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

Good morning, ladies and gentlemen, and welcome to MOL's First Quarter 2024 Results Conference. My name is Marton Teremi, Head of linvestor Relations. And as usual, we have a strong line [indiscernible] Dr. Gyorgy Bacsa, EVP for Group Strategic Operations and Corporate Developments; Dr. Ákos Székely, SVP of Group Planning and Reporting; Mr. Zsombor Marton, EVP of Upstream; and Gabriel Szabo, EVP of Downstream; Mr. Péter Ratatics, EVP of Consumer Services; and Mr. Zsolt Petho, Head of Circular Economy Services. We continue to use Microsoft Teams platform to hold our conference call. The presentation can downloaded from our website at molgroup.info, and we will be sharing the slides [indiscernible]. After the presentation, we will move to a Q&A session, where you will have the chance to ask questions by using the Raise Your Hand functionalities. Please keep yourself muted throughout the call, except when asking your questions. Before we start, I would like to draw your attention to the cautionary statement on Slide #2. And now let me hand over to Gyorgy Bacsa who will take us through the highlight of the first quarter.

Thank you, Marton, and welcome, everyone. Good morning. So regarding the 2024 guidance, as the title is saying, first of all, we reiterate the full set of 2024 guidance, but we shall not do this to the downside at [indiscernible]. Of course, these are only the first quarter results. It's always affected a certain level of seasonality, as is usual in oil industry. But for the coming quarters, we also have to mention that we are still looking through a series of turnarounds, normal turnarounds, both in Hungary and Slovakia, in the second and the third quarter. Just the first quarter is that we still think that it's been in the range of our guidance. Pro rata, it's little bit lower. Usually, it's expected, but we are at the bottom part of the range. Oil prices were unchanged compared to fourth quarter as prices are still falling. So that is the pressure. There is the double effect, the positive and the negative effect on [indiscernible] earnings. Refining barges continued to stay strong, and better margins slowly showing the size of recovery. Volumes in the Downstream segment were, however, negatively affected by the unplanned shutdown in the first quarter. So if you go into the next page. So as you can see that, definitely compared to the first quarter -- or the first half of 2023, today, in 2024, the macro environment is less supportive to all traditional industries. But in the regulatory environment, all of these are [ easements ] that we can already check in our reports. Profit before tax is down almost 30% year-on-year. EBITDA is flat compared to first quarter last year, but down compared to last quarter of last year. So operating cash flow of this is $280 million due to significant working capital [indiscernible]. The lower EBITDA is also affected not only as I mentioned, that in certain segments the volume decreases and the gas price point but also the foreign valuation, certain decreases of foreign dollar exchange [ data ] spend. Turning to segment performance. Upstream EBITDA was $262 million, driven mainly by the change in the hydrocarbon price environment, most notably the fall into natural gas pricing. In Downstream, the margin was in refining and petrochemical show some signs. However, the turnaround had a negative impact on volumes. So Clean CCS EBITDA came at 2% weaker than in first quarter 2023. Consumer Services EBITDA was $144 million. However, positively affected mainly by one-off effects of [indiscernible] this year and low sales in the nonfuel sales. The Circular Economy Services on the flip side was also impacted by a lot of accounting effects. That's in the magnitude of USD 30 million, and that's how it became negative in the first quarter. Let me also note that we still are paying extra government takes, again, which have made a real impact on results. In first quarter, EBITDA effect at the group level was USD 172 million, out of which USD 568 million related to Hungary [indiscernible] of the revenue-based tax we booked the full year in the first quarter, $27 million was the CO2 tax and $27 million was Brent-Ural tax. Some operational updates. In March, we published a new update to the strategy. We also received BBB minus investment grade of scope rating, and the AGM was also -- [indiscernible] to pay dividend of HUF 250, [indiscernible] HUF 155 and the takeout HUF 105 extra special dividend was also approved to be paid as usual over the summer. If you go to the next page, some updates relating to ESG performance. Total recordable injury rate, which is our main safety indicator, it's definitely related again. Now it's 1.39 in first quarter. The increase is mainly due to the previously mentioned lots of maintenance and smaller injuries, which increased compared to usual levels. And to mitigate, we tend to moderate the increase and to keep up with our guidance. We are already taking corrective actions. Just to remind, our target is 1.3. We had to ease on the target because too much stress in this targeting was not so easy to [indiscernible] so we are focusing on the gradual improvement in our TRIR performance. We received for 2024 ratings Ecovadis as well. We are in the top 5% of companies rated by Ecovadis, and we improved by 5 points. So now we have overall score of 78. So let me now give the floor to Mr. Ákos Székely, SVP of Group Planning and Reporting, to continue with the financials.

