AB KN Energies (KNE1L) Earnings Call Transcript & Summary

Good morning, dear listeners. Welcome to KN Energies Investor Relations 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 webcast is being recorded and will be available on the Nasdaq Baltic YouTube channel. I encourage everyone to submit questions in the Q&A section at the bottom of the screen. You can submit them either anonymously or with your name. With that said, I am pleased to introduce today's presenter, Tomas Tumenas. Please the floor is yours.

Hello, everyone. Good morning. It's nice to see the participants and looking forward for the tomorrow's celebration that we will have and maybe longer weekend, I'm happy to present the 6 months results of KN Energies. And let's start, I will make a short introduction to how we will present. We would like to show some highlights on the development of the energy sector, energy segment in Baltics, as well as in the world, the touch main key things that's happening also to touch upon the key components, I would say, of macro environment that directly and indirectly affect the company's performance. Then I will give a very short summary overview of the business segments, how we are performing, how we performed within the last 6 months, and as well as some facts about our financial results, and we'll be happy to answer your questions. So let's start. Let's start from the main KPIs, I would say our main highlights that I would like to point out. So if we start from the bottom of profit loss statement as usually, so we're taking and talking about the revenues, the first 6 months revenues of the company reached around EUR 43 million. And actually, we are slightly above on the last year. And very important to note that almost EUR 20 million of revenues came from our commercial activities. And this is a really good achievement because the commercial activities are very important for the company's development. And looking forward in the next forthcoming years, looking into our strategy, long-term strategy, the development of commercial activities, I would see, are one of the key for the company's success driving, driving forces for the revenues increase and for the profitability. So commercial activities grew by almost 13% versus the last year and almost by 10% versus the budget. If we take a regulated business activity, which accounts approximately to 47% -- 50%, sorry, 57% of the revenues, it's the biggest so far. Business segment, LNGT, the revenues remained almost stable, being precisely slightly less than the last year. And one of the key reasons are those that are our Independence, our Inde -- our vessel, which you see on the screen has been in the dry dock, and I will touch more -- in more details in the following slides. So from revenues point of view, company was, I would say, on the stable level, but taking into account growing commercial activities, this should be regarded as a successful factor. The company's EBITDA grew 30% versus the last year, and we reached around EUR 22 million in revenues -- in EBITDA amount. The biggest part of the EBITDA more than approximately up to 60% came from regulated business activity and specifically 57% and from commercial activity, 43%. If we compare commercial activities contribution to the EBITDA, it grew from 40% that we had last year to 43%. So this is again growth in commercial activities revenues directly affects company's profitability and EBITDA ratio. And looking forward, of course, our aim -- long-term goal is to increase the share of commercial activities into EBITDA, as of current ones, 40%, 43% to reach definitely 0.5% and even higher up to 60% in the long term because, as I said, this is the key drivers for the company's long-term strategy and its success. Net profit, adjusted net profit, please be reminded that adjusted net profit excludes impact of foreign exchange into our profit loss statement because we will be able to acquire by the end of this year the FSRU and our acquisition price is denominated in dollars. Therefore, a fluctuation of exchange rate, euro versus dollars has direct effect on the profit loss statement. So if we exclude that ForEx impact, which had -- which was in the first half amounted to EUR 5.7 million of loss in ForEx, adjusted net profit was EUR 6.3 million. And as you see, it's almost EUR 2 million above of the last year. So basically about a brief intro regarding our, let's say, financial performance. If we took on the business side, the first half of the year was really successful, especially for commercial activities. First of all, as you know, we already issued the notice via the stock exchange, we won 4 contracts of floating LNG terminals in Germany out of 5. So KN Energies has secured long-term contracts with the Deutsche Energy terminal operator, state-owned company, DET, that, as we are calling. So we have 4 agreements for long-term contracts from operating for floating terminals in Germany. Plus on top, we won also technical contract of one of the out of 4 terminals. So this is really good and big achievement, and it shows big efforts and big, let's see, professionalism of the KN Energies' team, and that's -- it's really that we could -- we are proud and proud not only, as a company, but I would say, proud as the country as well because we are selling -- we are exporting our brains and our expertise abroad. So we managed to put into our export markets, our commercial activities, our global business, not only Brazil, as you know, we already have Brazil for more than 1.5 years in our portfolio. So we added Germany as well. And looking forward, German market is very important. It's one of the biggest, of course, markets in LNG business in Europe, definitely, has the biggest economy of Europe, Germany. So our presence is really, really a very big one, very beneficial for the