AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the quarterly Klaipedos nafta webinar. I'm Emilija Ivanauskaite, an Account Manager at NASDAQ business, and I am pleased to introduce today's presenters, the CEO, Darius Silenskis; and the CFO, Jonas Lenkšas. Firstly, the management of the company will comment on Klaipedos nafta financial results of the 9 months of 2020 and guide us through the recent events in the company. Right after the presentation, we will open the floor for the Q&A session. [Operator Instructions] So let's begin. Dear, management, I invite you to start the presentation.

Thank you. Good morning, everybody. So before going into presentation of unaudited quarterly results, we would like to remind investors about our mission and vision to reflect on a COVID impact and measures taken in the company. So talking about the mission and vision, I would like to remind that KN ensures safe, reliable and efficient access to global LNG markets by sustainable development, investment and operation of multifunctional terminals worldwide. And our aim is to assist our customers some clean energy transition and to maintain their competitiveness. Our vision is a top LNG terminals operator worldwide and the most competitive oil and refined products handling up in both regions. Talking about COVID. This new normal is turning into new challenge worldwide. So company is taking a lot of measures, preventive ones, in order to ensure business continuity. And as of today, all terminals are fully operational. And from KN perspective, all contractual commitments against the clients across the markets, the company operates have been insured. The company applies various preventive measures to ensure safety of groups and companies, employees and continuity of all business operations. Currently, our company applies hybrid work model, which means that our employees are divided into 2 teams, which rotate on a weekly basis between remote work and work from the office. Taking into consideration recent increase in COVID case in Lithuania, KN employees is living -- working in regions, which are, in currently, are encouraged to work remotely if their work specifics allows it. The future uncertainty surrounding our sector, especially oil business, oil segment, wave of COVID, potentially third one, and respective economic impact globally. So safety of KN personnel efficiency and sustainability of KN terminals operations and prudent international project development in line with KN Strategy 2030 remain the core items of the company's continuity and risk mitigation plan. The company notices the COVID impact on decreasing demand on global and regional scale and respectively, on lower turn shipment volume through the company's terminals -- oil terminals in 2020 and correspondingly, the potential impact is in 2021. So talking about our key highlights, which has been presented through the NASDAQ platform and with media releases, I won't state all the events, which are listed in the slide on the screen. But still, it's worth to mention that we finally closed the case with Kroviniu terminal. And there will be no consequences from that. So also what is important to underline that the National Energy Regulatory Council set 3.46% rate of WACC of return on regulated asset base of the company. And it's very important since this is defining the return level from our regulated activities. Also, it's worth to mention that the old gas year, which is, let's say, from October -- till October, was a record one for 2019. I'm talking about 2019. And the volume was up almost 24 terawatt hours in regards to volumes which is 10 terawatt hours more comparing to the previous gas year. More about present situation, we will discuss in the following slides on both -- on all actually 3 business segments. Another slide where we have, let's say, some achievements. So we've been ranked as the #5 employer among 20 most desirable employers in Lithuania. Let's say, the list compiled by Verslo zinios. Also, I think it's important to say that Bank of Lithuania is a supervisory authority for the listed companies, evaluated KN as one of the best compliant to NASDAQ Guidelines on Corporate Governance Code among all 26 Lithuanian listed companies. Okay. So let's move to our financial results, and I will give the word to Jonas.

Good morning to everyone, and thank you, Darius. So I will continue with commenting financial results. And as usual, we start our presentation of financial results from results of the quarter. So in Q3, the group and the company has spent EUR 20.1 million of revenues, which generated EUR 14.8 million of net profit and EUR 2.9 million of adjusted net profit. So despite a number of challenges during this period, the level of revenues remained stable and similar to previous quarters of this year. As we can see, our net profit fluctuates substantially from quarter-to-quarter, and this is due to currency exchange rate in France, which emerges from application of IFRS 16 starting from 1st of January 2019. As for Q3, the overall continued to appreciate. And we see the gap between adjusted net profit and net profit increased, as additional positive impact to the net profit from currency exchange rate has been registered for Q3. As currency exchange rate influence is not realized by the company and will not be realized in the future because it is related to regulated activity. And costs are compensated at an actual exchange rate for the company. So therefore, the company, in order to explain the real result of the activity, is calculating alternative performance measures like adjusted net profit, adjusted EBITDA and so on. Also from Q3, the company has reevaluated and changed its methodology for calculating adjusted results, and came to the conclusion to eliminate from the results only unrealized impact of foreign currency exchange rate. All competitive numbers for the periods are recalculated accordingly. So in terms of adjusted net profit, Q3 was slightly better than Q2. And also we do not see significant [ inflation ] in the result. Going to 3 quarters accumulated result, we see sales revenues of the group and the company to comprise EUR 60.8 million against EUR 77.2 million for respective period in 2019. The main factor for this was the reduction of security supplement that has been introduced from the beginning of this year. And summarizing the period, the following factors had significant influence to the result. So decrease in oil products and shipment, but substantial increase in oil product storage and crude oil import that replaced part of transshipment of usual oil products, also higher diversification volumes of LNG and essentially better result of commercial LNG activities. In this slide, we present how we group our activity in the segments. So we group it in 3 segments: oil terminals, regulated activity -- LNG activity and commercial LNG activity. No changes in this regard. And as we can see, oil terminal and regulated LNG activity business lines, are the main ones generating the result for the group. However, commercial LNG activity is developing and growing, too. And now I will pass the word to Darius to comment on business lines and business factors.

