AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning, dear listeners. Welcome to Klaipedos nafta meeting with investors. I'm Emilija from Nasdaq, and I'll be moderating today's event. [Operator Instructions] Please be informed that this webinar is being recorded and will be available for a rewatch. [Operator Instructions] With that said, I am 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, everybody. Thank you, Emilija, for a good introduction, as always. So today, as usually, we will start from the highlights. We will talk about, let's say, main business messages or messages coming from our businesses from different segments. And of course, a major part of today's presentation is to present how we were performing financially during first quarter of this year. So I'll start from main highlights in our businesses. And if to talk about regulated activity, it was a lot of efforts spent on, let's say, looking for opportunities to maximize even utilization of our LNG terminal in Klaipeda. And after successful open season procedure and the discussions of potential market, let's say, demand or customers, we decided to start preparation of the binding season procedure together with Lithuanian national -- natural gas grid operator Amber Grid. Also, it's -- one of, let's say, important messages related with our regulated activity is that, due to the provisions of EU Council and due to regulation, we -- let's say, in addition to all the open season procedures and procedures in accordance to our, let's say, rules, we are, starting 1st of April, offering our capacities, our Klaipeda LNG terminal capacities; as well through GSA secondary capacity trading platform, which allow us to maximize utilization even further. Talking about our commercial LNG activities and talking about our business development during first quarter of 2023, probably the main message was about the selection of KN as, let's say, service provider to Italian energy companies now regarding, let's say, FSRU terminal based in port of Piombino, let's say, management of this project and helping them to start properly by using our know-how and our resources. Also, it is quite a significant event that KN has managed to, let's say, sign a framework agreement with such a huge natural gas major, Korean natural gas major, which is fully integrated, starting from the upstream liquefaction and then ending up with trading till the final user. So this is -- this creates a lot of opportunities for, let's say, our global LNG business development. Talking about the financial performance. Mindaugas will present in a more detailed way, but my message here is that finally we are on a significant recovery phase after all the crises and the hits suffered during 2022. So group EBITDA was 17% higher comparing to the same period last year. And revenue, respectively, was 24% higher and comparing to the Q1 of 2022. So talking about our -- here it's written oil terminals in presentation, but in general it is petroleum, biofuels and petrochemical terminals which we operate. So business performance was better in terms of EBITDA was better by plus -- even by plus 54%. So talking about the avenues, which I would like to highlight: So we received the latest or upgraded, a new version of letter of expectations from our major shareholder, ministry of energy, and which defines clearly what are the expectations from, let's say, the state and from the government and from ministry of energy in our activities. Also, I think selection of Šarunas Radavicius as Chairman of Audit Committee finalizes or completes the selection and establishment process of all our corporate bodies. Sustainability report. It's just a highlight, but if investors has a time to go through it: It's very extensive and important document for our company. We invested a lot of efforts into that. And as always, we are providing it in our website to get aware with it. Also the Annual General Meeting of shareholders on 28th of April adopted and approved our audited financial statements of the company for the year and also allocation of the profit and as well approval of the remuneration report of the company. So now going to key business, let's say, messages or main business messages, I will start from our, let's say, liquid petroleum, petrochemical, biofuels segment, where, let's say, we managed to get even 98% high revenues from rent of shore tanks, from the longer-term rent of shore tanks. There was a few reasons for that. Some were related with intensifying transshipment of diesel for deliveries to Ukraine, with some, let's say, increase on demand to this market. And also there was a bigger demand on biofuel storage as well, even 2x bigger. And as well, during Q1, we were successfully continuing, let's say, our cooperation with Vilniaus heating, Vilniaus šilumos tinklai, which is a municipality heating company. And we were helping them to save -- to make some savings from heating for the households and buildings. And we were providing services, transshipment and storage services for the light-sulfur fuel oil used as a substitute to the gas due to pricing, due to the high pricing. Talking about our regulated LNG activities. Let's say I will start from regasification numbers. And as you see, we were even 145% higher comparing to the respective period during 2022. And as all we know, the main reason was that, after the war started, let's say, a significant shift of the gas flows has been seen. And our LNG terminal has immediately become, from first day, let's say, of threats which we were facing related to the war -- from the first day of those threats, our terminal became main entry point of gas to Lithuania and also -- let's say, also to the region. Talking about our LNG terminal's performance in Klaipeda. So we are reaching, let's say, maximum safe possible authorization levels. Now we are operating -- or let's say, in Q1 2023, we were operating with 81% utilization [ intensivity ] or -- while, let's say, during Q1 of 2022, it was less. So talking about pricing, about TTF index. So definitely it was a bit, let's say -- let's call it prices for the gas stabilized during Q1. And what we see now, those prices are even lower; and the reasons are also quite well known. So market is quite stable and balanced because Europe managed to -- let's say, to keep significant amount -- or a sufficient amount of the gas in storages. And also Europe managed to substitute Russian gas supplies by many initiatives, including savings, including the changes in the supply chains, et cetera. So talking about our contribution, our terminal's contribution, to the Lithuania gas market. So simply, we were almost -- we're one, let's say, at least major and main supply point to the gas. So market share or share of gases which came through Klaipeda LNG terminal was 90% in Lithuania. And the balance was coming through interconnectors with Poland and Latvia, respectively. And this number, of course, excludes gas transit to Kaliningrad state. So in here, I will pass the stage to Mindaugas to present financial results.

