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It is even more important to preserve sound judgment right now

It is even more important to preserve sound judgment right now

Levon Garslyan, Strategy and Investments Director of "Metafrax Group"

- on preservation and adaptation strategies, algorithms for crisis management, the main task of the enterprise as of today and forecasts for the future.

Two aspects of adaptation

Levon Armenovich, in February, Russian business found itself in a situation that it had never been in before. How long did the pause necessary for adaptation of "Metafrax Group" last, and when did work begin on creating approaches to operation in a new situation?

I think it is necessary to talk about two aspects of adaptation. The first is related to business, the second is related to the emotional state. And, unfortunately, I can say that not everyone has gone through emotional adaptation so far. Many continue to focus on thoughts like: "This can't be happening," "It will surely end soon," etc.

As for business, the experience of working during coronavirus period has helped "Metafrax Group". At the beginning of the pandemic, an anti-crisis office was created at the enterprise, a special collective management body, with the task of making important decisions, but in real-time mode. We didn't disband it even when the COVID-19 statistics went down. After February 24th, the office was assembled again; it simply began to work in new conditions and for other tasks. And if we talk about a more strategic area of work, then it took us about 2-3 weeks to discuss what was happening with industry colleagues and consultants for a better understanding of the situation.

Are you talking about external consultations, not ones within the company?

Yes, that's exactly right. It was important to understand how experts see the course of events, to study various cases. For example, during these days I learned as much about the economy of the Middle East as I never knew, studied the situation throughout, and not only for the Middle East.

The company's management immediately and clearly concluded that this situation will not last for a month or two, but for a long time, that a difficult period is ahead of us, and on this basis it is necessary to reorient all plans. Therefore, we discussed what is happening with experts, conducted several focus groups and worked out anti-crisis measures. They were created out of potential risks or, vice versa, opportunities, and it was clear that they needed to be done.

At the same time, the planning horizon was very short. After all, usually, the strategy starts with at least a year or rather with 2-3 years, but in this case we understood that a lot can happen literally within a few months. And, in order to act in proactive manner, certain actions had to be taken now.

Therefore, the horizon was set for 3-6 months. We also made a forecast of the events that might happen (for example, there was a draft call in this list). So that in case of any given event we would already have instructions for action. Because "Metafrax" is a large, international company, and while in normal times it provides synergy, the scale currently creates additional difficulties.

Please tell us how this work was organized, who determined the direction of progress, how it went further in the holding.

In October, we began active work, and in November we went through the anti-crisis office. Right now we are talking about two strategy vectors. Short–term vector is preservation; what we are doing in the near future to preserve the sustainability of the group of companies, the entire business. The second vector is a more long–term one - adaptation. Moreover, it is long-term only in relation to the classic situation. We are still only talking about a period of 1-2 years. Of course, this is difficult, the investment cycles in the chemical industry are much longer – in general, 5-7 years pass from the idea to the construction of the plant. But this is today's reality, 1-2 years is a more or less visible horizon. When you are not able to influence the market or change the business environment, it is difficult to be an innovator, you can only try to adapt to what is happening, hence - adaptation.

A new approach

In-depth - what is the fundamental difference of the new approach?

There are a few main points. Firstly. Breakdown of activities into smaller ones – we need to see what the responsible employee does every two weeks. Secondly. Introduction of the independent control institution – the strategic development department verifies the conducted activities in terms of quality and deadline compliance. Thirdly. Following the carrot and stick principle. There are categories duty performance now: responsible (did everything on time), irresponsible (did a bad job and not on time) and super-responsible (did everything ahead of time). Consequently, the mechanism of award and cancellation of bonuses operates depending on the result. This is, of course, a very narrow path. But in this way we show how important anti-crisis measures are, and that, even despite the most difficult situation, employees of enterprises are able to not only keep their salaries, but even earn more. You see, for 9 months we have been urging to get out of the comfort zone, and in this case, the company and the shareholders show that they are also ready to get out of it and financially encourage employees, even if there is a crisis and economic difficulties.

And the fourth point, on one side, is completely technical, but still very important. Everything that happens is entered into an automated accounting system, which ensures promptness and transparency.