Thank you, Gyorgy, and good morning to everyone. Let me first start in the group EBITDA performance in the first quarter of 2024. The headline message will be no material change versus 2023 first quarter and [indiscernible]. Clean CCS EBITDA increased by 1% year-on-year to $718 million, and the segment EBITDA was broadly similar to the first quarter of last year. EBITDA has come at the [indiscernible] presentation, let me here just really highlight the most important effect. The lower gas prices had partly a negative impact on the results. As Gyorgy said, the margins were stronger both in petchem and refining. And on the other hand, the -- there's several plants at [indiscernible] turnaround during the quarter. Consumer Services EBITDA is supported by [indiscernible] margin growth and, yes, there was a positive impact of remedy handover of fuel stations in Hungary, which accounts roughly $45 million year-on-year. Current Gas Midstream, we are really pleased to see that the same strong performance happened at last year same period. And also the cash generation was high, was in the range of USD 79 million. There is [indiscernible] demand for the cross-border capacities, which remains strong, despite the high weather. Also important to mention that stronger focus -- management focus on OpEx and [indiscernible] limited cost increase. New segment Circular Economy Services posted an EBITDA of minus USD 10 million. That's [indiscernible] here that the segment still in a start-up mode. And eventually, a proportion of revenue is based on [indiscernible]. Some of those [indiscernible] made in 2023 were reversed due to the [indiscernible] or the next [indiscernible] registration has led to a one-off effect of USD 30 million. We already mentioned during earlier was that the profitability in waste management is expected to be volatile in the first years and -- because of interest of normal business. Let me continue with the CapEx. Total CapEx amounted to USD 320 million in the first quarter. And yes, this is a slowdown compared to Q4, but this is also business as usual, as Q4 is seasonally the strongest in the CapEx spending. However, [indiscernible] the realization in the first quarter of 2024 is better by 62% year-on-year. The organic CapEx spending is -- the increase is mainly driven by Downstream spending, and transformation project was USD 50 million higher year-on-year, mainly driven by the polyol CapEx [indiscernible] completion was based. And also the sustain-type of CapEx was higher, which accounts for USD 70 million due to the turnarounds in major facilities. Between [ USD 670 million ] and USD 780 million in Q1 translated to our net income of USD 265 million, and that's in the details in the next two slides. The CCS modification was quite limited, practically zero accounts for USD 7 million, which is driven by the fact of the relatively stable crude prices. DD&A, this is particularly the same level as it used to be the year before. And well, there is a slight increase compared to 2023, which is explained by cost management, OpEx spending and also network additions in Consumer Services. The financial expenses was USD 43 million, which is purely explained by the HUF weakening at 6% against U.S. dollar and 3% against the euro quarter-on-quarter. Income from associates came at USD 5 million, driven by the -- mainly by the contribution from Pearl. Income tax was lower USD 30 million quarter-on-quarter, and this is mainly due to the lower deferred tax expenses. And this is also followed normal seasonality. Intersegment EBITDA was not material, as discussed [indiscernible] stable [indiscernible] and the volume and the price effect of gas and crude offset each other. Therefore, there is practically no intersegment EBITDA [indiscernible]. Corporate and other, we can see that when compared to the previous book, there is a change, and this is explained by the fact that [indiscernible] independent segment. Therefore, we are going to report under for[indiscernible] activities. The -- let me turn to the operating cash flow item. I think it's quite visible on the chart that there is only one item which stand out, and this is the changes in the net working capital, which is amounted to USD 349 million -- or USD 350 million. While this is coming from the usual seasonality beginning of the year, as we discussed the capital expenditure of Q4 being the strongest, therefore, the -- those activities are being paid during Q1, which explains lower payable in the balance sheet in the amount of USD 200 million. Part of that, there is an increase in inventories. Yes, we are preparing us for the season as well as for the shutdowns to come. Therefore, there is an increase in volume, which is USD 50 million. And also the value of higher [indiscernible] quotation and the weaker for [indiscernible] additional USD 100 million. And finally, a few thoughts about the valuation of the net debt. The nominal net debt is particularly unchanged in Q1 at USD 2 million. And net debt to EBITDA ratio show a slight deterioration and arrived at 0.64x EBITDA. And this is due to the slight [indiscernible] terms, which stands up to USD 50 million [indiscernible] net debt to EBITDA and cash flow, the guidance and it definitely provides a sufficient headroom for the growth. And now I would like to hand over to Gabriel to discuss the Downstream performance.

