PAO TMK (TRMK) Earnings Call Transcript & Summary

Good day, and welcome to the Third Quarter 2021 TMK IFRS Results Disclosure Conference. Today's conference is being recorded. At this time, I'd like to turn the conference over to Vladimir Shmatovich. Please go ahead.

Good afternoon and good morning, ladies and gentlemen. Thank you for joining TMK's conference on the results for third quarter and 9 months of 2021. So as usual, today, it will be presented by myself, Vladimir Shmatovich, Vice President of TMK. Also, our Chief Marketing Officer, Sergey Alekseev, will talk about the markets, and then we'll go to a Q&A session. So analyzing our results for third quarter and 9 months, obviously, the major theme is the acquisition of ChelPipe Group that we completed earlier this year. And it's important to understand the dynamics of financial figures with this regard, as we completed it at the end of first quarter, beginning of second quarter. Therefore, our P&L numbers do not include ChelPipe Group enterprises numbers for first quarter. On the contrary, our numbers do include the balance sheet numbers of ChelPipe Group for -- starting from the date of acquisition. Therefore, speaking in advance, the metrics such as leverage debt to EBITDA, they have to be carefully analyzed because they may give a wrong impression as debt is accumulated for the period for both groups, while P&L starts to be joined only from second quarter. And prior to that, we only have TMK numbers. So overall, our experience in, let's say, new life of owning ChelPipe Group enterprises is rather positive. We work on discovering and realizing new synergies with this group. And in general, we are pleased with the acquisition. Although we became the producer of seamless pipes in Russia. Nevertheless, our approach and our attitude towards our major customers, we believe, is appreciated by them. And our relationships only improved after we became the main counterparts with regards to pipes to produce oil and gas. Speaking of the numbers, they also show positive dynamics. Revenues are up both quarter-on-quarter and year-on-year. Obviously, year-on-year, the growth is very substantial due to things I mentioned because we do not have ChelPipe in our perimeter last year. EBITDA is up quarter-on-quarter and year-on-year. You may say a modest number of year-on-year 9 months increase in EBITDA is partially explained by the fact that we realized certain exchange gains -- exchange effects on EBITDA. Last year, we introduced new methodology of calculating adjusted EBITDA, and this methodology sometimes gives pluses, sometimes minuses, but last year gave plus. So therefore, we compare EBITDA for 9 months 2021 to a very high base. That's why the growth may not seem to be that impressive. And obviously, challenges that we faced at the beginning of the year when steel prices went up very quickly and significantly also put some pressure, although temporary, on our margins. And as a result, beginning of the year was rather difficult for the group. But as I said, now we see positive dynamics and quarter-on-quarter EBITDA is up 19% and margins is 14%, which is, again, not that bad given the fact that we saw such a massive increase in steel prices. So speaking of developments of the company, we should say that TMK, even in new bigger perimeter, continues to develop high-tech products and to move and move more away from commoditized products to high-tech products. And that's reflected in big and smaller performances and positive business cases. Now we became the largest supplier of gas cylinders in Russia before we had it into our Orsky plant. Now we also have it in Pervouralsk, former ChelPipe Group plant and these cylinders are widely used everywhere. For example, we sold them to companies like PepsiCo, as you can see. So that shows certain diversification from oil and gas business that new acquisition gave us. We continue working in Sakhalin and supplying line pipes for Sakhalin-2 and the supply both onshore and subsea. In Sakhalin Energy, we signed addendum to long-term contract for tubular products. And again, this is high-tech pipes used on development on Russian subsea fields. New and premium products such as [indiscernible] chrome-nickel produced in-house, the success was happening in -- at VTZ, Volzhsky pipeline. Then we supply high-tech pipe to Turkmen State Concern. And also speaking about diversification from oil and gas, we now have a company called ETERNO, that, for example, manufacturing supplies Russian leading steel companies, MMK and Severstal EAF bath for steelmaking and the customized containers. ETERNO produces very solid and large size steel equipment and steel products, which are not pipes. So that gives us further diversification. Speaking on other fields, we completed consolidation of ChelPipe. Of ChelPipe shares made a voluntary offer than the mandatory offer -- I'm sorry, first mandatory then voluntary offer essentially [indiscernible]. So we now control 100% of ChelPipe. ESG is now a very important topic for us. We are now developing a new strategy and created the new business direction and new departments in this regard and plan to work on all 3 letters of this abbreviation, so to speak, and reduce greenhouse emissions and improve -- introduced recycled water supply. And our ratings in corporate governance are always amongst the highest in Russia. And cooperating with our major customers is very important. So again, despite basically controlling the large share of the market, we remain very customer-focused, customer-oriented and customers appreciate that. So agreements and various papers signed with Uzbekneftegaz, Gazprom Neft with which we have very extensive R&D cooperation with the R&D center with their ecosystem and with Gazprom as well. Also with Weatherford, we now formed the partnership to service our premium connection pipes and provide various oilfield services to customers. And then also, we work on laser technology and pipe production, TMK together with our partners IRE-POLUS, IRG (sic)[IPG] Photonics Corporation. Speaking of our outlook for 2021, we do see a positive trajectory in our development after a difficult beginning of the year, as I said, due to very abrupt steel price increase. We now see our pricing and our margins recovering. And in both seamless OCTG and seamless industrial pipes, we see quite stable markets until the end of the year and then gradual improvement, thanks to our price in formal contracts. And as I said, further exploring of synergies with ChelPipe allow us to expect increase -- significant increase in EBITDA year-on-year 2021 compared to 2020. And that also relates to the margin. So the trajectory would further improve in the fourth quarter. So those are basically main points. With regards to the debt, it is quite significant, we have to admit, after acquisition of ChelPipe Group. However, we have in our plans to improve the leverage. And as I said, measuring now makes little sense because we don't compare apples-to-apples and LTM, we don't have full EBITDA for ChelPipe Group. However, when we do compare apples-to-apples and periods would include symmetrical EBITDA, and we realize further improvements in our business. We can say that for year-end results, in first quarter, we aim at being at the area of 4x debt to EBITDA and would further decrease this ratio. So in brief, these probably are the main points. And now I'll pass the word to Sergey Alekseev, who will talk about the markets. Sergey?