company and looking -- and we are really wanted to expand beyond of our current, let's say, obligations, and it's only the start. So we see that market and opportunities for the -- further grow very, let's say, prosperous, and this is where we will focus in the next 5 years. The most -- and the most -- the last news is that the company established a daughter company. It will be called KN Deutschland Energies -- KN Energies Deutschland, which will operate those terminals. Also on new energy business segment, we have a small business segment created very recently new energies. Here, we are focused mainly on carbon capture activities. And important news is that Lithuania has been granted common interest, let's say, status of carbon capture business activities, which KN Energies leads, and we are like front runners for having that consortium. And also, this is only the start of our new energies business for a particular carbon capture activity. And as well, I would say, the path is quite lengthy in the future. And also, we have big ambitions here to expand the business and nearest future will show us, and of course, we will announce that into the public how we're succeeding. On regulated business, also, we had important things. Our Inde -- our vessels is how we're calling has been in, let's say, in dry dock in the beauty salon and the vessel spend 1.5 months, and we renovated that, refurbished that. So it's already in Klaipeda came back home to the Klaipeda port, Klaipeda harbor, and we are ready to -- for the acquisition of the vessel, which will happen at the end of this year in particular on the 6th of December. Also, the recent news is that regulator increased the WACC, which we have at the moment from 5% to 6.5%. That will give us additional revenues, additional income into our, let's say, regulated business portfolio, and that also is very important for the company's profitability and the cash flow. So small update on the global market. Basically, we are watching from a business perspective, also from a financial perspective on several things because they are very important for us and we exclude 3 of them. One is the exchange rate dollar versus euro. And then, of course, this is the natural gas price and carbon permit prices because all these 3 components directly and indirectly affects the company's performance, and I will make small comment, how it looks like, how it effects on the performance. So as you see, let's say, from the foreign exchange fluctuation, it was quite big and somebody -- someone, who is also interested in the foreign markets and noticing the exchange rate fluctuations, they are very, very volatile. And as I said, we will need to acquire our vessel, and it is denominated in U.S. dollars. So for us, the exchange rate fluctuation is very important because we will buy in euros now a loan, which is secured by Lithuanian government, and it's already agreed with the Northern Investment Bank, also is denominated in euro. And we have a cap, our cap is EUR 138 million, and the price of the vessel is $153.5 million. So definitely fluctuation effects in one another way. And for example, if we have reached, we have 1.6, so like our direct loss could be a debt exchange rate, around EUR 6 million. And if we take the last one in the graph, 1.7, it's almost EUR 4 million. And if we take today's rate, it's only EUR 1 million. What it means? It means, as I said, direct impact in our profit loss statement and also direct impact on our cash flow because what is above EUR 134 million -- EUR 138 million, we will need to give from our, let's say, [indiscernible] from our pockets. Therefore, we are watching carefully the exchange rate, and we are in negotiations with the energy regulator. And hope after the -- when the law in the parliament this summer has been passed, allowing us to hedge and to include the results of the hedge into -- hopeful into regulated asset base, which we will need to agree and to have the final verdict of the national regulator. This is our aim. And our aim, of course, is to secure the exchange rate, as best as possible in the market and to pass on to our end of consumers, the best read that we could obtain in the market. This is very important. And the gas itself, of course, fluctuation is not so -- I would -- it's quite steep, but maybe it's not every day big fluctuation. It impacts our variable costs and KN Energies usually hedges the gas at the beginning of the season. So here, we are more or less secured. But as you see in the recent trends, the gas price in the market grows because of the many reasons and foreign -- and the future shows also increased trend for the gas prices, especially in forthcoming autumn and winter. Carbon permits, as we operate the business, which is, let's say, mix of pollutions, and we need to buy the permits, and it impacts also our performance quite a lot. So we are hedging in that sense that we are looking on the prices of the EU permits and trying to find the best onetime for the entering into the hedge, not exactly hedge, but buying the permits and securing because we have a certain quantity, which we need during the -- over the year to purchase. So currently, our average price of the acquisition is EUR 68 -- EUR 68 per carbon permit, and it's much more better than we had last year. And after that action, especially if we compare to the prices, which we paid last year, and we paid, and we had in our budget, we are saving EUR 0.6 million. So this is very as well important, as the total costs of the permit accounts to almost 5% of our total costs of the group. So actually, a small -- basically, I touched upon the development of the energy, especially gas worldwide situation, and here, the graph shows the differences of -- that the price trends for the gas in the different markets and major events. This is just for