Uralkali's (URALL) CEO Dmitry Osipov on Q4 2015 Results - Earnings Call Transcript

| About: Uralkali Jsc (URALL)

Uralkali Jsc 144 A (OTC:URALL) Q4 2015 Earnings Conference Call April 11, 2016 10:00 AM ET

Executives

Veronika Kryachko - Head of IR and Capital Markets

Dmitry Osipov - CEO

Anton Vishanenko - CFO

Vladislav Lyan - Uralkali Trading CEO

Analysts

Joel Jackson - BMO Capital Markets

Oleg Petropavlovskiy - BCS

Alexander Nazarov - Gazprombank

Nina Dergunova - Goldman Sachs

Operator

Good day and welcome to the Full-Year 2015 IFRS Results and Strategic Update Conference Call. At this time, I would like to hand the call over to Veronika Kryachko. Please go ahead.

Veronika Kryachko

Good day, ladies and gentlemen. My name is Veronika Kryachko, and on behalf of Uralkali, I would like to welcome you to our financial year 2015 results presentation and conference call. I would like to introduce the Uralkali team that is presenting today; Dmitry Osipov, Uralkali's CEO, Vladislav Lyan, Uralkali Trading CEO, Anton Vishanenko Uralkali's CFO. With that, our presentation for the financial year 2015 key financial and operational highlights presented by Uralkali's CEO, Dmitry Osipov. Please go ahead.

Dmitry Osipov

Thank you, Veronika. Good afternoon, everyone. Thank you for attending our call on the financial year 2015 results of Uralkali. I’ll just go through the slides of our presentation.

Market environment in 2015 was characterized by lower potash demand, down by 3% year-on-year, predominantly caused by destocking cycle, decreasing crop prices and currency devaluation in developing countries.

Significant potash prices decline triggered by weak demand and intense competition among suppliers, along with lowering production volumes on the back of Solikamsk-2 accident, negatively influenced Uralkali potash sales volumes, down by 9% and net revenue down by 5% in 2015.

On the positive front, sales on ruble depreciation and export FCA potash price growth to US$245, 5%. On the back of transportation expenses shrinkage in dollar terms resulted in 2015 EBITDA growth by 7% to $1.9 billion.

Now, I would like to go over our share buyback program, which was performed in 2015. During the previous year, the company performed two share buyback programs resulting in purchase of approximately 33.5% of Uralkali’s issued common shares. During the period of open-market buyback from November 2015 to March 2016, below 5% of the company’s share capital have been purchased. Currently company’s free float is below 9%. Anton, our CFO will talk more on this thing later during this presentation.

Now, I would like to pass the floor to Vladislav Lyan, Uralkali Trading CEO who will provide the details of market overview and comment on sales dynamics.

Vladislav Lyan

Thank you, Dmitry. Good afternoon and good morning everybody. We continue from page number 5, which is about potash market environment in 2015. Potash market environment remained challenging through the whole 2015. Global potash demand is estimated to decrease by 3%, 4% compared to the previous year and totaled about 61 million tonnes as a result of inventory destocking, currency weakness against US dollar and low crop prices.

Demand in almost all market was down, except China and EMEA. China import sales increased to record high levels. EMEA demand was flat compared to the previous year supported by good demand in Eastern Europe and Africa.

On the right hand side, you see potash price dynamic in 2015 versus 2014 level. We observed accelerated spot price declines on a global level last year. US and Brazil have become a focus last year where prices experienced significant pressure due to strong competition, macro-economical challenges in Brazil and sharp drop in demand in North America.

Prices in Southeast Asia moved lower due to lower demand caused by local currency weakness versus US dollar, but prices in the region has been less caused by local currency weakness versus US dollar - sorry, but prices in the region has been less volatile last year, though this is due to potash prices mostly in the same trend in 2014 [indiscernible] for potash prices. European prices was lower last year due to weaker demand and devaluation of euro against US dollar impacted negatively potash prices in US.

