Transcription for SOCAR Petkim. November 11 th 2013

Transcription

1 Transcription for SOCAR Petkim November 11 th 2013

2 Corporate Participants Yasemin Ahmetoğlu SOCAR Turkey Energy Investor Relations Director Hayati Öztürk PETKIM Petrochemicals Former General Manager and current Board Member Bülent Aksu SOCAR Turkey Energy Group Finance Director Fatih Karakaya PETKIM Petrochemicals Vice General Manager for Sales and Marketing Rıza Bozoklar PETKIM Petrochemicals Chief Financial Officer Conference Call Participants Neeraj Kumar J.P. Morgan Ali Yavuz Birdal Merrill Lynch Koray Pamir Deutsche Bank Jon Alagon North Invest Presentation Ladies and gentlemen, welcome to Petkim Petrochemical Holding 2013 Earnings Third Quarter Financial Results conference call. I now hand over to Miss Yasemin Ahmetoğlu, SOCAR Turkey, Investor Relations Director. Madame, please go ahead. Yasemin Ahmetoğlu Good afternoon ladies and gentlemen, thank you for attending to our Third Quarter Earnings conference call. I will shortly leave the floor to Petkim Petrochemical s Board Member Mr Hayati Öztürk. He will summarise the

3 petrochemicals market environment during the third quarter, then Mr Fatih Karakaya, Petkim s Vice General Manager for Sales and Marketing will discuss the operational performance, demand and pricing conditions during the third quarter. Next, Petkim CFO Mr Riza Bozoklar will take the floor to give an update on the financial results and lastly, SOCAR Turkey Energy Group Finance Director Mr Bülent Aksu will give an update on the on-going projects. Now I leave the floor to Mr Hayati Öztürk. Hayati Öztürk Thank you, thank you for joining this conference call. As you know Petkim delivered quite strong third quarter results, and the main contributor of this successful result was mainly margin improvement in the industry and the recent depreciation of Turkish Lira against hard currencies like US Dollar and Euro, and some inventory gain both feedstock and the product side helped our margin in the third quarter. And as you know, on-going efficiency improvement programme, on-going cost savings helped a lot to this successful result in the third quarter. If we look at the first slide, on Monthly Naphtha-Ethylene Spread, as you know, Brent crude oil in middle of this year was around $100 per barrel, and we have seen around 15% increase in oil price up to start of September. There was a gradual increase in oil price recently. In line with the higher oil price, naphtha which is our main feedstock also followed similar trends and we have seen increased figures in naphtha price in this period. In this slide you will see Ethylene/Naphtha spread, Ethylene is the main monomer intermediate, which is the main building block for the petrochemical industry, the average spread between naphtha and ethylene was $489/ton, which is 24% higher than the previous quarter, there was quite a big increase in ethylene-naphtha spreads, which is a good indicator for profitability of the industry. So, rising feedstock prices and rising product price affected our customer behaviour and our customers, not only in Turkey but globally started to rebuild their inventory. Restocking period has already been started. As you know, in declining period, in down cycle, every customer prefers to minimise their inventories, just prefer to buy at minimum cost from hand to mouth, limited quantities. We have seen this in 2008 and, in mid-2012 because of downturn period, everybody preferred to decrease their inventory. So, in this quarter, we have seen a different behaviour from our customers, and restocking started and this also supported our product price all over the world.

