PAO TMK (TRMK) Earnings Call Transcript & Summary

Good day, and welcome to the TMK Q1 2021 Financial Results Conference. At this time, I would like to turn the conference over to Vladimir Shmatovich. Sir, please go ahead.

Hello, ladies and gentlemen, welcome to TMK announcement of first quarter results. Thank you for your interest and time. So first quarter for TMK was a very busy time, as you can imagine. During our last call, we have announced our annual results, we told you about our mega merger or mega acquisition, we [indiscernible] with ChelPipe Group. So first quarter -- it happened at the very end. So our P&L consolidates the results of ChelPipe only for a couple of weeks, last 2 weeks of March. Nevertheless, obviously, first quarter and subsequent months was dominated by this event. Besides that, we saw some significant movements of the markets. Obviously, the most important being the -- well, the sharp and somewhat unexpected increase in steel prices. So getting now these events, and it's the influence, we think that TMK's results in first quarter are quite good. We managed to increase revenue and both quarter-on-quarter and year-on-year. Year-on-year was up 18% and 9% quarter-on-quarter. And again, the ChelPipe results there were present only for 2 weeks. So it's primarily our hard work and growth in our [indiscernible] and most important segments of our business. Adjusted EBITDA grew up 12% quarter-on-quarter. And well, looking at our performance year-on-year, a very important thing to notice is that first quarter 2020, we reflected quite significant exchange difference impact on EBITDA, and that's those differences related to operations. So I think the methodology was fair to reflect those. So obviously, we did not have these developments and effect of this exchange effect in the first quarter of 2021. Therefore, comparing our EBITDA in first quarter of 2021 to 2020 is not really at those level. So if we exclude this exchange gain factor, EBITDA was down by only 4%. And while some may say that with ChelPipe's numbers in even for two weeks, it was important to show the growth. Here, we return again to the [ seventh ] major dominating factor for our performance in the first quarter is the steel price increase. And those of you who follow our story, obviously know that the way the pricing for our key customers or key segments work is that quite substantial number of the pricing deals have embedded formats. And those formats, they work in a way that they [indiscernible] out to the way the effect of sharp steel price increase. Therefore, we cannot immediately translate true price increase to our customers, especially in those key segments and those key customers. Therefore, our reaction to raw material price increase is always delayed. So in the long-term, we'll regain it all, and we already started -- have already started increasing our prices this month, and we'll continue doing it every month going forward because we have 2 price increases already in [indiscernible]. However, in the short term, the -- our pricing and, therefore, revenue do not capture this effect. Therefore, in short term, obviously, this price increase affected our margins, and we had to work very hard. Again, increasing volumes in ChelPipe, for example, and improving the mix to mitigate this effect and still demonstrate decent EBITDA results, as I just mentioned. EBITDA margin, again, was stable quarter-on-quarter. And again, taking into account the pressure ahead from slow price increase, this fact with you is positive. Needed to say that post acquisition of ChelPipe, our net debt and [indiscernible] leverage increased. So we estimate roughly the price value of this acquisition at [ RUB 160 billion, ] which then [indiscernible]. And yes, the consolidation mechanic stores in a way that P&L is going to be [ made ] for 2 weeks, as I said, while balance sheet and so for the debt numbers are consolidated completely. The first quarter, therefore, again, the resulting number of leverage is, of course, not characteristical. And as I said, the deal was partially financed by owing cash partially by debt. But from the net debt standpoint, basically the same effect. So the result in debt, net debt at the end of the first quarter is slightly over RUB 260 billion. So to probably smoothly continue into major events we're talking about. It's obviously acquisition ChelPipe Group. And while avoiding Putin's press release, various pro forma calculations or forecasts or guesses because we'll try to make our press releases manufactural. Nevertheless, well, the first quarter numbers can be somewhat strengthened. As I said looking on in the longer term, annual term on pro forma basis, we see that, obviously, this high leverage will see this move up. Given, obviously, higher drilling power of [indiscernible] company and the leverage estimates. And it's difficult to make those systems now. So we don't give exact guidance in our press release, given the big swings in steel prices, but yes hoping that they stabilize and they go down while our pricing power continues capturing this price increase. We think that leverage with the very broad margins will be slower between 3 and 4x. So as we said during last year's conference, repeat it again, we believe that this acquisition was a good thing for TMK because it will enhance our position as the leader in pipe markets, especially in consumer pipes and not just oil and gas pipes, where we worked a little before. But also in industrial, sales pipe segments where ChelPipe will deliver. So we have to do as well. And a number of other applications in the pipes and the round pipes because the acquired [indiscernible] interesting initiatives in these groups of products. So we believe that in [indiscernible] our leadership position was