Thank you very much, Ash. Good morning to everyone. So let me present the first quarter of '24 Downstream results. If we go to the first slide, thank you very much. So in the reported period, Downstream delivered USD 293 million EBITDA. Compared to the base, actually, you can see it's rather flattish. And compared to the last quarter of the last year, it's by one [indiscernible] lower. Beside of the macro environment, which I will mention later, the basic internal driver behind this is a lower utilization of our assets than [indiscernible]. It was triggered by [indiscernible] of the key facilities. Hence, we were forced to cut back the processing. And we satisfied the market opportunities from the third party, as also you can see on the chart there from our own production. In terms of the fuel market demand, it is still healthy with few differences. So while in Hungary, it's a few percentage points lower than base in Slovakia for a few percentage points higher. In gross share, we see a double-digit increase compared to the last year. With reference to our major projects -- investment projects, the portfolio is going through the up commissioning, and we are testing the product parameters at the half-tonne pilot plant there. [indiscernible] we see some risks potentially causing further delay of the projects. So currently, we are trying to analyze those, clarifying with the contractor and understand those. Today, I'm sorry, but I can't share any info that what is the expected delay there. If we get to the macro, next slide, please. Thank you. So in terms of the macro environment, we see stronger refining margin in the first quarter 2024, supported by lower CO2 price and also lower energy costs. The brand -- the group Brent refinery margins, because of it, average about $10 per barrel. You might also observe that there is, for the first time, not presented European Ural quotations. So as I mentioned during our last discussions, actually from the last summer on, there is no liquidity transparency of this benchmark. And these quotations are not trustworthy proxies of the evolution of our cost to the Euro blend. So we keep the DAP India quotation as the right benchmark. And once this is adjusted by logistic costs, I believe these are the reliable reflection of the market conditions. In the petrochemical segment, in petchem margin, we see some recovery there, but it states rather very [indiscernible] and I have to say that we do not see any positive signs of the plastic market recovery in Europe. And also, in spite of the better margin that impact can be very negative because due to the unplanned shutdowns, we are not able to fully cover the operational cost on other production. For the future outlook, so many refineries in the regions are in turnaround, like Republic of Serbia. And also Slovnaft this week, we are running just at the half speed, and we will be running just one of our distillation Slovnaft for another two months as we are going through the major turnaround, which will be then [indiscernible] by the turnaround in [indiscernible]. But as Mr. Bacsa said at the very beginning, so we -- in spite of this turnaround year, we keep the 20 million tonnes feed for this year. Finally, my last graph with the impacts of the different factors to our performance and comparison year-on-year. So the positive impact of the refining margins were eliminated by Brent-Ural spread. Finally, it's having a slight negative effect. The effect of the petchem margin was notably positive year-on-year, in line with the growth of the unit margin, but the impact of volumes compared to the base was negative. In the category Others, there is some of the governmental takes. So as it was mentioned by Mr. Bacsa, in case of Downstream segment, it's $26 million of the CO2 tax and the all year revenue tax for Downstream is $68 million. And this negative impact was counterbalanced mainly by the positive result of the trading -- gas trading. So my general conclusion or evaluation of the reported period is in spite of this more than $90 million extra taxes and some missed opportunities due to the [ unblend ] operational issues, there is a good performance driven by refining, while petchem is still lost. And with this, I will pass the word to Peter. Thank you very much.

