AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning. I would like to welcome you to Klaipedos nafta meeting with investors. I'm Emilija, an account manager at NASDAQ Vilnius, and I am delighted to be the moderator for today's event. [Operator Instructions] With that said, I am pleased to introduce today's presenters: the Chief Executive Officer, Darius Silenskis; and the Chief Financial Officer, Indre Kisieliene, Dear management, please, the floor is yours.

Good morning, Emilija. Good morning, investors and those who have joined today's presentation of KN first half of the year results.

Good morning, everyone.

So as usually, we will start from reminding what is mission and vision of KN Group companies. They remain the same. Our mission is to ensure safe, reliable and efficient access to global energy markets by sustainable development, investment and operation of multifunctional terminals worldwide. And our aim remains to assist our customers on cleaner energy transition and to maintain the competitiveness. Vision as well is still actual and applicable. We would like to become top LNG terminals operator worldwide and the most competitive oil and refined products handling hub in the Baltic region. So next slide. Since we are still in the COVID pandemic threat, and as we can see worldwide third or even in some countries, even fourth waves raising again with new cases of COVID. So company is still maintaining its focus on health and on the continuity the businesses and activities in the light of this challenge, global challenge. So probably main message which I would like to say today is that companies have, let's say, significant amount of employees who has got full immunity. And approximately, it's about 2/3. And to be more precise last week, we were checking, it's about 76% of those who have -- both for, let's say, vaccinated and immunity. And of course, COVID pandemic is still affecting, let's say, our mainly oil business because of, let's say, interruptions in mobility, let's say, refining margins are still, let's say, not so stable as we used to be before the pandemic times. So talking about the main announcements, I will not read this slide, but I think the main messages are related with the dividends, both what we distributed for the 2020 result and as well the latest and freshest news that, yesterday, our Board of the company has approved the renewed dividend policy. So for the 2020 results, KN has paid dividend equal to EUR 0.098 per share, and total amount of the dividends distributed to shareholders amounted EUR 7.5 million. Another important message is to underline that, let's say, our FSRU customers list has been supplemented by one more international company, by one more major company, by Norwegian energy company, Equinor SAA. And as well, I think it's worth to underline that it's already second time when company prepared Social Responsibility Report for 2020. So report is prepared following the international Global Reporting Standard, GRI. And you can find a report by clicking link, which is here in presentation or even by visiting -- or by visiting our website. And, of course, I'm talking about the dividend policy. There was a lot of questions during past few, let's say, webinars. So finally, we have the new version approved. And probably the main message is that, let's say, dividends for years 2021 to 2024 is and will be calculated by eliminating from the company's distributable profit, unrealized foreign exchange rate impact and other unrealized gains. So talking about the main highlights. The first of those highlights in this slide are about, let's say, efficiency and margin protection measures, which company is doing. So we are successfully implementing and continuing implementation of the LEAN method in our processes. So we already, let's say, certified and established 3 of them, Asaichi, 5S and Kaizen TM. And now we are starting to implement VACA method, which as well will improve our processes and will bring some benefit back to our bottom line. And also, probably this name is not well known to -- not to -- not for industry players and experts. But we thought that it's worth to mention that this efficiency improvement, let's say, tools are not limited to what we've already done. We started as well -- we concluded an agreement with Solomon Associates, which is actually probably the biggest and the most known company for benchmarking of the terminals and as well the refineries around the globe. So we will revise our business processes. We will benchmark that we are doing fine in some particular areas of our performance. And of course, this is all for further efficiency improvement and competitiveness improvement of KN terminals. Another important message is that Mr. Piotr Naimski, representative of Polish government, strategic energy -- and responsible for strategic energy infrastructure visited KN terminals, including our FSRU together the Minister of Energy, and we have discussed the energy cooperation between Poland and Lithuania and the possibilities of the lateral economic operation between Lithuania and Poland. As you probably know, end of this year, connection -- gas grid connection between 2 countries is planned to be open. So it's really important for us to -- let's say, to discuss with Poland as a potential partner on the exchange of natural gas between our markets. Of course, I'm proud to announce that despite of the challenges that each company is facing, presently, we've been announced as the #1 employer in logistics segment by the business magazine Verslo žinios, business news. And we -- among all the companies which have evaluated, we took the fifth place. Another important message is related with our ESG or environmental social governance areas of our activities. So Minister -- Environmental Minister also visited our oil terminal, where we have presented our latest investment into, let's say, environmental sustainability, new air pollutant treatment plant which cleans, let's say, pollutants collected from oil product tanks and railway loading platform. Why it is important? It is important because [Klaipeda] terminal is located within the city. So let's say, we are giving our contribution to the surrounding societies and to the city. So let's switch to presentation of a main topic for today of the financial results, and I will ask Indre to make a brief summary of how we were doing.

