Motor Oil (Hellas) Corinth Refineries S.A. (MOH) Earnings Call Transcript & Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Motor Oil Conference Call on the Fourth Quarter 2019 Financial Results. We have with us Mr. Petros Tzannetakis, Deputy Managing Director and Chief Financial Officer; and Ms. Mary Psyllaki, IR Officer of the company. [Operator Instructions] I must advise that this conference call is being recorded today. And we now pass the floor to your speaker, Mr. Petros Tzannetakis. Please go ahead, sir.

Good morning, good afternoon, good evening to all of you, wherever you are, from Athens conference call for the 2019 results. It is a different conference call. It's a different year we live and we experience these days. It's something that has never happened before. So let's think a little bit where we stand and what we have ahead of us as a company and as individuals. To have a chance to succeed in the day and months to come, companies need to ensure that we will sustain sufficient cash flow, sufficient liquidity to meet immediate obligations. But in the coming weeks, as economic activities remain suppressed, firms will have sufficient financial support and confidence to remain operational and maintain head count. In Greece, over the past almost 10 years, we learned how to survive. We learned how to be resilient and operate in difficult, at times impossible conditions. It is quite interesting 10 years later we have another crisis, but this is not a Greek crisis. It's a global crisis. Here we are again to be tested in a completely different situation. The coronavirus and the efforts to contain it are expected to affect the global economy and then as a result, the demand for oil products and crude oil. Those developments would have an impact on refining margins in Q1 and Q2 from what we can see now. We are hopeful that the particular location of the refinery in the Eastern Mediterranean and the surrounding area would result in a softer landing due to the particular supply-demand dynamics of East Mediterranean and North Africa. With respect to specific actions taken by us, we have taken all the necessary measures with regard to our own workforce health protection, and to the extent this is feasible, we have uninterrupted continuation of our production activities. Let us look at the slides. The highlights are on Slide 2. Again, large refinery sales, marginally lower than a year ago; large refinery process volume, 4.2 million (sic) [ 14.2 million ] of sales, 12.7 million of refinery volume; group EBITDA, EUR 474 million with adjusted at EUR 453 million due to some inventory gain for the whole year. Group net income, it's EUR 228 million. Adjusted net income, it's over EUR 200 million; net debt at EUR 354 million with net debt at the parent level, as we will see later, at the lowest figure ever historically. What happened during this quarter in the crude prices? We saw the -- we saw an average of $62, moving from about $50 to $72. It stayed more or less at Q3 levels, lower than Q1 and Q2. Sweet-sour differentials, which we can see on this Slide 3, they slightly widened from just under the Brent, so minus $0.3 for the Urals versus Brent to about $4 per barrel for the Basrah Light versus Brent. Product cracks were particularly volatile and unpredictable mainly because of the IMO dynamics affecting the quarter with a high sulfur fuel oil crack going into very negative territory. And average for the fourth quarter was at minus $27.9, with November being at $12.3. So you can clearly see how much it dropped. And in Q3 at minus $11.2. The euro-dollar movement for Q4 were from $1.09 to $1.12 with an average of $1.11. So it stayed very much at the level -- a stronger level than at the beginning of the year. The average for the whole year was at around $1.12. And for the whole year, it was between $1.09 and $1.15. So there was quite some movement. The Greek macros during this period were particularly positive. And the credit was improving. The -- all the metrics were much, much better, which culminated in January 2020 being upgraded by Standard & Poor's. So the credit rating improved, and the Greek government went and issued bonds, which had very long duration and a very good coupon. Q1 '20, with the outbreak of virus, the -- let's say, the positive in the negative environment was that the Eurogroup concluded the fifth post-bailout review, welcoming progress in reforms and fiscal consideration. So at 4% of GDP, the primary surplus exceeded targets for the fifth consecutive year. And again, the Eurogroup agreed that Greece would be able to make full use of the fiscal flexibility provided to other Eurozone members to deal with the outbreak. And what Greece managed to achieve is that this year's 3.5% GDP