barriers. So far, this refers only to China. Now, considering the overall situation, we have to adhere to the strategy of focus. There are not too many of resources, we have to direct them in the most effective lines of development.
- The stage of active growth is over. We now need to take stock of what we have managed to achieve and to focus on those target markets where we are able to make a profit.
Further, based on the available resources, we will focus on those projects that are economically viable for us in the short term.
- The business segment is specific, however our industry is rather conservative and its trends do not change so often - modifications occur every 15-20 years. In principle, all the trends are the same as a few years ago. The first trend is the automation of the process. It started rather long time ago. If our parents and grandparents used hammers in the mines, now mechanisms are operating there. The next step will be to ensure unattended mining, that is, the processes will be automated completely.
In this direction, we actually go. In fact we follow this line: now workers are already not working in the faces, remotely controlling the equipment. The second trend is a logical consequence of the first one: since the machines become more complex, the customers, especially from the developing countries, prefer to receive a "turn-key" service. It is very popular in the markets of India, China and Vietnam - where the staff do not have broad technical expertise, and it is more profitable and simple for the companies to order a ton of extracted mineral, rather than order the equipment, and then fit all the units of equipment together. Also, the customers require the "turn-key" service in terms of maintenance. If previously the maintenance was carried out directly by the mine or outsourcing companies, now the most popular are those suppliers who besides sale of equipment sell also the warranty for its operation. That is, simply said, the customer today is interested not in a piece of equipment as such, but rather in the amount of produced mineral stock or conveyed raw materials, if we are talking about transport.
- We took a fairly unique business segment which is typical for Ukraine and several other countries - it is mining in thin seams. We value our employees and respond to emerging challenges, protect our intellectual property and human resources by means of various incentive programs.
- For example, Vietnam, South-West Russia, China. Such deposits occur there. Moreover, China's government places mining companies legislatively under obligation to develop thin seams. In these countries, our equipment can bring significant benefits to miners.
- In Vietnam, mechanized mining today is underdeveloped. The Chinese companies have technical solutions which allow mining from seams 1.5 meters thick. They may develop thinner seams, but in this case the so-called ash content increases. That is, when mining coal from seam 1 meter thick, miners undercut another 50 cm of rock with coal. And this implies additional costs for cleaning and enrichment of the coal mined. Of course, it will be more profitable for them to buy a shearer, which cuts a seam with thickness of 1-1.2 meters.
- Of course, we have a pretty serious design engineering bureau, which is consolidated in the divisions according to the business areas. For open pit mining at the request of our customers, we have developed heavy PP1-24-180 apron feeder and a new type of single-spiral classifier, mastered the overhaul of the EKG-8US mining shovel crawler, we are developing a range of stackers and reclaimers.
If we talk about the Underground Mining Division, here we have a lot of developments - already implemented and those that are currently undergoing industrial trials. There is KNF roadcutter system, which was designed to replace KN-78 system. Whereas the KN-78 could drive up to 8 meters of tunnelling per day, the more powerful and productive KNF easily drives 10 m of similarly hard rock. We have manufactured and placed this machine at the Yubileinaia mine. We have received very good reports on its operation from the miners and several small notes, to eliminate which we are working currently. The production cost of this equipment should be reduced a bit: the roadcutter system is really very good, but it is not cheap.
- Recently we have presented this shearer loader and placed it at Geroev Kosmosa Mine. It is also operating there now. It is the first in the world vertical drum-type shearer loader with chainless haulage. The customer's reviews are positive. We have already got inquiries to place this system at other mines of PJSC DTEK Pavlogradugol. I believe this shearer like KNF roadcutter system has rather high potential. And not only in Ukraine. We can talk about serious prospects for exports. I think that this machine can be sought-after in the markets of the Customs Union and in Vietnam, too. We are now studying the possibility to supply KBT-200 to Vietnam.
- All Ukrainian companies are facing problems nowadays. Only perhaps the companies that are not tied to any vendors or buyers located in this country may be an exception. DTEK has objective difficulties, but we try to delve into these difficulties and be useful to our customer where we can help.