4 If you look at the bottom of the slide, you will see the average price of combined basic chemicals and petrochemicals, Platts Pricing İndex; from mid-2012, you will see increasing trends in average petrochemical price. The general trend was upwards, so as an example, the average price was $1,355/ton, in quarter three of this year comparing previous periods in quarter two, price was around $1,300/ton. That is the gradual increase in product price, this trend is going on, but there was some correction in October in line with declining oil price. There was some softening in oil price and product prices started to follow this trend very recently, but during the third quarter, we have seen a gradual increase in product price and the feedstock price. On the next slide, you will see the price change of naphtha (our main feedstock) and our core-product Thermoplastics. As I mentioned, we have seen quite a positive impact from global economy, demand side improving all over the world, including USA and Japan. Western Europe, also just started to improve, after the long-lasting recession. We have seen positive figures and signals from Europe. This also helped demand in the third quarter. Ethylene and propylene demand also increased and you will see the increasing contract prices in ethylene and propylene during that period. Volume and product price has increased in line with increasing oil price. As mentioned, restocking has occurred in this period. And, I think in the last quarter, the fourth quarter, restocking continues, especially in China. The main reason is that; China wants to increase their inventories before the holiday period, end of year. Especially as the Christmas period spending will increase, they are trying to increase their inventory level during that period. As I mentioned, in that period, we have seen the inventory cycle impact and the second quarter we have seen some restocking started and it did continue in line with our expectation, although there has been some correction in inventory levels, because of seasonal effects in this region. But, China, the main importer is continuing to increase their inventory levels; this is an on-going activity in China that is why in China we will see higher ethylene, propylene and polymer prices during that period. All in all, we are more positive on the outlook for 2014, because this year in 2013, real GDP growth was around 2.4% and 2014 we expect that the global economy will grow around 3.3% and the following year at 3.8%, this is the estimation of experts from all over the world. So, all the economists expect that the global economy will improve year-by-year. Demand will be in line with increasing trends, so the economy will be in a positive territory and chemical demand will follow this. And we hope that it will improve margins in the coming period. This is the expectation, prediction of international consultants. I think we are in an up-cycle and this up-cycle will continue up to This is the estimation of all international consulting companies. We will see ethylene margin peak in 2016, this is the general consensus in

5 the industry. The main reason is that the global economy is improving,, we will see some capacity rationalization especially in Europe, in Japan, and there will be some delay in new capacity addition because of feedstock availability, because of labour and engineering capability and shortage, so there are some constraints on the construction side as well, so the industry will be following this upward trend in the coming years. As for operational margin, I think Fatih Bey may continue on that. Fatih Karakaya Good afternoon ladies and gentlemen, thank you attending our conference call. I am Vice General Manager responsible for Sales and Marketing at Petkim. I want to give rough information about the global market, global demand and then coming to our local market situation. Globally, in petrochemical sector we faced very bad times last year, this year it started to recover, the main reason of this recovery can be summarised as: First, the recovery of European Union, somehow and then the recovery of China. Especially in the third quarter, China recovered its loss of growth rate and this affected the Turkish market also in a better way, because our demand, the Turkish market s demand and import rates are directly related with China s growth rate. Coming to the Turkish market, the local position in the global market, Turkey, now, this year became number two in all over the European Union countries, beating Italy and Spain also. In the previous time the first one was Germany, then coming Italy, Spain, France, now Turkey in two years time beat France, Spain and this year Italy, now becoming number two in all European countries. And also the growth rate of Turkish chemical sector and processing capacity is fascinating, it is growing with two digits in the past three years and we are facing this advantage as Petkim in our local market. Although, Petkim is not a refinery integrated petrochemical facility, it did well last year and also this year, because as you may all know, last year none of the petrochemical factories who are not integrated with a refinery recorded profit, except for Petkim. Petkim was the only company that recorded profits last year, and this year maybe you are also seeing Petkim is always evolving operational efficiency. We owe this now to pursuing a cost model phased planning. Every month we are trying to figure out the next coming month s figures and then we are trying to create an efficient management in terms of sales, production, planning and also financial planning. This helped us to improve our gross margin by more than 200%, which is fascinating, I believe, and for the coming quarters I can give you a rough idea about the local demand.

6 October was a tough month for the petrochemical sector, because there were two important fairs, which is the EPCA (European Petrochemical Association) fair and also a K Fair, which is hold every three months. These fair times are somehow lost times, but we did well in October too and also there was the holiday in October, besides all these things we performed well in October also. November and December are usually steady months for petrochemical sector, but as Petkim is the unique petrochemical producer in Turkey, I think we will succeed to turn this into an advantage in our local market. Because, in November and December also the importers are becoming a little bit hopeless to bring material to the local market, so we will try to take this advantage and we will perform better in the fourth quarter also. This is all what I want to say, because I want mostly to take your kind questions and reply to them as I can. Question and Answer Session Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. Please lift your handset before you ask your question. Thank you for holding until we have the first question. We have a question from Mr Neeraj Kumar from J.P. Morgan. Sir, please go ahead. Neeraj Kumar Hi guys, it is Neeraj Kumar from J.P. Morgan, thanks for the conference call and many congratulations for the good set of results. I have three questions if I may. The first question is do you expect some moderation in the gross margins from 10% in the third quarter going forward, any guidance for 2014 gross margins would be highly appreciated. My second question is how much have you invested in the STAR Refinery so far? My understanding is you plan to finance about 1.6 billion of equity and the rest by debt, so I understand you are still in the process of that additional, I understand out of 1.6 billion, how much have you invested in the STAR Refinery. My third question is any guidance for dividends would be highly appreciated. Thank you. Yasemin Ahmetoğlu Could you repeat your first question once more?