Now, I suggest we go to the next page. On page number 6, we see potash demand outlook for this year. We expect global potash demand to range 58 million tonnes to 60 million tonnes this year. The revised downward of previous estimate of 59 million tonnes to 61 million tonnes was due to delayed China contract. And we should admit that this year’s potash volumes will be heavily impacted by the timing and outcome of the Chinese potash contract.

Potash demand upside this year is also limited because of 2015 and the year excessive inventory. Customers have largely worked through existing potash inventories in Q1 2016 and purchase additional volumes only for immediate need. And as a result, inventory destocking was forcing down import demand for fresh volumes in the first quarter of 2016.

While the degree of caution experienced in the first quarter exceeded our expectation, all markets are now engaged and we continue to believe that demand will be more robust as 2016 progresses. Lower nutrient levels after relatively weak 2015 could be the catalyst for potash demand in 2016.

Let’s proceed to the next page, a little bit more detail about each market. I’ll start on China. In China, we see the current negotiations being delayed, but still we expect that we will achieve some progress in terms of the contract settlement and potash inventory levels are continuing their decline. A recent strong demand from China’s NPK sector is also a supported factor, but anyways this end year inventories are expected to lead through declining potash import volumes this year compared to record high level in 2015. We do anticipate the total 2016 demand will be in the range of 13.5 million tonnes to 14 million tonnes.

A lot has been said about India in general and a lot of different negative news, but overall situation is getting better. And there is a good expectation of the good monsoon season, which should lead to better potash consumption despite the potash subsidy is largely unchanged for 2016-2017 financial year, and the government may also reduce the maximum retail price, so the farmers are encouraged to buy more potash compared to 2015. But owing to elevated potash carryover stocks, potash import is expected to be below 2015 level of estimated - our estimation 3.9 million tonnes.

As far as South Asian markets is concerned, palm oil producers as usual brought into spotlight. We believe that the most of the palm oil foundations are awaiting for clear signs that what is going to happen to China market, for the China’s contract. They expect a slight improvement in potash demand this year supported by heavy farmers [ph] margin and lower pace of dollar strengthening against local currencies.

As far Latin America, Latin America used the first quarter to drawdown inventories built in 2015 and this is a clear sign of stabilization in Brazil in terms of demand and prices supported by improved credit availability and more stable Brazilian real relative to US dollar. For the time being we don’t see any price erosion in the region and we estimate that our total regional demand to range between 11.3 million to 11.5 million tonnes in 2016. Potential upside to potash demand may be limited due to lower economic growth in the region.

In North America, we do anticipate improved demand this year. This should be evident in the second quarter we believe and we believe that customers will attempt to finish the spring planting season with limited inventory and begin to process of restocking in the first quarter. Lower nutrient levels after extremely weak 2015 could be the catalyst for potash demand this year. We anticipate total 2016 demand in this market will be in the range of 8.4 million to 8.7 million tonnes compared to 8 million tonnes last year.

We do expect slightly rebound in Easter European demand as well driven by demand growth in FSU, Eastern Europe and demand upside in Western Europe may be limited due to high potash carryover stocks. So in this environment as I have already said in our forecast, the total global potash demand will be approximate 58 million to 60 million tonnes in 2016 and Uralkali will continue to place volumes depending on the market dynamics.

Thank you very much. I will now give the word to Anton Vishanenko, CFO of Uralkali to provide an update on key Uralkali financial results.

Anton Vishanenko

Good day, everyone. We are on now slide number nine. As Dmitry Osipov said, decrease in sales volumes to 11.3 million tonnes was driven by lower production volumes on the back Solikamsk-2 accident and decrease in buying activity. At the same time, gross revenue decreased by 12% in 2015 due to production slow down and was partially offset by significant transportation expenses shrinkage in US dollar terms. Despite lower production in sales volumes further ruble depreciation substantially helped to remedy the negative effort our net revenue.

Please turn to the next slide. This slide illustrates how our production cost evolved in 2015. As we present our financial statements in US dollars, the ruble depreciation obviously played a significant role in bringing Uralkali overall cost to much more favorable level given that majority of our costs are denominated in rubles.

