Orlen S.A. (PKN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call of PKN ORLEN. At our customers' request, this conference will be recorded. [Operator Instructions] I will now hand you over to Mr. Konrad Wlodarczyk, IR Director. Sir, you may begin.

Thank you, operator, and good afternoon, ladies and gentlemen. Welcome to the conference call regarding LOTOS and PGNiG acquisition. We prepared the presentation as usual, but I assume that all of us have got a lot of questions, so that's what I suggest, to go directly to Q&A session. Presentation, of course, that I mentioned describing strategic development of PKN ORLEN Group is available on our website. So you can easily download it and go through. During Q&A session, there will be several directors who are ready to answer your questions. We have Robert Sleszynski, Executive Director of M&A. We have Michal Perlik, Executive Director for Finance and Management. Karol Wolff, Strategy Director. [ Artur Chesnick ] Management Board Adviser and, of course, IR team. Operator, we can kick off with Q&A session.

[Operator Instructions] And the first question received is from Mr. Patricot of UBS. [Operator Instructions] And the next question received is from Michal Kozak from Trigon.

I have 3 questions. The first one, do you exclude paying for PGNiG only by cash? And if you exclude it, what kind of other options do you consider? The next question, what kind of synergies do you see regarding PGNiG? And the last one, do you plan a share swap with LOTOS after 60 -- 66% and thereafter?

Okay. So Robert speaking. In the letter of intent, which we signed today with the State Treasury, we do not include the specific details of the transaction with regards to PGNiG. So from my perspective, every option is possible. Nonetheless, our top priority is to organize that in a way that it will not deteriorate the balance sheet of the company. So our goal is to organize the transaction in a way that we will save the cash on our balance sheet and we would be able to invest that cash in new businesses or renewables. So that's the logic, I'd say. And maybe one comment, which is important from the perspective of both transactions. I mean it is feasible, and probably it is possible also that both transactions may take place more or less at the same time. And that approach, which would include our aiming at saving our balance sheet is important from that perspective. So I would say that in general, our goal and top priority is to save the balance sheet and be able to invest the cash back in different streams of core businesses. And this is our goal. So I hope that it does answer your question. In terms of asset swap after achieving 66%, it's too early to comment on that, actually. So I would say that we will see where we are in some time perspective, how we will -- to organize the transaction structure, both in terms of PGNiG and LOTOS. And we will see where we are with shares and shareholding in Grupa LOTOS, and then we will decide actually. So it's still early to say. At that stage, our goal is to get 66%. So that is a top priority from that perspective. Before I go to the synergies, maybe if you have any questions regarding the structure, I can answer a bit more. Or if it -- is answers your question, we can move on.

And the next question received is from Robert Maj of IPOPEMA Securities.

My question is regarding the disposal of all the businesses mentioned in the European Commission conditions, which needs to be fulfilled in order for PKN ORLEN to take over LOTOS. When exactly these disposals will take place? And who is going to be responsible for it? Is it going to be the LOTOS, as a company, who is now going to dispose all these assets? Or are you going to -- what is the next step? Are you going to announce tender offer first and then make all these disposals? Or what is the logic behind? And what should we expect right now?

Okay. So outside of the -- from the perspective of European Commission approval, it is important to understand that, first of all, you need to finalize the negotiations with the potential buyers of the remedies. So the European Commission, they will approve both the parameters of the potential transactions, of the assets which are subject to the disposals. And secondly, the European Commission is responsible for accepting the buyer themselves. So this is the first step. And if that is approved, then the tender offer or the other structure that transaction takes place. So once we have all negotiated with the partners, we can start the process of taking over the control of Grupa LOTOS. So this is the logic behind. And all of the parameters and the agreements which are negotiated and accepted by the commission are conditional. And the condition precedent is the fact that PKN ORLEN is taking over the control of Grupa LOTOS, who is responsible for running the process. So we are ahead of agreeing the kind of an operational agreement amongst ourselves, the treasury and Grupa LOTOS, based on which we will structure the team which will be responsible for coordinating the process. And that team was comprised of both PKN ORLEN and LOTOS. And of course, some of the reporting activities will be provided to the State Treasury, but no special rights will be attached to the State Treasury. So what we agreed to the Commission, that it will be in our, I would say, the team, which will involve both Grupa LOTOS and PKN ORLEN people, but at the end, there are 2, I would say, different parts of divesting the assets. First one is for Grupa LOTOS because, of course, all of the divestment packages, which are proposed as a remedy, it will be formally sold by Grupa LOTOS. Some of them, which are dedicated to PKN ORLEN, like 4 terminals, will be sold by PKN ORLEN formally. But from the operational perspective, and this is agreed and accepted by the Commission, there will be a combined team of 2 companies, which will be coordinating the process. We don't expect like open processes or open auctions because it is very, very sensitive and very complicated process. And we have interested parties who are interested in taking part in that kind of processes, but it is extremely important to have it really confidential, especially given the fact that there might be some social, maybe not problems, but challenges. So we just want to run it very smoothly, professionally and with dedicated partners who agreed to fund the NDA and run the process in a very attractive and confidential way.