Thank you, Vladimir. Traditionally, I will begin with the market overview. So first of all, I would like to know that the market moved in different directions during the first 9 months of this year. And firstly, I would start with comparing of Q3 to Q2 this year. So in Q3, the Russian market declined by 11% compared to the previous quarter. And we saw the growth of shipments of large diameter pipes plus 16% and higher demand for line pipes as well in the oil and gas industry is about 13%. So this growth was offset by lower shipments of industrial segment. We saw over 22% minus due to the market situation and a decline of the total OCTG market approximately to 8%. So it was mostly driven by slowing purchasing activity in the oil and gas companies plus a seasonable factor in the Q3 as usual. And of course, some cuts of production due to OPEC+. At the same time, we saw the growth of the share in horizontal drilling. So it's increased by 5% and reached almost 58% in Q3 2021. So for sure, it's very good for us as it helps us to supply more advanced products and to supply more premium products. So in Q3, this year in Europe, we saw the continued improvement and some lifting of supplies and lifting of prices of major -- for major -- of our customers, and it was driven by some COVID lockdowns out. And it was also driven by the elevated raw material prices, which helped us to put the new levels of our prices for our tubular products. Speaking about the 9 months of this year, the overall consumption in the Russian market declined by 5% year-on-year. So increased shipments of large diameter pipe, the same number as for -- in the third quarter, it was plus 16%. The OCTG market, it was in minus and the main reasons I have already noted, mostly driven by OPEC+. And we also noted that the growth of horizontal drilling supported our advanced product portfolio sales. It was quite stable. And for sure, we need to know that further plans of the oil and gas companies and our current portfolio of products is quite stable, and we're sure that the market will be moving up for the next year and will be supported by the growing E&P spending of the major Russian oil and gas companies and higher drilling programs. I think it's also important to note that we are looking ahead and to develop our product portfolio for the energy transmission. It means not pipe only for transportation, also pipes for production, pipes for storage and for other industrial applications. Vladimir has noted some diversification in our business, for example, the gas cylinders, which we are producing currently. So we have already a positive track record for sales of cylinders for hydrogen for industrial applications in Russia. And we have also invented new premium connections, which will help us to be a part of energy transmission. And our key customers currently working with us with a lot of projects with a deep R&D engagement with the help of our R&D base in Skolkovo, how we can adopt our products for the H2 transmission -- for hydrogen transmission, in transportation and other applications. As for Q4 and the forecast for the next year, in Russian market, we expect the growth above 10% currently supported by E&P spending. For sure, we will face the further horizontal drilling growth in Russia, which will help to supply more premium. And as for industrial segment growth, we see that the economic recovery on the government infrastructure programs will also support this market segment. Important to note, the situation in the international markets, we see that a further possibility for growth of our products in such markets like CIS countries like Uzbekistan, Kazakhstan, Turkmenistan and others as well as we do see the further growth in our, let's say, key export markets like Middle East and African area. And we hope that we will, for sure, change the mix of our products for the next year and supply more advanced products than commodity. The last thing, which I would like to note is that consolidation of the new assets gives us a huge possibility and opportunities in the complex supplies for the market when we can do such kind of additional offer to our clients, additional offer to our customers, which is extremely important nowadays. I think I'm done.