Thank you, Gabriel, and good morning to all. Consumer Services EBITDA, as mentioned already, finished in the first -- at the end of first quarter at $144 million, which represents a 13% year-on-year increase. And behind this performance, actually, we have several factors. The first one, which is, I mean, a long-lasting tenancy continued. So the trajectory is still very good on the non-margin. We continue to show strength and contributed $21 million altogether on EBITDA terms year-over-year. And that was supported both by the organic and also the inorganic factors since the Slovenian transaction was closed in the middle of last year. So the first half of this year, actually, we are continuing with our base in the numbers. So that's a clear growth. Higher fuel sales was the other factor, altogether $8 million we collected on EBITDA terms year-over-year, and that was driven by growth in fuel volumes and also from -- both from inorganic and also the organic, mainly actually in Croatia. The organic performance was very, very strong. Higher OpEx, though, accounted a little bit the group performance in the magnitude of $30 million was the cost of the operation of a larger network. Altogether, that was a part of the inorganic acquisition. And this time, actually, the one-off effect I would highlight as well because, altogether, it's $19 million. However, that consists of two very large components. However, the two components were completely different kind of impact. So the first one is the revenue base tax, which is a cost, which is a negative altogether $27 million with [ trading ] in the first quarter, while the positive one as a one-off is the handover of the remedy station, which contributed altogether $45 million year-over-year results. If we turn the page to the fuel. Just very briefly, as I already mentioned, the 6% increase on the volumes, but what is very important, and I would highlight this time, this year is the throughput per site. The growth rate was 5% year-over-year. That particularly means that the [indiscernible] of the network or the quality of the natural [indiscernible] the inorganic acquisition and also the remedy handovers might very visible on the throughput per site number. Regarding the margins, we registered a 2% year-over-year decrease unit fuel margins, and that is despite the share of the positive trend towards to the more premium liters, what we sold over this period. And if we turn to the last page, and that would be my last one, the usual non-fuel. I mean, very good trend, very good numbers. As I've said, the dynamics in the nonfuel sales were very strong, 21% growth in the non-fuel margin compared to the same period last year. 40% of this increase was due to the inorganic effect, but also the organic effect continued to contribute significantly to this result. On the share of the nonfuel in the total margin split, it grew to -- close to 37%, and that's compared to the last year same period, 3 percentage points higher. We are also glad to see that the average basket size has also grown significantly and indicated that the customers like the products we offer, and we are able to attract to the more and more products in every transaction, what they are continuing with us. We are continuing further this [indiscernible], and we plan to continue the rollout of the Fresh Corner network. And also, we still believe that a significant contribution can come from the integration of the inorganic acquisitions, mainly the Polish and also the Slovenian one. I truly believe that once we finish on the [indiscernible] changes temporary, that we intensify the marketing activities on the market, then the brand awareness, especially in Poland [indiscernible] more and more people here try our services and products and they like [indiscernible] increase and that will bring additional turnovers, additional customer transactions. And that was very much supported by all the big capabilities that we introduced in all the countries. So thanks very much, and I will hand over to Zsombor to discuss the Upstream performance.

