AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning. Dear listeners, welcome to Klaipedos nafta meeting with investors. 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 and will be available for a rewatch. [Operator Instructions] With that said, I'm pleased to introduce today's presenters, Chief Financial Officer, Mindaugas Kvekšas; and Chief Executive Officer, Darius Silenskis. Dear management, please, the floor is yours, and good luck.

Thank you, Emilija. So it is my great pleasure to introduce and cover our financial performance and operating performance throughout quarter 3, and also present some of the highlights since our last webinar in summer. So I would like to begin with the contents of today's presentation and as has been our practice. First of all, we start with the highlights, then cover some business overview, followed by the financial results. And we also have some additional information in our package that we present with the -- that we present on the NASDAQ after the presentation, after the live webinar. So talking about the highlights. Since our last webinar, a couple of important milestones were achieved in the regulated business. And at the beginning of October, we notified the current owner of FSRU Independence that we intend to exercise an option to acquire the vessel, and according to the contract, transaction is expected to be completed in December of 2024. An investment in FSRU as a regulated activity asset was already approved by the National Energy Regulatory Council last January, and the acquisition would be financed by the loan from Nordic Investment Bank. Another key event was the announcement of public procurement for operational maintenance services of FSRU Independence for the period starting at its acquisition. The selected contractor would take the responsibility for -- on the safe and reliable operation of the vessel, the management of the vessels maintenance and technical risks and further compliance with environmental and other requirements. In new business development area, we have also been quite busy, trying to exploit the opportunities that have been present in the market and that could lead to the optimistic future of this enterprise. So first of all, we are happy to see that our long-term experience in the floating LNG segment is valued by the very established energy companies like Uniper. So we secured a contract for operational services to the floating LNG terminal in Germany on the North Sea Coast. We're also active in exploring opportunities with technologies that are at various stages of development. And at the end of August, we announced that we, together with Akmenes cementas and Orlen Lietuva, signed letters of intent for a joint feasibility study to assess the potential and feasibility of liquefied carbon dioxide capture and storage technology for industrial companies in the country. The feasibility study will analyze the potential to reduce atmospheric emissions through the [ bold ] carbon dioxide management value chain concept in Lithuania, and the applicability of the solution to companies with unavoidably high greenhouse gas emissions from their business processes. And also, at the beginning of November, the international project, CarbonNeutralLNG, was launched in Germany with the participation of our company. The 3-year project will aim for its participants to collaborate on the development of a hybrid process chain, involving the production of hydrogen from biomass and its conversion to synthetic methane, using a variety of chemical and biological processes. I will comment on the continuing positive trend in financial performance in the upcoming slides. So I'm not stopping much here. And lastly, we had some changes in collegial bodies. Just recently, a new Supervisory Council has been elected with 2 independent members out of a total of 3. And Mr. Robertas Vyšniauskas was elected as a Chairperson of the Supervisory Council. The new composition of the Audit Committee with 2 new members elected. And also a new Remuneration and Nomination Committee was established. Selection of 1 additional Audit Committee and 1 additional Remuneration and Nomination Committee members shall be soon announced. Then I will present the overview for our oil segment and then followed by the regulated LNG segment. So the key word for recovery of the oil segment's performance has been the diversification of both the clients base and services. And despite great inflationary pressures, particularly that we experienced in the oil segment, our strong financial performance is driven by the higher transshipment volumes, and they were higher by 35% in comparison to the same period for 2021, and 43% higher transshipment of biofuels and petrochemicals was the key contributor during 9 months of 2022. Transshipment of petrochemicals increased by approximately 6x, while transshipment for renewables, the biofuels, increased by 22%. Now KN also takes 21% of bitumen transshipment market in the region. And during the 9 months, Klaipeda Oil Terminal was a quite significant player in this area. And right now, we have a total of 14 types of products being transshipped, and in comparison to the previous periods, we are continuing this trend of further expansion of our services portfolio. Next, the regulated LNG or the regional LNG activities. For the first time, Klaipeda LNG terminal has allocated long-term capacity. And overall, these recent months were very busy for our team as well as for the institutions that are involved in the process because approximately 60% of the total LNG terminal capacity has already been allocated for the period of 10 years, and a further 9 terawatt hours of the capacity have been allocated in the annual -- of annual regasification capacity has been allocated for 2023 to 5 customers. The average utilization of Europe's LNG terminals was 66%, and our terminal at Klaipeda was utilized at the similar level. And there is a significant increase comparing to its utilization in 2021, and this, of course, is explained by the significant increase in the demand for its services. And also lastly, the average Dutch TTF Natural Gas Index was almost 5x higher this year during the 9 months of -- 