CEO of Smart-Holding Julia Kiryanova talks on Novynskyi's Russian roots, problems with Akhmetov, investments during the war and attempts to sell the gas business
When, in the second half of 2021, Vadym Novynskyi was preparing a change of management at Smart-Holding, the question on the agenda was how to dispose of excess profits from the wild rise in ore and metal prices. In the first half of 2021, Metinvest, which accounts for 80% of Novynskyi's revenues, increased sales by 70%, EBITDA rose fivefold to $3.79 billion.
Julia Kiryanova, the new CEO of Smart Holding, whose appointment was announced on August 26, 2021, was preparing to work at a growing market, but found herself in the center of the fiercest war. "We see a decrease in the portfolio by more than 50%," says Kiryanova. "However, there is good news - we are alive."
Two-thirds of Metinvest's assets were destroyed in Mariupol. Among what was lost is Kherson Shipyard of Smart Maritime Group shipbuilding company, which remained on the occupied territory. The company has temporarily no control over Amstor shopping centers in Melitopol and Berdyansk, the buildings of the shopping centers in Mariupol and Severodonetsk were almost completely destroyed. On June 27, a Russian rocket destroyed one of the largest shopping centers in Kremenchuk - 21 people were confirmed dead. The company stopped gas production in Kharkiv region and put the industrial park and grain terminal in Mykolayiv region on hold.
Assets in the occupied territories have been lost, but Vadym Novynskyi's holding company still has resources for expansion. What is his investment plan? Here`s Julia Kiryanova's first interview for Ukrainian mass media.
Forbes publishes a shortened and edited version of the interview.
About Novinsky and reputation
When we met, you said that you pay a lot of attention to reputation. Is it about the company or its owner Vadym Novynskyi?
We want to become more transparent, demonstrate our projects and contribution to the economy. People should know where, what and how we do. We are a Ukrainian investor and we invest in those industries that should become the basis for the country's development.
When you talk about reputation, does it apply to the company as well and its owner Vadym Novynskyi?
Both. The company and its affairs should be talked about not less than the beneficiary.
Does the Russian origin of the owner hinder the group?
The origin is not the matter of choice. Everything gos doen to where you have realized yourself and found your place. For our beneficiary, it is Ukraine, of which he is a patriot. He has lived here for many years and does not associate himself with any other country.
In addition, our beneficiary does not run the business.
Do the law enforcement officers have any questions to Vadym Novynskyi, a former citizen of the Russian Federation, and now an active supporter of the UOC-MP?
The beneficiary has had Ukrainian citizenship since 2012, which means that the business belongs to a Ukrainian citizen. He passed all the necessary verifications as part of the procedure for obtaining it. There are no questions to him regarding this.
We do not see or hear any signals from the state that we are doing something wrong or that we are connected with someone, because there is none of that. Relations with Russian counterparties ceased in 2014–2015. Most of the businesses works for export to Europe, the gas business has localization. I don't see any significant risks here from the legal point of view.
Now we do not feel pressure, provocations, unnecessary checks - hope it will carry on like this.
Does Smart Holding have assets or business interests in the Russian Federation and Belarus?
Is Mr. Novynskyi in Ukraine now?
Vadym Novynskyi was in Ukraine from February 24 and for the next three months. Now he periodically goes on business trips, but always returns.
With the beginning of the war, has he considered returning to operational management?
No. He streamlines all his resources to charity. The amount of aid provided, taking into account our ownership share in Metinvest, has already exceeded $20 million.
As for business, there is corporate management system in place. The shareholder is a very wise person and very supportive morally, but the business is done by us.
To what extent is Vadym Novynskyi's son Mykhailo involved in business?
He is a member of the supervisory boards of Metinvest and several other businesses. Smart Holding focuses on international portfolio investments. Together with him, we are building the structure of the portfolio of liquid instruments, he is actively immersed in this area, and the leadership is behind him.
About the tragedy in Kremenchuk and the development business
We work within the framework of the standards established for shopping malls. An investigation is currently underway.
Do these instructions allow people inside a shopping center during air alarms? How was it in this case?
One of the instructions of the State Consumer Service expressly forbids the expulsion of people from the shopping center during an air raid. But for those who wanted to leave the building, the maximum evacuation flow was ensured. Thanks to the coordinated actions of all services and responsible persons, the scale of the tragedy was significantly reduced.
