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

[Audio Gap] And I hope everyone is safe and well since we last spoke back in late January. And today, I'm together with our CFO, Gökhan Bey; together with our IR Director, Hande. And let me start today's webcast by updating you on the recent developments regarding Sise management. As you all know, I took the CEO of this starting from July 1, and Mr. Gökhan Güralp, who has been serving as the Director of Financial Analysis and Control, since he joined Sise back in 2015, has been appointed as the CFO. And please join me in wishing Mr. Güralp best of luck and success in his new role. By July 1, we moved from a business unit-based operating model to a function-based one. And under this new structure, deputy general managers have been appointed to our core functions, which are mainly sales and marketing, supply chain, production, R&D and quality, finance, strategic planning, human resources and information technology. In today's call, I will first walk you through first half 2021 financial and operational results of Sisecam with performance review on a business line and geography basis. Afterwards, I will continue with our cash position and the capital allocation. Operational and financial review will be followed by Sisecam's approach to sustainability and the advancements we had on that front. And I will conclude by providing an update on our One Sisecam journey with the headline of what's next. As always, I will be pleased to take your questions at the end of the presentation. And please be reminded that our presentation and the Q&A session may contain some forward-looking statements, and our assumptions and projections are based on the current environment and thus may be subject to change. Moving on to Slide 3. We capped off June 2021 with a record-breaking performance, both on the top line and the EBITDA level. Our revenue grew by 45% year-on-year and reached roughly around TRY 12.8 billion, the highest top line we have ever recorded in a 6-month period. Thanks to the sound performance we had across all business lines, our EBITDA climbed to a record of TRY 3.7 billion with a year-on-year growth of 99%. Although we had been through new challenges that had ample details, aftershocks of everlasting COVID-19 pandemic, we ended the reporting period with 29% EBITDA margin compared to 21% recorded in the first half of 2020. High capacity utilization rates and larger scale of operations recorded at all business segment level, combined with raw materializing activities we have added to our operations management strategy and lower operational expenses were the main reasons for the boosted profitability. One of adjusted parents-only net income increased to TRY 2.7 billion, not only because of the merger but also thanks to significantly larger scale of operations and 2.5x higher operating profit in nominal terms. Since COVID-19's impact was visible, especially in the second quarter of last year, we believe it is worth providing a comparison of record-breaking results with first half 2019 and second half 2020 figures as well. Our top line grew by almost 50%, and our nominal EBITDA has almost doubled compared to the same period of 2019. Moving on to Slide 4. Every component of our portfolio have supported the outperformance. Still, architectural glass and auto glass business lines were the 2 largest contributors to the top line growth, and they were followed by glassware and glass packaging segment. Chemical operations on the other hand stayed slightly behind the glass portfolio due to hard currency price declines in sodas and chromium chemicals. Architectural glass operations were highly strong with sustained demand dynamics across all operating regions and almost in all end client industries. Upward trend in construction sector and the appetite for renovation, mobility on home appliances and perimeter sectors lifted the demand for flat glass products in Turkey. The market was further boosted by industrial purchases of the wholesalers. Supply shortage seen in Europe due to the peer's furnace cold repairs continue to push the prices higher. Stronger Russian operations and revival of India have also contributed to the eye-catching performance. Flat glass sales volume went up by 48% year-on-year versus 20% contraction recorded in the first half of 2020. In our surrounding region, flat glass prices increased -- hovered around 25% to 35% in euro terms on a year-on-year basis. Meanwhile, in Turkey, we made 2 price adjustments, by 13% in January and by 9.5% in June. Following the energy price hike, we have to announce another adjustment in July by 9.7%. Considering the demand timing hit in our operating markets and in the geographies to which we channel our products, we maintain our positive view for the second half of the year. Auto glass operations, which we used to report under flat glass business line was also negatively affected by the pandemic. Although we started the year with a bullish view on that part of our portfolio, constrained to order backlog, the demand environment turned out to be sluggish due to