Transcription for SOCAR Petkim. May 3 rd 2013

Transcription

1 Transcription for SOCAR Petkim May 3 rd 2013

2 Corporate Participants Yasemin Ahmetoğlu SOCAR Investor Relations Director Petkim Former General Manager and current Board Member Bulent Aksu Petkim Chief Financial Officer Berkan Ates SOCAR Group Financial Coordinator of SOCAR Group Company Conference Call Participants Neeraj Kumar JP Morgan Tomas Platser Erste Bank Onur Marsan Garanti Securities Koray Pamir Finans Invest Presentation Good morning and welcome to the SOCAR 2013 First Quarter Financial Results Conference Call ( Instructions). Today, I am very pleased to present Miss Yasemin Ahmetoğlu, SOCAR s IR Director. Madam, please go ahead. Yasemin Ahmetoğlu Good afternoon ladies and gentlemen, thank you for attending our conference call. I am Yasemin Ahmetoğlu, the IR Director of SOCAR. We are happy to hold the very first quarterly earnings conference call at Petkim. During this event, we will try to give you some insights about the petrochemicals market environment during the first quarter this year and explain how Petkim s earnings and operations will shape in the second. The Senior Management Team responsible for finance and operations will give you some insights about this subject and they will also give some guidance for the remainder of this year. Lastly, SOCAR Group Finance Director will take the floor and he will give some details about SOCAR s investment plans in 13. Those are topic of profitability of Petkim over the medium-term. We will be

3 happy to answer your questions at the end of our presentation and now I leave the floor to Mr Hayati Öztürk, the former General Manager and the current Board Member of Petkim. Hello and good afternoon, thank you for joining this teleconference. I would like to start with the general macroeconomic condition. As you know, the last two years back, the economy was not performing well; we expect that some modest acceleration in the economy in late 2013 and 2014 thanks to ongoing monetary stimulus of the Government and declining interest rates supporting global economy. United States and emerging economies will drive the global growth in the coming years, although Europe is suffering from debt problem, but the economy will grow around 2.5/2.6% this year and close 3.5%+ in 2014, so these are the general outlook. Although difficult business environment, Petkim s performance quite well in the first quarter. If you look at the feedstock, slide I, oil,naphta and natural gas trends. On the naphtha side the average naphtha price declined in the first quarter, but in the first quarter naphtha was higher priced feedstock against natural gas. On the same slide, You will see declining gap between naphtha and gas prices. Recently we have seen declining oil price because of economical problems, and oil will be around USD 100 today at Brent, and Naphtha close to USD 800, so this type of development makes Petkim s cost structure much more competitive. If you look at the feedstocks and main main products, Naphtha Ethylene spread in the first quarter was around USD/ton 500, which is quite high comparing last quarter figures, which was around USD/ton 350, so there is a considerable improvement in magins of petrochemical products. In the same slide you will see the Petrochemical Product Index which is the average index for petrochemical products starting from June 2012, there was an upward trend, and you will see the figure was around 1,100 in June As of today we are in between 1,200 and 1,300. I think this is because of ongoing pressure on energy side, oil side, but anyhow as I mentioned the spread between products and feedstock are improving day-by-day, especially in the Aromatic value chain, benzene and P-X naphtha spread. I think one of the good positions, overall USD/ton 500 as of today. On the following slide, you will see the market outlook and operations in first quarter 2013 (page3). As I mentioned the down-cycle has already finished. We have seen this down-cycle in the past two years, which was started especially in the mid-2011 and as I mentioned, there are some positive signals coming from different parts of the world, the economies of emerging countries are improving, you are seeing improvements of the demand side, is getting much stronger. On the other hand, the uncertainties are declining and the confidence of consumers and investors are improving, and they are seen in these types of trends in these days. If you look at the Purchase Manager Index all over the world, you will see the positive signal from these indicators as well. As I mentioned we have seen positive rebound in demand side in the first quarter, but some decline especially these days because of softening oil price, but I hope this will support our cost structure, as I mentioned. In line with this development, the first quarter margin improved considerably and the profit

