Transcription for SOCAR – Petkim
August 16th 2013
Corporate Participants
Yasemin Ahmetoğlu
SOCAR – Investor Relations Director
Hayati Öztürk
Petkim – Former General Manager and current Board Member
Bulent Aksu
Petkim – Chief Financial Officer
Berkan Ates
SOCAR – Group Financial Coordinator of SOCAR Group Company
Conference Call Participants
Neeraj Kumar
J.P. Morgan
Koray Pamir
Finansinvest
Tamas Pletser
Erste Bank
Presentation
Operator
Ladies and gentlemen, welcome to SOCAR 2013 Second Quarter Financial
Results conference call. I will now hand over to Miss Yasemin Ahmetoğlu,
SOCAR’s Investment Relations Director. Please go ahead.
Yasemin Ahmetoğlu
Good afternoon, ladies and gentlemen. Thank you for attending our Second
Quarter Earnings conference call. I will shortly leave the floor to Petkim
Petrochemical’s Board Member, Mr Hayati Öztürk. He will give you insight
about the petrochemical’s market environment and demand and pricing
conditions during the second quarter of the year. Next, our CFO, Mr Bulent
Aksu, will discuss the operational developments and financial results. Lastly,
SOCAR’s Group Finance Director, Mr Berkan Ates, will take the floor to give
an update on SOCAR’s on-going investment plan. We will be happy to
answer your questions at the end of our presentation, and now I would
leave the floor to Mr Hayati Öztürk.
Hayati Öztürk
Good afternoon, ladies and gentlemen. You can follow my presentation on
our website. I will start by mentioning the global market outlook first.
As you may know, the recession in the Eurozone, which has started in 2011,
continues to constrain demand of commodities in petrochemical industries
all over the world. You had seen this in the previous two or three-year
period.
As you know, crude oil started to decline in line with the demand problem in
the second quarter and we have seen the oil price close to $100 per barrel, I
think which is the lowest figure in the past two or three years.
In line with crude oil price, we did see some moderation in Naphtha price.
The main reason was there was no new demand for Naphtha in both refining
side and the petrochemical’s side, so Naphtha price in the average is $850
per ton.
If you look at the petrochemical ethylene-Naphtha spread chart, you have
seen the minimum figure in May 2013. This figure was around $300 per ton.
As of today, this figure is improving day-by-day, reaching contracts out in
Europe, we have seen another increase around €40-50 addition, so spread
and margin improving in coming days.
The reduction in feedstock costs was matched with reductions in co-product
values. I have to mention the import price in this. C4 was one of the most
attractive molecules in the petrochemical industry, but unfortunately in
these days C4 market, is in trouble, because of downturn in rubber
industries, so the by-products revenue from C4 supply chain is at least a loss
in the first half of this year.
After the peak in February, the petrochemical side has been in a declining
trend until June, because of the on-going recession in Europe, the slowdown
in Far East/China, and also sensitive in the USA, but today we have seen a
positive signal coming from different parts of the world.
The price of petrochemicals starts to improve and starts to rebound in June.
I think this trend will continue in the coming months. We think that the
gradual model improving margin is expected in the industry, this is a general
consensus.
If you look at the price side, we have the Platt’s Global Petrochemical Index,
which is the average of basic petrochemical’s pricing. Here we see in May
2012, we have seen the bottom of this price index, which was around
$1,100. As of today, we are around $1,300, you will see 20-25%, which is
the average price for petrochemical in the past one year, so the trend in
petrochemical side is upward, although on the other hand on the feedstock
side it is downward, although I will mention the recent geopolitical problem
in the Middle East, there is an on-going increase in the oil price, because of
logistic problems in the Middle East, some problems also in Egypt. We have
seen another rebound, another recovery, in the oil price. This is an
unexpected increase in the oil price. Normally, we expect this oil price will
stay around $100 per barrel, but today over $113.
The trend in pricing is upwards as I mentioned.
