AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning. Dear listeners, welcome to Klaipedos nafta meeting with investors. I'm Emilija from NASDAQ Vilnius, and I'm delighted to be the moderator for today's event. We will start with a presentation from the management, which will be followed by the Q&A session. [Operator Instructions] With that said, I'm pleased to introduce today's presenters: Chief Executive Officer, Darius Silenskis; and Chief Financial Officer, Mindaugas Kvekšas. Dear guests, please the floor is yours, and good luck.

Thank you for the introduction. And today, I will start the presentation of wrapping up our financial performance in 2021. Today, we are issuing the unaudited interim financial statements for the 12 months ended on 31st of December 2021. Later in March, we anticipate to issue the audited financial statements as well so -- and here today. We are going through the presentation as in the format that we are used to. And first of all, the mission and vision for the KN as a group, there were no changes as of this moment, and therefore, I will immediately go to the latest relevant announcements for the last quarter and some subsequent events that happened after the reporting date. So last quarter was quite busy with the changes in our corporate governance structures, and most of our news that we issued on NASDAQ were related to that. First of all, back in November, a new Board member, Mr. Guy Mason, joined our Board as an independent Board member. And later, on January 5, we received a formal notice from Mr. Bjarke PÃ¥lsson, who resigned from the Board on first of February. And immediately on 2nd of February, he was replaced by our new Board member, Mr. Edvinas Katilius. Later in April, we expect 2 new Board members joining and replacing our current Board members. So starting from 25th of April, we will have a new composition in the Board. And then also on 11th of February, we received a written notice from Ms. Laura Garbenciute-Bakiene about resigning from the audit committee, and the election of the new audit committee member has already begun. So also, despite the quite busy schedule with changes in the corporate governance structures, there were also some other significant news that happened. Back in January, we had the first bulk of bitumen transhipped from storage tanks to a tanker. This was quite the piece of news for us as this symbolizes that after we experienced a shock of lost Belarusian cargoes back in February 2021 that we have been quite busy finding new sources of revenue, and this is one good example of what we achieved during this period. And lastly, just last Friday, we achieved a very significant milestone in our long-term project of floating storage regasification unit acquisition. And last Friday, we had an extraordinary general meeting of shareholders that has adopted the resolution and approved the nafta's Board decision to acquire the floating gas storage regasification unit independents. So also the price was communicated for the first time when adopting the decision. Then going to the financial results. So already in -- while reporting on quarter 3 of 2021, we communicated about the single most significant event that happened back in third quarter. And on 31st of August 2021, we tested for impairment our property, plant and equipment, particularly the assets of Klaipedos oil terminal. And there were 2 main indicators that led to testing for impairment, so I will allow myself to remind about those. First of all, it was the long-term decline in revenue as a result of sanctions on Belarusian clients and then also lower transhipment of heavy fuel oil in the future as a result of expected investments by KN's key customer in Lithuania. So in the last quarter of 2021, while preparing the annual financial statements, we also revisited the impairment testing of quarter 3 and restated retrospectively the amount of impairment recognized back at 31st of August, and the main reason for restatement was the fact that we reconsidered the cash flows related to the long-term lease contract. And as a result, due to the revision of cash flows, the value in use of the assets has slightly declined. And due to that reason, we recognized the higher amount of impairment. Consequently, also the depreciation costs for the last 4 months of 2021 were calculated. So overall, looking at the total impact on our profit loss for the period. So we report a net loss of EUR 63.9 million. If we eliminate the impact of the impairment, which is EUR 45.2 million, then we are left with a net loss of EUR 18.7 million. And we're also here presenting the adjusted profit loss for the period, which eliminates the unrealized foreign exchange gains and losses and also the related deferred tax effect. And this is a more relevant key performance indicator for us, which shows less volatile financial performance of the entity. And if we see -- if you look at the adjusted profit loss for the period, we see that we actually we had a minus EUR 1.9 million in net loss. And also, of course, the impairment had no effect on the EBITDA presented here. So further details are available in the financial statements that we are issuing, and there is a more in-depth disclosure on the recognized impairment. And here in this slide, we provide an overview of the development in company's revenue, EBITDA and net profit