Anton Zebants, CEO of VLP Group: “Timber enterprises need more prompt measures of government support”

Anton Zebants, a person with extensive management experience in the forest sector, was appointed the new CEO of VLP Group (Group Vologodskiye Lesopromyshlenniki) at the end of January 2023. He had been the manager of the EGGER Drevprodukt Gagarin plant for 5 years before the new position. We were therefore interested to find out about the tasks that were entrusted by the management to the new CEO, about the differences between managing a plant and an entire group of companies, about the details of the Hasslacherles deal, about the current completion stage of the Plitwood project and whether the plant is ready to operate at full capacity, about alternative export routes the company is developing and much more.  

Before working at VLP, you had been the manager of Egger Drevprodukt Gagarin, now you are managing an entire large group of enterprises in the forest sector. How strongly do you feel that scale? Could you highlight any differences in the management processes? 

Of course, the new position implies more responsibility: if for no other reason than because I have to manage not one plant but an entire group of companies. For me personally, this is, first of all, professional growth. I was also surprised by the digital tools that were used at VLP Group.

What are the top-priority tasks set for you by the management of VLP?

These are three very simple things: to grow, to grow, and to grow. Despite the crisis and vicissitudes, our objective is real development. And not only in terms of increasing the output, but also in terms of organization, structure, team. Some aspects are quite successful, but certain other processes are slower.

I already knew about the purchase of Hasslacherles a month before the deal, but I could not go public with it. This acquisition complies with the desire and vision of Alexander Churkin (Chairman of the Board of Directors of VLP Group: ed. note of WhatWood) that we should develop and not rest on our laurels. These were the tasks entrusted to me.

You mentioned the Hasslacherles deal, how could you assess the acquisition of the new asset?

In general, this is a decent plant with good logistics, friendly staff, and a potential for further development. There are some issues with the supply of raw timber, but they are fully addressable.

We visited the enterprise a while ago. And I’d like to emphasize the fact that not only we chose Hasslacherles but also they chose us, and this makes a difference. The owners had several offers from different companies but they wanted to transfer their production facilities that they had been developing in Russia for so long to the right hands.

There is a little secret. When I found out that Hasslacherles was selling its assets, I was still working at Egger Gagarin. I sent a letter to Austria with an offer to buy the plant because we would have synergy with it. Now I amicably joke when talking to my colleagues from Egger: “I bought it anyway, but without you.”

Is the plant currently operating or standing idle? What are the top-priority production issues to be solved?

The enterprise is currently operating with some constraints: it only has two shifts. Our objective is to increase its productivity. To do this, we have to provide Hasslacherles with all the raw materials it needs so that the plant produces as much as it potentially can. We are therefore ready to supply the plant with roundwood from the Vologda region. In this regard, VLP Group has more opportunities than the previous owner had. A high-priority investment project is also being implemented at the site, and we are now working intensively to continue it.

What is the maximum production capacity of the sawmill line and what is its current utilization rate?

The maximum output was in 2019-2020 when the plant produced 150,000 m³ of sawn timber per year. The current utilization rate is 60%. The maximum capacity of the equipment is 300,000 m³ of raw materials. But there are no problems with the sawmill line, there are some constraints concerning sorting and energy along with the high-priority investment project mentioned above that was started two years ago.

There are quite a few constraining factors, that’s why we will try to reach the maximum production capacity step by step. This is a large site with a well-developed transport infrastructure: railways, roads, the port of St. Petersburg is near. Therefore, the potential is there, though not 500,000 m³ of raw materials, but we will aim at such figures. It will take many years of work to reach this level.

Don’t you think it is too risky to acquire such an asset in the European part of Russia in the current market conditions?

There are no profits without risks. Yes, there will be some difficulties but there is also export potential in the countries of Southeast Asia. You can’t ship everything to China. There are other markets in this region as well – like South Korea, Japan, Taiwan, Philippines – and we are going to harness that potential. It would probably have been more logical to build or acquire an asset in the Far East but its is not our region, we are used to working here, in the North-West.

The purchase of Hasslacherles is, therefore, an investment in the future, and we are ready to solve logistics issues to ship products to the East. Yes, VLP has not shipped any products there before because there has been no need for it. But now we have already got accustomed to working with eastern markets, just like Russian Railways and the ports. There is no point in being afraid of difficulties.

Before the European embargo was imposed on Russian timber products, VLP Group had been one of the largest suppliers of birch pulpwood to Finland, while now it is impossible to export there. How acute is the issue of timber harvesting in the company now?

Pulp logs, especially birch ones, are a big problem. We have a joint venture with Cherepovets Plywood and Furniture Plant that uses pulpwood. We process our own pulpwood ourselves, and our objective is to produce high-margin products that the market will need. Along with that, we endeavor to depend as little as possible on any external factors.

As for veneer logs, we are not experiencing such troubles with them. Yes, the price has dropped, but we continue to sell them. In any case, we want to get a value-added product from this raw material. Plitwood, a large-sized plywood plant, will soon be put into operation, which will require 500,000 m³ of raw materials. Of course, there are some difficulties concerning sales of plywood, but, let me repeat it, there are no profits without risks and problems.