If you look at the second chart slide here we see the trend in thermoplastics
and Naphtha. Thermoplastics, as you know, is our core product, almost [
50% - 55% of our revenue comes from thermoplastics. The blue one is
Naphtha, the other one is thermoplastics. Starting on this year, the
beginning of this year, you see the decline in trend in Naphtha side, as I
mentioned, but we have seen another rebound recently but thermoplastics’
price, there was a declining trend because of demand problem all over the
world, but as I mentioned, the demand is improving in Asia, in the USA, in
Europe as well, so we hope in the coming months the demand will recover
and the margin will be in a better position.
This stimulate the restocking plans in the coming days. As you know, we
were passing through the destocking period, because of the , decline in oil
price, the customers postpone buying when decline in oil price, so we have
just passed through these period and now this trend has changed, and
destocking is over and restocking has already been started, and this has
increased the prices in the market. You will see a price increase and Petkim
will follow as well, so over the coming months I hope we will see a
restocking again in the market. The underlying demand problem, as I
mentioned is over and you will see a demand recovery, At the bottom of this
slide you will see the trend of [inaudible] improving and [inaudible] side
[inaudible] ACN, the Benzene price, actually aromatics was one of the best
performing in the first half of this year. We hope to see this continue in the
second half. Thermoplastics was not in good shape, but as I mentioned,
thermoplastics price will recover in the second half of this year.
On page four, you will follow operations and margins. In the second quarter,
there is a big step change in profit margin; the margin was over $110 per
ton, the gross profit was 5.6%. As I mentioned the cost of naphtha is one of
the reason and, you know, the naphtha price was around $820 naphtha
dropped further relative to oil. Besides naphtha, LPG was one of the reasons
for the increase in gross margin. As you know, LPG and naphtha spread was
quite big in the second quarter, so LPG demand is declining LPG is almost
15-20% less compared to naphtha, so LPG utilisation adds a lot to our basic
chemical costs, and besides the feedstock, the on-going energy saving
activities on our combined feed and power system on different facilities and
factories. We focus on energy utilisation as efficient as possible. You will
see this declining trend in the following slides; energy saving trend in cost
cutting, naphtha and LPG utilisation. Of course, following the market
development day by day and adjusting our production accordingly helps on
reaching this higher gross profit comparing previous quarters.
Our first half actual performance has been in line with our full year budget
forecast. We expect reaching budgeted year end EBITDA figure as for at the
end of this year.
On the cost side, here you see the cost breakdown. Raw materials are the
main cost component, 84%. Energy another big cost component around 9%,
so our main focus is to have an efficiency on these two big main cost
components; raw materials, as I mentioned, feedstock flexibility one of the
main areas that Petkim focused on by using LPG. By improving our
integration level in cracker/aromatic plant I will mention later on this
project, so energy saving, energy utilisation, and raw material flexibility and
improving our efficiency in raw material utilisation, our main focus of Petkim
in these troubled days.
On the next slide, here we see capacity utilisation in ethylene cracker. In
June we averaged 70% one of the lowest CUR, but the main reason is
because of some turnaround in the Aromatics plant and some other
facilities, and if you look at Europe, you will see similar figures. The capacity
utilisation in Europe around 80%, less than 80%, so Petkim capacity
utilisation is in line with the Western European standards, so the main driver
for this is to maximise profit margin, not too much about production,
besides our capacity utilisation was around 80% in the first half of this year,
but we looked at improving margin, and expect having a better capacity
utilisation in the second half of this year.
As I mentioned, the decline in capacity utilisation is partly related with
Aromatics plant turnaround and that was that investment program on
energy saving side of Aromatics plant.
As we mentioned, energy efficiency, on-going energy saving programme
contributes a lot on Petkim’s performance in this stage.
You can see the declining trend in energy consumption and total production
in the bottom of this slide, as a new slide. I think this is a very interesting
slide and here we see the CUR decline in plant and drop in energy
consumption in production, as I mentioned, which is very important.