global semiconductor industry shortage. We kept the volume sales flat on a year-on-year basis, whereas we have recorded a significant jump on the profitability side thanks to 85% capacity utilization versus 65% last year in the same period. Gradual increase in the aftermarket sales share, inclusion of new projects and widening client portfolio have all contributed to higher profitability. Moving on to Slide 5. Glassware business line, the component of our portfolio that is most prone to consumer sentiment, therefore, severely affected by the spreading of COVID-19, ended the first 6 months of 2021 with a top line growth of 43%. Volume sales went up by 14%, thanks to the accelerated vaccination programs, gradual ease of restrictive measures and reopening of HoReCa channel. Capacity allocation based on a client and product-wide share-taking discipline enabled us to optimize the operations in all production facilities. While financially troubled and distressed global peers had to shut down their production units and limitation were seen on the international flow of products due to logistic disruptions, we were well positioned to meet the demand in Turkey and in international markets, especially in Central and Northern Europe. Our glass packaging operations continued to be strong with a top line growth of 25% on the back of 7% volume increase and 18% price sales mix and currency impact. Sales volume growth by evenly split between Turkish and international operations, while the share of international revenue stood at 64% of the segmental top line. Thanks to lower OpEx to sales on top of increased efficiency and larger scale of operations, EBITDA margin went up to 30%. As you may recall, we have long been very keen on expanding our glass packaging operation's global footprint. In the very beginning of June, we decided to go ahead with a greenfield investment in Hungary. A EUR 255 million [ size 2 ] furnace investment with a total of 330,000 tons per annual production capacity will be operational in 2023 and will reach its full capacity by 2025. With the completion of our Hungarian investment, our active glass packaging capacity will increase by 13% to 2.8 million tons per year. Based on our feasibility studies, the investment's internal rate of return is expected to be around 13% to 14%, and the payback period will be roughly 8 to 9 years. We are actively engaging with possible clients for long-term agreements. Last but not least, our chemicals business line revenue went up by 25%, while the EBITDA margin recorded at 34% pointed out to a 300 basis point increase. Although soda sales made a weak start mainly due to logistic disruptions, in line with the expectations and parallel to the annual sodas contract, sales volume made a jump in the second quarter and ended June with a 9% year-on-year growth. Chromium chemicals subsegment sales reported 6% increase compared to first half of 2021 on the low base. Pricing environment continued to be weak in dollar terms given the outstanding contract for the former and due to lower scale of operations at the client industry level for the latter. With the incremental production capacity we took on line in our Bosnia plant, our sodas capacity went up from 2.36 million to 2.4 million tons per year. Moving on to the next slide. With our operations in 14 countries, naturally balanced operations portfolio, wide range of products in all business segments and strong export capabilities, we continue to cater our products across the globe. In today's operating environment, where proximity and speed are gaining importance almost on a daily basis, we possess all the skills to rapidly respond to the changing dynamics. Further empowered by strict market monitoring discipline and agile decision-making processes, we are well positioned to benefit from the trends in our markets. In the first 6 months of the year, share of international revenues recorded at 64%, up by 500 basis points year-on-year. Export revenues, half of which are generated from sales to Europe, stood at $327 million. Including sales from Sisecam facilities located in the region, sales to Europe corresponded to 37% of our top line. Moving on to Slide 7. Our strong liquidity position was sustained in the reporting period, too. We ended June 2021 with $1.7 billion cash and cash equivalents, including financial investments portfolio, which is composed of Turkish corporate loans having similar to our higher ratings than Sisecam. Net debt position recorded at $391 million, with a 0.42% of -- 0.42 of leverage continues to be significantly below our comfort zone of 2.5. Outstanding debt was $2.1 billion, down by more than $200 million with a term structure of 30% short to 70% long and an interest rate structure of 66% fixed to 34% variable. We carry 85% of the cash and cash equivalents in hard currency as we continue to be short in TL to preserve our long position in hard currencies and to fund our Turkish operations. Parallel to our plans, we increased our use of cash in order to improve our midterm ratios. Sisecam's net long FX position came in at $865 million, keeping $700 