Compare the network now and before the full scale invasion.
After the occupation of the part of Donbass in 2014, 11 shopping centers remained on the territory not controlled by Ukraine. We do not know their fate. 15 malls were on the controlled territory. Since 2014, four shopping centers have been sold to partners.
After February 24, two shopping centers in Mariupol and one in Severodonetsk were destroyed. Berdyansk and Melitopol malls are under occupation - they were "nationalized". We stopped malls in Kramatorsk after approaching the battle line. Currently, shopping centers are open only in Zaporizhzhia.
How much has the total area shrunk?
The total area for rent before the full-scale aggression in February was approximately 132,000 sq.m, now - 62,000 sq.m.
Did shopping malls generate profit?
Only Zaporizhzhia, Kremenchuk and Kramatorsk had a more or less positive cash flow. All the rest were balancing. I considered it expedient to sell all shopping centers, except Zaporizhzhia. They were going to be reformatted and developed as commercial real estate.
Were there already buyers?
Yes, local players wanted to buy three shopping centers. There was already an assessment, but now they are all worth zero.
About Russia's losses and reparations
Are you planning to get compensation for losses from Russia? Estimate the losses of Smart-Holding as a result of the war.
Yes, but unfortunately there is currently no effective mechanism for obtaining compensations. Jointly with our partners, we record and classify damages (destroyed, occupied, stopped, etc.), as well as form a method of assessing the damage caused. It will be possible to build legal cases on this basis.
The main issue for Ukrainian business is the confirmation of damage assessment. You can apply to Ukrainian courts, the European Court for Human Rights, you can right off sue in foreign jurisdictions - the countries of registration of property and business owners. But we don`t hurry to choose a path, we are just preparing. 90% of success depends on preparatory work.
Perhaps there are intermediate loss figures?
We are talking about hundreds of millions of dollars. And this is without taking into account Metinvest and HarvEast.
What was affected?
Kherson Shipyard, one of Veres enterprises remain in the occupation, the project of the industrial park in Mykolaiv was halted, Ochakiv port was stopped - this is something that has already lost its value and cash flow. We have already mentioned malls. Park Inn Hotel on Troyitska Square in Kyiv is closed down. We have development projects in Kyiv, which were supposed to bring profit by now, but they do not since they are stopped.
As for the gas business, Poltava deposits are operating, while Kharkiv deposits have been stopped since the first days of the full-scale invasion. You see how much gas prices have risen, it's a big loss for us.
How do you rate them?
If gas prices remain, we will not receive up to $100 million in revenue by the end of the year. Of course, if we do not resume work.
You said that this year's production in the industry could fall by 17%. How much was Smart Energy's output reduced?
By 60–70%. If we do not launch Kharkiv deposits, we can extract 132 million cubic meters, with forecast figures of 360 million cubic meters.
What are your operating losses?
I will answer without taking into account Metinvest and HarvEast. In production, we fell by 60% plus. Real estate, Veres, polycarbonate production, gravel extraction, pellet and gas production work a little.
By the end of the year, we forecast a reduction in revenue of approximately 20%. A more significant decrease was avoided due to high gas prices.
We expect EBITDA to decline by 5% from what we previously forecasted. This indicator will be approximately UAH 3 billion per group.
About the gas business sale and problems with Akhmetov's bank
Smart Energy CEO Serhiy Glazunov said in December 2021 that he would invest $300 million in production by 2028, drilling 27 new wells. How are these numbers adjusted?
If there are interesting licenses, we are ready to consider. But our CAPEX program and investments are on hold until martial law ends.
In general, I would recommend foreign investors to pay attention to the gas industry of post-war Ukraine as part of the energy security system of Europe. If the current prices hold for a few more years, there is a prospect for development in the Ukrainian gas industry.
We were purposefully preparing our business for a strategic investor. Until 2014, we communicated with Shell and Eni, had preliminary agreements, but it did not work out.
How much did you want?
My ambition was $500 million. In terms of reserves, we have good assets, but the valuation is greatly influenced by gas prices. I believe that our business is fully ready for a strategic investor. We also considered listing on the stock exchange, but it is more interesting to work with a strategist. Attracting direct investments is the way to Ukraine's success, as they are always accompanied by technologies.
