AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good afternoon, Dear listeners. Welcome to Klaipedos nafta Investor Relations Conference. I'm Paulius from Nasdaq Vilnius, 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 on Nasdaq Baltic YouTube channel. [Operator Instructions] With that said, I'm pleased to introduce today's presenters, the CEO of the company, Darius Silenskis; and the Chief Financial Officer, Mindaugas Kveksas. Darius, please, the floor is yours. Good luck.

Thank you, Paulius, and good morning, everybody who has joined this early morning. So we are here to present our 2 quarters, first and second quarter financial results and present key highlights from main business streams. So I would like to start from our still fresh strategy, vision and mission. And it is, in addition, the healthy financial performance, one of the most significant achievements within the second quarter was definitely the introduction of KN brand new strategy until 2050. Therefore, I would like to use this opportunity and to highlight vision and mission to investors and those who are present today in webinar repeatedly. Our new vision broadens the scope of our activities by defining our role in the field of new energy, including significant contribution to region's energy transformation towards climate neutrality with clear commitment to reshaping our operations to fully achieve our own sustainability goals. While our mission is to enable safe and reliable liquid energy chemicals and feedstock in the Baltic Sea region by offering storage and transshipment solutions enabling region's decarbonization [indiscernible] of energy security. Also, we are continuing to support our customers globally with our knowledge and capabilities in LNG and other sustainable energy infrastructure projects in the nearest future. For sake of convenience, we have included 2 slides at the end of this presentation with our strategic goals and directions. Talking about our highlights for the reported period. So here, you can see from our old mainstreams the highlights, which I feel important to present to all of you. And I will start from regulated activities segment, where it's worth to mention that allocated capacities for 2023 is finalized and, I mean, allocation itself and it reached just 36.7 terawatt hours, which means that we will continue regasification in our FSRU terminal in Klaipeda at record levels and closed our technological capabilities. Another important thing in regulated LNG segment was that the regulator approved new rules of LNG terminal usage, which allows us to move on with our long-term allocation tenders till 2044. Also, it's not written here, but you can see [ tolerability in media ], and we have a very good news from regulator regarding our WACC, weighted average cost of capital used to define this return from regulated business. So it has been improved from 4.16%, which is applicable this year up to 5.06% for upcoming year -- for year 2024, which will bring us definitely more return and more profit from our regulated business. Talking about the business development, our global business development. So we've been selected as commercial operator in another German LNG terminal. So for now, 2 out of 3 LNG terminals in Germany commercially operated by KN. Also, KN and bp Gas & Power agreement -- we have signed agreement with bp Gas & Power, which allows us to investigate joint opportunities to build LNG terminal for truck supplies in Brazil in Port of Acu. Talking about the financial performance. During the first half of the year, group revenue was almost 18% higher. Adjusted net profit, 10% higher comparing to the previous year same period and EBITDA slightly lower or close to the same level. What is [indiscernible] underlying, it is that significant performance improvement was visible in our nonregulated streams. Liquid Energy business stream has generated 60% more EBITDA comparing to the previous period -- last year's first half of the year and which generated EUR 2.7 million of adjusted net profit and also our global LNG activity, global LNG projects, where we are participating contributed to our bottom line by EUR 0.5 million of net profit. And together, both segments generated absolute majority of reported adjusted net profit, but I believe more details to be presented by Mindaugas later today. From others -- other highlights. So I already mentioned about the strategy, which has been successfully approved two months ago and communicated to investors and also to all stakeholders. So we are now progressing internally with the implementation plan. And also, we got a new chair of one of our collegial bodies committees of the Remuneration Committee and Zivile Valeisiene has been elected as a Chair on 15th of June 2023. So talking about the business overview. Summarizing the financial performance of the first half of 2023 proves that our previous decisions and continuous efforts to improve efficiency and operational excellence have paid back, contributing to profitable results and improving our free cash flow. Stable refining margins and stabilized energy price indexes have also played a role in achieving these results. However, a significant portion of this success can be attributed to additional revenue opportunities arising from continued diversification of services, especially in liquid energy terminals, as well as higher utilization of our FSRU terminal in [ Klaipeda ] and increased returns from our global LNG activities. And now I would like to touch upon each revenue stream and to present main highlights by segments. So let's start from our Liquid Energy Terminals stream, which has generated the biggest part of adjusted net profit in the first half of the year. And yes, talking about the revenue. This half of the year was 22% better in terms of revenue comparing to 2022. And there were, let's say, a few blocks of this success and a few reasons. There was increase of vital products and biofuels handling -- so -- and it reached -- was primarily influenced by increasing [ tankering ] demand for liquid fuels handling, where gasoline, diesel, especially dedicated Ukraine diesel and biofuels were the main drivers and took about 67% of the growth. Stability of cargo flows, so a relatively stable European liquid fuels producers margins. I already mentioned shortly on that and refinery utilization rates, respectively, allowed to maintain steady cargo flows in the first half of the year 2023. Expanding of transshipment services geography, which is vertical expansion, transshipment services at [ Mariana ] [ poly-liquid ] fuels terminal operated by KN started at end of May 2023 and the transshipment agreement with ORLEN Lietuva concluded on long-term shipment agreement. So regular discharge of diesel cargo from [ rail tank cars ] tank truck operations are performed from beginning of the summer, the number of service trucks steady increasing each month. Also, we were servicing Lithuania full consumers' needs and slightly year-over-year increasing consumption of gasoline and road transport diesel in Lithuania as is proven by official statistic sources. So this ensures stable transshipment volumes in Klaipeda liquid energy terminal tanker truck station, which increased by 6%. And intensified bitumen transshipment, about 7% of revenue was generated by bitumen transshipment within the first months of 2023. And we handled about 52,000 tonnes of bitumen or 57% more comparing to the first half of 2022. Let's talk about regulated LNG activities. I already mentioned main highlights in the summary slide, but nevertheless, it's good to go through the numbers. So first half of the year, Klaipeda's LNG terminal regasification loading quantities were even 32% higher comparing to the same period last year. 19 carriers have arrived at LNG terminal only during Q2 of 2023 and they have been regasified and loaded, which is nearly equal to the same period a year ago. So talking about our capacity utilization. We were slightly higher in terms of utilization comparing to Europe's average rate while Europe's average was 64% hours during reported period was 74%. Talking about the pricing. Yes, we see a significant drop, I would say, a drop of DTF indexes, respectively, natural gas is getting more competitiveness [indiscernible] alternative to switch to another source of energy in the operations and activities and definitely driving some additional demand. We managed to provide 87% of entire LNG, which was transported into Lithuanian grid, excluding transit to Kaliningrad State. So this is an absolute majority of the supply has been performed using our infrastructure. Upcoming long-term capacity allocation procedure, so on June 26, we announced public consultation regarding the amendments to regulations. And on 27th of July, we received National Energy Regulator's approval on updated regulation. So long-term capacity allocation process. We are planning to start later on September. Shortly on our global LNG or commercial -- also commercial LNG performance. So almost 35% of increase in revenues comparing to the same period last year. And as already mentioned, we successfully adding to our portfolio projects, global projects where we are getting some [ roll ] so we have -- I have mentioned, we became a commercial operator of another LNG terminal in Germany. And as I already said, we are going to check together with bp opportunities to build together LNG terminal in Port of Acu, Brazil, where we already having activities and successfully operating LNG infrastructure for the last 2 years. On this note, I would like to pass the stage for Mindaugas and to present our financial results. Thank you.

