PAO TMK (TRMK) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of TMK regarding the Board Directors decision considering the tender offer [ and this deal ]. At our customers' request, this conference will be recorded. [Operator Instructions] I now hand you over to Vladimir Shmatovich, who will lead you through this conference. Please go ahead, sir.

Hello, ladies and gentlemen, this is Vladimir Shmatovich, Vice President of TMK. And our team is also on the call. Although due to circumstances, most of them are online. So we call this conference to basically answer your questions about yesterday event. And yesterday event was that our Board of Directors voted unanimously to launch buyback. And therefore, they offer by -- governed by Russian Law of Federal Law of Joint Stock decided to offer to sell the shares to all shareholders, except majority shareholder and affiliated persons. Also, the Board decided to cancel the listing of our GDRs in London, although this process will start only after the buyback happens. So the rationale for this decision is quite straightforward. Frankly speaking, London listing, according to what we understood and from what we heard from many investors, does not really bring any value to the shareholders. And instead, it splits the liquidity between 2 exchanges and basically is not really needed. But at the same time, since we didn't want to launch a partial offer prorating shareholders, we offered to all minority shareholders to sell all their shares. We realized that for quite a while there was not much interest in our stock from investors and the stock was facing all kinds of pressures. And there is a number of drivers starting from sanctions and up to not enough dividends. And now we realized that for considerable time ahead, we will not be able to even sustain the volume of dividends that we were paying. We -- of course, the Board will finally decide, but our understanding is that there will be no dividends for 2019. And we are yet to estimate the -- all the implications of current economic situation, especially in oil and gas world, where most of our clients are. And we understand that the level of dividends, the level of earnings expected by investors would be impossible to achieve. Therefore, we thought that giving this opportunity to all minority investors or financial investors to exit is a fair gesture, if you will. So this is the rationale. In terms of logistics, as I said, it is a voluntary tender offer; however, it has the form of -- it complies with the rule of mandatory offer as well in case the effective share of controlling shareholders exceeds 75%. Therefore, it's regulated by Russian Law. And we now have a couple of weeks to arrange formalities with authorities and don't expect any delays. And then 70 days, 70-calendar-day starts. And if everything goes as it should, the last day to present the shares to be bought by the company should be July 3. Of course, small variation is possible, but according to our schedule, it's very, very beginning of July. So there's plenty of time for investors to make the choice. And hopefully, by that time, the markets will be back. And so it will be a conscious decision. A very thorough, and I would say, and -- thorough work was done by the Board. A special committee was formed, consisting of only independent directors. They've been consulted by UBS. And the valuation was made of the company. And according to that valuation, the independent directors, members of the committee formed the recommendation that the Board has finally approved to decide on the price of the buyback, which was approved at RUB 61 per share. So we buy ordinary shares. Therefore, GDR holders will have to cancel their GDRs if they wish to participate. The purchaser of the shares will be Volzhsky, our major plant in Russia, 100% subsidiary of TMK. So that's basically the key steps. Once the buyback itself is launched, which, as I said, will happen in a couple of weeks after we clear everything with regulators, then the very detailed press release with instructions for shareholders will be published. But generally, they are supposed to report to the registrar, our registrar, which is R.O.S.T. in Russia. And basically, they represents the stock. The stock -- as soon as they do, the stock will be blocked. And then, by July 3, also there will be a final list of people willing to sell, and then the settlement will happen within a week or couple of weeks after that. So it's all regulated by Russian Law. We can't really change much there. So that's the process. And now I guess, we can open the floor for questions.

[Operator Instructions] And the first question received is from Nikolay Sosnovskiy of Prosperity.

I've got actually several questions. First one, you mentioned in the press release that the company has limited abilities to increase dividends, and this is one of the reasons why market is under-appreciating the stock at the moment. I was just thinking to reconfirm the logic you received $1 billion from the sale of IPSCO. And at your average borrowing rate, which is 7% at the moment, this is -- if you reduce your debt by this very amount, this will reduce your expenditures on interest by $70 million, roughly. This $70 million to your current market cap is roughly 10% dividend yield. So why don't you just do that exercise in reality and start paying this $70 million, not even included everything else, which you can generate as free cash flow and the remainder of that, which can become cheaper because this is a relatively high interest. That's my first question. The second one -- or I can go one by one, if you wish?

Yes, let's go one by one because I can forget the first one. So mathematically, you're correct. However, I am to remind that the, say, advice and the opinion that we heard from investors and rating agencies and whatever was that the company is quite heavily leveraged. Therefore, the -- all free cash flow it has -- should be used first of all to reduce the debt. And that's -- you're right, that's what we did with IPSCO proceeds. The -- some theoretical free cash flow that this action would yield, first of all, can also be directed to reduce the debt because the leverage today is actually a very good question because if we take last year EBITDA, which is in our annual statements, then the leverage probably will be quite low. However, what can we expect going forward is a big, big question. And I guess nobody today has crystal balls in what was going to happen. All in all is that a number of our key clients announced reduction in the upstream CapEx. And where that would lead us, it's truly difficult to say, but what for sure is that the drop in our bottom line, be it P&L or cash flow may be much more significant than $70 million. I'm quite sure. So yes, the de-leveraging yields some benefit, but the company was quite heavily leveraged before. And then there's a number of things that may more than offset this effect, and that's why we basically gave this conservative guidance. And of course, we'll keep updating on how things develop, but so far, we expect quite difficult time for quite long time ahead. So next question?

