AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, good morning, everyone, and welcome to quarterly webinar for Klaipedos nafta. Today, Nasdaq Vilnius is hosted by Chief Executive Officer of the company, Mr. Darius Šilenskis and Chief Financial Officer, Mr. Jonas Lenkšas. Before we proceed with the presentation, I will shortly introduce you with the agenda. Firstly, the management of the company will comment Klaipedos nafta financial results of the first quarter of 2020 and inform about current events in the company. Right after the presentation, we will open the floor for questions. All questions will be addressed after the presentation. Just a small notice that this time, we are connected remotely, and please be tolerant in case of some delays that may occur due to this reason. Mr. Darius Šilenskis, I invite you to start the presentation.

Thank you, Simona, and hello, everybody. So despite we're operating on a COVID circumstances, we decided not to postpone our presentation of the quarterly results and unaudited financial results of KN Group. And I would like firstly to start from agenda, or let's say, content of our presentation. So first of all, we would like still to pay some attention on our strategy document, which has been approved during Q1 of 2020. So we would like shortly to present the shift in our mission and vision and main strategical goals of our company. And also, we have added one slide on a COVID-19 impact on our activities and main measures taken by the company. Later, we will switch the financial information presentation. We will briefly present highlights on -- of quarter -- first quarter, sorry, first of all, we will start from highlights and switch to financial results later on. So shortly, I think approval of a strategy, which took place during Q1 of 2020 is a very important and key event for our company. This strategy document has been prepared during the last, I would say, 2 years. And we did a really effective job together with our actually supervising bodies including management board, including supervisory board and adding really professional consultants to help us to have the best quality document in our hands. So first of all, I would like to start from introducing our new slogan, it's Bridging Energy Markets, which really represents what we do. Our mission has shifted to rewarding where we have a mission to ensure safe, reliable and efficient access to global energy markets by sustainable development, investment and operation of multifunctional liquid energy terminals worldwide. I'm underlining the word liquid because our strategy till 2030 includes any energy liquids. So mainly, it's, of course, fossil fuel products of refining industries. And you will see later on some new goals appearing on the petrochemicals, ambition, et cetera, et cetera. So -- and our aim is to assist our customers in clean energy transition because we are already a few years on energy transition stage or phase worldwide and to maintain our competitiveness. So -- and of course, customers' competitiveness. And our vision is to become a top LNG terminal operator worldwide and most competitive oil and refined products handling hub in the Baltic region. Main business lines, which we have defined in our new strategy document, there are 3 of them. So we are remaining on a crude and refined products handling services, of course. We are, let's say, continuing activities in light of the LNG terminals, both FSRU unit and small-scale terminal. And also, we have really ambitious plans on international LNG projects development. So shortly about, let's say, main goals and KPIs and objectives of each strategic business segment. So in oil segment, we aim to handle any oil products without limitation to transshipment mode, to provide smarter throughput storage and lending services, to be fully capable of working with products that go actually even beyond the range of traditional oil or petroleum products. So I have mentioned already, this is our ambition to enter petrochemical segment and renewable fuel segment also. And we aim to invest in sustainable and more efficient operations, technologies, processes in order to reduce emissions from all our activities in oil segment. And objectives are to sustain and increase volumes and profitability of oil terminals and the consideration of changes to the market structure. And there are new markets for transshipment of already mentioned petrochemicals and any other new products, and ensure environmentally sustainable and secure activities of KN oil infrastructure. In light of the LNG or regional LNG infrastructure, we aim to assure region's access to the global LNG market at least until 2044 where we strongly believe that till that time, LNG will be really good alternative with less emissions by turning into emission-free, or let's say, CO2-neutral, let's say, country or even region. And of course, it's for benefit of Lithuanian consumers through the commercial activities by creating alternative pipeline supplies of natural gas. Also, we aim to assure highest quality bunkering and truck-loading services contribute to innovation development through LNG cluster, the part of which we are. And objectives are to ownership of FSRU and full operation and management of this infrastructure. So -- another objective is to implement long-term LNG import solution to ensure its activity till 2044 and also to generate more than 30% of revenues from FSRU operations from international counterparties. And also another objective is a provision of quality LNG services under a sustainable business model. Talking about our third business line, the development of international LNG projects. Our aim is to see that the net profit from this activity is becoming higher than from our, let's say, classical or historical activity oil products handling in region in light of that, which is actually the largest portion today. And our aim is to become a preferred partner for new LNG import terminal projects globally and also to be within the top 3 leading quality LNG import terminal companies. Our objective is to become an operator of at least 5 LNG terminals by 2030 and to become a shareholder in at least 4 LNG terminals or projects by 2040. Talking about the COVID-19 impact. So we came into quarantine conditions well prepared. We actually started to implement preventive measures even earlier than officially quarantine has been declared by Lithuanian state authorities. And we did a lot of various -- we implemented a lot of various measures, introduced several majority precautionary and organizational measures to ensure safety of groups and companies, employees and continuity of our business operations. Company has switched to work in remote mode and only employees that are essential and physically needed to perform operations in our terminals are working on site. And the COVID-19 effect started from the last week of February 2020. And this situation deterioration started global sell-off across all international exchanges, including the Baltic NASDAQ OMX exchange, gain share lost at least -- lost the least in its value compared to the KN indexes. And company is monitoring the situation and maintains close communication with major clients, suppliers and partners on a regular basis. As -- to this date, there are no concerns and no indications that could cause doubts about their possibilities to fulfill contractual obligations. Management expects that if measures are taken the group then the company will be able to continue its operations and achieve business goals defined in the long-term strategy. Of course, we are measuring the situation daily and taking respective, let's say, actions, let's say, taking into consideration any changes, which are appearing on this quarantine in COVID. Shortly, I would like to still make some briefing on the key highlights during Q1. So one of the main, let's say, highlights was the signature of operations and management services agreement for a provision of operations and maintenance services. The G&A, liquefied natural gas terminal, which is located in the Port of Açu in the state of Rio de Janeiro, Brazil, we also, as already mentioned, have had a key event approval of a corporate strategy 2030 by supervisory board on 13th of February. 8th of March is a very important highlight, the liquefied natural gas power vessel was successfully bunkered for the first time in the port of Klaipèda. During this operation, the full tank of carrier was filled with the gas at jetty -- at another terminal implied for the seaport. March 9, so we have -- KN has concluded loan agreement with NIB regarding granting a loan of up to EUR 160 million with a purpose to finance an acquisition of FSRU storage unit by 20 -- by the end of 2024. March '17, the operation and maintenance services agreement for LNG O&M services provision in Açu port has entered into course March 13, we had, let's say, unusual operation with FSRU Independence in Klaipèda, which was moved from the usual location from the birth at the island to another jetty in Klaipèda port in order to perform cleaning of the port waters to maintain sufficient draft for the FSRU Independence's operations. And FSRU renewed its operations on 6th of April. Another important highlight, a news, was related to the commencement of physical operations with our partner in small-scale infrastructure Polish company, PGNiG. It started operations at 1st of April. Capacities of the station, which will allow more efficiently entry into a small-scale regional LNG market is reserved for the strategic partner for a 5 years period. And on 28th of April, we announced about Annual General Meeting of Shareholders, which has approved the audited financial statements of the group of the company for the year 2019 as well as approved to distribute company's net profit of 2019 and allocate dividends equal to EUR 0.02 per share. So this was the main highlights from Q1, and now I would like to pass word to Jonas to talk about financial results.

