Transcription for SOCAR – PETKIM

March 3rd 2014

Corporate Participants Yasemin Ahmetoğlu SOCAR Turkey Energy – Investor Relations Director Hayati Öztürk PETKIM Petrochemicals – Former General Manager and current Board Member Riza Bozoklar PETKIM Petrochemicals – Chief Financial Officer Berkan Ates SOCAR – Group Financial Coordinator of SOCAR Group Company

Conference Call Participants Koray Pamir Deutsche Bank Onur Marsan Garanti Securities Ali Yavuz Birdal Merrill Lynch

Presentation Operator Welcome to PETKİM Petrochemicals Holding 2013 Earnings Year-end financial results conference call. I now hand over to Ms Yasemin Ahmetoğlu, SOCAR Turkey Investor Relations Director. Madam, please go ahead.

Yasemin Ahmetoğlu Good afternoon everyone, thank you for participating. During this call, PETKIM Board Member, Mr Hayati Öztürk, and PETKIM CFO, Mr Riza Bozoklar, will go through our full year earnings presentation, which is available on our website. We will be happy to take your questions at the end of our presentation and now I hand over to Mr Öztürk.

Hayati Öztürk Thank you, Yasemin. Thank you for joining this conference call. I would like to start with the general outlook of the industry. As you know, last year was a good year for almost all chemical industries all over the world. As for the 2014, it is expected that the global economy will be growing faster than 2013. This is the general consensus and especially high income countries, developed countries, will perform better in the coming two years. This is the consensus expectation and this will support chemicals all over the world in the coming two/three years. That’s why the general consensus is that in 2015/2016, the industry will feel the pick-up. As for Turkey, petrochemical demand in 2013 has grown over 8%, which is two folds Turkish Economy. This year the industry will grow around two times of our economy too. This is our expectation. In the third slide, you will see Naphtha – Ethylene spread. Ethylene is the main core product, main building block of petrochemical industry. Starting from second half of last year there was a real improvement in spreads thanks to increasing product prices and some moderation in feedstock prices. You see starting from last quarter the spreads started to decline. The main reason was the shortening demand, especially in China ahead of the lunar New Year. The Chinese postponed their purchasing. That’s why; we have seen some narrowing, etc, in Ethylene and Naphtha. On this slide, the feedstock in the upper side of the slide, ethylene, which is directly related to crude oil and Naphtha, you will see this intermediate is quite volatile, but on the other hand there is a similar trend for Naphtha but less volatile. On the product side, we are following the index called Platt’s Global Petrochemical Index, which is a weighted average of basic chemicals including ethylene, propylene, benzene, paraxylene, plus some commodities polymers like ethylene and polypropylene. If you look at these figures on the bottom of the slide, there was an increasing trend starting from mid-June 2012 and if you compare this year’s figure with previous ones, you can see around $50 per ton improvement in the product side, which was a big contributor to our margin in 2013. On the other hand, Ethylene-Naphtha spread was getting wider, comparing previous years and this year the spread was close to $447/ton.

If we look at last year, we had seen the strong demand growth in quarter three; quarter three was very good mainly because of the demand coming from China. So, all the products from Middle East, other parts of the world preferred to buy from Middle East and Middle East producers preferred to sell their products to the Far East, because netback was better than Turkey, so this gave us quite a supportive pricing power during quarter three. If you turn to the next slide on page three, you can see Thermoplastics and Naphtha price change in the upper part of this slide. Despite the stabilising demand, the operating margins in the last quarter were under pressure on the back of increasing Naphtha price and this volatility reduced the client ordering strategy in the second half of this year. Actually, the last quarter was off-season and normally the demand was not strong, but October/November period was quite good on the demand side as well. Asia, as I mentioned, was quite strong, because during the increasing trend, players in Asia prefer to increase their purchase and inventories, but ahead of new lunar year this trend has disappeared. That’s why the margin started to decline towards the end of last year, so we can say that this business environment during the fourth quarter was quite challenging, because of the softening demand in the Far East. In general, we expect that, as we mentioned, the economy will be in a better position comparing with previous years and this will be mainly driven by developed countries, including Europe and some developing countries, China, BRIC countries and Turkey as well but we will see some modest growth rate in developing countries; the average growth of the world economies is expected to be around 3.3%, and in the emerging markets around 5.3%. I think this figure supports the global demand. As mentioned, we will be passing through the up cycle and the peak probably will be in 2015/2016 in the industry. I think at this stage I can give the floor to Riza, who will mention the on-going activities in the Company, on margins, and some financial performance of the Company.