Operation cost per tonne in 2015 decreased from $47 to $33 year-on-year. It was a 30% decrease and it was driven primarily by ruble depreciation. We saw our G&A expense decrease by around 25% in dollar terms. Forex effect being a key driver to G&A decrease in 2015 amounted to 20 million [indiscernible]. Likewise our S&D expenses decreased by 35% in dollar terms as a result of 38% drop in transportation expenses which were denominated from Russian rubles. Summing up, favorable impact of ruble depreciation on cost structure provided support in 2015 and Uralkali continues to focus on efficiency in this field.

Please turn to the next slide. Despite gross revenue declined 7%, EBITDA and gross was driven primarily by external factors namely lower transportation expenses, forex effect and export FCA potash price growth. As a result of continuous ruble depreciation, EBITDA margin reached 72% in 2015. We did not see this flow of margin sustainable and it is going to be offset by close to double digit inflation in the long run. Nonetheless as what Dmitry mentioned, negative dynamics in fertilizer prices along with potash market imbalance may put pressure on the company earnings going forward.

Please turn to slide number 12. Our debt repayment schedule is comfortably spread out over the next five years with more significant payments due in 2018. The effective interest rate for the whole portfolio came in at stable and was just around 4%. We seek to maintain an optimal capital structure to diversify our loan portfolio and continue to working on the average tenure and decreasing our interest rate.

Moving to our next slide, slide 13, you will see our credit ratings. Sufficient level of free cash and EBITDA to keep our leverage at a comfortable level below 3 and our mid to long term EBITDA as at the end of 2015. Looking at our debt structure, our total debt which consists of both bank borrowings and Eurobonds amounted to $60.5 million at the end of the last year. We believe that [indiscernible] actions have taken place across all major rating agencies. Furthermore our credit rating has secured a consequently ranked stable from all rating agencies.

Now I will give the floor to Dmitry Osipov to give you an update on our CapEx.

Dmitry Osipov

Thank you, Anton. Total capital expenditures for financial year 2015 amounted to $343 million. Investments in expansion in 2015 totaled $160 million and were 55% lower than initially planned primarily due to shift in granulation projects, Solikamsk-2 new mine and Ust-Yaiva. The major part of investments in 2015 were attributable to Ust-Yaiva project of $66 million, increasing load $33 million and granulation projects $20 million. Maintenance investments in 2015 totaled $183 million. In comparison with the previous years, we made two major additions namely construction of backfilling complexes and Solikamsk-2 maintenance.

And I will now again give the word to Anton Vishanenko who will finish our presentation with a description of buyback programs performed by the company in 2015.

Anton Vishanenko

As you know, during the previous year the company performed two share buybacks programs [Technical Difficulty] 34% Uralkali issued common shares and GDRs. In November 2015, the company launched open market buyback as a way to [Technical Difficulty] Since the start of the program and by the end of March this year, we acquired almost 5% of the company’s share capital. As a result of the program, the company’s free float decreased to below 9% and might no longer satisfy the MICEX Tier 1 listing rules. Veronika?

Veronika Kryachko

Thank you very much. That concludes our presentation. In appendix section of the presentation you may find overview of our existing assets [Technical Difficulty] Now, I will open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will now take a question from Joel Jackson from BMO Capital Markets.

Joel Jackson

Hi, good afternoon. A couple of questions, we do see that in your release, you don't really give guidance for 2016 for production or sales. Can you give a bit of guidance, would you expect with potash volumes to be down year-over-year based on your projections that Uralkali sales would be down or would you expect flattish sales, may be given us a little bit of color on that please?

Dmitry Osipov

Yeah, good afternoon Joel. This is Dmitry. Our production guidance for this year is in the range from 10.3 million up to 11.3 million tones of potash depending on the market conditions. Thank you.

Joel Jackson

And would it be fair to say that - would it be fair to say that 58 million tones, you would sell 10.3 and at 60 million tonnes you would sell 11.3 would it be that simple?

