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

Good morning, ladies and gentlemen. Welcome to MOL's Q1 2023 Results Conference Call. My name is Zoltan Pandi, Head of Investor Relations. We have a strong lineup of management to discuss the recent developments. Dr. Gyorgy Bacsa, Executive Vice President of Group Strategic Corporation and Corporate Development; Mr. Jozsef Simola, Group Chief Financial Officer; Mr. Berislav Gaso, Executive Vice President of Upstream; Mr. Gabriel Szabo, Executive Vice President of Downstream; Mr. Péter Ratatics, Executive Vice President of Consumer Services. We continue to use Microsoft Teams as a platform to hold our conference call. The presentation can be downloaded from our website at molgroup.info, and we'll be sharing the slides on Teams, too. After the presentation, we will move to a Q&A session. [Operator Instructions] Before we start, I would like to draw your attention to the cautionary statement on Slide #2. Now let me hand over to Gyorgy Bacsa, who will take us through the highlights of the Q1 period.

Welcome, everyone. I think after the first quarter, we can report that we have a strong year start, definitely a strong bond based on internal deliveries. We managed to overcome some of our guidances and some of our targets, especially in the oil and gas directions. So the EMT volumetric figures are significantly higher than targeted. So it's a reserve replacement, and we have Mr. [indiscernible] who will talk about it in detail. But then there are a lot of internal strong performance that we can highlight. The other figures are mainly in line with the guidance, especially if I take into account that first quarter is usually weaker in terms of investments, in terms of spendings. And definitely, I have to highlight that the dividend payment and a lot of expenses, tax payments in certain consolidated payments happened in the second or the third quarter, so not happen in the monthly in the first half. So that's why there is a little bit disproportionate effect. That's why the net debt to EBITDA is historically low, as you can see. And the CapEx spending is also low compared to the annual guidance. However, we think that in terms of performance, in terms of -- we are still in line with our guidance. So if you go to the next slide, thank you, here are the key figures, $714 million EBITDA. I think it's absolutely in line with the expectations and definitely taking into account the government takes, which are still significant, $350 million impact on our performance. It's a good result for the start of the year. I think that downstream diminishing petchem contribution was offset by refining and marketing EBITDA, so this $299 million. Consumer service EBITDA rebounded. So after last year's performance, we are glad to present that Consumer Services, too, performance is back on track. And Upstream EBITDA, slightly decreased $283 million quarter-on-quarter, but it's mainly due to the diminishing gas price since the gas price dropped now on the market and, of course, the royalty scheme, which is lowering our EBITDA performance. So all in all, strong first quarter compared to last year's pace, slightly lower performance, but mainly due to macro environment, not due to internal performance. So the macro conditions are still very volatile. And then we told last time, we will emphasize that it's very hard to forecast the 2023 year's -- or annual performance, how it will look like. It's not realistic that -- to assume that in 2023 we will replicate the 2022 performance, and I think it's obvious already. But based on last year's performance, and that's something that I think the investor base expected from us as well, the long-awaited dividend decision was passed last month. So we increased the base dividends, and we -- and the General Meeting approved an extraordinary dividend spread. So all in all, HUF 350 per share dividend was approved by the General Meeting. If you go to the next slide, we can see targets and the EU taxonomy alignment. This is the first quarter that we really report the EU taxonomy, eligible and aligned CapEx. We have -- that's a long growth. Of course, we had at the beginning of the group, but you can see that we have already 15% eligible CapEx. And of course, then we complete most of our transformation CapEx investments. Of course, the eligible CapEx rate will also increase according to our plans. The TRIR is slightly above tolerable limit. Tolerable limit, however, will be set at -- based on the benchmarks at an ambitious level. Unfortunately, with this high internal performance, it's difficult to match -- to meet with this limit. We take it seriously, and we take all the measures to keep the limit. Thank you very much, and now I give the floor to Mr. Simola.