So good morning, everyone. Let me start with the Upstream performance in the first quarter. We're already close to that $262 million. This is 30% less to Q4 and 8% less to last year first quarter. This is largely impacted by the gas prices, which were 24% down compared to the previous quarter and resulting therefore like 10% less average realized hydrocarbon prices. On the extra government takes, which had also effect on our revenue -- on our performance, because the revenue base [indiscernible] in Hungary, which was $15 million this quarter. But also let me give you a bit of [indiscernible] because these periods are also affected by special levies. Just to remember, on the first quarter in 2023, it was impacting in Hungary by $28 million. There was extra mining oil in Hungary and the regulated gas price cap in Croatia. And in Q4 last year, we were also [indiscernible] as positive impact to posting our results by $54 million. So if you move on to the next slide, you can see that these effects are also visible [indiscernible] the following [indiscernible] free cash flow by having an absolute $190 million cash flow performance of the division in the first quarter. Despite these circumstances, we were still able to beat the unit free cash flow above the long-term strategy guidance, which we gave already, which is $20 million [indiscernible]. We delivered $24 unit cash flow at quarter. If we move to the next slide. There is nothing extraordinary looking at the waterfalls and the breakdown of our EBITDA term quarter-on-quarter and year-on-year. You can see that there are largely [indiscernible] factors having an effect and impact on our results. The extra royalty had a significant impact in the base period, which I already told, and this is dominating the price component by more than $100 million, having that last year. The hydrocarbon prices, especially the gas prices, have a negative impact both quarter-on-quarter and year-on-year. And then the other factor, you can see on the chart, is actually the revenue base tax in the first quarter of 2024, again $15 billion. If we move to the next slide, which I would like to spend a bit of more time to give you a snapshot about our internal action performance. Despite the nature of our more and mostly mature assets, we were able to increase our production line quarter-on-quarter, which is a very strong performance. This was largely driven not only by the CEE, where in Hungary, we were able to strongly decline and also starting out new discoveries in [indiscernible], which is a joint venture with the OGV Hungrary, giving us 500 barrel [indiscernible] oil production already. But also our international assets contributed heavily to this performance. In Kazakhstan, after the first cut, we were able to keep the field in operations, despite of the heavy flooding in the region. In Kurdistan, despite all the export pipeline still shopping, we will still be able to increase our domestic production, having a positive impact on our overall results. Mid-April, we're also starting up the ACE platform in Azerbaijan, with the first already delivering to the ACG performance. And all these effects -- and we are contributing to a year-on-year -- quarter-on-quarter increase on the production performance. You can see that going forward, the April production has decreased compared to Q1 by about 1,500 barrels. This is a mix of a plan that [indiscernible] largely due to a fairly strong attack in [indiscernible] operations in Kurdistan in April. For that -- for 1 week, the field gas in shut down, but now it's back on production on the original normal barrels. And also in April, we had a planned turnaround, then shutdown of the ACG field [indiscernible] shutdown planned, it happened our production performance. Still, we believe that we remain confident that we can reach the annual target of 90,000 barrel oil that we were than the -- 2024. And again, despite of the stronger production, the pressure on the gas price has really limited our earnings potential in the quarter. If we move on to the next slide, actually, my last slide. Finally, let's look at the evolution of our cost structure CapEx and OpEx. The unit OpEx was flat year-over-year and decreasing quarter-on-quarter, driven actually by three factors: lower electricity prices in Central Eastern Europe; higher production, leading to unit savings; and our asset composition shifting towards low growth assets. We have a very strong cost discipline on our operation spending. With regards to the CapEx, there is a 7% decrease, largely due to suspending OpEx project in Shaikan, with the shutting of the export line. And lastly, let me again note that the spend in our [indiscernible] exploration portfolio in Croatia by entering into a joint venture [indiscernible] and giving them for exploration in Croatia in 2024. This is in line with our strategy, to create value, to partnerships in the CEE region. And with that, let me pass the ball to [indiscernible] to discuss the Circular Economy Services.

Thank you very much, Zsombor, and good morning, everybody. This is the first time that Circular Economy Services is being [ treated ] as a separate segment. [indiscernible] already mentioned that the main highlight of the first quarter is one of accounting correction. It's $30 million as an effect from last year. And the result for this is that the extended [indiscernible] service possibly [indiscernible], so-called EPR fees are not paid as we expected. So many, many companies haven't registered in the system and haven't paid this amount of money. The whole concession and the new base management model, which started in the middle of last year, is not only new for us, but it's for all the participants, including the producers, companies or authorities. So we are -- together with the responsible authorities, we are doing our best to make -- to registrations happen. And if the companies have registered, they have to pay the full amount of money from 1st of July, 2030. So we are very confident that this money will come, and we can invoice it. And they will pay the amount, which they are responsible to pay. Excluding this one-off effect, the EBITDA was $20 million, which is absolutely in line with the previous quarters and in line with our expectations. And I would like to rather highlight that in the first quarter, we already started the development programs. So more than 2,400 of reverse vending machines are already in the shops and the supermarkets waiting for the startup of the deposit refund system from 1st of July. And we are still continuously installing those machines. We started separate kitchen waste collection. We increased the textile waste collection and also opened our first waste yard in Esztergom. But also I think it's really important that from 1st of July, we now have a joint venture company, 50%, 60% joint venture company with the municipality of Budapest as -- and MOHU Budapest, the company is called MOHU Budapest for the waste management operation, which represents [indiscernible] for the country population and one for the waste volume now is managed by a company, which is partly operated by us. And I would like to highlight that we are now owners of crucial assets, like the only incinerator in Hungary and the biggest landfilling sites in Hungary. So we have ownership of those assets and control of those assets. And I really hope that in the long term, we showed the most important region of waste management to be operated by the group. Thank you very much.