primary surplus requirement has been scrapped. And additional expenditures relating to tackling the migrant refugee crisis and the virus will be exempted from the budget. Today's news on top of the previous ones was that Greece was included in the quantitative easing with a potential maximum amount being -- costs to be suspended for Greece at EUR 13 billion. Domestic demand during the period was slightly weaker. We will cover it in a minute, go into more specifics. But let's start with the operations before we go into the demand-supply dynamics. Operations were interrupted -- not interrupted exactly, but had the stop of the FCC maintenance for the 21st days of October. So to refresh the memories, it was a 40-day shutdown, 20 days in September, 20 days in October, and there were some smaller shutdowns in December. So clearly, this affected the quantities processed, and we can see this on Slide 4, where the refining process -- refinery process volume was down to 2.291 million metric tons compared to 2.5 million metric tons in the previous year, the previous quarter of 2018. This brings the overall [indiscernible] at lower levels because we also had the different opportunistic maintenance done in Q2 last year. What is very significant during this quarter, something that cannot obviously be seen from Slide 4, where you see the circle with the mix of crudes, but for all of you who have the previous quarterly breakdown, what one can see is that heavy to light was 60% heavy, 40% light in Q4, having started from 89% heavy, 11% light in Q1. So clearly, the mix changed significantly because of the dynamics in this particular quarter. In a way, you can see the dynamics from the process volumes where the fuel oil processed amount has gone down to 118,000 metric tons, so really 1/3 of what it was a year ago. And if you see it on a yearly basis, almost 600,000 pure volumes, lower volumes of fuel oil were processed. If we move on to the next page, the next slide, you can see that this is reflected in the refinery production and yields with a much lower output of fuel oil, down to 14%. It's something which, theoretically, we were referring to in the previous quarters, and here is the resulting that, yes, when the financials, when the economics of high sulfur fuel oil are weak and when the discounts on heavy crudes have narrowed, you can clearly reduce the output of it. And actually, the low -- the levels of fuel oil output were the lowest for many, many years, and the feedstock of fuel oil outputs were the lowest since 2012. So clearly, the flexibility is there where the economics show us that. On the other hand, gas oil was at high levels with the feedstock being actually higher in Q4 2019 than in Q4 2018 because the economics were present. And it is actually the highest quarter from all the quarters in 2019 this particular gas oil feedstock. Total volumes were at 3,145 cubic meters, reduced but still at comfortable levels. Q4 sales. Q4 sales, total sales were EUR 3.5 million metric tons, lower than the Q4 sales of 2018, but overall, at usual quarterly level. If we -- you can see that the overall EUR 3.5 million metric tons is actually higher than it was in Q1 and Q2 of 2019 but lower than it was in Q3. So it was a pretty normal, I would say, quarter with the domestic market being stronger and picking up actually quite significantly, and it was one of the high quarters. And actually, it was the highest fourth quarter. Okay, last year was high as well, but it was one of the high ones. It is important here to look at Slide 8 at the same time because you can see that what we did not have from refinery process volumes, we covered to a large extent by traded volumes. So it was a conscious choice and then economic choice that you refine slightly lower because of optimizing the crude mix and optimizing your additional feedstock mix, and you cover the rest of your demand as long as there is a demand with traded stuff. So looking at the particulars of Q4 a little bit further for the domestic market. Domestic market in total was down by 0.5% with diesel being down by 0.5%. Heating diesel this is. Automotive gas oil -- sorry, with heating -- sorry, with gasoline being down by 0.5%; automotive gas oil, up by 0.6%; and automotive fuels by 0.1%. Heating gas oil was actually down by 3% because of the warm winter. This leads to the full year numbers, and the full year numbers actually stand at 2.567 million metric tons, which is the highest domestic market sales since 2012. And for the full year, we see an increase in total of 2.8%, with gasoline losing about 0.7%; automotive gas oil, plus 1.5%; so automotive fuel at plus 0.5 a percentage point. Shipping/aviation was healthy as well, and it was actually, again, the highest we have