AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning, dear listeners. Welcome to Klaipedos nafta Investor Conference. I'm Emilija from NASDAQ Business and I'll be moderating today's event. We will start with the presentation from the management, which will be followed by the Q&A session. Please be informed that this webinar is being recorded. As always, I encourage everyone of you to ask questions during or after the presentation in the Q&A section. 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.

Good morning to everyone and good morning, Mindaugas. It's the first time for us doing a presentation in Zoom platform. I think it's really good choice of NASDAQ because that extends opportunities for a wider list of participants to join and then to listen for the main messages. And yes, today, as usually, we will present the main highlights for quarter 1 of 2022, and we will share with all of you financial results of the company for the same period. So I will start from main announcements from the last webinar, meaning using the time line, not only in Q1. On 3rd of March, we probably were the first company in Lithuania, which denied acceptance of Russian molecules of liquefied natural gas in our terminal by reacting to the war in Ukraine and by not supporting any Russian revenue generation, at least here in our infrastructure from LNG shipment. So further on, what was happening and actually, it was really quite an intense period for KN as operating a critically important infrastructure of natural gas supply. So it was intense period and we on 17th of March had already booked all our FSRU terminal capacities for the current gas year, meaning until end of September 2022. And accordingly, the total amount of, let's say, re-gasification forecasted to this period -- even this period will reach almost 24 terawatt hours. Another important thing to say that we have agreed with the regulator and had collected all needed approvals on amending our annual capacity allocation procedure and principles applied for our LNG terminal capacity allocation for the last quarter of 2022. So later on, we have also agreed with the regulator on a revised tariffication so to say, of the regasification services. And as of May 2022, the tariff for -- the variable tariff component is defined in a level of EUR 1.19 per megawatt hour. Of course, sustainability, social responsibility report, as usually has been released. So I'm recommending our investors to get acknowledgment that the content of such this document because I think nowadays it's especially important to have not only, let's say, figures, but as well understanding on what company does in the area of ESG and social responsibility. So another important message to say that on 8th of April, our case regarding shares to our employees as a part of remuneration of previous periods, it has been dismissed by the Šiauliai Regional Court, and the prosecutor appeal -- provided actually appeal on a higher, how to say it, court extension in this still case. So we also must say that I think it's important event for entire company and investors. We have completely new Board of Directors with Edvinas Katilius chairing this new Board of Directors, let's say, for the oncoming 4 years. I'm really glad the competencies which we brought, really glad the diversity which we have in our new board, and I really believe that we will have smooth, let's say, smooth cooperation and smooth work together in order to improve our returns to all our shareholders. And another important thing regarding capacity allocation for our LNG terminals, so we have approval from the regulator applicable for 2020, if we -- reservations of, let's say, regasification capacities. So those are the main announcements, which were at least a few other highlights to be mentioned. So we took the 33rd place in the top 500 ranking of Lithuanian business leaders, which is not so bad for the company size like ours. I think it's quite a good result. We have reached 1,500 trucks loaded in a small-scale LNG relating station starting 2017, meaning that this infrastructure works quite well and our strategic partner utilizes our capacities for the supply, mainly of Northern -- Northeast region of Poland to the old grid customers. Yes. And finally, we finalized the construction together port authorities of jetty, additional jetty in our Klaipeda oil terminal. So it's important and significant achievement because it gives more flexibility for our customers. And this jetty is really actively used for the discharge and loading of various tankers, including chemical ones from the very beginning of when it became available. And another important thing to mention is that the government of Lithuania approved that our FSRU Independence, which ownership will pass to KN starting 2025, will be registered at Lithuanian ship -- flagship register. So I think it is important since this FSRU is a symbol of our independent -- energy independence. So quite a big achievement. And another significant event which took place recently is an opening of a GIPL gas interconnector between Lithuania and Poland, which in the light of recent challenges and changes of the gas supply due to Russian war in Ukraine gives additional security to -- not only to Poland but as well Lithuania and even Baltic markets. So those are the main messages in the slide, important things to address and to mention. But immediately from the, let's say, first days of newly selected the Board of Directors came into -- came in, so we started the process of KN strategy -- a new strategy actually in preparation for the long term. And the idea is not only define the exact goals for our core businesses, which we are doing now, but also to define KN plays in the future energy world and actually a pathway how we get to the net zero, and it is a top priority for all my team for remaining 2022 year. So -- and as I mentioned, projects has been already initiated and started. Talking about the war impact, I think it's important to share with investors how it has impacted us so far. So no negative material impact has been visible and now some indications on impairment arising from revised business consumptions is appearing. Of course, we are spending a lot of our time and resources to strengthen our operational security, cybersecurity and continuity of our operations. So this is under control. And management is working on newly appeared opportunities in terms of global LNG development. And as you -- most of you know, Europe is actively looking on alternative supplies and to become less dependent -- at the end, completely independent from the Russian gas supplies. So our know-how and, let's say, our capabilities allows us to think that we might have some success in helping one or other country to build infrastructure, which we operate -- which we are operating and which we know how to build. So this is one. And another thing, it's not written in this slide, but we are quite actively working on, let's say, opportunities to supply petroleum products by using our infrastructure to the Ukrainian market. Talking about our regional development of LNG, so I briefly mentioned. nevertheless, let's say, we have a quite active regasification activities and actually operating on a maximum regime from beginning of April. This will not have a significant impact on our financial, so-called, normalized and adjusted profit. Why? Because it is a regulated activity and the differences -- or the surpluses are balanced later by a regulator. So this is a key message from myself, and I would like to pass the page Mindaugas to go more into more details for about the figures.