4 margin and the profit figures in line with our expectations. I hope these magins will be improving gradually quarter-by-quarter, in line with the global economic development. On the following slide, slide 4, we will see the cost structure of Petkim. As you know we are naphta based producer crackers, after this, but thanks to ongoing technical studies, we have enough flexibility to crack LPG in our cracker facility. As of today, we can crack around 18% LPG besides naphtha, which also help us a lot in the first quarter. I think this type of feedstock flexibility will bring additional benefit during the coming months, even follow market conditions while looking at naphtha, LPG spread, we are using more LPG in our feedslate. As for the capacity utilisation in the first quarter, the overall capacity utilisation was around 85%, which is a little below our historical trend, but you know our main focus during that period to focus on not volume, but the profit, that is why we try to optimise the production portfolio by looking at margins of different value chains, so adjust our production configuration accordingly. That is why we shutdown some units temporarily...that is why our capacity utilisation is a little bit lower, but I hope growing market demand, we will be recovering this and I think the market will define our capacity utilisation in the coming months. On the cost side, as I mentioned, streamlining activities, cost saving activities still going on. We continued to improve cost competitiveness, competitive position by driving down our cost. One area, LPG as I mentioned, the other ones, natural gas, we have already started to buy from SOCAR Gas, we have some discounts, so this will be some additional cost saving. On the other hand, last year we were quite successful in the energy saving studies.kbc International Consulting Group, we used this well-known consulting group and we have now the flexibility to optimise our combined heat and power system, and this will bring a considerable saving in energy and steam production. We have also defined a number of other energy saving projects. You will see in our investment programme, so the main target is to improve our cost position, so cost competitiveness is the main focus point, especially in this difficult time period inside cost cutting in feedstock side and in the cost side. If you look at turnover, because of lower capacity utilisation, turnover was lower, around 18% comparing previous year, but as I mentioned the profit jumped nearly 150% during that period, which is a significant improvement in profit margin. If you look at the gross profit margin, you will see the improvement in profit margin trends. We will continue on cost cutting activities, streamlining activities, and with the help of the [moderating] oil price, naphtha price, we hope our cost structure will be in a better shape and the margin will improve in both the cost side and with the help of improving demand. During that period, as I mentioned, one of the areas where the Company focused was inventory and sales management. As I mentioned we have to follow market dynamics, very quickly and adjust our procurement/supply chain strategy and manufacturing production strategy accordingly. This helped us during the first quarter, officially have started this strategy in the mid-2012, and this strategy will be followed in the coming months. The market, as I mentioned, will define our production strategy. In line with our production strategy, we will procure our naphtha, LPG and other chemical requirements, so inventory management, cash management was number one issue during that period, and you will see the improvement in our cash position, inventory position in the balance sheet in the following pages.

5 We mentioned feedstock flexibility without investing big money, we just created efficiency on feedstock side, and on production side, and you know the recent investment on advanced process control, on process optimisation, so these are operational excellence objectives, one of our on-going journey, so we will be focusing on this type of efficiency gain activities in all of our operations. That will lead us to a better performance. On page 5, You will see the energy consumption declining energy consumption on the same slide and the capacity utilisation of [main core unit] ethylene. As I mentioned, because of softening demand, we adjust our capacity utilisation accordingly in the past nine months. On page 6, you will see the breakdown of our sales revenue in the first quarter, and as you can see Petkim s product range is quite diversified, which is thanks to our naphtha based production. So having naphtha based feedstock gives us a very broad range of product portfolio, and especially in these days as I mentioned, in the beginning the Aromatic value chain is quite attractive, Aromatics prices are secure, I hope in the coming months and years the Aromatic value chain will be in a better position because of feedslate change in global ethylene manufacturing industry. The new development in US cracker will shift feedstock from liquid to gas, because of cheap shale gas. We believe still based on ethylene natural gas, the availability of co-products like C4, Aromatics will be less, and I think naphtha based production will be benefitting from this type of feedstock change. I hope we will be getting better figures from both C4 and Aromatic value chain in the coming period. I will give the floor to Mr Aksu to give some information on financial results and outcome of this quarter. Bulent Aksu Good afternoon, this is Bulent Aksu, CFO of the Company. In quarter one of 2013 the total EBITDA of the Company is TRY 42 million, net income of the Company is 3 million, and the net debt of the Company TRY 40 million. The total financial debt of the Company, TRY 121 million. If you look at the financial results of the Company, the total sales of the Company, TRY 990 million, and gross profit amounted TRY 54 million and the gross profit margin is 5.4%, and the EBITDA of the Company is TRY 42 million, increasing revenue by 6% and sales volume by 7% according to the last quarter, despite the challenging market conditions which will defer demand triggered by decreasing market prices. Starting from quarter four of 2012, Petkim has focused demand based production strategy for optimisation purchases? According to year-to-year revenue decreased by 18%. The main drivers of Q1 margin analysed are as follows, increased consumption of LPG has decreased average cost of feedstock and decrease of natural gas costs, efficiency projects helped increase the productivity and decreased the energy consumption. Efficiency measures taken within the Company production and focuses to operating expenses has resulted with 4.3% EBITDA margin with TRY 42 million EBITDA. Petkim has exceeded its annual first quarter expectation in terms of gross profit margin and EBITDA. When considering first quarter results, you must keep in mind the following items negatively affect Petkim s P&L, first of all net financial loss mainly due to fluctuation in FX rate, it is around TRY 7 million, and oneoff school donation amounting to TRY 6.6 million. Thank you very much.