Thank you, Darius. Let me introduce financial results of first half year of 2021. So here are our presented financial results on a quarterly basis. So in Q2, as well as in Q1, revenue level is at the same. And we see the decrease comparing to the quarters of 2020. So net profit loss is impacted by foreign exchange rates. And you can see that net profit adjusted for Q2 and Q1 is balancing around 0. And for more details, let's move to half year results. So revenues of half year 1 2020 have decreased in EUR 9 million compared to the same period of last year. And the main reason for the decrease is the loss of Belarusian cargoes starting from February of 2021. Also, revenues in regulated activities in LNG parts has decreased also. And the main impact is that quite a significant amount of LNG surplus, which will be returned to consumers starting from 2023, has been collected in 2020. That's why the level of 2021 when compared to previous year is lower. Also, LNG security supplement amount in 2021 has been reduced in EUR 1.9 million, and the impact to half year is EUR 1 million with a surplus of the first regulated period, which happened in 2019. Yes, the decrease in EBITDA is also noted. As I already mentioned, the main impact is the decrease in revenues. Net -- we have a net loss of EUR 6.8 million, and it is the effect of EUR 9 million of loss of foreign exchange rates. Let me remind you that it is -- the products arise from IFRS 16 requirements and capitalized assets and liabilities, which most are denominated in U.S. dollars in KN. Also, we are calculating credit tax assets and the liabilities, which has significant impact to net profit, and we have financial derivatives. So what the company is doing is calculating adjusted net result when unrealized ForEx rising from IFRS 16 is eliminated as well as respective impact of deferred tax, which is calculated to 15% from unrealized parts, and the impact of financial derivatives is eliminated also. So we have net adjusted loss of EUR 2,000 for first half year of 2021. And let me remind you that the company is calculating dividends starting from 2020 by -- from net profit loss adjusted, and it is based on dividend resolution, which has been amended in April 2021, and it is in line with the approved amended dividend policy, which has been announced yesterday. I would also like to say that net profit loss adjusted has been impacted by the increase in environmental pollution expenses, and significant increase in permit prices in 2021 has made a huge impact. It's almost EUR 2 million compared to 2020 during the first half year. Darius presented the structure of revenues, EBITDA and net profit loss on a segment basis. So in the first block, you can see IFRS based. And in the second part, you can see adjusted results. So from the diagram, it's obvious that adjustment comes from regulated LNG activities, and it comes from financial activity parts that I have already mentioned. Yes, and we are happy to announce that from commercial and commercial LNG activities, the revenue part has increased in 2021, and this segment has become profitable and started to generate returns. So Darius, I will pass forward to you.

