Türkiye Sise Ve Cam Fabrikalari A.S. (SISE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Sisecam 2020 Year-end Consolidated Financial Results audio and webcast call. I will now hand over the call to Mr. Görkem Elverici, CFO. Sir, please go ahead.

Thank you very much. Ladies and gentlemen, first, I'd like to welcome you all to our webcast where we will be discussing me about the financial results of 2020, and we will try to provide you some additional color on what is next in Sisecam. So starting with the first item of today's agenda, I will cover financial and operational performance of Sisecam, together with the earnings performance of each segment in geography. And then, I will focus on our cash position and the capital allocation, and we'll continue with our sustainable priorities. And I will conclude by running you through our One Sisecam project with the headline of what's next. At the end of the presentation, we will be happy to take your questions. And I would like to remind you that our presentation and the Q&A session may contain some forward-looking statements and our assumptions are based on the current environment and may be subject to change. And moving to Slide 3. For the full year, we have delivered TRY 21.3 billion in revenue, with 18% increase year-on-year and capping on a record year, thanks to the outstanding performance in our operations. The fourth quarter marked the strongest quarter in both revenue and EBITDA terms, thanks to the recovery seen in operations, which lagged behind during the early stages of the pandemic. Although we had a very challenging year, we ended 2020 with 23% of EBITDA margin, which is only 55 basis points lower than that of 2019 level, while we recorded about TRY 2 billion parent-only net income up till the adjustment. Moving to the Slide 4. As you may see, we significantly exceeded the expectations that architectural glass operations had been very instrumental in delivering a very strong operational performance. The boost in construction activities in Turkey, together with increased mobility in renovation side, the upward pricing trends in Europe, resilience of Russian operations and strong comeback in India and higher volume registered from auto glass operations in Turkey were the main drivers of this performance. Volume contraction in flat glass operations was limited to 4% year-on-year versus 18% contraction recorded in the first half of 2020. Considering the unfulfilled demand in the surrounding region since 2020, 2021 performance is a better outlook for architectural glass operations. Momentum, quoting Turkey, raises our expectations, especially for the first half of this year as pace of construction activities seems to be continued. I should also remind you that we have the muscles spread out ourselves with ever-changing conditions supported by our diversified business portfolio. The second season at line severely affected from pandemic was glassware, which also benefited from a cyclical upturn with the pent-up demand seen through its channels, retail was the most resilient one. Thanks to increased household consumptions triggered by Christmas season amid progressive lockdowns, following relatively easy restrictions during summertime, we managed to limit the volume contraction level at 11% for the full year while it was as high as 20% in the first half. As we announced earlier, we have already finalized the official registration and permit processes for V-Block technology. Assuming the responsibility of protecting public health, this technology will be primarily applied on a selected group of beverage and tableware products, with a roughly 10% allocation of our total glassware business segment production capacity, and the products will soon be on the shelves in Turkey, which will be announced soon. Moving to Slide 5. Having built a very strong footprint in export markets, our glass packaging operations exhibited a good set of results in 2020, further improving from 2019 levels. In Turkey, volumes continued to be strong with 6% year-on-year increase, while Russia was relatively weak. Still together with higher exports from Turkey, total sales volumes were up by 6%, combining with strong pricing environment. Considering this inert nature protecting its content and recyclability, we believe that glass packaging will continue to create its own demand with healthy and eco-friendly solutions. Despite having an operational weak second half, chemicals operations continued to provide highest margin contribution to Sisecam benefiting from TL depreciation, even if its effect lessens within the fourth quarter. With uncertainty in the flat glass market throughout last year pulled down our soda ash sales volumes, scheduled cold repairs in the market for 2021 also pressurized the pricing outlook. We ended 2020 with 8% lower soda ash volume -- sales volume, while we expect demand to be recovered starting second half of this year. Sales volume from chromium business was also down by 5%. Mobility seen in the end markets of chromium business within the fourth quarter was not enough to push up overall 2020 sales volume. Yet, recent upturn in the market seems to persist throughout 2021. Moving to Slide 6. Despite a very challenging year, we closely monitored and calculated the risks, which were both pandemic and macro-related and responded rapidly in our operating regions. Operations in Turkey were relatively strong, especially backed by architectural and auto glass