Riza Bozoklar Thank you very much, Hayati. Slide number three, operations and margins in 2013; as you may see from this graph, our unit margin has the tendency to decrease in the last three months versus the previous period. It is mainly due to the sales price minus Naphtha’s [spread effect] and plus LPG charge effects. You may see that our numbers are $64, $67, $57 per ton in the month respectively.

If you look at our plant cost breakdown, there is not really a significant change versus the previous presentation; 85% of our total costs, excluding the depreciation and everything, the main cost items, are from raw materials and this is in Dollars, as you may expect, and the rest are mainly in TL. If you look at the whole year, we had a successful year with the focus on our EBITDA and our gross profit margin. In fact, these improvements have come versus 2012 especially thanks to the sales price minus Naphtha spread effect, LPG charge effects, and some effects also from vent gas usage effect, especially during the last three/four months we had these positive effects. On top of that, we had fewer sales versus 2012; at the end, we raised at gross profit of $140 million versus $42 million versus last year. If you look at the slide number four, in operational efficiencies you may see that our capacity utilisation rate has been declining during the last three months; 66.3 in October, 82.3 in November, and 78.6 in December. This averaged for the full year 81.4% of capacity utilisation rate in 2013 versus 87.8% for 2012. In fact, if you look at our accounting numbers, it is a different story. We had total sales of 447,000 tons for the last three months versus 403,000 tons in the quarter three. It’s 11% more in the volumes and this helped us to reduce our feedstock, our inventory levels. If I go to page number five, you may see our net sales breakdown as per product. You may see that our main sales, 45.2% for Thermoplastics from revenue side and 40.7% for benzene/aromatic products, and 14% for fiber raw materials. For the volume side, if you look at the percentage of volumes, 37.7% for Thermoplastics, 12.9% for fiber raw materials, and 49.4% for benzene and aromatics. As I mentioned, our quarterly sales reached to 447,000 tons. Page number six for export composition; you may see that our main exports are liquid products such as benzene, C4 and PY-gas for the revenue side and as per the breakdown by country mainly to the European Union, about 53.8%. I turn to page number eight, our income statement. So, we closed our year in Turkish Lira with net sales of TL 4.158 billion. This is less versus last year, but in fact this is mainly due to the decrease in volumes for 8%. If you look at the other part of our figures, our net profit reached TL 49 million. It’s, in fact, only 0.3 million profit in the quarter four, but as you may imagine, it is mainly due to the deterioration in TL vs US$ which caused us to record FX loss, but if you look again for the total year, we had an EBITDA of TL 234 million with 5.6% of EBITDA margin, which was 0.7% in 2012.

Slide number nine for the balance sheet, you may see that our numbers are relatively higher versus the last year-end figure, but it is mainly due to the deterioration in the Turkish Lira versus Dollars, because we closed the year at TL 2.13/Dollar, while the closure of 2012 was 1.79. We see there is an important change in long-term borrowing; this is, as you may know mainly due to PTA and ethylene investments long-term borrowing. I go to the page number 10, the last page that I will present here, Major Investment Project Report, so our investments for ethylene and PTA are going on as ’14 and we hope to finish them in this year as planned. This is all for the moment from my side.

Yasemin Ahmetoğlu We will be happy to answer any of your questions.