What is the further strategy of behavior of the group with the debt portfolio? What is your debt-to-EBITDA ratio now and what are you aiming for?
After 2014-2015, we had over $500 million debt. We entered today's crisis with a debt portfolio of $21.8 million, 90% of which is in hryvnias. Strategically, we first of all tried to reduce the open currency position.
We have done a lot of work. Many thanks to the Ukrainian banks, which did not force us to pay everything off urgently, everyone was in dialogue and tried to extend the credit lines. Even now, we are negotiating with Raiffeisen Bank Aval to increase the credit line for business relocation. This is an example of partnership, for better or for worse.
What is the situation with Rinat Akhmetov`s FUIB?
At FUIB, we have a loan for about $17 million, in hryvnias. FUIB is the only partner bank that asked us to repay the loan. This was a very unexpected and unpleasant event for us. But this is a moral aspect, financially we will be ready to repay the obligations by the end of the year.
In Davos, you said that the production of steel products fell by almost three times. What is the stabilization plan at Metinvest?
Metallurgy is our profile, we understand this, so we are not going to give up.
It is critical that we preserve ore and coal (coke chemical) as our resources. These are critical products needed for the group development. There are two steel productions left in Ukraine: Zaporizhstal and Kametstal. In the post-war period, we will continue their development and transition to more ecological products. For diversification, we are planning investments abroad.
What volumes does Metinvest count on now and what are expected by the end of the year (ore and steel)?
It is difficult for me to make predictions. Our results also depend on world prices and the capacity of export logistics. The economy worked when there was shipping through ports. Shipping by rail to western ports significantly reduces the margin.
Veres waiting for a strategist
Can you name the assets you are looking at in Ukraine? What can work out during the war?
It is too early to say, but we have an example of creating a new product line. We invested almost UAH 4 million in the canned meat production line at Veres factory in Cherkasy. The first batch will be 750,000 cans. The total production capacity is 2.3 million cans per month. The raw material is supplied by MHP. We make food rations for the army and are now planning to install a new line to double production if necessary.
We are watching competitors. If we see that the capacity has failed somewhere, we immediately calculate whether we can quickly meet the demand.
Can you increase the export of Veres products?
Veres still produces a specific product that is designed for ethnic markets. We are strong where we are. How to develop? From a product point of view, we are looking at ready-made meals. As for the sales market, we need to focus on promotion in the countries of Eastern Europe.
Veres is waiting for a strategist, because our strength lies in our brand and product quality. A strategist can add markets and new technologies.
Investments in the West
Companies with a large export component turned out to be more stable. If Metinvest is not taken into account, the core of Smart-Holding's business is located in Ukraine. Will investment emphasis change from domestic to foreign markets?
Well, it is difficult to transport a well or a quarry from Ukraine. But a chain with added value must be created around them.
We were to present the group's new strategy in Ukraine by the end of April. The task was to make our portfolio an alternative to Commodities, more sustainable, with a more pronounced export component. But the February changed everything.
The strategy in Ukraine was put on hold, and in two months an international strategy for portfolio and direct investments was created. As for direct ones, we are ready to buy a majority stake in businesses that are related to our business in Ukraine. That is, we are talking about development of our expertise in new markets.
With minority stakes, we are ready to enter businesses that are potentially ready to localize in Ukraine. That is, to act as leading partners for Western companies that are interested in entering our market.
Now we are at the stage of analyzing our opportunities for implementing this strategy. And at the same time, we are starting to see what can be done in Ukraine.
We already have directions that can be developed, including with expansion in the west of Ukraine - real estate, food industry, polycarbonate production. Regarding the latter, we have already relocated two production lines to Uzhhorod. We also analyze other business opportunities.
What is your budget for expansion and M&A in Europe?
Several tens of millions of dollars. This is, on the one hand, the expansion of expertise, and on the other, potential localization in Ukraine. Industries? Various types of equipment, chemical components for agriculture, pharma, paper, cardboard, building materials. We have priority countries and industries, it's all spelled out in the strategy. We have historically been a Ukrainian industrial investor. Now we are taking first steps in international direct investments.