million cash reserve in hand after the bond issuance of 2019. Moving on to Slide 8. CapEx recorded in the first half was 34% higher compared to the same period last year, mostly on low base. Majority of TRY 838 million investments were in relation mainly with scheduled cold repairs and mold investments. Cash conversion cycle shortened by more than 20 days year-on-year with improved receivable and inventory turnover ratios. Thanks to strong operational performance and improving working capital ratios, free cash flow was recorded at TRY 72 million versus the negative balance of TRY 1.3 billion we had last year. Moving on to the next slide, I will continue with our sustainability approach. We would like to remind you that the founding mission of Sisecam was to meet the growing demand of society for [ buttressed ] glassware back in 1930. Our sustainability journey today is no different. While meeting the needs of the markets and to societies, our resilient and Care for Next integrated business model has helped us to offer solutions that improve society and the planet while not leaving our suppliers behind. Our responsible business approach has led us to provide tableware with V-Block technology, which has an antimicrobial coating effective against viruses and bacteria for ease and comfort in daily lives of the society, by providing 24/7 hygiene as a result of our superior R&D know-how. As part of our donation program, we have delivered roughly around 1.3 million V-Block coated special artifacts to health care professionals in public hospitals of Turkey. Being eligible for the sustainability index of Borsa Istanbul following the merger is a clear indication of our strength in sustainability organization wide. Moving on to the next slide. Our endeavors in addressing the United Nations' 11 sustainability development goals have continued, backed by robust monitoring practices. In 2020, our best practices mainly prevailed in the fields of natural resource consolidation, digitalized businesses, low-carbon products and energy-efficient production under the theme of climate change. We follow the GRI standards and cover the entire regions in which we operate. Moving on to Slide 11. Committed to take a larger stake in the circular economy, we have recently published our policy on waste management and circular economy with clear principles to adapt in waste as a material or energy resource, whilst planning with life cycle analysis and identifying our priorities based on a true cost of waste model throughout our value chain with support of our stakeholders as a reflection of our extended producer responsibility approach. In 2020, we ensured that 55% of the product packaging materials we released were collected from the markets and recovered. We have increased our local supply ratio by reaching to 83% in raw material supply from the local markets. Having involved in all phases of the glass value chain, we continue giving uttermost importance to glass recycling activities. We have pursued our role in pioneering glass recycling activities in Turkey despite challenging hygiene concerns due to the COVID-19. We were able to directly recover 256,000 tons of glass cullets from the market while avoiding 153,000 tons of carbon dioxide in total with a clear increase of over 20% compared to the previous year. Furthermore, we were able to use greater [ rate ] for furnace cullets at a rate of 70%, especially at our glass container plant in Yenisehir. We achieved the reduction of specific energy consumption by 33% and GHG emissions by 46% as compared to the no-cullet scenario case. Our 100% recycled glassware product has been instrumental in empowering consumer awareness on environmental sustainability and the natural resources. Not only nature resources saved -- 38% of GHG emissions were mitigated as a result of low carbon melting practices. We moved forward with improving our chemical management practices through adaptation of a new corporate standard, scoping the entire value chain, including selection, purchasing, transportation, use, storage and disposal phases. We have also been supporting our suppliers to comply with REACH and the equivalent legislations in EU, U.K. and in Turkey, based on the rapidly changing requirements. In 2020, our standing solidly for the environmental investments reached to TRY 40 million. As part of preserving corporate glass heritage, we have been pioneering the leadership towards 2030 transformation agenda on the International Commission on Glass. Moreover, we are engaged in promoting the declaration of 2022 as the International Year of Glass by the United Nations, which was approved at the UN General Council meeting in May this year. We are also proud of taking our antique glass works exhibition, presenting glass pieces remaining from the period of 3,500 years back in time, on an online and open source platform, a model comprehending all the relevant cost of waste management, including loss of raw materials, labor work, energy and any other input spent throughout the entire waste management cycle. Moving on to Slide 12. Thanks to our strong corporate