U.S. Markets close in 6 hrs 18 mins

Edited Transcript of MYTIL.AT earnings conference call or presentation 12-Sep-19 2:30pm GMT

Q2 2019 Mytilineos Holdings SA Earnings Call

Athens Sep 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Mytilineos Holdings SA earnings conference call or presentation Thursday, September 12, 2019 at 2:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Evangelos George Mytilineos

Mytilineos S.A. - Chairman & CEO

* Ioannis Kalafatas

Mytilineos S.A. - CFO

================================================================================

Conference Call Participants

================================================================================

* Dario Carradori

Edison Investment Research Limited - Equity Industrials Analyst

* Iuliana Ciopraga;Danske Bank;Consultant

* Katerina Zaharopoulou

Eurobank Equities Investment Firm S.A., Research Division - Equity Analyst

* Manos Chatzidakis

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

* Vangelis Karanikas

Euroxx Securities S.A., Research Division - Head of Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the Mytilineos financial results conference call to present and discuss the Mytilineos first half 2019 financial results.

At this time, I would like to turn the conference over to Mr. Evangelos Mytilineos, Chairman of the Board of Directors and Chief Executive Officer, and other senior executives. Mr. Mytilineos, you may now proceed.

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [2]

--------------------------------------------------------------------------------

Good afternoon, everybody. Good to be with you again after a few months from all of us here. We're quite a few this afternoon. We are here to present to you and discuss with you the results of the first half of Mytilineos. Overall, we are satisfied with the results. We have approached for the first time the EUR 1 billion mark in turnover.

We have had a substantial increase in our EBITDA and our operational profitability. We have had a more or less equal bottom line, which would have been, as you probably read in the press release, EUR 28 million higher except for one-off items, which we expect to be normalized in the second half.

We have a very improved cash flow position despite the substantial CapEx, which we also hope to be maintained. Overall, a good set of results. I'm personally available and all of us here to listen to your remarks and questions to proceed the discussion. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

The first question comes from Karanikas Vangelis with Euroxx Securities.

--------------------------------------------------------------------------------

Vangelis Karanikas, Euroxx Securities S.A., Research Division - Head of Research [2]

--------------------------------------------------------------------------------

I have a couple of questions. The first one relates to the one what you just said about this EUR 28 million one-offs. You mentioned in the press release that this relates to the first time adoption of IFRS 16. If you could please elaborate on this and how this will be normalized in the second half? This is question number one.

And number two, you mentioned in the press release about potential uncertainty around the collection of capacity payments. And what are your expectations on this front? And how -- if you could somehow connect this, if it is connected to your -- what are your future estimates for the new electricity plant for sales and the EBITDA? And what assumptions are those built?

And if you could provide then, question number three, CapEx guidance in the next 2 to 3 years related mostly to this plant? And how are you going to treat this given that METKA will construct this plant.

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Let me answer you the second question about the capacity payments. The capacity payments issue has been a mysterious case for some time. They are coming and going, what we call the provisional capacity payments. Since March, if I remember well, we have been without capacity payments. For no reason -- they were introduced for some reason. They were -- they finished for reason we don't know. We have put it out of our budgets and out of our forecast position. So more or less, we will have to wait for the target model and the permanent mechanism. I'm not sure anything in the provisional will be anticipated. We'll be very glad. We're pursuing it. We'll be very glad, but I'm not sure we will see them as a provisional things. For the EUR 28 million issue, Mr. Kalafatas will give you some details.

Regarding the new CapEx. We are finalizing a 5-year CapEx plan, a 5-year business plan in general, which, when it's finished, we may make it public for analysts, which includes the CapEx, includes, of course, the new CCGT. It includes a solar platform and includes annual CapEx, which, as you know, is quite a substantial figure for us. If you add up the figures, I can tell you at this stage, the recurrent CapEx is at least EUR 56 million. And the alumina, the CCGT will be no more than EUR 300 million. The BOT depends on the depth of the backlog. And the alumina, if we had a positive FID, will be up to EUR 500 million.

Our -- according to our initial estimates, which are not final yet, the figures of the company when this total investment program is accomplished, I repeat, total includes potentially alumina, we'll be a different company. It's quite different already from what many of you remember until a few years ago until we have the big one -- the merger project. It's already a different one. But the one we are talking about, it's going to look really very different.