Thank you, Darius. So it's a great relief to see the huge efforts of our team finally paying off. And we believe we have seen the beginning of a stronger positive trend of recovery in the financial results starting from the beginning of this year. While last year throughout the fourth quarter, we have seen the financial performance that was relatively stable. Finally, this quarter, we are seeing, as I said, a stronger trend and a visible improvement in all key financial indicators, which improved both in comparison to the last quarter of 2021 and also in comparison to the first quarter of previous year. So the non-adjusted net loss, which is reported according to the requirements of IFRS, was again impacted by further depreciation of euro against the United States dollar, and we incurred an unrealized foreign exchange loss of EUR 4.2 million, less deferred taxes. Such losses arising from a lease liability for FSRU, floating storage regasification unit, that is denominated in the United States dollars. And since these [three] payments are fully compensated by the regulated income, either of the current year or the future periods, therefore our approach is not to hedge against this risk in 2020. Worth reminding that in 2020, we had the opposite situation and the company recognized significant unrealized currency exchange gains due to the same reasons. And so we also measured, for the management purposes, the indicators that take into account so-called temporary regulatory differences, and this is a common practice among other regulated, the enterprises operating in the energy sector in Lithuania. And these temporary regulatory differences, we take into account such -- they are adjusting for us amounts such as costs, which were incurred in excess of revenue in the regulated LNG terminal segment that should be compensated into future periods. But it could also be the revenue in excess of costs incurred that are eligible for compensation. Such excess revenue should be paid back in the future periods. Accordingly, in the first quarter of this year, the EBITDA adjusted for such temporary regulatory differences would amount to EUR 8.1 million. So this would be a slight reduction of the normal non-adjusted EBITDA by EUR 0.3 million. And while last year, our performance was significantly affected by recognition of huge impairment loss for the Klaipeda oil terminal assets, and despite the recent terrible events in Ukraine and long-reaching consequences, we have not identified as Darius mentioned, any indications of additional impairment at the recent reporting date for neither of the segments where we operate. And then how the individual segments were performing in the first quarter of this year in comparison to the last quarter of 2021. So overall, revenue increased by EUR 2.4 million, and as I said, in comparison to the last quarter of the previous year and EUR 0.5 million comes from the oil terminal segment, mostly from further diversification of the client base and also the trend shipped goods portfolio. and EUR 2 million of additional revenue comes from LNGT as regulated revenues. In respect of EBITDA, the increase -- or the improvement was of EUR 2.7 million. And of that, EUR 1 million coming from the oil segment, mostly achieved by growth in revenue and the reductions in fixed costs, despite great inflationary pressure. Variable costs of the energy and the railway were at the same level as in Q4 of the last year. And EUR 1.7 million improvement coming from regulated segment, mostly due to higher revenue as costs remain at a similar level. Relatively low EBITDA in last quarter of 2021 was affected by the mentioned temporary regulatory differences. And if we take these differences into account for both periods, then the growth in EBITDA for the regulated segment would amount to EUR 0.4 million. And last, the performance of commercial LNG segment remained at a relatively similar level, and we expect improvements in the future. As also Darius mentioned, our team is actively involved in all the turmoil that's going on in the LNG market and the global energy market at the moment. And last, the net profit loss -- in respect of the net profit loss, it's important to mention that finally, in quarter 1 of 2022, none of the segments were loss-making -- in loss-making this year after we will eliminate the mentioned unrealized currency exchange losses of the regulated segment. Then going back to the overview of the business factors for separate segments. Darius?