important. As far as synergies, we continue working on those. And while we made some estimates before acquisition, obviously, when we obviously do not have access to all the information and all the aspects of ChelPipe business. Now we have them, but we still need time to digest those because you can imagine the company is quite big. And once we do that, we will be more specific on synergies. But given the synergies we see today, well, they tell us that this acquisition will pay off. And some of these are quicker, some are less quick, but we'll keep working on those. For example, just let's take some projected CapEx numbers that we have is that although the company increased various measurements of 40%, 50%, 60% with our segments, the CapEx will increase only significantly, will be somewhat, say, above $200 million. That's the guidance we used to have on TMK some years ago. So we would manage to ensure stable work and still realize some ongoing projects with essentially the same or all the same CapEx as before, while the company became much, much bigger. In terms of our other events, it's important to mention the recent event, which happened actually during [indiscernible] that's a company from [indiscernible] group having the same beneficial holding as TMK and signed a major contract with Rosneft, Russian major. So basically supply various metrological products sell bikes, obviously [indiscernible]. So service the development of a major was the [indiscernible] project, full-scale development of deposits peninsula. And that's a major, major achievement as we see it. A number of details are still to be worked out. But nevertheless, the project is very impressive, and that will give a major boost to our sales in various segments. So those including large enterprise and seamless pipes and even other non-pipe auxiliary products. So obviously, there were other achievements. We keep developing our stainless business at TMK-INOX and launched [indiscernible] plant. Then, as I mentioned, for the ChelPipe assets, [indiscernible] clients had some successes in exporting mechanical engine, it works with other products to Europe, which was very positive. One of the new features that we required another transaction. Getting back to the deal and [indiscernible] over capital launch mandatory par offer for remaining shareholders of ChelPipe. And we did that. It's ongoing. We see and expect that most of outstanding shareholders adjusted reminder a required just over 86% of the asset initially, but now we made offer to other main shareholders. So we expect that most of them will take this so far. And these, let's say, expected cost of acquisition is included in this estimate of RUB 160 billion enterprise value that we estimate for the deal. And obviously, ecology as the [indiscernible] very important for us. And again, there we require assets at risk pipeline plants finish the first stage of a project to implement a constraint plus gas cleaning equipment. It shows our commitment to continue efforts to improve environment. So these are major events that happened in the first quarter and afterwards. I already mentioned that we probably would avoid now to give some specific outlook for 2021 because this major increase in steel prices change perception of many people. Now we delivered, otherwise it may go down when it happens. There are different views on that. And that, of course, will influence our performance. The only thing I can say that our markets are very stable and improving in Russia being, obviously, compliant with the [indiscernible] deal, still generates very stable demand for pipes and especially premium, highest premium connection pipes with the share of directional horizontal drilling being stable, even slightly increasing recently, and that's, together with volume, is a major driver for our business. So again, thanks to our premium business to improving the mix, increasing volume on the right segments, so managed to offset somewhat the negative influence of steel price increase. And the key numbers, I already mentioned, you can see it in our press release, and that's how our drivers will going forward with oil production being stable and pipe markets, again, not growing much, the key drivers for our growth are the improving mix and working on cost, and these are major parts of synergies we hope to realize with the acquisition of ChelPipe. So I think I capture all major topics. We note that the situation in the European market is improving. So we saw some growth in the depth of our European division and the size, of course, on well, small compared to size of Russia. It is still important for us because it's our [indiscernible] European Union and pipes for manufacturing industries, machinery industries, a very important part of our business going forward. As far as our financials are concerned, I already mentioned the naturally increasing debt. However, from now on, we plan to decrease it, obviously and let us say that we obviously had agreements and constructive deals and that it is with major creditors, with major banks. And this temporary increase in leverage, of course, is well agreed. With them, the structure of our debt is, we think, quite balanced. Now we have quite a bit of bonds in no portfolio because ChelPipe had a significant number of bonds in the balance sheet. They have also material bonds and rational bonds. The average rate slightly increased because the key rates like in Russia now is increasing, but still our average rate is 6.32%. And as I said, the structural financing and our relationship with creditor is quite sound and give us good ground to gradually decrease the leverage in the financial stability. So at this point, I pass the word to Sergey Alekseev, who give you a brief update of Russian pipe market. Sergey?

