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

Ladies and gentlemen, thank you for standing by. I'm Nina, your chorus call operator. Welcome and thank you for joining the Motor Oil conference call and the live webcast to present and discuss the first half 2023 financial results. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Tzannetakis Petros, Deputy Managing Director; and Mr. Psyllaki Mary, Investor Relations Officer. Mr. Tzannetakis, you may now proceed.

Hello to all of you. Good morning and good afternoon, wherever you are from sunny Athens. Q2 2023 results and Half 1 2023 results. Highlights, starting with a sort of -- with a small catch phrase, I think the most appropriate for this time, it is consistency and perseverance. It goes well with what we are going to discuss about the past quarter and about the current quarter. Let's move to the slides, Slide 5, what we see the highlights, strong financial performance in the first quarter, a weaker second quarter mostly due to the scheduled maintenance in the refinery and to a smaller extent, to weaker global refining margin environment. For the first half of the year, the group turnover was close to EUR 6 billion, down 25% year-on-year. Adjusted EBITDA was EUR 602 million, down 14%, and adjusted net profit, EUR 329 million, down 35%. Net debt stood at EUR 1.5 billion approximately. EUR 210 million below what it was at the end of '22 and actually significantly lower than it was in the first half of last year and the cash flow generation of EUR 258 million for the first -- for this period. Going to the next slide, we see the segments the way we have been reporting them for the past about almost 1.5 years now. We see the adjusted EBITDA at EUR 155 million for the second quarter from EUR 509 a year ago, mostly hurt by the maintenance during this quarter. Fuels Marketing profitability continued to be weak year-on-year due to the margin cap still in place. Unfortunately, this has been in place since the year of the crisis with the war in the Ukraine and continues being implemented by the Greek government and renewed every period that it elapses. So it's being kicked -- the bucket is being kicked down the road. Power and Gas continued to increase its contribution to group EBITDA. Will come into some more details later. Reported numbers were slightly lower due to inventory losses during the period after the drop in oil and product prices. Slide 7. We see the different indicators. The Brent oil price continued to fall for the fourth consecutive quarter to an average 68 -- 78 barrels -- $78 per barrel as a persistent uncertainty around the global economy and limited supply disruptions. The dollar weakened further Q-on-Q standing at an average of $109 compared to $107 in the previous quarter. During this quarter, we saw a normalization in mid-distill cracks from the highs experienced in the full year '22 and in the first quarter of '23 as a result of weaker demand due to muted economic activity and sufficient supply from other countries compensating for the lost Russian volumes. Gasoline crack strengthened further during this quarter, so looking at this table, you can see the green line is the gasoline coming up from $13 going up to $20. Because of healthy demand, inventories are tight. Seasonally, it improved even further, the summer driving season coming up, and we'll talk about it later and refinery outages in Europe and the U.S. Fuel oil cracks improved further in the second quarter due to the need to decrease supply of medium and heavy crudes. Crude differentials continue to narrow as a result of tight supply after the OPEC cuts and the Basrah Medium discount narrowed to $5.3 from $8.5 in the first quarter but it was slightly better year-on-year. On the next slide, we see the fuel marketing and the statistics for the domestic market and the different market segments. Demand was healthy in this quarter. Sales in the domestic market increased by 4.7% in the second quarter with a similar rate of growth across all the 3 market categories. On a year-to-date basis, sales were still marginally down year-on-year, mostly due to weak heating diesel sales during the first quarter. We had a mild winter and increased stockpiling by customers -- by consumers during the third quarter of '22 due to the subsidies. Next page, we see the selected products for the domestic consumption, strong growth for LPG, gasoline, and jet. Milder growth for diesel and bunkering. Specifically for the second quarter, you can see the total civil is up by about 5%. You don't have the percentages, but you see the numbers. Gasoline up by 5%, automotive gas oil by 2%. Okay, heating is not significant because it is already very, very small in this quarter. Looking at it for the first half, including the first quarter, the total civil market was down by 2%, but mainly almost exclusively caused by lower heating gas oil sales because of the mild winter because gasoline was up 5% and diesel 3% on a half yearly measure. Slide 11, Power and Gas. High inventory levels and lower-than-expected heating demand. Gas prices continue to drop. TTF fell to EUR 35 per megawatt hour in the second quarter from EUR 53 in the previous quarter and about EUR 100 a year ago. European gas storage was [ full ] by 77% at the end of June versus 58% a year ago. And currently, it's over 90%. In the same [ vein ], Greek wholesale electricity price fell to an average of EUR 106 per megawatt in the second quarter from EUR 157 in the first quarter and EUR 237 in the second quarter of 2022. EUAs remained barely unchanged quarter-on-quarter an average of EUR 89 from EUR 84. Greek electricity production continued to head south during the second quarter, ending the first half down by 13% and as a result of mild weather conditions and continued cutting back by customers. Renewables accounted for 61% of total production in the second quarter from 47% a year ago. Let's move to the next slide. What do we see here? It's by segment. We see solid performance from the Refinery despite the big maintenance. Profitability is not really comparable year-on-year because such a maintenance only takes place about every 4 or 5 years. Last year, in the second quarter, we reported the group's highest ever EBITDA driven by product supply