Thank you, Mindaugas. So very shortly about each segment, the key highlights and messages. So talking about the oil segment since we're really dependent -- we are really dependent as well on the macroeconomical and fundamental factors in oil markets. So what was going on in Q1 and it was, let's say, record-high refining margins period, which due to many reasons which actually listed in this slide. Of course, caused partially as going to more effect. And disruptions appeared from -- as a consequence. So those factors had a positive impact for our transshipment in Klaipeda terminal. And comparing with last quarter of 2021, we were seeing an increase of 5% approximately on our handled volumes or transshipped volumes amount. Of course, transhipment is not reflecting the full -- let's say, full scope of our revenues and other revenues, we are collecting from such services as storage. So in storage services, let's say, the global demand remained quite low because there was no contango in none of the oil product segments during the entire Q1, and it was only continuing backwardation tendencies, which means that we were not accumulating some extra or additional revenues from the storage services. Nevertheless, it's [worth] to say that our mutual terminal which where we store state reserves of fuels as well having some commercial activity, it's fully utilized, 100% utilization. And yes, we are performing quite well by utilizing this infrastructure. Another additional products which appeared in our terminal after the finalization of the investment program, both into tank forms and the jetties, as I already mentioned, is giving a return. And we can see almost in all so-called petrochemical, chemical and other grades of oil products increased. So it was about 5.5x higher transshipment of ethanol in our applied infrastructure comparing to the same period of last year. We are doing really well with Bitumen and our share among the Baltic terminals, including Russian actually ports, let's say, the share is quite significant. We have about 41% of this. And yes, we have also increased of petrochemical activities. And we already reached about 40% within 1 quarter. We reached about 48% of the total last year's volume, which was handled in our infrastructure. And yes, it's maybe a good thing to say, but we added into our, let's say, list of services which we provide Lithuanian crude oil. It's not a significant amount of that crude oil coming, but still we are utilizing our idle capacities pretty well and all possible products, which we can find in our markets, we are trying to attract them and hand over. So this is about oil. Some of the messages about regulated LNG activities has been already shared. What is worth to mention that our average utilization of Klaipeda LNG terminal here, we can see 31%. But it's worth to mention that before the war, due to the very high prices in the markets and due to very high levels of natural gas indexes, let's say, here, started with I would say, very poor utilization. But nevertheless, after the war in Ukraine started, we are operating almost on technological maximum capacities, which exceeds even 90% of technological capacities level. So about the bookings, we already told for the remaining gas year, also about the banned import LNG -- Russian LNG, it's already mentioned. So I think those are the main messages about what the regulated activities so we can switch though. The commercial activities, it's worth to still underline what we include. We include our small reloading station, we include our operation of LNG terminal in Açu port, and it also includes another projects globally, including as [indiscernible] consultancy services. So we can see here that Q1 was on the neutral or very slight negative zone in terms of bottom line. But it's worth to mention that -- and especially in our Brazilian operations, we are seasonal. And this power plant, which is supplied by natural gas and via part of it, usually is used for power generation during summer season or in the Southern Hemisphere it's winter season, when there is less rain and Brazilian energy market is very dependent on hydropower. So what we expect, we expect improvement in the second half of the year, and we expect still to have a profitable activities in all -- overall profitable activities in the commercial LNG segment. So Mindaugas, that's all from me. I'm sending back the work to you.

Thank you, Darius. Now as I already introduced the financial results of other ones, so in respect of the key performance indicators, finally, we are seeing the EBITDA margin coming closer to the average EBITDA margin for the last several years. We still have a gap of several percentage points to close. But hopefully, the trend that we saw in quarter 1, 2022 will continue, and we will manage to achieve that. And while in the slide deck that we published this morning for this presentation, we include the definition of alternative performance measures, and also the return on equity and return on assets. As we are measuring those by taking the net result for the last 12 months, therefore, under the profit for the first quarter of 2022 is -- well, it's not directly reflected in the -- in these ratios for the [quest] worked of 2022 because these are significantly impacted by the significant impairment loss that was recognized last year. And in respect of our statement of financial position, we are not seeing much changes in quarter 1 except for a small change in our capital structure as we took the loan to finance the security supplement reduction mechanism in the regulated segment as we were doing for the last 2 years. And other than that, our financial position remains quite stable. This ends our presentation, and Emilija, over back to you.

Thank you very much for the comprehensive presentation. And now we will proceed with the Q&A part. So please feel free to send in your questions in the Q&A box of your screen. So let's proceed. I see that we have questions coming. The first question would be, does Klaipedos nafta see itself in providing O&M or any other services for Finland, Estonia, LNG terminal? Which of the projected LNG terminals in Europe are the most attractive for Klaipedos nafta to produce -- to propose its operations services? Thank you.

Thank you, Emilija. So actually, we are looking into all opportunities, which appears, especially when we talk about Europe. Europe is our home market, I would say. And actually 2 out of 3 FSRUs, meaning floating LNG terminals, we were very closely involved. And one is which we are going to become an owner soon. So really unique experience and really unique value proposition can be generated to any of, let's say, upcoming floating LNG terminals across Europe because Europe meets our risk appetite, Europe meets some, let's say, all the criterias, which is a part of our global development global LNG development strategy. So by protecting confidentiality commitments against our customers or potential customers, I will not go into the details in which of those we are focusing the most, but a general comment is that we can be a part and by creating the value to any of those newly opportunities -- new occurring opportunities in Europe.

Thank you very much for your answer. We are waiting for more questions to come in. So let's take a minute. [indiscernible] This of, same as Economics Committee after their visit to Klaipedos nafta.

Well, yes, I mean, the intention of the visit was not itself to do or take any decisions. It was probably more to get aware about actual topics due to the dramatically changed situation actually in the markets and caused by war. So I think we answered all the questions, I think what we heard that we have support in all the areas and important topics regarding assurance of energy security of Lithuania by using our infrastructure.

Thank you very much for your answer. [Operator Instructions] So as all the questions are answered on behalf of Klaipedos nafta and NASDAQ business, thank you, everyone, for joining us today. It was our pleasure to present these results. The recording of the presentation will be available in the company's website and NASDAQ Baltic YouTube channel. Dear guests, thank you very much, and have a good day, everyone. Goodbye.

Thank you. Goodbye.