How was the list of necessary actions formed? How large-scale is this action plan?

It is very large-scale. There are 56 actions and 376 tasks. More than 100 employees of the group of companies are involved in the implementation.

In regards to preparation, we also gathered focus groups in the areas I mentioned above. It was necessary to understand where the bottlenecks were, analyze what had been done in the previous months, which issues remained relevant and why they were not solved. The spectrum is wide; there is no single focus, such as, everything for the sake of sales or everything for the sake of production.

You said that the forecast for the course of the situation was made for the first 3-6 months, now more than 9 months have passed. Have the events that have already occurred confirmed the correctness of this forecast?

To answer in a binary manner, it is more of a yes than no. Unfortunately, most of our hypotheses have been proven true (and it's right to talk about hypotheses specifically, because forecasts at such a time are an even more thankless task)

If the actions within the enterprise were more effective during the first six months, would it be possible to achieve more positive results? Let me clarify my question. No one has ever been through such situations, and I want to understand how competent business solutions are able to smooth out the aftermath of a crisis of this level as well as the consequences.

Once again, in a binary manner, it is more of a yes. Because when 80% of the risks have materialized, and you did only 30% of what was planned and possible, then there is reason to believe that the result could have been better. Let me give you an example. Even back in March, it was obvious that methanol would definitely be recognized as a sanctioned product, it would still be recorded into one of the sanction packages. And the way we prepared for this (not even "Metafrax", but the country as a whole) in regards to finding customers and infrastructure for export, it went, let's say, a little worse than it could have. Of course, we have conducted and are conducting this work, we are communicating with colleagues about the possibility of building or converting terminals for methanol, and "LUKOIL" is implementing such a project in Vysotsk. But if we were less calm, but rather proactive, then we could have had more positive results a little earlier.

Is it already possible to assess the ratio of responsible and irresponsible workers among employees involved in anti-crisis measures?

We have been assessing the status of tasks and employees from the first day after the decision was made. The information is updated daily in a specialized information system, where pre–configured visual reports are already automatically generated – how many tasks are completed, how many are in progress with the remaining deadline for execution, how many are overdue - with a breakdown into events, responsible people, group's companies, etc. Twice a month, we record an intermediate result, which serves, among other things, to calculate incentives.

There is an important psychological moment here. Such a tough approach is being implemented for the first time in the history of the company, and we hold many meetings to explain the following: no one aims to necessarily punish; we are not an outside company whose main goal is simply to work through its contract and that's it, on the contrary, we are open to any communication and discussions. For example, there is a special email address, which everyone can write to and clarify the rules for working with the information system, directly send results of their tasks or even just share their worries. In addition, consultations on all arising issues and concerns are held every day in the video conference format.

Therefore, there is such a fine line here, no one seeks to punish at all costs, but it is also impossible not to react to non-fulfillment of obligations. It is good that, in general, there is a response from the employees; we continue to meet, explain and move forward.

The main point today

Is the current task for the holding to stabilize the situation and not fall?

Yes. Perhaps this does not sound ambitious, and "Metafrax" has accustomed us to other plans, but this is the exact task right now. After all, "Metafrax", despite its active development, has always been a conservative company. We thought for a long time, but we acted quickly. It is even more important to preserve sound judgment right now. Sustainability preservation is the number one priority.

I constantly tell my young colleagues that a crisis is an opportunity for bright extraordinary people to prove themselves. After all, when everything is good, your contribution is not so noticeable, but if there comes a time when everything collapses, and you need to show determination, working efficiency, lack of indifference, then the situation changes. And it is possible to achieve promotion within the company, besides, the management of "Metafrax Group" always supports such bright young people, and this is inspiring.

Is it possible to say that today the number one task for the group of companies is to find new markets and secure positions there?

Yes, the focus has definitely shifted from the product to the markets. Previously we went into processing, into creating new products, explored new technologies, acted as innovators, and in 20 years our colleagues have done a great job - the company has grown 30-50 times. But now the main focus is on the markets.

