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Edited Transcript of MOH.AT earnings conference call or presentation 29-Aug-19 2:30pm GMT

Q2 2019 Motor Oil Hellas Corinth Refineries SA Earnings Call

Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Motor Oil Hellas Corinth Refineries SA earnings conference call or presentation Thursday, August 29, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Petros Tz. Tzannetakis

Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director

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Conference Call Participants

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* Ekaterina Smyk

BofA Merrill Lynch, Research Division - Analyst

* Manos Chatzidakis

Beta Securities S.A., Research Division - Analyst & Head of Research

* Thomas Yoichi Adolff

Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director

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Presentation

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Operator [1]

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Thank you for standing by, ladies and gentlemen, and welcome to the Motor Oil Conference Call on the Second Quarter 2019 Financial Results. We have with us Mr. Petros Tzannetakis, Deputy Managing Director and Chief Financial Officer; and Miss Mary Psyllaki, IR Officer of the company. (Operator Instructions) I must advise you the conference is being recorded today.

We will now pass the floor to your speaker, Mr. Petros Tzannetakis. Please go ahead, sir.

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Petros Tz. Tzannetakis, Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director [2]

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Good afternoon, good morning, hello to all of you, ladies and gentlemen, from, yes, windy and sunny Athens. We are towards the end of the summer but still very warm here. So let's talk about the Q2 and half 1 results.

Let's start with the environment during the second quarter. There was a lot of volatility in the prices, which clearly continues in this quarter as well. We started from prices that already had increased -- product price that had already increased from the end of the year up until the end of March and then picked up further in April, so we had a strong April with the gasoline reaching $680 -- almost $690 at the end of April, but then falling in May. And this was very much the picture in all the products, up from the March into April, down from April into May, a little bit up in June. I mean just an example of the crude, $68 per barrel, moved up to $72, went down to $66. So this volatility created a very mixed picture for the operation of the refinery. The parity of the euro-dollar as well influenced these prices when they were translated into the euro P&L and the euro balance sheet. So we started from about $1.1235, going down to $1.11, and going up to almost $1.14. So a bit of a strange behavior there as well, and of course now we are at the $1.11 levels. Interesting to see the average though, the average was $1.19 in the respective quarter of 2018 and started from almost $1.14 in Q1 to go down to $1.12 in Q2, so clearly a stronger dollar that has helped us overall.

Big macros, the second quarter was, as we all remember, was quite active, shall we call it that way, because we had the Euro elections, and the Euro elections triggered the call to national elections, which took place on the 7th of July and therefore this period of elections -- and don't forget that together with the Euro elections and actually one Sunday before that, we also had the municipal ones. And municipal, we are talking about both greater prefectures but also individual citizen municipalities, so it was a huge electoral activity across the country, which clearly affects both the consumption, people moving, transportation. Somehow you can say in a way it helped but in a way it was hindered. So this was the environment towards the last part, the later part of the second quarter.

And then we had July with elections and new government with absolute majority, and we can touch upon it later, but let's say the obvious thing that affects and will probably affect us is the reduction of the tax rate, and already in our numbers we have incorporated 1% reduction that was already passed into law from before. And now there is an expectation across-the-board for a further reduction probably in the coming law -- announced at the coming law into -- in September of this year.

Domestic demand was slightly improved. What we see in the second quarter is that gasoline was up by 0.5 percentage point, with automotive diesel up by 1.6%, giving to the automotive fuel demand an increase in number of 1.07%, almost 1.10% increase. It is a slightly better performance. To what extent, as I said before, this was influenced by people moving around or by Easter, nobody really knows. We have to wait until the third quarter to see how real this increase is.

Looking at it for the first half, gasoline was down by 1.9%, minus 1.9%, with automotive gas oil up by 1% and automotive fuels down by 0.4%. Total is up, but total is clearly influenced by heating diesel that increased drastically, pretty significantly in the first quarter. So on automotive fuels, it is a bit of a mixed icon but we are a bit -- we are hopeful of that.

The refinery operations, what you will see, and I'll come into more detail in a minute, is slightly lower throughput for the first time for quite a number of quarters where we chose to run slightly lower feedstock. We -- it was a choice because margins were quite tight, and so we prefer to take some unplanned maintenance to do little improvements here and there, and so cover the demand for our sales through traded, through products that were traded, which again we will see in a minute.

Overall, the refining industry backdrop was weak, this was mainly due to higher supply vis-à-vis lower demand, and tightening in the light-heavy differentials. And we will see in a minute our mix of crudes gradually becoming a little bit more -- a little bit lighter.

