AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to quarterly webinar for Klaipedos nafta. I am Simona Backiene, account manager at NASDAQ Vilnius, and I'm pleased to introduce today's host, Chief Executive Officer of the company, Mr. Darius Silenskis; and Chief Financial Officer, Mr. Jonas Lenkšas. Before we proceed with the presentation, I will shortly introduce you the agenda. Firstly, the management of the company will comment on Klaipedos nafta financial results of the first half of the year 2020. Right after the presentation, we will open the floor for questions. All questions will be addressed after the presentation. Mr. Darius Silenskis, I invite you to start the presentation.

Thank you, Simona. Good morning to everyone. As Simona already mentioned, today's objective is to present to investors KN Group financial unaudited results for first half of the year 2020. So I would like to start shortly from the content of today's presentation. So we will present our mission and vision. We will reflect on the COVID-19 impact for our activities. Also highlights of -- main highlights of the main events of key events during first half -- during Q2 of 2020. And afterwards, we will present financial results and investments overview. So as we are presenting during each webinar, we would like to also use the opportunity and to present again our mission and vision. And our mission is to ensure safe, reliable and efficient access to global energy markets by sustainable development, investment and operation of multiple functional terminals worldwide. And our aim is to assist our customers on clean energy transition and to maintain their competitiveness. Our vision is to become a top LNG terminals operator worldwide and the most competitive oil and refined products handling up in the Baltic region. COVID-19 impact management measures, which has been taken. So by the end of May, companies had safely returned from work in remote mode to offices. The company still applies various preventive protection measures to ensure safety of groups and companies, employees and continuity of business operations. During the peak of COVID-19, company participated in various initiatives, including the initiative of Klaipeda port companies to provide lung ventilators and other important equipment for regional hospitals, which represents our corporate social responsibility in action. Company anticipates that COVID-19 will cause downturn in global economic growth, which will lead to a decrease of demand on global and regional scale. And it can possibly result in lower transshipment volumes through the company's terminals in 2020, and correspondingly, in 2021. Reacting to the changed environment, management of the company has activated various business continuity and risk mitigation plans for each of our business segment. And the risk management team has been set up to monitor the situation of the group and company and main partners on a daily basis, taking into account the high liquidity of the group's company preventive measures taken activated business continuity and risk mitigation plans. From a cash flow point of view, the group and the company are in a secured position to continue the business operations in front and unfavorable situation. Talking about the key events and main highlights of Q2. So in April, Polish oil and gas company, PGNiG commenced their commercial operations at our operated Klaipeda liquefied natural gas reloading station or as we are calling it internally LNG small scale terminal. The capacities of the station, which will allow more efficient -- more efficient entry into the small-scale regional LNG market, is reserved for a strategic partner for 5 years, as it already has been mentioned. 10 of April 2020 Extraordinary General Meeting of Shareholders adopted a decision to elect Mr. Karolis Švaikauskas as a new member of the Supervisory Board of Klaipedos nafta until the end of the term of office of the existing Supervisory Board of Klaipedos nafta. On 28th of April, Annual General Meeting of Shareholders of the company decided to distribute 100% of the company's financial profits received in 2019 and allocate dividends to the amount of EUR 0.02 per share. On -- during June, key events was as follows: On 4th of June, KN has completed the annual procedure of allocating LNG terminal capacities for the new gas year, which lasts from 1st of October until 13th of September each year. During this procedure, 2 customers have signed agreements for the regasification capacity of 8.4 terawatt hours of LNG, 68% -- which is 68% more comparing to the previous year. And this is the first time when 2 customers participated in annual procedure of allocating LNG capacities for the new year. And [indiscernible] regasification capacity is the highest one from the beginning of the terminals activity. On 5th of June, we have received first in our operation history, U.S. origin crude oil cargo, which was further diverted to our customer in Belarus. Mr. Andrius Varanavicius, is member of the Supervisory Board and the Audit Committee of Klaipedos nafta, submitted a notice of resignation from the Supervisory Board and the Audit Committee of the company as of 31st of July. This is the last day of his mandate. Another important message was about the finalization of the court case with Kroviniu Terminalas. And this court has been closed. The Supreme Court of Lithuania did not accept that deal submitted by Kroviniu Terminalas in this case regarding the alleged damages from the breach of a competition law. And the deadline for re-appealing has expired on 1st of July. Therefore, the decision of the port remains final and uncontested. On 11th of June, PGNiG received the first supplier of LNG at the Klaipeda LNG reloading station and the Finland's Gasum was a supplier by delivering about 1,500 tonnes of LNG that originated in Norway. From there, it may be transported further by the road tankers or trucks from Klaipeda to consumers in the Baltic states and northeastern Poland. An increase of the authorized capital of the company by EUR 20,000 -- EUR 29,000 has been registered on July -- 9th of July. And authorized capital has been -- capital has been increased by nonmonetary item vessel order. And the purpose of that was to decrease -- to continue, let's say, initiatives to decrease OpEx by operating FSRU infrastructure in Klaipeda. So here, I would like to pass stage microphone to Jonas.

