AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning. Dear listeners, welcome to KN Energies' Investor Conference. I'm Emilija 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 on NASDAQ Baltic YouTube channel. [Operator Instructions] With that said, I am pleased to introduce today's presenters, the CEO of the company, Darius Silenskis; and the CFO, Tomas Tumenas. Please, the floor is yours.

Good morning. Good morning. So thank you, Emilija for the introduction. Thank you for those who joined this morning. And I'm more than glad today to present together with Tomas what are our unaudited results and main highlights from all our business streams. As always, I would like still to remind what is KN Energies' mission and mission since it is revised during 2023 while developing -- drafting our brand-new strategy, long-term strategy. So shortly saying our vision is to be at the forefront of energy transformation by expanding in general, our services and improving our operations and activities in order to become climate neutrality company itself and of course, to support our customers on energy transition. And mission is, in general, remains the same. I mean, to continue our activities of storage, transshipment, accumulation handling in our operated terminals, liquid energy terminals, but also to enable the carbonization by developing infrastructure, which will be suitable for future energy carriers and also the least, but definitely not the last, emphasis on importance of KN Energies to the energy security will remain. So talking about the main highlights during the reported period, we, as usually, including the main highlights for the previous quarter or for the quarter about which we are talking today. So I will start from a very brief introduction of the key performance indicators, financial performance indicators, but I will not get into the details since Tomas will explain in a more detailed way later today. So EUR 83.5 million group revenue level unaudited, of course, results is and which means that our revenue was growing 7.3% comparing to results in 2022. Talking about EBITDA. So it is also improving by 2% comparing to the previous year. Talking about the net profit, it's a significant increase in net profit where net profit reached EUR 13.2 million while in 2022 was EUR 5.9 million loss. Nevertheless, just wanted to say, and it will be explained by Tomas later that it is not adjusted and normalized results. So you will have information about the all angles on a net profit a bit later. Talking about our regasification, which contributes significantly to our revenue line. So regasification was slightly -- and reloading services as well was slightly higher comparing to 2022. Talking about our liquid energy terminals. So we had slightly less transshipment. But as I will explain later, that doesn't mean less revenues and less profitability. So main highlights from liquid energy terminals. Maybe it is worth to -- still to remind that we achieved 1 more record below the biggest historically shipped the gasoline that means and reflects our capabilities to adapt to the market and meet the customers' needs in order to remain competitive. Also, we are successfully continuing, let's say, our services related the supplies from and to Ukraine by using our infrastructure, and it is not limited only to petroleum products, but as well so to some biofuels. And also, it is not, let's say, a typical DET operation of our terminals where we are providing services -- loading services actually to ISO containers, which gives more flexibility to enter or leave Ukrainian market. Talking about our global energy, let's say, business stream. So we secured the public tender for commercial services of 4 German LNG terminals on North Sea coast of Germany. Actually, this is 4 out of 5 terminals in Germany, which were built or are being to build to substitute Russian suppliers by the grid. And talking about our new energies business stream. So the biggest achievement during reported period is the fact that the European Commission included our, let's say, our leaded CCS Baltic Consortium to the final list of projects of common interest, and this will give additional opportunities or maturity to dispose to expect financing. Avenues, we finally changed our legal entity name, which is more reflecting our new strategy and scope of our activities. I'm getting still from some -- I mean, I'm getting still questions, what does that mean, KN? So I think the abbreviation KN, the best explanation could be that KN refers to key and new energies, which reflects our new strategic ambition. Respectively, we also changed our subsidiary's name, which is, let's say, used and responsible for our Brazilian business. Okay. So let's talk in a more detailed way about each business segment about each business stream. And I would like to start from the liquid energy terminals. So during 2023, we had firm demand for the services in all of our, let's say, operated and owned liquid energy terminals. Presently, we have 3 of them. One is in Klaipeda, one is in Subaciaus and also we are commercial operator of the Marijampole terminal, which is not -- maybe big budget is important for our Ukrainian related business. So revenues are growing 0.4%. But as you will see in the following slides, profitability and return was, let's say, growing or improving better. And why the transshipment activity was successful because the consumption was stable and the supply of liquid fuels to Europe were tense due to some unplanned