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

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome and thank you for joining the Motor Oil conference call and live webcast to present and discuss the full year 2020 financial results. At this time, I would like to turn the conference over to Mr. Tzannetakis, Petros, Deputy Managing Director and Chief Financial Officer; and Ms. Mary Psyllaki, Investor Relations Officer. Mr. Tzannetakis, you may now proceed.

Hello to all of you from Athens, slightly later -- considerably later, actually, Q -- full year results than we are used to. If you remember, we usually publish them in the middle of March. But many things have happened since. So we had to slightly delay them. But this will give us a good opportunity to discuss all these things that happened between the mid of March and now in the company's sort of front. Let us start from some general comments on 2020. It was a year we are all happy that it's behind us. It was an unprecedented year for the refining sector. It had negative and very low benchmark margins for most of the year, very weak product cracks, significant inventory overhang affecting the markets, reduced OPEC+ supply and sour grades availability. And at times, sour grades were more expensive than Brent. Travel and tourism resumed a little bit internationally and in the local markets, but it was significantly lower than the previous year. And a few weeks later, a couple of months later, it had to stop again. I mean just an example is jet demand in Q4 was down by another 64% in the country. So this, in short, gives us a very not rosy picture for what we lived through during this year. What we have seen in Q4 is a slight recovery of benchmark margins from negative to slightly positive. But again, we will come a little bit into the details. This is related to the different products, and there was a change between the products margins and the cracks. The recovery in Europe was very fragile as COVID-19 infections increased and new lockdown measures were introduced by many countries and Greece as well. As of the beginning of November, we are again in a sort of -- different sorts of lockdown. Crude prices and product prices moved all over during the year. Crude prices, for example, started from about $67 per metric ton -- per barrel, sorry, at the beginning of the year to dip down to $18 in March, to go back to mid-4 -- mid-to-high 40s at the end of the year. Of course, products follow the very similar behavior. I mean just to mention gasoline, which from $590 per metric ton at the end of December last year -- I mean, '19, dropped to $175 per metric ton at the end of April. So -- and jet, from $616, dropped down to $91. So a very, very difficult situation to manage and keep our heads above the water. To exacerbate that, we also have euro-dollar movements, which in the last year started from about $1.12 down to under $1.10, I mean, we even reached $1.08 in April, to close almost at $1.23 at the end of the year. So specifically in Q4, we saw from $1.17 up to $1.23, roughly, with an average of almost $1.20. Just for comparison purposes, in Q4 2019, the average was at $1.11. So clearly, this is the strongest euro-dollar parity over the last 2 years, again, not helping because it generates an even weaker gross margin and an even weaker EBITDA and everything else. Greek macros. Clearly, the country was affected as most of Europe and most of the world. Demands of everything collapsed. The shops were closed. People weren't moving out of their houses. People couldn't go on, on trips, on excursions, they couldn't eat in restaurants. And that affected domestic demand quite drastically. I'll give you some numbers for the fourth quarter, and then I'll give you for the whole year. The fourth quarter, which 2/3 of it were on the lockdown situation, including Christmas and the holiday period, we had a total demand drop of 18%, with the gasoline falling by approximately 24%; automotive diesel, 5.7%; automotive fuel is minus 14%; and heating gas oil by minus 32%. Looking at it for the full year, the total drop was just about 8% -- just under 8%, with gasoline at minus 17%; diesel at minus 9%, automotive fuel is at minus 12.6%; and only heating being up 15%, but of course, it's not a fair comparison because the sales of heating oil were extended a year ago by over a month period. And so we are not comparing apples-to-apples. And clearly, this influenced the average for the year. But for automotive fuels, we have this sort of very negative picture. If we then move to jet, things are even more dramatic. In Q4, it was minus 64.2%. And for the full year, it was minus 67%. So clearly, Greece suffered along the situation that existed and prevailed in other countries as well. Motor oil, of course, could not be an exception to all of the above. However, what we saw during the year was that the flexible refinery operations, resilient downstream activities and a solid balance sheet and access to capital markets and access to the -- to financing in general, allowed Motor Oil to continue its investment program in the refinery and, in parallel, to accelerate its plans in the renewable sector. So even though we lived in a very difficult period, the refinery operated on almost flat out for more than half of the year. And the CapEx continued as the plan with the projects not delaying at all. Another important new thing that we saw during 2020 was something we have been working on for the past sort of 1.5 years. And this is digital transformation, which is started -- starting to take shape for the whole group. And so we are moving into a new era, doing new programs and passing new measures in all the companies and in the refinery. ESG is something to which I referred in our previous call as well has been addressed holistically across the group companies as well. And you will have seen in the report, our first nonfinancial information report included in the financial -- the financials of the year. And corporate governance improvements, according to new practices and legislation, are being implemented as we speak so that we will be ready for the new legislation that is going to be applied as of the next shareholders' meeting. Clearly, Q4, as the whole year, was a year of managing crisis. So health and safety for all employees was very important. And uninterrupted operations was -- were very important, particularly because of the health situation. And we were able, therefore, to continue supplying the market through our own network. And we're able to source the crude in almost an optical -- in an optimal way. I will give you some numbers as far as the mix is concerned. In Q4, heavy sour mix was 72% versus light sweet, 28%, which was slightly better compared to the -- slightly better, not really better. It depends what is better. It is actually worse than in Q3, which was standing at 81-19, respectively. And therefore, the full year managed to have a heavy sour of 