Thank you, Darius. Now proceeding with an overview of the financial performance of the recent quarter, I feel happy to announce that continuing growth in performance is noticeable across all 3 business segments. And the revenue for the first quarter was up by EUR 4.3 million compared to the same period in 2022. Of that, EUR 1.4 million is coming from the oil terminals segment. The increase was highly impacted by almost twice a higher revenue from rent of storage tanks, as noted by Darius. And while biofuel's transshipment volumes remained stable in comparison to the first quarter of last year, the much stronger demand for biofuel storage services led to nearly 2x bigger revenue from biofuels segment, where ethanol was the key driver behind that. Moreover, during the first quarter of this year, we continued to participate in the logistics chain of the fuel oil supply, so this contributed to the energy security and lower heating prices in our capital city. Then EUR 2.5 million, an improvement in revenues from our regulated LNG terminal segment, where the key factor for jump in revenue was a significant increase in demand for regasification services in the terminal; and the change in regulation which happened only in the second quarter of 2022. Therefore, its impact is not yet visible in the comparables. The latter led to an increase in the regasification tariff by nearly 3x. And subsequently, because of these 2 conditions, revenue increased by EUR 3.6 million. Also during the first quarter of 2022, the company received EUR 1.1 million as income related to the natural gas consumer's liability for previous periods, after the court decision, and this positively affected last year's revenue. However, as always, the profit from regulated business remains limited to regulated rate of return. And the temporary excess profits, according to current regulation, shall be paid back in the future periods. About the profitability measures. The EBITDA was higher by EUR 1.4 million; and again an improvement in the oil segment of EUR 1.1 million, demonstrating a more than 50% increase achieved mostly by diversified growth in revenue and implemented cost efficiency measures; a minor increase in the regulated segment mostly due to higher revenue. The regulated segment costs increased by more than EUR 2 million, of which EUR 1.5 million is an increase in the cost of emission allowances affected by larger regasification volumes and higher emissions but, more importantly, affected by higher prices of emission allowances. And finally, the commercial LNG segment also demonstrated profitability improvement, with income from projects in Germany and Italy having, making the impact on the performance in the first quarter of this year. And then about the net profit. The appreciation of euro against the United States dollar had a major impact on the non-adjusted net profit during the first quarter of 2023. And the total unrealized foreign exchange profit of nearly EUR 4 million, less deferred taxes, was recognized this year compared to a EUR 4.2 million loss during the same period in 2022 after we eliminate the unrealized currency exchange income of the regulated segment, its adjusted net profit this year amounts to EUR 0.9 million. And the net profit of the oil segment increased by EUR 1 million due to the already mentioned reasons. About the free cash flows. Significant [ increase ] in the working capital, particularly accounts payable, last year, and less-significant increase this year resulted in a negative change of the free cash flow of EUR 5.4 million. The recent quarter was also less intensive within investment projects. Those capital expenditure was lower by EUR 4.3 million. Adding all that up, the free cash flow was positive at EUR 2.2 million. The leverage metrics. There were no significant changes in the capital structure, as in the previous quarters as well, except for the taken loan to finance reduction of the security supplement in the regulated segment. And while we repaid EUR 12 million of lease liabilities, they were settled during the first quarter of 2023. However, due to appreciation of euro, the remaining balance decreased by a somewhat bigger amount of EUR 16 million, as the liability is mostly denominated in United States dollar. Lastly, profitability margins have mostly improved compared to the first quarter of 2022. Net profit margin is higher than for the same period in 2021 and 2022, indicating recurring performance after a huge decline in 2021. Return on equity and return on asset and also the price-earnings ratio are calculated taking into account the performance over the last 12 months. Therefore, the comparable figure of 2022 is affected by the big impairment loss that was recognized in the third quarter of 2021, yes, so I'm happy again to cover what is a noticeably strong recovery starting from the end of 2021 and continuing onwards in 2023. So that ends the overview of the financial results. And we are to the question-and-answer session.

Thank you very much for the presentation. And indeed, let's proceed with the Q&A session now. [Operator Instructions] Let's begin.

And the first question would be as following. It consists of 2 parts, so I will split it. "As you know, governments have adopted laws that currency differences should not affect the results of companies, so we would like to ask you when you will start following the dividend policy and honor the minority shareholders."

Yes. So I will take the question. Thank you. So indeed, when distributing the retained earnings for 2022, we were following the government's regulation and also our dividend policy. And due to accumulated losses, no dividends were distributed for 2022. This was the decision of the General Annual Shareholders' Meeting. So thank you for question, again.

Thank you very much...

Emilija, sorry for interruption. There was another part of the same question, by [ Rokas Lapinskas ], and it was a question on the company strategy.

Yes. I just wanted to move to that, right.

Okay.

So the question would be, will you present the company's new strategy?

Okay. So the answer is very simple. Yes, of course. We are still working hard to finalize our new strategy, and we are going to the market. I hope that we will manage to, let's say, present it in a month or within a month approximately.

Perfect. Let's proceed. What is the key success task, number one; and number two, most important challenges for Klaipedos nafta company seeking higher profit during the year 2023, in your understanding?

Well, it's -- I will take the question on my side. It's -- the most complicated part of this question is to identify only 2 challenges, because we are working in a really volatile environment. And we are exposed also to the energy prices, which stabilized and, hopefully, will remain stable till the end of the year. We did a lot of measures to protect our margin, including even hedging of gas in one of our business segments. Otherwise, of course, importance of -- let's say, of stability of the oil business. Why? Because we have an agreement with ORLEN Lietuva. And quite a significant part of revenues are related with the macro factors such as refining crack margins [ so called ]. So if our customers can stay on a profitable level, that means higher volumes and quantities to us as well, but anyway, as I said, there are many reasons for that. So also I think it is important for us to keep the terminal, Klaipeda LNG terminal particularly, availability stable, meaning assuring business continuity, assuring technological availability and safety, because without that, we cannot be sure on a revenue -- on a stable revenue and profit generation streams from regulated activities. So as I said, it's a quite round answer to quite precise question, but it's quite hard to purify only 1 or 2 challenges in a, let's say, business environment where we operate.