disruptions due to the war in the Ukraine. Fuels Marketing, it's still weak performance. Somehow improved in the second quarter versus the first one. But this cap is there and is dragging profitability down. Power and Gas increasing contribution of this segment due to the addition of animals' renewables and the continuous good performance of energy. Slide 14, the refinery. Clearly affected by the turnaround maintenance to the main extent and to a lesser extent, because of the correction in the refinery margins for the whole industry, as you can see in the benchmark margin. Our maintenance program took place during May, June and involved almost all the refinery units. Furthermore, it involved a revamping on one of the two crude distillation units, actually, the oldest and largest one, leading to an increase in the refinery capacity by about 8%. Thus, our new operating capacity is moving from 185,000 barrels per day to 200,000 barrels per day. And this again is the number we give as operating capacity because effectively we can operate higher than that, and we've already tested it and it is possible -- easily possible. Therefore, a small impact of the maintenance will be felt in the third quarter of the year because the crude units came back into operation in the middle of July. Adjusted EBITDA stood at EUR 89 million from the historical high of EUR 451 million of last year. Reported EBITDA was a bit lower because of the inventory loss. And there were some costs that burdened the refinery OpEx because -- through the refinery maintenance. CO2 costs were higher by about EUR 7 million in the second quarter and by about EUR 18 million in the first half. CapEx was also hit by additional charges for the maintenance of about EUR 30 million. And last but not least, net debt dropped considerably by EUR 200, EUR 329 million year-on-year -- sorry, it fell by EUR 329 million year-on-year standing at EUR 392 million at the end of June. So this is the net debt for the refinery. On Slide 15, you see the processed volume and the crude mix. Clearly, process volume was lower by 33% quarter-on-quarter and 16% for the first half. And crude utilization fell to 139 barrels per day in the third quarter compared to 181 in the first quarter. The mix of crude was similar to the previous period with the Iraqi crude being the dominant crude used, but it is a slightly lighter mix than we used to have in the past because of the way the market has moved. Slide 16, production and yields. What we clearly see here is an increased gasoline yield of 22%. Bottom right, you can see this 22% compared to 13% a year ago. And this clearly is the result of the new naphtha reformer. Also, lower fuel oil yield, 14% bottom right, compared 25% bottom left. As a result of the elevated light product yields as well as a higher contribution from asphalt, which has moved to 11% compared to 7% a year ago. Slide 17, sales. They fell -- sales volumes fell by 28%, again as a result of maintenance, but domestic sales went up by 26%, and mainly the loss happened in the exports, while shipping. And aviation also grew by 6%. Looking at it for the first half, the number is much sort of softer with sales volumes being down by 9% and domestic sales growing by 25% and shipping by 9%. This is important to see and to notice for the first half because it gives us the confidence that during the second half, we will be able to catch up a part of the lost volumes of the second quarter. Finally, in terms of product mix -- sorry, finally, in terms of country mix, we clearly say that Greece is a bit higher compared to a year ago with shipping and aviation being at 10% and then having Libya, Italy, and Gibraltar being the large sort of destinations. Margins. The result of -- what we said, we see on Page 18. Our adjusted margin is at $104 from $155. On the right-hand side, you can see this and $159 in the second quarter of '22. In the first half, our adjusted margin stood at $133 only slightly below the historical high of $140. One point that we must sort of emphasize here is that as we have written in the notes in the bottom note with the small letters there. S&P Global proceeded with methodology changes to the product yields and energy consumption. And therefore, we also revised the numbers from 2020 to align with S&P global new methodology. After all, there must be some credible benchmark to -- with which we compare so we follow it. Slide 19, the Fuels Marketing segment. Sales volumes increased by 20% year-on-year with Greece delivering a strong rate of 16% in the first half. Profit performance remained weak, in line with what we said earlier and something that we have also communicated in the conference call of the first quarter. Adjusted EBITDA stood at EUR 37 million in the first half compared to EUR 75 million a year ago, held back by the margin caps in Greece and pricing restrictions in international markets and higher operating costs. Keep in mind that the total number of stations stands at around 1,530, 95% of which is located in Greece. Power and Gas. The EBITDA climbed to EUR 93 million from EUR 32 million a year ago as a result of addition of animals and strong performance of energy. Renewables operating capacity stood at 772 megawatts at the end of the first half, unchanged quarter-on-quarter, but higher year-on-year due to the incorporation of animals from December onwards. MORE's EBITDA stood at EUR 22 million in the second quarter from EUR 32 million in the first due to anemic, playing with a word wind in Greek, to anemic wind conditions during the second quarter of '23. The metrics of wind were very weak during this period. generally, this first 6 months has been peculiar as far as the weather conditions, a warm winter, a very mild winter and much lower wind intensity in the second quarter, moving also a little bit into the third quarter into July. Going to Slide 22. Again, the result of everything said up til now, reported EBITDA of EUR 535 million. Obviously, it seems low compared to the record high of EUR 932 million a year ago. But it still is a very strong number, and we must not forget that, particularly if one compares it to the average annual EBITDA of the last 5 years before 2022. So 2022 was an exceptional year. '23 started strongly -- weaker because of