Question and Answer Session Operator Ladies and gentlemen, if you wish 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 Koray Pamir from Deutsche Bank. Sir, please go ahead.

Koray Pamir Hello, thank you very much for the presentation. May I ask the operational outlook that you can see. I know it is quite volatile, but in essence your guidance on volume, revenue and if possible on EBITDA basis for 2014. Secondly, going forward, should we expect the share of exports to be around levels that we have seen in 2013, or are we expecting a significant increase or decrease in the share of exports in your total sales. Thank you.

Riza Bozoklar For 2014, we are in the beginning of the year. Some deterioration in the case of volumes, I should say, you can expect. Some volume decreases. That is true. But, looking at the first two or three months expected figures, we are

not expecting any deterioration in the same way in the profitability. That is a positive sign for us, and especially for the local sales part, we may expect some improvement. For the export side, also, we are not expecting any deterioration versus 2013; even we are not expecting a big improvement versus last year. I should say that the export figures are not affected negatively, and they are in line versus our expectations.

Koray Pamir Thank you. Will we be able to memorise any guidance, or is it just too early to provide a numerical EBITDA margin guidance? Thank you.

Riza Bozoklar In fact, for EBITDA figures, we are still keeping the same EBITDA figures for 2013. We are not expecting any deterioration. It should be around $120 million. We are not expecting any surprise. As I explained, the first two or three months, as profitability is not giving negative signs to us.

Koray Pamir Thank you.

Riza Bozoklar You are welcome.

Operator We have a question from Ms Onur Marsan, Garanti Securities. Madam, please go ahead.

Onur Marsan Hi, thank you for the presentation. I very much like your total year 2013 EBITDA, but as a follow-up question to Koray, by 13th March after the Local Elections, we expect some increase on the electricity prices, so I understand that you will be able to reflect it to your increasing costs to product prices. That is one of my questions. The second is, have you seen any pressure regarding the Iranian Petrochemical products at the end of third quarter/fourth quarter, and do

you expect any impact from Iranian petrochemical exports to Turkey. Thank you very much.

Hayati Öztürk Thank you. For Iranian side, you know Iranian capacity utilisation was not strong, because there was some problem in finding some chemicals capacity and the feedstock, you know, but Iran, because of logistic advantage, Iranian products prefer to go to Far East. The logistic cost to Far East is very cheap comparing Turkey by ship. However, there are some border trading and land transportation. In general, Iranian products mainly flow to China, we have seen this in the last four/five months, not only Iranian, but Saudi and Qatari products also, prefer to go to Far East because of very cheap container from the Middle East. Return ships of export products from China to Europe, to other parts of the world, and while returning back to China the majority of ships are empty and the cost of logistics, almost nothing. That is why they prefer to sail Far East, so the pressure on the Turkish market is very limited. This will continue. If the market is strong, you can easily pass through the costs to your product price, we hope, you know, the production side, but not strong. Capacity utilisation versus in Europe, just 80%, so because of these uncertain times, because of this high volatility of markets, they prefer to optimise their production; if you look at the whole value chain pipeline, pipeline is not strong or full, so during that time of business environment, you know, as an important player in the country, as a local producer, PETKIM will benefit from this type of fluctuations, since customers prefer to be on the safe side and prefer to buy from PETKIM to mitigate potential risk on either currencies or pricing.

Onur Marsan Thank you.

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. We have a follow-up question from Onur Marsan from Garanti Securities. Please go ahead.

Onur Marsan I have one more question. We haven’t seen…in the fourth quarter, the CapEx was around $15 million, and we haven’t seen any deferred tax income. Should we expect some deferred tax income in year 2014 depending on your CapEx programme, which is quite large? Thank you.

Riza Bozoklar For 2014, in fact, I don’t understand very well why deferred tax income should be affected by CAPEX 2013. Could you please clarify this?