Thank you, Dr. Bacsa, and good morning, everybody. Let me start on Page 8 with the EBITDA overview. As Gyorgy mentioned, slightly lower year-on-year and Q-on-Q performance, but I think, given the external environment, it's overall solid results for the group, with a very strong free cash flow generation. As usual, you will hear more details and background from the business leaders on the 3 major businesses. Let me cover some smaller items here. I mean, very strong gas transportation business contribution in Q1 on the back of stronger capacity booking and cross-border volumes. But I think it's very clear that it's -- at this point of time, it's hard to extrapolate or forecast full year results. It's very hard to see that we will have a normal autumn and the business as usual or, again, a very volatile kind of preparation for the winter period. C&O minus $55 million [ new gearing ], and there's a minus $20 million interest -- very small intersegment that's a net impact of various end of the quarter eliminations. We go on Page 9, CapEx. I mean, a slow -- a low number, even more than $100 million lower than last year. This, I think, in line with the usual seasonality and patterns that generally very, very low CapEx spending. There Is no systematic or specific reason for this, so no CapEx controls or anything else. We pretty much expect that the year-end spending will be in line with the below $1.7 billion guidance for the whole year. Let's go to Page 10, the net income waterfall chart. No real special items here, but let's go through the details on Page 11. CCS effect is just from the decreasing crude prices in Q1. It would have been negative, but there were other items, CO2 quota-related issues and other derivative transactions, overall resulting in a small positive number. DD&A fully within the normal range. Q4 was higher because of impairment booking, and Q1 last year was actually lower because of the impairment reversals at that point of time. We had overall $48 million financial gain. As in the previous quarter, the forint strengthened 7% against the dollar, 5% against the euro, and that drove the overall number. Plus $10 million income from associates mostly coming from Pearl. And income tax expense, slightly lower than Q1 as kind of the mix of various impacts, up and down essentially from various companies. I think at this point of time, taxation is clearly a key issue nowadays. At this point of time, it's very hard to forecast kind of overall year numbers. Probably earliest in Q3, we will have some clarity on this. So let's go to next page, Page 12, on the operating cash flow. From a strong EBITDA generation, overall a number close to $750 million, including $90 million positive contribution from the working capital. This is clearly a price impact reflecting the decreasing price for us. In terms of volumes, we still run kind of a full inventory operation to maximize security of supply. But overall, essentially, higher than $0.5 billion free cash flow, even after covering organic CapEx. So very strong contribution in terms of strengthening the balance sheet from the first quarter. And that brings us to the last slide, Page 13, where you see this strong cash flow generation and the further decreasing of the net debt to EBITDA and also the gearing. As Gyorgy mentioned, the dividend payment and other things, we expect some larger outflows during the year. But I think still, the overall guidance of below 1, which is -- that could be below 1, which is still a solid number. We do expect to remain within that range. And I assume there is one question on your list, the kind of timing of the dividend payment. As usual, the Board of Directors will kind of take care of this as normal course of business. The next meeting is next week, so I think there could be a decision at that point of time. As soon as the decision is made, we will publish it. And I think, generally, as usual, the -- we expect it to be sometimes in the summer months. So with this, I'd like to hand over to Gabriel to cover the Downstream results.