Dmitry Osipov

It all depends on the market conditions, it’s not all - the proportion could be a little bit more difficult. We will see the development in markets - rural markets and if the market is sustainable, we will place close to their upper limit is 11.3, if the market conditions are less favorable close to produce left, as I said close to 10 .3 million tonnes of potash. Thank you.

Joel Jackson

And my last question would be, it looks like in your presentation you talk about 1.4 million tonnes at Solikamsk-2. Would it be fair to say that your capability right now is 11.3 million, which includes 1.4 million at Solikamsk-2. And then can you talk about what your capability will be in 2017 as Ust-Yayvinsky completed and then just a general update on the brine inflow at Solikamsk-2? Thank you.

Dmitry Osipov

Let's start with Solikamsk-2, at the moment the inflow of brine in Solikamsk-2 is 320 cubic meters, this is the average for the last 10 days, it’s a little bit up in comparison with the winter figures we had but if we can compare with last spring figures, we also - last year we also saw some increase during the melting of snow but we believe that it is manageable, we use just only one pump to maintain the same level of brine inside the Solikamsk-2, so the main goal right now is to [indiscernible] operation capacity of Solikamsk-2 at the moment is close to 60%.

Joel Jackson

And on the capability, your capability right now for the company is 11.3 million tonnes and what would it be next year after Ust-Yayvinsky?

Dmitry Osipov

According to the plan we will start the production in 2020 not 2017. There is a debottlenecking program we are now financing and it means that we own capacity in Berezniki-4 and Solikamsk-3 and - Berezniki-4 and will have some capacity in the next year and not in 2020. Thank you.

Operator

Thank you. [Operator Instructions] We would take now a question from Oleg Petropavlovskiy from BCS.

Oleg Petropavlovskiy

Good evening gentlemen, thank you for the presentation. One question from me. What about you’re the lifting plants, they’re still - think that you might do this and what - more general question is what are you going to do with minority now, maybe another round of buybacks or all is this finished?

Dmitry Osipov

Oleg, thank you. You are aware with content of tender offer memorandum which was accompanying second term tender offer which were launched in August last year. There was a risk of potential companies lifting and potential also shift from tier 1 to tier 3 on MICEX. The decision was in capacity of Board of Directors. That’s why we as a management cannot comment whether or not the Board of Directors will make the decision but I should stress that this risk does exist as we made it public in September last year and again reiterate this time.

Operator

Thank you. We will take now our next question from Alexander Nazarov from Gazprombank.

Alexander Nazarov

Good evening, gentlemen. Thank you very much for presentation. I think a quick technical answer. According to the statements about 12.6 shares reported at VTB as I understand and another 20% stakes are a held as collateral at the bank and you should make an additional collateral of 8.6 share. So basically as far as I understand, you out of your quasi-treasury shares that will be about - actually all of your quasi-treasury shares will be held as a collateral, did I understand the statements currently or is it something you can clarify here? Thank you.

Dmitry Osipov

Yeah, you understood it correctly. Total stake was [indiscernible] placed with VTB equal to 20% and 28% used as a pledge of for Sberbank loans, so in total it’s 48% report pledged. Thanks.

Alexander Nazarov

In this case, the follow-up question and thank you for the answer. So what's the potential risk of let’s say additional collateral for the loan towards Sberbank and in this case, other than mentioned in the presentation any additional debt capacities you have took out of the potential collaterals or breached covenants?

Dmitry Osipov

The reason why we published these shares with Sberbank because I should say that conditions from Sberbank is virtually unprecedented to Uralkali and without any humbleness I would say to [indiscernible] because we’ve got credit lines varying from 7 to 10 years of total payment which to a large degree made our debt repayment schedule. This way virtually, it will support [indiscernible] for the next 10 years if anything happens, given that it's committed lines previously and given that turbulence of the market which we see yourself, which will help [Technical Difficulty] this additional 8% EPS to provide sufficient long-term LTE ratio for Sberbank, that's why we consider it to be on - for us on quite favorable terms and out of additional debt raising capacity, we're working on this for this year and if we successfully finalize it, then we will be on the safe side for the next like 5 to 7 years.

