Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to Tupras Quarter 1 2019 Financial Results Conference Call and Webcast. I will now hand you over to your host, Mr. Levent Bayar, Head of Investor Relations. Sir, the floor is yours.

[Levent Bayar, executive]

Hi, everyone. Good evening from Tupras headquarters. Welcome to our teleconference for the first quarter of 2019. I am Levent Bayar, Head of Investor Relations. I am here with Dogan Korkmaz, CFO; Asli Gulcur, Strategic Planning Director; and Tuncay Onbilgin, Financial Reporting and Planning Director. Over the next hour, we will first present the results and then take your questions. In the next 2 slides, we will provide you with a brief summary of the key highlights regarding the first quarter, and we'll go into detail for each subject on the following slides.

Let's start with the key highlights for the quarter. We will first provide an overview of the key factors regarding the external market environment during the first quarter of 2019. We have divided this section into 2 main areas as development in global oil market and development in Turkish market.

Let's start with [ cracks ]. In the first quarter of 2019, middle distillate cracks maintained their strength, similar to what we have been observing for some quarters now. High sulfur fuel oil cracks were also quite strong, while gasoline cracks were weak compared to same period of the last year. However, with the beginning of the driving season in U.S. and the refinery maintenance in that area, gasoline cracks have started to increase with further improvements in the second quarter of 2019 so far. High sulfur fuel oil was also strong mainly due to supply-related factors, such as limited heavy crude availability.

In terms of numbers, diesel cracks were higher by 25% compared to first quarter of 2018. Jet cracks were up by 4%, and high sulfur fuel oil cracks were up by 54%. On the other hand, gasoline cracks were lower by 59% compared to first quarter of last year. In the following box, we see crude price development in the first quarter of this year. Crude price followed an upward trajectory in the first quarter and posted 26% growth since the beginning of the year. The upward momentum was a result of mostly geopolitics, limiting the supply, while underlying solid global economic performance was also a contributing factor for the price increase.

Now taking a look at the bottom row, i.e., the Turkish market development, bottom left box shows U.S. dollars versus Turkish lira in the first quarter of 2019. Lira showed 7% depreciation during the quarter. As you may recall, lira depreciation creates an FX loss in our P&L, which is pulled back in the following quarter with inventory gain. Finally, we do have the Turkish fuel market data for the first 2 months of 2019. This indicates about 5% contraction in diesel and around 4% growth in jet fuel demand. Diesel consumption drop can be attributed to slowing down economic activity, while jet demand remain [indiscernible] with healthy aviation market in Turkey.

Now let's take a look at the Tupras in the first quarter. As you know, we achieved quite strong results in last year 2018. In line with our dividend policy, our dividend payout ratio reached to approximately 100%, and we paid about TYR 3.8 billion respectively. This imply that around 11% dividend yield at the announcement date. With the latest number of this dividend payout, our total dividend payout was recognized as TYR 13.5 billion in the last decade.

Another significant development was the result of IGA tender, which is the jet fuel sales tender to new Istanbul Airport. Tender work successfully completed in the beginning of April, and we are granted to sell 1.8 million tons of jet fuel per annum to new Istanbul Airport. We will give more details in the coming slides, but in summary, RUP maintenance is now at the final stage. As you know, we completed the heavy maintenance program last year in 2018 as well. Therefore, with the completion of RUP maintenance, all of our assets will be ready to benefit fully from IMO 2020 development.

Thanks to our strong customer relations, proactive sales planning and well-grounded agreements, our disease sales were sound in the first quarter of this year. Our diesel sales posted a small growth compared to the first quarter of 2018 despite weaker Turkish market. Tupras' net refining margin in the first quarter of this year was at $4.2 per barrel. This is largely in line with last year's same period despite the negative impact of heavy crude differentials, much higher natural gas costs and the RUP maintenance. In summary, we have processed 6.7 million tons of total crude and other feedstock, sold about 7.2 million tons of refined products and generated around TRY 850 million of EBITDA in the first quarter of 2019.