Onur Marsan No, your CapEx programme in year 2014 continues, and looks like there are some strategic investments; therefore, we may be putting aside some deferred tax income. That is what I was wondering, if there is none, so that is okay with me as well.

Riza Bozoklar In fact, I should not expect any deferred tax income here.

Onur Marsan Not regarding ethylene investments, no? Nothing for strategic investments incentive?

Riza Bozoklar One moment please. Okay, let me explain in this way. In fact, this is the strategic investment, as you know, our PTA and ethylene investments are strategic, but we have too many accumulated investment incentive amounts in our account, so it will be utilised in many years, I think after five or six years I will be able to use the income gathered from our strategic investments. Is this okay for you?

Onur Marsan Yes, okay. We see not a lot of companies doing it differently, so that is what I was asking for, but that is okay with me.

Riza Bozoklar The issue here, I have accumulated, already accumulated amount of incentive to be used for five or six years, and I will be able to utilise the incentive amount coming from PTA and ethylene investments after finishing these incentives.

Onur Marsan Okay, thank you very much.

Operator I would like to remind you that if you wish to ask a question, please press 01 on your telephone keypad. We have a question from Ali Yavuz Birdal from Merrill Lynch. Please go ahead.

Ali Yavuz Birdal Hi, thanks a lot, first of all. I have only one question regarding your CapEx. Can you summarise in terms of ethylene, PTA and the port investments for 2014. Thanks a lot.

Riza Bozoklar We have about $36 million remaining for expenses in 2014 for the investments.

Ali Yavuz Birdal Can you say again?

Riza Bozoklar $36 million to be spent in 2014 for PTA and ethylene investments.

Ali Yavuz Birdal Okay, in your presentation you are saying $115 million CapEx, this also…

Riza Bozoklar Including also $ 36 million, yes.

Ali Yavuz Birdal Okay, and on top of that, is this including port investments, or port investment is something else?

Riza Bozoklar No, port investment is apart.

Ali Yavuz Birdal Okay, so $36 million plus, let’s say, $80 million for other investments, most probably for efficiency maybe or some other maintenance and plus for PETKIM port, as far as it was mentioned in the presentation, it is like to $80 million. How much have you spent so far? That is my first question. Second, what is your budget for ’14, if you can say, if you cannot, no worries.

Berkan Ates My name is Berkan Ates, SOCAR’s Financial Coordinator, let me answer this question on company side. Port investments will be around $270 million, and we are putting approximately $70-75 million total equity. This so far went down of $40 million of this amount, but in fact, we are going to receive $65 million from APMT and our equity therefore will be met by the down payment that we will receive from APMT. As you may know, of the followers who have joined recent calls, we have received $25 million of it already, so for the time being, PETKIM, from own pocket, we put additional $50 million, so we see additional amount from APMT, this will also be settled. So, that means that we are not going to invest equity on the port side from PETKIM’s own money, so the amount that we are going to put will be coming from APMT. Remaining amount of investment will be coming from the bank that we are going to arrange a project financing for amount of $200 million, so the terms of this agreement is almost reached, and we are soon, hopefully going to release to the market that we are going to sign the project finance for $200 million with one of the reputable institutions, but I cannot reveal the bank’s name. Thank you.

Hayati Öztürk Any further questions?

Operator I would like to remind you that if you wish to ask a question, please press 01 on your telephone keypad.

Berkan Ates In case that there are no further questions, we can close, but we have to remind to all the audience that although we have been affected largely by FX losses. Petkim, as one of the largest industrial concerns in Turkey, PETKIM was one of the least affected, because of the strength in its balance sheet. So, therefore the numbers, although they seem to be low, taking into consideration in the last two quarters of Turkish enormous economic volatility, and enormous volatility in the FX we managed to put our EBITDA numbers into growth and we are hopefully continuing the same way for the year 2014. We thank you very much for joining us.

Operator Ladies and gentlemen, this concludes our conference call. You may now disconnect.