Thank you, Vladimir [ Shmatovich ] So I would like to start that the recovery in business activity and the improving macroeconomic situation, it drives the consumption of steel pipes globally, not only on the Russian market, but we do see that it's happening practically everywhere. As for our, let's say, estimation of [Audio Gap] but we see that the volumes at the level of consumption, they are improving. For example, in Russian market, in Q1, we see some low volumes. So the market declined by 6% year-on-year. But if we see the numbers according to our estimation for, let's say, 4, 5 months of this year, which we see on the market, we see a great [indiscernible] recovery. And the lower volumes were mostly driven by OPEC+ deal and the lower volumes of the drilling. But at the same time, we do see, as Vladimir mentioned, that horizontal drilling is stable, and it means that the situation for our high-margin products is stable as well, and we are improving mix. We are making more, let's say, high technological products, adding to our -- the line of high-end products. As for the consumption for new pipes in Russia, as I noted, for the 4 months, it's just 2% lower than here -- than the 4 months of the previous year. And we do see that the market could change in the second half of this year, and we would see the more volumes, not only from the, let's say, industrial segment as we see it right now, but as well as from some oil and gas companies, which will be drilling more due to the complicated transitions of drilling and their new projects. It's also important to know that the Russian market of the first quarter of this year declined by 13% compared to the previous year and was mainly due to lower large diameter shipments only. As for our core segments like OCTG, practically stayed at the same level as it was in the Q4 of the previous year. As for international markets, I already noted we see the improving situation and growing business activity. And especially important for TMK, the European market, we do see some recovery. And you also can see it in the results of our European division. As for the other international markets like Middle East and others, we also see some pluses, for example, for the latest statistics published by Baker Hughes, we do see the overall plus 86 rigs in the international drilling activity. At the same time, plus 14 in the Middle East, for example, plus 17 in the U.S. as well as in the other regions. As for our export sales, I would like also to add that we are now also going with high technologically products to our core markets. And now we have some sales of premium connections to the new Middle East area and to the North African area, and we would like to also to diversify our channels and to supply more high technological products to the overseas markets. As for the important, let's say happenings, I would like to say that we are still working with the most of our key customers with the long-term technological partnership programs and agreement, which are supported by our R&D center in [indiscernible] with the most of oil and gas companies in Russia. And for sure, it's an extremely important step for TMK that we have signed an agreement with Rosneft for the further supplies of tubulars for the project [indiscernible]. Vladimir, I think I'm done.

Thank you. Thank you very much, Sergey. So this concludes our presentation and we open for questions.

[Operator Instructions] Our first question comes from Timothy Riminton with Barclays.

I just have a few questions. So on the price side, you're being squeezed a bit on the high raw material costs. At what point do you think we'll start to see the higher prices come into results? You mentioned that you started increasing prices this month. So does that mean most of the sort of the positive effect of that will be seen more in H2 rather than Q2?