information for you and for investors, which would be keen on knowing we have to answer later on or separately. But as you see, our environment, it's quite -- in which we operate is really fluctuated, it's very, let's say, vulnerable, I would say, and whole energy sector operates under quite vulnerable market conditions and everyday needs to adopt and to make appropriate decisions in order to secure the profits and to mitigate the risks. So if we -- here, we can start very briefly upon our business segment. So regulated activity, I already mentioned in terms of the revenues we have -- we are quite flat, slightly below on the revenue level of the last year because of the simply -- simple factor that our tower vessel was in the beauty procedures, which I mentioned, and we have not been operating it almost 1.5 months. Therefore, definitely the volumes of regasification declined versus the last year, and it was definitely predicted into the budget, and this is nothing new, but simply explaining the overall situation, this is one of the reasons. But so far, we managed to unload 30 ships and to unload almost 800 billion of cubic meters of natural gas. And as you see, it's below of the last year because I already mentioned reason. So important to notice to send the message that as I already mentioned again, the vessels ready for the acquisition. Everything is checked. It's operated well. So we will acquire in a very good condition, good vessel. And we are happy about that and prepared for this very important strategic, I would say, a strategic move for the whole energy sector. And KN Energies will be the operator, owner, ultimate owner of the -- our Inde and Inde, as you know, is a really, really good example, how many years ago was made very profound, looking forward decisions to secure our energy sector and also not only to secure, but allowing us to export our brains, our expertise in the foreign markets. Liquid energy, liquid energy market, as you see, if we take a short, I mean, a brief look from the market situation. So in the Baltic Sea ports, meaning Estonia, Latvia, and Lithuania, this year, first half of this year, still, we are declining in the volumes of the liquid energy products transshipped via all ports. And -- but despite of that, KN Energies' volumes are very close to the last year. So our decline is less than the total decline of the ports. Again, here, as you see, the Klaipeda port, I would say, performed comparing with the -- with other Baltic ports in total better. Of course, it's anyway declining by 6.5% in the volumes, but it's much less than, as you see in our neighboring ports. And KN Energies' loading of liquid energy products are less -- in terms of the -- are less -- I mean, we are declined less than total market. So this is, again, like a signal that we are managing better or performing better than the total business environment at the moment. If let's say, I'll give some figures, if our transshipment of oil products declined by 3.3% versus the last year in terms of the quantity. We transshipped 1.9 million tons of liquid energy this year versus 1.95 million of the last year. The volumes -- the volume-wise, we sold the volume-wise, I mean, not volume-wise, but on the revenue level, the sales of the liquid energy reached EUR 14.6 million, and this is almost 3% above versus the last year. So the quantities declined, but the revenues increased. And the main reason is that we managed to negotiate with our clients on better terms of service that service fees, simply speaking. So this is also very important and shows company's abilities to adopt to the market despite of the declining the trend on the transshipment volumes, we managed to increase the service fee, and therefore, on revenue level, we are not declining. Actually, I mentioned almost everything that I wanted to say about liquid energy, but here may be a couple of points is that very interesting products. We are managing -- we are transshipping like bitumen products like biofuels products, and we are calling them light oil products. And the tendency for light oil products versus the traditional ones, dark oil products over the past couple years increasing. So that tendency will prevail in the next years, as well and the company sees that, and the company also prepared for this because we need to have a certain different capacities and abilities and equipment, while transshipping light oil products. And we are considering one of -- one, we have many, let's say, plans for our investments in the next the 3, 5 years, and one of the directions will be strengthening the loading capacities at Klaipeda port, our port of bitumen and light oil products. So one of the directions of our investments will go into that area because we see the market trend and the growing trend for -- and the demand -- growing demand for those products in the future. So we came to very interesting part, commercial LNG. Here basically is everything that is beyond Lithuania. And I'm very happy, as I mentioned, that we managed successfully to enter into Germany market. And of course, that happened not within 1 day, it was long-lasting efforts and performance of our team. And so finally, we managed then into the market, adding Germany on top to the, let's say, Brazil activities. And this is not, of course, the last things. So we really hope in the next couple of years to expand abroad in other different countries as well because we have already the track record, and this is really important for the KN Energies. And again, I'm very proud that this is also its export of Lithuania, as well as export for LNG business in the worldwide markets and KN Energies are very known already, as a company operating LNG business, knowing how to operate and a lot of our clients looking forward to co-operate with us. So here also definitely shows all data