75% with a light sweet of 25%. Obviously, opportunities that existed in earlier parts of the year, like in the third quarter, did not exist any longer in the fourth quarter because the market became much tighter. But actually, overall, the 75-25 was very much similar to the mix we observed in 2019. The overall performance of crude throughput, even though started from low levels in Q1 because of the shutdown -- the maintenance shutdown of the hydrocracker, increased significantly in the further out months. So in Q3 and Q4, in particularly. And actually, Q4, the throughput increased up to 184,000 barrels per day, which, just to remind you, is well above the nominal capacity of 172,000. So the overall yearly average, including the very low first quarter, closed at 172,000. So we can pride ourselves that during the most difficult year of the past sort of more than a decade, we managed to operate at full capacity. The processed volume was clearly higher in the last quarter than in the previous 3 quarters. But there have been some slight changes in the mix between the different products produced, which we can see in the Slide 4. What we can see here is that gasoline, specifically for slide -- for Q4 was at 13%. So it was lower than in Q3 where it stood at 15% of total production, and full year, 15%. Asphalt as well, where in Q4, it was standing at 10% compared to 16% for Q3 and then 12% for the whole year. These differences are quite important because they show you the shift in the yield of the products, which was something that affected the profitability of Q4. So Q4 had a lower overall profitability compared definitely to Q3, which we had a particularly high profitability because of the mix of the products and the shifts that occurred. So gasoline, asphalt were down. Diesel was up: Q4, 45%; Q3, 41%, average for the year, 42%. Naphtha was actually slightly up at 8% and continuing its increase from Q3 at 7% and from the full year at 6%. So naphtha performed quite well. And fuel oil increased to 13% at -- in the fourth quarter from 10% in the third quarter, which clearly affected the economics. Jet was very low at 5%, both in Q4 and Q3, and clearly different and much lower than the 7% of the full year. According to the production, we also have the sales, where we clearly see a drop in the domestic market, and we can see this in Q4. A drop -- a dramatic drop in bunkering and aviation. So the domestic market, as I told you earlier on, fell across all the products, except again for a yearly -- from a yearly point of view for heating. And bunkering and aviation clearly was much, much lower. But we were glad and happy that exports increased. So as you see on the slide, total sales managed to be slightly higher than in Q4 2019. But this was achieved exclusively because of exports. So our model of operating the company with very strong trade relations in the broader area and with the situation of other refineries in other countries, cutting runs and reducing the overall production, help us export more and cover part of the deficit that was created in the domestic market in bunkering. And actually, this even allowed us to do some trading volume on top of the refined volume that you can see in the next slide. Clearly smaller because it is always like a top-up activity with smaller profitability. But the mere fact that it still exists for the fourth quarter and for the whole year is quite good for the company. I mean if you look at the page -- Slide 7, you can see for the whole of 2020, it was at the levels of '18 and higher than 2017. So our trading levels were quite satisfactory for 1 more year. The result of what we just said gives us the margin for the full year. Clearly, lower margin for the fourth quarter. Fourth quarter was lower than in Q3. And Q3 was actually higher than people expected. So we had a reversal of the situation. The fact is the reason is exactly the same that it was in Q3, the reason being the mix of products. And -- but on the other hand, it gave us the ability to continue operating flat out. So the whole year closed at $46.3 per metric ton, which is well above the benchmark number. And if one looks at it per dollars per barrel, it is $6.3 per barrel for the full year compared to $1.2 for the benchmark. Quickly look at the financials. We can see that for the parent company, P&L had a positive EBITDA of EUR 20 million but moving into negative territory after tax. And full year, it is just barely positive EBITDA with a minus EUR 136 million profits before tax and EUR 113 million after tax. And excluding impairments, the numbers are slightly better, with EBITDA at EUR 31 million and earnings after tax at EUR 85 million. The adjusted number on the next page adds back the inventory losses for the full year and subtracts the inventory -- small inventory gain of the fourth quarter, giving a EUR 10 million EBITDA for the fourth quarter and just under EUR 200 million EBITDA for the full year and the respective earnings before tax and after tax. I mean you have it all here. So don't linger on that. Group reported EBITDA, EUR 49 million for the quarter, EUR 86 million for the full year, both turning negative at the before and after-tax level. And if we look at the adjusted number, EBITDA, EUR 331 million, with a slight increase to EUR 337 million together with impairment, but let's stick to the EUR 331 million compared to the EUR 34 million for the fourth quarter, leading to minus EUR 20 million before tax for the fourth quarter and EUR 109 million before tax and EUR 74 million, EUR 76 million after tax for the full year. We can always come back on that. In the next slide, we see the situation with CapEx. CapEx for the full year stood at EUR 175 million. As I told you earlier on, the project moves on schedule well within budget. And so hopefully, by the end of the first quarter of 2022, it will be completed, the big naphtha reformer project. Debt was slightly lower in Q -- in full year. So the positive development of Q4 that -- was that we improved the working capital management, and there was a cash flow improvement by an amount of about EUR 145 million. Therefore, the working capital change that occurred in Q1 is gradually being normalized, something that all of you and us expected to gradually happen. These things happen slower usually, but they do happen. So it is good news, particularly in a year with such high CapEx. On the next slide, we have the guidance, the estimate for the CapEx for the current year, standing at EUR 240 million. And a big part of it is obviously the reformer. And on the next slide, we have, again, the net debt on the left side and the maturity profile, which is being gradually lengthened, extended. Because in 2022, besides the bond, which stands just under EUR 350 million, the rest is just some small facilities. And the other loans extend after 2023. And also take into account that here, we do not include the bond, the new Greek bond. And -- we include it or we don't?