seen historically since 2012, you can see it on Slide 12. And obviously, exports, which makes the difference, it's really the balance, and it all reflects the overall sales reduction. This shows also something that will lead us probably to the discussion later on that when we see levels of EUR 14 million sales, we must always keep in mind that the refinery capacity, the pure crude refinery capacity has a ceiling of just under EUR 10 million, and everything above it is either traded products or blended like the fuel oil, traded like the gas oil. So clearly, these are the 3, let's say, segments, trading, diesel, fuel oil, can be adjusted to the economics, the individual economics of each product and are not that important in the overall profitability of the refinery. A little bit on the subsidiaries, on Shell and Avin. They both are doing well. Both are gaining market share in Greece and are selling increased volumes. Avin has also picked up, and both of them have performed better than the Greek market, marginally but better. Yes, what else do I have to add on Shell and Avin? Well, this is the main thing. Yes, the expansion is going well in the Balkans. So stations in Serbia are opening. Cyprus stations have reflagged, all of them, into Shell. And the loyalty programs of both these brands have been doing quite well, and we keep growing our retail -- nonfuel retail sales. These results in Slide 9, which you can see the refinery margin ending at about $49. Again, keep in mind that this includes the blending volumes. Okay, so if you look at it as a pure refining margin, it would have been slightly higher compared to a benchmark of just under $26. So again, compared to the benchmark, it's a decent margin in an environment, which has been declining. Looking at Slide 10. We can see the fourth quarter with an EBITDA of EUR 40 million compared to last year's EUR 11 million. These are very important numbers. Obviously, there was an inventory loss last year, which was quite significant, bringing the full year numbers to EUR 411 million for EBITDA and EUR 360 million for 2019 numbers, and earnings after tax of EUR 228 million for full year '18, EUR 206 million for full year '19. Clearly, there, we benefit from the reduced tax rate, which we applied in the fourth quarter retroactively for the full year. So it moved down from 28% to 24%, and clearly, this was a benefit for all of us. Slide 11. You can see the same for the adjusted numbers where we added the EUR 123 million inventory loss for Q4 and the EUR 18 million. And in the full year numbers, you have EUR 102 million inventory loss, and in 2019, you have EUR 21 million inventory gain. So earnings after tax at EUR 190 million for full year compared to EUR 301 million. But really, it's the reported numbers out of which we calculate, let's say, the dividend payments. Group, EUR 146 million, EUR 78 million for Q4, EUR 602 million, EUR 453 million. And if we take the -- this is the adjusted numbers where we include the same inventory gain and loss, having for the year after-tax earnings of EUR 333 million for 2018 and EUR 212 million for 2019. What's important to see here in the next slide is the balance sheet. Clearly, debt keeps improving. And even though net debt appears bigger, it is because of the IFRS 16 being included, which IFRS 16 was EUR 136 million for EUR 354 million in total. So if one excludes the IFRS 16, this EUR 354 million would look like EUR 200 million. So it would have been lower than the number of 2018. And if we go to the next page where we have the cash flow, and I'll come back to the debt figure in a moment, you can see that for 2019, for the parent, EUR 360 million, giving you gross cash flow of EUR 292 million. The big working capital change giving operating cash flow of EUR 433 million, free cash flow of EUR 201 million, used to pay down debt and reduce dividends and increase the cash position by EUR 60 million, more or less. The group had good cash flow generation as well with EUR 474 million, taking it down to EUR 374 million with a smaller working capital change probably the -- with the growth of the subsidiaries, they had more working capital tied down to their business. So operating cash flow, EUR 492 million; free cash flow, EUR 224 million. And this, of course, is after investing activities and capital expenditure. So a healthy cash flow overall. One probably can say that 31st of December 2019 was the best picture from a credit point of view that Motor Oil as a parent but also as group has seen since 2010 when the Greek crisis started and when Greece joined the IMF, if you remember. Forecast for 2016, CapEx, as we said, it was a EUR 101 million for the parent. There is a forecast for EUR 210 million, which mainly includes the forecast for the reform spending, and I'll come back to that in a moment. Slide 17. We see the net debt in the small square and the drawn debt as of 31st of December with the different maturity profile. Slide 18 shows you the dividend. We try to keep the same pair. For 2018, it was 63%. 