MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (MOL) Earnings Call Transcript & Summary

All right. Good morning, everyone. It's 2 minutes past the hour. So we will start today's call. First of all, I'd like to welcome you all to MOL Group's First Quarter 2021 Conference Call Results. My name is [ Mikael Skugar ], and I'm here on behalf of Investor Relations. For today's call, we actually have a full lineup of senior management to present and discuss recent developments. The presenters will be Mr. Jozsef Simola, who is Group Chief Financial Officer. We have Dr. Berislav Gaso, Executive Vice President of Upstream. We have Mr. Gabriel Szabo, Executive Vice President of Downstream; as well as Mr. Peter Ratatics, Executive Vice President of Consumer Services. For this conference call, we will continue using Microsoft Teams platform. This has worked well in the past, and we will hopefully make it work this time as well. If you haven't done so already, the presentation can actually be downloaded from our website at molgroup.info, but we will, of course, be sharing the slides in Teams as we speak, too. After the presentation, as is customary, we will move to a Q&A session, where you will have the chance to ask questions. If you wish to ask a question, you basically have 2 options, you can either use the Raise Your Hand functionality of Teams or you can indicate your intention or wish to ask a question in the chat function of Teams anytime during the call. And please remember to stay muted throughout the call, except, of course, when you ask a question. Before we start, I would like to draw your attention to the cautionary statement or disclaimer here on Slide 2. So without further ado, I will hand over the word to Jozsef Simola, who will give you a brief summary of the Q1 2021 financials. Jozsef, the floor is yours. Thank you very much.