9 months ended on 30th of September comparing to the average for the last year. So this also kind of explains why we see this increase in demand for our services, but also has some negative impact on our oil terminal segment. Now I shall proceed with the overview of the financial results. And quarter 3 was exceptional for the highest so far natural gas and electricity prices. However, the company found measures to amortize rising costs and demonstrated strong financial performance in the most challenged oil terminal segment. And revenue was up by EUR 10.2 million, and of that, EUR 3.7 million in Oil Terminal segment is transshipped volumes, as I already mentioned, increased by more than 1/3, driven by the growing consumption of fuel in the world, which for 9 months of this year exceeded the volumes for the same period of 2021 and was close to 2019 indicators. After the pandemic reduced refining capacities and the changing geopolitical situation led to a tight supply and demand balance in the market and increase the demand for both the production of European oil refineries and demand for our oil terminal services. Also, regional LNG, the regulated segment has contributed significantly to this increase in revenues and nearly EUR 7 million increase in LNGT regulated revenues comes from the fact that there was a significant increase in demand for regasification services in the terminal and also a change in regulation. The latter change in regulation led to an increase in the regasification tariff by nearly 3x. However, since May, fixed part of regasification service fee, which was part of security supplement paid by gas consumers, has been reduced to 0. So subsequently, because of these 2 conditions, revenue increased by slightly more than EUR 5 million. On the other hand, it is important to note that the company's profit from regulated business remains limited to a regulated rate of return for a temporary excess profits according to current regulations, shall be paid back in the future periods. Talking about EBITDA, it is up by nearly EUR 7 million compared to the same period of last year. And I'm happy that EUR 1.5 million of that is coming from the oil segment, achieved by growth in revenue and effective management of fixed costs, also the variable costs achieved by some energy efficiency measures. And electricity and gas costs were higher by 2.3x, which results in EUR 2.2 million compared to last year. So this is a very significant factor behind our financial performance, which we amortize successfully with the increase in revenue. And EUR 5.7 million of EBITDA is coming from the regulated segment, mostly due to higher revenue. Key element behind almost EUR 1 million increase in cost was the cost of emission allowances, which is affected by larger regasification volumes and as a result, higher emissions, but more importantly, affected by the higher prices of emission allowances. Performance of commercial LNG segment remained at a similar level. Now net profit and loss. The depreciation of euro against the United States dollar had a major effect on the nonadjusted net loss according to IFRS. And during the reporting period, we incurred a total unrealized foreign exchange loss of EUR 35 million less deferred taxes compared to only EUR 12.4 million during the corresponding period in 2021. After we eliminate the unrealized currency exchange losses of the regulated segment, its adjusted net profit amounts to almost EUR 5 million. Last year, in quarter 3, we recognized a significant EUR 54 million impairment loss for the cash-generating unit of Klaipedos Oil Terminal, which was a key factor of EUR 47 million net loss in Oil Terminal segment. This year, so far, no additional indications for impairment were recognized, although the net profit of Oil Terminal segment is also affected by rising gas and electricity prices, the increase in revenue and continuation improvements allowed us to finish the reporting period with a positive EUR 1.5 million result. We also measured indicators that take into account temporary regulatory differences, such as previously mentioned excess revenue in the regulated LNG terminal segment that should be paid back in the future periods. Accordingly, for the 9 months of 2022, EBITDA adjusted for temporary regulatory differences would amount to EUR 26.5 million compared to EUR 21.9 million last year. The similarly adjusted net profit for the 9 months of 2022, having also excluded the impact of unrealized currency exchange losses would amount to almost EUR 6 million, so namely EUR 5.7 million compared to a loss of EUR 45.5 million last year. About the free cash flows. So strong improvement in the group's free cash flows was, to a large extent, driven by the growth of EBITDA, which I have already discussed. Furthermore, decline in the working capital contributed to an additional almost EUR 2 million positive effect and also the lower level of investments has led to a EUR 4.1 million improvement. No significant changes in the capital structure, except for undertaking loan to finance reduction of the security supplement in the regulated segment. While EUR 35 million of lease liabilities were settled during the 9 months of 2022. Due to depreciation of euro, the remaining balance, which is mostly related to the lease liability for FSRU, still increased in total by EUR 11 million, and most of that amount is related to the mentioned lease liability of FSRU, which is denominated in the United States dollars. And therefore, this increase in the liability. Lastly, about key performance indicators of key ratios. The profitability margins have improved compared to last year, and net profit margin this year even exceeded the level of 2019, indicating recovering performance after a huge decline in revenue throughout 2020 and 2021. Return on equity, return on assets and price earning ratios are calculated with the net result of the last 12 months. Therefore, this quarter, they are no longer affected by the impairment loss, which was recognized in quarter 3 of the last year. So that's it for the financial performance and the business overview. So we have finished with our presentation and ready for the question-and-answer session.