Thank you, Darius. So during the 6 months ended on the 30th of June 2023, the group have continued to maintain improvement in overall financial performance. And Liquid Energy Products Terminals and Commercial LNG business segments being the key drivers for success. Revenue for the first half of the year was up by EUR 6.4 million compared to the same period in 2022. And of that, EUR 3 million were earned as regulated revenue in the regional LNG business segment. Key factor for generating revenue was a significant increase in demand for regasification services in the Klaipedos LNG terminal and the change in regulation, which happened in the second quarter of last year and which affected an increase in regasification tariff by nearly 3x. So subsequently, because of these 2 conditions, regulated revenue increased by EUR 1.5 million. And also during the first half of 2023, the company received approximately EUR 900,000 as income from the clients for the unused allocated capacities. Meanwhile, Liquid Energy Terminals segment continued its solid recovery as the revenue was boosted by EUR 2.6 million relative to prior year first half. And revenue growth is primarily influenced by increasing liquid energy products [ tanker ] for handling gasoline, diesel, especially dedicated to Ukraine and liquid biofuels. In relative terms, the strongest growth in revenue was by 35% and was demonstrated in our commercial LNG segment as commented by Darius. In addition to Brazil's Acu LNG terminal operation income, provision of commercial operation services to LNG terminals projects in Germany and Italy has not just further proven KN's expertise in this segment, but also strongly added to the revenue growth by approximately EUR 800,000. So despite revenue growth, temporary regulatory differences in revenue of regional LNG segment led to a decrease of EBITDA by roughly EUR 0.2 million. And specifically, regional LNG segment EBITDA was lower by EUR 2.6 million, mostly due to higher expenses. The regulated segment costs increased by EUR 5.4 million, of which EUR 2.4 million is an increase in the cost of commission allowances affected by larger regasification volumes and higher emissions but more importantly, affected by the higher prices, of course, of emission allowances. And also one-off expenses of EUR 1.5 million related to contractual obligations were accrued in 2023. Other FSRU operational expenses were higher by EUR 1.5 million due to inflation, a higher maintenance and various [ minor ] projects. So it is important to note that had the EBITDA being adjusted for the estimated temporary regulatory differences, it would have amounted to EUR 11.8 million for the 6 months ended on 30th of June 2023 where assets amounted to EUR 12 million for the same period last year. And these number of regulatory differences due to the net excess costs, which are not compensated by current year's revenue are expected to be settled through higher regulated income in the following years as the regulation mechanism works. So contrary to regional LNG's performance on a non-adjusted basis, liquid energy terminals went up by EUR 2.1 million in EBITDA, demonstrating a more than 60% increase, achieved mostly by diversified growth in revenue and implemented cost efficiency measures as well as [indiscernible] stabilized energy prices. Commercial LNG segment EBITDA has also improved by EUR 0.3 million due to the mentioned successful international LNG terminal projects. Finally, arriving at the net profit loss performance. So the appreciation of euro against the United States dollar in this year had a major effect on the non-adjusted net profit during the first half of 2023 as recognized under requirements of international financial reporting standards. Total unrealized foreign exchange profit of EUR 4.8 million less deferred taxes was recognized this year and compared -- this compares to the loss of almost EUR 17 million during the same period in 2022. After we eliminate unrealized currency exchange income of the regulated regional LNG segment, its adjusted net profit amounts to EUR 0.1 million for the first half of 2023, while the adjusted net profit of EUR 2.5 million was earned last year. Again, we estimate that had the net profit been adjusted for the just mentioned temporary regulatory differences, it would have amounted to EUR 1.7 million, which compares to EUR 2.1 million in 2022. And finally, the net profit of the Liquid Energy Products Terminal segment increased by EUR 2.1 million compared to the same period last year due to the factors already mentioned. Now moving to the slide on free cash flow performance, notably decreasing the working capital, particularly the accounts payables. Last year and a less significant decrease this year resulted in a negative change of the free cash flow by EUR 2.9 million due to this reason. On the other hand, due to lower investment needs, the free cash flow has improved by EUR 1.7 million. And with other less significant factors accounted for, overall, the free cash flow has remained relatively stable at approximately EUR 80 million. Then on the next slide, going to the -- our capital structure and the net debt leverage metrics. So more significant changes in the capital structure, except for additional partial loan drawdown to finance the reduction of the security supplement in the regulated segment. And while EUR 24.2 million of these liabilities were settled during the first half of 2023. Due to appreciation of euro, the remaining balance decreased by more than EUR 28 million, that this is mostly denominated in the United States dollars. And finally, the last bit of the financial overview. The profitability metrics unsurprisingly, temporary regulatory differences stemming from higher costs of regulated regional LNG segment, negatively affected profitability KPIs. And net profit and EBITDA margins are slightly lower compared to the previous period due to this reason. Otherwise, if these factors, we are not taking -- if the temporary regulatory differences were adjusted, the group's net profit margin has strongly improved this year. And finally, return on equity and return on assets as well as price earnings ratios for the first half of 2022 were affected by the significant impairment losses recognized in the third quarter of 2021 as the calculation took into consideration the net profit loss for the last 12 months. Finally, and before we move to the Q&A part of today's webinar, I would like to take this opportunity to inform the participants that this is my last webinar representing [indiscernible] team. And starting from September, I will begin writing a new chapter in my career. Meanwhile, contact details for your inquiries will be accordingly updated on [indiscernible] website as well as NASDAQ. Thank you. So now Paulius, shall we proceed with the questions received?