for [indiscernible] results. And from commercial LNG sales, we had for the 6 months, EUR 4.3 million, and this is almost 1.8x higher than we had last year. And definitely, in the future, I would say, it's bright here, and it doesn't mean that we don't have any challenges or things to overcome, but we have very solid ground for growing further. And export activities, not only for KN Energies and for the energy sector, but I would say, for the full Lithuania, the company's economy is strong as much as it could have strong presence in foreign countries and have the capacities for export, especially taking into account our current political environment. So we are very proud of that, and I see good prospects of the commercial activities. And yes, we are preparing for the business and continuation of the business, as I said, it's only a start of the long journey. New Energies is a very, very small business segment. At the moment, we don't have sales here. We have only small costs related to the long-term projects, and one of them is carbon capture project, which already I mentioned at the beginning of my presentation, and it's a really interesting one. It's very, I would say, up to date to what is happening in energy markets. And I'm happy that again, that we are in -- at the beginning of that journey as well. We are trying to use all opportunities what is going on at the moment, and KN Energies is wanted to be there, like pioneer here from the Lithuania perspective, from the Baltic perspective. And if a real opportunity -- real business cases will appear, I hope that we will be the first ones, which could use that business cases and make it alive and profitable for the businesses. Therefore, we already have made a consortium of several companies in that direction, and we will start step-by-step investigation -- deep investigation of that business case, let's call it. And all our investments are -- a part of our company's investments will be directed into that activities, which we hope could an optimistic case, be very profitable and successful, and also upfront runner in the whole European carbon capture market. Sustainability, it's worth to mention because it's really important for the KN Energies and used to be always. I'm happy that the company won a batch from Nasdaq of Sustainability Index, 9.6. It's very high rank, I would say. And we are happy that again, we are one of the upfront runners for sustainability, business project, how to call it transparency things because stakeholders, our shareholders, our Board puts a lot of attention into this area, and as whole energy sector, it needs to read up, to rechange, reshape its activities, so we are not exemption. And here, KN Energies is doing the good things, good investments and strong background for being carbon capture free till 2050. It's long journey, but it already shows that we're in a good track. So I'm very happy about that. Financial results, actually, everything I mentioned, basically, mentioned revenues, the drivers for the revenues, EBITDA, the EBITDA drivers. Net profit, as you see, we had EUR 1.5 million, but again, excluding the impact -- So basically, the 6 months are successful for the company's operations. Then the second half, I hope, will be nevertheless, even maybe the better not to give a concrete forecast. But I hope that this year, as full year for the company's activities, will be a really good one, and allows us to have everything in our pockets in order to prepare for our strategic implementation till 2030 and beyond. If we take some metrics on our profitability ratios, maybe I will even just skip those the other facts. They are more or less reflects the average industry level in energy sector because we are operating in capital intensive business environment, in the business environment with heavy investments into the assets. And some information on our debtness, on our leverage ratios, our total loans amounts, as we see around EUR 30 million. And after acquisition of the vessel, as I said, that will happen at the beginning of December [ to be ], financial loans will reach around EUR 320 million. From one hand, it's quite a big amount. But from another hand, it's secured by the government. And if recalculate the net debt-to-EBITDA level, we have quite high. But as I said, we have the government guarantees for that. And also, we're carrying some positions in our cash, which we have together with deposits more than EUR 60 million, and all our deposits are definitely invested into the, let's say, look with instruments basically high-ranking deposit instruments. And we are, of course, earning money not laying free. And looking from a very important debt service coverage ratio, which shows the capacity -- companies capacity to serve the loans, we have it quite high reaching almost 5x. It's really quite high. As you know, especially financial analysts, the normal one is around 1.5x, maximum 2x because our loans are long term in nature. They are lasting till 2044. But again, looking forward, taking into account our appetite for investments, of course, the company will go into the market for commercial loans in the nearest future because we have investment projects, as I said, which we need to implement, and we are, as normal business need to leverage our cash flow situation and to invest not only shareholders' money, but of course, to use their lending facilities and for the projects -- for different projects, for business maintenance projects, as well as for the projects, which are profit oriented, which will give additional profit for the whole KN operations and strengthen group's financial view and financial capacities in the nearest future. So this is my presentation, information about the KN performance, about the market things, and I'm very happy to answer your questions, if you will have those.

