Efficient Response to Crisis. NIS’ Business Performance in 2014

April 26, 2015

The experts unanimously agree that the previous year was extremely difficult for the entire Balkan region’s industry, which did not bypass NIS business operations either. The last year was characterized by largescale devaluation of Serbian dinar, a big drop of oil and gas price, and around 2 per cent decline in the gross domestic product. In addition to the aforementioned, NIS' business performance was negatively impacted by the establishment of emergency stocks, increase in excise, fuel marking, and difficulties in collection of accounts payable from the public companies. Although the oil and gas sector was hit by similar crisis in 2008, when the fourth quarter recorded a substantial fall of oil prices and RSD devaluation just like in 2014, NIS' results today substantially differ from those seven years ago. The Company closed 2008 with losses of eight billion RSD, while, in 2014, it recorded net profit of 27.8 billion RSD, while currency gains and losses amounted to as much as 13.2 billion RSD. Kirill Kravchenko, Chief Executive Officer of NIS, says that, in spite of the difficult year, NIS achieved good results in 2014 in all business segments and successfully completed key projects. - NIS had good business performance and generated profit. The Company was financially sound and proved that it was able to go through a crisis and generate profit under severe conditions - Kirill Kravchenko pointed out at the Extended Advisory Board Session where he presented 2014 business results and highlighted NIS' main focuses for this year. Financial Indicators Although the extremely adverse macroeconomic conditions, which prevailed on the global hydrocarbon market in 2014, exerted a negative impact on the Company's financial results, owing to the business process efficiency improvement program in the main busi ness segments, NIS managed to mitigate the fall in EBITDA indicators to eight per cent, to the level of 63.4 billion RSD. – We may well say that we scored victory, given that our profit dropped far less than profit of our competition - Kravchenko explained. Miroslav Radaković, the chief broker of BDD Sinteza Invest Group says that somewhat lower NIS results were expected considering the "cocktail" of very aggravated business conditions. - However, the overall result may be rated as solid under the given circumstances. This is also supported by the share prices at the stockexchange, considering that, when the results were announced, only minimum adjustments were made – says Radaković.