maintenance picking up steam now. Below the EBITDA, we note a significant increase in net financial expenses as a result of higher interest rates and additional loans versus a year ago. And again, we remind income from associates is not comparable as last year's number included a gain of EUR 35 million from the sale of 50% of ALPHA. Net debt increased from -- sorry, decreased from EUR 176 million at the end of 2022 to EUR 155 million at the end of June because of solid cash flow generation. And free cash flow reached EUR 258 million from only EUR 10 million a year ago by solid profitability and lower working cash -- working capital outflow and lower investments. And we can see also the company profile and the company balance sheet, but let's not spend time on this. CapEx, given the spending so far, we feel confident with our previous guidance for the group at EUR 270 million, of which EUR 170 million in the current refinery. Group Bank debt decreased by EUR 247 million versus the end of '22 because of this solid cash flow generation. The average interest cost -- weighted average interest costs stood at 4% in the first half for the group compared to 3.4% at the end of 2022 with the main burden falling on the subsidiaries of Motor Oil, therefore, on the other segments, not on the parent's Motor Oil because the parent Motor Oil has a large part of its loans with fixed interest rates because of the two bonds, the Eurobond and the Greek bond and interest rate swaps on a significant amount of the remaining loans. So refinery itself its cost of debt is almost unchanged because the loans where that cost increased, we have interest income from our deposits. The subsidiaries because the expansion of MORE has mainly happened through debt. The increase in interest rate there of Euribor has been felt. On the next page, No, we have covered the debt. No, I don't think there is a next page as far as the slides are concerned because I prefer not to expand any further and have questions. A little bit an update of where we stand today, an update on the developments of the third quarter. The maintenance is behind us. The refinery is running flat out. And the units are performing very well. Our choice of having the shutdown in May, June, we believe, proves after the fact we to have been quite correct. Industry margins have fully recovered from the correction [ seen ] in the second quarter. And the new reformer continues to operate under very favorable pricing terms. Just to give you number. The year-to-date average difference in the price of gasoline between gasoline and naphtha stands at $215 per metric ton. With the current -- today is actually standing at $357. This is a very favorable development. And for as long as this lasts, we are happy for the payback of this project. Our refining margins once more outperformed the market. And so far, in the third quarter, they are close to the levels of the first quarter of '23. In the Fuels Marketing, our sales are resilient, and our market shares are intact. Profitability is slightly improving only slightly because the cap is still there. But mainly because of tourism and the mix of where the sales happen with tourist destinations, having a big growth in demand. Numbers, hopefully, will look slightly better in the third quarter for this sector as well. In the renewables as well, wind conditions are now -- have improved in August. And we are more optimistic as far as the wind metrics from the second half of the year. We continue with the construction of the wind generators that we had announced to you earlier. So out of this 84 megawatts that we have told you, 60 are close to completion and are going to be operational in the third quarter. Some recent developments. There have been some organizational changes and additions in the group, which we announced a couple of days ago. As the Group grows, expands, the organization must also adopt. And so people are moving around and new people are coming. I'm leaving the position of General Manager of Finance of Motor Oil, which I've been holding since -- I don't remember when. Yes, many years. And Manos Christeas is taking this responsibility who has been with us since 1990 -- 2020. And Loukas Tripelopoulos, who was responsible for the treasury operations will replace Manos in -- as General Manager of finance for the retail subsidiaries. A new person is coming in to replace Loukas from outside. So it is people from outside and people from inside. Her appointment starts as of 2 days ahead, I mean, on September 1. She's an ex banker. And her name is [indiscernible]. She's also here with us. All these associates are with me in the room. And I will continue as Deputy CEO, Deputy MD and keep my responsibilities in the group, supervising the finance functions of the group as the group now is becoming much bigger. Another sort of 2 or 3 little points. Our IRIS carbon capture project was selected by the EU's Innovation Fund as eligible for a grant of EUR 127 million. That's a very important milestone because this will help us with project of the carbon capture for the CO2 emission control. UNAGI, which we announced 2 months ago, the 3 projects of a total of 300 megawatts received the final grid connection terms in early July. And we proceeded with the payment of the relevant letters of guarantee. So these projects are also gradually taking their path. And last but not least, with the FSRU, which seems to be dragging from quarter-to-quarter, the environmental terms of the project were approved earlier this week. And in terms of funding, the DG Comp from the European Union has sent questions on the project, for which we will respond hopefully by September. And it has been included that in the national plan for energy and climate, together with the FSRU of Alexandroupolis. These are the 2 FSRUs included in this plan. So we are continuing our gradual process without though having taken a final investment decision because clearly, this depends on the support that we will manage to get. Therefore, I guess, we'll have to sort of wait for another quarter and see how these things mature and how the back and forth with the DG Comp moves forward before we decide we make our final decision. I think I'll stop now and listen to your questions. Thank you very much.