Thank you, Darius, and good morning to everyone. So I will proceed with commenting financial results of first half of the year. And first, I would like to start from commenting Q2 results. So the second quarter of this year, I would say, is one of the best quarters in the last 2 years in terms of net profit, maybe slightly below the results of Q4 of previous year. So in the second quarter of this year, the group around EUR 20.7 million of revenues. And the sales revenues, as we can see, are lower than in previous year's quarters. And the main factor for the decrease is the reduction of security supplement, which has been started from the beginning of this year. So the same reason for lower sales revenues are also for first quarter of this year. In terms of net profit in second quarter of this year, financial net profit amounts to EUR 9.8 million and is more than 2x higher than in respective quarter's result in 2018. In terms of financial net profit, we can see a substantial fluctuation from quarter-to-quarter. And the main reason is currency exchange rate influence, which emerges due to IFRS 16 application, which has been started from 2019, 1st of January. And we can see it from the graph. So as euro appreciated against U.S. dollar in the second quarter of this year, and therefore, a substantial positive impact to the net profit from currency exchange rate has been registered. And due to this reason, an adjusted net profit result a normalized ratio calculated by the company in order to reflect real result, which could be also comparable with previous periods, is presented here and it amounts to EUR 4.3 million for the second quarter of this year. It is better than Q1 of 2020, lower than the last quarter of 2019. But still, it's the best -- second best quarter in the last 2 years. So going to first half of the year. So looking at the sales revenues, the group earned EUR 40.7 million of sales revenues against EUR 51.2 million in respective period of 2019. The main factor for the decrease, as was mentioned in the previous slide, was the reduction of security supplement. Financial net profit for the first half of the year amounts to EUR 9.4 million, while adjusted net profit, EUR 8.2 million. And these results are substantially better than the results of first half of previous year. So the main factors for higher adjusted net profit in the first half of this year was due to increase in revenues from all product storage, lower FSRU OpEx expenses and essentially a better result of commercial LNG activities. The latter has been achieved due to entering into agreements with Polish state company, PGNiG, regarding booking capacities of small-scale LNG terminal and income from international [indiscernible] project in Brazil. So in this slide, we show main type of groups of influence, which we are using to hopefully normalize the net profit or adjusted net profit. So these 3 groups are reduction of security supplement, difference due IFRS 16 calculation method and the impact of euro-dollar exchange rate. The main highlight in this regard for this quarter and the first half of this year is that it is the first reporting period when we are experiencing the positive impact of exchange rate. Just to remind, according to IFRS 16 requirement, all lease liabilities of the whole lease period, in our case, the main impact comes from FSRU lease, which is still 2024, are accounted in the balance sheet as liabilities. And as lease payments for FS are denominated in U.S. dollars, euro-dollar exchange rate for patient creates positive or negative impact. However, it's worth mentioning that for the group, this is unrealized influence as the company has compensated its costs related to regulated activity at the active exchange rate. So going into segments. We group our activity into 3 segments: Oil Terminals, Regulated LNG Activity and Commercial LNG Activity. We can see from here that in the first half of this year, Oil Terminals and Regulated Activity segments both bring almost the same inputs to the group's net profit result. And also we can see from this slide that the main impact of IFRS 16 is realized in Regulated Activity. This can be seen from the difference in EBITDA and the net profit results. The substantial difference in EBITDA is due to lease payments that according to IFRS 16 are accounted through depreciation expenses. And adjusted net profit of regulated activity is a little bit worse because of elimination of positive influence of euro-dollar FX, euro-dollar exchange rate, which is not realized. So due to the distortion of real result by application of IFRS 16 and thus caused in ability to compare results between 2 periods going forward in the next slide, so we'll speak about normalized store in other words adjusted results and ratios. So here, I will pass the floor again to Darius to comment on main business factors.