Thank you. That completes all the parts of our presentation. So we'd like to now open the floor for [indiscernible] question. [Operator Instructions] Tamas Pletser, please go ahead.

I got couple of questions. First of all, on this -- you mentioned this new benchmark on the Brent-Ural differential. How does it relate to your realized Ural prices, this Indian benchmark you mentioned before? I know that you said in the last conference call that you paid the tax -- Ural -- tax based on the realized Ural price. So my -- this is -- my question is, how is this realized Ural price relate to the Indian benchmark? Is it far away? Do you get cheaper Russian crude compared to this? So that would be my first question. And the second question would be regarding your polyol ramp-up. How do you plan this kind of production increase in the new polyol factory you have? And how does the current profitability of polyol looks like? And finally, on one issue, I heard yesterday when the Chinese President was visiting Hungary that they might be involved in the pipeline building projects in Hungary. I know that you have a partnership with the Serbian company to build a pipeline between -- a crude pipeline between Hungary and Serbia. So what does it mean that -- how the Chinese would be involved over here? Do you have any ideas on this?

Thank you, Tamas. Thank you very much for the questions. So the first one, so to provide you some help, as I mentioned, I would calculate the DAP India and adjust it by the logistics cost. So this is roughly the benchmark for the price, which -- for which we are getting the growth delivered to other border, Slovak, Ukrainian and Hungarian-Ukrainian border. I can't disclose further details on this. I believe these are pure calculations. Just in terms of the polyol, what I said, the mechanical completion is ready. So the plant is there. Now we are starting it up. We are testing the parameters of the final products at the pilot or testing plant there, half-tonne pilot plant. And I believe this year, we will be very much working on the start-up of the plant. So this year, I would not count with the positive impact to our EBITDA with the polyol plant. And also it's a good point that you mentioned that what about the profitability, of course, that there are several factors. So there is the official quotations, and there are either premium or discounts. So -- but I believe it for our further discussions, once we are ready, once the plant is running, which will take time, then we can discuss that how we will attract our customers. So there is a high interest for the European customers for this uptake. So they are rather happy that there is a new player in the market. But this is our policy, how we will attract those customers with the quality products. And in terms of the last point, yes, it was several times mentioned even in the media. There is an interest to build up this crude pipeline from Hungary to Serbia. Currently, our engineers and also the Serbian engineers, they are working on the details of the design there. This is the case. So my guys, also with the help of some external engineers, they are putting together the feasibility and the technical detail of this connection.

Okay. Just one follow-up on the Ural-Brent question. You mean logistics, you mean the logistic to India. So that's the Brent effect.

Right. Okay.

So you might get it because you don't have to pay that logistics. So that might be more favorable to you.

Thank you. Anna Kishmariya, please go ahead.

I have two questions, actually. So regarding the working capital build this quarter, would you expect some reversal to happen over the course of the year? And another question regarding the media, we saw this -- potential Hungarian government are looking again for the tail of regulation. There were this two weeks period when the company can adjust the pricing. But what is the update? Should we expect some possible interventions? And do you have any update on that side?

Let me take the first question regarding the working capital. As we explained, basically, the same factors behind. One is, of course, the normal business. We are finishing with a larger project in Q4. Therefore, we are paying out the vendors in Q1, and this is the usual pattern. And in this sense, yes, it's going -- it will not happen again in Q2. With regards to the level of inventory, we are preparing ourselves having a higher level of inventory because the turnaround season is coming. But this only accounts for $ 50 million in the quarter -- in the first quarter of 2024. And the larger part, which is $250 million, it's purely depending on the potential. So I think the answer is that, yes, there is no further [indiscernible] working capital driven by the CapEx project. But with regards to importation, I think this is not in our hand. It's going to happen according to [indiscernible] prices.