INTERVIEW: Phosagro thriving in the time of sanctions

INTERVIEW: Phosagro thriving in the time of sanctions
Russia's Phosagro is the biggest fertiliser company in Europe and a favourite among investors
By Ben Aris in Berlin March 29, 2018

bnePeople Russia Andrei Gurev CEO Phosagro HEADI meet Andrei Guryev at Kuhlhaus in central Berlin, the venue for this year’s world chess competition and a typical Berlin venue: a former factory building with bare brick walls and heavy iron girders holding up the ceiling. It is thronged with chess geeks who have come to see the best in the world battle over the 64 black and white squares.

Both Guryev and his father (also Andrei) are keen chess fans, and sponsors of the world chess championship since 2014. Despite the fall of the Soviet Union, Russia remains a force in the world of chess and several of the competitors are Russians. The father is the founder of Phosagro, Russia’s largest fertiliser producer that has made him a billionaire. The company has been on a tear, and is a favourite of both portfolio and bond investors. It is cash rich, has low debt and grows at a steady 10% a year irrespective of the shockwaves that have bombarded Russia in recent years.

The small crowd of enthusiasts have flocked to Kuhlhaus and crowd the balcony overlooking the four boards in the darkened room. The venue has a gladiatorial feel and the hushed silence is broken only by the occasional click of the players’ clocks after they make their moves.

“Russians have chess in the blood. Soviet kids learnt chess in their childhood,” says the younger Guryev, who took over the management of the company from his father while still in his thirties.

Guryev's father was a judo expert and junior is the vice president of the Russian chess association. This is the third world chess tournament Phosagro has sponsored, the first being in Sochi in 2014, and last year the tournament was held in New York. The next one will be in London in November.

“It’s part of our social contribution,” says Guryev, lounging on a sofa in the VIP zone. “We sponsor sports in Russia and have spent some RUB2bn [$35mn] on charity. But it is good for business too. We invited our investors in New York to come along and watch.” 

Phosagro has been growing in stature as its business grows, and Guryev says he spends a lot of time on the road talking to investors and at sector conferences. Speaking constantly to investors interested in Russia, he has become upbeat about the country’s prospects as well as his own business. The nine-year long crisis is receding and he becomes energised when he starts talking about the growth, arguing that reforms are happening which are taking the country in the right direction.

“Just look around at the facts. Boom boom boom, we have growth everywhere. And this in a country that has been living under a sanctions regime for four years,” says Guryev in a matter of fact tone.

Even the media frenzy that dogs Russia’s relations with the west is more noise than consequence. Guryev's name is one of the 210 oligarchs and politicians on the US Kremlin Report list issued in January. Guryev is dismissive of the list and says his inclusion has had no impact on his life or business.

“My name is on the US list. But my name is Andrei Guryev and my father’s name is Andrei Guryev so the question is which of us is on the list? Logic says it has to be him as the founder of the company, but everywhere it is my picture,” he says with a chuckle. “It was just the Forbes list [of rich Russian businessmen] and this list means nothing. I was in the US and meeting with top guys from US banks and there was no problem.”

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Fertile fertiliser growth

The last few years have been tough for everyone, Russia in particular, which went through a quiet crisis in 2014-2016. The fertiliser business has also been hit after prices fell sharply at the end of last year, but Guryev is upbeat about the prospects for this year and the near future.

“Last year was tough for the fertiliser industry because we hit the bottom in terms of prices in October and November. In the phosphates and nitrogen businesses some marginal producers went out of business – including in the US because of the rising cost of production. Exports from China fell two fold, and as China accounts for a third of the global trade this had a major impact on the market.

“Today we see a recovery in raw materials. The cost of production for the Chinese is growing and they also need to restock their strategic stores, which is about 5.5mn tonnes of phosphate,” says Guryev.

India has also been through the mangle and over the last two years was importing raw materials for fertilisers rather than the fertilisers themselves as costs for raw materials fell.

“Now they have a very low strategic stock of phosphate fertilisers. At the same time there is a significant increase in the price of phosphoric acid, which they buy [for example] from Morocco. So the cost of production in India is growing significantly and they have gone back to importing fertilisers again,” says Guryev, who reels off statistics on world trade and production capacities of the various types of fertilisers with the ease that comes from constant use.

China’s production costs set the floor of prices in the business, but Phosagro is in a strong position even after the price of a tonne of phosphate fertiliser fell to $320 last year as it has the “lowest cost of production of any company in the world,” claims Guryev. 

“The prices are rising again and have recovered to $400 in the first quarter, which is good for our margins, and we are expecting these prices to stay for the rest of the year,” says Guryev. “Demand for fertiliser is also expected to rise, especially from Latin America. The cost of commodities like soya and wheat is going up, which is driving demand for fertilisers. Big harvests last year means that farmers need to refuel the soil with fertilisers in Latin America and Russia too, which also had a record harvest.”

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The two worlds of business and politics

Phosagro’s success highlights Russia’s growing dichotomy between how investors see Russian business and the fraught geopolitical story that dominates the headlines.

The company reported revenues of $788mn, Ebitda of $231mn and net income of $125mn under IFRS in the third quarter of 2017, with the numbers coming slightly below analysts’ forecasts. That led ratings agency Fitch to upgrade the company to investment grade before the sovereign rating was hiked to the same level. And Phosagro held an SPO in February as some of the minority investors wanted to cash out some shares, although the Guryev family remains the majority shareholder in the company.

