AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning, 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 Chief Executive Officer of Klaipedos nafta, Darius Silenskis; and Acting Chief Financial Officer, Vaidotas Dirmeikis. Darius, please, the floor is yours.

Thank you, and good morning for all participants who joined us today. As usually, we would like to start our presentation from reminding our vision and our mission, but expecting that there are at least one new participant within today's audience who is not yet aware of the purpose and then strategy of KN -- or KN Energies soon. So one more time to remind that our vision is to be at the forefront of energy transformation in the region and globally, to support it for our customers and to become climate neutral ourselves latest by 2050. While our mission stands for offering services to our customers for a wide range of various products, liquid energy products petrochemicals, feedstocks, and of course, enabling decarbonization in the region and being ready to provide services for our customers in the future energy mix by handling, storing future energy sources and future energy fuels and continuing to ensure energy security in Lithuania, for Lithuanian state, for Lithuanian businesses, and of course for Lithuanian and maybe even the region's people. And finally, we are continuing our, let's say, global footprint or global presence direction and developing LNG terminals and other sustainable energy infrastructure projects. So going further, as usually, I would like to highlight the main events which took time during Q3. And during Q3, we have finalized the selection of operations and maintenance service provider for our FSRU Independence following the takeover. And I'm pleased to announce that after a rigorous international tender, we have decided to continue our partnership with Hoegh LNG. They possess extensive expertise in operating this type of floating terminals as being the actually biggest FSRU owner in the world, meaning having also the biggest experience in this field. Also, with now regulated activities operating FSRU in Lithuania, it's another good news came out where regulator approved the higher WACC starting 2024, and this will allow us to ensure needed investments into this crucial for entire region energy infrastructure and also to think about sustainability-related investments which we will definitely need once we will become full owner of this asset and by understanding that during regasification process, there are quite a lot of emissions. Klaipedos was also visible in LNG world with another great event, where KN was hosting global LNG terminal managers in annual conference here in Klaipeda. And last but not the least, we are finally changing our legal name to KN Energies, which is a natural continuity of our strategic changes together with the new strategy. It is not a rebranding, but I think it's very important for us because we are -- while a long time already not only Klaipeda and definitely not only oil or naphtha. So let's move to a short business overview before we will get to the numbers. And we will start -- I will start from going through the key highlights from liquid energy terminals. So continuing diversification and variety of provided services and handled liquid fuels, petrochemicals and biofuels was again a key driver during Q3. And also, let's say, our newest development activities in Marijampole started to contribute to this business segment's performance, let's say, more tangible. Also recovery in mainly petroleum fuels consumption was also one of the factors positively affecting the result during Q3. Bitumen infrastructure, which I can say it's still quite new, but it performs really well. And after the work has started and Russian bitumen was restricted or even banned in some regions, growth of the services in this area was quite a significant where our transshipment in bitumen infrastructure was 42% more compared with the same period 2022. Let's move on with our other -- our business stream and talking about regulated activities. Amount of gas actually provided to the grid from our FSRU Independence was quite similar to previous year's figures, but in comparison with the trends in Europe, with other terminals in Europe, we were one of the leaders of available capacity utilization. And actually, we are matching all possible demand in our markets. So I mean, about 80% of entire gas flow which was in Lithuania came through our infrastructure. Talking about the prices of gas, so gas prices stabilized to close 40s level. And this is the reason of record high storage levels in gas storages across the Europe, meaning that even though the winter is coming, shortages are not expected. So talking about our commercial LNG -- let's move forward. So talking about our commercial LNG activities. The main message here is that we are continuing to grow and increase our revenues from this business stream. And revenues were growing from our commercial LNG activities, which includes both global LNG projects and also small-scale terminal activity in Klaipeda. So revenues was growing by 35%, which again confirms that our strategic direction to monetize our know-how pays back. Okay. So talking about following slide, since we are obliged to provide ESG-related data, and we are one of the forefronters with CSR reports already for second or third year in a row, we decided to include some information to investors into our quarterly presentations. So it's not a question about importance of such, let's say, activity, since we are still operating or a lot of businesses are related with fossil. And that means that important part of our activity is continuing the efforts to further minimize our climate footprint. Despite a huge actually progress during the recent years on energy efficiency, and reductions of emissions from our activities, we are managing further to decrease our CO2 footprint in comparison to the same period last year, and we have managed to minimize emissions within 9 months of 2023 by additional 9%. And I would like to remind that our strategy is to become climate neutral by 2050, and till 2030, the interim goal is to reach 30% ambition on emissions reduction, which, as I said previously, taking into consideration that we are becoming owner of FSRU, is quite a challenging goal to achieve. Talking about the other part of ESG, about the social part. So emphasis on social component of ESG is also one of our key areas of attention, and efforts in safety culture improvement and investments into this area allows us to continue safe and reliable operations in all our terminals. We use TRCF as a metric to measure our performance. And I believe that, with reserved optimism of course, we are in a good position to reach ambition for this year, which is below 0.81. About methodology, there is a description how it is used, how it is calculated, but in general it's number of recordable incidents for per 100 full-time workers during 1-year period. It's an industry best practice. And we decided also to use the same KPI, which represents the status of the progress of the company in a field of social and safety part. Talking about statistics. So entire KN Group managed to work without any lost time incident for 250 days already. And as far as our strategy, 2050 defines clear ambition in the safety area. We will continue improvement in this field by dedicating proper resources and competencies and gaining additional knowledge from the best industry practice and professions. And finally, in the governance part of ESG, main highlights for the period which we are presenting today, and main achievement is actually that we received A rate from state governance center for the period 2022-2023. By methodology of this center, it's in general, results achieved within Q3, Q4 of 2022, and Q1 and Q2 data is taken into consideration of 2023. So we have managed to improve. Previous year, it was A-. So now we are back to A. And we have managed to improve significantly even to the highest rate in a transparency dimension. So on this good note, I would like to pass the word for Vaidotas and to go through the numbers in a more detailed way.