Yes, Darius, thank you very much. Good morning to everyone, and it's a pleasure to have you here with us today. I will present in brief our unaudited financial results of the group, and I will start from the usual slide of showing our main financial indicators in quarters. So starting from the numbers what we have. So for the first quarter in this year, the group earned EUR 20 million of revenues. EBITDA was EUR 7 million. And the net profit for this quarter is negative, a loss of EUR 0.4 million. Actually, the result is better than in previous year in respective quarter. And in terms of net profit adjusted, this quarter is one of the best quarters starting even from Q2 2018. Only the last quarter of 2019 being having the better result. And the main reason for the negative net profit result in the first quarter is a loss of EUR 5 million registered from currency exchange rate on the lease liabilities. In regards to sales revenue and EBITDA if compared to the first quarter of 2019, they are substantially lower, and the main reason is reduced security supplement in the amount of EUR 6.7 million. As we can see from the graph, starting from 2019, group's net profit result and EBITDA has quite wide range of fluctuation what we do not have in 2018. And this is caused by lease liabilities accounted in the balance sheet as to IFRS 16 requirement that came into effect from the 1st of January 2019. And as a result of its application, the group has accounted into liabilities large amounts of liabilities denominated in U.S. dollars. So in our opinion, in order to understand the view -- the result of the group's activity, it is necessary -- and to be able to compare the result of the previous periods, it is necessary to use normalized ratios. And what we are doing, we are calculating adjusted EBITDA result and net profit adjusted. So looking at the dotted lines in the graph, then we can see that the results are in usual ranges and can be compared. So in terms of net profit adjusted for the first quarter of this year ended with EUR 3.9 million of net profit compared to the first quarter of previous year, EUR 3 million. So in general, in our regulation, this first quarter is better than having a better result than previous respective period. In this slide, we want to explain the principle how we calculate our net profit adjusted result. And here, we see 3 components. One is difference due to IFRS 16 calculation method, and subsequently, a rising impact of exchange rates. And also, while calculating adjusted net profit result, we are eliminating the impact of security supplement optimization as it is a noncommercial activity and also taking full life cycle, this has a neutral effect for the company as in subsequent years, starting from 2025, this reduction will be recovered. In this slide, we present a breakdown of our main indicators by business segments in 2 ways, IFRS-based and adjusted. And what we can see here that our -- almost all effect of IFRS 16 and reduction of security supplement is experienced in regulated activity, LNG segment. And as the current exchange rate, which has the biggest impact here is not realized and will not be realized in the future. So we think that these factors distort the real result of the group's activity, and therefore, going further into separate business segments and explaining their results, probably -- we will use adjusted EBITDA and net profit result. So speaking about oil terminal segment, we have slightly lower revenues in the first quarter of this year if compared to the first quarter of previous year. But on the other hand, in terms of adjusted net profit, the result is better. And the main reason is higher efficiency, and accordingly, lower cost than shipment operation costs. And here I'm switching to business factors, I will give a word to Darius.