We think and we believe that in this 5-year period, 2020 to 2024, we will have enough cash flows to do the CapEx with some reasonable external financing, which will not exceed the limits of where we're now plus maybe EUR 100 million or EUR 200 million. We will continue our dividend policy, which is, of course, if all goes well, a very good scenario. This is how it looks at the moment. When we have more details, we will tell you. About the EUR 28 million, Yiannis Kalafatas will give you some more details.

--------------------------------------------------------------------------------

Ioannis Kalafatas, Mytilineos S.A. - CFO [4]

--------------------------------------------------------------------------------

Good afternoon from me. About the EUR 28 million, let's refer to the adoption of IFRS 16 only. As you have read in the press release, it contains collectively the impact from IFRS 16, which was EUR 4.4 million, the impact from the increased income tax and the impact from the increased noncontrolling interest.

Now IFRS 16, as you may already know, is a new standard that requires all financial and operating leases of -- that are long term to be depicted as assets and liabilities. So that means that the liability increases the level of debt in the balance sheet of the entities. And the asset is depreciated over the time of the contract. And at the same time, we recognize an interest cost over the time of the contract. So that's why we had an impact below EBITDA line from the adoption of IFRS 16.

For the taxes, there is a normalization of the effective tax rate. We have said that following the big 1 project, we had some past accounting losses that were offsetted during the period. Now the tax rate is normalized again. And we have the first impact from that normalization. This will be, of course, diffused during the year. And for the noncontrolling interest, it's the first time for this first half of '19 that we have an increased contribution from our solar business run by METKA EGN. And because we have not, for the first half, completed the transaction of the buyout of the minority stake, we recognized an increased minority for the first half.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Next question comes from the line of [Labate Victor] with Piraeus Securities.

--------------------------------------------------------------------------------

Unidentified Analyst, [6]

--------------------------------------------------------------------------------

Considering the drop in metal prices in the first semester of 2019, I was wondering if you -- if your aluminum production for 2020 has been hedged. And if there is a hedge, is it at the satisfactory levels?

And my second question is regarding the Power & gas business. The results were really very strong in the first semester. And I was wondering if the trend is continuing in Q3 and if you expect it to continue going forward.

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [7]

--------------------------------------------------------------------------------

Thank you for the 2 questions. The aluminum prices -- the aluminum dropped, the premiums have dropped, the dollar has gone up. We have completed our hedges for 2019 some time ago, as you know, so this year is going as anticipated. For next year, we have no hedges either in the cash or in the LME. In the meantime, we have had a substantial drop in raw materials prices and a much better basket price level for our gas basket. So we will have to deal with this in 2020. We have not given yet any forecast for next year. Let's see how it plays out. The Gas business has done remarkably well this year, both for our old plants and also for sales to third parties. We have -- we already have a contribution for EBITDA from the Gas business for the first time. It's going to continue in the second half, at least as strong as the first half, and we are preparing ourselves big time for next year.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

The next question comes from the line of Zaharopoulou Katerina with Eurobank Equities.

--------------------------------------------------------------------------------

Katerina Zaharopoulou, Eurobank Equities Investment Firm S.A., Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

A few questions, if I may. First, could you give us some color on the prospects of the business segment? How do you see your backlog moving in terms of your typical EPC projects versus the solar power projects of METKA EGN? And if your backlog mix changes, will that affect your margins going forward?

And secondly, given that at the current juncture, in Greece, the environment is such that sentiment has picked up considerably. What are your thoughts about your future growth? You arguably have notable balance sheet capacity. So are you actively looking into capitalizing on M&A opportunities? Or is your focus solely on organic growth?

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [10]

--------------------------------------------------------------------------------

Thank you. Let me first complete my previous answer regarding the prospects of the Power business in the second half. I think they look good for the second half as well, especially if you take into account that we are in the CO2 market is very strong, which is a supportive level for our Power business. Today, we are again at EUR 27. It looks very strong for the rest of the year. And possibly next year, where our initial projections, they account for at least EUR 30 as an average.

Going into your other questions. EPC business is evolving very Much. And we must all get used to it. I talked to you about this evolution maybe 1 year ago. It is not the right thing to consider EPC as we have done in the last few years. I told you then, and I am repeating today that we are going to see a different mix of businesses in the EPC, which includes the traditional power plant business, includes infrastructure, includes solar, includes hybrid, includes a totally new basket. So when we're talking about backlog, it's a different story. But look, now is -- this is different in the mix. It's different in the timing as well.