Thank you. Thank you, Sergey. So now we pass to Q&A session, please.

[Operator Instructions] We'll take our first question from Boris Krasnozhenov from Alfa Bank.

That's Boris Krasnozhenov of Alfa Bank. Just 1 question, probably, it's a bit more on the -- it's interesting to note your expertise. Recently, I got a discussion with one of the industry representatives and learned quite interesting statistics from him which as I'd like to verify from your view, if it's correct assumption or not. So we obviously got OCTG pipes, 2 types, seamless and welded pipes. And I have kind of an assumption that in oil and gas sector, 90% of the product mix of seamless OCTG pipes can be technically -- is substitutable with the welded OCTG pipe. In your view, is it really the case that there is such a high level of substitution of seamless pipes with the welded OCTG pipes or it's a bit exaggerated assumption?

Thank you for your question. I think Sergey Alekseev will answer this question best way. Sergey?

Yes. Thank you. It's a very interesting question. As you know, there are different players in the Russian markets, supplying OCTG, produced as welded and seamless. And nowadays, I would say that I do not agree with the numbers, which you announced because of the several things. First of all, for sure, there is a huge premium segment in Russian market. So the pipes, which are supplied for gas projects and all these pipes should be made in seamless for sure. And all pipes with premium connections, all of them are also in seamless. So it means that approximately 15% to 20% of the market only for premium connections should be in seamless. Plus I would say that we have some technically advanced wells, which can be also used only -- which would be constructed only with seamless pipes. And I would say that this percentage is about from 20% to 25% plus to first 10%, 15% -- plus the first 15%, which I have noted. And the other things which I already mentioned, the further horizontal drilling and the length of laterals, it also provides the special characteristics of the pipes, which can be supplied only in seamless. So according to our estimation currently in the Russian market, I would say that in seamless, it's about 60% or something closing to it, OCTG -- only for all OCTG products. And speaking for the further development of the market with such kind of projects which we have in our current horizon like Vostok Oil of Rosneft, further development of the gas projects [Chayandinskoye] field, some others which are required not only, let's say, high strength tubulars and require also special steels, which are used in these tubulars. It will also give a huge opportunity to seamless manufacturers to supply more and more seamless.

Thank you, Sergey. So the short answer, the number of 90% is absolutely incorrect. 90% of seamless pipes cannot be substituted by welded. So in OCTG, as Sergey said, and year-on-year, we always look at the statistics, the proportion of seamless OCTG in Russia fluctuate somewhere between 60% and 70% versus welded. In terms of line pipe, I think, there the potential share of welded pipes is somewhat larger, but still it's below 50%. So the majority of seamless pipes in oil fields cannot be substituted by welded pipes.

And we'll go ahead and move on to our next question from Anna Antonova from JPMorgan.