operations. Still, share of international revenues was down by 3 percentage points year-on-year at 60% in 2020. We recorded $685 million in revenues from exports and generated 50% of these revenues from sales to Europe. Moving to Slide 7. Our strong liquidity position was preserved in the second half of the year too. We ended 2020 with $1.9 billion cash and cash equivalents, including financial investments portfolio, which is composed of Turkish corporate bonds having similar to our higher rate in Sisecam. In total, 80% of the euro bond portfolio will mature within this year and in 2022. And we still monitor the market conditions closely to decide whether to reinvest or not. As stated in the first half webcast, we did not use any emergency loans during pandemic, even continued with our ecosystem financing program in order to support our key clients and suppliers. Year-end net debt position recorded at $533 million, which 0.65x of leverage continues to be far below our comfort zone of 1.25x. Outstanding debt was $2.3 billion with a term structure of 27% short to 73% long and an interest rate structure of 68% fixed to 32% variable. We carry 89% of the cash and cash of equivalents in hard currency as we continue to be short in tier to preserve our long position in hard currencies and to fund our Turkish operations. This year, we have plans to increase our use of cash, which was kept at very low levels in 2020 due to uncertainties dominating the market in order to improve our return ratios. Sesicam's net loan FX position continues to increase and came in at $937 million, keeping $700 million cash reserve in hand after the bond issuance of 2019. Moving to Slide 8. We ended 2020 with 52% lower-than-planned CapEx, which consisted of mostly delayed ones, while we spent TRY 1.9 billion, mostly due to ongoing cold repairs and new line investments. Cash conversion cycle shortened by more than 4 days year-on-year and 35 days base compared to first half of 2020 with improved inventory turnover rate. Thanks to strong operational performance and improving working capital ratios, free cash flow was recorded at TRY 660 million. Glass industry offers unlimited opportunities in a variety of ever-evolving applications. On the other hand, this sector is highly dependent on the use of raw materials and energy and has a capital-intensive production model that requires continuous investment and high level and effective R&D capabilities. We integrated 11 sustainable development goals into our 5-year term strategy, Care for Next, and shaped around the pillars of preserved and power and progress that was set back in 2017. We aligned business practices that I will mention starting from the supply chain and reaching to the end-consumer with these goals. Moving to Slide 10. Under the pillar of preserve, to attain resource efficiency in manufacturing processes, an ESG-focused approach has been integrated into production operations in the first place, while we structured our relations with the suppliers sharing our values to create a meaningful impact on a broader sense as part of extended producer responsibility. Within the scope of circular economy, we progressed in recycling operations in the recent years and established a glass recycling company with the partnership of EBRD back in 2016, with the aim of increasing the usage of glass recycling in Turkey. With the capacity additions we have made, the company's aggregate capacity increased to 790,000 tons per year. Not only reduced use of raw materials is parallel to our climate action plan, we attained 33,000 tons of greenhouse gas emissions reduction on an annual basis. We also created a responsible production and consumption model, avoiding use of raw materials creating the means of opportunities, increasing recycling of containers by working closely with municipalities, reaching up to use to raise awareness and eventually contributing to the overall economic growth. Social, economic and environmental aspects of glass recycling enhanced this cycle to continue after the glass production phase. Under the pillar of empower, diversity and inclusion have always mattered for our organization while employment in such heavy industry operations have always been in our DNA. At this point, I proudly want to remind you that the first head of our R&D unit back in 1940s was Huban Amora, a deeply respected human -- chemist in Turkey. In 1999, Phoenix Award, which is a prestigious award in the glass industry and given to the people to honor their extraordinary contributions to this industry, was given to another Sisecam lady, Alev Yaraman, who had chaired Sisecam Flat Glass Group back in 1990s and early 2000s. Having been inspired by our women leaders, we are committed to eliminate any gender-related barriers for women career advancement and to increase women representation at production sites, thereby, we introduced women-friendly factory project, targeting women employment rate of 25% by 2023. The rate has reached 20% as of 2019 year-end and moved up by approximately 1.5 percentage points in 2020 despite the women employment rate decline experienced around the globe due to pandemic-related reasons. With an aim of mainstreaming sustainability into our value chain, while empowering and aligning our suppliers, we published a supplier code of conduct in compliance with the international standards as a guide to our suppliers with the aim of increasing overall awareness of sustainability. We plan to roll