6 Berkan Ates You are all welcome. My name is Berkan Ates, I am the Group Financial Coordinator of SOCAR Group Company, and I would like to give you information about SOCAR s projects in Aliaga peninsula. I would like to start first with our refinery project and its status. As you may all know the STAR refinery project, 81.5% owned by SOCAR and 18.5% by Turcas, and it is total Capex amount of USD 4.26 billion. This number includes contruction amount but excludes financial interest. The sponsors of the project will contribute USD 1.8 billion approximately as equity to this project, which is 45% of the Capex, quite a high number. Where we are right now in the project, the project has already started in the area, and the EPC signature will be released soon to the market and we hope that we will release it within the month of May, this month. Four companies are in the consortium and, they are TR, from Spain, Saipem from Italy,, GS from Korea, and Itochu from Japan, and the duration of the EPC will be four years. The first naphta to be received by Petkim will be in the first quarter of Regarding the financial package of this project, the lenders and the sponsors almost agreed on all commercial and legal items, and we shall release also the package to the market after the announcement of the EPC signature, and the market will know conditions. I can say that STAR is a very profitable project and the project IRR for such an amount of project is more than 15%, which is quite sizable and it is high EBITDA generator and we are expecting to generate EBITDA for this refinery USD million depending on the conservative and the normal scenarios. As you know that Petkim is not going to put equity for this project, but will be one of the major beneficiaries of the project, by having cost savings advantages on the following items. The optimum and homogenous inventory and sustainable, stable naphta quality will be the main issue for Petkim, maintenance cost, safety, security, best disposal and the type of service. We can very normally expect that a range of USD 250 million to 400 million is achievable, when the refinery will be operating and will start commissioning. This is all about STAR refinery. Regarding the other developments on Petkim s own port project which is Petlim Port. As you know we have released the information, we have signed the contract with the service operator, APM Terminals, and this will be 1.5 million TEU container terminals, and it will be served on 42 hectares main port area, and the capacity in this port can be increased up to 4 million TEU. This will make the port the largest in the Aegean and the Eastern Mediterranean coast of Turkey. It will be a very efficient port because Alsancak Port is fading because of the drafting problems. The infrastructure of the port will be carried out by Petlim which will be approximately USD 300 million investments, but equipment of the port will be provided by APM Terminals. As you may know we released the information to the market that USD 65 million will be received by Petkim and will be paid by APM Terminals as the down payment and this will also satisfy the equity requirements of the project finance we are seeking for. The amount of investment will be approximately USD 300 million for the overall that we are seeking we have received more than ten term sheets from the local international bank and we expect to release the details to the market very soon. The port will be operated by APM Terminals, 28 years. There are some guarantee payment conditions secured by APM Terminals to Petlim and we will expect that that amount will be no less than USD 700 million in the first 15 years. we can say that the Phase I of the port will become operational in 2015, and Phase II will become operational mid-