Thank you, Jonas. Let's start from oil segment. So actually, year 2020 is unique in terms of challenges, which probably energy industries has suffered, mainly due to lockdowns and the consequences of the lockdowns around the globe. So for first 9 months, our industries where we operate was figured as well and especially it was visible for oil industry. And the reduction of demand until today amounts up to 10% drop in crude oil demand worldwide, which is, respectively, of course -- actually, it's a consequence of drop demand in the product due to less mobility and some disruptions on the production side. So -- and this -- both consequences, we put a significant pressure on KN's oil business activity and the results. So COVID-19 has a continuous effect in oil markets. So in the beginning of September, sales of spot crude oil cargoes globally started decreasing. Demand of the storage and tankers went up due to market participants' anticipation of increase in number of COVID cases. Also the peak, at the end of June, the total amount stored in large capacity floating storages tankers is also decreasing that remains at record high levels. And it is anticipated that the second wave of COVID will further strengthen demand for storage since, let's say, expected recovery of demand and of the consumption is postponed. A good example could be, let's say, jet fuel, which is used for aviation forecast, where I remember analysts was showing or expecting the recovery of jet demand back to minus 10% comparing to pre-COVID situation. And it happened to that on September, the fact was minus 50 from the volumes, which was consumed before the COVID appeared. So not so good for oil business, and those refining margins are not forecasted to recover before 2022. So all of European refineries actually operating near breakeven or even at negative margins. And it's forecasted that more refining capacity than usual, will shut down for maintenance in Europe this autumn, in part, because of the pressing weight of high product stocks. And stocks, I can just say that, it's a record volume, a record amount of stocks around the globe, including in land-based terminals and even floating storages, floating tankers. So refinery utilization rates fell to just over 68% in May, August. And what does that mean? That means that most of the refiners are operating at the absolute minimum capacity utilization, which is allowed by the technological so-called restrictions. In May, August, effective close to minimum operating levels and down from nearly 82% a year earlier, and the figure is unlikely to rise much before during and after the maintenance. It will further influence volumes of product and shipment. Due to geopolitical circumstances and COVID impact, if to compare with 2020 Q3 to Q2, total Baltic -- total, let's say, transshipment in Baltic states oil terminals decreased by 5% in Lithuania and respectively, by 6% in Estonia and Latvia. So anyway, looking into the numbers, I probably can say that we managed successfully to stabilize the negative effects. And as you can see, let's say, influence into net profit was a minimum one. Jonas already mentioned what can be the reason. The reason -- one of the reasons is increased demand in the long-term storage services. And also another reason that we are successfully implementing our investment program, expanding our, let's say, flexibility and complexity of our services, which allows us to attract new products, new customers, and that was really visible during all quarters of 2020. So in general, I can say that the oil result is quite a good one comparing with what can be -- what could be. Talking about our utilization capacity, in this slide, you can see comparison with other Baltic state terminals. And methodology is very simple. We are taking entire, let's say, capacity in cubic meters and dividing it into -- actually from tons of various products. So here, you can see that our capacity utilization is about 57% and others are, let's say, lower. Of course, this approach is not representing the revenues of competing terminals from the storage services. Talking about business factors in our LNG. So main factors, which has impacted the results, it's still LNG security supplement reduction. I would like to remind that annual reduction is about EUR 26.7 million. So respectively, EUR 20.1 million less for 9 months of 2020. And low demand affected, of course, by the COVID pandemic. And the oversupplied gas market and warm 2019 and 2020 expected and even 2021 winter seasons have increased the attractiveness of LNG. And as a result, during the 3 quarters of this year, more than 71% of gas in Lithuania was imported via LNG terminal in Klaipeda. During the first 9 months of 2020, utilization of LNG terminal in Klaipeda reached more than 50% from theoretical maximum technological capacities, our FSRU. And due to favorable LNG market conditions, gas exports from Lithuania, to other Baltic countries and Finland have reached 7.8 terawatt hours, which is -- almost 8 big conventional cargoes of LNG. So if you compare those volumes, we are 2x higher than in -- comparing to the same period in 2019. Talking about the pricing of LNG. So very shortly, the average Dutch TTF index, a natural gas index, which is broadly -- which is most common in our region, as defining the price levels on the markets, Baltic states markets, Service index was equal to EUR 6.15 per megawatt hour in the third quarter in comparison to EUR 11 per megawatt hour the same quarter a year ago. Talking about the financial details or returns, you can see that yes, revenues are less, but only due to reduction of security supplement. The same can be said about the alternative performance measure EBITDA adjusted. So it's also main influence is, let's say, a main effect comes from the supplement reduction as well as net profit is affected by the same reason. We added a slide about comparison of our FSRU operated in Klaipeda utilization with other European terminals. So here, you can see that our terminal is matching the trend, so to say, of our LNG terminals operating in Europe. Yes, some of them are operating at higher capacities, but it's worth to mention that there are 2 types of both terminals -- of our terminals, which are operating in commercial conditions like ours, meaning we have a lot of customers. And let's say, we are deciding what kind of volumes to book and to re-gas into the grid, while some of terminals from this table, on the left side of the slide, we have one customer and committed volumes. And this percentage doesn't depend on a fundamental market condition. Talking about -- and following slide. So here, we have a reflection on our results from so-called nonregulated LNG activities. And those activities includes our, let's say, small-scale LNG reloading terminal in Klaipeda. Also operation of our LNG terminal -- operated by our terminal in Açu port Brazil and also other business development projects and other LNG consultancy services. So looking into numbers, I can say that, let's say, result is improving, and this was achieved by entering into agreements with all-state company, PGNiG regarding booking of capacities of small-scale LNG from the second quarter of 2020. And also, let's say, commencement of receiving revenues from our project in Brazil. So I will not [ state ] numbers we are seeing on a screen. So EBITDA is about -- is above -- is more than EUR 1 million, and revenues is EUR 4.3 million. Okay. Jonas, so I'm giving the stage back to you.