There are two components here. The first is geography, when the company changes sales directions. The second is the areas of application. In a stable situation, you don't think about any new applications, for example, for methanol. Sales are ongoing, the market is growing, and it is logical to plan the expansion of production, the construction of a plant. But during a crisis, you start discussing new or well-forgotten old options for application of the existing product.

Here, the fact that the holding has excellent technical teams at the production facilities is a huge help, and moreover, there is an Engineering and Technology Center that generates ideas on where and how any of our given products can be applied in addition to traditional industries.

And are there such interesting ideas?

Yes, there are, and we will announce these plans soon. Everything in the company is implemented with serious analytical support in compliance with all requirements and norms. By the way, "Metafrax" recently presented its ESG brand at the Engineering and Industrial Forum. The holding shows that despite everything, in an effort to preserve sustainability, we in no way sacrifice the principles of a responsible attitude towards business performance.

In regards to new markets. It is known how China behaves, for instance, which discounts its companies are ready to work with. In this situation, is access to new markets possible only at the expense of price? Or are there any other options?

Let's say upfront that not only China behaves this way. Everyone uses the opportunity - notably, not only external, but also internal consumers. In some cases it is reasonable, and if we see that the consumer's sales have declined, the margin has decreased, then the company is ready for negotiations and behaves flexibly. But if the counterparty is in a comfortable situation and only earns more, then we express our dissatisfaction.

As for the foreign partners, the first task here is to understand the cultural code, because sometimes you are being read incorrectly and vice versa. Of course, there are no such difficulties with long-term partners. After all, price is an important, but still not the only factor, especially in the b2b field; there is the product quality, reliability of supplies, etc.

But I will not stretch the truth; all of it is not easy. The markets have narrowed, Russian companies are out of favour in many places, and it is necessary to make a lot of efforts.

Are these more like new markets or are you striving to explore those regions where you have already been represented in a deeper way?

More like new markets. We were lucky that "Metafrax" was already present in Asia, there is a Korean joint enterprise. Yes, it is difficult, yes, there are sanctions, but at least there is an opportunity to navigate in the area. But we are also going in other directions. To the credit of the "Metafrax Group", all colleagues are open, everyone is interested, they travel to negotiations, communicate, gain understanding. Many negotiations last for months, and sometimes it's unclear whether the company is actually going to sign a contract with you or this is just a ritual dance. The East is a delicate matter, but the further you go, the more details there are. A firm from China is one thing, from Uzbekistan - another, a third firm from Arab countries - another, etc. The mindset is very different.

You have already identified several areas, but I will clarify, could you name the countries where "Metafrax" is holding negotiations today?

We work everywhere outside of sanctions. Because it is still necessary to create a stable structure. You started your question with China, so even if we could agree on the supply of products in full scope to China, the company would not be satisfied with it. Because such mono-supplies do not ensure stability.

We are also exploring the possibilities of using the products in terms of expanding the scope of application and offering this idea on the Russian market. And the third area is connected with the holding's experience in going through various difficulties in terms of exports. We offer assistance in this area to our clients, both directly and through federal bodies (through the Ministry of Industry of the Russian Federation, through trade representations). Because the large companies manage on their own, but our experience can significantly assist smaller enterprises.

Are negotiations regarding supplies to new countries still ongoing or are there first results already?

There are results; we have already shipped products to countries, which are fundamentally new for us. Unfortunately, I'm not ready to name them yet, because having made one sale, it is not guaranteed that there will be a second one. Each transaction is an individual story, it has not been made regular yet and it is too early to draw conclusions.

To which degree of flexibility is the holding ready to respond to requests from new customers?

As for the main products, here everything is rather standard. But when there are ideas in terms of areas of application, special packaging, the holding is engaged and is even ready to invest. Since the investment cycle is understandable in such cases, it amounts to 1-2 years, meaning that it fits into today's reality, and there are consumers who are ready to be part of it.

Which products have the priority for the company today in terms of ensuring the stability of its work?

Firstly, it is methanol and its derivatives. Secondly, it is mineral fertilizers. We are currently launching the AUM plant, on which we count upon greatly both in terms of product sales and in terms of raw material integration – support of resin production with our own raw materials. And resins are the third area that provides stability. They mainly go to the domestic market, here "Metafrax" has every opportunity to strengthen its position for greater stability, and the availability of proprietary raw materials provides good support.

