OREANDA-NEWS. March 25, 2009. Director General of Titanium Corporation VSMPO-AVISMA, Mr. Yevgeny Romanov, took up his post in September of the previous year, going into the company from “Nornickel”, reported the press-centre of VSMPO-AVISMA.

In his interview the Head of the Company told with what difficulties the Company had to face in the period of the world crisis, to what extent the company was ready to them and also explained how the Company Policy was drawn up in general.

- How do you feel in capacity of Director General of Titanium Corporation? Were you ready to the crisis occurred and was the company ready to such event when you entered it?

- The fact that systemic crisis had occurred was not a thunder-clap for most people related to the real sector of economy. A year ago it was clear that there were objective factors for its evolvement. It was true that then nobody believed that the crisis had turned out so deep but the expectation was in evidence.

In this respect I disposed myself to the thing that the problems would appear. Was the company ready? To such extent of the crisis, probably, no. But it is normal, that’s the crisis. The Corporation was not “confined” for work in unstable and constantly slowing down world economy.

- What measures does VSMPO-AVISMA take in order to get out of this crisis with minimal losses?

- The Corporation is geared, first of all, to deliveries for aircraft manufacturers, for enterprises that are working for aviation, space, traditional sectors of world economy. The crisis affected these sectors not so rapidly, they’ll become increasingly aware of it later. And the companies whose activity is associated with these sectors get over a crisis later than all others.
Respectively, we evaluate the situation as dynamic therefore we are doing everything in our power in order to be ready also for the worst sequence of events.

- How it will affect the production volumes of the company?

- I don’t think that the situation will approach to become very critical – it will be difficult: some changes in the volumes will definitely occur. But I think that these changes will be measured not by times but only by tens of percents.

- Currently, is everything proceeding according to the company plans or do you need to review the plans?

- To build an aircraft is not a rapid operation. Aircraft manufacturers are working now per the orders signed up since before the crisis.

The first who respond to the crisis are air carriers: they have dropping of traffic volumes and passenger traffic flows. After that they start to withdraw the orders which they are able to withdraw.

When exactly this will operate, to what extent the orders will be withdrawn, we’ll see in the years coming. But even if the situation is stabilized and certain economic growth starts, air carriers will be in any case very accurate as concerns the matter of market development.

- If I am not mistaken, at the end of the previous year VSMPO-AVISMA planned to overview the agreements with air group companies...

- At the end of the previous year we agreed the contract with Airbus per most contract items, practically by 100 %, the contract concerns continuation of the existing agreement from 2012 till 2020. Initially we intended to sign it at the end of the last year.

- Why was the signing of the contract postponed?

- There is a certain technical interruption. This contract in the present situation has very important interstate significance (between Russia and EU). Its signing shall be accompanied with the definite procedure requiring attendance of persons of high standing represented both parties.
In this connection it is necessary to agree carefully the working schedules of all the participants of the contractual process. As soon as the schedules are “mated” the signing shall take place.

- What are the terms and conditions of the contract?

- The volumes, prices, their changes depending upon the economic situation, the rights and obligations of the parties are included in it.

I have already noted that the contract that is in effect till 31st of December, 2011, joins us together with Airbus. When the agreement about interrelations till 2020 is signed we’ll say that from January, 1, 2012 we begin to live within certain rules. That does not mean signing of a new contract but prolongation of the current one with consideration for the new terms.

- In what way are the relations with Boeing built?

- As for Boeing, the contract with them is in force for a longer time than with Airbus. That is why we have much more time to prepare prolongation of this contract and establish economic magnitudes, and foremost – the volume and price policy.

- Does the Corporation still supply to air group companies minimal product volumes stipulated in the contracts at the present time?

- Traditionally, each year starts from the thing that minimal volumes are confirmed. During a year these volumes may be increased. Besides, it is not the fact that PO quantity couldn’t be increased on the part of aviation manufacturers.

The year always starts from the minimal delivery quantity. This year doesn’t differ in anything from the previous years and won’t differ in anything from the next year. As we go forward during this year we shall resolve arisen issues and observe to whom, how many and what products to be needed.

- That is to say you are on the minimum now?

- I can’t say so. Now we are above the minimum. And to what extent we’ll go up it remains to be seen. It cannot be below the minimum. At the moment we observe what orders are appeared, how they are realized.

- Do you have any new orders for your products?

- We have absolutely new project with the Institute named after Burdenko. Notwithstanding the fact that titanium quantity proposed by this project is imperceivable and the process is on the stage of memorandum of understanding, the intentions are of great interest.