So thank you, Indre. Talking about each segment separately. So as it has been communicated many times before about the COVID pandemic effect and geopolitical effects to our activities, so as you can see, we have, let's say, accounted during first half of 2021 loss of EUR 635,000 in our oil terminal segment. The reasons are listed on the left side of the slide. But in general, as we already said, first of all, restrictions around the globe due to COVID. And as a consequence, negative refining margins is influencing the still reduced amount of cargoes which are being exported to the seaborne markets. Talking about the Belarusian situation, yes, we have, in June, let's say, a new package of the sanctions applied to the Belarusian regime. But it's worth to mention that for KN oil terminals, actually, this effect of the sanctions materialized even much earlier in the year. So starting from February, we are not having any revenues from the Belarusian, let's say, cargoes. And of course, as a consequence, because we don't carry part of let's say, conventional flow, we were looking for opportunities in the market. So it's worth to comment briefly how we were doing with that. Redundant capacities which appeared, let's say, as a consequence of loss of Belarusian cargoes, the potential, let's say, utilization of those capacities is entrance of storage market. Let's say, during the first half of the year, this market was, let's say, influenced -- or demand in this market was influenced by backwardation on oil products on markets. So we had a bit less demand as it was expected. But nevertheless, we were quite successful on renting our tanks and capacities for storage of the gasoline with one of the most active, let's say, gasoline traders in the region. And also, we have extended this operation just recently by adding the full oil storage services. So let's say, mitigation plans are in action, but the market, let's say, consequences is not the best presently. So let's hope we will have another. And then let's say, other opportunities within, let's say, remaining year. Other, let's say, flows of revenues, which is worth to mention is that biofuels is continuing, let's say, bullish trend. You probably don't remember, but last year, we have -- we had a record growth by 6 or 7x. I don't remember exactly. So this year, it's continuing, and comparing even with the last record year, we have, let's say, about 63% more transshipment of biofuels during first half of 2021. Also, we added into our portfolio contracts and activities, respectively, related to imports of FAME, which is, let's say, as well biofuel or feedstock for biofuel; and monoetilenglicol, which is used for PET production. It's actually a petrochemical market product. And also we signed a contract for handling of bitumen, which is also a new activity for our terminal, and we are planning to start delivery center and shipment activities in August. Talking about our other segments. So our LNG, our regional LNG activities are mostly -- were influenced by the index pricing and supply-demand balance around the global LNG. So summarizing Klaipeda LNG terminal was utilized by 42%. And actually rate is in line with utilization of other European terminals during the same period. Why it is slightly less comparing to 2020? That's because, let's say, higher LNG demand in Asian markets, particularly in China, have been recorded and, of course, record low injections to European gas storages impacted this lower utilization rate. So LNG security supplement reduction impact is minus EUR 13.4 million. It remains the same or approximately the same. Just to remind that Klaipedos nafta is implementing, let's say, the security supplement reduction. So to see project starting 2020. Talking about the amount of cargoes. As you can see, it's quite similar to what has been transhipped regas during the same period 2020, 2 more cargoes, but here it's very important what is the size of the cargo. So during half -- first half of the year 2020, we had 9 large-scale deliveries, 26 small scale, and we have performed 2 cargo reloading operations, ship-to-ship operations of LNG. Talking about the market shortly. So natural gas consumption in first half of the year in Lithuania increased by 17%. So imports by LNG terminal accounted about 64% of entire supplies to the Lithuanian market. And talking about the pricing index, it remains quite high. So Dutch TTF index was equal to -- the average index was equal to EUR 19.5 per megawatt hour while during the first half of the year last year, it was even more than twice cheaper. The average was EUR 9.2 per megawatt hour. So talking about our commercial LNG activities, which includes our global LNG development projects and, let's say, operations of our small-scale LNG infrastructure in Klaipeda , so as Indre already mentioned, we -- during the second quarter -- sorry, during the first half of 2021, it's a breakeven period since we came finally with net profits into our P&L from both activities. And we, as already, it was mentioned about EUR 129,000 of net profit has been gained. So talking about further development. So we are on the same strategic line. We are looking for potential, let's say, projects, terminals and investment opportunities globally. So focus -- regional focus remains the same. So mainly it's Europe, Southeast Asia, Middle East and South America. So that's all probably about main messages from all our business segments. Indre, I'm giving back to your presentation of profitability and market value ratios.

Thank you, Darius. Here are those main financial ratios, the comparative periods in the first half year. So you can see, I suppose already mentioned many times in previous webinars, that EBITDA margin has changed from 2019 due to IFRS 16 as the accounting of lease payments has been changed based on IFRS 16 requirements. Those have been capitalized, so not directly accounted in P&L. So the effect comes here and seen in EBITDA margin. As well as -- ratios are presented for the same period. You can see price earnings ratios. Those 3 blocks of ratios are calculated based on moving annual average method. And earnings per share are calculated based on profit, as suggested of the reporting period. So also, please be noted that all the ratios here are presented based on net profit loss adjusted. And here, let me briefly comment on the structure of balance sheet. So total assets has decreased in approximately EUR 24 million. And the main reason is the depreciation of property, plant and equipment and right to use assets. Also, we have changes in cash and cash equivalent balances at the year-end 2020. The company and the deposits in the current asset side, and it has been returned to the company, and now we can see it in the cash equivalents. So cash also has decreased as dividends the EUR 7.5 million has been paid in 2021. Noncurrent lease liabilities has decreased also mainly due to lease -- due to finance lease obligations decrease, and net amount of loans payables have increased to EUR 5 million. So as Darius already talked, let me remind you that we have LNG secured to supplement production projects, and it means that the company has loans from Nordic Investment Bank and EUR 26.8 million per annum additional. Other noncurrent liabilities has reduced due to decrease in fair tax liabilities amounting to EUR 1.3 million, and also other liabilities has reduced mainly due to the decrease in payables and the changes in value on financial derivatives. So equity has reduced, respectively, due to mostly dividend payments and accumulated net profit.