out the training for our suppliers this year to build on their capacity. Having joined the CDP supply chain program in 2012, we have been conducting risk assessment and monitoring processes for our suppliers based on their risk scores. Under the pillar of progress, energy efficiency is another component of our production processes, and that has a wider role in reducing energy, lowering production costs and maintaining product quality. We have built a 6.2 megawatt solar powered plant, laying solar panels on the roof of our Flat Glass [ national ] factory, and we have made a significant contribution to the goal of accessible and clean energy. We are taking further steps to invest in clean energy. Our Aware Collection, a series of glassware is a great example, produced with 100% glass color, reducing greenhouse gas emissions by 38%, while also decreasing the end customer carbon footprint and urging customers to take client affection or recycling rapidly. In addition, we constantly focus on R&D activities to improve customer experience based on sustainable solutions with essential deliveries for the health of society as well as for energy and resource efficiency and waste and emission reduction. V-Block technology for glassware products is a distinguished example of this. Under the brand name of [ Pasabahçe ], we have been producing solar lobby coated glass, which saves fuel consumption by reducing heat losses by 50% as a result of applications of flat glass products in building structures. Lightweight glass used for bottling is another sustainable solution that is employed for our glass packaging products and provide a 15% reduction in end-customer carbon footprint. Speaking of our R&D activities, I should also say that in the past 85 years, we have transformed into a global player in all types of glass production together with other business lines covering soda ash, chromium chemicals. Since then, we have been playing a key role in conserving this cultural and intellectual heritage with full responsibility and handing down to the next generation. Back in 1976, we established one of the first private sector R&D centers of Turkey in Istanbul under the name of Research Laboratory. And today, at its new location since 2015, Sisecam R&D Center is one of the largest and most equipped R&D centers in Turkey, and it is also a leading one globally regarding the glass industry. Moving to Slide 11. We have already attained our 5-year targets set for recycling of industrial wastewater, usage of color in production processes, increasing forest area, renewing all procurement procedures in line with our sustainability targets, promoting workplace diverse and decreasing lost time injury frequency rate. We will be reaching our target on reduction of NOx emissions in at least 10 furnaces soon also. We have been taking steps to improve or redefine previously set but unattained targets, such as reducing green gas emissions and specific energy intensity of glass production, increasing renewable energy resources and initiatives to be taken for increasing biodiversity. These goals have always been indicative for our investment decisions and M&A activities. At this point, it is crucial to state that we have also established strong relations with EBRD and IFC, of which, approximately 15% share in our total loans, they regularly conduct environmental impact assessments of the projects that they have been financing. Moving to Slide 12. While we are getting closer to the end of our presentation, I would like to provide you some updates on our transformation during -- from the silo base management of different business segments into a holistic and function-based management of the overall group. As a starting point, I would like to underline the fact that moving to a functional base rather than a business line-based approach to the core functions still increase our competitiveness with an accelerated focus on operational excellence. Since we have mentioned in many instances about the rationale behind the idea and the steps taken for merger of Sisecam with its subsidiaries, I will not go into the details of what has already happened and what we have done in the past. I would rather try to walk you through our transformation journey for you to have a solid view on our next step. Yet, I feel the need to emphasize once again that the digitalization going hand-in-hand with One Sisecam transformation is the key enabler of our vision of targeting first on optimum values within the group through the creation of synergies at the core functions. It will also allow our group to bring the operating model and organizational culture to the optimized level for adapting ourselves to tomorrow's reality at a later stage. Our next step is to transform Sisecam operating model through restructuring the existing technologies, processes and organizational designs in such a way that we can fully exploit the capabilities and benefits we will attain with the ongoing technological advancement. In our digital transformation program, the main goal would have a best-in-class technology, allowing us to process massive amounts of real-time data in a very short period of time and to get front and accurate results from all types of business transactions and debt analysis through the usage of analytical capabilities. SAP S/4HANA is identified to be the ideal system to serve our emission goals as it will be forming a very concrete platform for our operations to work and