PAO TMK (TRMK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of TMK regarding the second quarter financial results of 2020. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Vladimir Shmatovich, Vice President of TMK, who will lead you through this conference. Please go ahead, sir.

Thank you. So good morning, good afternoon, ladies and gentlemen, thank you for being with us on this call. We present the results of our second quarter and first half of 2020. So the senior management team is with me. Obviously, given our turbulent and volatile times, the most interesting things are short-term things, so related to result of a quarter as such, and that's where we start with our highlights. And I guess, the most important thing during this -- those times, with oil market turbulence and COVID and others, is that Russian oil and gas markets, which we dominate, showed remarkable resistance to this development. And Russian drilling activity remained quite stable despite certain forecasts that we heard when the OPEC+, the deal was announced. And the reason for that is that, given the geological structure of Russian oil reserves and specific programs and policies of Russian oil companies, they managed to comply, obviously, with the OPEC+ deal. But at the same time, they did it mostly by regulating or stabilizing or sometimes decreasing the oil flows from existing wells. And therefore, they didn't really have to stop or decrease significantly the drilling program. So we saw that, quarter-on-quarter, the drilling is stable. Year-on-year, it declined a little bit, but again, nowhere near those devastating 40%, 50% numbers we are contemplating in the United States, where the market was pretty much -- I mean, the drilling was pretty much shut down and so did the oilfield service industry. So in Russia, again, we see very good resistance. And as a result, our key products, seamless OCTG, is basically flat, and seamless pipes -- sorry, not OCTG but seamless pipes are pretty much flat quarter-on-quarter, and the revenues are basically even up a little bit. EBITDA is down due to certain ingredients and raw materials being more expensive because of ruble depreciation. But still, ruble remains stable. That would be a one-off thing. And again, together with certain improvements, we see in our European division after they passed the bottom peak, we believe, and even in the first quarter because in Europe, European industries, automotive and others, which our European business serves, the drop happened earlier than in oil and gas markets. So now they're in recovery mode, and they help to offset the slight decrease in Russian EBITDA quarter-on-quarter. So overall, EBITDA is insignificantly down, so pretty much stable. And so is the margin, just 1% down from the second quarter. So our bottom line or P&L is really stable. Of course, basically, we still aim at growing the numbers. But given what's other -- what our competitors reported and the status on international oil and gas markets, we believe these results are quite good. In terms of net debt, it decreased a little bit to RUB 103 billion. Yes, we are now learning switch to rubles, so speaking of TMK because we became a ruble -- essentially a ruble-reporting company. And debt-to-EBITDA ratio was at 2.76x. We try to stay disciplined and basically, especially in CapEx, so we don't substitute any significant organic measures. And in CapEx, so essentially, we live with maintenance CapEx plus a little debt. So I mean it's -- CapEx is not higher than, say, RUB 10 billion or so in terms of organic developments. Then, obviously, in debt markets, we see the decrease of interest rates, which is always also positive for us. And as a result, the service of our debt is -- becomes cheaper. So that's with -- that's what concerns the results. And as far as -- yes, by the way, the weighted average noninterest rate was down by 49 bps. So 6.45%, that's what I'm about to say. So again, not an easy time, but we contemplate again the resilience of Russian markets and, therefore, the resilience of our financial results. In terms of major developments, obviously, for you, for investors, for shareholders, the key was the completion of the buyback program that we launched back in May. It's actually a decision we've taken in April. But on July 27, we completed the buyback. So 22.3% of our share capital was purchased by our subsidiary, and we believe that's a very good result. And the fact that about 60% of float responded to this shows that the price fixed on ruble was adequate because, for example, should it be too low, obviously, investors would not have participated. Should it be too high, then everybody would have sold. But this split, the investors have sold. And the stake shows that this number was some sort of a good middle of investors' expectations and still remains very attractive, despite some recovery of Russian equity markets. Now we proceed with our delisting of our GDRs from the London Stock Exchange. So you'll see the related press release today, and that's in accordance with the decision of our Board of Directors. We still remain publicly listed on MICEX. And also, we were mentioning in our release, with the results of buyback, that we received a number of calls from investors, who -- it really takes time to prepare the papers so they missed the information in the -- missed the deadline. And they really asked us to buy their stock as well. So we're saying that we will -- we are likely to ask our Board of Directors to perhaps conduct another buyback and just to make sure that all the investors who, for whatever reason, couldn't participate at the buyback that's passed, that they could participate in the next one. And the price will be most likely the same or very close. So these were the main developments. And maybe one more important thing that I have to say on our results is that some headwinds in terms of volumes of pipes, so we compensated by increasing share of our premium products, primarily premium connections. And since the percentage of horizontal directional drilling, which is one of the indications of sort of premiality, if I can use this word, of Russian market, it remains over 50%, and we expect it to grow in the future. And TMK, the positioning, basically only one company possessing real premium connections in Russia, obviously, capturing this development and, therefore, increasing profitability of our business. And I should say that the -- although we structure our financial statements by geographical divisions, but if you look over at our management accounts by type of pipes, so seamless, profitability of seamless pipe, for example, gross profit margin of 24%. So despite some headwinds in volumes, we obtained good margins on our key products. Other products suffer more, of course, as well with business, as you could see from our tables. But again, the major money and margin generator work so right, it seemed to. So these were the main developments. And looking forward, we, of course, still see some headwinds because the -- although we believe that the very bottom passed, but it's not going to be like V-shaped recovery. But -- although we see now quite stable and growing oil price, it will get some time before real recovery starts. However, if the market situation doesn't worsen, we will do our best, and we expect our performance, specifically EBITDA, to remain more or less on the level of first half, speaking of the second half of the year. And we basically have these certain factors that led us to deliver it because, for example, Rosneft, in their statements, basically said that their CapEx for 2021, they're putting together. And we're already working for that because certain pipes are being purchased in advance given the better transportation condition in Russian oilfields, which starts in the fourth quarter. So the Rosneft CapEx in -- for 2021 basically more or less matches their CapEx for 2020, which they adopted before COVID and the OPEC+ deal. So that gives good signals that Russian oil companies would continue their drilling and would need our products. So that's basically what we have to say about our results, and now we are open to questions.

[Operator Instructions] And we've received the first question. It's from Anna Antonova, JPMorgan.

Just 2 questions from our side. First, could you please imply -- elaborate what's your expected CapEx guidance for this year? I think you mentioned that your maintenance CapEx should be roughly RUB 10 billion for this year. Where do you expect the group total CapEx spend to be as we are entering the second half of this year? And the second question is on your EBITDA expectations for the second half of this year. Did I understand you correctly that you would expect roughly a similar level of EBITDA in the second half on roughly current spot levels of prices and of oil prices as well? Or does this guidance factor in some further improvement or deterioration from current spot levels in the market?