Current products

You have already mentioned the Engineering and Technology Center, I would like to ask a question about R&D. Please tell us more about what a formic acid plant is.

Firstly, it is important to say that we definitely do not produce acid from Formicidae, but use a synthetic method. No ants were harmed in the production process (smiles).

I have always believed in the genius of the Russian engineering school of "Metafrax" and, if I saw the future in ideas, I tried to go into them. This story began several years ago, even before the pandemic. Coincidentally, the "Metafrax" Engineering and Technology Center as well as strategic subdivision were created almost simultaneously, and together we are responsible for development. At that time, there was a pilot plant, but they did not go further at the enterprise, after all, this is pure R&D and the decision is difficult. In this case, the conditions aligned in order to start the progress.

We have visited the Institute of Catalysis under the Russian Academy of Sciences at Novosibirsk several times, where the pilot plant for formic acid is directly located, had a discussion with colleagues and made an important decision to start activities on the project implementation. We have upgraded the existing plant and improved the technology (now we are getting several new patents). Due to COVID, everything has been greatly delayed in terms of timeframes, we have been engaged in R&D for the last three years, but today we are very satisfied with the results of the plant tests. Now we are actively engaged in scaling up – the production of formic acid on an industrial scale.

What markets is the product aimed at?

There is a very good domestic market here. In addition, we are now actively working on possible options for processing of formic acid. While we are talking about the possibilities in general, a decision has not yet been made as to how exactly "Metafrax" will progress. These can be formates (sodium, potassium, calcium...), acidifiers and preservatives for feed. Meaning that the agricultural application is possible. And formates, for example, can be used in the production of deicing agents. It is too early to forecast what will happen in the end, as far as the formic acid processing goes – we will analyze everything.

We are already discussing options for cooperation with potential partners, and we are open to dialogue with all participants in this market. If we understand that the supplier-buyer option will be more profitable than opening our own production, then we will follow this path. There is no goal to destroy something, it is important to achieve maximum efficiency for all participants.

Is there competition in this segment in Russia?

There are no companies here - we plan to be the first. Our formic acid project can be fully considered an example of import substitution – the entire volume is currently being supplied from abroad.

Everyone knows that in difficult times, the R&D costs are among the first to be "cut". And I am very grateful to my colleagues and the shareholders of the company; they kept their patience and trust in us as a team, which can bring the project to completion, and allowed us to finish this work, despite the difficulties initially related to the pandemic, and then to a special military operation.

We also see the government's attention to the development of low-tonnage chemical products, which are new to Russia. In the current situation, the entire industry needs more support in terms of development and opening of production facilities for new products than, say, a couple of years ago. We hope that the project will be implemented faster through joint efforts.

The last question is about forecasts. What do you see next? You said that, for example, the option of the draft call was in your forecasts. What else is there for the near future? Is there a stabilization of the situation somewhere?

And what do we mean by stabilization? If we are talking about a return to the previous state, then this will surely not happen. COVID was the first to show this, because there were moments when "Metafrax" earned even more than before the pandemic, but not because the market returned, it genuinely became different. It is very important to understand why 2021 was such a successful year for the chemical industry. The most common explanation is related to the prices of products, which, indeed, were very high. But this is definitely not the only reason.

Now about the future. The situation shall definitely stabilize, you can recall a lot of sayings that light days always come after dark days, etc. But the hope is also supported by historical statistics. If you look at humanity, there are cycles of development, cycles of pandemics, local conflicts, etc. As for the time frames, let's make such a forecast and then check it. The first interview I gave to your publication as a representative of the "Metafrax Group" team was in February of 2020, and back then we talked about the possible large-scale crisis that awaits the world in 2-3 years. Unfortunately, that is what happened.

Now, when my colleagues and I forecast those exact good times, we are leaning towards 2026. I think that the lowest point will be in 2023, and then growth will begin in 2024-2025, which will reach its maximum values in 2026. Although, of course, I will be glad if I am wrong, and this year we will already hear positive news.