all the additional analytical capabilities to be built on. It will also enable our systems to speak in the very -- same language between and among the different existing prospective business segment, and allow us to integrate with artificial intelligence-based skills and capabilities at the final stage. The challenging part, on the other hand, was to plan the digital transformation project in such a way that it could be aligned to the needs of our higher role of restructuring and transforming the way we do business from a segment based approach to a holistic functional based one. As highlighted by SAP itself, our transformation program is amongst the top 3 largest global transformation programs that they are conducting as of now. We started our digital transformation program back in the early days of 2018, and structured it as if we were building the blocks from scratch. Together with the enabler pillars like finance, procurement and HR are being restructured, we also kicked off with the digital transformation of our glass segment as the first business area to implement this new technology. As of the beginning of 2021, glassware segment new system transition is completed, and we are glad to say that the program has only found its place as one of the leading best practices among the projects that numerous global industrial enterprises have been conducting so far. Key RP system transformation process is scheduled to continue, with the remaining business lines of our portfolio of operations that is expected to be completed in the next 2 to 3 years. Our operating model transformation program, on the other hand, is composed of a 2-phase plan, at the end of which, core functions, namely the supply chain, sales and marketing, manufacturing and quality operations, are targeted to be restructured as centers of excellence. First phase of the program was dedicated to regrouping to centralize these core functions currently being held by different teams in and across different business segments by constructing job families. The second phase includes revisiting of these centralized functions, technologies, processes and organizational designs, with the ultimate goal of standardizing the procedures to bring up the group's agility and function-based specialization at the optimized level with best possible practices. Once the transformation progress is implemented and live, we will be managing and monitoring our core functions from warehouse to production planning or from logistics to sales and marketing activities at One Sisecam level to enable us further optimize our businesses. We have already carried out the required studies on our supply chain operating model in the first phase of our program. The key elements behind this space was to achieve the functional excellence by aligning strategic and operational plan through active prioritization of inventory management and customer satisfaction, which will pave the way to unlock further improvement in our profitability metrics. We are about to kick start the second phase in this area. Supply chain central of excellence is targeted to be live within this year and centralization of the remaining 4 core functions are also scheduled to happen within 2021. And project management teams have been assigned with the target of having those centers of excellence live in the upcoming year. It is necessary to note that strategy had also been included in this transformation program so that this wider function can be held from both top-down and bottom-up approaches at the same time with a holistic portfolio management view. Reshaping this function as a center of excellence will nourish the techniques we will employ for the growth management of existing resources and assets growth at the local optimum. It will also allow us to access the corporate venture capital in recognizing and evaluating new business opportunities in global sense. Moving to Slide 13, with the optimization of operational performance through improved efficiencies and effectiveness, we will have increased availability of funds to further grow our existing business portfolio. In terms of new business opportunities, we prefer not to limit ourselves with glass industry only nor with organic growth. We will be utilizing our brand-new digital infrastructure to invest in complementary businesses, adjacent industries and vertical integrations. We will also support start-ups with the set of skills and capabilities in hand that complement our existing businesses that provides us unique opportunities. As it has always been the case, we will continue to evaluate in a possible investment opportunity with the concentration of 2 main KPIs, the respect to Roots & Wings. Having completed One Sisecam transformation and increased our profitability through creation of synergies, our main target is to continuously increase the cost of margin between the Roots & Wings of each business in each respective geography, and as to our existing EBITDA margins, at least 200 to 300 basis points in the next 2 to 3 years, as that has been already announced during our merger process. Within this year, we will also come up to the market by announcing some main KPIs of the transformation program. And we'll continue to announce that in the upcoming years so that you can also track the performance of the transformation program and the realization of the expected benefits. And coming to the end of the presentation, now I will be happy to take your questions.