refinery outages due industrial actions in the region. And this contributed to the stable demand for our services, which we provide mainly in Klaipeda terminal. So talking about another driver few years in a row, we are reporting a record on a biofuel transshipment and related services. So this tendency is continuing. And of course, more light products, so to say, products which are not used -- which are not needed to be heated during the handling operations. The share of those products is significantly increasing. Year-over-year consumption of gasoline and diesel in Lithuania actually increased during last year. It's about 7%, and it caused a 7% higher than shipment flows in our Klaipeda terminals, the tanker truck station, where mainly gasoline was a growth driver. Also talking about bitumen, we started this business almost 2 years ago and there is a stable growth, which we can see and last year the, let's say, amount of bitumen, which we handled in our Klaipeda terminal was growing quite significantly. It was 18% more comparing to the previous year. Talking about our regulated LNG or talking about the performance of our FSRU Independence in Klaipeda. So regasification and reloading quantities were growing, but not so significantly. It was 4.7% higher comparing to the same period. Utilization of our infrastructure of this terminal was at the level of 71.4%. It is slightly higher comparing to the average of Europe's LNG terminals during 2023 where the average in Europe was 59%. Talking about the natural gas index prices, which indirectly is affecting, of course, our regasification volume because natural gas has substitutes in the region. So price dropped significantly from the very peak EUR 130s, EUR 150s even in 2022. During 2023, average Dutch TTF gas index was at the level of EUR 40 and for those who are checking pulse of the market, you can see that the tendency is continuing, TTF index is even below EUR 30 last month. So during 2023, we have booked fully all capacities of FSRU Independence till 2032 and capacities have been allocated to 6 different market participants from Lithuania, Latvia, Estonia, Poland and Norway. 85% of natural gas transported into Lithuania during 2023 were handled or imported through our operated FSRU Independence. And shortly about market tendencies so Lithuania's natural gas consumption was about 14.9 terawatt hours during 2023, which is about 4% less comparing to 2022. Okay. So let's move to our commercial LNG segment. Commercial LNG segment, I'd like to remind, it includes our global business development and projects which we have overseas and also our small-scale terminal performance or truck loading -- LNG truck loading terminal performance in Klaipeda. So 27.4% increase in commercial LNG revenue during 2023. And the main drivers for that, of course, was successful contracts the DET terminals and also revenues, which we managed to accumulate from cooperation with Italian partners by supporting Piombino LNG terminal. And of course, LNG truck loading station in Klaipeda was picking up, and it was a record number of LNG semi-trailers loaded in this infrastructure during 2023 and this growth or increase was quite significant. It was 57% more. Talking about our new energies, new business segment of new energy. So the biggest progress presently is on carbon capture and storage, Baltic Consortium development. I already mentioned briefly, we were included in a 6th PCI list by European Commission and this gives, let's say opportunities while it will -- when it will be approved to move on with the traction of funds from EU to develop this project together with our partners, which are the Japanese company, Mitsui O.S.K. Lines, Norwegian shipping company, Larvik Shipping and Akmenes cementas, SCHWENK Latvija as well. So this new energy stream is really developing well. So talking about our environmental, social and corporate governance, let's say, block or part of our activities. So what it is important to say that our new strategy is very significant milestone achieved during 2023. Why? Because it defines very clear commitment of the company to climate neutrality, and we have very, let's say, precise goals and ambition defined in this document. Talking about safety block, which is very important for the company like KN Energies, the operator of, let's say, dangerous products in all our terminals. So we are measuring closely and investing a lot in the safety culture improvement. So the main, let's say, KPI, which we use to measure performance is TRCF. So our goal was quite ambitious. We were targeting 0.8. We managed to achieve 0.6. So talking about the Scope 1 CO2 emissions, so meaning the emissions from our direct activities, we managed to decrease CO2 emissions by 8%. Also, we have included suppliers angle in our ESG activities and prepared and approved Code of Ethics for them. Talking about the equal opportunities, pay gap decrease is 14% real -- I mean, the actual result is 14% comparing to the goal, which was 10% and women in managerial positions presently consists 26% in our company or group. Improvement in governance. So we -- comparing to the last 3 years, we were ranked A-. So this year, good governance index is A. And also we have improvement in corruption intolerance rate, which improved by 3% up to, I would say, a record 96%. So transparency, let's say, goals are also improving. And at this point, I would like to pass word to Tomas and to talk about our financial performance and about the ratios in a more detailed way. Thank you.