Now let's take a look at the oil market highlights on the following slide. As you know, the first quarter is the seasonally maintenance period, limiting product supply and supporting cracks in general. Compared to the first quarter of 2018, diesel cracks retained their strength and averaged at $15.4 per barrel in this quarter. Compared to first quarter of 2018, diesel cracks posted 25% growth, mainly due to low stock level and solid demand growth in both developed and emerging markets. We observed from the market that marine sector has yet to start buying diesel and marine gas oil to comply with the International Maritime Organization 2020 regulations. Hence, we believe that the first quarter diesel cracks did not include the positive impact of this regulatory change. We continue to expect to see a positive impact on diesel cracks in the second half 2019.

Jet fuel cracks posted a limited growth compared to last year and registered 4% growth. The main driver for jet cracks were again limited stocks, strong demand growth in the Asia and steady aviation demand globally. Gasoline cracks, on the other hand, declined by 59% in the first quarter of 2019 compared to last year's same period.

This was on the back of 2 main factors: First, high stock levels, particularly in United States, limiting European exports to there. I would like to remind you that the cracks number that we mentioned here are European market. Second, higher light product yield boosted by shale oil and shale gas in the United States. As a result of these developments, gasoline cracks were $4.5 per barrel during the first quarter, roaming around the lowest levels of the past 5 years. However, with the beginning of the driving season and U.S. refinery maintenances coming to an end, gasoline cracks have started to improve further in the second quarter.

Finally, high sulfur fuel oil cracks increased by 54% compared to last year's same period. This was mainly driven by supply-related factors, such as limited heavy crude availability post-Iran sanctions and OPEC+ cut decision. In addition, new fuel conversion units in Asia and Middle East region caused lower high sulfur fuel oil availability. Higher United States light crudes continues to positively impact high sulfur fuel oil cracks due to lower fuel oil yield from lighter crudes.

Moving over to the crude price differentials. As maybe recalled, in the first quarter of 2018, heavy differentials widened due to worldwide refinery maintenances and began to narrow again after refineries were back online. During the second quarter of last year, sanctions regarding Iran were announced and OPEC policy change was announced to increase production in June, which led to a widening of differentials during second quarter and early third quarter. In the third quarter of last year, differentials narrowed on the back of expected loss of supply from Iran as well as limitations in the Venezuelan supply.

In the fourth quarter of last year, heavy crude differentials narrowed further with Iran sanctions kicking in on November 4 and OPEC+ cut decision on December, which was around 1.2 million barrels per day. And finally, in the first quarter of this year, with the ongoing OPEC+ cut decision, Iran sanctions and problems in Venezuela, heavy differentials -- heavy crude differentials continued to narrow, and oil started to trade above Brent. Looking forward in 2019, we believe the outlook for heavy differentials will be set in accordance with the decisions of OPEC+ in general as well as IMO 2020-related crudes rate decisions later on the year.

Now let's move on to the operations of Tupras. Before we talk about the utilization for the quarter, we would like to remind that the utilized capacity of our refineries have been increased from 28.1 million tons to 30 million tons following several upgrade investments that we did since 2017. We have made a special disclosure regarding this development yesterday. We would like to remind that following these investments, we had applied to EMRA for license amendment, and the regulator approved our request. We weren't able to update the market on this sooner as the process was still ongoing.

Taking into account this development in the first quarter of this year, our total crude and other feedstock capacity utilization was realized at 94%. This 94% utilization rate includes the negative impact of RUP maintenance as well. We would like to remind that all historic utilization levels are based on our previous capacity number, which was 28.1 million tons, and all future calculations starting with the first quarter of 2019 are based on new capacity of 30 million tons.

Moving over to the sales. We generated total sales of 7.2 million tons in the first quarter of 2019. This is 17% above last year's same period. Our exports more than doubled in the first quarter, mainly driven by high sulfur fuel oil exports. Despite 5% contraction in diesel in the first 2 months in Turkish market, Tupras diesel sales were flat.