And regarding the...

[Foreign Language]

Sorry. Robert Maj from IPOPEMA. Can I have a follow-up question on this?

Yes.

A disposal of 30% of the stake in the Gdansk refinery, which is kind of a setback to all the story and the logic behind the acquisition of LOTOS. And the condition reads that actually the purchaser needs to have the right to approximately half of the refineries: diesel and gasoline production, which means that, in other words, you just give up -- you just sell 50% of the Gdansk refinery capacities. Does it still make sense to go ahead with this transaction? And basically, which entities and which parties do you think could be most interested in effectively buying 50% of Gdansk refinery? And maybe if I may, is that 30% stake, the threshold of 30%, can you sell more? Actually, can you sell 50% of the stakes? And attached to this, half of the capacities or you would rather sell only 30% with attaching half of the capacities' rights to this transaction?

Okay. So maybe just one comment at the beginning because we couldn't comment on that in a public domain. But from the very beginning, given the complexity of the transaction and actually a very high concentration in terms of the market shares, especially in Poland. From the very beginning, the Commission expected that we would divest one of the refineries. And one of the major refineries were in PKN ORLEN Group following the transaction. So we spent all the months, actually 2 years, to persuade the Commission to deploy different approach based on which field it would be acceptable from the competition perspective by the Commission, and from our perspective, it will be acceptable from the business point of view. So as I said, we couldn't comment on that, but we spend that time to persuade them to the different approach. So we came up with the conclusion that we would need to offer to the third-party players some stake in one of the refineries. And the logic behind it, that we will carve out the refinery of Grupa LOTOS, and that would be the processing refinery. Yes, we will sell the 30% stake in that JV. And there is some additional volume attached to that stake, and you are right, but our priority is to sell actually 40%, but for the cash, which would include the fact that they will have access to the larger volumes that it would result from the proportion of the stake. So that's first. Secondly, yes, we do find it still very beneficial. So we will stay as an operator of the refinery, and we will be obliged for the main decisions of the refinery. So at the end, we would implement the logic based on which our Czech refineries have already worked in the past because we had that kind of experience with ENI and Shell, where in Czech Republic, we had the processing refinery. We do have experience in that. We now have to organize the business in a way it is beneficial for us and for the partner. And at the end, it is really important to say that, that transaction should be beneficial for us. So if we are offered a very low-value, which will not -- which would not let us realize the synergies following the transaction, we would not agree on that kind of transaction, actually. So what we are saying is that, yes, it is very prospective and the perspective is very good, but at the end, everything depends on the parameters of the transaction. But based on the discussions which we already had with some potential partners because, as I said, we had some NDAs signed and there are many parties involved and there are many parties interested, we expect that at the end, the parameters of the transaction will be beneficial for us and for the partner. But at the end, what is also important, and we would like to very strongly underline, is that we will seek for potential asset swaps. So our priority is to focus on our negotiations on asset swaps, not only within the refinery, but also within other assets, which are part of the remedy proposal. So yes, at that point in time, we think that the perspective is very positive. But at the end, the money will talk, yes? So we will see.

If I may, to quickly follow-up on this, what kind of capacities of LOTOS, of Gdansk Refinery, should we take into our calculation? If you say that there are some additional volumes in place and are in -- that some additional volumes could be squeezed out from the installation from the refinery? What are the target volumes and out of which 50% goes to the JV partner? And does it mean that if you say that money will talk, meaning that the final transaction will either go through or not materialize? I mean thus, the transaction may not materialize in the end? Because you are for sellers, I mean, if you wanted to complete the transaction, you need to sell it to fulfill the condition of European Commission, and everybody knows that. So this is like a perfect occasion for them to lower the price as much as possible.

That is right, unless there is a strong competition between the partners. And we do expect that kind of strong competition. So at that stage, I would not worry about it, to be frank. But yes, we are not pushed against the wall actually with that kind of transaction at the beginning of the process. We have time to run the competitive process with a couple of partners who are interested in being part of the Polish market, actually. So they find that market very prospective. And to be frank, I would not expect that we would not have a competition, which is enough to set up beneficial parameters for us and for the shareholders.

And the question about volumes, target volumes at the -- and the rest of the Gdansk refinery?

Yes. Well, it's between 8 million and 8.5 million of tonnes of total capacity, which is being produced in the Gdansk refinery.

Okay. And the final one from my side at this time, at this moment. When you say about all this disposal, that there would be teams set up with PKN and LOTOS personnel to run through this divestment. When actually we should expect the tender offer? And is it going to be a tender offer just straight away up to 66%? Or any intermediary process from your side, buying the shares from the State Treasury or just, at one stage, 66% tender offer?