As you remember, some years ago, when we were talking about backlog, we talked about several years going forward. Now it's not this kind of bucket anymore. It's a different mix. It's a much, much shorter execution. For example, for next year, the backlog as it stands now, because it may be different tomorrow, I mean higher, it's more than $600 million. So we have to all get used to the new realities of the EPC business.

Now M&A. We had a very interesting American company yesterday. And we were discussing overall strategy and very interesting investors by the way we have seen for the first time, very knowledgeable. And they were asking us the same question that you asked in a different way. They said, how have you managed to grow so big organically? And if you look back, it is very true that this company, some like maybe 20, 15 years ago, it was growing bigger and bigger by acquisitions. And for a number of years now, especially in the 10 years of the crisis, growth has continued organically to an extent of more than 90% to 95%.

My straight answer to your question is that we are back in the M&A business. Our balance sheet in the meantime through the organic growth and the cash flows is much stronger and healthier. The crisis is slowly behind us, our borrowing capacity is very high. Therefore, the answer is yes, we are back in M&A. And we will speak soon about it. Thank you.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question comes from the line of Carradori Dario with Edison Investment Research.

--------------------------------------------------------------------------------

Dario Carradori, Edison Investment Research Limited - Equity Industrials Analyst [12]

--------------------------------------------------------------------------------

A few questions from me. So the first one is regarding the gas supply business. And can you talk a little bit more about what are the key advantages of your gas portfolio compared to the competition? And how -- your competitive positioning in gas supply results in the first half and maybe not only for the Power & Gas business but also for the group overall? And can you also explain if you see other opportunities going forward? And you have -- you've already increased your market share very significantly. Can you increase it further beyond 2019?

The second question is on the electricity supply business. You have achieved higher EBITDA and market share. I was curious and maybe this is a bit early, but I was wondering if you have any expectations of how this business could evolve also in light of the potential energy reforms that we will see in the next few months and years.

And finally, further question on the -- for the EPC business. Can you give us an update on the potential to invest more of your capital into some of the projects that do more BOT business? Can you give us an update on where you are on that?

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [13]

--------------------------------------------------------------------------------

I hope I understood your first question. It was -- I'm not sure, but I will tell you a few things about how our gas business is evolving and how we think it's going to play out in the future. We have worked quite a number of years in order to create a competitive gas basket. When we say competitive, we don't only -- in gas business, it's not only price. It's price. It's conditions. It's peak hours, normal hours. It's base load. It's so many other technical things that play an important role.

For example, you can pay higher price, but it's much more important if the gas is there for you when you want it. And when you don't want it, you don't need it, you don't have any obligation, for example. There are many elements in the baskets of gas that play a role. So it's not only price. We have managed, I don't know, maybe through hard work, through critical mass, through very good people that run the deck, we have managed to have about 35% of the Greek market already, which does not include the new volumes that we will need for the big plants, which we're initiating on October 2, as you know. So there we are with gas.

In electricity supply, we are watching with great interest what the dominant player is doing and how the new government and the new CEO wants to transform EPC. We are here. We are going to be here. We hope that the ultimate set of reforms for the energy sector will help the liberalization of the market, which is your overview. And it's a business, which is right now a core for us both gas and power. And we are going to be there for a long time to see how it's going to develop.

In the EPC and our investments. Our investments in the EPC are mostly on our solar platform and which we have talked extensively in the last year. We have already started our investments. We are -- as I said, we are creating new capacities, which we are then selling to the market. We're going to flip in the market. As we speak now, we have our first 50 megawatts package, which are all of them situated in Greece. They are already in the market for sale. Depending on the offers we get, we're going to do this first transaction of this kind. And then it will be much more obvious for all of you to see how this business is going to play off hedge.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

The next question comes from the line of Chatzidakis Manos with Beta Securities.

--------------------------------------------------------------------------------

Manos Chatzidakis, Beta Securities S.A., Research Division - Analyst & Head of Research [15]

--------------------------------------------------------------------------------

I would like to ask how is this thing with alumina supply is evolving regarding Elmin? And what is the outlook for the decision of DIGI.COM? And secondly, any thoughts about the LNG landscape after recent developments in PPC and the decision of de-lignitizing, if I'm telling this correctly, of the electricity market in Greece?