7 2016, and we can say that this will be not only the most largest capacity port of the region, but will be the most modern and efficient operated port by APM Terminals. The final...one of the most important projects for Petkim s cost savings, as you may notice PETKOJEN Project. In the PETKOJEN Project we are going to convert the natural gas fired turbines into the coal fired turbines and for this project we are expecting to receive the environmental/social impact assessment report within the next quarter and after that, the investment of the project will start. I would like to thank you very, very much and [audio]. Yasemin Ahmetoğlu Well thank you for this thing [audio] presentation and we are now open up to questions. We are looking forward to hear. Question and Answer Session Thank you, ladies and gentlemen, if you do wish to ask a question please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel, and there will be a brief pause while questions are being registered. Our first question is from the line of Niraj Khumar of JP Morgan. Please go ahead with your question sir; your line is now open. Neeraj Kumar Many thanks for the call; I have three questions if I may. I am sorry for the repetition if you already answered it. The first question, why share of thermoplastics is coming down in overall sales, like 38% in first quarter What is this 45% in first quarter 2012? Is it due to lower thermo plastics demand or higher exports from Middle East or other countries? Question number two what is your demand outlook for key export region Europe, which contributes 60% of exports for Petkim, then big chemicals like BASF and SABIC are cutting workforce there. Question number three on the second page of the press release there was a comment from Petkim GM, Improvement in the margins in the first quarter was positively reflected to our gross profit, if this continues we will achieve our profit target. If possible can you please share your profit targets, any guidance will be highly appreciated. As you know if you look at markets], the polymer side problem implies that quite big. There is demand but not strong, and imports from Middle East, especially from SABIC and some other Middle Eastern producers exporting to Turkey. As for PVC, US exporting quite big quantities to Turkey, so increasing production volumes was not attractive and we keep the production volume in our control as mentioned...if you push up the production, then you will have more inventory as I mentioned in inventory management, capacity optimization. In the first quarter because of imports from overseas, we focus on the margin and keep our production accordingly.

8 As for the second question, demand outlook, as I mentioned there is a soft recovery in the economy, moderate recovery, I hope this recovery is stronger in the second half of this year, in line with the global economical development. In Turkey we predict a better demand, especially in the third quarter and fourth quarter, these are our expectations. We export mainly aromatics to Europe. We don t expect any big negative impact from Europe. We think, we have seen the worse in Europe up to now. As for your question, concerning EBITDA expectations Bulent Aksu will answer your question. Bulent Aksu We captured a strong first quarter performance result. Petkim has more confidence to reach its annual targets of EBITDA around USD 100 million which is 4.5% EBITDA margin. Neeraj Kumar Thank you. Any other questions? Just to remind all participants that if you wish to ask a question could you please press 01 on your keypad now, and press 02 to cancel. There will be a further pause while questions are being registered. Our next question is from the line of Thomas Blutcher of Erste Bank. Please go ahead with your question; your line is now open. Tomas Platser Thank you very much, good afternoon. It is Thomas Blutcher from Erste Bank. I have just one question regarding your first quarter performance. Which of your products do you see have the most demand now from your portfolio and what do you expect for the rest of the year, how the demand side can change among the key products you have in your portfolio? As I mentioned Aromatic value chain will be a good performer, in fact, you know, benzene, P-X, C4, I think we can be in a better position. As for thermoplastics I think polymer demand will be improving also, but in Aromatics value chain, I think Aromatics value chain is the most attractive product group in the coming days, being P-X/OX/benzene.

9 Tomas Platser Do you find the market for these products mainly in Turkey or do you export most of this Aromatics. Most to the export market, as in benzene 100% goes to European markets. P-X half of our production goes to domestic market including our production, some portion goes to export market. Tomas Platser I see, and one more question if I may, you showed on your presentation that the margins were very strong at the beginning of the year and they became weaker towards March. How do you see April and how do you see the second quarterly generally. Do you think it will be worse than the first quarter on average or do you see this trend to improve later in the year? The problem is the correction in the oil price. Customers expect that the product price will follow this correction, and they prefer to postpone their purchase. They want to buy minimum quantities especially during this type of correction period, so we will see some impact, we have seen some impact in actual, you know, people, the customers expect that the product price will follow the declining oil price, but I hope this up to now oil price decline much higher than the product price decline, up to now, but we don't know in the coming months. we hope demand will be in the table, I think, this will continue, but it is some negative figures in the meantime, of course, the declining trend in oil will cause similar trend in product price, but as I mentioned, declining prices will stimulate and support the overall demand. UIp to now, the product price decreased much less than oil price decline. Tomas Platser I think I understand, thank you very much. Our next question is from the line of Onur Marsan of Garanti Securities. Please go ahead with your question; your line is now open. Onur Marsan