During the second quarter, gasoline cracks improved, they recovered from their multiyear lows reached in Q1. However, diesel cracks were under pressure mainly because of an increase in inventory levels. Jet kerosene was strong because we had strong fuel -- jet fuel demand.

And of course, all this was helped by the stronger dollar vis-à-vis the euro. We will see that marketing had a good overall performance, mainly led by the increase in demand of auto diesel, as we said before. And motor oil continued gaining market share, and we will see this number as well. And marine diesel also helped, because our sales from marine diesel are doing well and we grow -- of course, it is volumes more than premium and profits, it's a business of higher volumes and lower profitability. But still, it adds up.

Let's go through the slides. You know I'll skip, all right, Page 2. One notable, again, point is the net debt, but we'll touch upon it in a minute. The net debt for the parent was we're cash positive EUR 8 million, even after taking into account the IFRS adjustment for Motor for the parent, which is EUR 21 million. So without the IFRS, we would have been EUR 28 million, EUR 29 million cash positive.

Let's go to Slide 3. We see the feedstock. As I said, lower was a choice. We ran lower crude and lower other feedstock. If you look at the small circle at the top, the mix of heavy to light is -- 87% is roughly heavy, 13% is light. If you work backwards and take into account what happened in Q1 and look at Q2, this gives you a Q2 number of 83% for heavy and 17% for light, which clearly is a change from what we ran in the first quarter. So we are moving to a slightly lighter mix because the differentials weren't there.

Going to Slide 4, we see, again, quite notable reduction, fuel and oil production and an increase -- significant increase in special products, which is mainly asphalt. So asphalt is something we have commented to you before that it's something we aim at increasing production as much as possible, and we are doing well on that front and this helps also with displacing part of the fuel oil.

On the sales front, you see number being slightly lower. Up overall, but if one looks at specific market segments, overall the sales are lower EUR 6.873 million compared EUR 6.984 million, they are lower by 1.5%, which is about 110,000 metric tons, so it's a very small amount taking into account the weaker second quarter.

Actually, if one looks at both quarters, Q1 and Q2, they are almost identical as far as the sales volumes are concerned, so it is EUR 3.431 million for Q1, EUR 3.444 million -- EUR 3.447 million for Q2. So it's almost identical quarters that we chose to run.

But looking on Slide 6, what is interesting is the breakdown per market, and here you see the civil market, 581,000 metric tons compared to 553,000 metric tons in the respective quarter last year, which is a 5% increase. So we did capture more than what the Greek market did, meaning we gained market share. And in Q1, again, we had a 5% increase, making the average 5%, but Q1 was not as strong underlying because this 5% includes the heating oil while in second quarter this 5% is clearly automotive fuels.

Bunkering as well, very strong, 512,000 metric tons compared to 472,000 metric tons, so that's plus 8%. And of course, there we had a very strong Q1 as well so Bunkering for the half year is up 18%.

So where is the lower part? The lower part is in exports, which is more or less standard outcome because exports is what makes up the difference between -- after we subtract civil and Bunkering. So exports were down by 6%, 6.5% in Q1, 6% overall because of the choice of our sales. This -- let me see if there is any point in going particular details, no, I mean, gas oil was very strong for us in the domestic market, more specifically, I mean diesel sales in Q2 were up by 17% for Motor Oil, asphalt was very strong. No, the rest we covered, so there isn't any additional point to add here.

Taking us to Slide 7, which shows you a lower margin compared to what we had before, still well above the benchmark, which takes us to Slide 8 where you see the delta in the total volumes sold. While the delta in the crude is 400,000 plus, the delta in the overall is about 111,000, so the difference was made up by traded products.

This leads us to the P&L on Slide 9. We see a quarter -- we can go straight to the adjusted numbers, I guess, on Slide 10. We see a gross margin of EUR 122 million, which takes us to the EBITDA of EUR 72 million and an earnings after tax of just under EUR 40 million. Very small inventory loss because of this up and down, it was a mixed picture. But if one looks at the first half, we reached a number of EUR 95 million after tax compared to EUR 122 million a year ago. So our very strong Q1 and our weak Q2 give us an average, which is quite acceptable and it's one of the -- another one decent year if one looks at the history, particularly if one looks at the reported number where you also have the benefit of the lower tax rate, so the after-tax number just edges higher than the reported number of 2018.

If we add the group, you see that the number was improved compared to the quarter a year ago, so there is a slight improvement there. And this from the EBITDA line carries down to the earnings after tax, which again in the half year is a matching number, almost has become EUR 48.5 million (sic) [EUR 148.5 million] for 2019, EUR 148.8 million for 2018, with slightly adjusted numbers when we look on Slide 12.