Thank you very much, Jozsef. Good morning, ladies and gentlemen. So let me report on the Downstream result in the first Q 2023. So during the reported period, Downstream delivered a solid result of $300 million. It means and it's clearly seen on the graph that is 18% increased year-on-year. It's also seen at the graph that the performance was driven mainly by refining and marketing, while petchem did not deliver positive results due to the persisting sluggish business environment, as it was mentioned by Mr. Bacsa and also by Mr. Simola. I believe that it's fair to mention also that the first quarter result was impacted by a few factors, which we did not forecast it. First, this is the lower processing due to some unplanned events in our landlock refineries, resulted in 7% lower processing compared to base. And due to the very good external environment, the impact of this unplanned events, mainly in Slovnaft, are very much recognizable in our results. The other I would mention, and this is similar to what I mentioned during our last session when we discussed and commented the Q4 results for 2022, and this is the gas trading, I mentioned 3 months ago that we do not do in this business segment the CCS adjustments. So the falling market prices resulted in an accounting loss of Downstream as an inventory revaluation. And -- but I believe that this is rather technical item because, in the long run, it should be balanced. There is also an important factor, which should be mentioned here, and this is the -- that the new sanction package came into first from 5th of February this year, which is limiting the sales of products made from Russian crude. With reference to this, we are increasing the processing of alternative crudes, progressing with the 2 dozens of investment projects in the area and also continuously testing other alternatives. Now let me turn your attention to the macro, so in case we can get to the next slide, please. Thank you very much. So the refining macro environment was rather strong. However, we experienced a drop of fuel spreads in April. And also, similarly, the Brent spread remain about $30 during the reported period. But recently, there is a drop there as well. Regarding the regulatory environment, by that I mean the governmental anti-inflation or solidarity taxation, there is a change in Hungary. The price cut was canceled, but the 95% taxation from Brent-Ural spread was introduced. And there is even a new change there that from 1st of April on, MOL is now able to retain $7.5 from Brent-Ural spread per barrel. And from the remaining part, we pay 95% to the government in Hungary. Petrochemical margins are still at the bottom of the cycle, which is coupled with the rather weaker demand and reflected in negative petrochemical performance, as mentioned before. And now let's get to my last slide, thank you. So what are the drivers behind our year-on-year performance and the gap? So the $9 improvement in refining margin and Brent-Ural spread had a significant positive impact, partly depreciated by the lower processing, as mentioned before. On the other side, also, the big petrochemical margin and sluggish demand are behind the negative impact on petchem. And there is -- also within the category of other, there is the major -- out of it, a major impact in the gas business, as I mentioned. Approaching the results from another -- so from another point of view, the windfall taxation in the form of this 95% Brent-Ural take remained kind of major negative driver, significantly impacting the financial results, and the stake is $190 million. With this, I would like to ask Péter to continue with the Consumer Services. Thank you very much.

Thank you, Gabriel, and good morning to everyone from my side as well. As Mr. Bacsa said at the very beginning, and I like the expression that the Consumer Services is back on track. And I really hope that this growth trajectory could be, again, a longer horizon for us. The first quarter in 2023, the EBITDA increased significantly by 97%, [ fully leveraged ] to $127 million. On all major lines, actually, we were able to increase the performance, both on the volume and also on the fuel sales and margin generation side as well. The fuel sales volume increased by 16% compared to the last year same period. So in this first quarter, first time, the Lotos figures also incorporated. Still, we are kind of fighting and struggling against the increase in cost base of the operation. The OpEx also increased by 27%, which gives us a lot of task to optimize further the cost base. And the majority of the drivers came from the PTE, so the personnel type expenses, related cost increase, but also the utility price environment, still much higher than we used to. And also in Hungary, the retail tax and the bank charges are being a bit of a headache for us. If you turn the page to the last one there, I can deeper explain the fuel market and the volume situation. There you can see that this 16% from quarter-to-quarter compared to the last year is a great result, but also on fuel throughput per site stabilized on a -- higher than it was last year. If you take out the Lotos impact, then we can say that roughly 2% is the network increase from the volume sales point of view. However, market by market, country by country, that is a bit different. In Slovakia or Croatia, the fuel sales are up by a double-digit growth. However, in Hungary, we experienced a bit of a drop compared to the base period. Actually, the drop is 13%. However, I should remind you that last year, under the price gap environment in the first quarter, we experienced a lot of disturbances on the market. And actually, we recorded at that time the highest-ever daily sales in our network since the other competitors' route of [indiscernible]. So I think in this case, the base is not really that I want to rely on. But I will come back at the end in my last slide, so fuel volumes, but before that, let's tackle the nonfuel margin -- the nonfuel performance. Here, I'm really satisfied with the performance of the fuel part of the business. Both the sales and the increase and the margin increased significantly. And I think in every retailer, the most important question whether the margin could grow faster than the sales. And in our case, that's a given. It should be noted that margin on a constant currency was 43%, obviously. But even the Lotos impact, both the sales and the margin, much more than double digit. So it's 19% from turnover point of view, which is I think is significant. And as I have already mentioned, I prepared 1 additional slide for this occasion, which is the total fuel volume analytics. This, we look back to the previous few years. I mean, we had a lot of different kind of new phenomenon on the market. In 2020, 2021, the COVID impacted significantly the numbers. In 2022, the price caps and the price regulations all over the market. So if you compare everything to 2019, which were the last kind of so-called normal year in our operation, then compare to that, you can see that 31% is the fuel volumes increase in our network. Even if I would take out the Lotos impact on that one, then 15% is the sales impact. And during this whole turbulent period, I think the most important number, so TTF was the increase of the market share. And that's what we successfully performed from transaction point of view, from customer number point of view and also from total volume point of view. Seemingly, we are in a very strong market share position, and that will be a good start for the -- for the upcoming season period for all of us. Probably a nice addition to do that next to Hungary, Slovenia and Croatia. In this quarter, we launched the digital loyalty program in Slovakia and Czech Republic as well. The start was very strong in both of the countries. Now we have more than 2 million downloaded application. And also the active customer number reached 2 million, even surpassed it, which means that we have a very, very strong loyal customer base. I think we can communicate on a daily basis, and we can approach them with different customers. I think that could be the success of the future growth in terms of transactional customer interaction. It also affects our margin. Thanks very much for your attention, and I pass the word to Beri.