So we are given like 18 months to agree on the parameters of the transactions with potential partners and, hence, taking the control over Grupa LOTOS. So we have 18 months for that. And in terms of the transaction structure, I can only reply -- I can only repeat what I have just said at the beginning of our discussion that all scenarios are feasible. And today, we will not exclude the ones which would be noncash transactions, actually. And that would happen at the same time with PGNiG and Grupa LOTOS. So today, it's hard to say, to be frank, but our goal at that stage is to have 66% of Grupa LOTOS, and this is what I can confirm right now.

[Operator Instructions] And the next question received is from Ekaterina Smyk of Bank of America.

I have a couple of questions. And the one -- the first one is sort of a follow-up on what has been just asked. I just want to confirm that the previous structure of the LOTOS deal is no longer relevant, which was like the deal was supposed to happen in 2 tranches, right? And the first tranche was supposed to be like 33% minus 1 share directly with the State Treasury without triggering any minority buyouts, and then the second tranche was supposed to be -- the second stage was supposed to be acquisition of 66% stake in total. So this structure is no longer relevant, and you will have to work out some other options?

It doesn't mean that we have to work it out, but what we are saying is that all scenarios are possible. And given the fact that we announced today the takeover of PGNiG, where the transaction structure has not been decided so far, what we are saying is that our top priority is to organize both transactions in a way that it is beneficial for us and for balance sheet going forward. And this is important. So I would not exclude any possible scenario. Nonetheless, the priority is to focus on the structure, which would enable us to protect the balance sheet and limit the cash proceeds for takeover. So that's the logic.

And in terms of the leverage levels that you will be sort of targeting as you -- at the marketing levels that you're willing to go and in terms of the dividend approach, I mean this year, we saw that you cut the dividend when you implemented the ENERGA deal. Should we assume that you will be following conservative approach with dividends for the upcoming couple of years as you go through these 2 acquisitions?

Michal speaking. So as Robert mentioned, we'll look for the transaction structure, which will, first of all, strengthen our balance sheet. It means also that our goal is to maintain -- is to look for a transaction which would guarantee us to maintain our investment-grade rating. And this will be one of the objectives when thinking about the transaction structure and developing the transaction structure. As regards to the dividend policy, it's too early to refer to it. It will be definitely driven by the transaction structure. And I believe we will be able to give you more details when announcing the new strategy later on this year.

And when should we expect any news on the potential structure of these 2 deals? Is it possible that you will present this already with the update on your strategic direction?

It might be too early, to be frank. So I would say that it's rather next year.

And the next question received is from Tomasz Krukowski of Santander.

Two questions if I may. The first one refers to the LOTOS transaction structure. Do I understand it correctly that, first, you agree with the potential partner's disposal of the assets from LOTOS and only then you will get the approval from the EU Commission, and only then you make a tender offer for LOTOS, but before those assets are actually sold to a third party?

The steps are as follows. So first, we negotiate. We agree the parameters with the potential partners. Then it is subject to the approval of European Commission, and the Commission approved both the key parameters and the buyers from the competition perspective also because they want to be sure that any potential entrant on the market will not cause any other difficulties in the market. So they want to have it approved. And it is not disposed. So it is not subject to the disposal at that stage. We are announcing the tender offer or we are running the process in any different scenario, which, at the beginning, ends up with our control of Grupa LOTOS, and then only the assets are being stopped.

It's clear. And if you could comment, I know it might be not the question directly for you, but if you could comment on the investment case of LOTOS after you acquire control of it and still keep the entity listed on Oslo Stock Exchange. What would happen to minorities if you decide to go only for 66% of the company? Because eventually, they end up with the asset which is not the asset that we'll take as of this moment?

Can you please repeat the last part of the question because I didn't catch it.

Eventually, minority support of -- if you decide to keep it with the [ Oslo ] Stock Exchange, we end up with the asset which is much different than the current asset. So what's the investment case for them? I understand that it might not be the question for you, but maybe you could have some comments on that.

That is a very good question because I ask it to myself, but probably it's hard to explain at that stage. So please forgive me, but at that stage, I will not comment on that. Okay?

And if you could comment what is more probable that you will decide to basically acquire entire [ lots ] by completely going for 100% or you could still keep it listed [ at ] 66% stake?

Well, our track record, if you take a look at, for example, Unipetrol case, at some stage is to have full control over subsidiary companies. So that's the long-term goal, I would say. But within a year or 18 months, which I described just before, we will see what the macro conditions are. What is the market cap of Grupa LOTOS? What is the actual, I would say, investment case for us and for the minority shareholders? We will decide what to do next. At some stage, probably, given our track record in many different cases, probably we'd aim at having 100% control of the subsidiary company. But it's really hard to say when exactly that could happen.

And one more question. I know it was already asked, but if you could comment specifically what kind of leverage you would consider acceptable in terms of either net debt-to-equity or net debt-to-EBITDA ratio?

Well, as I mentioned, our goal is to keep investment-grade ratings. The definition of the leverage by different -- it's a little -- it's slightly different, depending on the agency. And actually, the preferred transaction structure will be even the one that could potentially improve our rating in the long, long term. But in general, that means that we will try not to excess the level of 2x, 2.5x EBITDA.