Yes. So probably that's it from our side, and we can switch, Emilija, to questions, and that is the first part.

[Operator Instructions] The first question that we received before the webinar is what are the last projects implemented by Klaipedos nafta with your own or EU funds.

Yes. Thank you for the question. It's quite extensive because it consists from 2 parts, so meaning with own or EU funds. With own, meaning everything which -- all the projects which we have done recently. So talking about the biggest own, let's say, financed projects, I think it's reconstruction or construction of additional jetty at Klaipeda oil terminal; and, let's say, expansion, the last phase of the expansion of our, let's say, tank farm, adding petrochemical and let's say, more flexible tanks for our oil terminal strategy implementation. Talking about projects which has been financed or granted by European funds. The last one was already mentioned earlier today. It's a vapor collection unit and filtering units from railway trestles and heavy crude oil tank farm. And this project was partially funded by KN and by the environmental projects management agents in Lithuania. Project is actually on a testing -- or infrastructure is on a testing phase. And then final dunes of it has been done. Value of, let's say, this project reached about EUR 1.4 -- EUR 1.5 million, from which about EUR 130,000 were funded by EU funds. So that's probably it with this question.

The next question is as following. What acquisitions are planned for the next 2 to 5 years in oil and LNG segments?

It's worth to mention that company presently is under a revision phase of our Strategy 2030. So probably more precise directions of potential M&A activities will be identified during Q3 and Q4 of the year. But talking about the nearest acquisitions, which we are planning to implement, is, of course, acquisition of FSRU, which, as you know, until 2025 is leased from Hoegh, Norwegian company. And of course, as a part of our strategy, we are looking into various opportunities including M&A opportunities in the field of LNG projects worldwide with the main focus on floating technologies, where we have, let's say, a competitive edge and where we can capitalize our know-how accumulated the implementation of Klaipeda [indiscernible] project.

Also another question, which is, to what extent does the strategy of Klaipedos nafta relate to that of Ignitis Group? Does the implementation of Klaipedos nafta strategy depend on the success of Ignitis Group? What is the economic relationship with the company in question?

Thank you for the question. So I think, first of all, we should start from the basics. Klaipedos nafta and Ignitis Group has different representatives of main shareholders where Ignitis Group is reporting to finance -- Ministry of Finance -- well shareholders Ministry of Finance, in KN case, its Ministry of Energy as a major or main shareholder. So talking about the calibration of strategy, so to say. I think we are a bit different nature companies where KN is operator of logistics infrastructure and is a part of the supply chain of the liquid energy, let's say, in the shape of oil products, crude oil itself and liquid natural gas. So strategy is, and I believe, remain different. I think the directions of, let's say, our strategies, which can be common is definitely a vision on a greener, less pollutive fuels part, where Ignitis is, let's say, already defined what are all directions. We are, as already mentioned, on the way and in progress of finding our additional legs or, let's say, activity directions in the greener topics such as hydrogen and such as maybe CTS or other alternatives. So some part of our updated strategy definitely will have some, let's say, similarities or some connections to Ignitis Group. Nevertheless, as I already said, we have different nature companies and strategies is different. Another part of the question was what is economic relationship with the company in question. So Ignitis Group has a few or Ignitis Group and KN has few crossing points and a few angles of a commercial relationship. So first of all, Ignitis Group is a supplier of -- let's say, of energy to KN, was, is now we have some competition in that market. But in general, from time to time, we are concluding transactions with Ignitis Group on acquisition of electricity or gas. Since it is treated as a related counterparties, you can find a detailed information in our publicly accessible sources such as our website. And of course, Ignitis Group, on the other hand, is a customer of ours and a client to the FSRU infrastructure. And actually Ignitis Group is a client, which is a dedicated supplier of LNG to Lithuania. So this is an answer from our side.