On the sales side, here we see the breakdown of sales as per product on the
next slide you will see some decline in volume and breakdown of our
revenues against net sales and better volumes. As I mentioned,
thermoplastics was the main component in our turnover. So there was
generally in some ways no big change in revenues.
For exports, exports accounts almost 30-31% of our total revenue. These
are Benzen, C4, Py-Gas, three main products, contributes our export selling,
which adds up to around 52% of three main exports molecules, export
products. Our exports market revenue, Europe, 56% of our exports already
comes from Europe. You have Korea, also results coming from C4 exports,
almost 38-40%, so Europe, as I mentioned, improving, but I think the
recession is about over and we hope the European market will be well
positioned in the coming months.
This is the general outlook and I will give the floor to Bulent Aksu, who will
mention our financials. Thank you.
Bulent Aksu
Good afternoon, this is Bulent Aksu, the CFO of the Company. I would like to
start my presentation with the presentation of the income statement.
Net sales of the Company in the last quarter was around TRY 918 million; in
the first half year amount, TRY 1.9 billion; there is almost 18% decrease in
the total net sales amount and, as Mr. Hayati did mention, it is directly
related with the maintenance in the Aromatics unit. The total gross profit of
the Company, TRY 107 million. It is the highest annual gross profit margin
obtained for the last four years, which is 5.6%. The operating profit of the
Company, TRY 15 million, and EBITDA of the Company is TRY 88 million,
which is 4.6%. The main drivers of such increases are directly related to the
increased consumption of the LPG, which directly saved TRY 27 million in the
total cost of the Company. Dynamic planning and market oriented
optimisation efforts, and purchasing natural gas from SOCAR Gas, which
saved TRY 8 million, in the first half of the Company, and Petkim has
exceeded its annual half year 2013 expectations in terms of gross profit
margin and the EBITDA.
When considering the second quarter 2013 results, please keep in mind
negatively affected Petkim’s P&L net financial loss mainly due to fluctuating
FX rate, amounting TRY 20 million.
Regarding the balance sheet of the Company, the total cash amount of the
Company amounts to TRY 163 million and total current assets of the
Company amounts to TRY 1.3 billion, short-term borrowings of the
Company, TRY 107 million and the long-term borrowing is TRY 76 million. It
is directly related to the on-going investments of the Company. The major
investments of the Company, Ethylene and PTA Capacity increases, total
ethylene capcity is planned to be increased by 13% and the total capacity
will reached to 587k tons, and the total investment amount is USD118
million, 58% of the investment completed and the third quarter of 2014 the
total investments will be complete.
These investments will be financed by LIBOR plus 3.5% in March 2013.
Regarding the PTA capacity, 50% of the capacity will be increased and the
capacity will reach 105ktons. Total investment amount is USD20 million and
11% of this investment will be completed.
Thank you very much.
Berkan Ates
Dear audience, my name is Berkan Ates, I will summarise you the state of
our investments and I hope you analysts of Petkim and closely following
Petkim, are in fact knowing what investments we are undertaking. Let me
summarise in brief what are these investments and why we are doing them.
First of all, our investments has several dimensions and that will reshape the
future of Petkim. If you look at Petkim today, Petkim needs debottlenecking
investments, as Mr. Bülent mentioned these investments are at running
capacity, the current capacity increasing by 13%, it shall receive 587,000
tons by the third quarter of year 2014, and it is being financed by long-term
loans by Türkiye İş Bankası and also PTA capacity increase and these
investments are going together with some positive results in terms of
EBITDA and sales and would further enhance the use of aromatics in the
plant. More importantly, with the synergies that came from STAR Refinery,
Petkim is going to profit from a lot of benefits, as you already know that
STAR Refinery investments has started and EPC contract has been signed on
20th May of this year, and the refinery is going to be operational within the
year of 2017. We don’t expect a significant time delay, or costs overrun
because we still lump sum EPC contract, and luckily, because of the global
demand on the major infrastructure projects, we have achieved to secure
the total capacity for this refinery as USD4.5 billion. This plan is not
including the financial costs, but you should take into account that this is a
significantly low range for STAR Refinery that will process 10 million tons of
crude per year.
