Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Tupras conference call and live webcast to present and discuss the first quarter 2021 financial results.

At this time, I would like to turn the conference over to Mr. Dogan Korkmaz, CFO; and Mr. Levent Bayar, Head of Investor Relations. Mr. Bayar, you may now proceed.

[Levent Bayar, executive]

Hi, everyone. Good evening to all from Tupras Headquarters Istanbul, and welcome to our teleconference. I am Levent Bayar, Head of Investor Relations. I'm here with Dogan Korkmaz, CFO; and team members from Tupras Investor Relations and reporting departments.

Over the next hour, we will first go over our operational and financial results for the first quarter of 2021, then we will continue with the Q&A session.

I'll draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially. Please refer to our financial reports and material disclosures for more details. These documents are available on our website.

In the next 3 slides, we will provide you with a brief summary of the key highlights regarding the first quarter of 2021. Then we will go into detail for each subject on the following slides.

Now let's take a look at the Tupras highlights in detail for the first quarter of 2021. Firstly, diesel and jet fuel cracks were largely flat compared to the fourth quarter. Since existing cuts of refineries are still going on, diesel stock levels continue to be elevated. On the other hand, gasoline cracks showed an impressive upward trend, strongly supported with normalizing demand and lower stock levels in the U.S.

On the second chart, our proactive approach in the second and third quarter of 2020 regarding refinancing have paid off, which reduced our rate average cost of funding against the current market trends, with sharp increase in Turkish lira rates because they have positive carry and recorded net interest income from our deposits and loans in the first quarter of 2021.

On the left chart at the bottom, we have inventory and FX effects on our financials. As you know, Brent prices increased by 31% quarter-over-quarter based on period-end figures and prebooked material inventory gains accordingly. However, due to Turkish lira's depreciation against U.S. dollar at around TRY 1 level in the same period, we booked a substantial FX loss, which swept the positive impact from the inventory gains. We will recover this loss at the EBITDA level in the second quarter with the help of FX-based pricing.

Let's move on to the detailed market section and take a look at the global and domestic developments on the following 3 slides.

As you know, we cover this section in 2 main components as developments in global oil market and developments in Turkish market. Let's start with the top-left box. Brent price started to show a steady positive momentum since November 2020, driven with vaccines initially, OPEC decision later, and reached to pre-COVID levels with $65.6 per barrel as of the end of the first quarter. In the top-right box, you see the evolution of average differentials in comparison to OPEC's production cut decisions. As you can see from the chart, OPEC+ reduction and production cuts have almost a direct correlation with the financials widening so far in 2021.

Now taking a look at the bottom row, Turkish market. Bottom left part shows U.S. dollars versus Turkish lira in the first quarter of 2021. Turkish lira depreciated materially, especially towards the end of the quarter, leading to sizable FX losses.

Finally, we do have the Turkish fuel market data for the first 2 months of 2021 on the bottom right chart. Diesel consumption in Turkey was resilient with only 4.1% decline year-over-year with the help of uninterrupted food and essential goods transportation and logistics demand at the same time. Decline in domestic jet fuel demand has been easing since April 2020. However, it has contracted by almost 46% in the first 2 months of 2021 compared to the same period of last year. Even though a number of international flights are still very low compared to previous year, the year-over-year growth of cargo volumes are still supported. Gasoline demand was also down by 12.3% year-over-year, mainly due to restricted mobility.

Let's take a look at the crack in comparison to the last year's first quarter on this page. Mid-distillate cracks were still beat with respect to 5-year averages in the first quarter of 2021, due to elevated inventory levels versus the lagging demand. Gasoline, however, shows a glimpse of post-COVID world as strong vaccination in the United States, strongly supported the crack product in the first quarter of 2021.

Taking a look at the details. For diesel, diesel cracks were down by $6.8 per barrel compared to last year's first quarter and averaged at $4.50 per barrel in the first quarter of 2021. Diesel cracks remained under pressure in the first quarter, with refineries globally continuing to switch to diesel production instead of jet fuel, resulting in elevated inventories for the product.

Mobility restrictions in the European Union created a brief weakness in demand and placed further pressure on cracks. Jet fuel cracks averaged at $1.90 per barrel in the first quarter of 2021 and posted $6.2 per barrel decline compared to the first quarter of 2020.

