15.04.10 Interview with Mr. Vitaliy Antonov, President of "Concern Galnaftogaz"

"Concern Galnaftogaz" belongs to those of few Ukrainian companies which have concentrated as much as possible on other aspect of crisis - on the possibility, on the chance. We will talk about how could this company, with a head office in Lviv, see the chance in crisis, which namely chances and possibilities it used, and which it did not, with Vitaliy Antonov, the President of Holding, which except "Concern Galnaftogaz" comprises Insurance Company "Universalna" and "Concern Khlibprom".

— Mr. Antonov, how have you gone through economic "winter", and when do you expect economic "warming"?
— Speaking about this matter, there is no special secret - prepare sledge in summer. You should run your business in that way that when winter begins, you do not appear in the street in shorts and sandals. Probably the experience of the previous crisis of 1998 also helped us. However, many companies have gone through that collapse. A lot of companies had the experience, there were written a lot in books and magazines, therefore only some of them could take advantage of this experience. Speaking briefly, it looked as follows: starting 2001 we took accurate strategy on introduction in our enterprises of the best business-models, the best world business-practices, the best world standards of corporate management.          

In practice it goes like that. We can take "Concern Galnaftogaz" as an example. Firstly we transparently built the business structure, consolidated all property, accurately built the development strategy of a network "ОККО" for the next 10 years, and precisely positioned it as Filling Complexes. And we did it all transparently and openly. In 2003 together with MFK we began the project "Improvement of practices of corporate management in "Concern Galnaftogaz" and as a result we got the development and introduction of the Code of corporate management. Since 2004 we have performed the international audits of our financial and economic activity (E&Y).

We were talked about as the most transparent and open company of the Ukrainian market. It was a very essential point of differentiation. As a result, when we applied to the financial establishments for credit resources, they made decisions in a short period, as all information about us was on our web-sites, and in the press. Moreover, very often such offers were made to us without our inquiries.

We started to apply immediately this experience and lots of practice in Galnaftogaz in all other companies of the group: arranged the structure, business - processes, corporate management etc. All these together made our businesses operative and manoeuvrable. Besides, even during the most carefree times, in 2005-2007, we always had prepared scenario in case of "X time".

I think that all these efforts together have lead our companies successfully through the period of recession and they continue the development, though not such steep, but assured.

— Well, and what about your forecasts regarding the economic warming in Ukraine?
— Today in banks there is a surplus of liquidity and it is necessary for them to invest these surpluses in profitable assets. Further, according to analysts during the last year through different payment systems it has been entered 16% of currency to Ukraine more than in 2008, it amounts about 3 billion US dollar. And in general, again according to the evaluations, about 6 % of world volume of dollar weight is now concentrated in Ukraine. It is considerable potential. It is only necessary to involve it effectively in economy. Talking about bank system, today banks give rather unbeneficial offers on crediting. But by our estimations in 3-4 months credit rates should fall. Positive trends will be assisted also by tranches from IMF. Besides, in a year - one year and a half we expect mortgage revival in Ukraine. And this will give a new spur for extensive residential construction resumption.

— You have spoken about achievements of Holding companies. Please tell us few words about these results.
— "Concern Galnaftogaz" is a leader of our Holding. In spite of negative influence of crisis and the general recession of economy in 2009, "Concern Galnaftogaz" managed to keep the physical sales through the retail network of Filling Complexes of the company (the falling of sales was only 5,5% in comparison with 2008) and at the same time showed high level of profitableness. During the hard period of crisis on the credit market, we managed to involve a considerable financing - 50 million dollars from our old partner European Bank for Reconstruction and Development in the form of investments into the capital. As it was planned, the first tranche in the amount of 20 million dollars has already been received to the Concern’s accounts. 50 million of investments will be directed on further development of network of Filling Complexes, first of all to those regions and cities where the company aspires to strengthen its positions, namely in cities with more than million inhabitants. Hereto, I underline, that the company carries out all obligations before creditors and adheres to all corresponding financial indicators agreed in credit contracts.

In 2009 Galnaftogaz fixed its market positions, now the company occupies the 3-rd place as to the number of Filling Complexes (309) and the 3-rd place as to a share of the market of fuel sales volumes (10,1%). Besides, in the crisis year we started with the loyalty program for regular clients FІSHKA.

Now we will talk about "Concern Khlibprom". Under a condition of consumer demand reduction "Khlibprom" has increased an income from the realisation of bakery products on 3%, though physical volumes of manufacture were reduced to 7%. We can expect that in 2010 demand will cease to reduce further.

In addition to that the gross profit of the company has increased by 18% in comparison to the last year, and gross margin has grown from 23% to 27%.

EBІTDA of the company for 2009 has made 65,5 million UAH and that is 22% more than the last year.

In time when practically all area reduces capital investments, the company has successfully started ultramodern factory of manufacturing of the frozen semi-finished products, and plans to launch it completely till the end of a year. We can expect that market ZNF will develop very promptly, and can be doubled in a year or two. The total investments in the project are about 80 million UAH. The company plans to continue to invest into this segment.

During the last week on "Lvivskyy khlibzavod No1" of "Concern Khlibprom" 2 new lines of manufacturing of bakery and puff pastry products were launched. Also we expect an establishment of one more line of manufacturing of puff bread grades.