2019, it was 62%. So one can probably think that we decided to be a little bit more conservative at the end because of the situation that we live in, but we still believe that the EUR 0.80, the remainder dividend, is a satisfactory dividend under the circumstances. A couple of points to add before we conclude my talk is that during this period, we continued investing in renewables. In subsequent events from the closing of 31st of December, we acquired -- we concluded the deal with the 47 megawatts of solar that we bought from Mytilineos' company. And this grows our -- gradually grows our portfolio. And actually, this particular one is one that is operating since December of 2019. So besides the one that we bought in September, October, which is on the development phase, we have some which are actually in the producing phase. And we have some others at which we look. Last point is liquidity. We were preparing for a bond, for the refinancing of the bond, but market caught up with us. So I -- we do not think it would be wise to actually exercise this option now. We had the option to refinance the bonds because it was -- it was at a non-call basis. And I told you because of the very good credit profile of Motor Oil, we were quite optimistic about the issuance of a new potential bond, but of course, we are in the very fortunate position to have ample liquidity, having a lot of committed lines with our banks and something that we are happy and have worked very hard on that for the past sort of 8 or 9 years. So we feel confident that we can clearly support the business circumstances. And a few concluding remarks that operations continue uninterrupted. An important point here is that major maintenance is behind us. It was completed during a tough refinery margin environment. We completed the maintenance of the hydrocracker in January, February, and a small maintenance in one of our crude -- one of our 2 crude units in February. We chose this winter period because being in Greece, you have the advantage of the weather and can have maintenance in January and February where no other European refiners, particularly the ones in the north, could do that. So now with the virus, we are in this very strong position because we would definitely not like having big shutdown of the refinery during the period when we try to control the health of the employees and safeguard them. So this is -- adjustments in the operation mode are continuous according to the different product dynamics. And this is something that we have seen in the last quarter but also in the current quarter. And that's where, again, Motor Oil has a very strong track record. These are proceeding as planned. There might be a small slippage to the reform. Nothing is final yet. But depending on the coronavirus, one can expect a small slippage. When we have something firm, we'll clearly come back to you. We are committed to continuously improve our business. A great effort has been put in the digitalization and upgrading of our systems, with a major restructuring of the IT and technology division already completed. It was a project that we undertook last year. So the whole IT and technology department was upgraded. New people were hired. New structures were put in place. We are glad that this was done before the virus hit the world. And this was done strategically to support Motor Oil in its next phase of growth. Second, selectively, we grow the business in pockets of value. So there are refinery upgrades and refinery small expansions in areas where these products give us greater value-added and consumer-focused expansions. So through this digitalization in IT, we expand and have a very aggressive and ambitious -- I forgot my English, an ambitious program for the nonfuel retail growth and the cross-selling where, actually, the market, as of a week ago, cross-selling electricity by offering Shell parts. So people, new customers of the electricity company can fill up their car at the Shell station after they get -- after they sign for the loyalty program of Shell. And third important bullet, develop new business units in the areas of renewables, power and gas while focusing on group energy efficiency. New departments have already been set up for all, and talent has been attracted to Motor Oil, both from Greece and abroad. We believe that it is the perfect timing to prepare oneself for the future. I think I will stop here to give you time for the questions. Thank you for listening to me.