Good morning, everyone. Thank you, Darius, for passing me the floor. So I'm happy to report on positive trends in our financial performance. During the first 9 months of 2023, the group has continued to make improvement in all our financial performance, liquid energy terminal on commercial LNG activities being the key drivers for success. So it's very pleasant to see that the efforts which we are putting into efficiency of operations, and at the same time the efforts which we are putting to expand our footprint in the region globally, they are starting to pay off, bringing us the better results. Revenues for the first 9 months was up by more than 7% -- EUR 7 million compared to same period in 2022. The main elements of this were we are EUR 3.8 million in LNG terminal as a regulated revenue. A key factor for terminal revenue was a significant increase in demand for regasification services in the terminal started in 2022 due to the war in Ukraine. Also a change in regulatory regime, the increase in the pricing to -- pricing level to EUR 1.41 per megawatt hour. Also during the first half of 2023, the company received almost EUR 1 million income related to penalties for unused capacity. However, as the profit from regulated activities remains limited to regulated rate of return and temporary excess profits according to the regulation, current regulation shall be paid back to the consumers in the future periods. Plus EUR 1.9 million in liquid energy terminal segment revenue, mainly -- revenue increase mainly influenced by increase in liquid energy product tank [indiscernible] and handling gasoline, diesel, especially diesel related -- dedicated to Ukraine and also [ liquid biofuels ]. Another driver was EUR 1.4 million increase -- improvement in commercial LNG activities segment revenue. As in addition to KN Acu, LNG terminal operation income, LNG-related projects in Germany, where we are commercially operating 2 of the 3 terminals, and consulting revenues in Italy were received. At the same time, we have a slight increase in EBITDA by EUR 0.8 million, the main drivers being EUR 2.4 million improvement coming from liquid energy terminals and demonstrating a more than 40% increase achieved mostly by diversified growth in revenue and implementation of cost efficiency measures. At the same time, stabilization of energy prices in the region and globally also making a positive impact. Commercial LNG segment's profitability has improved by EUR 0.8 million, mainly with income from projects in Germany and Italy, as mentioned before. Unfortunately, the negative impact of EUR 2.5 million for regulated segment, mostly due to higher expenses. The regulated segment costs increased by EUR 6.1 million, of which EUR 2.5 million is an increase in the cost of emission allowances since the -- our activity level is higher, we need more allowances -- to purchase more allowances. Also EUR 1 million accrued customers compensations were recognized in 2023. And FSRU expenses higher by EUR 0.6 million due to inflation and higher OpEx maintenance costs. If we turn to net profit and loss, the appreciation of euro against USD has a major effect on a non-adjusted net profit during the 9 months of 2023. According to IFRS, total annualized exchange loss of EUR 700,000 less deferred tax was recognized this year compared to the loss of EUR [ 35.3 ] million during the same period in 2022. After eliminating unrealized currency exchange income of the regulated segment, its adjusted net profit amounts to EUR 1.2 million. And the net profit of oil segment increased by EUR 2.5 million compared to the same period in 2022 due to already mentioned reasons. [indiscernible], if you could jump to another slide. So increase in other cash flows, mainly due to currency impact from lease liabilities, generated the positive effect of EUR 5 million. The recent half -- 9 months of the year, we were less intense with investment in projects, plus CapEx lower by EUR 1.3 million. If you can jump to another slide to discuss leverage metrics. So our cash flow of EUR 44.5 million was deposited to short-term deposits generated quite similar return. At the same time, no significant changes in the capital structure, except for additional partial [indiscernible] finance reduction of the security supplement in the regulated segment. Also during 9 months of 2023, EUR 53.4 million lease liabilities we have settled during this period. And if you jump to the final slide of our financial presentation. So our gross profit margin have mostly meeting similar level compared to 2022. Net profit and EBITDA margins are slightly lower compared to previous period, mainly due to previously mentioned decrease in regulated LNG activities result. If you exclude regulated LNG activity results, group profitability ratios are on the recovery path. And return on equity, return on assets and price -- P&E ratio for the 9 months of 2023 were significantly -- were affected by significant impairment was recognized in Q3 of 2021. So that's all from my part about our financial performance. Looking into the future, we foresee that positive trend continue into the year-end. And we will be -- we will gladly answer your questions. Take away, Paulius.

