PAO TMK (TRMK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of TMK regarding the presentation of the third quarter financial results of 2020. At our customers' 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.

Good afternoon, ladies and gentlemen. Thank you for joining us at the call where we present our results for 9 months of 2020. Our results, we consider being positive under circumstances. We saw a strong, let's say, a noticeable increase in EBITDA. It's up 6% year-on-year. And that's taking into account even the fact that last year, we had American division in our perimeters. So even together with this fact, we see the increase in EBITDA. The revenues was predictably down given the decrease in volumes, first of all, and the disposal of American division as well. However, we managed to improve our mix, selling more profitable, more high-tech pricing pipes. And as a result, the adjusted EBITDA margin for Russian and European divisions, which essentially is TMK today, it now stays -- now at 21% in 9 months 2020 compared to 16% in 9 months 2019. So I think we demonstrate quite good resilience to the circumstances. Net debt is at RUB 108 billion as of September. And the leverage decreased considerably to 2.3x net debt EBITDA. Speaking of major developments, there's a number of them. We updated our strategy and got approval from the Board of Directors with this update and strategy. We confirmed us focusing on premium segments, producing more profitable, more high-tech products as opposed to just increasing the volumes. And also, we deepen our long-term partnership with our key clients, and we have both R&D programs and selling supplier programs with major Russian oil and gas companies. Also, obviously wide usage of digital technologies and green aspect in a lot activities and also certain reorientation of our product mix towards, for example, nuclear energy supplies -- I mean products to produce nuclear energy, and we'll talk about it later. And in general, ESG component gets stronger, stronger. We also have a mentioning of hydrogen in our strategy, and we are well positioned to capitalize on this long-term trend as we produce at our Orsky plant. We produce high-tech gas cylinders, high-pressure vessels that are used -- potentially can be used in hydrogen production transportation. In October, we acquired -- which was an event after the important date, but nonetheless, we acquired the controlling stake in a company called Truby 2000, one of Russia's leading manufacturer of pipeline systems. So that's really enhanced our cooperation with Rosatom and its companies, its nuclear power plants construction. And as you may know, a number of nuclear power plants construction sites are now developing both in Russia and abroad. This is becoming one of the main Russian exports, the expertise to build and operate nuclear power stations. So we are becoming part of it as well. And although the tonnage of this facility may not seem to be impressive, but nevertheless, the complexity and the quality requirements and thus, the margins very different from what we have on the mass production mass-produced pipes. Also we supplied 200,000 meters of unique pipes for a fast neutron reactor at an experimental demonstration power unit developed by Rosatom, which again shows our diversification compared to our main focus on oil and gas production. We're also developing other high-tech segments to not to overemphasize our dependence on upstream oil and gas production. As we said, so this example also shows this trend. We are becoming a strategic partner for Rosatom. So I already mentioned our Orsky plant, its capacity to produce high-tech gas cylinders can be very useful given the overall hydrogen trends. And lastly, we also acquired a stake, controlling stake, in casting and rolling complex, which is not pipes, it's rebars. But that's what's important, it's vertically integrated. It had an electrical service. And that's also sort of a move a little bit away from oil and gas to expand our portfolio and to capitalize perhaps on the back of construction ready, which [ funds ] expect in Central Russia. Also, again, talking about diversification from upstream supplied by Amursky Gas Chemical Complex. And again, that's a very, very high-tech pipe supplied. So SIBUR, which is our strategic partner as well and it's various pipes, seamless, large diameter and also pipings, which are bends, fittings and other prefabricated sections, which again have quite good margins. But of course, we don't get our main business and no premium connections. OCTG pipes were successfully lowered into the well at Sakhalin-1, ExxonMobil and Rosneft. And that basically shows that we are capable of supplying the world-class premium solutions for our global customers as well. On the other fronts, we continued -- actually, we launched another program to buy back our shares back in September and it finished in October. And there's a different buyback compared to the one we launched in second quarter. And as a result, we bought about 2.9% or a total number of outstanding shares of TMK. And also, as we stipulated before, what we do in our first offering for the shares, we closed down our programs in London and U.S., 144A GDRs and Reg S and also ADS Level 1 program as well. So just to focus on Moscow Exchange despite the fact that the flow got smaller. So that's basically key events. As far as the outlook, we expect the demand to be generally stable despite OPEC deal, which, by the way, got loosened a little bit recently by OPEC+ members. We see that even to sustain the -- a lower level of oil production, Russian companies still need substantial drilling. And therefore, the demand was not growing but still remains stable. And then coupled with our efforts on premium products on that side, we obtained a high EBITDA margin. And thus, we look in the future with cautious optimism. The recovery in Europe may take a little longer, but again, it's such a low level now so that we expect it to recover once the COVID syndromes and related fall on production goes away. So that's basically it. In third quarter, speaking of the third quarter, we see some good increase in overall pipe, consumption in Russia, even including large diameter pipes, which, again, don't have a stable supply, but -- I'm sorry, demand, but we still saw some projects that added to this number. So again, despite overall contraction of the market that we saw last -- more than a year, we still see that our products have a good potential and good demands going forward. So as far as debt profile, we -- I already mentioned that we considerably reduced our leverage to 2.3x. And net debt is just above RUB 100 billion. Total debt is much higher, but that basically shows that we have quite large cash reserves on our accounts. It's actually over RUB 60 billion and also we have some investments in financial instruments as well. So overall liquidity that we possess and is quite considerable, so basically around $2 billion. So in brief, that's the overview of our results. And we now will be delighted to take your questions.