[ We don't ].

We don't. And we have only the numbers as they look at the end of the year. So as we speak, this has already improved in Q1, and you will see an improvement in Q1. I guess you will want some comments from my side on where we are with the first quarter. So let me preempt your questions. First quarter is going well. Sales volumes have caught up, overall sales volumes. And so clearly, they have covered the gap that was left in the first quarter last year because of the big shutdown for 40 days of the hydrocracker on the turnaround. Again, however, the picture is concentrated in exports where we see the biggest part of the growth. And domestic market is still weak because we continue being in a lockdown, maybe partial, but we are not allowed to move from one prefecture to the other one, and we are only allowed to move within the same -- the boundaries of the same [Foreign Language]

[ Municipality ].

[ Municipality ].

Municipality only since a couple of weeks ago. Before that, we weren't even allowed to move away from -- between the north and the south of Athens, for example. Therefore, clearly, the domestic market is being affected. There is some improvement. Things are better this year in the consumption, the demand for the domestic market than they were a year ago. So clearly, numbers of demand, of consumption are lower than they were in the same period for 2019, but they are higher than they were in the period -- the same period last year. And shipping and aviation. Shipping continues being very low. Aviation, we start seeing a glimpse of hope and some demand and also some pickup in margins. Also, what happened during this quarter, we concluded -- we didn't conclude, but we signed the agreement for an acquisition of 220 megawatts of wind turbines and plus another 20, which are near completion. So 240 megawatts will be added to our already existing...

Portfolio.

Portfolio of 124 megawatts. So the first target that we referred to back in December of reaching above 300 megawatts sooner than later has been obtained, and we, I think, stand at 380 megawatts, 384 megawatts. Plus a pipeline of over 600 megawatts, which we are going to acquire in the same deal. So another 650 megawatts will take us up to 1 giga of operating and plus licenses of mainly wind renewables. We also issued a Greek bond. We went out in the market and issued a Greek bond. We -- it is a 7-year bond of EUR 200 million, priced at 1.90%. It was a very successful issue with over EUR 1 billion in subscriptions, of which over EUR 650 million -- if I remember well, about EUR 670 million was from Greek retail investors, with a very large number of retail -- of individuals. So that's a big vote of confidence to the company and to the future of the company and a good opportunity to raise funds at competitive rates for the CapEx that is following. I think I'll sort of pause here because I'm sure you will have many questions, even though most of you have understood the results, reading your comments. So thank you.

The first question is from the line of Adolff, Thomas with Credit Suisse.

Petros...

Mr. Adolff, I'm sorry, we cannot hear you. [Technical Difficulty]

Hello? Can you hear me?

Yes, we can hear you now, sir.

If you don't mind going through the step-by-step on the renewables again, how much of it is operational today? How much will be on stream by, say, 2025? And how is this going to be funded presumably using project funding? So how much of this renewable spending is reflected in your CapEx guidance, for example? I have 2 more questions and -- but I'll let you answer this question first.

