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9 December 2014 year Unstable Ruble Rate Hinders Competent Forecasts. Interview of Mikhail Lifshitz to Interfax

Ural Turbine Works, a manufacturer of steam turbines within the Renova Group, hopes for revenue growth despite the predicted recession in Russian economy. The company pursues development both in Russia and in the foreign markets of Mongolia, Belarus, Kazakhstan and India. However, the instability of the ruble exchange rate denies the possibility to correctly predict and plan the financial outcome, said Mikhail Lifshitz, Director for development of high-tech assets with the Renova Group and Chairman of the Board of Directors of Ural Turbine Works, in an interview to Interfax.

Ural Turbine Works just recently signed a contract with Mosenergo to replace one turbine at CHP-22. Are you planning to expand cooperation?

- Mosenergo has nineteen T-250 turbines, and now we embark on replacing the first one that we built. In 1972, it was a first production unit, and now, too, we are installing a first production model of the new generation instead of that pilot turbine. Capacity of the new turbine reaches 335 MW.

Certainly, all the old turbines will be replaced over time because any equipment has a limited lifespan. We expect that after commissioning of the first pilot model we will continue to be a part of this process. A lot depends on the outcome of the first project.

One should understand that in Moscow it is impossible to carry on reconstruction of more than two turbines simultaneously. Therefore, it will be a rather long program.

What is the current scope of work of the plant?

We manufacture about one turbine a month, i.e. 12-15 turbines of different types per year. Their total capacity is up to 1.6 GW.

Are you considering a possibility of supplying the turbines that you produce to the Crimea?

Steam power unit is a system that consumes water, and you know what the situation with water is like in the Crimea. So, it is unlikely that our steam turbines will be in demand there. We do not produce gas turbines. If the power grid of the Crimea uses the combined cycle, then yes, we expect that the customer will consider our product line, in particular, the new type of turbines for combined-cycle units.

Regional authorities, the Ministry of Energy of the RF, and the industry science must determine which units are more efficient in that region.

As sanctions were imposed on the Russian Federation by the United States and the European Union, many started talking about the import substitution. Is this a benefit to you?

Sanctions are never positive. We manufacture a product of long production cycle, i.e. manufacturing of a turbine takes one to two years. Consequently, the cost of components, contracted works, and the value of money are not changing for the better.

In terms the competitive environment, given that there is a competition of foreign companies Siemens, Alstom, GE, more so; the sanctions gave some benefits. But in terms of the business processes, the impact is negative rather than positive.

Only time may tell what impact the sanctions will have on the economy of the company in the result.

Investment program of Ural Turbine Works is $ 20 million per year. Where do the funds come from?

We finance the investments ourselves from the profits of the company.

The plant is loaded with orders. We cooperate with nearly all generating companies in the country, and do more than that. This year we are commissioning a unit in Mongolia, and we have recently commissioned a power plant in Pavlodar, Kazakhstan. We have ongoing orders from Central Asian Power-Energy Company.

Any new contracts to be signed?

It takes a year to manufacture a turbine. We are now concluding contracts for the turbines that will be supplied at the end of 2015 and in 2016. Year 2015 fully booked.

To feel healthy and sustainable in a changing economic environment, the company needs diversification in terms of product range and geography. In the past few years, the plant created a line of small turbines of different purposes. And now we are coming back to the high capacity market with a large turbine. We are interested in working in all countries that have centralized heat supply, and I hope that we will slightly expand our geography in the nearest time.

Do you have plans to cooperate with Chinese companies?

- In the 2000s, we have supplied ten turbines to China. Today we buy semi-manufactured components there, mainly foundry products, castings. That is why it would be more accurate to say that these are not plans but current activities. We work with the Chinese companies on a purely commercial basis: sell to them and buy from them.

Have they offered to establish joint ventures in Russia to start a new production?

In regard to turbine manufacturing, they have not. In the joint projects, we are donors rather than recipients. In terms of security of intellectual property, China is still a risk zone.

Do you continue to cooperate with European companies?

Yes, very closely. We have joint projects. Besides, today we are interested in India, Mongolia, Belarus.

Wherever we go, whatever tender we participate in, we compete with European, Chinese, Russian companies. Procurement procedures nearly always include a tender that one has to come to with a competitive product and very well verified commercial offer to be chosen be the customer.

Ural Turbine Works is a modern manufacturing facility, quite lean, without swollen overhead costs, which produces modern machines on the existing site that has shown a good performance over the decades of work. This applies to 100-150 MW turbines and 250-300 MW turbines. In terms of reliability, these machines are among the best in the world. And in terms of technical performance, we have invested a lot of effort and resources into modernization of the plant and development of new solutions that are being implemented.

What financial performance do you expect by the end of 2014?

We will finish this year with a quite significant revenue growth against year 2013. I think that we will show at least 15 percent growth as compared to last year. The expected number is about 6 billion rubles. Average EBITDA marginality in machine-building is about 11-12% . We expect that in the future our income will keep growing. Time will show should we succeed in it and should the state of the market and the political picture make it possible.

How does the ruble’s fall affect your work?

- Once again, the turbine manufacturing period is a year to a year and a half. The budget is calculated at the conclusion of the contract, but then, when it changes in the process of implementation of the contract, it affects all the aspect, including economic efficiency. We use imported components but not that much, so it is not determinative factor. In a greater degree, it is the changes in prices for the products of Russian companies and the cost of crediting services that throw obstacles to our path. Above all, the unstable rate of the ruble takes away a possibility to competently predict and plan the outcome.

Have you revised your development strategy pursuant to the changing economic and political situation?

We have not. The strategy is found on geographical diversification and expansion of the product line, which we are working on it and feel confident enough about the future.

What prospects will open for you if the Western giants such as Siemens and GE will leave the market of generating equipment under pressure of the sanctions?

Nobody is going to leave; everybody will re-arrange their activities somehow. Sanctions are temporary; no matter how long they stay, they will not stay forever. Refurbishment of the turbine fleet ensures the reliability of infrastructure and energy security; therefore, it has to be done under any conditions.

Are you planning to procure borrowed funds?

We are procuring them within reasonable limits, and we are not planning to multiply them. We have enough of our own stability for sustainable development.

Are you considering any new acquisitions? May new transactions be declared in the near future?

They may. We are looking at the market, field-specific one, of course. We offer a product of long production cycle, and clearly, it makes sense to have something else with a shorter production cycle. For example, related products, which are around the turbine, are of interest to us. Therefore, we are considering and studying the subject.

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