[Operator Instructions] The first question is from Sergey Beiden from Renaissance Capital.

I have actually two questions. The first one is about your new methodology of the EBITDA calculation, you added the FX contribution coming from receivables and payables. And it makes it very difficult to forecast for the future accounting periods because we don't have an FX composition of your accounts receivables and accounts payables. So the first question, do you plan to disclose such information in the future? That's the first question. And the second question is that your main shareholder now controls 95% to more than 95% of TMK. Do you plan to ask without of the rest of like 4%, 4.3% free float, or you kind of -- you have no legal obligation on doing that because your buyout will split in 2?

Thank you. Thank you very much for your questions. Indeed, we did change the methodology to compute EBITDA, which we basically think is fair because while financial asset liabilities should not concern and affect EBITDA calculation, but operational assets, such as such as receivables, for example, I think, can because that really affects separation cash flow and, therefore, whether ruble strengthen or weakens, it basically affects -- I mean, the existence of such assets and liabilities affects the operational cash flow. Therefore, EBITDA being basically a proxy for operational cash flow should reflect that. I fully appreciate the difficulties that you have in modeling. And we'll try to solve that. I'm not sure how exactly we do that because the hard currency component of our cash instruments may vary. But we understand that you have to forecast our results. Actually, we'll consider disclosing this in our financial statements. And then, therefore, maybe -- again, to the extent we can, give guidance at least on a big scale, what's happening with these foreign currency asset liabilities. So we'll try to make your life easy as much as we possibly can. Second question about the control. Yes, as a result, our controlling shareholder now possesses more than 95%. And technically, that's not automatically, as you mentioned, so we don't have obligations, but theoretically can lead to these results. However, I'm not aware of such plans of majority shareholder because that's, I guess, him who's supposed to do that. And I don't know of his plans. And therefore, I don't think it is happening in the near future.

And the next question is from Timothy Riminton, Barclays.

So just to follow-up on the question on EBITDA. Could you explain a little bit more about your rationale for changing the calculation there? I mean you just mentioned operating cash flow, but the way -- just having a quick look at your statement, the operating cash flow you generated 9 months to September was about RUB 26 billion, including working capital changes, or about RUB 25 billion excluding; and that, to me, lines up better with your EBITDA, excluding the FX change.

Okay. Thank you for your question. Well, when I was talking about EBITDA being a proxy for cash flow, I meant it not in the, say, accounting way within one period of time, but rather in general. Of course, the numbers of operating cash flow and in EBITDA are not the same. But what I meant, and -- that was especially, I think, relevant at the time of ruble fluctuations, ruble weakening, which we saw some time ago. That existence of, for example, accounts receivable in hard currency, that basically promises, for example, in case of ruble depreciation, increase in ruble cash inflows in the future. That's, I guess, what I meant. Of course, it can work the other way around as well. But we just thought that if those assets are significant, more or less -- or liabilities, it should affect EBITDA because it's just fair to just better reflect our operational status, if you wish. So yes, we know not everybody does that, but we thought it's feasible. And we appreciate that this can add some volatility, but we still thought it's a better way to disclose our results. So I think on the long run, it's -- it will be, again, more adequate. But I get your point, of course, in a specific period, when this cash gain is not realized, it's just a receivable. Then, of course, EBITDA and operational cash flow numbers can be different. I hear that.

Okay. I just noticed that your net debt calculation is a little bit different from what I see from the financial statements. So you said you added some short-term assets to cash. Could you tell me where those are on the balance sheet and what they are, please?

Well, I'm not sure if there is a note about it. But basically, it's some sort of a short-term -- it's only short-term financial investments and basically notes, which we hold and they're first-class bank notes -- I mean, notes of the bank. Therefore, we believe it's a very, very solid liquidity in a way. So it's very fair to treat them as cash, so to speak. And by the way, more information about that is in note 16 of our financial statements. Note 16, please, yes.

Okay. I'll have a look. And just on the recent acquisitions you've made, do you -- can you give us any indication of the cost of these acquisitions and when that cost will be realized?

The costs will be realized in fourth quarter, of course. And overall cost for the acquisitions is about area of RUB 15 billion. So I wouldn't call them very significant. But as I said, we believe it helped us diversify from oil and gas a little bit because it's, again, with all our dedication and high expertise and advanced products, we do realize that with some stagnation, low production. So despite increasing and improving our premium product expertise, it's wise to diversify a little bit from oil and gas.

Yes. Understood. Just on that quickly, do you have any indication or idea on how much they might add to EBITDA?

Well, the -- I think these are mostly long-term pains. And probably, we're talking of in the -- I'll say in the mid-term, like 2, 3 years, we are talking about some, I would say, low single-digit billions of rubles. But that's just a start because we have some other ideas how to increase synergetic effect of those acquisitions.

And currently, no further questions. [Operator Instructions]

While we're waiting for questions, by the way, I also wanted to mention that we decided to discontinue issuing operational press release. Because basically, it was some -- a little bit confusing thing for years because then the shipment -- because operational release reflected the shipments and the shipments numbers did not match the sales numbers like transfer of ownership numbers for the volumes. So it was always confusing a little bit. And then our main competitors don't do that. So we are probably going to discontinue it. However, it did have some marketing -- useful marketing information. So we will consider maybe enhancing our financial press release with more sort of flavor of marketing information starting from next quarter because we did issue the operational release for third quarter. But from now on, we're probably not going to do that anymore, we'll be just issuing quarterly financial releases.