Yes. Thank you, Mikael, and good morning to all to you. Just a brief introduction. As of 1st of May, Robert Rethy, who used to be for 8 years, the IR leader, moved into a general finance controlling area within MOL. And Mikael Skugar took over his responsibilities as IR representative and interim head of IR. And I like to wish all the success to the new challenges for Mikael and Robert. Starting on Page 5, just very briefly, COVID is still with us, but I think we delivered a very good business as usual, business as normal quarter, 7% higher overall CCS EBITDA and as previous year, which was almost from CCS point of COVID free and much higher than in 2019 Q1. Now going before the financial, but going briefly to Page 8 to the ESG. I think generally, very good operational numbers, essentially Q1 at the same level as the last year. I think COVID became very much as part of the life. We are organizing testing, vaccination. And I think everything is fully controlled from our operational point of view. And I think the major kind of milestone was in the first quarter, issuing the 2020 integrated annual report where we disclosed even more numbers and data for your peruse. Starting on Page 10. The financial part and maybe the most important slide, the CCS EBITDA, as I said, overall, strong results, 7% higher in dollars year-on-year. In upstream, slightly higher production year-on-year, including already the full impact of the ACG acquisition, higher crude prices than a year ago, resulting in a significantly higher contribution. Downstream, we partially see the impact of the negative macro, total sales down 8% year-on-year, significantly lower refining margins. But the impact of our balanced business model shows up in the petrochemical. Actually, if you look at the composition of the downstream EBITDA, refining actually probably around 1/3, what used to be a year ago. On the other side, petrochemical is 3x the size roughly what used to be a year ago, overall somewhat lower downstream EBITDA performance in this quarter. Consumer services, I have to say, as usual, highest EBITDA performance in Q1, very impressive 30% year-on-year increase. But again, I have to point out as the advantage of the business model, we had some quarters where Consumer services has the highest EBITDA contribution. This time is now the third highest compared to the other 2 businesses. Gas Midstream, a lower number than last year. As I pointed out in the Q4 numbers, with the end of the Serbian transport contract and other changes, we should expect generally lower EBITDA contribution going ahead. As a reminder, the average of the last 5 years was around $200 million. And going ahead, we expect around 25%, 30% lower guidance. You see a high negative number in the CNO and Other. This is actually almost all coming from the intersegment, which Q1 2020 was plus 21. The last quarter was minus 23. This is essentially coming from the inventory handover between Upstream and Downstream. And generally, the -- you should take thus the intersegment kind of guidance for the whole year is around minus 10 , but with the usual large fluctuation quarter-on-quarter. Now, seeing this number, the 664 EBITDA, I'd like to anticipate the question. How about your full year guidance, the $2.3 billion especially if we added to this number, the -- or April margins, which was $1.5 refinery margin and EUR 1,035 per tonne petchem margin, I think that clearly gives a very strong start of the year, and it may be a very good basis for upgrade of our guidance. Qualitatively, however, to do any quantitative estimate, we will come back to this question at the Q2 numbers, seeing the whole half year result. Now going to the next page, Page 11, CapEx numbers. No surprise here, essentially the same number as a year ago, and I'd like to remind you that Q1 was a COVID-free quarter so essentially the normal spending pattern. And that means that with this number, we are on track to be 1.7, 1.9 yearly guidance given the usual seasonality and usual weak Q1 spending numbers. Page 12, simplified free cash flow. No surprises here, strong EBITDA, low CapEx spending, kind of a very high number, EUR 383 million. And even coming -- even given the coming CapEx seasonality, I'd like to remind you that last year, whole year number was EUR 636 million, so clearly a good start of the year. Let me go to Page 13, the below EBITDA items. In a rising oil price environment in Q1, plus 109 CCS modification as expected. No special items, DD&A $405 million, fully in line with the guidance we gave last time, the kind of $400 million run rate per quarter. There are no other special items. Total finance loss minus $28 million, essentially a small FX loss coming from the slight weakening of the foreign to the dollars. Foreign euro essentially was the same on a quarter-on-quarter basis. Income from associate 3 a year ago, it was 2. Again, you should expect fluctuations and technical items here, guidance for the whole year is most like in the $15 million to $30 million range. And going to the income tax expense. The trade and industrial tax is very much in line with the trends, an increase in the CIT coming from various sectors, but I'd like to point out, too, inclusion of the ACG, which was not part of the Q1 numbers, and very high petrochemical margins, driving our petchem subsidiaries profitability and kind of a decrease in the deferred tax slide or a deferred tax benefit actually coming from the increased exploration activities in Q1 in Norway, which will lead to tax reclaim in the future years. So much then about the below EBITDA numbers, and then let's go to Page 14 to operating cash flow. I think the interesting item is the $607 million buildup in the working capital. This is the usual seasonality, which we have seen in the last year's Q1, coupled with the high oil price environment. And as usual, we expect that this is going to be reversed in the next quarters. Now the last slide in the financial part, Page 15, is the balance sheet. A strong and strengthening balance sheet, if you look at the time series, a slight increase in the gearing and in the net debt given the working capital buildup I described in the previous slide. However, that was more than counterbalanced with the EBITDA increase. And so we have actually a decrease in net debt/EBITDA. Just as a reminder, the EBITDA we have to use for net debt-to-EBITDA calculation is 12 months rolling IFRS EBITDA. So that's a much bigger change than in the CCS. So that's the summary of the financial part, and I'd like to hand over to Gabriel Szabo, EVP for Downstream, to tell you more about the Downstream results.