Yes. So 124 megawatts is the portfolio that we had before this recent acquisition. And 240 megawatts is with the acquisition. The sum of the 2 is going to be operational by June 2022 or the end of December 2022. But the bulk and rough numbers, 220 megawatts plus another 70 megawatts, 60 megawatts. So 300 megawatts are operational as we speak, and the additional, roughly 80 megawatts, will be by -- before the end of 2022. Now funding, I am not ready to elaborate on that because we are funding them as we come. Some are through project finance, some are through shareholder loans to the company that invests. And we are also thinking of possibly doing a Eurobond in order to fund part of this expansion. So I'm not ready with numbers on that, but we will soon be ready, and I will share it with the investor community when I'm ready. But now the number of -- by 2025, which you said, I can give you a much more aggressive target, which maybe 500 megawatts, 600 megawatts should be ready by then. Because out of the pipeline of 650 megawatts, we are picking the better ones and we are moving ahead fast, particularly now that we are gathering expertise quickly. A whole team has been set up in-house. And we are moving very well on that front. So 300 megawatts operation today, 380 megawatts by next year, over 500 megawatts, maybe 600 megawatts in 2025. Thomas, your next question?

I was just disconnected so I'm back online, so I apologize. The...

Did you get the answer or not?

I just got the last bit, but don't worry about it. My colleague is listening into as well so I'm guessing he's taken note. If not, I'll email you.

Okay.

The second question, I guess, very important for refiners generally is working capital release. And you had one in 4Q. And I was wondering if you can give us some guidance for 1Q. And what's really driving the release here, if you can provide more details? and then my final question is on the dividend. You chose not to pay one on 2020 earnings. Is this just a defensive measure to protect your balance sheet? Or what has gone into the decision to not pay the dividend?

Yes. Okay. So Q1, as far as working capital situation and the cash flow, will be around the number of the end of the year. So we will not see an improvement in Q1. Q1 usually is a weak one. If you remember, last year, it was Q1 that generated all the negative working capital movements. But we are clearly experiencing an improvement as we speak. The dynamics behind it are mainly payables with timing of inventories. So if some cargos have arrived and now -- thinking about it now, cargos are more expensive, okay? They are now over 60 million. 1 million barrels multiplied by any number you choose compared to what they were a year ago. So 2 cargos arriving before the end of the quarter clearly improves -- increases your inventories on the one hand and probably affects your payables as well. But the payables are also affected by payments that are scheduled. So in Q4, it was -- the improvement was driven almost exclusively by payables and by the increase -- decrease in inventories because sales picked up very significantly towards the end of Q1 and beginning of Q2. So March, April were very strong months as far as sales are concerned. And dividends, I would say it's a defensive move. Clearly, one could pay a small dividend. It wouldn't be difficult to spare some cash flow. But we believe as we are thinking long term and we always try to find -- to strike a balance between dividend return and CapEx and profitability. If you remember, we left last year's dividend intact, which we could have reduced, but we did not. So we said, why pay a small one now and not delay, postpone, see how the first 6 months go and come back with a more generous interim dividend, which one could also try and pay earlier rather than later.

The next question is from the line of Labate, Victor with Piraeus Securities.

I have 2 questions. The first is regarding your subsidiaries. Looking at your Q4 results, it looks like your subsidiaries' performance was improved versus last year. Can you explain to us why this was the case? My second question was regarding the outlook in Q4 2021 in terms of product cracks and refining margins.

Yes. Subsidiaries actually, I would say, suffered a little bit during the fourth quarter. Is my line echoing to you as well?

No.

No? All right. So subsidiaries, I would say, suffered a little bit during the fourth quarter. And we have energy in particular, the electricity where the cost of electricity increased dramatically with the target model being introduced in the last 2 months of the year. So we had some negative results coming in there, plus being quite aggressive with the growth of the customer base of the electricity company, which clearly means more money being expensed and different money spent on SAP and on upgrades for this company. So I would say that the fourth quarter was not particularly strong. As far as the first quarter, margins have picked up. And they have been picking up since January. And so we had January, February, March and April even more so with margins picking up. Clearly, there is some element of inventory gain here. But as far as the reported numbers, which I have in front of me, they are good. Now with cracks, we have seen the gasoline crack improve in Q1 a little bit, but even more in Q2, so in this part of the month. We have also seen -- we've seen a little bit the fuel oil crack deteriorate, but not a lot, only a little bit. And we have also seen crude differentials widening during Q1 and Q2. So clearly, there is a benefit in buying heavier crude now, particularly with Iraqi crudes, this has widened.

Our next question is from the line of Lamb, Jonathan with Wood & Co.