“The investors are completely ignoring the politics and they are just interested in the corporate story,” says Guryev, as a mix of Russian businesspeople and chess aficionados float in and out of the VIP area. “We as a company are growing every year at an average of 10% volume-wise. Since the IPO, we have paid $1.9mn as dividend to our shareholders — about $5 per GDR — and the investors understand all these figures. Sanctions? The fact is money is still coming into Russia.” 

Phosagro raised $538mn with a float in July 2011 on the London Stock Exchange. Since then the company has been investing in its stock, and while Russia’s equity market indices were flat in 2017, Guryev says the fund managers and other investors he meets are well aware of the details of Russia’s leading corporates. “They know all our numbers off by heart.

“If the stock prices are low then the situation becomes interesting, and to sell stock or to come back is a one-day decision. Where else can you get such good dividend yields?” says Guryev, alluding to the fact that currently Russia is offering the highest dividend yields from all the stocks included in the benchmark MSCI EM index.

Russia’s leading bluechips remain in high demand amongst investors who are currently overweight in Russia’s leading names. Bond traders are equally keen on Russia: in the midst of the recent spy poisoning scandal in March, Gazprom and the Russian state got bonds away worth a total of $3.75bn in the same week as the UK government expelled 23 Russian diplomats. 

Phosagro has also had a warm reception on the bond markets. “We just made a $500mn Eurobond deal with a historically low coupon yield for a non-energetic company – 25 years for less than 4% at a fixed rate. 41% of the investment came from the US, and that happened only a few weeks ago,” says Guryev. “The issue was five time oversubscribed. And all the banks that worked on the issue said they had never seen [demand like that] in their life.”

Another motive for the recent SPO was to get included in the MSCI benchmark index that has recently become a theme amongst leading Russian traded companies, which are increasingly interested in improving the attractiveness of their stock.

“It’s a good exercise to be included in the MSCI index as it gave us more liquidity to stock and brought a passive flow into our shares. Today we have 26% free float (30% in the index) and this gave us another inflow and the liquidity and daily trade volume went up. In Russia if you are bluechip then you have to be in the MSCI index,” says Guryev, who displays the interest in his share prices that is growing increasingly common amongst Russia’s top companies.

“It's a good market environment to do an IPO or SPO. I know there are a lot of companies in Russia that are thinking about this despite the political environment, despite the sanctions,” he continues. “The prices are recovering. Look at steel, coal, even oil and gas, they are looking at IPOs. In terms of operations and cashflow Russian companies are in very good shape.”

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Russia is not a country for old men yet

Phosagro is still growing but plans steady-as-she-goes organic growth going forward. It added new urea production facilities last year and continues to invest a steady RUB30bn a year, but capex is limited on principle to a maximum of half the company’s profits.

Guryev says with the 12% growth in production volumes in 2017 and the 10% he is expecting to maintain in the coming years, the company will double in size over the next decade.

However, Russia’s economy is still volatile and prone to shocks and crises. In 2014 the ruble halved in value against the dollar, although Guryev says the devaluation was mitigated for Phosagro as fertiliser prices in Russia are de facto linked to the export price, which gives the company a natural hedge in its domestic business.

“Ruble volatility is an issue, but the Russian government is very keen today to support export orientated companies. They do a lot of tax reduction and special programmes. There is a central bank policy to prevent the ruble appreciating and fight against inflation. We are one of the countries that is winning against inflation — it is less than 2% — which has never happened before in Russia since the collapse of the Soviet Union,” says Guryev, who is also in constant talks with the Russian government on how it can improve the business climate.

On interest rates, Guryev complains the domestic cost of borrowing is still high after the Central Bank of Russia (CBR) made an emergency hike in rates during the 2014 collapse of the currency’s value, but falling now.

“The problem is not that interest rates are high. The problem is the availability of money. The central bank was fighting against inflation and limited the access to money. They were fighting against the bad banks and that is why the growth of the Russian economy was also questionable. The availability of money is not there and is still not there,” says Guryev. “The central bank was tightening the liquidity and as a result inflation went down, together with economic growth. Today we need to understand what is happening: liquidity has to be given to business.”

And Guryev is expecting more progress. Now the presidential elections are over everyone is expecting a big government reshuffle, probably in May, and a new detailed long-term reform programme.

“I think that we have quite clear picture of where to invest and what to do. The president and government know what are the steps and what are the problems. We have very frequent discussions with the economic, industry and finance ministries and they really understand what should be done,” says Guryev. “And we have fantastic implementation. Today we have so many programmes that work.” He then counts off a long list of state programmes to support export orientated businesses and the construction of new factories, and tax breaks to promote various economic goals.

“It's a lot of stuff. Russia wants to be more competitive and [that involves] not just companies that will work on the domestic market, but those that will be competitive in the rest of the world too. And the government is giving money; in agriculture the effective interest rate after all subsidies for a Russian farmer is 3% — its unbelievable. I tell this all to the foreigners but they don't believe it because they don't know.”

Guryev says the Russian government is simply becoming more professional as the crisis focused it on improving efficiency because it had to raise more revenues. He also points to the digitisation drive and, like many others interviewed by bne IntelliNews, highlights the revolution that has been the new tax authorities’ IT system. All this gives Guryev confidence in the future.

“Russia is going, it is growing. Look at me. We are the largest shareholder in Phosagro and we invest $500mn into the company every year. We are sure of what is going to happen and we know how to grow. We have confidence in the numbers.” Checkmate.

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