[Operator Instructions] First question today is from Thomas Adolff from Crédit Suisse.

Three questions from me, please. Just firstly, on 4Q and your operational performance. You had maintenance in October, and you had some maintenance in December. But you also talked about optimizing the yield, the crude state, the product slate. The maintenance, perhaps, was a reflection of how to best get the -- how to optimize the yields? And that's the first question. The second question is if you don't mind just reminding us of your liquidity position, the committed lines you have with the banks and the utilization of that. Then maybe the final question is, obviously, it might be a little bit too early to talk about demand in Europe. But clearly, that's going to have an impact in April and May, and hopefully, not for longer than that. Do you have enough storage capacity to allow for your operations to -- normally if demand were to collapse by, say, 15% to 20% in April and May?

Yes. Maintenance. Maintenance was not really linked to the yields, particular -- definitely not the FCC ones. So the FCC was a planned one, and it's one that happens every -- I don't remember how many years, and we planned it for this period of the year. The one in December, probably yes because it was smaller and a bit opportunistic. So it was more related to the yields. Clearly, we moved to a sweeter mix of crudes and reduced -- extent having reduced the blending of fuel oil and operating, as we saw earlier on, with much lower high sulfur fuel oil production. Liquidity position. We have -- and actually, it's also included in the annual report, we have lines of up to EUR 1.2 billion committed lines for parent company, Motor Oil, out of which, if I remember well for 31st of December, we have it at the slide, actually, EUR 580 million were drawn at the end of December, so roughly another EUR 600 million of available lines, plus about $800 million of -- $970-roughly million for bank guarantees, letters of credit, which tend to be uncommitted because they are of a short-term nature, and they are more trade related. But almost all of those are more or less with the same banks as the other committed lines, so one feels pretty comfortable. Demand in Europe. Clearly, one expects it to be affected. Clearly, I mean we see the cars being driven around. Two angles must be highlighted here, something I quickly touched upon on the slide where we show -- on Slide 8 where we show the sold volumes for the year. On top, you see the traded volumes. We do trading when we have bigger demand than we can cover out of our own production. And you can clearly see, even during 2019, we increased the traded volumes from 1.2 million in 2018 to almost 1.8 million. So there is big flexibility there. So one part which you can actually give it up completely with very low loss of income because that's a low-margin business. You only have a small trading margin, which I don't know if we have it here, but historically, let's say, it's around $10, up and down. So that's the part of the -- can comfortably allow to go because it's opportunistic. And also the fuel oil one because, again, the fuel oil part on Slide 4, which is this additional fuel oil feedstock, you can clearly see that in 2018, it was 1.360 million, down to 875,000. But actually, if you look at the last quarter of 2019, it was only 118,000. So if you project the fourth quarter for the full year, it would actually be less than 500,000 of fuel oil, but we had some contracted volumes at that time for Saudi Aramco, which we had to honor. So one can really give up almost all of this fuel oil. It's something I've been always highlighting when I was asked about the IMO in the past. I mean even to you, Thomas, I've mentioned this in the past. Now diesel, the green part of this slide, is something that very often, the diesel we buy and de-sulfurize, we have already the captive demand. We have the customer at the same time there. So if one takes a catastrophe scenario, you would need to go down from 14 million to 10 million, right? Let's see, 4 million divide by 10, and still, you would be operating at -- so you would be 40% down and still operate at 103% capacity. Let's say, that's the beauty of Motor Oil because you operate in a bigger marketplace. And also last point, to make things even more, let's say, feeling safer, that part of the products that Avin and Coral sell into Greece are from direct imports they do buying from trading companies, particularly, when it comes to the north of Greece rather than us selling to them from the refinery and having to burden the freight cost. This as well is something.

Our next question is from Yuriy Kukhtanych from Deutsche Bank.

Yuriy, I can't hear you.

Yuriy, it seems that we can't hear you. [Operator Instructions]

Sure.

We can hear you.

Yes. Sorry. Can you hear me now?

Yes.

Okay, that's great. Sorry about that. Some technical problems because everybody is working from home now. Look, first of all, I have 2 relatively simple ones. The first one, if you could just elaborate a little bit more about your exports, especially in the context of jet fuel. Would it be true to say now that the higher demand from the traders, do you see traders in the Mediterranean buying more fuel into storage? And the second question is about the feedstock. If you could remind us how much of your volumes on the feedstock side are contracted. And would you be looking into hedging your feedstock volume for the, I don't know, next year maybe or next couple of quarters to the current prices? Yes, that would be it for me.