loss throughout the period of 5 years. And comparing 2021 to 2020, we see that we had experienced a very significant decline in revenue, which was -- which is spread across 2 business segments. First of all in the oil terminal segment, we had a decline of EUR 10 million, which was mostly caused by lost Belarusian clients that stopped, as I said, in February 2021. Then the second segment where we had the decline in revenue is the regulated business segment, the LNG terminal segment, which is the decline is mostly explained by the excess net income that we earned in 2020, but we'll have to repay it. Most of that amount is already being repaid in 2022. And in 2021, we had the opposite situation where we are in the regulated business segment, we had a net excess cost, meaning that the costs are higher than we are earning in regulated revenue, and this net excess cost shall be compensated to us in the future periods starting from 2023. And then about the EBITDA. The EBITDA declined by EUR 22 million in comparison to 2020. Well, the reasons for decline in EBITDA are quite similar to those, which I mentioned for the revenue. And EBITDA for the oil segment declined by EUR 11.7 million. And of course, as I said, it is mostly affected by a decline in revenue due to Belarusian clients and also what we experienced, especially in the last quarter of 2021. This is a significant increase in variable costs, driven mostly by unusually high market prices for energy products. Then also, in the regulated business segment, we had a decline of EBITDA by EUR 11.2 million, which is mostly driven by those temporary regulatory differences that I mentioned, those net excess incomes and costs but also a significant increase in emission allowance -- in the prices of emission allowances also has deteriorated our financial performance in this respect. Yes. And on the bright side, if I may say so, we saw an improved financial performance in the commercial LNG sector, and this is a very positive outcome and as commercial LNG sector has an increasingly important spot in our strategy, and it's increasingly important for the future of KN. Now talking about the net profit to loss, especially about the non-adjusted net profit and loss. We see that it is a very volatile line, and there are 2 reasons why we see such a change, just such a radical change comparing 2021 to 2020. And this is driven by the unrealized foreign exchange gains and losses that we had both in 2020 and 2021 and also the amount of impairment loss that I already introduced. So just a short reminder that our alternative performance measure of adjusted net profit loss corresponds or reflects the adjustments made in accordance with our dividend policy. And the adjusted net profit loss shows our net profit loss that is adjusted by eliminating these unrealized foreign exchange gains and losses, the related deferred tax impact and also the unrealized gains and losses from financial derivatives that we used in 2021 to hedge against the foreign currency risk. So now we overview the financial performance on a quarterly basis. And as you might notice, revenue was quite stable throughout the year, which indicates that we managed to stabilize the situation, and we can already identify positive signs of recovering revenue. Because back in first quarter of 2021, in January, we still had some revenue from the Belarusian clients. In the second quarter of 2021, we also had some one-off sales. So if you look at the last 2 quarters of 2021, we see that not even -- the situation not just stabilized, but it started recovering and improving. However, the EBITDA for the last quarter was slightly lower than it was for the third quarter, and there are 2 reasons for that. Both are related to the variable costs. First of all, due to some seasonality effects, variable costs increased due to higher quantities of energy products consumed, but also the significant increase in the energy prices has driven our variable costs upwards, and therefore, we see a decline in EBITDA to some extent. However, we expect that despite all the situation in the markets that sometime later in 2022 or 2023, when the situation with the energy prices becomes more ordinary, if I may say so, we should see an improvement in company's profitability. Yes. So well here, we are basically introducing the financial performance across the 3 main segments of our company, and the most important probably piece of information here is the significant difference in net profit loss comparing the IFRS-based financial performance indicator versus the adjusted net profit loss, and difference is almost of EUR 17 million, and this is mostly the effect as I said, because of the unrealized foreign exchange gains and losses. Yes. So further on, I shall review now the key developments across the different business segments. So here, we see the financial performance of the oil revenue segment, oil terminal segment. And I've already introduced that the impairment was the most significant one-off event that happened in 2021, and we see its impact on the adjusted net profit loss. However, well, the gradual increasing global liquid fuel consumption is also giving a positive impact on what we see in our financial performance. And already in the last quarter of 2021, we saw an improvement in the transshipment volumes in Klaipedos oil terminal, and when