Yes. There are panelists for the comprehensive presentation. Now we will proceed with the questions. [Operator Instructions] We do have one question which is when is it expected to make a decision on the expansion of the gasification capacity of the LNG storage vessel independence? What is the current stage of the deliberations and which development option up to 5 billion or up to 6.25 billion cubic meters are -- is the company going to choose? And according to market consultations, how much the capacity expansion could cost?

Thank you for your question. I will get -- but on my side, then we'll try to answer. So first of all, it's important to say that our priority is to finalize allocation of existing capacity till 2044 which we will perform during September. And after that, final decision will be made on how and in which scale and scope, we are proceeding with potential capacity expansion. What it is clear. It is clear that we are considering only, let's say, expansion only up to 5 bcm's. There are many reasons, including technological ones on this decision. And unfortunately, I'm not able to comment and to provide investment costs of potential expansion because we are not yet mature enough and no decisions are taken on this investment. So unfortunately, I cannot comment on that on a potential value. Presently, we are meeting all potential market participants and main market players regionally on to, let's say, in order to clarify potential needs from [indiscernible] on an existing capacities and on some -- and on potential capacities, how we can expand on FSRU independence. So if we will go with the capacity expansion, decisions are forecasted to be made during Q4 of 2023.

Thank you, Darius, for your answer. While we're still waiting for more questions to come in, I'd like to remind everyone that this webinar is being recorded and shortly after, it will end, it will be uploaded to NASDAQ Baltic YouTube channel. You can also view the financial report on the Nasdaq Baltic website on the company's profile. And yes, please do not hesitate to ask further questions, take the opportunity to speak with the company's management. Okay. So if there are no further questions, I would like to say that, well, if you will have some in the future, I'm sure that the company will be happy to answer them after the webinar. And as all questions are answered, on behalf of Klaipedos nafta and Nasdaq Vilnius, I would like to thank everyone for being here. It was a pleasure to be here with you today. And gentlemen, thank you for the comprehensive and informative presentation. Have a great day and goodbye.

Thank you, Paulius and all participants. Likewise, have a great day. .