Thank you, Oszkar. Good morning, ladies and gentlemen. So let me sum up the Downstream results. So it was mentioned by Mr. Simola as it is shown in the graph, Downstream EBITDA declined by 14% compared to Q1 last year. We delivered $254 million, thanks to our vertical integration within Downstream. So the decline was the result on the one side by the refining still under pressure. The third wave led to a drop in demand, resulting in lower sales. But on the other side also, combined with the lower margins, resulted in a considerable drop in refining earnings. Volumes perspective. So in Q1, generally, this is always the weakest period. However, this year, practically, the whole quarter was affected by pandemic lockdown. While in the base period last year, it was limited only to March. On the positive side, I would mention the petchem business, which showed a robust results and posted significant gains both on year-on-year and quarter-on-quarter, supported by record high margins and strong internal availability of our production assets. Concerning our transformation project, so I can report a very good progress. The Polyol projects continued on track, exceeding 79% of overall completion. Now let's move to the macro environment. So here, what we can see that the refining margins are slightly higher compared to the last quarter, thanks to the better euro pricing and gasoline crack spread, but dropped significantly compared to 1 year ago level. So we can see that compared to $6, $7, currently, we are recording around $3 per barrel. Petchem prices and integrated margins climbed sharply in recent period. And probably, as you remember, I reported this positive trend when evaluating 2020 and focusing particularly on the last quarter of 2020. So today, we even reached our record high levels, so which is about EUR 1,000 per tonne. And of course, that's -- as the other producers, we are benefiting from it. On the other side, I have to mention that at this record high price level, customers also increased their pressure and concern regarding the sustainability of the current price levels. Now let me comment the last -- my last slide, the waterfall chart. So all in all, my comment would be that this quarter, we showed that the strength of the integrated model of downstream, which would like to follow in our strategic transformation. So commenting the annual EBITDA change, we see that it was overall relatively modest 40% decline. On the one side, refining and marketing price and margins impact with almost $4 per barrel drop in our headline refining margin and over diesel and euro spreads. The volumes were also negative, and I commented them already, so compared to the first quarter last year, the pandemic hit just March. while today in this first quarter of the 3 months of the first quarter, we were hit roughly by 10% decline in demand. But we can also see the positive effect of the petchem prices and margins. This positive impact of petchem is also seen compared to the last quarter of 2020. So on the one side, we can see the positive refining and marketing price and margin impact, but also we can see the increased integrated margin, which is negatively offset by the lower demand. So this would be from my side. And now I would like to hand it over to Peter who will walk you through the Consumer Services segment. Thank you.

Thank you very much, Gabriel, and good morning to everyone. I'm very happy again because I can report that despite all the challenges, what we got in the first quarter, Consumer services can again reach an all time high Q1 EBITDA actually on the level of $150 million, the reported currencies reported USD. With that, actually, the division kept and even accelerated the first quarter results growing trend over the years. The strong earnings were mainly the result of the year-on-year higher fuel, but also on the nonfuel and the third building bulk of the EBITDA is the OpEx. So actually, on all of the 3 building blocks, we were capable to contribute to the better results. We are still focusing very much on the OpEx minimalization to let the cost to run up. And obviously, we try to keep the unit margins and also the premium penetration on the fuel side on the higher level. Probably a few strategic note from my end that probably you have already read or heard about the acquisition developments from our end We started the year with Marche acquisition. So the Swiss-based Marche sold its subsidiary here in Hungary. That subsidiary operates 9 restaurants next to service stations, fueling stations on the highway. And actually, we acquired the entire Hungarian subsidiary, Hungarian company with Marche brand. However, we just signed a 3-year long brand usage agreement, so much probably even earlier, much earlier, we will start the reconstruction of that restaurants to our Fresh Corner restaurants. But that development of that acquisition perfectly fits into the strategy of what we announced at the beginning of the year, we certainly want to improve further the contribution of the consumer goods sales and margin to the Consumer services. The other development, what we have already announced, that we acquired 100% of the Normbenz Slovakia that operates actually 16 Lukoil-branded fuel stations all around across Slovakia. The transaction on closing is still going on at a much [indiscernible] by the end year to -- we will take over all the sites and we will fit into the current operation. So as a combination of this higher EBITDA and lower CapEx, what we managed, we jumped the free cash flow contribution by 45% actually year-on-year. We reached the $100 million EBITDA. And to be honest, just referring back to Mr. Simola, I have to say that I'm still very happy to be on the served position from group perspective with this number. I think all in all, it's a good development for the group. And yes, now let's move on the next slide, please, to the deeper insights of the fuel sales performance. And surprisingly, we have a bit of a decline still compared to the last year's same period. Just a bit of a note that in 2020, out of the 3 months, particularly 2.5, was of pre-pandemic compared to this year, actually, where even in the entire first quarter apprised with a very significant lockdowns. So the survey of the pandemic was very heavy. That limited the movements of the residential traffics and that obviously resulted in this 6% decline. However, on the positive side, the -- as I already mentioned, the higher unit margins, we were capable to manage. In major retail of our countries near the price sector, we are the dominant player. But next to the unit margin actually -- or to the unit margin an even higher contributor nowadays is the high penetration of the premium fuel, which has a much higher unit margin, obviously. And what's very important for us, and that's what we keep on our focus, is to manage the market share. And actually, during this period, our market share in the entire CEE region was practically flat. So we haven't used anything on this market despite the high prices. And let's now finish my presentation with the last slide, the non-fuel side. Fortunately, we were capable to grow further despite all the challenges, all the lockdowns and all the limitation to the gastro items. However, on the other side, next to the gastro or as a compensation of the weakened gastro sales on the highways, practically the higher share or the highest unit margins we are capable to generate in unusual period. The grocery items, the sales of the grocery items, increased significantly. And obviously, on the back of the sales, we are capable to generate more margins as well. Despite the pandemic, we continued the Fresh Corner penetration or the reconstruction of the Fresh Corners, and that's what we plan to do during this upcoming period. So all in all, I think circumstances or this -- or the environment will be better and better alongside of the vaccinations in the region, and much probably more and more easement account that we also have the mobility region, which should also increase further the fuel and the non-fuel consumption. And with that, I'm happy to hand over the word to Beri who will present the robust Upstream segment's development. Thank you very much for your attention.