Two years ago, the most efficient harvesting enterprise was the one that did nothing. You could buy a stack of timber and let it lie, it would yield more money two weeks later. That was a purely speculative effect. But that time is over, and that strategy is ineffective in the long run.

Did you manage to complete the supply of equipment for Plitwood, a joint project being implemented together with Cherepovets Plywood and Furniture Mill?

Yes. There were some problems with the supply of equipment for Plitwood but we managed to import all the main units from Finland. Some components were not delivered in time but we found equivalent ones produced by Russian manufacturers. There are definitely some risks for the project: colleagues from Raute have left it.

But we can train people in automation and electronics together with Cherepovets Plywood and Furniture Mill that has its own plywood facilities. Russia features a very decent technical and engineering background, so we will find ways and means to develop without our Western colleagues.

What is the current project implementation stage?

The first batch is scheduled to be produced at the end of July this year.

Given the closure of the European market, will the plant operate at its full production capacity (180,000 m³ of plywood per year)?

Undoubtedly, all the enterprises of the group must be utilized at 100%. There are no some markets anymore, which means we will look for other ones. The world is not limited to European customers. While high-quality birch plywood is only produced in Russia.

Difficulties with logistics are now the main problem for most Russian timber enterprises. How is the company addressing the issue? What alternative logistics routes are you using for exporting products due to the overload on the Eastern railway infrastructure? How actively are you using transportation by sea?

There are difficulties with logistics not only in Russia, but throughout the world. The company has a separate management department that is focused only on solving logistical issues. Now we are using not only the Trans-Siberian and the Baikal–Amur Mainline but we are also exploring and already partially operating some alternative routes to find some kind of balance for ourselves. Previously, we didn’t even know that there were such opportunities because we just had no need in them.

The main challenge for us now is the high cost of logistics because the market hasn’t yet bounced back after the shake-up. The ports of St. Petersburg and Arkhangelsk haven’t yet got accustomed to working in this mode. We also need to develop the southern direction. Unfortunately, the Volga–Baltic Waterway can only be used during the summer season.

There is also the question of competition with European countries. For example, the delivery of containers from Finland, Sweden, and Germany to China or India is three times cheaper than from Russia. There are large container lines in Europe, and it is with them that we compete.

This is why it will take time to find a new equilibrium in logistics routes.

The bulk of VLP Group’s products is exported. Is the company developing supplies to the domestic market as well at the moment? Or are you mostly focused on foreign markets?

We are also developing supplies to the domestic market, although VLP had previously supplied there nothing at all. We do have a clientele in the Russian market. We cannot switch to the Russian market completely but we are developing both the domestic supplies and exports step by step.

At the beginning of this year, the government increased the maximum value of compensation that can be granted to timber enterprises to subsidize the cost of transportation of their timber products from 300 to 500 million rubles and increased the maximum share of compensation for the actual transportation costs from 80 to 100%. Do you consider this measure of government support sufficient at the moment? What other government subsidies could help Russian timber enterprises?  

These subsidies definitely help and “provide more oxygen”. The problem is of another kind. First of all, these support measures are not available to all enterprises since there are many restrictions, and then they are very bureaucratically time-consuming.

We also proposed other support measures that could help timber enterprises much more quickly like, for example, calculation of lease payments based on the actual amount of timber harvested.  There are, therefore, measures that could have brought faster results for the enterprises and that could have really translated into lower costs of production by now.

The Union of Timber Industrialists and Exporters of the Vologda Region and federal agencies are actively participating in the discussions. We are making our proposals as well. I wish the government support measures were more prompt in the future. Because it’s not very good for business planning when you don’t know whether you will receive a subsidy or not.

After the closure of the European market, South Korea remains virtually the only importer of Russian fuel pellets. With that said, how is VLP Group solving the problem of selling wood biofuels? Do you see any prospects for the development of consumption of fuel pellets on the domestic market?

Previously, sawmill waste – timber offcuts, chips, and sawdust – was not considered a resource at all but was simply incinerated. The emergence of the European market of biofuels and the “green” agenda incentivized Russian sawmills to produce wood pellets from this waste and export them. After the closure of the European market, however, many enterprises faced the issue of wood waste disposal again.

Thus, we now need to spur domestic demand for this type of fuel somehow. This is not easy since Russia has very cheap gas for domestic customers. We are actively collaborating with local authorities to switch boilers from coal to our biofuel products that cost no more than gas.

Until 2022, we exported pellets at a good price and did not consider the domestic biofuel market at all. Thus, we will address the problem of recycling sawmill waste. For example, by processing it into boards since we have our own facilities for that. There are other possible products as well. The situation is complicated but manageable, so we are trying to be more flexible in the market.

What are VLP’s plans for the next 2-3 years?

VLP Group will definitely grow and invest. In the near future, we are going to develop our new assets: Plitwood and Hasslacherles. We have a whole portfolio of projects that has already been approved. Now we are getting up steam and looking for specialists.

Is it expected that VLP will acquire new assets in the forest sector in the near future?

There are a lot of offers of different scale, so we are actively researching the market. There is nothing specific yet but we are still exploring various options. The company is not only ready to build new production facilities but is also open to consider M&A deals. If we see an asset that is interesting for us and that opens up prospects for further development, we will definitely acquire it, I suppose.