7 Neeraj Kumar Yes, definitely. The first question is about the 3Q gross margins, right, so you reported gross margins of 10.1% in the third quarter right, so my question is, going forward, do you expect some moderation, moderation in the sense that do you still expect the gross margins to be as high as 10% going forward. Then secondly, is there any guidance for the gross margins in Ladies and gentlemen, the conference is continuing. Yasemin Ahmetoğlu Sorry about the cut, Neeraj. We are answering your questions now. Hayati Öztürk Let me explain, concerning last quarter, as explained, the market is in changing mode, China, continues inventory building, but on the other hand, oil price is softening and probably oil will go lower figure and our cost of production will drop thanks to declining oil price. I think we will have some correction in last quarter, but in general, in the coming year, we expect the margin will be at a positive level and we expect next year s figure in 2014 in line with global economic improvement, in line with improving demands. Margins may enter an up cycle. Bülent Aksu Regarding your second question, related with the STAR Refinery, the total investment of the refinery without the finance costs will be around USD4.5 billion and equity amount of SOCAR side (sponsor side) will be around USD1.9 billion and USD400 million until now, spent by the shareholders for that project as an equity. Neeraj Kumar 400 million, right? Bülent Aksu Sorry, USD 400 million, yes.

8 Regarding dividend, as Petkim Management and as the main shareholder of the Company, our plan is to distribute profit if the Company has enough profit and cash in the financial statement. As you know that we have acquisition finance in SOCAR because of the Petkim acquisition and we would like to distribute profit of the Company and if at the end of the year there is a profit in the Company, we are planning to distribute a profit of this year in the coming year as dividend. Neeraj Kumar Okay, thanks. Can I please go back to question number one, I understand the qualitative perspective prospect of that, but just to understand, would you mind quantifying the gross margins? Bülent Aksu You mean our expectations for next year? Sorry, you mean the coming quarter, this quarter, or 2014? We don t understand your question. Neeraj Kumar Hayati Öztürk As I explained, we expect that the global industry will be improving and the margins will be in a better position for the coming years in line with the improving petrochemical industry and global economy, Turkish economy, will grow, and demand in Turkey also growing, as we explained, so on-going energy and cost savings, market driven production planning/optimization and on-going investments will have positive contribution to the bottom line. Now Riza Bey will continue on our financials, he will explain. Riza Bozoklar Okay, thank you very much, Hayati Bey. Good afternoon ladies and gentlemen, I am the new CFO of Petkim Company; I have just begun here this week in fact. This is my first presentation for Petkim, so I will just pass through the pages, number seven, income statement of Petkim and the balance sheet. Firstly, if we look at the income statement, in the third quarter results you may see our sales in the third quarter was TL billion versus TL billion last year. It is almost constant, let me say. There has not been a significant change in Turkish Lira terms. In gross profit, we had a significant increase versus last year, TL106.3 million versus TL32.4 million. For EBITDA, we saw also the same improvement, TL 100 million in