An increase in OpEx is mainly of the refinery, is mainly due to higher CO2 emission costs compared to the previous year and to some maintenance CapEx, which was expensed because it was more of a short-term nature, because of this unplanned maintenance that we did, taking the advantage of the weaker market situation.

This takes us to Slide 13 where we are giving a guidance for CapEx of an additional EUR 25 million. So from EUR 90 million, which we had in the previous quarter for the year, we increased it by EUR 25 million. It is a very rough estimate, we don't know the exact number yet for the new project because the new projects, the expense is backloaded and -- but there are some costs that would be incurred during this year.

On the debt maturity profile, you see the picture, it hasn't changed much. We have done some refinancing. We continued actually the refinancing of the loans as we do almost every quarter. It's an ongoing process that helps us renegotiate with our banking relationships and improve the terms of our loans, which are reflected in the interest cost.

What is quite important in this quarter is the cash flow, which we don't have a picture there. You have to work it out from the financials, but I mean I'll give you some ballpark figures. In the second quarter, even the gross cash flow was weaker than the first quarter. We had a big reversal of the working capital, and the working capital change there was plus EUR 70 million compared to minus EUR 182 million in the first quarter. So this gives us an operating cash flow of just under EUR 140 million -- EUR 138 million, which helped us reduce debt significantly. And clearly, this improved the picture for the first half.

The debt number, as I said, Motor Oil is cash positive by EUR 8 million, the parent, and the subs are -- have a debt of EUR 374 million making a gross debt of the group of -- the net debt of the group of EUR 366 million. Actually, if one wants to adjust for the IFRS 16, it's an academic exercise, but the IFRS 16 is EUR 148 million. So one has to take EUR 366 million -- EUR 148 million out of EUR 366 million to reach the number of EUR 218 million, which would have been the debt reading, which is a good number if one considers that at the end of the year we were at EUR 250 million.

So without IFRS 16, our June number of net debt is even lower than it was at the end of the year, EUR 250 million. Instead of EUR 250 million, it's down to EUR 218 million. But you have the IFRS 16, which increases it, so we did well on that front.

I think I covered most -- yes, I covered most of the topics. And so I will wait for you to ask the questions. So thank you for listening, and I'm all ears, as we say.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Ekaterina Smyk.

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Ekaterina Smyk, BofA Merrill Lynch, Research Division - Analyst [2]

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I have two questions, one of them is related to your refinery margin and to -- how you refer to the second quarter being weaker than the first one. My understanding was that the increase in gasoline cracks was quite material and so you having a quite significant share of gasoline should have covered all the, like, $1, $2 decline in diesel and fuel oil cracks, and the crude differentials remain flat quarter-over-quarter. And I mean your peers were able to get higher refinery margin in second quarter compared to first one, can you please comment here? Are there any impacts that I'm missing, because I mean if you calculate the refinery margin decline by $1 in Q2 compared to Q1.

And my second question is on the quarter-to-date dynamics of the fuel oil cracks, they have been quite weak, reaching negative $18, $19 at some point. Can you please give us some color whether these weak cracks are reflected in your sales margins? Whether you are changing -- if you are taking any steps to decrease your fuel oil -- your product for example, what's the flexibility to move from fuel oil to asphalt more, something similar to what we saw in Q2?

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Petros Tz. Tzannetakis, Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director [3]

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Yes. Our margin -- there isn't any sort of magic or secrets, the margin in the second quarter was lower than the first quarter, the overall margin. And the benchmark was lower. So I don't really understand your question of our peers because also the benchmark was lower. So this is what we saw in Q2, and we did try to move a little bit our mix of crudes because the discount of heavy crudes during this period narrowed.

Maybe, maybe what you might have noticed but simply guessing is that if some other refiners had a very big proportional Urals or sweeter crudes compared to, let's say, Iraqi crudes, yes, they would have had a better margin relatively than we would have who have a much higher share of Iraqi crudes. This could be the case in the second quarter. So this could be...

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Ekaterina Smyk, BofA Merrill Lynch, Research Division - Analyst [4]

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And why is that?

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Petros Tz. Tzannetakis, Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director [5]

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Because the discounts on the heavy crudes narrowed during this quarter. So if somebody has -- let's use an example, if someone has 80% Iraqi crudes and 20% Ural, for example, in Q1, he is doing very, very well, but the same mix in Q2 is much worse. While other, let's say, Central or Northern European refineries who don't have Iraqi crude because they don't have access to them and just use Ural crudes, by doing nothing but just running the same exact mix would've had a better margin in the second quarter.