Good morning, everyone. I will walk you through the Upstream results about the first quarter, which shows 3 main characteristics. Firstly, we have a very strong internal results on production delivery and cost discipline. Secondly, we had normalizing decreasing commodity prices, especially on gas. And thirdly, we have a very high government tax impacting our positive internal performance. So if we go to the first quarter EBITDA, it stands at $283 million, which is down by 42% quarter-on-quarter and largely driven by diminishing contributions from the Hungarian operations. You see the oil price falling to USD 81 per barrel. And moreover to that, the gas, the TTF month ahead also normalized further and average at about $97 per barrel equivalent, which brings us to the realized hydrocarbon price, $78 per barrel altogether. So that resulted this 42% lower EBITDA quarter-on-quarter. Still, we see Croatian gas cut played a bigger role -- also played a role in our results kind of decreasing. We still paid that -- the $41 per megawatt hour gas price in Croatia and the total impact of the regulation in Hungary, and the windfall tax is $130 million in Q1. If we move to the next slide, despite all these regulatory burdens, again, we had a very strong production performance, not only on the baseline production, but also on project contributions, combined with strict cost discipline brought us, although decreasing, but stable $25 free cash flow. And in an absolute terms, that resulted in a $205 million free cash generated by Upstream in the first quarter. So if we move towards to the next slide, I will elaborate a little bit on the very high government take and prices -- these effects -- impact for Upstream. Quarter-on-quarter, the EBITDA evolution you see, the largest negative is the price impact, which is quarter-on-quarter due to the $25 lower realized prices versus the Q4 last year. Royalties in Hungary even increased, so you might thought that, despite of the fact the TTF is less than half what it was in Q4 2022, we would pay proportionately a lower windfall tax due to that. However, in our case, this is different. We still pay even more windfall tax in Hungary by $15 million quarter-on-quarter. You might recall, it was $90 million in our Q4 results. And now out of the [ $130 million ] government intakes, [ $105 million ] is solely the windfall tax on gas in Hungary. Still, we see improvement because from 1st of April, it was already mentioned on the other segments as well as in the beginning that the windfall regulation changes in Hungary, which results an ease for Upstream on the gas windfall royalty by about USD 100 million. However, the revenue base tax, which was introduced, is also hitting our division as well, also on the corporate level. If we move to the next slide, a little bit on the production itself. So again, very strong volumes, 95,900 barrels in Q1, that's around 5,000 more than what our guidance was. Largely 3 main contributors, Hungary and oil driven on the ACG in Azerbaijan that production sharing contract and price driven the PSA mechanism. And the third one, which is the gas -- increased gasoline condensate production due to higher local demand. So all these are overall good news, but I have to also give you a little bit of a forecast because if there is -- there is no light without shadow, and our shadow for now in the production is the Shaikan shut in and the Turkey -- the Iraq-Turkey pipeline, which is not in operation from the end of the month, which is very pity because Shaikan, actually, March, was performing on all-time highest daily production rate. However, from the 25th of March, the lifting from the Turkish-Iraqi pipeline at Ceyhan stopped. It is going on for 50 days now. However, just yesterday, there was a good news published that the -- in a couple of days, the production lifting might resume because the -- between the -- debate between Iraq and Kurdistan is now seemingly resolved. And now, Iraq somehow is turning to [ quotas ] to resume the production in a couple of days. We cannot say it's going to happen, for sure, but we are very positive for that development, and we are one step ahead. So if we move to the unit OpEx, that's also a big achievement. If we consider our external environment, we are still below $6 per barrel in the first quarter of 2023. Three major pressure points we have. One is the inflation, especially the significant energy cost also jumped accordingly, which we need to also overcome. And thirdly, the weaker USD against regional currencies also hit our cost base, but we make significant efforts and continue to be very focused on cost and discipline on the project and production delivery. Thank you.