The implication lies in the manufacturing of titanium implants for brainpans. These implants have been made earlier and also now but their fabrication takes plenty of time. And the technologies existing at our enterprise allow fabricating of an implant in factory conditions upon availability of a digital model for an individual person waiting for elective surgery. If we really begin to do this it will be very beautiful and as for the main thing – very useful. There we’ll have no large volume of sales and big financial gain but in terms of social significance and progressive movement I think it is a very important project.

- Does VSMPO-AVISMA suffer from underloading of production capacities at the present?

- None of the enterprises ever works on full production capacity. Each type of equipment has performance coefficient: normative, above norm, there is also coefficient less useable in general. We use normative coefficient for all equipment utilized but it depends on different conversions.
I can’t tell you that our technological conversions are fully balanced.

At the present day part of them is working with a definite underloading as compared with the previous year. Let’s assume that in 2008 part of our conversions worked so that we indeed had no enough time to repair the equipment i.e. we didn’t stop the production process in order to perform scheduled ordinary maintenance. Equipment was working for wearing as a matter of fact. Now these conversions are working in quieter mode.

- What product volume does the Company produce at the moment?

- In terms of production of titanium as a material, we have possibility to produce more. And let us say that we can’t produce titanium in the form of mill products in the volume larger than we have per the orders up to date. That is why as for particular types of products I would like that the orders will be received and as for the other types of products I would not like.

- Do you ship all finished products to your suppliers?

- Yes, we do.

- Do you release nothing to warehouse?

- On the contrary, we took the instructions for stock reduction.

- Are many products accumulated in stock?

- Yes, but there is an objective reason of accumulation in stock as the range of our manufacture is rather wide. Frequently aircraft manufacturers can’t identify beforehand what particular range of items they will need here and now.

For example, Boeing is located in the USA that is we shall create certain warehouses in this country which allow us to resolve logistics issues in an expeditious manner. If Boeing needs something just today – they will place an order: who is able to deliver? We say that we have these products in the warehouse in America – and you can take them right now. Therefore, warehouses perform a definite mission of delivery acceleration according to the need of manufacturers.

- Start-up of Joint Venture with Boeing is postponed for one quarter. Will it be after all carried into effect this quarter?

Yes, it will. We needed to resolve some technical points – we did not force events, we were waiting when the new President of the USA would be inaugurated and new administration would take their seats. We started to negotiate the remaining issues with the new administration. Now we expect the supply of remained equipment required for machines from the USA after that we plan to start commissioning work.

On the part of Russia, the situation is that an amendment was incorporated in the Customs Code. So, minor “judicial vacuum” with regards to delivery of our second machine that is in the Baltic States now appeared. If earlier it was said that the equipment not included in the Charter Capital and not produced on the territory of the Russian Federation is not liable for VAT, beginning from the new year the following phrase comma separated was included: in accordance with the List approved by the Russian Federation government. At the moment this List is being agreed. Prior to its publication the rate shall not be in effect.

That is the reason of this project delay for a quarter.

- Do the plans for output to designed capacity remain in force?

- Well, as for design capacity – it is not a quick process because only the second machine will be supplied and in total five machines are planned to install. The production is launched by turns: i.e. we launch one machine than one more machine and increase and increase the capacity step by step.

- Do you have the orders for Joint venture products by now?

- The orders for these products will come into being. While it is not expected that there will be very many of them for one simple reason: the main goal of the Joint Venture is the output of products for a new Boeing aircraft named Dreamliner. For the reason that there were certain technical problems, strikes at Boeing, they had to change run schedule for new Dreamliner.
For the time being Boeing states that the first Dreamliner will get off the ground this year. After that Boeing will be able to issue the final technical documentation and begin to order parts for their airplane production. The main mission and primary purpose of our Joint Venture consists in production of parts for this airplane.

- Last year the prices for non-ferrous metals slumped very much and this year the prices continue to drop down. Did this drop in prices touch the titanium manufacturers?

- Titanium as compared with metals you mean is not bargained on the exchange market. It is sold per the long-term contracts with the fixed prices. That is why the fact that prices for metals began to fluctuate is indifferent for us in terms of sales.

Everything that concerns whatsoever the prices influence on metals you need to understand that we supply not pure titanium but titanium alloys for aircraft manufacturers. These alloys contain aluminum and vanadium and molybdenum. Therefore, the prices for these metals by all means have an effect on our manufacturing costs. In this respect global tendency of price reduction for non-ferrous metal turned up rather favorable for us as aluminum and molybdenum also went down in value.

- With what financial and performance indicators did the company finish last year?