Jet fuel cracks are still weak compared to 5-year averages due to reduced number of flights globally. Despite improving demand in the United States and Asia, jet fuel demand is approximately 40% lower compared to 2019 on a global level. Gasoline cracks were up by $1 per barrel compared to last year's same period and averaged at $7.9 per barrel in the first quarter of 2021.

Decline of gasoline inventories due to decrease in the United States, an upward trend in the petrochemical sector, strongly supported gasoline crack in the first quarter of 2021. Ongoing use of passenger cars and continued to structure with support gasoline cracks as well. This strong trend is still going on with opening of driving season in the United States and vaccine distribution.

Finally, high-sulfur fuel oil cracks averaged around minus $8.9 per barrel in the first quarter of 2021, and increased by $6.6 per barrel compared to the last year's same period. In first quarter of 2021, HSFO cracks were materially better compared to last year's same period due to the low base of first quarter of 2020, stemming from IMO-related weakness in HSFO.

Moving over to the crude price differentials. In the fourth quarter of 2020 and early 2021, we started to observe a gradual widening pattern for the crude differentials. Simple average of main regional heavy-grade differentials widened to minus 1.5% in the first quarter of 2021 from minus 0.8% in the fourth quarter of 2020. This widening trend also continued in April and May, especially after OPEC's actual decision.

As you may recall, OPEC decided to add around 1.1 million barrels per day over May, July against market expectations of extension of existing cuts. Moreover, Saudi Arabia will also gradually roll back its voluntary production cuts of 1 million barrel per day over the same period as well.

Looking forward, we continue to believe the outlook for heavy differentials will remain hard to predict. However, as shown in earlier slides, there's a meaningful correlation between OPEC production cut reduction and differentials. Hence, if OPEC continues to reduce production cuts, this will likely lead to further widening in differentials.

Now let's take a look at the Tupras operations starting with production volume. On the left-hand side, you can see our production numbers. Our total production in the first quarter was around 4.6 million tons. Production of the first quarter of 2021 was lower than last year since Izmir refinery was shut down due to maintenance in January and February of 2021. In the first quarter of 2021, our total crude distillation capacity utilization was 57%, and the other feedstock capacity utilization was at 8%, reaching to 65% for the whole system.

Moving over to the sales. Let's start with the chart on the left-hand side. We generated total sales of 5 million tons in the first quarter of 2021. Our priority in this quarter was meeting the local demand completely and increasing margin of profitability considering our production was relatively limited due to Izmir maintenance. Therefore, our export volumes were lower compared to the same period of last year.

In the first quarter 2021, our domestic sales and exports reached to 4.2 million and 800,000 tons, respectively, summing up to 5 million tons in total. As you can see from the chart on the right, which represents the domestic sales for the selected products, jet fuel was the most severely affected product in line with the expectations. Our diesel and gasoline sales remained largely unchanged with the resilient demand profile in the market.

Let's move over to the financials. Let me start with the refining margin developments with this slide. During the first quarter of 2021, Mediterranean refining margin decreased by $2 per barrel compared to the first quarter of 2020 and settled at negative $0.2 per barrel. Decline in the net margin compared to last year's same period is largely a result of weaker mid-distillate crack margins and narrow oil Brent differentials.

Tupras net funding margin realized at $1.50 per barrel in the first quarter of 2021, increased by almost $0.3 year-on-year, mainly due to strong inventory gains of -- which was elevated with sizable improvement in Brent prices. As we have discussed earlier, crack margins continued to be weak throughout the quarter, along with narrower differentials. We continue to record inventory gains with the improvement in Brent prices and Turkish lira depreciation, supporting the second quarter net refining margin as well.

Let's take a look at the P&L items in detail for the first quarter of 2021. Our revenues increased by 17% to around TRY 20 billion in the first quarter of 2021. There were 3 different drivers leading to this performance. Our sales were down by 20% in the first quarter of '21 versus the last year, but this was more than offset by 21% higher Brent price level and 21% depreciation in Turkish lira on average.

With the upward trend in Brent price and depreciation in Turkish lira, we have recorded TRY 1.5 billion of inventory gains in the first quarter of 2021. Our costs remained flattish in the first quarter of 2021 versus last year, with lower production amount offset at higher Brent prices. Our gross profit turned into black with the help of inventory gains despite continued weak performance in cracks and narrower differentials.