Exports are -- it's not easy to respond to the current situation because it's very dynamic, which goes to Europe. It's mainly diesel. Part goes to Turkey, again, diesel. Jet goes to the U.S. Navy, U.K. Navy, the Shell-MOH Aviation, the company we have as a joint venture at the Athens Airport. Okay, that's with the jet. Not really traders, no. Most of it is to end customers and clients. I guess the feeling with the drop in air flight is something that we are going to see soon. It's not something yet, though, because we're still talking about March. So January, February was pretty normal. Obviously, with jet, you can move and produce more diesel out of jet. So there is this ability to shift a bit. Gasoline is mainly domestic. Big part is domestic. And that's what I mentioned earlier on that if there was a fall in demand, then we would simply stop importing gasoline and additional diesel quantities and use our own gasoline to supply the Greek market. Now on feedstock. Contracted are about 2/3, I would say, and the rest is spot. And some of the contracted are, let's call it, soft, meaning that we have optionality to pick up demand. So it's not months out of the year, and we have, let's say, 6 or 7 months out of the year, and we can choose the month. And all this can -- has to be decided the previous month for the next month. And for hedging, it's something we look at continuously. Have been, again, fortunate in a way that we bought this small company, Tallon, which has given us in-house expertise on risk management in general and more specifically in hedging cracks, hedging crude and CO2 emissions. So we are gradually becoming more sophisticated in that front.

[Operator Instructions] Our next question is from Henri Patricot from UBS.

Yes, Petros, can you hear me okay?

Yes, I can hear you. Yes, Henri.

Okay. Okay, great. I wanted to ask you mostly around the -- what we're seeing on the crude side with much wider differentials going into the second quarter. Can you give us a sense of what you're all planning to do on the crude side over the next 2 months and whether you're able to recapture the much wider differentials, in particular, for Saudi grades share to be able to increase the Saudi's grades in your mix? That would be the first question. Just around the dividend, a follow-up on your comments that you mentioned today to be a bit more cautious, which is understandable given the environment, but still a very high dividend yield given where the share price is today. So just thinking about future dividend payments. So we should think about that just on net debt level, a payout ratio? Any particular metric we should look at?

Yes. With the crude slate, the strong point is, again, that we have this optionality. All these years, we've been fighting on the credit front to make Motor Oil better and better. And the asset is flexible, and it can refine anything. And so today, we do have contracted volumes, but also we have a lot of optionality with big international integrated companies and trading companies to buy opportunistic crude, and we actually do it. So we scout the market all the time. Besides the standard Basrah Heavy, Basrah Light and the Kirkuk and the Arab Light, we look at others like CPC or Ural or even Brent at times. So this continues. We do not like committing down the road because things change very quickly. Clearly, with the discounts, if one looked at today's prices, assume you buy the crude today and sell the products today, so there is no inventory effect. Clearly, margins are very good again. The difficulty in this period is that you buy the crude today and sell the products in a week from now, and the delta might change completely. So obviously, this volatility is not to the favor of the refinery. We prefer to have a more stable environment. But it's something that we work on now, and we keep our fingers crossed that this problem for the whole world will soon be fixed. As far as the dividend, in a way, it has to do with payout, even though I would not go for strict percentages. And I would go with the overall logic of having a strong company and a strong [indiscernible]. And clearly, we saw last year, the credit profile of Motor Oil has improved dramatically. I see this in the borrowing rates from the banks. I see it in the potential of the bond. It's all there. So in a way, the dividend payment is part of that. And as one of the very best analysts wrote in his today's report, the world has changed since we realized 4Q numbers. And so there was a slightly lower dividend than one expected because this is exactly why we decided to be a little bit more conservative. Okay. So if things are good and we feel happy and comfortable, yes, you feel a bit more relaxed. Otherwise, I guess this 60% was a decent dividend, particularly, with the hammering the share got.

[Operator Instructions] The next is from [ Rafael Moore ] from [ Amaral ].

Not an expert in refining, obviously. Just a simple question. You mean there is an eradication of petroleum product demand currently going on in the world, while, I guess, refineries keep operating. So well, how does it get sold? I guess there is some product storage, but at some point, I guess, some refineries will have to shut or all of them will have to reduce production utilization of capacities. So how does it get balanced in the end? [Technical Difficulty]

Apologies, ladies and gentlemen, the speakers have disconnected. Please stand by whilst I reconnect them. We will continue the Q&A session. [ Mr. Moore ], please continue.

Okay, Petros, can you hear me?

Rafael, don't worry. I didn't do it on purpose. It was all right.

I thought you didn't like my question.

Still waiting.