Now let's move to the financials, starting with the net refining margin. In the first quarter of 2019, Tupras' net refining margin was at $4.2 per barrel, which was above Med complex margin and slightly below last year's same quarter. Main reason behind the weaker refining margin -- weaker net refining margin was the narrower differential, higher natural gas expenses and RUP maintenance impact.

Now on the following slide, let's take a look at the P&L items for the first quarter of 2019 compared to last year's same period. Our revenues increased by 54% and reached to TRY 20.7 billion. This was mainly achieved by 17% increase in our sales volumes and average 41% increase in U.S. dollars versus Turkish lira, i.e., lira depreciation. Our costs increased more mainly due to narrower heavy differentials and elevated natural gas costs.

As disclosed earlier, RUP maintenance also had a negative impact as well. As a result, our gross profit decreased by 7% to TRY 991 million. Our operation expenses posted 39% growth in the first quarter of 2019 compared to last year's same period. This was mainly due to new foreign exchange levels of hard currency expenses, such as transportation and insurance and inflation adjustment for our Turkish lira-based cost.

As you may recall, FX impact of payables are booked under income and loss from other operations in our P&L statement. Therefore, the negative figure of TRY 390 million is mainly a result of 7% depreciation in Turkish lira in the first quarter. We would like to remind that this development is part of our FX exposure management policy, which treats our stocks as natural hedge. Therefore, one can expect to grow back through inventory gains once we process or sell the mentioned inventory, depending on the FX rates and product prices as was the case last year.

Our net financial debt had increased in the fourth quarter of 2018, mainly due to deteriorating working capital related to early payments to Iran in crude in October. This contributed to increase in financial expenses of the first quarter of 2019. About half of the increase in financial expenses that we have recorded can be attributed to this development. In the first quarter, there are no early payments, and our working capital continues to improve, and we have reached a [ poor ] fourth quarter working capital days in terms of our balance sheet.

700 bps higher Turkish lira funding costs as well as about 140 bps higher USD funding costs also elevated our financial expenses, and we were recorded TRY 330 million increase in financial expenses compared to last year's same period. Following the drop in operational profitability and higher financial expenses, our bottom line realized that TRY 375 million of net loss in the first quarter of 2019.

Regarding EBITDA, we have recorded TRY 751 million (sic) [ TRY 851 million ] in the first quarter of this year. We have materialized TRY 301 million inventory gains, which includes hedging activities. When we deduct this inventory gain from reported EBITDA, we reach TRY 550 million of clean EBITDA or EBITDA CCS in the first quarter 2019.

As you can see, there are both operational and financial items leading to the decline in profit before tax for the first quarter of 2019 compared to last year's same period. Let's start with the operational front. As we had discussed earlier, cracks were better compared to last year's first quarter, and their contribution is positive TRY 270 million in this year. Production's contribution is also positive at TRY 192 million with higher utilization and production level this year. We have recorded TRY 224 million negative impact from narrowing heavy crude differentials in the first quarter of this year compared to previous years. RUP maintenance had a negative impact of TRY 216 million in the first quarter, which is largely in line with our disclosure of USD 40 million per month.

Due to a streak of price hikes in natural gas last year, our gas costs have increased and had an impact around -- had a negative impact around TRY 320 million in our bridge. As majority of the hikes were conducted in the second half of last year, the first quarter of 2018 is at low price, and we expect to see reduction in this space effect in the coming quarters. We have already explained the key factors behind the increase in interest expenses, such as last quarter's working capital effect and elevated funding costs. These factors resulted in a TRY 253 million negative impact on our bridge.