9 three months in the third quarter versus TL38.2 million last year, and we saw finally the positive picture in the net profits as well, TL43.1 million versus TL 14 million. So, consequently we had nine months figure, the sales almost TL 3 billion, but last year it was TL 3.4 billion. Nevertheless, thanks to better gross profit margin, we had TL 213mn gross profit in nine months versus TL48.1 million last year, and for EBITDA we have raised TL 188 million versus TL 31 million last year, and in the net profit, as of September, we had TL48.6 million versus a loss of TL 26.6mn last year. As of September figures, in Dollar terms, I explained to you in Turkish Lira terms, in fact due to demand in production and profitable pricing strategy year to year revenue decreased by 16%, mainly driven by 16% volume decrease. I explained that it was almost constant in Turkish Lira, but in Dollar terms there is a decrease in fact. And our revenue is 11% lower compared to Petkim annual forecast, also driven by 9% lower sales volume. We explained that our gross profits had better percentages, in fact better EBITDA, better gross profits. This better EBITDA impacts were driven especially thanks to increased consumption of LPG, 11% higher production versus naphtha spreads by shipping price level almost flat, while naphtha prices decreased by 5%. As Fatih Bey explained our Vice General Manager of Sales and Marketing buying and planning, and market-oriented efforts helped us to reach our good result, I may say. Our gross profit margin increased and additionally focus to G&A expenses has resulted with 6.3% EBITDA margin and with an EBITDA of TL 101 million as of September. For the income statement, that is the general picture. If we pass to the balance sheet, you may see our net debt position and you may see this on slide number eight, TL19mn positive now and our working capital also still increased, TL 208mn and in fact this is also thanks days payable outstanding higher and better EBITDA helped us mainly to improve our cash position. If we pass to page number nine, you may see our major investment progress report, we have two major projects, as you know, in Petkim. The first one is ethylene production capacity increase by 13%. We have an investment amount of USD 118 million and it s planned to finish in We have already obtained a loan from Isbank it was already explained to you with 10 years of tenor LIBOR plus 3.5%. The other investment is PTA capacity increase; it is also planned to be finished in 2014, USD 20 million, and project finance tools have been used for this. For me, that s all. Thank you very much.

10 Bülent Aksu Good afternoon ladies and gentlemen, this is Bülent Aksu, SOCAR Group Finance Director, I would like to summarise the on-going investment project in Aliaga region. First of all, I would like to start with Petlim Project. As you know, the Petlim Port Project has 1.5 million TEU container handling capacity. The first phase will be operational in 2015 and the second phase will be operational in APMT and Petkim s 100% subsidiary Petlim has a revenue sharing agreement for 28 years of the operational period. Our subsidiary Petlim s Board approved and announced the increase of paidin-capital from TL 8 million to TL 83 million 30 th September, following the receipt of first instalment of the upfront fees from APMT. The investment is carried out by Petlim. Petlim s part of investment is USD 276 million, of which around USD 70 million will be equity and the remaining will be financed by project financing. Financing negotiations are currently on-going and planning to finalise until the end of The sea dredging, levelling, and excavation works continue at the site right now. Regarding the STAR Refinery, it s a majority owned project by SOCAR Group and will be financed by equity and project finance debt. PETKİM will not contribute any capital into the refinery project. STAR Refinery will have 10 million tons/year crude oil refining capacity. Around 1.6 million tons of refined products will be consumed by PETKİM. This investment and feedstock procurement from STAR Refinery; PETKIM will benefit from decreasing freight costs, lower inventory costs, increased stability and quality of feedstock and supply security. The refinery is expected to be operational in Excluding the financial costs, the refinery investment amount will be approximately USD 4.5 billion, and the total equity amount of the project will be around USD 1.9 billion, until now USD 400 million is spent by the shareholders as equity for the project. Regarding the Petkojen Project, the Petkojen plant project will be fully financed and owned by SOCAR Group, the entity, SOCAR Power. Petkim will not contribute any capital into Petkojen. With the planned new investment, Petkim s aged steam and electricity generation plant will be replaced with new clean coal-fired steam generators. Total installed capacity will be around 205 MW of electricity.