[Operator Instructions] So let's proceed with the fourth question, which is when is it planned to purchase the FSRU from Norway and of what capacity.

Thank you for the question. So it's worth to clarify here that there is no plan to buy Norwegian or other origin FSRU. We are now performing or starting public -- or already started public procurement, international public procurement process. And the goal is to seek for -- and to seek and select economically and the most advantageous offer of FSRU. And of course, we have a so-called buyout option with a Hoegh with the Norwegian FSRU supplier in the time charter party agreement. And as I already mentioned about -- in acquisitions part or question part, KN will become the owner of FSRU latest in December 2024. Side of FSRU, as it is described in the conditions of the public tender, they will not be lower than the 150,000 cubic meters, and other technical characteristics of FSRU should remain same or similar or better as they are today. But all the details are also available in a publicly accessible sources because it's a very big and international acquisition process with a lot of regulations. So if you need some additional information, you can find it on our website, about technical parameters, about the criteria, about what is related to this acquisition.

And could you please comment if the pension funds invest in Klaipedos nafta? And if so, which countries?

Yes, we checked a bit. So yes, pension funds as well as financial institutions among our investors or shareholders, and most of them are from Baltic region.

To what extent is Klaipedos nafta able to adapt its existing infrastructure to hydrogen? Could LNG terminal infrastructure be adapted for that?

Yes. Thank you for the question. I will start from, let's say, physics, probably physical differences between the liquid hydrogen and LNG. So it's completely different molecule. It's completely different, let's say, source of energy. And the question about possibility to adopt LNG or liquefied natural gas infrastructure is simple and straightforward. No, it's not suitable. Why? I just will give a few examples. First of all, liquid -- temperature of liquid natural gas is about minus 160 degrees, while temperature of liquid form of hydrogen is 250, around 250. So technologically, LNG infrastructure was not built for that and cannot resist more cold or more cryogenic temperatures. Second of all, I would mention the size of the molecule and the difference is as well significant. Talking about density of the liquid LNG, it's 450 kilograms in the cubic meter while liquid hydrogen it's about 70 kilograms per cubic meter. So it's significant differences. And the answer here is no. Talking about adoption of, let's say, our jetty or the pipeline which we operate from FSRU to gas metering station, which is about 8 kilometers. Yes, theoretically, we have some CapEx investments we can adapt but not for pure hydrogen transportation but for some part of, let's say, our share in natural gas. But still, it's not possible without the technological changes and investments into infrastructure. And the percentage, there's various opinions. Percentage can be up to 10%, but some scientists are saying, no, it should be less than 3%. And it's not only a problem about the possibility to adopt infrastructure. The problem is if you're adding the hydrogen molecule into the mix of natural gas, what about consumption because you should adopt them not only the logistics or grid infrastructure. You should adopt as well the, let's say, end users' infrastructure or power generation or heating generation whatsoever.

[Operator Instructions] So the seventh question that we have is what age of natural gas has begun in Africa with limited infrastructure? Does Klaipedos nafta have plans to invest in Africa?

Yes. Thank you for your question. Yes. So now a lot of regions are extracting natural gas. So you have Africa. Maybe it was the first, I don't know exactly, but nevertheless, our strategy, as already mentioned, in the global LNG development includes all of the globe, all the geographical regions, of course, subject to, let's say, country crediting and, let's say, even safety risks. So let's say, all the projects which meet the appetite of the mentioned, the risks, is subject to, let's say, to our decision.

We just received one more question, which is as following. Any chance that transshipment FRM BNK can resume in the near future, please?

Can you scroll one more time but -- okay, you can see it now on the screen. You know this correction probably is more political in nature, not economical in nature, the infrastructure, which we operate in. And of course, we can physically restart transshipment of any product which can be produced in Belarusian refineries. But as I mentioned, it's a question of political decisions, and it's a question of where Belarus will turn in the nearest future, with the existing sanctions, no. If situation changes significantly, yes, of course, we are able and capable to provide services for transshipment of any product out of Belarus.

So as all the questions are answered, on behalf of NASDAQ Vilnius, thank you, everyone. It was our pleasure being with you today. Recording of the presentation will be available in the Nasdaq Baltic channel. Thank you, dear management, for the presentation and a very interesting Q&A session. Have a good day, everyone, and goodbye.

Thank you. Goodbye everybody.

Thank you. Have a nice day.