So thank you, Jonas. So shortly about business factors, which has affected our oil segment result during Q1 of 2020. Some of them were predictable, some unfortunately not. And let's say, predictable ones was an expected effect on the bunker market, which comes from the Annex 4 of IMO 2020 entering into force as of 1st of January since not a majority, but really sufficient part of, let's say, our transshipped products is being further used as a blend stock for the bunker fuel production worldwide. So this uncertainty when IMO Annex 4, let's say, restrictions on the sulfur content in the bunker tool has entered into force has affected, let's say, temporary fall of refining margins in the regions' refineries. So respectively, it was probably some decline on the throughput volumes caused by that. Unpredictable, let's say, factors there was, let's say, a few of them. So first of all, we had really warm winter season in Europe and diesel fuel, heating oil and similar fuels, let's say, demand of them has naturally decreased, which has affected, of course, the inventories grow up, and this usually is leading to decrease of refining margins. And as a consequence, production capacities of regions' refineries has been decreased. Another, let's say, unexpected, let's say, factor was a dispute between Russia and Belarus in Q1, and let's say, stoppage, I would say, stoppage of the main crude supply by the pipeline from Russia to the Russian refineries because of what the Russian refineries was operating on a minimal mode, and of course, there was less export volumes appearing in the market. Another reason, which has caused lower refining margins was COVID-19. And actually, it started earlier, let's say -- the effect started earlier because the main, let's say, import market for the oil products, I mean, China has been fighting with the COVID starting from January, meaning there was a drop in demand much earlier than in Europe or United States. So refining margins started to erode from the very beginning of 2020. And let's say, what wasn't expected or unpredicted but turned into positive factor to us was the fact that we have managed successfully to replace lost export volumes by the crude oil import or alternative crude oil import to Belarusian refineries. Actually Klaipedos nafta became the biggest supplier hub for alternative crude to the Russian refineries. We made, I think, about 62% of the overall alternative crude supply during Q1 to the Russian refineries. So Jonas, I'm giving back microphone to you to talk on financial highlights from our life of LNG or regulated LNG activities.

Yes. Thank you, Darius. So speaking about financial results of our regulated activity. So what we see on the revenue side and what has been mentioned earlier, so we see a decrease. And the main reason is a decrease of security supplement starting from beginning of this year. However, on EBITDA and net profit side, they are at the same level, we could say. And the main reason is, as it is commented always, it is regulated activity and the income is set by regulator and the company is earning a predefined return from regulated asset base. So as regulated asset base is decreasing year-by-year. We should expect a slightly lower net profit. But as the first quarter of this year was -- we had higher regasification volumes than it was forecasted when income level and security supplement was set for this year. So this compensated and earned -- gave to the company more income, and as a result, higher net profit. So now switching to business factor, again, Darius.