Our operational expenses increased by 22% year-over-year in the first quarter of 2021, mostly in parallel with 21% year-over-year Turkish lira depreciation against the U.S. dollar, while inflationary adjustments continued to have an impact as well.

Due to Turkish lira depreciation of around TRY 1 throughout the quarter, the loss from other operations materialized at TRY 1.6 billion versus TRY 350 million of loss in the first quarter of 2020.

Our net financial expenses were down by 61% compared to the first quarter of 2020. In detail, we have recorded around TRY 300 million of FX losses in the first quarter due to sharp depreciation in the Turkish lira. We have recorded a quarter of net interest expenses of last year's same period despite nearly a double interest rate. This was achieved with sound financial policy and proactive refinancing that we did last year.

As you can observe from the table, we have recorded negative TRY 960 million of profit before tax in the first quarter of 2021. Below profit before tax, we have recorded TRY 224 million of deferred tax income, which was mostly in relation with accumulated deductible financial losses. Consequently, our bottom line materialized at TRY 760 million loss for the first quarter of 2021.

Now for the EBITDA for the quarter, our EBITDA CCS materialized at negative TRY 342 million due to historically weak crack and narrower differentials compared to last year's same period. We have recorded at around TRY 1.5 billion of positive inventory effect due to recovery in Brent price and sizable depreciation in Turkish lira. Consequently, our reported EBITDA materialized at TRY 1.2 billion, which is substantially better compared to last year's same period, with minus TRY 1.3 billion EBITDA.

Now let's take a look at the profit before tax bridge. As you can see from the profit before tax bridge chart, due to almost $0.70 per barrel narrower heavy crude differentials year-over-year, we have recorded TRY 159 million of negative impact from the differentials. Crack margins still remained historically weak in the first quarter of 2021, leading to TRY 728 million of gap compared to last year's same quarter.

We have recorded almost TRY 1 billion more FX loss in the first quarter of 2021 due to sharper depreciation of Turkish lira in the first quarter of 2021 compared to last year's same period. Due to severe inventory loss in the first quarter of 2020 and sizable inventory gain in the first quarter of this year resulted [in improvement] in domestic TRY 3.5 billion.

With proactive refinancing actions that we did in the last year, we have managed to materially lower interest expenses and recorded a positive contribution compared to last year's same period from the net interest expenses. All in all, the first quarter 2021, profit before taxes materialized at negative TRY 960 million.

Now let's take a look at the financial highlights. In 2021, we have generated TRY 1.2 billion of EBITDA versus minus TRY 1.3 billion figure recorded in the same quarter of last year. Sizable year-on-year increase is largely due to inventory gains. As a result of weak core refining profitability and sizable FX losses, we have recorded minus TRY 760 million net loss in the first quarter of 2021. Distinctive operating environment that began by the second quarter of 2020 continues to dominate our industry in 2021 so far, with historically weak performance in crack margins due to weak demand and elevated stock.

In order to present a more comparable presentation of our leverage metrics in the first quarter, we continue to exclude one-offs in relation with historically weak crack, which has been materially below of its past five years' average level from our EBITDA calculation.

Within this context, as maybe recalled, we had to shut down our Izmir refinery in the second quarter of 2020 for 2 months under very weak demand conditions as we classified its impact on our financials as one-off due to the nature of this event. Due to elevated stock levels, mid-distillate cracks have been in record low levels in the second half of 2020 and in the first quarter of 2021.

Being designed as supplier of mid-distillate short country, Tupras has been exposed to historically weak crack to which crack margin of Tupras has resulted materially below of its past 5 years' average level. When adjusted for this gap against average of the past 5 years, we calculate around TRY 2.6 billion one-off impact on our EBITDA in the second half of 2020 and the first quarter of 2021.

Summing up all these factors together, we calculate around TRY 6.4 billion adjusted rolling EBITDA from second quarter of 2020 to the first quarter of 2021. Using this as a base, our net debt to adjusted EBITDA materialized at 1.9x as of the end of the first quarter. Despite elevated net debt, our improved EBITDA generation has led to lower adjusted gearing figure for the first quarter of 2021 compared to 2020 year-end. Our current ratio is at 1x, which is in line with the last 5 years' average.

And on the bottom right panel, we have the return on equity. Once we use the adjusted EBITDA in our return on equity calculations, our ROE realized at 14% as of the end of the first quarter of 2021.