[Operator Instructions] The first question we received was regarding the dividend policy. Are you planning to update the policy?

Yes. We will update that policy, and we will update afterwards when we will have final, let's say, let's call it, final conditions approved by the ministries, by our shareholder, let's put in this way, because we need to be here very clear, very transparent definitely. And as the shareholder or the final shareholder will make a decision, concrete decisions, we will update those. But as you know, we already paid for the last year, the dividends, the amount of the dividends the market knows. So it most likely would be in that direction.

And the technologies and demand from the market are changing very rapidly. Are you planning your strategy plan 2023, 2050 update in the near future?

Strategy plan, we have a like confirmed strategy. And every company, I would say, not even exception, KN Energies usually wants to update its strategy because of the reasons, again, what you mentioned. So we're already updating that, let's say. And basically, we are in the line with the long-term strategy. But of course, some minor changes might happen, and we will make those announcements, as soon as we will be ready to do that. But basically, we're in the same direction. Nothing dramatically is a different one, absolutely materially not. But it also confirms us that we're on the right track. But since we once been update, and it's needed because the market changes, and if material changes in strategy will appear, of course, we will update the strategy, and we will announce that in our website, which is at the moment post, yes.

The company now generates around EUR 40 million of operating cash flow. How will it change when the FSRU will be bought out and the new RAB and WACC figures will come into power?

Basically, I would comment in this way that we will have a positive effect versus current situation. I would not say that it will be materially different -- materially big change, but it will be, of course, on positive side. This is my comment in brief.

Will there be significant changes after December 2024 in EBITDA in each business line, regulated LNG, liquid terminals, commercial LNG for the upcoming years?

If we take regulated business, as we as KN Energies, we are not announcing public our forecast. And of course, I'm very cautious about giving this hints, especially what relates to the things that it's beyond 2024. I would say if we take the second half of this year, the directions, which I already described what happened during the first half, it should remain. So directions, the trend should be the same. So you can make your own decisions and what it will be beyond. As I said, our aim is really and effort is try to increase the revenues, definitely the revenues and EBITDA from commercial activities to increase the share of commercial activities of the share contribution chain to EBITDA and to the revenue side, and that's obvious. So I don't want to give you any concrete like things directions, but this is the goal, let's say, of the management division, and as well this is in our strategy. So I hope that the things that we're doing at the moment lays a strong background for that direction.

And what are your RAB and WACC projections for the year 2026 and further? And do you see this current high WACC level sustainable?