Yes. Thank you, Jonas. So business factors in our regulated activities anyway affected by the market situation globally on LNG. And I would say that main factors comes from the pricing of LNG worldwide and on a change from supply-demand side, which is actually caused by 2 main factors. One is it was a record drop on LNG pricing indexes. You can see here even the numbers how big was the drop, let's say, within 2019. So now we have something about EUR 6 per megawatt on the spot market. And while in September 2018, the price was about EUR 29 per megawatt hour. And also, the pressure for LNG pricing has been affected by an expected warm winter. And we actually never seen a situation where after winter season, the storage is, let's say, occupied by 50% -- storages in Europe is occupied more than 50% in average. So usually, during winter time, let's say, the occupation level in storages was much lower. So -- and this, of course, gives some competitive advantage against the pipeline, supplied by pipeline, by grid supplied to the natural gas from Russian side and our customers are using this opportunity, and that's why we are having such a, I would say, even a record regasification volumes in our Klaipèda LNG infrastructure. So Jonas?

Yes. Going to another business segment, commercial LNG activities, which encompass business development activities, small-scale LNG terminal in Klaipèda and operation of LNG terminal in Port of Açu in Brazil. The result of this business segment is still negative, having a loss of EUR 0.4 million, but substantially better than in respective period of previous year. And positive LNG bunkering market development leading to increase of small-scale LNG terminal operations. And first project of LNG terminal operation have substantially improved the result of this business segment and revenues. So again, giving word to Darius regarding business factors.

Yes. Thank you, Jonas. So talking about business factors in our commercial LNG activities, so -- which include our small-scale or reloading station activities in Klaipèda are operations of our latest and probably first big-scale O&M LNG terminal contract in abroad, in Brazil. And also it includes another business development projects. So as it was already mentioned in the highlights, so main business factor for, let's say, such financial results was a signature of agreement with G&A in Brazil and the commencement of, let's say, of this contract and generation of revenue from this contract. The Klaipèda LNG reloading station services comparing to Q1 2019 has increased by 35%, and this was also mainly affected by increasing market and favorable prices of LNG. A favorable sign of LNG bunkering market development was, of course, the first LNG bunkering operation performed in Klaipèda port on the 8th of March. And it's important to mention -- worth to mention that in order to do that, there was a lot of actions needed, preparation actions needed, changes of some loss, acquisition of some permissions. So despite of, let's say, small scale of the single operation, I believe it's a start of a continuous and really profitable activities for our, let's say, reloading station operations and for our customers. Jonas, giving back.

So going further, we present in the slide in one place in one table different type of financial figures. I will not stop for more on commenting them, and I will go on further to the slide of our balance sheet. So no major changes appeared from the end of previous year and during the first quarter of this year. What we can see, we can see a movement in right-to-lease property and noncurrent liabilities as on the one hand we are depreciating the right to this property and also making payments of noncurrent risk liabilities. Then going to investments overview. Also a slight usual slide in our presentations, showing the amounts of investment over the longer period. And for Q1 of 2020, we see EUR 1.3 million investment. This is related to investment in Klaipèda oil terminal, proceeding with second-stage investment program. So usually that is has something to add?

On Q1 investments?

Yes.

Right, let's say, very beginning of railway trestle expenses and some investment into our new jetties construction. So it's very, let's say, trust phases or initial phases of those investments. So that's why amount is such as it is shown, mainly preparational design contracts, et cetera. Thank you.

Yes. So thank you very much for your attention. It was the last of our slide, and we can switch to Q&A part.

The Q&A part of the session.

[Operator Instructions] And we received the first question. What portion of Belarus crude demand is currently supplied by Russia?

To be honest, probably the best addressee of this question is the Belarusians, but I mean, we can be subjective on that, but I can only confirm that they have recovered majority of demand, let's say, supplied by the Russians. So -- and of course, it's worth to mention that the technical capabilities of Belarusians finance that accept crude by alternative means of transport actually are limited. So you cannot supply it by the rail tank-cars all the demand, so it's still part of it shall be supplied by grid pipeline, crude pipeline. I see another question [Technical Difficulty] more immediately.

Yes. And another question is related to the first one. Do you expect to continue accrued supplies to Belarus in coming quarters?

So this is also the best addressee would be Belarusians, but we can, so to say, to express our own thoughts. So first of all, KN become fully ready to operate in, let's say, both inbound and outbound mode. So meaning our investments allows us to add crude oil imports to portfolio of exported products. So expanded capacities and investment into another infrastructure are done, including, let's say, those who prevent emission of odors and other emissions from handling operations. And our expectations is that this will continue because smooth operations, which our customer has received. And let's say, good pricing on alternative crude oil due to, let's say, really dropped demand worldwide potentially can be favorable to Belarusian refiners, but it is only my personal opinion and always on customers' hands.

And we received one more question. Does Mažeikiu Nafta export increase, decrease using KN terminals? What about forecast?