cultural and diversity and inclusion allowed us to remain on our target for women employment. We are thrilled to announce the new targets for 2030 as part of our upcoming sustainability strategy. The ratio of women executives on the board has been 44% in the first half of the year. The number of disabled employees reached to 502. Having recently employed human operating even at the furnace front-end process, we once again proved our leadership in the glass industry, not only with the figures and also with the equal opportunities we exert and the confidence we have in humans' involvement at any process of our heavy industry. As part of our corporate social responsibility program, which has been in place for the several decades, we have reached a total number of 8,000 children are new trained as athletes in canoeing, rowing or sailing sports in Çayirova region. Since the beginning, a total of 1,960 athletes, 79 of whom were national athletes, started their sports career at Sisecam Çayirova Sports Club. Our long-term partnership with Deepak Foundation in India has strengthened during the heavy pandemic conditions, where we helped in delivering health care services upon a mobile health unit and reached approximately 19,000 people last year. With the highest level of actions and plans we have put in place since the pandemic, we have obtained COVID-19 safe production certificates for 17 facilities, R&D center and workplace centers of Sisecam. Moving on to Slide 13. Our clear goal on reducing our GHG intensity continues to be in place. We have recently announced our business case for combating climate change through the entire supply chain. Our coordination board on climate change has identified the prior mitigation techniques and technologies to be actively revisited and integrated into the investment decision-making progress -- process. As part of transforming our scope 2 emissions, we will soon start investing in another renewable energy project with a capacity of 4.8 megawatt direct supply green electricity for our glass fiber factory. As part of the renovation way for Europe, which is an important component of the green deal, we believe our product solutions with triple-double glazing system in addition to solar Low-E coated glass products will provide low carbon opportunities within the framework of 0 energy building standards. We are keen on announcing clear and exponential targets on GHG reduction, following the preparation of our new sustainability strategy. Moving on to the next slide. Last but not least, we have exercised GRI-backed materiality assessment practices last year and having identified our most material issues for the new strategy term, where we screened around hundreds of topics collected from our diverse stakeholders. In this direction, we are aiming to bolster our sustainable division, where we will take our Care for Next strategy to a next level by committing in protecting the planet, empowering societies, transforming lives while making all 3 pillars with our corporate culture of continuous development. Moving to the last slide. As I have mentioned on the opening of today's call, by July 1, we moved from a business unit-based operating model to a functional-based one. Under this new structure, deputy general managers have been appointed to our new core functions, which are namely sales and marketing, supply chain, production, R&D and quality, finance, strategic planning, HR and IT. Our key expectation with implementing the functional-based restructuring is to ensure that Sisecam operates in multiple geographies with larger volumes in the upcoming periods, while reaching a much higher level in terms of its usual flexibility, agility, entrepreneurship and decision-making speed in its existing scale of operations. This way, we would sustain our efficiency and performance without any slowdown. We would like to complete the transition of operational and manual jobs to digital solutions wherever we can. We already have extensive use of RPAs and shared service centers. All of the analytical systems and infrastructure to run them have been moved to the cloud systems. We are now able to perform data communication and process it in a much more secure and rapid way. Currently, we are focusing on managing these more effectively. And to do so, we adopted an organizational structure where our sales and marketing presence is the backbone of the entire model, based on the success we have achieved as a driving force for growth in the coming periods. The model surely includes major changes for us. But the main aspiration is to speed up our decision-making process to become more lean and become more agile. Our plans include the developments required to boost our competitiveness. We will implant them gradually in the upcoming periods, and we will create -- we are creating a Sise that can come commit its market domination to a more extended geographies from individual locations, with influence across a much larger global footprint. So I have completed sharing the comments and the slides with you. So now we can move forward with the Q&A session.