Thank you, Peter. Good morning on my side, and welcome to the Q1 results of Upstream. Similar to the divisions that have been presented by my predecessors, very strong and solid results also on the Upstream side. EBITDA is up by 70% to $307 million in the first quarter. That increase is mainly driven, of course, on one hand, by rising and recovering Brent and gas prices. Brent is up by 38% quarter-to-quarter, and gas is up by 24%. But it does, of course, also reflect the high-margin barrels of our ACG acquisition that showed their value and contribution in that result. Free cash flow has doubled to $218 million in the first quarter and puts Upstream in the position of being the largest cash contributor of the group. If you move to the next page, you can see, as usual, our unit free cash flow, which tripled compared to Q4 and stands at a remarkable $22 on every barrel oil equivalent in an average Brent environment of $61. So these numbers truly speak for themselves. Very, very strong performance in the first quarter. Next page. Now if you look on a quarter-by-quarter comparison, and we dive into the numbers and key drivers, then probably the first thing that you will observe is, of course, prices and FX with a plus of $100 million contribution. That's driven by Brent and gas prices, which are 38% and 24%, respectively, up. You can see somewhat a dip on the volume side because that's 9,000 barrels per day that we lost in the production mix compared to the previous quarter. You see in the item, Other, basically a higher receivable collections, specifically coming from Egypt and Kurdistan. And of course, overall, in this result, you can see also that what we guided last year on ACG the positive reversal happened in the first quarter and very strong contribution. For the details again on the ACG PSA related adjustments, please prefer off-line to Mikael and the IR team. They're happy to walk you through the details and explain. Next page. Production stood in the first quarter at 117,000 barrels per day almost $117,000. There is 1,100 barrel per day higher contribution coming from Kurdistan. ACG is down by 5,000, but that's, of course, due to the PSA regime that adjusts the entitlement barrels downwards as oil price is growing. We discussed that also on earlier calls. U.K. is a 2,700 barrels, somewhat lower contribution, partly also due to some technical issues that we have had on the Catcher FPSO. And CEE is at 1,900 barrel per day less. April figures, you can see at 112,000. But that, again, is largely driven by turnarounds in ACG and some technical issues on the U.K. FPSO vessel, as I mentioned earlier. Next page. We've continued the very strong cost control and our unit OpEx remained at very, very competitive level of $6. Unit OpEx, again, one of the co-strengths and you can expect those numbers as we also earlier guided, to stay at around that level. CapEx is somewhat up, partly due to higher CapEx need on ACG compared to the first quarter of last year. That's all on the Upstream side.