Thank you very much for the presentation, and indeed, now we will proceed with the Q&A. [Operator Instructions] All right. And we have the first question, which is regarding the dividend. So will there be dividends for the 2022 financial year?

So we are following our dividend policy which is publicly available and has been announced in the past. And so far, no changes to the dividend policy are in the plans, and we anticipate to follow the dividend policy. And depending on our performance throughout the full year 2022, we will evaluate and take into account the results and the dividend policy while proposing allocation of the retained earnings for this year.

We are waiting for more questions to come in. All right. The next question is, how the company will pay for so high net debt to EBITDA?

Yes. So we believe it's important to note where -- which segments are the most leveraged. And for us, it is the regulated regional LNG segment, and we believe that our long-term financial plans are completely sustainable, and we can pay out the debt. And it's also important to note that the regional LNG is financed by the long-term debt, which have the maturity -- which will be paid back during the period which ends after approximately 20 years. So they are spread out over the very long period, and therefore, we believe that our financial position is very strong and not affected by the relatively high leverage.

Thank you very much. Are there any changes due to the recovery of unused asset deferrals?

I'm not sure if I understood the question. So -- yes, could the person who asked the question elaborate more on the context?

Yes. I see that this is a question from anonymous attendee. So if you could just paraphrase the question in the Q&A box, we would very much appreciate it.

Yes, providing some additional context would probably help to answer the question better.

So the clarification would be, there was deferrals for unused asset of oil business. Will it be recorded? Oil business is growing up.

So I suppose the question is about the impairment losses or the impairment of the assets that was recognized last year. So the impairment was recognized in accordance to the requirements of International Financial Reporting Standards, and the standards require that we assess for any indications of impairment at each reporting date. So that means that we have also assessed for new indications for additional impairment at the end of quarter 3, and no additional indications for impairment were identified. And so far, we haven't also determined any indications that would lead us to believe that the reversal of previously recognized impairment plus is possible, but the situation might change in the foreseeable future or in the upcoming report -- on the upcoming reporting dates, especially the strong performance in the oil terminal continues, but for that, we need even stronger recovery, probably.

Thank you very much. As it seems there are no further questions, would the management like to give final remarks in this presentation?

No. Thank you, Emilija. Thank you for the assistance, and thank you for the questions, to the participants of today's webinar.

Thank you. As all the questions are answered, on behalf of Klaipedos nafta and Nasdaq Vilnius, thank you, everyone, for joining us. The recording, as always, will be available in the company's website and NASDAQ Baltic YouTube channel. Dear management, thank you very much, and have a good day, everyone. Goodbye.