[Operator Instructions] The first question is from the line of Testa, Peter with One Investments.

I have three questions. I'll go one at a time, please. One is just to understand a bit on the margin development in two parts: One, you should talk about the naphtha numbers, which is very helpful. And I was wondering if there was anything also on the, say, cost efficiency from the topping investment on the positive; and then on the other side on the margin, you've seen the fuel oil spread and the Basrah Heavy crude spread become less helpful Q3 versus Q2. And I was wondering if you could give any sense as to how that trend in the year is impacting the margin. That's the first question.

Peter, naphtha, I'm not sure if I understood the question. Naphtha, the numbers, I sort of mentioned before, is 250, is the delta between gasoline and naphtha, the average for the year up to date. And the current run rate is over 350, which practically gives it's 1 million -- approximately 1 million metric tons of -- sorry, 1 million capacity, which naphtha is turned into gasoline. So we are talking about big numbers, right? Now with the fuel oil and the heavier crudes and the lighter crudes, yes, the discounts have narrowed on the one hand, but the fuel oil numbers are relatively healthy. Fuel oil, 3.5% sulfur, now is at minus [ $7 40 ] crack, which is a very strong crack for fuel oil. Okay. So maybe the discount is lower, but we are almost compensated by this lack of discounts by the crack itself. And just to give you some more light with the current situation, the gasoline crack today is at 29, gas oil at 38, jet at 39. These are yesterday numbers. I'm not saying that nobody can claim that these numbers will stay. But clearly, they show you where we are currently and how the margins look for the current period, for the current month or so.

Yes. And then the other part of the question was on the [ topping ], you have the extra capacity. I was wondering if you looked at it as a the cost per unit, whether that also is coming down because of fixed cost leverage and other efficiency may have incorporated into the big upgrade?

Clearly, clearly, this -- it would come down because you are talking about a bigger capacity by 8%. But I guess in order to be able to answer such a metric and to calculate it, you need some run time before we can see it. But currently, it is clearly very good that we can run 200,000 barrels per day instead of 185,000 barrels per day as long, of course, as we are able to sell the products, which we are.

And then another question on free cash flow. Just I would have -- it's a slightly surprise in the free cash flow, I thought, with the sales head of production and using of inventory. You may have seen more free cash inflow in the second quarter. And I was wondering if there's anything on the working capital side, which we needed to understand how free cash flow of working capital should be developing?