Thank you, Berislav. Now we're moving into the Q&A session. As I mentioned earlier, you have 2 options. You can either raise your hand and/or indicate your willingness to ask questions in the chat function. And we will take the questions on our first-come-first-serve basis.

And so I can see we have our first one. I will start with Henri Patricot from UBS. Please, Henri, go ahead.

Yes, a couple of questions just on recent developments on treasury shares and then one on petchem. So yes, I just wanted to ask you about the recent transfer of treasury shares to these -- MOL New Europe Foundation, 43 million shares, which is roughly 5% of the total. So I wanted to just get a sense of how much you will be saving in terms of cost. I mean, what will this foundation do that MOL was doing itself previously? And secondly, just in light of this development. And can you comment on your plans for the remaining treasuries? And I think you still have like 7.5 million shares. So what's your intention with these? And finally, other question on the petrochemicals, following up on some of the comments you made on the very high petchem margin that we see in the third quarter, are we seeing there's some pushback from customers of these higher prices. So wondering to what extent you can capture the higher margins if we compare the second quarter realized margin to date versus what you did in the first quarter.

I will start with the treasury shares, Jozsef Simola, CFO. Just to correct you, Henri, that there was no recent transfer where we are now that with the Board of Directors' decision. Opportunity is open and with the decision of the Hungarian Parliament, it's a similar situation on the state side. The detailed discussions are ongoing and as soon as there will be any decisions or any actual next steps, then we will, of course, give you details and appropriate communication on this. But generally, as it was mentioned before, the sources of savings are the decreased CSR spending in MOL and potentially a higher pool of revenues for kind of CSR targets, which are beneficial for MOL. But as I said, no share transfer happened, then we will update you as soon as there are actual further steps. Now in terms of the remaining treasury shares, I mean the answer is the usual as before, that the Board of Directors regularly reviews the situation, but at this point, no major steps planned with the remaining treasury shares. And I probably would ask Gabriel to comment on the petchem margin question.

Yes. Thank you very much, Henri, for the question. Very good question and the right one. So whether we managed to capture the full margin, in short, not. So we were not able to fully capture the headline margin as our sales structure is composed by a mix of long-term, midterm and spot deals to ensure protection against downturn as well as opportunity to take advantage of upticks. So we are not able to follow the steep increase in the petchem prices with the same pace. On the other side, also in the -- once the market will change, we will also follow the decrease with a slower pace down. We did kind of optimization on our side. So we put into place the optimization plan, where on the one side, we are fulfilling our long-term customers and long-term contracts, but also we are taking the advantage of spot market and both opportunities.

All right. Thank you. The next question comes from Alexander Burgansky from the Renaissance Capital. Alexander, please go ahead. Thank you.

Yes, thank you very much for giving me an opportunity to ask questions. So I would like to follow up on the question of treasury shares. And in particular, I wanted to find out what the foundations are legally for the proposed transfer of shares. I was reading the Hungarian Civil Code, and that requires companies to explain the reasons for buying treasury shares in the first place. And I have looked through the AGM materials of MOL Group for the past, I think, 9 years or so and in none of those AGM materials, you have proposed that those shares have been acquired for the purposes that you have mentioned with respect to the proposed transfer of these shares. There were some reasons mentioned in this AGM materials, but none of them referred to the fulfilling corporate responsibility objectives, especially in the field of sports, culture, health and environmental protection. And so I wanted to find out if you could please explain the sort of legal background for the transfer of shares, because this transfer is quite significant in terms of the number of shares and I was wondering why the shareholders are not going to be given a chance to vote on this decision.

Thank you for the question, Alexander. Jozsef Simola, CFO. So as I said, at this point, actually no transfer of shares happened. I mean, as soon as there will be further development, then we will update all shareholders about this. For any detailed, especially kind of legal questions, then please contact IR, and then we will give you the appropriate detailed answer to your question through our legal department.

Thank you, Alexander. I don't seem to see any more questions. If there are questions, as I mentioned, please either use the Raise Your Hand option. Yes, I see one more now. Ildar, please go ahead and ask your questions.