Probably, the hardest period was for "Insurance Company "Universalna". But it is the company, which still enters the first ten insurance companies of Ukraine."Universalna" is presented and successfully works in 24 regions of Ukraine and Autonomous Republic Crimea. The regional network amounts over 200 sales points across Ukraine. In 2006-2008 the company hold 3 private shares placing and concentrated 49% of the capital in hands of portfolio investors. By the way, "Universalna" is the first insurance company of Ukraine, assets of which started to rate on PFTS. Shortly about "Universalna" results:

• Real falling of bonuses has made 11% that is much better, than on the average on the market - 25%
• Financial results have improved in almost 3 times in comparison to 2008.
• Having optimised expenses, we have reached higher operational efficiency, and have achieved reduction of unprofitableness of products.

Furthermore we have construction direction in our Holding. In general, it is business, which has been developing together with our leader - "Galnaftogaz". Actually, every year we built from 30 to 60 Filling Complexes "ОKKО" across Ukraine. It is a huge amount of work. Having positive experience in industrial construction, we have gone to residential construction. We have already built and have put in operation buildings in Lviv (Sykhiv district), in Mukacheve, Uzhhorod, Ivano-Frankivsk. In 2007 we started the construction of the whole residential area in Pasichna Street in Lviv. The crisis has corrected rates and schedules of works, but the construction lasts, floors grow. Sales of apartments are renewed. The market of residential construction in Ukraine is very perspective.

By the way, speaking about the "possibilities from crisis" I would like to tell the following. It is well-known, that before crisis we did not think of such things as thriftiness, energy conservation. Everything was developing with a huge speed, and there was no time for such "trifles". The crisis has forced everybody to think. Somewhere in the beginning of 2008 - by the way, even before crisis - we have started to introduce the program "Green office": we promote a clever energy and water consumption. On our Filling Complexes "ОKKО" in Lviv and Kyiv we have introduced the sorting of litter: there are containers where separately paper, polyethylene and glass are to be put. However, the market of recycling is not yet ready to support us across Ukraine, but we do this and even we are speeding up the recycling. By the way, our employees extend all this ecological ideology in their apartments, and houses.

The following – "no limits" project. As you know, since 2008 in Ukraine in State Building Norms the norms of availability act, (in other words of no limits) according to which all social and cultural objects should be accessible to people with special needs, for disabled people. All our Filling Complexes "ОKKО" are projected and constructed according to these norms. We equip toilets on route and some city Filling Complexes with a special handrail, we equip ramps or lower the pavements, and we equip the parking for disabled people. From one side we carry out norm of the law (by the way, the majority of establishments in Ukraine do not adhere to this norm). But the law does not oblige us, let’s say, to buy the car for a social taxi in Lviv or the specialised hoist for Kharkiv Opera theatre that disabled people could come up on the second floor, in audience hall.

— Your expectations from the Spring Business Forum 2010?
— First of all I expect that the Forum will be vivid and interesting for business. In this case, it will be successful. There is a sufficient potential in our region, and it simply needs such platform.

The thing is that for the last 10 years the best representatives of Ukrainian business have saved up a lot of positive experience: concerning the correct business dealing, business relations. It means, a certain critical amount of positive has gathered which under certain circumstances can lead to very considerable qualitative changes in the public relations. We are still a transitive society, a society in the course of transformation.

And one more thing. Now Galicia, and the Western Ukraine in general, is in the dejected condition. From one hand it is a result of after the pre-election "warming up of emotions". On the other hand it is a consequence of absence of the balanced position of elites and a consensus of environments. Here, in Galicia, in due time, when after disintegration of the USSR the basic big manufactures fell, the business elite lost its power. It has simply "disappeared as a class". And politicians became almost the only representative of Galicia. I will not give estimation to them here now. But these politicians, in spite of small exceptions, were not supported by resources and system structures; they had no analytical establishments and opinion creative structures. They simply had no means for it. As a result they have been doomed to supporting roles. At the same time in the East of Ukraine it was differently: the first violin has always been played by business there. That is why we see such a powerful force and systematic, supported structurally in them.

But, there are grounds for optimism. For those twenty years in Ukraine, and in particular in Galicia, the middle class was born and the society of small proprietors was generated. And this environment is a potential for occurrence of new, more serious projects, including business projects. But it is unequivocal to us that we need to displace the stress on questions, so to say, the political and ideological (which, in their essence are rudiments of old Soviet system) on the political and economical questions. Then under all of our political superstructures there will be a reliable economic basis. When a question is about a personal welfare, personal enrichment - it is simple business, private business, or in Latin language - res prіvata. And when we are speaking about public and economic processes, about an economy role in society transformation – it is already, in a certain sense political economy, and then it is a common deal, or in Latin language res publіca. Or Republic.

Coming back to your question about my expectations from the Business Forum it goes as follows: the forum would have to become a platform for formation of new political and economical elite of Galicia, which will accurately understand, that it is already not enough separate small economic happiness for the further development. Today different social and creating processes on a pragmatic basis, which will influence both a certain person and a society as a whole, are topical.