This investment of SOCAR Group, Petkim will integrate some synergies and
cost savings. The major ones are the decreasing freight costs lower
inventory costs, increased stability and the quality of the feed stock, which is
a really important aspect for Petkim, and also we will have cost savings on
the maintenance, security, the waste disposal services, although it is very
difficult to quantify all these numbers, but we are expecting more
contribution than historical EBITDA of Petkim, which means that Petkim’s
EBITDA will be very different than historical figures and we will use the
naphtha reformate, mixed xylene and LPG, and on a continuous basis from
our refinery investment.
Another investment that we are doing in the area, which is a very important
the container terminal project, and the investment over this time put on our
side is more than USD200 million because Petkim is undertaking the
infrastructure part of this investment, and the remaining costs seems to be
around USD276 million, 10-15% lower than the budget. We are going to
finance USD207 million of this amount by project financing. We have
received the international banks and we expect to make the closing by the
end of this year, but the investment has already started, putting USD69
million total equity in this project and with the agreement between APMT
and SOCAR, we have already received the first instalment from the APMT,
which is current USD29.5 million. We received that amount in July 2013.
The payback period of these investments shall be in the range of 8-12 years
depending on the revenue stream of the port, and the first phase of the
port will become operational in 2015 and from today we can count down 20
months, so we are not also expecting any further significant time delay in
construction, and by having 1.5 million TEU capacity container port in this
very strategic geographical location, Petkim has a very important asset, in
terms of differentiating its revenue and more stable revenue from the port.
This will also contribute to Petkim’s future.
These are the major investments that I wanted to share with you. I would
like to thank you very much for listening to us. We will answer your
questions now.
Yasemin Ahmetoğlu
Ladies and gentlemen, we would like to hear your questions. Thank you.
Question and Answer Session
Operator
Ladies and gentlemen, if you would like to ask a question, please press 01 on
your telephone keypad, please lift your handset before you ask your
question. Thank you for holding until we have the first question.
We have a question from Mr Neeraj Kumar from J.P. Morgan Dubai. Sir,
please go ahead.
Neeraj Kumar
Hi guys, it is Neeraj Kumar from J.P. Morgan, many thanks for the
conference call, three questions if I may. The first question is on gross
margin has increased from 5.4% to about 5.7% in the second quarter. Using
the same level of price and volume, do you further expect margin expansion
on cost reduction?
My second question is, any update on the naphtha imports from northern
Iraq?
My third question is, as per your presentation, LPG use has increased to 16%
in the first half 2013. Can you please remind us once again what is the
target usage and by when you plan to achieve it. Thank you.
Bulent Aksu
First of all, regarding the LPG usage, our target and capacity is 20% for the
second half of the year, but it is directly related with the naphtha and LPG
price differences, but right now our aim and the target is 20%. Regarding
the cost reduction, as Mr. Hayati mentioned that in June, in Aromatic factory
we converted to the…
Hayati Öztürk
Our main objective to increase the integration level in our existing facilities.
Besides we find in the petrochemical integration, we have to focus on the
existing plants, so Aromatic plant, existing Aromatic plant and cracker
integration, one of the areas that we have focus and this is to be reinvested
part time bringing Aromatic to existing cracker, which will benefit 15,000
tons naphtha to [inaudible] in crackers, so this will bring additional USD10
million value for Petkim, per year, contribution to Petkim’s operations, so
this is one example, you know, to increase our feedstock [productivity], to
keep our integration level in the existing facilities.
Bulent Aksu
So that we are expecting more cost reduction in the second half of the year,
regarding the other question, Iraqi naphtha, we have on-going discussions
regarding the contracts with some suppliers, but we could not finalise the
agreements with them until now.