10 Hi, good afternoon, thank you for the presentation. I have got two little questions. The first one is, do you have capacity increases in the products like [benzene], the naphtha based product in the upcoming period. My second question is, one of my clients want me to ask, are you still considering buyback for Petkim. I have one more question; the 4% EBITDA margin for next year we are assuming like $100 PBL oil price levels, is it sustainable. Should we consider 4%, 4.5 over EBITDA margins going forward. Thank you very much. Berkan Ates Let me answer your buyback question by myself, and then let me give the word to Hayati for the other question. For the time being SOCAR s only publicly listed company is Petkim. We would like to stay transparent to our minority shareholders, and we would like to keep our listed company on the market, and we do believe that until the commissioning of the refinery and thereafter the performance of the Petkim, Petkim stock will move higher, with better results in the future, so we would like to keep it on the market for the time being. We are not considering any buyback on the shares at the moment. On the capacity side, you will see the expansion projects on our presentation. As you know, cracker expansion around 13%, still going on. We have also defined financing of these projects which is around USD 100 million, besides cracker capacity expansion, PTA one of Aromatic value chain product will have a 50% capacity expansion in We have already completed other aromatics value chain products, expansion last year. We want to optimise the integration between STAR & Petkim and investigating potential investment opportunities. Refinery will bring additional feedstock to Petkim, Aromatic feedstock. I think this refinery will bring some potential, but until now we have no clear complete decision but in due time, you will be informed if we decide to invest in Aromatic value chain, but besides this capacity expansion we have brand new investment on C4 value chain, and some other niche products, like etoxylates. These are not big projects, but they bring some special products to our competitive portfolio in the coming three/four year s time. Onur Marsan Thank you very much. As for your EBITDA margin expectation, we hope that 2013 it will get the business cycle, petrochemical cycle, although [audio] or CMAI, IHS, they are expecting better margins in the coming years we will see an improvement in margin, so Petkim s EBITDA margin will improve in line with on-going cost cutting activities, the global demand increases and global economical developments. As you know, as mentioned, our 2013 EBITDA expectation will be around 4.5%, but margins will be in better shape in

11 2014, this is our expectation. This is not only our expectation, but consultants all over the world expect some recovery in the industry. We have just to pass through the bottom of the cycle and we hope we will see better margins in the coming years. Onur Marsan Hopefully, thank you very much, very informative. Thank you very much. Our next question is from the line of Koray Pamir of Finans Invest. Please go ahead with your question; your line is now open. Koray Pamir Hello, thank you very much for the presentation, two quick questions. First of all regarding competition from imports, are you observing a significant change in any of the products that you produce, or is the competitive environment should continue to do better than last year, or any other issues that we need to know around the competition side. My second question would be regarding the accounts payable to SOCAR. I am seeing a 665 million TL as of the end of the first quarter, which is a significant rise from the last year. Should we expect this figure to rise, looking forward, or at some point will this accounts payable should start coming down. Thank you very much. Petkim is open to overseas competition, you know, product from all over the world coming to Turkey, no [audio], no barriers, but still we are open to competition. The problem is the competition is not fair competition. As you know some countries has a big incentive, big subsidies on feed stock side, you know these countries, you know governments supporting the manufacturer by giving cheaper, discounted feed stock. This is not a free trade; this is not a fair trade. This is the main issue, but as you know we are open to this type of competition, that is why we focus on efficiency improvement programme, cost cutting, energy saving, capacity creep, fixed cost reduction, so our main objective, to make our production assets competitive always, recently, last year, the government decided to implement new tariffs for export from third countries, like Middle East, like US, like Far East. If you import from these countries you have to pay around 6.5% duty. This will help Petkim in the coming days, but as I mentioned the majorities of Turkey s import are duty-free from European Union, from free-trade agreement countries like Egypt, like Israel,Korea. We will focus on cost side, and competitiveness will be improved by this ongoing investment on Petkim side, on SOCAR side, but on the other hand in the short term our main objective to focus on cost structures to make our production much more competitive. Bulent Aksu Regarding the second question, we have an account balance with SOCAR Trading, and the reason of this balance directly relates to our naphtha procurements from the SOCAR Trading. This balance has been

12 changing according to the naphtha prices, capacity usage of the Company and the toner of the naphtha cargoes, so that it is not possible to say a significant amount, or it is not possible to say any certain change right now, but it is a roll- over balance between the parties, that I mentioned that it is changing according to the naphtha prices, capacity usage and the tenors. Koray Pamir Thank you very much. Once again, if you have a question could you please press 01 on your keypad now? As there are no further questions, Yasemin Ahmetoğlu, may I please pass the call back to you to close? Yasemin Ahmetoğlu Well we thank you very much for listening and your questions. We will continue holding our conference calls after every quarter announcements from here on, and on demand, this conference call voice-record will be available on our website and here we conclude our conference call. Thank you very much once again. This now concludes our call. Thank you all very much for attending. You may now disconnect your lines.