We tried to shift a bit, and we did, but you can only shift that much because you have some contracts and you have some -- you don't shift overnight. So this is the picture. This of course has improved and changed in Q3, so both July and August, the picture started changing. So that's my only I think guess answer to the question.

As far as fuel oil, the fuel oil, yes, it has been under some pressure, and the pressure has not been as big at the beginning of the quarter. Margins were not as negative as initially expected, so it was a slightly better picture than expected, more of the opinion we also had from the beginning. Yes, we have reduced the feedstock of fuel oil, as you see, and part of our fuel oil we have moved into -- turned into asphalt, and we are doing that to a significant extent continuously. So yes, we are making asphalt. Otherwise, no. Otherwise, there isn't any other way of making our fuel oil disappear, besides maybe buying less fuel oil for blending and running slightly sweeter mix of crudes.

But one overall expects that with fuel oil weakening and heavier crudes producing more fuel oil that eventually the sweet-sour differential will widen again, so that the heavier crudes with higher percentage of fuel oil -- of heavy fuel oil we'll be able to sell. So that's -- it's wait and see and going from month to month, okay?

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Operator [6]

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We will now take our next question.

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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [7]

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Petros, Thomas Adolff from Crédit Suisse. Just three questions. Just on the maintenance, you talked about in the second quarter, can you perhaps comment what exactly you brought forward? And how long do you -- the maintenance or the unplanned maintenance lasted? And then, perhaps, in the third quarter, perhaps you can comment on the Motor Oil specific refining margin condition on a quarter-on-quarter basis and how operations are going as well? And then maybe, finally, obviously, fuel oil cracks have fallen quite sharply over the past 4, 5 weeks and I wondered whether anything has changed specific to your operations, whether you've changed your crude slate, whether you started to buy more fuel oil again or that sort of thing?

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Petros Tz. Tzannetakis, Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director [8]

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Yes. Maintenance was mainly related to the hydro cracker and it was more doing things like changing here and there different things that could be done without doing a major maintenance, which was not planned for now, and this will help us delay the next maintenance, which is due for next year and also improve some throughput capacity. So this was the main thing. I can't remember the days, but it was not a complete shutdown, so it was more adjustments and stopping for a few days and doing things, so maybe it was a week or 10 days.

Now in Q3, we have a maintenance plan for the FCC, which will start at the beginning of September and finish at the beginning of October. This is a proper planned maintenance shutdown of the FCC. And actually, it is not only maintenance but it is also revamping because in -- particularly for the FCC, we have planned to slightly increase the capacity and the quality in the maintenance we were going to do. And so we will -- once it starts, again, operating in October, going forward, we will have additional volume and quality improvement.

As far as the operations otherwise, they are -- everything is fine, and we are looking for options of sweeter crudes as we speak, so we are slightly changing the mix again. But it's a little bit wait and see. It's also relevant to the fuel oil cracks as you said. So when the fuel oil cracks weaken, you tend to see how the discounts are and plan your next month. So yes, we are moving into slightly sweeter mix. And also, we are reducing the imports of fuel oil so that we fine-tune our output of fuel oil that which, of course, we are selling but if the price is lower, you make less money on it. So it's a little bit micromanagement month by month.

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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [9]

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Yes. And is the refinery margin in the third quarter better for you than in the second quarter?

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Petros Tz. Tzannetakis, Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director [10]

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It is. Yes, definitely. Yes, I said this earlier on, it is definitely much better than in the second quarter.

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Operator [11]

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We will now take our next question.

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Manos Chatzidakis, Beta Securities S.A., Research Division - Analyst & Head of Research [12]

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This is Manos Chatzidakis from Beta Securities. Now transaction with [ABG] is finished, what are the plans till the end of the year? Should we know something about the new plans for the bank?

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Petros Tz. Tzannetakis, Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director [13]

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Yes. Manos, I don't think I'm in a position right now to give any plans. We have done -- studies have been made for the plan -- for the bank and how it's going to proceed, but I'm not yet ready to give you some information on that. I'm sorry.

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Operator [14]

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There are currently no further questions, sir, please continue.

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Petros Tz. Tzannetakis, Motor Oil (Hellas) Corinth Refineries S.A. - Deputy MD, CFO & Executive Director [15]

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Thank you very much to all of you for listening in, and see you in a few weeks in London for the Athens Stock Exchange Conference where I'm sure I will meet many of you there. Bye from all of us here in Athens. Have a nice rest of the day. Bye.

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Operator [16]

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Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.