[Operator Instructions] We have our first question coming from Unlu Securities.

Congratulations on the strong numbers. I have a question regarding your long-term profitability margins. So as of second quarter, when you look at the analyst EBITDA margin level, it stands around 26% and 30% according to your calculation. So going forward, for the third quarter, for example, would it be fair to assume a similar margin level given the recent price adjustments in Turkey and given -- considering the natural gas price hike? Could there be a normalization in the margin as of the third quarter? And going forward in 2022 and the other years going forward, excluding the effect of any merger benefits, what could be the level of your sustainable EBITDA margin like with -- net margin? For example, in net margin trends in good figures in the last 4 years, you are reporting around 15% to 16% net margin. In bad years, you are reporting 10% to 11% net margin. So going forward, should we take the average of that around 13% net margin? It would be great if you share some thoughts about or some prospects about your margin generation overall.

Thank you, Ece. And first, I would like to thank you for your congratulations. We hope to continue hearing this on a long-term basis. The thing is that for the last 5 years, we keep on saying that we always would like to keep our EBITDA margins north of 20% and gradually increase them to move up one step up in the ladder. And I believe, with all the operational excellence programs that we have been on, again, all the reshuffling that we have been doing in our portfolio, now it is more fair to say that we will be in the north of 25% in the EBITDA margin. But our striving for reaching to a higher level in the upcoming years for sure continues. So that was one of the main reasons why we undertake the merger, coupled with the operating model restructuring and a total technology restructuring that we have been experiencing right now. So for sure, there might be some fluctuations from period to period or year-to-year because in the end, this is a conventional industry where it includes, in almost all parts of our portfolio, some cyclicalities. But we are carefully managing and try to just align the outcome of our portfolio that we will always stay at the north of 25% and take the advantage of increased margin generation possibilities in the upper sides of the cycle and make the necessary investments, especially during the downturns so that we get prepared for the upcoming cycles and get the most out of the cycle. So you may see that we are one of the better equipped companies that still has almost all the capacities alive and keep on announcing new investments. Because we believe that in some of the business lines that we are operating, we are moving to a better part in the cycle. And the pricing conditions and the demand conditions continue to improve, not only in the geographies that we are operating or catering to but also in some of them like the architectural glass more on a global basis. Coming to the net income, this is much more of a challenging part because you know that we have a pretty good long position in FX, which is linked with the realities of the business we are doing because although we have been continuously increasing the hard currency portion of the revenues that we keep on generating, still there is a good amount of EM currencies that we generate in our turnovers. But when you are doing a CapEx investment, unfortunately, still most of this is coming as a hard currency. So we will continue to stick to our long-term financial strategy and especially in the years like we have been experiencing for the last couple of years in Turkish market, where there has been an increased devaluation of the EM currencies, then that is bringing additional margins to your top line as to your bottom line. So, in fact, how we are managing our business is to just eliminate all of the one-offs, like the one-off returns that has been generated or any additional returns generated from the currency fluctuations and try to stick to an improved operating profitability year-on-year and stick to this that will keep our net income at a higher level. But especially even in some months or quarters, you may see that if there is a valuation of the foreign currency in that net income part, that comes with then side effects. And also, we are very careful in managing the -- doing the necessary alignment in the transfer pricing so that we stick to all the rules in the tax part. So for sure, especially when we are in investment periods, we might be benefiting from some of the additional returns especially from the state aids and some provisions in the tax part. But those are the things that create an ongoing volatility in the net income. So that is why we would like to stick more on the EBITDA and especially the return of equity against the cost of equity difference on a long-term basis that will secure also in return a pretty good net income generation. I hope this helps to provide a clear picture of how we are trying to manage our business on a short and on a long-term basis.