Okay. So let's start from Oil Terminals segment. And as you can see in the slide, all the, let's say, data shows that though both revenue and EBITDA was higher during half -- first half of the year 2020 comparing with 2019. Comparing to the respective results of 2019 and talking about the main business factors, it was full of challenges, of course, because we have -- we had not only COVID-caused negative margins -- refining margins, we also had unexpected warm winter season, which also is affecting, let's say, less demand from a market on oil products also. And in addition, discussion on negotiations between Russia and Belarus some crude supply has lasted almost entire first quarter of 2020, which, let's say, caused less volumes from this direction for transshipment in our oil terminals. And also OPEC+ format negotiations failed, meaning that oversupply of the crude, which was -- let's say, production was higher than a consumption was one of the factors eroding refining margins and influencing, let's say, less potential throughput tons through our infrastructure. COVID, as in all businesses or most of the businesses, it's also affected our activities. And the lockdowns caused significant decrease in -- globally, which has been reaching almost 35%, 30% drop on the oil products demand. So this was also one of the criteria which influenced negative margins. So during this turbulent period, our oil terminal holds the leading positions comparing to other Baltic States terminals, demonstrating pretty high transshipment volumes, which is reflected in our first half of the year result. One more thing which I would like to add to the slides that we accumulated quite a significant amount from such services as storage which was not so usual before. So -- and we also successfully exploited contango situation upsides and the increased income from this. Okay. So let's talk about -- next slide is about the regulated LNG activities. So as you can see here, we have less revenue. But this is mainly caused due to reduced supplement. And talking about EBITDA and net profit, both were higher comparing to respective periods in 2019. Klaipeda LNG terminal utilization rate in the second quarter averaged about 55% of theoretical, so to say, maximum capacities. And total regasification during the second quarter was 5.84 terawatt hours, which were regasified and transmitted to the transmission system. Key reason of high utilization and high demand of LNG remains the same, low LNG index values. And this period continues on European Gas Exchanges, Dutch TTF. Average index for second quarter was EUR 6.92 per megawatt hour compared to an average EUR 14.71 during the same period last year. Here, you can see also the number of the tankers accepted for STS operations. And you can see also overall regasified volume during the first half of the year. Moving forward. Okay. So talking about commercial or not regulated LNG activities, which includes small-scale LNG reloading station activity, Klaipeda operation of LNG terminal in Port Açu, Brazil and also other projects, other LNG -- global LNG development-related projects. So we have generated almost EUR 2.5 million in terms of revenues. and EUR 264,000 of EBITDA. The result in terms of net profit was negative 400 -- minus EUR 403,000. But it's worth to say that it's first time in our, let's say, reporting than LNG activities generated positive EBITDA results, commercial activities. Key factors. Key factors was again, to go its subsidiary, KN Açu branch, signed an operation -- an O&M services agreement with GNA for the provision of operations and maintenance services. So this contract started to generate income for our group. And also, as it has been mentioned before, let's say, commercial activity of our strategic customer, which reserved 100% of the small-scale LNG capacities in Klaipeda. So PGNiG started real activities by using this infrastructure. So I think that was main messages from our business segments, and I'm giving microphone to Jonas.

Yes, I will proceed -- cover on the -- give short comments on our financial ratios. So margin and efficiency ratios in the first half of this year are better ones than in their respective periods of 2019. So as a result of EBITDA and net profit are higher, thus, the margin rates are accordingly higher, too. And as there were no changes in -- major changes in assets and equity base, therefore, return on equity and return on asset ratios are also substantially better. Accordingly, price earnings and profit per share ratios for -- in this year are -- so far are more favorable than in previous year. Speaking about our structure of balance sheet, there are no major changes in the structure of assets and liabilities. After the application of IFRS 16, the major portion of the assets consist of right to use -- right to lease profit, which decreased due to depreciation. And the right to lease property consists of FSRU independence lease liability until 2024 and purchase option of FSRU. On the other hand, on liabilities and equity side, the biggest portion also is lease liabilities of the same items. FSRU lease liabilities till 2024 and the purchase option of FSRU. A small movement could be seen in loans balance. It has increased as company uses the loan facility to finance reduction of security supplement. And now we come to investments overview part. And a short comment will be given by Darius.