Thank you, Darius. Good day for everyone. So I'm really glad, first of all, to join the KN since I became CFO, like a brand new one, 1 month old, while my age is more bigger. So let's look at the results. Thank you. I would like to point out maybe first of all, very shortly the glance of what happened in the last year in overall macro environment. As you know, geopolitical situation and the war in Ukraine has a very big impact on Energies' business as such. And of course, even at higher level on Europe Energy business, and the market situation and fluctuations of the prices are very, let's say, big ones, very steep ones. And if we take even the 1 side of the gas price. The gas price during the last year, basically declined, was on downward trend and declined to, let's say, by almost 47% and followed by other, let's say, the liquid product prices. Therefore, the market player has to adopt to these fluctuations in the markets. And accordingly, our business, our company is definitely depending indirectly to those movements of the prices of gas and other energy products. And it was successful adaptation I should admit. And -- because as Darius mentioned, if we look on the revenues, we increased by 7%, reached EUR 83 million revenues in total. It's one of the highest revenues of the company's history. And if we look on our 3 business segments, the growth -- the biggest growth came, which is very important for us is on commercial LNG side and commercial energy grew by 28% and their LNG regulated business sales growth was 9%, and liquid energy was on the flat, I would say. The growth was very small. But nevertheless. If we go to the EBITDA, EBITDA for business segments, especially commercial business segment growth was really nice, really big one. Commercial LNG grew by 44%, liquid energy by 13% year-on-year basis and regulated business by 9%, which is really important for the company. I will repeat what Darius said that on LNG regulated activities, the company managed to have long-term agreements with the clients till 2032 and securing the utilization of the terminal around 73%. This is a very high utilization ratio. And in our backup slides, you can see their table showing how in Europe, other terminals are performing and what is the utilization ratio. So this is a very key big achievement. We have a secured utilization till 2032 around 70%, 73%. This is really, really good and very strong message to the market and to the company and to the all I would say Lithuanian customers and eventually the consumers meaning that it's not like we can sleep peacefully, but we can sleep peacefully in that respect. If we talk about liquid energy products. Here also, we are very strong in terms of our market share. We're having almost -- if we are comparing ourselves to other Baltic terminals because our operations on liquid energy basically is based on Baltic countries and neighboring countries like Poland. So comparing to the -- our other Baltic terminals in liquid energy products we're occupying the market share from -- at the beginning of the last year, 40% till the second half of the last year almost reached 60% of all liquid energy transshipped amount that KN occupies approximately 60% of the market share. So this is like a sign showing our ability to capture the best clients to put and to solve -- the best service to provide the best service. And also, this is a strong fundamental for the future growth. And the -- very, let's say, predictable future cash flows because also we are aiming to secure our clients on long-term basis contracts as much as we can. Looking on the bottom line net profit, as Darius said, we had a quite nice profit from balance sheet point of view, let's say, accounting level, around EUR 13 million. Of course, it's a huge improvement from the last year's loss. But usually, we are showing managerial figures. Managerial figures, meaning that we are showing our adjusted net profit. Here, basically, we are taking out impact of IFRS 16 and taking out that impact, our net profit was EUR 7 million, which is less by almost EUR 2 million versus last year. Basically, in this IFRS adjustments are adjustments related to their unrealized ForEx because when we are renting our FSRU Independence, we have in our asset-based lease amounts and those shows like on the balance sheet like assets. Therefore, our financial debt grows and having payments in U.S. dollars for the lease of the vessel and our functional currency is euros, some other currency