Every year, the company, usually, it's a usual procedure. It's a normal procedure, have negotiations with regulators regarding asset base. And of course, the aim of the company, of course, to have the high as much as possible. But from another hand, it's, again, an interesting topic because this is -- the WACC it's the price, which company receive it eventually came from the end consumers and directly from the end consumer. So we, again, understand the situation. We need to be as a company, how to say, theoretically, we would like to have as biggest as possible. But in reality, the directions of the company to put is directed into the efficiency, let's say, because it's our aim. We need to create as efficient as possible, and to, let's say, to have us less cost based on regulated activities because of the reasons why we are created and why we need to operate. We need to pass, as less as possible cost to the end consumer. So here, it's like not a thing that it's not a thing that it's commercial 100%. It's also the thing of efficient operation of the company because we have that on our shoulders, and this is our one of the missions, let's see. But of course, the cost increases, and we need to operate the regulated asset base, the vessel, we need to secure operations, we need to be up, again, upfront of the many things. And also, we need to invest. We need to have the newest possible and also IT solutions in various activities and that also in the regulated business because this is the market, again, otherwise, you can't sleep on and do nothing in simplified version. So the WACC, we will see. It's not likely to give a long-term indication that we'll have 6% of WACC or 7% of WACC. But I would say this is a direction, where it's going to be at from 5.5% to 6%, it's a more unsustainable level.

And the next question is, can you disclose the approximate price of the FSRU sale purchase deal? And what will be the sources of financing?

So the price is $153.5 million. This is that we -- this is that we need for what we need to buy. This is the last piece of our lease, let's say, lease payment. And we had secured the loan, as I mentioned, and our floor of the loan is EUR 138.4 million.

Question about the CEO. Why was he decided to search for a new CEO? And what stage is the process at right now?

Yes. Solely, as we are state owned company, and we are transparent company and shareholder also is transparent. Energy, Lithuanian Energy, Minister of Energy, and it's a normal logical procedure once per 4 years if I'm not mistaken. I'm sorry to see and to look for to make that procedure for renewing the position of CEO. And only what I can comment that our currency also participates in that process, let's say. And we hope that maybe even this month, we will know the outcome of that procedure, let's say, of the decision of the shareholder.

And the final question is how big is the business of commercial LNG? And how are the projects in Germany going?

So as I mentioned, currently commercial business accounts, if we take 6 months actual results, 43% of total sales and sorry, 47% of total sales and 43% of EBITDA -- contribution to EBITDA. And so, this is the thing. What we had last year, as an example, the contribution to EBITDA of commercial activities accounting to 40%. Today is 43%, not maybe big change, but still an upward trend. And as I mentioned, again, looking forward, we really would like to increase that contribution percentage from current 43% to 50% and even beyond. One thing, I know that the Germany -- German activity is high, right now. As we won the contracts, right now, we are in a process of simply starting the day-to-day business operations. What it means? It means that right now, we are in process of selecting people. We are already established -- we are actually buying the company based in Germany, and this is the most efficient solution, which will operate those terminals. And we will have in our group of the companies, another one KN Deutschland Germany company created in the Germany, based in Germany. So everything is, I would say, according to the plan. And we are starting real business right now, looking for the people, looking for the staff and already getting first income from our contracts. So it's -- the real business starts right now, and we'll have a lot of things to do in the nearest future. But we are secured from in terms of the revenue intake everything, and so day-to-day business, of course. It's very important to show us -- to show our partners that we are successfully managing the business and our -- fulfilling our obligations that we have. How we -- what we are doing at the moment with Brazil? So we are operating very successfully and managing the business and managing the risk also successfully. And this is really, really important.

It looks like we've covered all the questions so far. If you would like to send any questions, please do so now. So as all questions have been answered on behalf of KN Energies and Nasdaq Vilnius, thank you, everyone. It was a pleasure being with you today. The recording of the presentation will be available on the Nasdaq Baltic YouTube channel, and thank you for a very informative conference.

Thank you. Thank you, all of you. So have a good longer weekend. Goodbye.