December was the best month of the year in respect of the transhipped volumes. So we could expect similar trends in 2022 if the situation remains as it was back -- at the end of 2021. However, the oil product markets remained in backwardation, and this made a negative impact on our storage volumes. And until the end of the year, it remained quite limited. And as I already mentioned, the first bitumen cargo shipment happened in 2021. And yes, as I said, this was a positive sign in respect of how much focus we are paying to finding new sources of revenue and diversifying our sources of revenue after the shock of lost significant revenue due to Belarusian clients. And in the end of the quarter 4, the company signed a contract for transhipment of one more new product, the crude oil of Lithuanian origin, which will become effective in 2022. Then the regulated business segment. And while the average utilization of Klaipedos LNG terminal was quite low, however, it was in line with what we saw as a trend for utilization rate in other European terminals, which also declined on a year-on-year basis. And during 2021, we have 15 large scale, 54 small-scale cargoes and 2 cargoes for reloading operations. So the overall number of cargoes was quite similar to what we had in 2020, where we had 73 cargoes. However, the regasification and reloading quantity was significantly lower. However, it had little effect on our financial performance in respect of performance that is adjusted to take into account temporary regulatory differences. So yes. And that TTF natural gas index was equal to EUR 79.2 per megawatt hour versus the price of just EUR 13 a year ago. So this just not only affects the supply or demand of LNG products for -- in our market, but it also has a negative effect on some of our variable costs in other segments. Now the segment that I said -- showed the most positive change in comparison to 2020 was the commercial LNG sector, where our EBITDA significantly improved from EUR 1.3 million in 2020 to more than EUR 2 million in 2021. And this is mainly driven by the fact that we are both entering the new phase of the terminal operation in Brazil, but also introducing some efficiency measures that allow to achieve a better result. And our commercial LNG activities include a small-scale LNG reloading station in Klaipedos, so the operation of LNG terminal in Acu Port in Brazil, and some other business development projects and other LNG consultancy services. Yes. Then moving back to KN group's key performance indicators. Well, I wouldn't stop much here because those significant events that happened in 2021, like the recognition of an impairment, made the greatest impact on key performance indicators and some other factors. As I said, the situation was quite stable throughout 2022. But relative to performance in 2020, of course, the 2 factors of the recognized impairment loss and also due to a decline in revenue, mostly because of the lost Belarusian client made the greatest impact, not going into further details here. Then the overview of our balance sheet or the statement of financial position. The decline in property plant equipment is quite evident, and it is all explained by the recognition of the impairment loss. And the same factor was important for the decline in right of lease property, which is also affected by the depreciation in 2021. Concerning cash and cash equivalents, the increase was mostly driven by short-term deposits that expired in 2021, and this also corresponds to the decrease in other current assets. Concerning increase in loans, this increase is because -- due to financing of restructuring mechanism of security supplement in the regulated segment. We are taking out loans of around EUR 27 million each year, so we shall see an increase in loan as well in 2022 in that amount. So this finalizes my presentation and my overview of the financial performance in 2021, so we shall move to the question part.

Yes, indeed. So thank you very much for the presentation. And as you've mentioned, now we will proceed with the questions. [Operator Instructions] So the first question that we received is as following, when Klaipedos nafta will resume publishing monthly results, please? It has been stopped since November 2021. Thank you.

Thank you for your question, and thank you for noticing that. In fact, we thoroughly considered changing the practice of reporting on a monthly basis. But since our business is quite stable, we came to the conclusion that it brings little value to our investors, the analysts and to market participants for issuing the very short and very brief overview of our financial performance on a monthly basis. Instead, we shall keep the quarterly webinars and reporting on a quarterly basis. I think it allow us to achieve a good balance of keeping our stakeholders informed but also providing -- and also providing the piece of information that is the most valuable, most relevant. And as we see it, it is not becoming outdated.

Thank you very much. We are still waiting for more questions to come in. [Operator Instructions] It seems that there are no other questions. So thank you all on behalf of NASDAQ Vilnius and Klaipedos nafta. It was our pleasure being with you today. The recording of the presentation will be available in the NASDAQ Baltic YouTube channel. Have a good day, everyone, and goodbye.