Berkan Ates
SOCAR Azerbaijan is developing some businesses with Northern Iraq
Management Federation, so they are discussing a lot of issues. This is one of
the topics, which is under discussion, so when all the package is ready, I
think this issue will be more clear to all of us. Thank you.
Neeraj Kumar
Thank you very much.
Operator
We have a question from Mr Koray Pamir from Finansinvest. Sir, please go
ahead.
Koray Pamir
Hello gentlemen, thank you very much for the presentation, just a couple of
quick questions. Can you provide an update on the possible closing of the
financing of the STAR Refinery? The latest information that I have is that it
should be towards the end of this year, but I wonder if you knew a bit of
information on that.
I might have missed it, but my second question would be in EBITDA margin
guidance and capacity utilisation guidance for the full year or for the second
half of this year, [inaudible], I understand it will be better half-on-half, but I
would appreciate if you can provide a numerical guidance if possible. Thank
you.
Bulent Aksu
Regarding refinery finance, as you know we started the launching process of
the financing of the STAR Refinery and we are planning to get the
commitment from the commercial banks until the middle of September, and
after that we are planning to finalise the market [query] at the end of
September, and finalise the documentation until the end of the year, so
there is no change regarding our plan, our previous plan and our aim to
finalise the closing of the STAR Refinery, the financing of the STAR Refinery
until the end of this year.
Regarding EBITDA expectations of Petkim, we are more confident to reach
our annual target, USD 100 million EBITDA, which is 4.5% EBITDA margin for
2013.
Regarding the capacity usage for the second half of year, our aim is 92%.
Koray Pamir
Thank you very much.
Bulent Aksu
You are welcome.
Operator
Ladies and gentlemen, I would like to remind you that if you wish to ask a
question, please press 01 on your telephone keypad. Thank you for holding.
We have a question from Mr Tamas Pletser from Erste Bank. Sir, please go
ahead.
Tamas Pletser
Yes, good afternoon. It is Tamas Pletser speaking from Erste Bank. I have
just got one question; you mentioned that your capacity utilisation by the
end of the period was cut due to this maintenance shutdown. Can you tell
us a little bit more the impact of this maintenance shutdown, how long it
takes, what is the financial impact, I mean both the cost of this maintenance
shutdown and the opportunity cost, the production you lost due to this cost.
Bulent Aksu
As you mentioned, that first of all this maintenance is directly related with
the implementation of energy savings project in Aromatic [inaudible], so
that there will be approximately USD 10 million cost savings per year,
because of the [inaudible].
Regarding the cost of this maintenance, it is around TRY 5 or 6 million cost to
the Company in June 2013.
Tamas Pletser
Is it only the cost of the shutdown or is it also includes the lost production?
Hayati Öztürk
Some part of this amount includes approximately TRY 2.5 million includes to
the total investment, and the other will directly go to the costs.
Tamash Pletser
Okay, great, thank you very much.
Operator
Ladies and gentlemen, I would like to remind you that if you wish to ask a
question, please press 01 on your telephone keypad. We have no other
questions, Miss Yasemin Ahmetoğlu, back to you for the conclusion.
Yasemin Ahmetoğlu
Okay then, well, we thank you very much for listening and your questions,
and lastly I would like to remind about our site visit, which will take place on
the 23rd August next Friday in [inaudible]. SOCAR Turkey President Mr
Kenan Yavuz and Petkim General Manager Mr Sadettin Korkut will host this
event. Also, project managers of Petkim Port and STAR Refinery will attend
and make their own presentation, so we believe it will be a good
opportunity to see our projects and on-going work [inaudible]. We invite all,
we welcome all, please contact me for registration and the voice record and
also a transport of this conference call will be available on our website.
Thank you very much once again.
Operator
Ladies and gentlemen, this concludes our conference call, you may now
disconnect.