Just a quick one on the petchem side and the pricing issue or not an issue, but maybe you could just elaborate a bit more on how the higher spot price and margin, how differently it affects long-term and short-term deals, basically, what kind of price structures you have there, if it's a long-term contract, like how exactly it is capturing the subside or whether it's capturing at all or not? And maybe if you could tell us maybe the structure like in terms of how much of your petchem sales are being conducted on a long-term basis and short-term basis, these kind of things, that will be very helpful.

Yes. Thank you. So well, we have a portfolio of the contracts, which I mentioned, the long term, the midterm and the spot. Of course, that we try to -- or begin our strategy. We try to have a very healthy portfolio of these contracts to be really -- ensure firstly the demands, mainly in the polyethylene. So -- and within the optimization I mentioned. So within those contracts, there are some minimal volumes, which we have to supply to our customers. So of course, that we are keeping that commitment. On the other side, we are trying to increase the spot ratio of the sale. So this would be the -- in nutshell or the explanation. Thank you much for the question. Thank you.

Thank you, Ildar. We have one more question from Tamas Pletser from Erste. Tamas, please go ahead. Thank you.

I got 2 questions. First of all, on the CEE production, I saw there is a decline there. Is this decline in line with your expectations? And what do you do to address this decline rate? That would be my first question. And my second question regarding your Consumer services margins. I mean what are the reasons that you were able to raise these margins so high? Is this the lower competition in the CEE region? Or do you have any other secret?

Thank you, Tamas. I'll take the question on CEE production. Yes, that's in line with expectations. Actually, this quarter, even the -- how should I say, yes, even somewhat better than what we expected. And what are we going to do to slow down the decline? I think we discussed on many occasions that we do a lot of production optimization, well workovers, the whole applicable suit of tools that we have and that we can apply over a well stock of almost 1,800 producing wells in Hungary and in Croatia, where we continuously review how to optimize, how to extract additional incremental barrels. Then on top of that, we, of course, have contribution from very successful shallow gas exploration. In Hungary, we presented those results, I think, also during some of the last calls. There were 6, 7, 8 wells drilled in the past 4, 5 quarters, which have all successfully contributed to incremental production. We have also development wells in the pipeline that we are drilling out. So we do apply the whole suite of tools that is out there. But unfortunately, the high single-digit decline will persist also in the future. We're fighting to make sure that we slow it down as much as we can. But we will see decline also going forward.

Péter Ratatics speaking, from Consumer side. Well, we have a data-driven algorithm, what we are using for the micro market pricing. And actually, that helps us to test different type of price elasticity test on several micro market for [ pricing, ] sorry. And actually, that really helps for us to improve significantly the main grade unit margin. However, as I mentioned, more than half or roughly half -- sorry, roughly half of the unit margin development came from the premium penetration. So the premium fuel sales increase in our portfolio and these 2 combined effect delivered the unit margin and fuel margin development.

I see. One more follow-up here, if I may. Has the recent price increase on the retail station affected the premium volumes? So did you experience some slowdown in premium sales growth?

Yes, a bit. Yes. Obviously, the increasing crude price and the fluctuating local currencies against the dollar, in some cases, boost up the total price. And some of the price-sensitive customers turned down from premium to main grade. We have already observed a bit of a fallback here. However, this is just a few percentage points. And even if you compare it with the last year same period premium sales, then we can still say that significantly above than it was a year before, where actually the price environment was significantly lower.

Thank you, Tamas. I don't see any more questions. Let's just give anyone last chance for it. But unless there aren't any more questions, I'd like to thank everyone who participated in the call, everyone who asked questions as well as the presenters. And as you know, you can always reach out to Investor Relations at [email protected] with any further questions, we'd be happy to answer them. And if we don't get to speak, then we'll hopefully see you again at the half year results 2021 in 3 months' time. And thanks, everyone. Have a nice day, and stay safe. Thank you. Bye.

Thank you. Bye-bye.

Thank you. Bye-bye.

Thank you. Bye.