- I find it hard to say, how it was in 2014, because I was not at the operational level of the Company management, but rather at the strategic one. But my inner feeling is that the business has not yet felt a noticeable improvement in the regulatory environment. I wish that the reform referred, above all, to the creation of conditions for the development and provision of opportunities to work smoothly.
- The State is one of our customers. We try to be as useful as possible for this customer, as well as for the others. And we do what we can: we are manufacturing our products, carrying out maintenance of these products, helping miners to extract minerals, paying taxes and fees to the budgets of all levels in a timely manner and in full, taking part in the development of the state regulation system. Unfortunately, today there is no clear understanding of the strategy and policy for the development of industrial system in general and machine-building in particular. Sufficient measures are not taken to develop the domestic market and promote export activities. In this situation, we seek to cooperate: our experts provide advice to the relevant ministries. For example, we are actively cooperating with the Ministry of Economic Development and Trade, jointly developing policies to create industrial clusters. Their creation will be of great importance for the companies that have moved their production sites from the ATO zone to the territory controlled by Ukraine. When it comes to the regulatory side, we are a transparent public company, so there cannot be any claims to us. For our part, with regard to the current difficult situation,we would like the government to be more flexible. However, I understand the existing problems.
- The support is necessary. Machine-building industry produces expensive, integrated products with a long production schedule, with a large working capital. And, very importantly, it is a product that aggregates the achievements of a dozen related industries: scientists, metallurgists, manufacturers of components. Investments in such highly intellectual industries are vital for long-term development of the state. The cycle of such investment lasts for more than a decade. Many states understanding the importance of machine-building, solve the major problems faced in the sector. Which problems are they? Firstly, it is skilled labour. It is necessary to subsidize those who are trained, and those involved in labour training in order more people received special vocational and higher technical education. Secondly, it is financing of the circulating assets or financing of sales. It's not a secret that the State Agency for support of export sales available at the government is a sign of courtesy. For example, Germany and China grant free loans or loans with minimum interest rate for the machine-builders exporting their products. Popular exporters' supporting tools include also insurance against risks, guarantees of supply and settlement procedures, serious participation of diplomatic missions and chambers of commerce. In Ukraine, where exporters are waiting for special support, we have initiated the establishment of an expert group, and in partnership with other companies and the government are working to create an action plan. Thirdly, it is regulatory policy in the field of taxation. Here it is necessary to take into account the amount of withdrawn working capital, which has to be involved in the production process, and also - to freeze taxes.
- It is one of the major thorny issues for us. There are difficulties here not only with the external markets. The situation is as follows: the domestic banking system is unable to address the issues of business financing, and external creditors are not willing to take the risk of Ukraine for the implementation of foreign trade relations. And this refers not only to the long-term financing of capital construction, the question is even in an elementary trade financing, when it is necessary to set out tender guarantees, to secure our ability to fulfil commitments. A problem of great concern exists here.
- As I have already said, our activity provides an enormous withdrawal of capital. If we participate in a tender for the sale of the shearer loader, which is worth half a million dollars, we need to deposit UAH20 million - for the bank to secure our participation and issue a guarantee. At the same time, our banks have the same problem that we have. They have limited ability to issue such guarantees, as international banks do not accept them. The problem, in fact, is systemic. And I would advise our government to focus on solving the issue of providing liquidity of the monetary system of the country. A number of our contracts were scuttled due to the fact that we had no possibility to do the basic, but so essential business things.
It is not easy to operate in the Russian market, as we have to reconvince the customers on our reliability all over again. We do this and have a result. Whereas in 2014 Corum sales in Russia amounted to about UAH260 million, in 2015 for the period from January to May, we have already reached the figure of more than UAH115 million, and we plan to sell products for more than UAH 520 million over the whole year. Our customers see that we fulfil our obligations and meet us halfway.
- We have had this cooperation and continue working together. In 2014, we delivered a roadheader, now three of our roadheaders have already operated in Poland. We expect that by the end of this year the number of roadheaders operating there will have increased to six. In addition to roadheaders, we will deliver other machinery to Poland. This country is an important target market for the Company where we plan to develop our presence. Of course, there is also its own specifics: Europeans are accustomed to a serious level of service. We prove that we are able to ensure it and that our machinery shows good results where equipment of our competitors cannot work.