Last year, NIS contributed with 136 billion RSD to the state budget, or 13 per cent more than the year before
According to him, the situation across the entire petroleum sector is very difficult, not only in Europe but globally as well. He claims that shares of petroleum companies, both in the USA and Europe, have devaluated from 30 to 50 per cent during the previous eight months. Wells are being sealed, investments in exploration and development have been cut down, redundant labour is dismissed, all with an aim to adjust to low oil prices. In addition, NIS management, according to him, also shared the problems of its parent company, Gazprom Neft, which was facing economic sanctions, and was dealing with the negative impact of the Russian rouble’s plunge, which had rendered the overall business process even more difficult to cope with. Add to this extremely bad local macroeconomic environment and it is clear how tough challenges the company was facing. - Most key production and operational indicators remained at the approximately same level, which is en couraging and gives hope that, should the economic situation improve, all indicators could be re-valued to produce an adequate financial result. Also, the continuity of the dividend policy is commendable, and this is highly appreciated by the investors – explained Radaković. He added that the current situation offered an opportunity for increase of NIS’ market share as opposed to its regional competition which was in a comparably worse position. – If NIS seizes the opportunity, it may come out even stronger and bigger, and this will eventually have positive effect on the share prices – Radaković pointed out. Debt of Public Companies Affects the Investments In 2014, the investments amounted to about 40 billion RSD. Although it was expected that large public debtors - “Air Serbia”, “Srbijagas” and “HIP Petrohemija”, would settle part of their debts, they remained at the same level of 59.2 billion RSD, which resulted in a decrease of planned investments. This fact naturally contributed to the fall in the operating cash flow, amounting to 59.5 billion RSD, which was year-on-year lower by 34 per cent. - We expected the collection of minimum 20 billion RSD, however this did not materialize due to the economic and political crisis. Yet, the Memorandum regulating debt settlement which we signed with the Serbian Government at the end of last year is very important. I believe it will be a sound basis for resolving this issue in the upcoming two and a half years – said Kravchenko. According to him, a positive fact is that “Air Serbia” settled half of its debt at the end of last year, while the second half is scheduled to be settled by the end of the first quarter 2015. On the other hand, last year, NIS contributed with 136 billion RSD to the state budget or 13 per cent more than the year before. Results of Corporate Blocks Revenues derived from sales amounted to 258 billion RSD, which is at the level of 2013. Likewise, business operations of the Sales and Distribution were at the approximately same level like in 2013, and 3.08 million tons of petroleum products were sold across Serbia. The share of motor fuels in the overall sales soared by 57.9 per cent, whereas NIS’ share in the national market remained at the level of around 78 per cent. Gazprom ranks first in Serbia, and second in the region in terms of the average output per one petrol station. – We achieved remarkable results in Retail – highlights Kravchenko. As for production indicators, the Exploration and Production recorded a 3 per cent drop on the year before, resulting from reduced investments in this business direction. On the other hand, oil and gas stocks raised by nine per cent, which gives company further security in the future. In the refining segment, the last year’s results are similar to those in 2013. 3.1 million tons of petroleum products were refined, exceeding 2013 by one per cent, by which 2014 Business Plan was fulfilled. Completed Key Projects Last year, NIS completed a number of projects, the works on the CO2 Amine Separation Unit have been completed and it is expected to start operating during the year, while the development of joint geological models in the Pannonian Basin is in the final phase. In addition, the overhaul of refinery plants was completed. New products were adopted, such as BMB 100 and polymer bitumen, and the first NIS branded fuel – ULTRA D was launched in the market. A new concept of restaurant offer was introduced in our petrol stations – Aromatik and the “Super Card” Loyalty Program was launched at Gazprom retail facilities as well.
Last year, 592 million RSD was allocated to social programs
Last year, four small-size power plants were started up, with the ratio of own electricity generation amounting to 20 per cent. According to Kirill Kravchenko, this year’s plan envisages that the Company’s share in electricity production will be more than 50 per cent. Another key project completed last year was the start-up of NIS’ first compressed natural gas generator. Operational Efficiency One of the key business goals in the upcoming period will be the operational efficiency, as it proved last year that the operational efficiency increase had a very positive impact on the Company’s income. Specifically, 2014 Business Plan envisaged three billion RSD of savings in this area, while at the end of the year over eight billion RSD was saved. - I am convinced that we are growing into one of the best companies in the domain of operational efficiency, which becomes the key factor in the time of crisis –Kravchenko pointed. This year’s Business Plan envisages 18.2 million Euro savings through the operational efficiency improvement program, while the overall potential of the program in 2015 exceeds the Business Plan by 20 to 50 million euros. As to be able to meet the ambitious goals of this program, a new organisational unit, Department for Development of Operational Efficiency has been established within the Strategy and Investments, in order to provide assistance and support in the implementation of additional measures for business operations improvement.
The overall potential of 2015 operational efficiency improvement program amounts to 20 to 50 million euros, exceeding 18,2 million euros envisaged by the Business Plan
Vladimir Vukojević, Deputy Director of Strategy and Investments says that operational efficiency is actually the method for creating positive effect for the Company through optimization of the most diverse activities and processes it is currently involved in. - The basic task of the newly-formed Department for Development of Operational Efficiency in NIS is to establish such an organisational structure which would provide support for continuous efforts to improve operational efficiency, mentality change and motivation of all employees to propose new ideas, and constant monitoring of competitors, market and global trends in the oil business, so that the Company could respond to all challenges accordingly – says Vukojević. He adds that the up-to-date results of this program were achieved through the initiatives of the managers and the employees, while application of a systematic approach is planned in the future. – As opposed to the previous period, now we have clearly defined goals we will strive to achieve over the next three years. The Company also turned to a consultant for assistance, benchmarking against other companies is conducted in order to implement the best practices – explains Vukojević. Maxim Ufaev, representative of McKinsey, the company providing consulting services to NIS in the project of operational efficiency improvement, says that three key requirements must be met in order for operational efficiency to bear fruit. - These are speed, persistency and dedication - says Ufaev. He claims that they are helping NIS build corporate operational efficiency system, stating that a good example of functioning business efficiency implies teamwork. McKinsey is a global consulting company which has participated in over a thousand operational efficiency projects around the world in the last five years. - This approach saves companies money and time. Our consulting services include both analytical support and training aiming to show how to construct and maintain approaches for business efficiency improvement - stresses Ufaev. Improvement in business efficiency is expected in four key areas: Exploration, Production and Services, Energy, Sales and Distribution, and Refining. In order for the Program of Operational Efficiency Improvement in NIS to yield expected results, each employee has to change their approach to the duties and contribute with their own spirit of invention to the improvement of work process efficiency, new job development, implementation of new technologies and innovations, improvement of competitiveness... The new employee motivation program "I Have an Idea" has been launched to achieve this goal. The program includes material and valuable rewards for the implementation of viable ideas, active participation of the management and a fast evaluation and development process, which is the most important step in their application. Market Trends and Plan for 2015 Macroeconomic situation will be comparably different this year. A further fall of RSD is expected in Serbia, and a fall of GDP accordingly, and 2015 Business Plan envisages a further drop of oil price per barrel, to 50 dollar. On the other hand, Serbian and regional markets are slowly recovering when it comes to motor fuel. The major challenges for NIS to face in 2015 are as follows: to hold down the reducing rate of domestic oil production in the conditions of investment reallocation, the necessity to update and adopt the strategy under the given macro conditions, further optimization and cost-reduction, operational efficiency improvement, to ensure debt settlement of state-owned companies by instalments. – These are hard times for petroleum companies, but we are going to survive – Kravchenko pointed out. Authors: Nenad Stanojevski, Vesna Lapčić This article had been published in the 5th issue of the Corporate magazine Energize