Yes. Thank you very much for your detailed answer. So for the third quarter, should we expect that a 26% EBITDA margin level to remain or could there be some normalization as per what you can see from the July figures?

So there might be a little diminishing margins due to changing costs, which we've already shown that we can almost immediately adjust the pricing. But you know that also in our business lines, we have OEM businesses like auto glass business or glass packaging business, where we have escalation formulas that we have been reflecting the cost increases to the prices 3 to 6 months basis. So this might bring some diminishing margins for the third quarter. But as I mentioned, on a longer-term basis or medium-term basis, I should say, for the upcoming quarters of this year, we should be still staying at the north of 25% apart from anything that might happen on the FX side.

Okay. One last question I wanted to have is about your [Audio Gap] you already -- you are consternating that you want to keep the same level of the payout ratio. But given such a successful year as far as we can see, based on first half numbers, could there be any potential increase in your payout rate? Could there be any upside risk on that?

So we are not only looking at the dividend payout ratio. You know that we already announced a buyback program also. So how do you try to manage this is a combination of CapEx requirements that we need to undertake to continuously grow our business in a sustainably profitable manner. As I shared with most of our colleagues now that are here in this call, to be able to carry out on a long-term profitability level, you have to be able to continue to have your market power in the pricing and have at least worth to say in the markets that you're operating in. So and if -- as you might see, we are mainly operating in the regions that most of the time continue to grow and grow beyond the other parts of the globe in their respective industries. So CapEx requirements to continue to grow our business together with guaranteeing long-term profitability, plus the dividend payout and the buyback strategies that we keep on onboarding and would like to continue on a long-term basis, are forming the main pillars of how we are trying to manage both the returns generated from the business on a long-term basis and continue to create additional shareholder value for all of our shareholders. So that is one thing that we will for sure sit down while we are making the next 5-year strategy starting from next month and come up with how we can continue to balance this trio so that in the end, we generate the highest shareholder value for our own shareholders.

So we have the next question coming from Daniel Zaczkiewicz from Barclays.

Could I just ask about the CapEx, whether you are accelerating any of your plans in order to meet the strong demand conditions that you've been seeing? And if you could just give us an idea of where we should expect full year CapEx this year and next year? And then also, I just have a question on your Eurobond portfolio and what you're planning to do with this, whether you're now going to allow that to run down and use the proceeds for reinvestment.

Can you please repeat the last part of your question? I had issues in hearing.

Yes, sorry. So just on your Eurobond portfolio. As the bonds are coming up and maturing, do you plan to make reinvestments in new Eurobonds? Or are you going to reuse that cash for actual CapEx?

So let me start with the CapEx part. Normally, we were building to continue to speed up CapEx investments for this year. But as you know, there is also some delays in the overall supply chain. So it is delayed a little bit. It is not only linked with, I think, the demand but being so much experienced in the industries we are operating, as I mentioned in the -- while I was answering the first question from Ece, we know that when you're starting to come up from the downturn, it's the better time to make your investments. So we were already planning ahead for the investment. For sure, strong demand seen in the market is also supporting our perspective on that front. So this year, I believe that as we have ended up the first half roughly around $100 million, most probably, apart from any M&As or any additional things that might be realized in the upcoming quarters, I should say, the normal CapEx we should be spending should be roughly around $300 million, $350 million as we have only 5 months left. But we -- you know that we already announced our investment in Hungary. We already announced our very strong intention to build 2 new furnaces -- flat glass furnaces in Turkey, which -- one will be dedicated totally to auto glass production, which will bring additional capacity and margin generation not only to auto glass but also to the architectural glass business in Turkey. So we will continue with the long-term strategy we have. And we will try to eliminate some of the delays, unwanted delays we had to face due to the COVID-19 environment. So... [Technical Difficulty] Can you hear me?

Yes, we can hear you.