Yes, I will comment several slides related to financial ratios and our balance sheet structure. So in this slide, we provide financial ratios based on adjusted results. So for 2019 and 2020, we see a significant increase in gross profit and EBITDA margin. Ratios for 2019 are influenced by application of IFRS 16. And in 2020, additional impact comes from 2 things: first one, capitalization of FSRU as [ at 31st ] of December 2019; and the second one, reduction of security supplement, which has started from 1st of January 2020. So price earnings ratio decreased, while profit per share remained stable, and we can see a slight increase. Going to the balance sheet. We're going to have major changes in the structure of assets and liabilities. After the application of IFRS 16, the major portion of our assets consist of right to lease property and property dependent equipment, which both items decreased due to calculated depreciation. And property plant and equipment depreciation was partially amortized by finalized investments during quarter 3. Right to this property consists of FSRU independents lease liability until 2024 and the purchase option -- capitalized purchase option of FSRU. On the other hand, on the liabilities and equity side, the biggest portion also is lease liabilities from the same items. I mean FSRU lease until 2024 and purchase option of FSRU. Bigger changes can be seen in the balance of loans and these liabilities amount. So loan balance has increased as the company uses [ net loan ] to finance the reduction of security settlement and new tranches of the loan are drawn over the time. And noncurrent lease liabilities decreased as part of the liabilities are paid by the company. And also, we had an impact of U.S. dollar depreciation against euro. So now I'm giving back the word to Darius.

Okay. So very shortly about our investments. So company is continuing its, I would say, strategic orientation to improve our infrastructure. In Klaipeda port, talking about oil business and also continued investment in environmental projects, which would allow us to meet corporate social responsibility goals and to be more green, more efficient, in terms of emissions from our activities. Now here on this slide, you can see the graph where, let's say, investments of the company during the past 7 years are reflected. And during first 3 quarters of 2020, the overall amount is EUR 4.7 million. And as you can see, it's mainly oil terminals, let's say, upgrade, Klaipeda oil terminal upgrade. Investment program, which we are, let's say, implementing right now includes few components or few phases, a few improvements. One is expansion of Klaipeda to oil terminal tank farm, so-called. And here, you can see on right bottom, let's say, part of the slide fresh photo of our brand new tank farm. Some of the tanks are, let's say, designed to serve our strategic goals, meaning to attract additional products such as petrochemical, feedstock, some components, et cetera, and we are successfully utilizing those tanks already a year. And some of those tanks are designed for, let's say, attracting of additional customers and being capable to match, let's say, the market demand in terms of accumulating sufficient tanker cargo batches. New berths. It's, let's say, construction works are underway, and it's almost in the line with the time line defined in a project. And here, you can see a photo of the new berth. We will have -- after the implementation of this project, we will have 3 berths instead of 2, which allow us to have more flexibility and to provide more services to our potential customers. So probably that's all from our side, and we can turn to Q&A session.