11 The project will provide Petkim competitive advantage in terms of reducing its energy costs. Environmental Impact Assessment Report has been approved. The license and all required permits approvals are in progress right now. Thank you very much. Yasemin Ahmetoğlu If you have any further questions, we will be happy to hear. Yes, we have a question from Mr Ali Yavuz Birdal. Sir, please go ahead. Ali Yavuz Birdal Hi, this is Yavuz from Merrill. Two questions; the first one is related with the third quarter operational numbers. Is it possible to quantify and say a number for inventory impact on operational performance in third quarter, and the second question is related with payable days; it is highly volatile in the last two-three years which number should be the normalised number for payable in terms of days or whatever you can give colour? Thanks a lot. Bulent Aksu Regarding the payable days, it s directly related to the market conditions and to competition between the traders. Nowadays, because of the demand in the sector in naphtha side we can achieve higher tenors, higher maturities for repayment of the naphtha, so that in that period our total payable number increased when compared to the last or other quarters for this year, so that the total payable number has been increased. As I mentioned, it is directly related with the market conditions; nowadays, we can achieve higher maturities and tenors, so that at Petkim we are trying to catch or get higher tenors from the traders and we benefit from these market conditions nowadays. Regarding inventory effects, as Petkim from the last quarter of the last year we are working with minimum inventory amounts in order to maximise the inventory losses and gains, which we suffered a lot in last year, so that when we look at this year s numbers, the inventory effect in our results are very, very limited numbers, because of minimum inventory level and minimum inventory aims and budget numbers of the company.

12 Ali Yavuz Birdal Thank you. We have a question from Mr Koray Pamir from Deutsche Bank. Sir, please go ahead. Koray Pamir Thank you for the presentation. Maybe a quick question on your expectation of any regulatory additional barriers in terms of quotas that might be in place for next year; do you have any expectation of additional measures that might be taken against competition? Secondly, have you observed any substantial change in the composition of imports? Mainly from the Middle East, or is there a structural change in the level of concentration that s coming from regions or it s practically composition versus mainly the NG based producers? Thank you. Fatih Karakaya We are coming to the second question, thank you for your question first; I am Fatih Karakaya, Vice General Manager responsible for Sales and Marketing. Coming to the second question, the Turkish market, as I mentioned in my first bit, growing quite quickly; that is why also it is becoming an attractive market for all the producers all over the world and also, there is one more issue that China becomes an exporter in some products. China was a net importer country, but very quick investments are done in China, that is why they are becoming an exporter in some products. This makes the other markets attractive for the producers, but as the growth rate is enough for all the producers all over the world, as it is increasing, we don t expect any disadvantage coming from this issue. Hayati Öztürk As for the regulatory issue, for the trading side, as you know, starting from beginning of next year, the European Union will apply additional duty for imports from Middle East and from third countries. The duty will increase from 3% to 6.5%. So, countries in Middle East, they have to cover this additional cost if they want to export their products to the European Union. As for special products, Petkim has tried to protect the market against unfair competition, so if there is unfair competition we will apply to create some barriers to import to Turkey, so these types of activities will continue. We have some products that we are discussing with the Ministry of Trade, but did not reach to the final level. Another regulatory issue that we think will

13 be crucial is related with environment i.e global warming, because of the environment pollution in some parts of the world, especially in China, I think a lots of facilities, which are not complying with international regulations, will be the main candidates for closure. These inefficient facilities have to be shut down otherwise, you know, there will be some social unrest in China because of environmental issues. This will have impact on the chemical supply side in the coming years, this is another critical issue for regulation side. Koray Pamir Thank you very much. We have a question from Mr [Jon Alagon] from North Invest. Sir, please go ahead. Jon Alagon Thanks for the presentation first. I have a question regarding the STAR Refinery. On the Bloomberg News here today, UniCredit announced a USD 3.5 billion financing is completed for the SOCAR Refinery, I think is the STAR Refinery. Can you confirm this or do the financial negotiations are still ongoing or any new developments regarding the financing issue? Thank you. Bulent Aksu Regarding the financing of STAR Refinery, yes, there is this information but this is not formal information announced by UniCredit or any party. Right now we are working on the finalisation of the financing. In July, we made the bank launching of the STAR Refinery. Until the end of September we took the commitments of the commercial banks. There is a very good demand from the market, as right now we are working on the allocation of these commitments and we are planning to finalise this process as soon as possible. Jon Alagon Thank you. We have no other questions; Yasemin Ahmetoğlu, back to you for the conclusion.

14 Yasemin Ahmetoğlu Well, if there are no more questions, we would like to thank you for listening and for all your questions. Have a nice weekend. Ladies and gentlemen, this concludes our conference call. Thank you for participating, you may now disconnect.