PAO TMK (TRMK) Earnings Call Transcript & Summary

Good day, everyone. Welcome to the TMK 2Q 2021 Financial Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Vladimir Shmatovich. Please go ahead, sir.

Good morning, good afternoon, ladies and gentlemen. Today, TMK announced that second quarter and first half results for 2021. Thank you for your attention and participation. So as always, our presentation would consist of my general overview, then Sergey Alekseev, Chief Marketing Officer, would talk about major market trends, and then we'll go to questions and answers. So needless to say that in the first half of 2021, the major theme of TMK development was acquisition and gradual integration of ChelPipe assets into our company. So transaction was completed in March. Since then the united team of TMK and former ChelPipe management worked hard on integrating the assets and realizing the synergies. And although this effort was coupled with quite sharp and unprecedented steel price increase, which happened slightly before that, but continued throughout the first half. This obviously was a complicating matter for the company because as you know, the structure of our business and the relationship with -- and the way we work with our customers, such that steel price increases are being transferred to customers gradually, while commodity prices may rise quite sharply. Despite that, TMK posted reasonably good results. Second quarter revenue was up 68% quarter-on-quarter and first half revenue was up 56% year-on-year. And that was obviously thanks to acquisition of ChelPipe, but also based on gradual recovery and post-COVID period of major fundamentals of the company, market demand and improved mix of products. So as a result, second quarter adjusted EBITDA up by 64% quarter-on-quarter. And first half EBITDA up by 11% year-on-year, and it amounted to RUB 22.7 billion. So as I said, the integration is our main topic at the moment, but also the adjustment to steel price increases also took quite a lot of our efforts. Margin -- EBITDA margin was stable at 13%, and net debt slightly decreased to RUB 251 billion quarter-on-quarter. Speaking of developments, I'll break it down in 3 parts, the way the press release does it. In terms of business development, we probably should notice then that after acquisition of ChelPipe assets, the unified group now has somewhat more focused on non-oil and gas segments and not necessarily oil and gas, but also on adjusted segments to pipes, for example, our new subsidiary, ETERNO, manufactured delivered to Kazakhstan a number of steel-pouring ladles, which is one of its main products. And in general, this company continues to work with its customers finding new engineer -- engineered solutions designed for the metallurgical energy and nuclear industries. Also, ChelPipe Pipe Service, which is a service division, signed 3-year tubing service contractors with Udmurtneft. And overall services in oil countries at the oil well is one of the directions of our development that we'll get a new dynamic because ChelPipe Group had similar divisions and we realize synergies now throughout Russian oilfields. In terms of modernization, although we concentrate on controlling our CapEx and we tend to be quite disciplined on that. Nevertheless, we modernized according to our plans, our facilities, for example, pipe heat treat equipment at Pervouralsk plant get upgraded, which obviously adds our ability to add more value to -- in producing high-end pipes. And then modernization projects for electric steelmaking at Pervouralsk Pipe Plant. Also was launched and its recruitments will allow the company to produce new corrosion-resistant and stainless steel grades. So we obviously now look at our big portfolio of assets and try to focus on the key ones to reshape them and to realize synergies. In terms of our corporate events, corporate life, we launched a mandatory tender offer to minority shareholders of the remaining share of ChelPipe Securities and completed that. So we bought slightly above 11%. Total number of outstanding holding shares of the company. And in August, again, we made a mandatory tender offer to minority shareholders to buy the remaining 2.4%. And as a result, the target structure of ChelPipe would be 100% subsidiary of power TMK. Now besides that, we develop our ecosystem and for example, in ESG -- on ESG front, we cooperated Ural Institute of Management, and that's a branch of Russian Presidential Academy of National Economy and also Graduate School of Economics and Management of Ural Federal University to train employees for the single multifunctional center, which we have in Yekaterinburg. So again, we are looking to work with our partners to join our activities in developing people. And also in a similar development, we also launched an accelerated program with Moscow Agency of Innovations. So I guess also our effort to not to do anything about ourselves necessarily but to cooperate with partners and to create an ecosystem to realize mutually beneficial projects. So in terms of outlook, we do see stable demand for our key products, such as the OCTG pipes in Russia, further development, of course, will be influenced both by OPEC+ deals and agreements and as well as well as the activities of Russian oil and gas companies and government stimulus for them and of course, new project developments such as Vostok Oil development by Rosneft with -- where TMK participates alongside with other partners, obviously, would influence our performance. Also a big unknown is the -- for the behavior of steel prices. We do see that some reductions starting of those globally and especially in Russia. And that, again, gives us reasonable optimism short term, since we already got the heat of sharp steel price increases. Now we should be in a position to offset those in our bottom line. However, these movements are quite big. And it makes it difficult at this point in time in the middle of the year to make more accurate forecast for our financial results. But overall, we expect them to be better. than in the first half. So at this point, I would pass the word to Sergey Alekseev to briefly talk about the market development, and then we'll go to questions and answers. Thank you.

Okay. Thank you, Vladimir. Ladies and gentlemen, first of all, I would like to say a few words about the Russian market. So the second half of this year was much more better than the first half. So the market has increased by 12% comparing to the previous year quarter. And this was mostly driven by the growth in consumption of large diameter pipe and industrial pipes as well, seamless and welded. So the demand as was told by Vladimir ...

Excuse me, ladies and gentlemen, it looks like there's some problems with connection, so we'll reinstate it in a second. Again, just a second, we'll see we can restart the connection quickly. Sergey will continue. If not, we'll go to Q&A and then he'll join later.

It looks like Mr. Sergey has rejoined.

So I'm here, guys. Yes, I can continue. So there was something interrupted in the call. So I would say that the Russian market is showing us quite stable recovery. So the second half was much more better -- the second quarter was much more better than the first one. And we do see the further gradual recovery in the market segments. For the second half of this year, we do expect also the better demand in our core products. We also expect a better situation in the oil and gas sector. So we expect that there will be some recovery in OCTG volumes for a couple of weeks. And we also do expect that we will have a more stable situation with the sales of our niche products as well. So nowadays, we also see the tendencies that the global market is showing also the gradual recovery. We do see some activeness in our core export markets like East and North Africa, and we expect that we will sell more volumes due to better market situation. As for the new product offering, it's also important to note that together with the ChelPipe now, we are working on our let's say, balanced product portfolio, which will include not only special offering for oil and gas products, but also for the other sectors like our industrial segment. And we're seeing that it also gives us huge stability and market power in working in such kind of diversified portfolio. So we also have a dialogue with our key customers at the moment with the ESG approach as well as the dialogue based on our R&D center in Skolkovo, where we do have so many talks about the further developments, the further new product development for the upcoming new projects. And we think that this is the main part of our further strategy for the development of products. Vladimir, I'm done.

Thank you, Sergey. So now we can go to questions and answers. And again, just wrapping up presentation, we went through rather challenging first half, as I said, integration process and steel price behavior, but we now realize more and more synergies and we see that our group now has much more capability to develop new directions of business. And we actually are now rethinking our long-terms plans. And most likely, we will get some updates to our strategy later on this year or maybe beginning of next year. So we are quite positive looking forward. Now we go to questions and answers, please.

[Operator Instructions] We'll take our first question from Anna Antonova from JPMorgan.