[Operator Instructions] So it looks like we haven't received any questions so far. So let's wait for a couple of minutes, and we will proceed with the Q&A session. [Operator Instructions] So it seems that we have received some questions already. So dear, management, the first question would be, please describe your current relations with Belarusian clients in light of the political turbulence in that country?

Thank you for the question. As it was communicated a number of times before, we have a long-term agreement with Belarusian Oil Company, U.K. branch, and the contracts are based on the take-or-pay commitments from both sides. So, so far, let's say, contracts are valid. Terminal is delivering products. And turbulence, yes, turbulence is visible. It's worrying, but we are only service provider to, let's say, based on a commercial relationship. And I would like not to comment, let's say, political factors.

Another question that we have, looking for operational period for the next 5 years versus current establishment in green energy sectors, what are the main goals expected company's development?

A very good question. Thank you, and actually answer into this question is well reflected in our strategic document for 2030. And also based on a, let's say, agreement worldwide, both analytical sources and European Commission and other institutions, meaning that, yes, world is turning into much greener. And that's why we are focusing our development on LNG, which is so far the only one real alternative in the -- during transitional period significantly -- allowing significantly reduced emissions of greenhouse gases, NOx, SOx particles, et cetera. And trends and forecast is such that, yes, oil in various scenarios is seen as decreasing demand, but still demand during next 3 decades, mainly in emerging and developing countries. While LNG is a product -- or natural gas, is a source of energy, which will be increasing and increasing mainly in the transport segment -- in the shipping and in the heavy transport segment. So let's say, main goals -- our main goals or strategic goals are reflected in a strategic document. But shortly, we would like to operate at least 5 LNG terminals worldwide and be an investor in some of them or even all of them. Talking about oil, yes, that's why we are investing into more flexibility and also into environmental measures in order to have less emissions from our activities and in order to match changing mix of the fuels. And this is really visible already during 2020, where we have let's say, increase on renewable and biofuels transshipment and storage by times. So -- and our development, I think that's all probably. I hope I answered the question. And I'm convincing everybody to visit our web page and to go through our strategic goals where this energy transition and emissions or greener world in the future expectations and trends, they are reflected in our strategic document.

Another question that we have, do you still expect to extend your agreements for Belarus clients for the next contractual period?

Yes, we still expect.

That would be the fourth question for today. What is your base case expectations for quarter 4 financial result?

Thank you for the question. I would name it as restrained optimism. Since, yes, the COVID already affected, the market has adopt and our services portfolio also adapt to a new reality. Meaning, we are storing a lot of products, and we have, let's say, stabilized, as I've already been showing stabilized, let's say, the activities in oil segments. So I would say it's still optimism. It's still optimism. Yes.

Another question would be, regarding continuing dividend policy, what are your forecast of dividends for year 2020? Do you plan any changes due to changes in leading politicians' parties after elections?

Yes, the question is a really good one, but probably not applicable to us since, yes, the main shareholders states by holding 72%. But if you would look into our corporate governance structure, I think we are, let's say, not affected directly by the political changes. Otherwise talking about the dividends, we have a dividends policy, which is also -- let's say, you can find it in our website or probably in NASDAQ platform as well. And we don't see -- we don't have any plans on the dividends policy change during the coming year.

One more question we have, as there is strong demand for oil product storage services, have you increased prices for such services to cover lower revenues for transshipment?

And we are -- I would like to remind that in all business, we are operating in a competitive environment. And prices are defined, let's say, by the market. So I can assure that the pricing, which we are applying to our customers, fully matches the market levels. Otherwise, we cannot comment the exact numbers because it's commercial, let's say, secret and with confidentiality commitments-related information.

Will the pandemic and uncertain situation in Belarus adjust dividend policy in any way?

I would say the challenges, which are in the market, can affect dividend amount, but not the policies itself. But that's applicable to any company.

Why your preliminary monthly revenue indicators constantly under estimate revenues from commercial LNG activities?

Thank you for the question. I will comment on that. So announcing preliminary monthly revenues, we announced revenues for the company. And now we are reporting the group and the company results.

And it seems that we have the last question. It includes the URL, but I will read it without it. Could you please elaborate regarding your dividend policy changes more as current one on your web page, is valid only until year 2020?

In case -- to be honest, that was a surprise for myself, but in case of dividend policy, let's say, the validity of the document is still end of 2020, meaning we must renew it. But as already commented, we don't see any plans to, let's say -- or we don't have any plans to revise the policy principles, in general.

Thank you very much for the Q&A session. It's like we have covered all the questions so far. So as all the questions were answered on behalf of NASDAQ business, thank you, everyone. It was my pleasure being with you today. Recording in the presentation will be available at NASDAQ Baltic YouTube channel. Dear management, thank you for the presentation and the explicit Q&A session. And have a good day, everyone.

Thank you. Have a good day, everyone, and stay healthy.