As we explained previously, our foreign exchange losses mainly originate from our stocks, which is recorded in Turkish lira but are effectively are in U.S. dollars. As we went over the foreign exchange exposure management slide with you several times last year, when lira depreciates, we will record FX losses, but one can expect to grow them back through inventory gains on the profit or sell the mentioned inventory depending on the FX rate and product prices as was the case last year. Since this bridge mainly focuses on Tupras' refining activities, nonproduction gains and expenses as well as changes in our subsidiaries' performances are recorded under other items which is at TRY 102 million for the first quarter.

Now for the financial highlights of this quarter. In the first quarter of 2019, our EBITDA was realized at TRY 851 million, about 18% below last year's same quarter. We have recorded a net loss of TRY 375 million. Regarding gearing, our net debt-to-EBITDA ratio is at 1.2x. Our current ratio is at 1.1x. Our rolling return on equity, materialized at 46% in the first quarter of 2019.

Looking at the balance sheet, our cash and financial loan at the end of the first quarter was TRY 11.3 billion and TRY 22 billion, respectively. Our focus on tight financial management has resulted in a near 80% long-term ratio in our financial debt breakdown. We would like to highlight the evolution of working capital once again to show how changes in operational front have impacted our figures. As you may recall, the increase in our working capital in the fourth quarter of last year was mostly a result of early payment of Iranian crude before November 4 and decreased payable days throughout the fourth quarter of 2018. In the first quarter of 2019, our payable days are normalized with better market conditions. And since we did not make any early payment in the first quarter of 2019, our working capital improved significantly around TRY 3 billion.

Regarding our FX exposure management, we continue to employ rigorous FX policies to mitigate currency risks, and our policies continue to keep the risk level within our limits. Our treasury team manages our balance sheet and foreign exchange risks in a holistic way. We have finished the quarter with about USD 1.7 billion in hard currency to cover for changes on the liability side. Our USD 1.4 billion worth of cash flow hedging and forward also aim to cover for RUP bond's and Eurobond's FX impact during times of Turkish lira depreciation.

We do keep and treat our stocks as a natural hedge as it consist of FX-based price groups, such as crude oil and unsold product. Therefore, in times of Turkish lira depreciation, we do record operations-related FX losses corresponding to the amount of inventory, only to recover them, then we use this inventory as inventory gain. This is what we have observed in the first quarter of 2019 and in the majority of the past year's quarters. We will continue to employ financial expenses and management policies to govern our balance sheet and manage our FX and commodities exposures.

Now let's take a look at what we have achieved so far in 2019. We have produced around 6.7 million tons in the first quarter of 2019 and sold around 7.2 million tons of product. With narrowing oil differentials and gasoline cracks in the first quarter, net refining margin materialized at $3.6 per barrel. With higher light yield and better crude mix, Tupras managed to outperform Med margin by $0.6 per barrel in the first quarter of this year. Regarding CapEx, we spent USD 33 million in the first quarter of 2019.

Now let's take a look at our 2019 maintenance schedule. With our major CDU maintenance activities mostly completed in 2018 and RUP maintenance progressing on track, there is limited change to our agenda. Regarding RUP, as we have disclosed earlier, we have kicked off maintenance on February 26 and reaching completion of the process. We will not revise our EBITDA impact of $40 million per month during the shutdown of the facility, which was announced back in January this year.

Now let's take a look at our 2019 guidance before we conclude the presentation. As you can see from the table, we do not revise our 2019 guidance. Going quickly over the numbers due to narrowing the financials and weak crack margin expectation for high sulfur fuel oil, we assume annual Med complex margin for 2019 to be between $3.75 to $4.25 per barrel. For Tupras, we expect net refining margins to be between $6 to $7 per barrel with the help of higher light product yield and heavier crude processing capability of Tupras compared to the Med margin.

Our capacity utilization target is 95% to 100%. We expect production and total sales to be around 28 million tons and 30 million tons, respectively. We would like to remind that our capacity utilization calculation is based on new capacity number of 30 million tons and is inclusive of RUP shutdown impact. We are expecting to spend around USD 250 million on refining investment in 2019.

Thank you for listening to me. We can now open our session for questions.