I would like to ask a pause just to prepare properly for the answer. Hold on a second. Okay. So I'm ready to comment on [indiscernible] question about Mažeikiu Nafta or Orlen Lietuva to be precise. And yes, Orlen Lietuva has been facing negative refining margins period or worse refining margins period. And this, of course, is affecting capacities. So the export volumes to the seaborne market, we are -- let's say, less when during -- comparing to, let's say, volumes and capacities, which can be expected during the positive margins period of profitable operations. Talking about the forecast, probably I'm not the best commenter on that also because we are operator of the terminals, and let's say, refiners are doing some forecasts on a crack margins or refining margins or taking some measures or actions related with that. But still, we expect that, let's say, negative margins period or, let's say, less demand period will end once the world manage COVID-19 situation. So it's a very broad comment, but I cannot comment anything more precise.

We have one more question. What is the size of annual revenues from the LNG terminal operation in Brazil?

So actually, as all the commercial activities, this one is not an exception from the rule. Commercial information, let's say, fixed in the contracts is confidential. But still, I think 2 things can be mentioned or 2 numbers. So first of all, since we have, let's say, a goal on return on equity, which comes from the main shareholders, meaning it shouldn't be less than 6%. So let's say, the -- let's say, in our business plan, respectively, in a contract, the same principle is applied. So meaning, the return on equity from this project should not be less than 6%. Talking about the revenues, so first year of our operations isn't aligned with our bank guarantee amount, meaning it will be up to EUR 5.9 million per year.

Next question. How you see oil products export trends, bearing in mind drop demand and probably lower flows from Orlen and Belarusia?

I think I already mentioned some ports during our presentation, talking about the factors, which has affected our Q1 result. But in general, of course, let's say, oil markets are very liquid comparing to LNG, and let's say, we need to recover demand worldwide in the main markets in order to be -- to come back to stable crack margins period, which can grant, let's say, stable export volumes. And I'm trying to read this question one more time just not to miss the main point. So the trends are -- let's say, now we are stable. The flow has become stable. And talking about our activities, actually, as crude oil compensated -- imports crude oil compensated partially loss of some exported volumes, additional services such as storage -- long-term storage because of contango in the market is creating alternatives and opportunities even for the terminals worldwide. So we are not an exemption from the room. So we even can see some opportunities, not only negative effect to our oil segment coming out from COVID-19 effect. Thank you. I hope I answered it.

There is some more questions. And -- are your oil tanks used more for storage of crude or oil products amid current low oil prices?

No. We are still throughput terminal mainly if we talk about Klaipèda infrastructure in terminal -- talking about terminal located in Klaipèda seaport. Yes, when we are talking about our inland terminal. So much is terminal. Was we making some major shifts in our, let's say, services portfolio? I also should say no, because we are maintaining, let's say, throughput activities. But yes, some of the additional capacities, which has been built. They are used also partially for the longer storage, let's say, services provision. I hope that I answered.

What amount of equity is invested in Brazil?

I need some time to check the answer. While we are preparing for the answer, we can go with another question.

Yes, sure. Are you already doing oil storage service?

I already answered actually that. Daniel's question was about that. So yes, we are doing storage service actually for many years already and not only in Subaciaus terminal. It's a part of our activities. So I'll try to answer to [ Arvidas ] on the amount of equity is invested in Brazil. So as I told, this is a part of confidential information. But in general, what's important to underline, it's an O&M contract. So meaning we are not investing in this project into some assets or some infrastructure. Our investment consists, let's say, into hiring people, creating teams, providing all needed IT, software and other equipment in order to perform operations in this terminal. I hope I have answered.

Thank you for your answers so far, and we're still waiting for some more questions.

We see one more question. So we can read it to all participants, and we can answer it.

Yes, please.

Okay. So Sander is asking, has the LNG terminal lease payment remain fixed in USD or any adjustments this year? So yes, lease payments remains fixed in USD, and we are not expecting any adjustments in this year in regards to the current.

And could you please take one more question? And the question is, is the lease payment still USD 146,000 per day?

Yes. It remains the same as it was.

[Operator Instructions] Thank you. It seems that all questions are answered. No more questions. On behalf of Nasdaq Vilnius, thank you, everyone. It was a pleasure being with you today. A record of the presentation will be available in the Nasdaq Baltic YouTube channel webinar playlist. And on the website of the company, kn.lt. Mr. Darius Šilenskis and Mr. Jonas Lenkšas, thank you for your presentation and for answers given. Participants, thank you for joining. Everyone, have a wonderful day.

Thank you. Stay healthy.

Thanks.