Again, a very valid question, but the second quarter was the one where we operated in a much lower capacity. So our sales were down, considerably down and inventories were up. So I mean just to give you numbers, May refinery throughput -- crude throughput was at 120,000 and June at 63,000 barrels per day. So effectively, these months generated losses. And inventories were going gradually up because we wanted to be able to supply our customers, even though the refinery was not operating, so maybe a little bit more trading during this period, which locked down some part of the cash and then release it. We see a big release as we speak, which is convenient because we have the tax payments because keep this in mind that the installments of the statutory tax and the extraordinary facts are happening as we speak. They started at the end of July, and they are EUR 88 million per month from July until February.

Right. That's very helpful. And then the last question, just...

So to generate cash flow, good cash flow as we speak because sales are up, refinery margins are up, profits are up, generate cash flow. Part of it will go to the payment of the tax, which is convenient because it means you don't need to increase your borrowing or anything like that.

Yes. Yes. That's clear. And then last question, please, just to help us on in the medium term, understand the opportunity on the renewable side. I was wondering, is there a point, at which you may be able to give us a sort of longer visibility on the capacity expected to come through? And maybe also understanding the sort of PPA terms you're getting, so we can get some understanding the visibility of the development of the renewable side going out in years.

Yes, hopefully, we plan to be able to do it in the call of November, in the 9 month results, because we are sort of bringing up to the present, the plan, the 230 plan, and we have better visibility of how the pipeline will look.

The next question is from the line of Athanasoulias, Nikos with Eurobank Equities.

Thank you very much for the comprehensive presentation. I have 2 short questions, if I may. The first one, I'm not sure I understood correctly the timing of the maintenance. So it was from early May until mid-July. And can you tell us how much did that cost? And the second question is about its adjustment to what you asked before about the areas. What percentage of the EUR 270 million of CapEx will be allocated to us for this year?

So before -- let's deal with the first question. Maintenance started in early May, beginning of May. And a number of units of the refinery were stopped in order to be maintained and revamped for the crude unit. This is like a sequential process. Some -- because some, like the crude unit, the maintenance last 40 days, others the maintenance last 20 days, other 30 days. There is a period during which everything stops, and there is a general shutdown, and this lasts about a week. And this happened in June, if I remember well. The rest is more periodic. So there is no exact timing I can give you. What I can give you is the throughput, which I referred to earlier on, the crude throughput, how it was lower during this period. Now with the CapEx -- sorry, plus to throw some more light because it's a difficult question to answer, to throw some more light is that when the hydrocracker, for example, had its maintenance and it lasted 30 days, it coincided with the shutdown of the crude unit and the shutdown of some other units, but it was up and running before the crude unit. So you started having some income from the process -- from the operation of the hydrocracker. The last one, which was the crude units, which came back in operation at the middle of July, so from beginning of July until the middle of July, you only had the crude unit missing and giving you. So it is a very progressive thing that happens. On the cost, about EUR 30 million from the maintenance went into CapEx and another EUR 20 million into OpEx, and this is for the first half. There is some remaining amount for July because, as I said, some maintenance happened in July and some of the payments happened in July. But I don't have the numbers of July in front of me.

Okay. This is clear. And what about the renewables CapEx for this year...

Yes, the renewables CapEx for this year is about EUR 50 million is the budget.

The next question is from the line of Grigoriou, George with Pantelakis Securities.

I know I understand you're going to provide us a detailed breakdown of the renewables pipeline in November. And I know it's still early yet for next year, but could you provide us roughly a ballpark figure for CapEx in 2024 and possibly or hopefully, for 2025 also? Thank you.

Mr. Grigoriou. That's a difficult question. I don't have it at this point of time. I don't have it. What I can tell you -- no, I don't have it. I don't have it. We will come back on that. Okay?

The next question is from the line of Kishmariya, Anna with UBS.

I actually have 2 very quick follow-ups. First, regarding the maintenance completion, if you can give us a sense of what the utilization rate is currently? Where are we running it? And also when we see working capital, should we expect like a full reverse in second half? If you can give a sense of that.

Anna, we are now running above the 200,000 as we speak because we like testing the new unit. So we ran above it, closer to 200,010. But I prefer not to commit to this number because you have known me now for a number of years, both you and Henry and know that we are conservative. So I'd prefer to come back after the fact and tell you. But the testing of the unit is clearly far higher for higher numbers. Sorry, what was your second question?