- We closed a year in the black. When the official report appears and be approved at stockholders’ meeting then it will go public.

Naturally, volume of profit was reduced somewhat as compared with the previous year but is within the limits of those figures that were planned by budget approved by the Board of Directors.

I can add also that last year we borrowed less quantity of loans than it was supposed initially. This year we intend additionally to decrease amount of credits.

- Has the company managed after all to take out a syndicated loan in the amount of US160 mln?

- Syndicated loan is not signed yet as a document, but studied: credit memorandum exists. We are ready to sign it when we obtain the final answer “Yes” from that party.

- Who organizes the loan?

- The loan is syndicated by Barclays. Truly, I don’t know finally if we use it or no.

- But do the Corporation need additional funds?
- We need the credit for VSMPO-AVISMA indeed. In principle, Vnesheconombank (VEB) is ready to grant us an investment loan which terms and conditions were discussed last year.
Besides, we had negotiations with Sberbank management concerning an investment credit on terms that now seem to me more attractive than VEB proposed.

We reached an agreement with the Ural management of Sberbank that the period of February-March will be spent on development of revolving credit line with maximal usage of US150 mln. It is referred to 7-year credit that will contain of three different currencies (roubles, dollars and euro), i.e. if we purchase the equipment sold in euro in European area, the equivalent is given in euro; if we purchase the equipment in Russia or in ruble area we pay in roubles, purchase in dollars – borrowing deal is realized in dollars.

At the moment we are conducting all necessary negotiations in order to understand in what bank gaining credit will be more attractive to us. The point at issue is discussed along all three lines to the amount of US 150 mln.

- Except for purchase of equipment, for what other purposes will funds attracted be spent?

- Any investment process consists of four main elements: the first one – designing, the second one – purchasing of equipment and materials, the third one – services of builders and installers and the last one – start-up and commissioning. So the credits will be used on these four directions. Construction and installation work and designing are performed in the ruble area, as for start-up and commissioning, three currencies may be used because as a rule commissioning is carried out by equipment manufacturers.

- At the beginning of this year the Corporation should develop the new strategy till 2020 with the perspective till the year 2030…

- Initially, the corporate development strategy till 2012 was accepted. I think that it is too short interval of time and we shall overview the strategy thinking it out till the year 2020. Considering the fact that in the strategy we made provision for a number of raw materials projects that have long implementation period and periods of repayment it is necessary to review the strategy together with the perspective till 2030. This year we shall develop it, issue and approve at the meeting of the Board of Directors.


- It means that the investments stated in accordance with the strategy of VSMPO-AVISMA till 2012 in the amount of US 1 milliard and production of 44 thousand tons are not relevant now, are they?

- First of all, rather big amount, about US 600 mln, from this stated sum is already used.

At that nobody revoked the objective to produce 44 tons of titanium. Simply, if earlier it was said that these 44 thousand tons will be necessary for 2012, now we understand that to 2012 we’ll not need them. And when they are required it depends upon how fast the economic crisis ends up.

The fact that the shift will take place minimum for 2-3 years, it is already an accomplished fact. And we say finally that we need to be invested not to 2012 but to 2015. On this basis we, of course, review our investment plans.

- What is the planned amount of investments for this year?

- Not less than US 100 mln., and not more. As a matter of fact if we speak impartially, the projects that may be invested amount to US 100 mln. These are our future development prospects – areas where we are engaged in designing and calculate economic indicators. In the investment plan we have expenses for design and estimate documentation for the time being, these expenses are not significant, the projects themselves shall be realized later, most probably, next year.

- Will it be borrowed funds or own funds?
- Our money is not enough for all, even for credit repayments but the point is that it’s very correct when credits are attracted for investments. Why I ask the banks for the investment loan- because they give the long-term percentage, they are laid on cost of projects, i.e. are paid for. That is why we are very interested that the investments go in the line of investment loan – we want to divide: the investment budget is the investment budget, ongoing operation activities are as ongoing operation activities.

The task that I set before the financial divisions and further before those who will implement it consists in decreasing of the total credit value in absolute measure by US 150 mln.

- Will the Corporation pay dividends for the last year?
- While the financial statements are not approved as concerned the previous year, the issue about dividends payment is not raised. The decision about payment-passing of dividends is accepted at the stockholders’ meeting – considering what financial reporting and what parameters for budget shall we have. This process always takes place somewhere in summer. Of course, I’ll bring up my proposal to the Board of Directors but what kind of proposal I’ll have to define. The company has the profit and as for the possibility of dividend payment it’s the next question because proceedings are expended on social programs, investments and so on.