[Operator Instructions] The first question comes from Ece Mandaci from Unlu & Co.

Congratulations on the strong results. I have two questions. One is regarding the working capital requirements. We have seen a significant improvement as of 2020 in your working capital sales ratio since you have also highlighted the sustainability of the positive trends in the flat glassware businesses. Could there be an opportunity for further improvements in the first half in the working capital reserve ratio? And the second question is on, again, the operational improvement and growth trends. You, again, mentioned about those -- the sustainability of this trend. And we have seen a significant improvement in your EBITDA margin, given a higher capacity utilization rate, operating leverage, et cetera. So will this high-margin level be sustained for this first and second quarters of the year, since we don't expect a major cost increase? Also concerning the new contracting prices in the chemicals business, could you just give an overview about the profitability in 2021?

Thank you, Ece, for the questions. So for the working capital, there are two dimensions. First one is the business as usual and the performance of the business itself. So thanks to the improved sales performance, for sure, that is adding up to the performance of the overall margins, plus improving our working capital position as it is improving the percentage of the costs when you compare with any metric, including the sales. But all the transformation program that I have been talking extensively, like you're unfamiliar in the previous one, is mainly directed to improving all of our operational KPIs, and working capital is one of them, or I should say, improving our cash conversion cycle in a continuous basis. So we should keep in mind that our business, unfortunately, is -- due to its nature, is a more immensely required type of business. But together with trying to optimize our inventory levels, not being short in any time that there is a sales opportunity, but not having excessive inventories, both on the products for all the raw materials and other necessary inputs that we have, we will try to continuously strive to have better cash conversion cycle days in the upcoming period. So all the digitalization and the operational excellence programs that we are putting in place right now are mainly directed to the improvements in those operational KPIs, I should say. But without getting the necessary support from digitalization and optimizing the way you do business, unfortunately, the improvement, most of the time, stay on a term basis or it depends on the performance of sales from the period. What we are going after is to continuously improve and have a sustainable level of improved working capital usage, for sure, compared with the size of our business and improved cash conversion cycle as of today. And coming -- for the performance of the businesses, we believe that, especially with the improved pricing and sales environment that we are experiencing right now, we feel ourselves more comfortable with the foreseen period, I should say, like you mentioned, the first half of the year. And looking at individual businesses, we are aiming to have double-digit improvements in all the turnovers generated from those businesses, which I can say that starting from like 13%, 15% in glassware, going up to 25%, 26% in businesses like glass packaging and chemicals. We believe that flat glass will continue to prove to be very strong and supporting the performance and the margins of our business on a continuous basis. And EBITDA margin, the thing is that we have already told that in 2020, we were fighting to stay at the levels that we have been able to achieve back in 2019, and we were very close. And with the improved environmental conditions, hopefully, that will continue or not having additional issues that are faced, like we experienced within this year, both the macroeconomic conditions and the pandemic conditions, we believe that we will be getting back to the levels of 2019, if not better. I hope this is enough.

The next question comes from Catherine [indiscernible] from Colombia [indiscernible] Investment.

Yes. Just a question on the CapEx. You said you were able to delay some CapEx for 2020, which obviously helps keep your free cash flow positive. Just wondering, in terms of '21, when we're looking forward at what CapEx we should expect? Is it more the original plan 2020 levels or are you able to defer any other CapEx from this year, or indeed, as the additional CapEx we should expect to come through this year to, say, catch-up from last year?

So you know that from 2020, there has been some delayed investments. So with the performance of the business and to be able to stick to our strong positions in the markets, we will be continuing those investments. And with the additional investments that were already planned for 2020, we believe that we should be landing somewhere around EUR 450 million to EUR 500 million of CapEx spending this year, including the large investments we have in U.S. for the natural soda ash production. So for the natural soda ash production facility, this year is lowering figures for CapEx requirement. But especially starting from 2022 going up to 2024, there will be more extensive investments made for this big project, I should say. So we will be trying to complete our investment plan and get the EBITDA returns, which we will be able to provide the necessary funding for this upcoming large investments. And still, I should say that looking at each and every metric, especially net debt-to-EBITDA is one of the key metrics that we are tracking for the debt business -- of our business. And in the upcoming years, even when we will be making further larger investments for the U.S. investments, we believe that we will stay lower than our comfortable level of 1.25x net debt-to-EBITDA level on a continuous basis.

Okay. Great. So then from '22 to '24, we should expect it to really ramp up then to be able to cover the project. What is the total cost of the investment project in the U.S. over the next few years?

So the total magnitude is $2 billion, and it's a joint venture. So for Sisecam, it is roughly around $1 billion, I can say. And that will be financed 20% equity to 80% of external sources like project financing. And the financing of the program is already under discussion with the larger banks, multinational banks. So whenever they are finalized, for sure, we will provide the details of the financing in the most probably through to the end of this year or early next year.

The next question comes from Daniel Zaczkiewicz from Barclays.

And could I just ask about your dividend funds and dividend policy? Particularly under the new group structure, could you just remind us what the dividend policy is and what we should expect in 2021?