Right. Thanks very much, [indiscernible]. That completes the formal part of our presentation. We now open up for the Q&A session. [Operator Instructions] We already have the first question coming in from Anna Kishmariya, UBS.

I have 2 quick questions. First would be on the Downstream and the throughput rate. Do you expect to see improvement in second quarter? And second question would be regarding the recent news on the new oil pipeline construction between Hungary and Serbia. Do you have an estimate for a potential cost? And what portion would be allocated for MOL?

Thank you very much, Anna. Thank you very much for question. Well, the throughput should be in line with the base last year. However, from yesterday, I received the information that there is the [ plant ] shutdown with one of our units -- cracking units at Slovnaft, which will have definitely a negative impact to crude processing. Now it seems that the repair works, maintenance works are under control, and it will take max 2 weeks to get back. But with those events, unfortunately, we cannot plan in advance. And I hope -- or I believe that the processing will be in line with the base last year.

Let me try to answer the interconnected Hungary and Serbian pipeline interconnection question. It's -- yes, we have estimations on different versions of the pipeline. There is -- of course, it's a matter of capacity that, finally, we have to build in. And of course, it's matter of financing. I think that -- because we are in the middle of the intergovernmental discussion, I cannot really say that to what extent it will be borne by MOL Group and how it will be returned in terms of capacity booking and how much it will be paid by the government for the states who are strongly supporting the interconnector. It's -- to a certain extent, it's an existing network expansion, so I think it's not a new pipeline. As you could see the -- and they are also saying that this is an interconnection between Novi Sad and Algyo because in Algyo, there is an existing one. And from Novi Sad to Algyo, it's a section to be built that will connect the 2 existing pipeline networks to each other. So it's -- I would say, it's very easy to calculate. It's a very -- it's a limited section, and the [ completion ] time is also reasonable since most of the capacity expansions will happen on existing routes. So I don't want to go into detail since we are also in discussion with the states. However, how they plant to make it economic, definitely, investment decision on all sides will be based on financial returns.

Yes. If I may, Gyorgy , just to add a few technicalities. So currently, the technical teams both from Hungary and from Serbia are working very closely to each other. We are trying to set in the scope, which is very much dependent on the throughput of the pipe. So there are several options there. There are also some challenges ahead of us. But once we agree, and we will see what is the scope and what is the technical solution, so we will know the other aspects of this investment in terms of the investment itself and the time spent needed.

And not to, how to say, go away without figures, I would say that it's a couple of hundred million euros and not billions, what we are talking about. And now by calculating both sections, both the Hungary and the Serbian section, so it's a few hundred millions that you talked about.

Next question comes from Tamas Pletser, Erste.

Yes. Just a follow-up on this Serbian pipeline. If you get the chance to build it? How long will it take to finish this 130-kilometer section? And also a follow-up over here. As far as I know, you own the pipeline, the Druzhba pipeline, the Hungarian section of it. Does this mean for you that you can get some extra revenue from the transfer of crude oil to the Serbian counterparty or the issue is someway different? So that would be my first question. And my second question regarding the Lotos acquisition, do I understand correctly that this acquisition improved your fuel and nonfuel margins? Was this network more efficient one than the existing MOL network? And how do you proceed with the -- this acquisition? I mean, did you change already the colors or the outlook of this network? Or is this still going on in Poland?