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [16]

--------------------------------------------------------------------------------

So your first question, obviously, first the bauxite issue, not the alumina issue with Elmin. We have, as you know, a legal difference with Elmin regarding the policies in the Greek markets. We have referred these differences to the Greek monopoly commission, not with DIGI.COM, some 3 years ago. And after 3 years, the monopoly commission decided initially in our favor. Elmin is pressing this in the court to cancel or postpone its final decision. We hope the issue will be resolved soon. And the way I see, it's really a pity that 2 companies that have worked together more than 50 years have to end up in monopoly commission's court to resolve such things. I hope it's a temporary, so to say, argument. And I hope we will soon be back in much better for the good of both sides and for the Greek economy in general because we are both very important companies for Greek economy.

Now the energy landscape. It's changing finally. The de-lignitization, as you can realize, is extremely serious step. It has many aspects, not lease social aspects. It must be carried out with great efficiency and sensitivity, I would say. The outlook, as -- if you see in -- from the rest of the EU, and if you see the [Brexit] look at it, additions are probably now #1 enemy of the European Commission and in the European capital (inaudible). So that poses a big problem for the Greek energy market that has to be resolved somehow. And it poses an even bigger problem for the plant, which is under construction to remain (inaudible), for which I have said quite some time ago actually that it will pose one of the biggest problems that we will see.

If you consider that PPC could have spent EUR 300 million to build a gas plant of 800-plus megawatts and now spends EUR 1.5 billion to build a 600 lignite plant. That was unfortunately a very erroneous decision. They were based on history and other factors. And we want the new realities. Of course, as we say, it's easy when we speak afterwards and not beforehand. That's why now we want to play smart, but it's one of the probably most difficult decisions of the de-lignitization, as you call it. Thank you.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

The next question comes from the line of Ciopraga Iuliana with Danske Bank.

--------------------------------------------------------------------------------

Iuliana Ciopraga;Danske Bank;Consultant, [18]

--------------------------------------------------------------------------------

Could you give us some guidance on natural gas prices for Mytilineos in the second half of 2019? And secondly, European gas prices declined significantly in the first half of this year versus the second half of 2018. However, the price, where we see now, seems to have remained kind of the same. Could you explain what is happening?

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [19]

--------------------------------------------------------------------------------

So price level. Okay. Let's say first one thing. Gas is traded worldwide in U.S. dollars. But locally, it's traded in euros. So when we say gas prices have fallen, we mean, obviously, in dollars. In euros, in the Greek market, prices have fallen only slightly. Also considering the fact that most of the pricing of the dominant player, DEPA, is done on a 6-month lag basis. So in terms of euro and 6 months lag, we have not seen any big decreases in the price. But some we have seen. Now regarding the commercial policy with [land gas and the price] that we have, as we realized, we cannot make it public. It's something which is, I would say, a commercial secret within the company. We cannot share this with all the competition outside our investors, of course.

Now your second question about gas prices going forward. We have this discrepancy here where you have take into account. Gas is traded either on a Brent-linked formula or on a hub-linked formula. The Brent-linked formula, which is pretty -- probably majority in the good care consumption, it's like the oil price. The oil price, should OPEC not be there or did not have an agreement, maybe prices would have been much lower. So the gas that is priced in Brent-linked formulas is, for this year, definitely much higher than the hub-linked, which is the open market supply/demand situation.

So if I may, I would turn your question like this. How does the arbitrage between Brent-linked and Hub pricing is going to develop next year, if I may say. And this is a million-dollar question. It depends how the oil price is going to play out. But we can say definitely that there would be a mountain of supply of LNG and Hub quantities in 2020. Now regarding the oil, if I knew the answer, I would be now in a nice Greek island. I'll not be working in this office for quite a few hours during the day. Thank you.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Mytilineos for any closing comments. Thank you.

--------------------------------------------------------------------------------

Evangelos George Mytilineos, Mytilineos S.A. - Chairman & CEO [21]

--------------------------------------------------------------------------------

So overall, summing it up, I'd say, we are quite pleased with the results of the first half. It looks like the rest of the year is going to be a good year, a good second half, a good year in total. I think you are going to see -- going forward, you are going to see the company getting bigger and bigger. And the size is going to be higher than the decrease of the margins that inevitably occur when you grow so much bigger. I think you would be very pleased to hear the results of the total 2019 in due course. Thank you very much, and have a good evening all of you.