Thanks, Jonas. So as you can see, comparing to the previous periods, the amount of investments into capital projects was much lower comparing to the previous periods. And main investments carried out this year consists of, let's say, investments in the so-called Stage 2 of expansion of our oil terminal in Klaipeda. So -- and it was related with investments into storage tank parks, reconstruction of -- and also reconstruction of jetties, which we use for lowering and discharge of both oil and LNG tankers. So -- and main investment, it's worth to underline the main investment, which is on progress in our CapEx or capital project pipeline in all terminals or now with investment into construction of a new railway trestle. So because it's only, let's say, first phases or beginning of this procurement, there was no significant amount invested during this period into this. Okay. So that's all. We can move to questions and answers part.

Mr. Silenskis, Mr. Lenkšas, thank you for your presentation. Now we will proceed with the questions. And the first question was received in advance, and it is the following: which direction the company is having to increase profitability, LNG or oil terminal transshipment?

I think our directions are pretty well described in our strategy document, where we are, let's say, focusing on competitiveness or increase of competitiveness of our oil segment by, let's say, increasing efficiency of this infrastructure. We are using various tools for now. I can mention, let's say, one of those tools we are implementing ISO process. We are now started to use lean methods in our activities, which already is giving the returns. So we can see a result for the first half of 2020. So I can say that, yes, one of the, let's say, one success criteria was additional revenues from additional services and products, which we were handling. But another important effect -- or positive effect was generated by cost savings, which came from our efficiency measures and improvement, so to say, of our operations measures. Talking about our LNG activities, so on the regulated activity or operations of FSRU infrastructure, so we are keeping the same direction and maintaining, let's say, pressure for the costs by controlling, let's say, OpEx by investigating new opportunities and one of those opportunities has been presented to investors. For example, a small but really valuable acquisition of vessel Audra or boat Audra. In the long run, we'll definitely generate additional returns and savings.

Thank you for your answer. The next question received in advance is when do you plan to buy out the LNG ship from Norway?

Thank you for your question. So the answer here shall consist of 2 parts. So first of all, it's very important to underline and to state that we are not buying ship from Norway because it's just an option, which is fixed in time charter party with the owner of FSRU independence. So another part of your question is about the timing. So timing is that we can execute option till let's say, end of 2024. And also, it's worth to mention by using the opportunity that we already started selection process of the FSRU vessel. We already started the procurement process of technical and legal consultants. And it's a beginning of, let's say, of this process. Thank you.

Thank you. Are oil cargos from Belarus permanent or temporary? Is it plan to supply LNG gas? If so, when?

Very good question. Thank you. So talking about the regularity of the crude cargoes arriving through our infrastructure to the Belarusian customers, As you can see, it already have, let's say, regularity behind as far as volumes are really sufficient during the past half of the year. But it's a question to our customers. It's probably not to us because it's a lot of factors which are affecting the decision to import through us or to supply crude by alternative way of buy it from the east. So it's a pricing, it's probably also geopolitic behind. So it's hard to say or to confirm whether it's permanent. But it seems to be that it becomes really important part of our oil business. And it's good to see that we are really competitive by providing this service as far as about 60% of the entire alternative crude to the Belarusian oil refineries has been supplied by using our Klaipeda oil terminal. Talking about the LNG supply to Belarusian side, I cannot comment here as far as we are not, let's say, having any agreements with nobody from Belarus on that. Thank you.

Thank you. In terms of interim dividends, what is the future dividend policy?

Okay. So I'll try to answer. We hadn't yet considered it such, let's say, such ability. So for now, I cannot confirm that it's under consideration. Thank you.

Thank you. In order to increase the return of investors, how is it planned to increase the liquidity of the stock?