Yes. So the second question is basically the extension of what you just said because if someone is expecting very tough markets and earnings and balance sheet to deteriorate quite significantly in the coming years, I guess, in this kind of circumstances no one would buy 1/3 of the company at the current price and with premium. I guess it's reasonable to assume if you expect earnings to deteriorate significantly. In 12 months' time or 24 months' time, you will have an opportunity to buy the stock out, I don't know, at 50% of this level. So why doing it now? Because you said current EBITDA is relatively okay for 2019. And also in the press release, you said that you hoped for at least similar EBITDA for 2020. So if we assume that management works in interest of all shareholders, why buying stock expensively now and not at much cheaper level later?

Well, we -- of course, obviously, a press release was issued before we saw circumstances that happened. And as I said, we just saw little interest in the stock before. And we just don't see any drivers that would reverse this trend. And I mean why do it now, not later? Well, we basically completed the sale of IPSCO, and I know that certain investors expected special dividends. But at the end of the day, we decided to rather than pay dividends just to go for buyback because then that will provide a much larger liquidity events for investors, which apparently would not be -- we're not happy with the stock because the dynamics of the stock and liquidity of the stock was frankly quite poor. So wait until it gets cheaper? I don't know. Would it be cheap or not? I don't have crystal ball, but since we do have this ability to buy it now, why not do it now, and then investors could use this cash to buy the assets they want. And I'm sure there's now plenty of interest in assets to buy at reasonable price. And the overall expenditure for this buyback, and of course, we don't know the percentage that would eventually be sold, the percentage of shares. But still, it's not such a major amount that would dramatically change the company's financial conditions, you can easily do calculations, if you know the number of shares and the price. So basically, it's a good compromise. And the logic of the Board, the logic of special committee when they contemplated the price and finally have chosen this price, maybe it's more the compromise between shareholders who sell and shareholders who stay. So it's some sort of a golden middle where shareholders would go, receive very good premium. And by the way, I think it's like the highest premium that I saw in Russia, ever, buying the stock. And shareholders who stay, they also basically choose to stay. They -- yes, they may -- if they value their share, they would basically own cash flows in the future. So it's a good compromise. And of course, for financial shareholders staying in a company, that would be much less liquid, is more challenged, but that's a different story. So next question?

Yes. And the third and final question from my side is basically an extension of your answer into my second question. In the first bullet, and as you mentioned, just now, this event would create even lower liquidity going forward. So what's the endgame? You will spend money on this buyback. There will be less dividend firepower. There will be less deleveraging. Someone will stay and liquidity would worsen presumably. So how are you going to support your investment case afterwards? What would be the key attractiveness of TMK, if you are not going to take the company private after all?

Well, yes, thank you for the question. The point of taking company private, this was not -- this is not in the Board's decision for a very simple reason because under Russian Law, to take company private, basically, 95% of shareholder votes is needed. So today, obviously, it's -- this issue would be irrelevant to the Board's decision. So we'll see what the results of buyback will be. Of course, it's -- if the participation is high and little, if any, float left, then by sort of -- not by legal terms, by investment terms, by business terms, the company would be rather private than public. But this decision will be made in the future. So it's -- yes, it has to be seen what kind of participation will be. And then when you say an investment case, yes, we'll see whatever happens because, obviously, the horizon, the commitment and the -- well, appetite, whatever you call it, of majority shareholder and floats, financial investors is different. So the strategy then would depend on the outcome of this exercise -- of this buyback. And if the participation is high, then, I guess, the question of investment case would be irrelevant.

The next question we received is from [ Aruj Ilya ] from Franklin Templeton.

Yes, do you hear me?

Yes.

Yes. Actually, I have like a similar like mood of Nikolay. I am a bit muted by the fact that -- with this announcement. Because I'm a bit puzzled because a month ago you were saying that actually EBITDA projections of brokers are very conservative, and you expect much higher numbers. And definitely, they were affected now maybe by COVID-19, but -- and definitely, you started the evaluation process of your buyout notes like yesterday, probably -- sorry, like 2, 3 weeks ago. So that's why it's a bit puzzling that you -- with relatively good projections, you still started the buyback process. Another thing is actually that according to your R.O.S.T. financials or annual report, you actually increased like 10x the payments to the Board. And at the same time, you're saying that you cannot pay dividends to shareholders, that's a bit also frustrating. And yes -- and another thing, so it's also a bit puzzling that you already have a buyback program and you haven't purchased any single share probably for a pretty long period of time. So -- and now you're basically offering in my view to buy shareholders for a relatively cheap price. Yes, the stock dropped dramatically in line with the market, but still the equity valuation of the company is pretty low. And if you look on assets and then potential to have free cash flow in normalized environment, so because if you assume that demand to recover probably next year, the valuation you are offering is a big discount to the -- any peers -- global peers. So what's your view on this kind of like topics?