Thank you, Vaidotas. Thank you, Darius, for the comprehensive presentation. And now we will proceed with the questions. [Operator Instructions] And so the first couple of questions were submitted in advance. And let's start with the first one: How capable is the company of achieving its objectives in the 1- to 5-year range, taking into account geopolitical threats?

So I will take this question on me. It's quite philosophical question because the level of threats or challenges in the geopolitical arena which is neighboring our, let's say, country is unpredictable. But the answer is very short from our end. We are capable. Of course, a new strategy requires revision of the capacities, resources and competencies which we have. But I strongly believe that this company is ready to resist any challenge, since last 3 to -- 3 years, we survived COVID, we survived Belarusian crisis, we survived losing Russian, let's say, flows. We adapted the organization to, let's say, -- we made organization leaner. We made the organization much efficient. A good example was when I was talking about the CO2 emissions. So this year it's only 9%, but in general, within last 3 years it was actually by 2x reduced, the energy consumption. So we are ready to compete. I believe, from the terminalling companies, at least in this region, we are best positioned to, let's say, handle with threats. Of course, it's not my duty to comment risks like conventional war risks, which are, depending on analytics, we have probably still on the table, but I believe this will not be the case, and we will be able to continue our activity smoothly. But maybe this question also involves some comment which is needed about safety of our infrastructure. So it's worth to mention that during this year we significantly improved the status of physical safety, maturity and status of all our terminals located in Lithuania, including anti-drone solutions and including underwater protection of our, let's say, marine infrastructure. So once again, we are ready.

Thank you, Darius, for the answer. And in terms of the strategical objectives, a question is: are there any plans to expand beyond existing activities? If yes, to which regions?

A question which is, let's say -- the easiest answer is to get that [ we are following ] a new strategy, still new. I'm saying it's still new because it's less than a year. Yes, our ambition is to enter new energies, let's say, business lines, which means hydrogen, liquid carriers and hydrogen carriers. It is also participation in energy storage activities and ambition to have CCS infrastructure or carbon handling infrastructure in one of our terminals. So it's many new topics, also including our ambition to expand our liquid terminals presence. And from our presentation, you've probably seen Marijampole, our latest development, which is close to the Polish border, it is doing fine, and we have strategy as well to, let's say, expand activities, not limiting ourselves to Klaipeda, Subaciaus and any other locations. Talking about the regions, yes, our ambition in a global LNG terminals development is quite a wide one. I think the most preferred regions is still Europe, Latin America and Southeast Asia, where we are really looking for opportunities. In Latin America, we are present. In Europe, we are also present. We are a commercial operator of 2 out of 3 presently active LNG terminals in Germany. We supported Snam terminals in Italy, et cetera, and of course still continuing to look for any other opportunities in the markets which are acceptable in terms of the risk for us.

Thank you for your answer. And let's proceed with the last question, at least for the moment: Are there any changes in the dividend policy foreseen such as interim dividends 2 times a year?

Yes, Vaidotas, please.

Maybe I can jump to this question. So in general we do not foresee, at least so far, interim dividend option, since the size of our company, the amount would not be meaningful. But we are constantly looking into ways how to expand our value proposition for the shareholders.

Thank you for the answer, Vaidotas. And with that said, it looks that we've covered all of the questions. If anyone has one still, please submit it. But as all of the questions are answered, on behalf of Klaipedos nafta and Nasdaq Vilnius, thank you, everyone, for being today with us. The recording of the presentation will be available on Nasdaq Baltic YouTube channel. Darius and Vaidotas, thank you for the presentation and also answering the questions. Everyone have a great day, and goodbye.

Thank you, Paulius.

Thank you very much. Have a wonderful day. Bye-bye.

Bye.