Let's continue with the details of our balance sheet. Our cash and cash equivalents and financial liabilities at the end of the first quarter was TRY 21 billion and TRY 34 billion, respectively. Net debt is at TRY 12.5 billion as of the first quarter. Apart from this, cash conversion cycle continued to improve thanks to extended payment terms of our suppliers, especially for the spot cargoes, which have extended our payables to normalized levels. We have also accelerated collection of receivables and reduced payment base for some of our products.

And we have also used factoring to increase cash flows whenever we find better spreads between factoring versus deposit rates. The cost of funding for the short-term liabilities are much better compared to current funding costs with proactive refinancing actions that we did in 2020. We continue to enjoy positive sharing out of the outstanding cash position versus the short-term loss. We also continue to diversify our funding portfolio with additional Turkish lira bond in the first quarter of 2021.

As discussed above, our working capital improved with better payable days and receivable management. Going forward, some of the improvements that we have employed, such as extending our payment terms to our suppliers and effective receivable risk assessment and fully collateralized receivables, should positively contribute to working capital requirements. However, as we have guided before, ideally, working capital should remain around zero level with underlying operational framework ensuring the business funds itself.

Regarding our FX exposure management, we ended the first quarter with USD 81 million loan position. Following the increase in the Brent prices, our inventory amount registered at USD 1.5 billion in the first quarter of 2021. Our hard currency cash position was at USD 336 million, as swap forward rates were more favorable compared to U.S. dollar deposit rates. As a result, we have decided to manage the foreign exchange risk through derivative instruments rather than depositing in hard currency.

Our payables climbed to USD 2.4 billion due to expansion in our payable terms and increase in Brent price. We continue to employ strict FX exposure management policies we started at the close position at period-end.

Before we head into our guidance for 2021, we should like to sum up some key figures in the first quarter and compare them with our latest expectations for the year. We had a net refining margin of $1.50 per barrel in the first quarter. This is below our full year guidance range of $2.50 to $3.50 per barrel, but in line with our expectations as we were expecting a weaker first half and stronger second half for 2021.

Net refining margin was at negative $0.20 per barrel in the first quarter, just below our guidance change of $0 to $0.50 per barrel. Our capacity utilization was at 65%, below the full year guidance range of 90% to 95%, mainly due to maintenance shutdown in Izmir. We continue to expect higher utilization rates for the rest of the year.

In the first quarter, we have produced 4.6 million tons and sold around 5 million tons of products, keeping our existing full year guidance of 26 to 27 million tons, both in production and sales. We have spent USD 34 million for total investments in 2020, keeping our guidance at USD 200 million for the whole year. We have spent about 42% of our CapEx in sustainability-focused investments in the first quarter of 2021, in line with our guidance of 40% for the whole year.

Now taking a look at the maintenance calendar for 2021. Our maintenance schedule for 2021 is shaped by ensuring the health and safety of our employees by taking COVID-19-related safety measures and proactive approach on adapting volatile market dynamics in addition to seasonal norms. Nevertheless, in parallel to initial plans, majority of the activities were completed by the end of the first quarter.

The revamp at our FCC unit in Izmit is ongoing. It would temporarily reduce our gasoline production at around 180,000 tons in total for the whole year, and it will improve our gasoline yield after its completion. We have 2 more maintenances in Izmir relating to lube complex and vacuum. These tools were initially planned for 2022 and brought forward with the revision in maintenance calendar. Production impact -- will be impacted from these maintenances. And last but not the least, there is no significant maintenance activity planned for our Kirikkale refinery in 2021.

Now finally, on this slide, we have our expectations for 2021. Taking a look at the details, we expect med complex refining margin to average within a range of $0 to $0.50 per barrel in 2021. We expect Tupras net refining margin to materialize somewhere between $2.5 to $3.5 per barrel in 2021. Mid-distillate and high-sulfur fuel oil cracks are performing in line with our expectations so far, while gasoline is better than our initial expectation. Brent prices improved better than estimates -- better than our estimates in 2021 so far as well.

Regarding operations, we expect 26 million to 27 million tons of production and sales, while capacity utilization is expected to be between a range of 90% to 95%, accordingly.

We target about USD 200 million of consolidated CapEx for 2021. We anticipate that around 40% of that will be focusing on energy efficiency and environmental projects regarding the sustainability investments.

Thank you for listening to me.