is euros. Therefore, the exchange rate fluctuations has a big impact, and it was more than EUR 7 million last year. And the minor impact was deferred income tax. It's also related to this IFRS 16 adjustments. This is more than 1 -- this is EUR 1.1 million. But looking forward, as you know, and heard in the market that this year is very important for the company because we will acquire our FSRU Independence totally, let's say, eventually. And by the end of this year, we'll have it operating and including in our balance sheet. So we'll own the vessel. And what it means? It means not only from the strategic point of view as a country's point of view, having that Independence in own balance sheet, but as well as owning the vessel and operating the vessel. Also, it means that those from a financial -- point of view, those fluctuations of IFRS 16 will be diminished to almost minimum because we will have our vessel in the balance sheet, and we also will have on the left-hand the loan for that acquisition for that, let's say, vessel payment. And therefore, we'll be good in that respect that we will have less and less differences between accounting net profit, accounting EBITDA and adjusted net profit. So if we can move forward, this our basic ratios. That's basically reflects what I said previously. As you see, our gross profit margin is quite nice, fluctuates during the past 2 years, around 27%, 26%, 28%. EBITDA margin is very healthy and it's around 43%, 45%. And looking forward, we are aiming to keep that level according to our strategy, but also according to our, let's say, vision because this is very, very profitable and marginable business. Accordingly, our having the huge balance sheet on our side to the return equities -- the return on equities, return on assets also fluctuated depending on the asset size. Some comments on our leverage because we think it's very important to comment this because from first glance, it might be quite high ratios, looking like 12, 11x to EBITDA. But again, as you know, our loans are basically related -- not basically actually related all loans to the Independence, and those are secured by the government guarantee. And the net debt amount then to the last year was EUR 300 million, as you see. The company has quite big liquid buffer. This is very important to know. As you see, we have around EUR 20 million in cash and in short-term deposits EUR 57 million. So we had quite healthy liquidity buffer, which company invests in according its investment policy into very liquid and transparent and secure instruments. And we are doing this all over the year and that liquid buffer company wishes to maintain, to keep in order to finance its growing business, especially commercial business, future expansion in the foreign markets or maybe even having various acquisition transactions because also our commercial team are working in that area very heavily. And we are looking forward to have those in the nearest couple of years. So from a liquidity perspective, for one hand, we quite have a high amount of the debt, which is secured by the guarantee. And also, we are quite okay with the liquid buffer. But if we look on our DSC, debt service coverage ratio, meaning we know that ratio who is in the financial field. So that is around the level of -- from 3 to 5x. So this is a very healthy DSC ratio, meaning that we are from a cash flow perspective, very secured and basically already repeating myself that securing LNG regulated business for the next 8 years at 73% occupancy ratio. So no problems in that respect. Free cash flow also was quite healthy, finishing at EUR 35 million per last year. Yes, this year, we have quite ambitions regarding our CapEx expenditures in various investment projects. And as you see, our loans are basically our companies or the banks, financial institutions, which are key players having, let's say, state companies, financing state companies and financing even in the state. So here, the company doesn't happen in commercial loans and -- but nevertheless, looking forward, depending on our future expansions and our growth and our acquisitions, we're also considering going public in terms of the -- maybe finding another partner's financing, which will be keen on financing our, let's say, various investment projects and acquisitions. And basically, that's it from our side. So you're welcome to -- for questions, and we're happy trying to answer them and give additional explanations, if there are such.