Thank you for the question. Unfortunately, we cannot guess the global steel price increases because as I mentioned, it was, as we saw, unexpected for many analysts who are following these trends. However, what we see now is stabilization. And I saw some estimates that may be -- start coming down rather shortly, some other estimates to say by year-end. And this, of course, we cannot control. However, we do control our contracts with our customers. And yes, I said that we started increasing start of increasing prices this month. And that's basically the end of Q2. So I guess obvious answer is that most of the effect of our price increase will be seen in second half of the year, but the increase will be quite significant because the steel price increase was significant. So again, it will be smoother. But we -- yes, we see this effect in the second half.

Great. And then I guess my next question would be on your maturity profile. You've got quite a lot of short-term debt in the next sort of 18 months or so. Do you have any thoughts about how you intend on managing and refinancing that debt? I mean, will you be looking at Eurobond markets still? I mean I know you've now effectively got 2 bonds outstanding, but is that something you'd consider expanding on further?

Thank you for this question. Well, we always -- optically, if you a look at our [indiscernible] profile, it sometimes may seem that with quite a bit of short-term debt. And the reason for that is that unlike some other companies, [indiscernible], for example, who finance pretty much only the bonds. We keep the balance because we also want to capture the opportunity to adjust our interest rates through the changing key rates. So we maintained the group of mix between bond financing and bilateral bank financing. And speaking of that, it's basically being rollover. We have credit lines [ standby line ] with the banks, which allow us to roll over this debt relatively in a painless way. So we are not concerned with the 18 months debt profile. We're quite confident we'll keep rolling the sower. As I said, the management to agree all necessary amendments or waivers is net trade for coverage due to acquisition of ChelPipe. So we don't see running this over. In terms of bonds, we already have quite almost a $2 billion equivalent of growth with Eurobonds and Russian Ruble bonds, which is quite a bit -- I'm sorry, quite a lot. So we are not planning to issue that -- not new Eurobonds at this moment because we have 2 Eurobonds already, one TMK and one from ChelPipe. Eurobonds as far as Russian bonds so, you may know, they usually have embedded options in them. So it's effectively by adjusting the coupon, we can keep these bonds in the market rather than accepting the offer. So in a way, it's a way to refinance and to extend our maturity, which we did all the time. So we are not issuing new bonds at the moment, but we are -- we'll try to extend those bonds through we think makes sense, extending our maturity profile. So of course, [indiscernible] it's quite a busy time for our finance team, managing all the debt, but we think it's quite balanced, and we don't see any provision.

That's very helpful. And just to follow-up quickly on the covenant point. Are these covenants attached to your bank debt? And could you give us any idea of what those covenants are?

Well, they are -- they -- mostly, the key metrics is quite clearly that we did at. Of course, there is sometimes different definition of that OIBDA. And as I said, we have comfortable levels of covenants agreed with the banks. And obviously, going forward, we -- or the banks that we work with know our business quite well. So the gradual improvements of financial condition and the leverage is agreed with the banks. So basically, it will be -- we will have a form of a certain scale where the covenants will get to normalized level within a reasonable time. And I did mention I rather broad, but still an indication that for this year -- by end of this year, we will get [indiscernible] time. So again, we are not -- internally, we're not -- there's nothing striking in the debt as one may feel just right now in our first quarter [indiscernible].

Our next question comes from [ Dmitry Smolin ] with [ Emera Financial ].

Thank you very much for the presentation and congratulations on the results. I have 3 questions, if I may. The first one is outlook on domestic steel prices. We saw quite significant run in prices, and we still see the rise in some steel products on domestic markets. Do you -- when do you expect to see like some direction in steel prices? Or do you expect these elevated steel prices to remain longer term? Secondly, on large diameter pipe segment, which is very important for you, with the acquisition of ChelPipe. What were the volumes of large diameter pipes in the first quarter? And what is the outlook for the volumes for 2021? And last one is on Pakistan stream projects. What is the rational for TMK to participate in the project? And what is the actual stake, which the company may get in the project? And what investment -- what investment it will require from TMK?