Sergey Stepanov told RBC how a key titanium producer in the world survives a catastrophic drop in the number of orders from aircraft manufacturers, whether VSMPO-AVISMA helps the state and when the situation can be expected to normalize
- In the United States, Joe Biden wins the presidential election. Will the arrival of a Democrat in the White house lead to a tightening of relations with Russia and, as a result, a reduction or termination of cooperation between VSMPO-AVISMA and the largest customer — the American Corporation Boeing?
— Our relationship with Boeing is about 25 years old. When there was a hepatitis epidemic in Verkhnyaya Salda in 2003, Boeing purchased a vaccine from the United States with its own money and delivered it to Salda to help fight the epidemic. And there were several such episodes in the history of our cooperation. We have worked with the company under various administrations in the White house, and our work has always been exclusively within the framework of business — so that people can fly all over the world. We hope to continue delivering parts to our key customer.
- In an interview with RBC TV, the President of Boeing in Russia, Sergey Kravchenko, said that in the next few years the Corporation will produce twice as many aircraft as it planned a year ago, due to the crisis caused by the pandemic. How will this affect VSMPO-AVISMA?
- Boeing supplies account for 20% of the company's revenue (about $250 million). Aviation has fallen by half this year [in terms of passenger numbers], but the major aircraft manufacturers, Boeing and Airbus, have developed a delivery plan for their 20 largest suppliers, including VSMPO-AVISMA, for the next three difficult years. It is slightly better than the overall order numbers of these manufacturers. Boeing's share [among VSMPO-AVISMA customers»] will decline in the coming years, but it will remain our key partner.
Kravchenko in the same interview noted that now there is an increase in freight traffic. Plus, in the US, everyone is waiting for the Boeing 737 Max (its deliveries were postponed in 2019 due to two accidents. — RBC) will receive permission to fly either at the end of November or in December 2020. This will be positive news. In addition, the stock market, as we have seen, reacted very well to the news about the effectiveness of the Pfizer vaccine. After that, the shares of one of our clients, Rolls Royce, which makes aircraft engines, rose by almost 50%. This suggests that there are expectations that with the release of the vaccine in mid-2021, international traffic will resume.
In addition, in China, domestic transport has now recovered to pre-crisis levels-this is an example of a country that has already coped with the pandemic. If the vaccine can repeat this success in nine months in other regions, then this is a fairly good prospect.
— Does this mean that deliveries of the Boeing Max to Russian airlines may start soon?
— This is more of a question for aircraft buyers. But we see that Boeing has a stock of almost ready-made vessels made in America that can be delivered to global customers. The issue of availability of funds [for airlines and leasing companies].
— When do you expect the recovery of titanium supplies to the level of 2019?
— There are aircraft manufacturers that plan to increase production by 15-20% from July 2021, but I don't want to name these companies. We expect to place orders for additional deliveries of titanium in the first quarter of 2021. I think that we will be able to return to the level of 2019 in 2023, possibly in 2022.
— How did the crisis affect VSMPO-AVISMA's joint venture with Boeing-Ural Boeing Manufacturing? How many people had to be cut?
— There have been no cuts in the last six months, but the company employs 189 people, which is one of the most optimal production facilities in the world. Loading there has fallen by half, and according to the basic scenario, it will remain at this level in the next three years, but production is so compact and technological that it was not necessary to resort to cuts.
— How much have you reduced staff at other production facilities?
- There are fewer orders, and therefore the number of employees has decreased by about 10%. In Verkhnyaya Salda, we refused contractors — this is about 1 thousand people. But in 2019, even taking into account contractors, we felt a shortage of staff. There is a concern that if demand returns by 2022, we will have to actively look for specialists.
— Was it possible to partially redirect the supply of titanium from the aircraft industry to other industries and improve the situation?
- Apart from aviation, our other sectors are stable or growing. We are seeing growth in medicine, for example in the field of dental implants. This is a global business. Growth in this segment is 15-20%. Demand for flat rolled products and welded pipes is increasing in the industrial sector. Customers are mainly power engineers and chemists.
The flat-rolled segment now accounts for 35% of the company's revenue, while medicine accounts for about 5%. When we had free capacity, we managed to reduce the waiting period for the customer from ten to four months. And now there is a deferred demand. The flat rolled shop has been loaded by 90-95% in recent months, and we are even thinking about investing in this production. In August, we began to actively go to meetings with clients, participate in exhibitions both in Russia and abroad, despite the pandemic.
Litigation with the former CEO
- In the summer, VSMPO-AVISMA sued for 4.07 billion rubles from former CEO Mikhail Voevodin, who headed the company for 11 years; a criminal case was opened. But in October, the company decided to go to the world, under the terms of which the top Manager agreed to compensate 1.95 billion rubles. What were the claims against Voevodin (according to unofficial information, he was suspected of organizing a scheme for purchasing raw materials at inflated prices), did he pay compensation?
— I will refrain from comments on court cases, it usually only harms. (The press service of VSMPO-AVISMA reported that on October 27, a resolution was read out on concluding a settlement agreement with Voevodin, under the terms of which the Corporation will not collect more than 4 billion rubles from the ex-CEO. Voevodin must compensate the company 1.95 billion rubles within 47 days after the decree was issued, that is, until December 13-RBC).
— Did your major clients have any questions about the criminal case against Vojvodina and the lawsuits against him?
— No, there were no such questions. But recently, we were forced to review a number of contracts for the purchase of raw materials and investment projects, or ask for a delay due to a decrease in orders from our customers. Most of us went to meet us, seeing that the situation is difficult. Some of the contractors went to court, but we hope to settle all disputes. This is a normal story in a crisis, you just need to understand how the losses will be divided between the parties.
— And with Boeing to the courts did not reach?
"No, I didn't get it. And given the history of our cooperation, I'm sure it will never come to that.
— In 2018, the Russian authorities considered the possibility of introducing a ban on the export of titanium to the United States as a response to American sanctions. The idea hasn't come up since?
— I can't evaluate and predict actions on the part of the government. But you need to understand that in Russia today fly dozens, if not hundreds of Boeing aircraft. There are only three major titanium producers in the world, so I think there is less room for competition and more for cooperation.
Tasks and plans for the coming years
— Who invited you to head VSMPO-AVISMA in July 2020? What are your goals? Did the company promise you an option?
- I was invited by the shareholders, the option was not promised. There are many tasks, and they can be grouped as follows: for 2020-2021, these are anti — crisis management, reducing investment programs, costs, balancing cash flows, and stabilizing the situation. This is what we are doing now. The second step is that in 2021 we need to prepare for the growth of orders in aviation, which we forecast for 2022-2023, so that we look stronger in terms of production capacity than we do now. Plus moderate diversification into the industrial sector — we need to launch several new projects and purchase equipment. At the third stage (2025-2027) — new products: 3D printing and titanium powders for it, finishing mechanical processing, namely the production of components that are completely ready for installation in the aircraft.