Thank you for the comprehensive presentation. [Operator Instructions] The first question received in advance is regarding the dividend payout plan. Could you comment on that?

I think that maybe Darius you wanted to comment it, please?

One second, I'm trying to see the number. Emilija, could you please clarify the question? Can you read it because dividends is quite a complex topic because it's not -- what is the question to be precise?

The question is regarding whether the 2023 profit will be used for dividends?

Thank you for the question. And as always, this decision is taken by -- in a general shareholders' meeting and should pass all the, let's say, steps of approval all the way to this decision. And as always, we are, let's say, making this decision in April. Talking about the dividend policy itself, I must admit that we have one which is now valid and potentially can be used to, let's say, set up distributed net profit but it's worth to admit that presently, we are revising this dividend policy. And I hope that we will have a new version available till the decisions regarding distribution of the profit will be taken. Why we are changing because we have a new strategy and we have a new ambition and new financial projections. But let us work on that. It's too early to confirm that we will have dividends but we have valid dividend policy processes, as always, related the audit results and all corporate approvals.

The second question is regarding the FX contracts. Will they be settled in line with the acquisition of FSRU Independence?

No, I will try to contemplate on this, I give a short answer. Basically, this is 2 ways to look at this and being open with our shareholders and minority shareholders, if looking, let's say, simply from the business perspective, of course, from the business perspective, we are very looking on the situation and thinking and making a decision regarding this ForEx transaction because, as you know, from one hand, we have price in dollars of that vessel. And meaning that as far as exchange rate fluctuates, then the price eventually looking -- converting into euros also fluctuates and that affects the -- and will affect the price -- eventual price of the vessel price to what the vessel will be acquired. And of course, how much cash we will need to pay. Looking on the -- from the accounting point of view, of course, transact -- I mean, the price of the vessel will be recorded according to official exchange rate, as you understand, and that will be -- that will take place on the 6th of December. So from a commercial point of view, we are -- as a management of the team, we're really thinking how to do this and logic says, okay, maybe we should go and we shall see the hedge possibilities, and we are watching very, very closely the market because usually we can hedge and secure, let's say, our price, which was pre-agreed since agreements has been, let's say -- since the decision was made to acquire the vessel. But from the regulator's point of view, it's a tricky bit one, because will, let's say, the company will make a hedge and the price -- sorry, and the exchange rate on the 6th of December will be different. And if the exchange rate will be favorable for us, so everybody will be happy. But if, let's say, exchange rates will be worse, meaning versus our hedge than the company comparing to the 6th of December official rate and let's say market rate might have a difference and might have a loss. And therefore, regulator will not compensate for that loss. So here it's just a bit tricky. But anyway, this is very important because we understand the dialogue, the transaction and impact on the cash flows. And -- okay, so my quite long speech was in that sense that we have a mechanism and procedures watching and making or giving a decision, let's say, to the stakeholders and whatever is needed to react, let's say, when the exchange rate will be favorable. So meaning that we are still in the process, and we are thinking very seriously maybe to make a hedge depending on the situation in the markets.

Just to supplement Tomas, one more thing to highlight is that, nevertheless, we will manage or not the FX -- locking in FX, all the actual value will be defined by regulator as the regulated asset base. So returns will be calculated from the actual value so to say value in euros. But of course, for sake of mitigating any related risks and not exceeding the, let's say, amount of credit from Nordic Investment Banking management we will be looking into opportunity in case if FX rate is reasonable to step in and reduce any possible risks. But as Tomas rightly said, it must be agreed with the regulator. And let's say, stipulated in respective bylaws and legal acts.

But yes, but the company has all instruments and it's prepared for, let's say, for this hedge and having the credit lines with the appropriate banks and everything. So we are ready for this.

It looks like we've covered all your questions so far. [Operator Instructions] As all the questions have been answered -- sorry, just got another one. When will the project of common interest be implemented?

Well, common -- project of common interest is the status of the project of the Baltic CCS Consortium.

Please unmute.

Important, let's say, in Europe, let's say. So final approvals, as far as I remember, need to be done in spring by European Commission -- by European Parliament. I don't know exactly if it's needed, we can clarify. But I think in our media reports on this, I think we mentioned, but sorry, I don't remember exactly.

Thank you. As all the questions have been answered on behalf of KN Energies. Thank you, everyone. It was a pleasure being with you today. The recording of the presentation will be available on NASDAQ Baltic YouTube channel. Thank you for a very informative conference. Have a good day.

Thanks you so much, Emilija, thank you for good moderation and for all the participants. Thank you. Thank you for all of you, and have a good day. Thank you.

Bye.