Alexander Nazarov

Okay. That's very clear. Thank you very much. And the last very small thing, do I clearly understand that on the slide 12 of your presentation, these credit lines from Sberbank is not included into the credit lines shown at the slide?

Vladislav Lyan

Yes. What is here is only committed line, 1.5 billion actually additional line, which they called. [Technical Difficulty] additional attention on it, but answering the question, what other sources of debt available for us, you can add this 1.5 billion, which is committed as Sberbank line and which runs till sort of March 2017, which is also available for us. So far, we haven't drawn any amount from this line, which is long term, 5 year tenure. Thank you.

Alexander Nazarov

Excellent. Thank you very much.

Operator

Thank you. [Operator Instructions] We will take now our next question from Nina Dergunova from Goldman Sachs. Please go ahead.

Nina Dergunova

Good day, gentlemen. Three quick questions from me. First one is, how did your market share change in your key markets last year, in what markets have you lost market share and why and what's your feeling of competitive pressure currently? Second question relates to your cost cutting or efficiency improvement measures if you're taking any and what's the target in the near term? And last but not least, the question on Chinese potash contract, is there any specific timeframe by which this contract must be concluded in your view and do you have any feeling when do you expect it to be assigned? Thank you.

Vladislav Lyan

Nina. Yeah. Thank you very much for your question. I will comment one by one. Regarding our market share, yes, we target a sustainable market share in line with our historic averages, which is 18% to 19%. Our market share in global potash sales was 18 in 2015 and we are always looking for ways to maintain our strong position and capitalize on the strengths of our business but [Technical Difficulty] and we target our historic averages. This is regarding our market share. Can you kindly repeat the question regarding efficiency?

Nina Dergunova

The question is, if you're undertaking any cost cutting or efficiency improvement measures and if you do, what's your target to reduce costs in the near term?

A - Dmitry Osipov

Yes. Nina, this is Dmitry. Thank you for your question. Yes, really, we have cost cutting program and there are several [Technical Difficulty] in this program. First of all, we have our own production and also we are investing in energy efficient equipment. Also, we have program to replace the absolute equipment with new one more efficient and but we understand as the company will lower its cost production, we understand that our potential is limited, but still we have some capacity to improve, but no dramatic, real issue in this direction. Thank you.

Vladislav Lyan

Nina, this is Vladislav again. I will proceed with the third question regarding the Chinese contract. We do expect that the new contracts will come around still within the first half of current year. Demand for potash, we believe, began to gradually increase, driven by NPK’s producers’ orders and we do estimate that China's potash inventory levels dropped to approximately 4.4 million tonnes compared to 6 million tonnes in the beginning of this year. We believe that contractual commitments to China will definitely take off a certain pressure from spot market and at this stage, I think that we are not in a position to discuss any kind of price level. I think the price for the new supply contract will be settled in the course of talks. Thank you.

Nina Dergunova

Thank you very much. May I ask one short follow-up question, you spoke - when you were speaking Brazil end market, you mentioned that you see some greenshoots in terms of demand, which allows the market to relatively stabilize now. Can you elaborate little more details, what kind of improvement do you see?

Vladislav Lyan

Yes, definitely. So a dramatic change in Brazilian market demand during March and April and we really see that demand was reactivated with a full order book with a lot of distributors and I think that demand in May should be same active, because May usually is active starting point for Brazil. Definitely, we believe that price floor in Brazil already passed and we do believe that the market will improve in this region. Thank you.

Nina Dergunova

Thank you very much. That is it from me.

Operator

Thank you. [Operator Instructions] Thank you. We have currently no further questions at this time. Ms. Kryachko?

Veronika Kryachko

Okay. Ladies and gentlemen, if you don't have any other questions, that will conclude our call. Thank you for participation and good bye.

Operator

Thank you very much. Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.

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