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Edited Transcript of PKN.WA earnings conference call or presentation 27-Apr-17 9:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Polski Koncern Naftowy Orlen SA Earnings Presentation

Warsaw May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Polski Koncern Naftowy Orlen SA earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dariusz Grebosz

* Slawomir Robert Jedrzejczyk

Polski Koncern Naftowy ORLEN Spolka Akcyjna - VP of the Management Board and CFO

* Wojciech Jasinski

Polski Koncern Naftowy ORLEN Spolka Akcyjna - President of the Management Board and CEO

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Presentation

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Dariusz Grebosz, [1]

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Ladies and gentlemen, a very good morning to you and welcome to our quarterly meeting, during which we will present and discuss again ORLEN's consolidated financial and operational results after the first quarter of 2017. A warm welcome to all of you here at the Warsaw Stock Exchange Main Office as well as our webcast viewers who are with us over the Internet. We are also welcome at the Twitter, #ORLEN1Q17. Let me repeat, #ORLEN1Q17. The results after the first quarter of 2017 will be presented by Mr. Wojciech Jasinski, President of the Management Board at PKN ORLEN; and Mr. Slawomir Jedrzejczyk, Vice President of PKN ORLEN. My name is Dariusz Grebosz. I am the Investor Relations Department Manager -- Director. I will be here to make sure that this meeting proceeds as planned. After the presentation, we will have a Q&A session and lunch downstairs. Due to the market fair, which is going on downstairs as we speak, today's lunch will be moved to another location behind the glass doors, not, as usually, downstairs. Our webcast viewers are warmly encouraged to ask their questions after the presentation. I will be here to remit those questions to our presenters. And now I'll give the floor over to Mr. Wojciech Jasinski, President of the Management Board of PKN ORLEN.

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Wojciech Jasinski, Polski Koncern Naftowy ORLEN Spolka Akcyjna - President of the Management Board and CEO [2]

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Welcome to our presentation. I do hope that our Sunday proposal was warmly received by a number of people who enjoyed ORLEN Warsaw Marathon, Poland's biggest running event for the past 5 years. We have had 130,000 runners of many countries and we were supported by 6,500 volunteers, and I do believe that all of our runners, all of the people who managed to run this distance, just as our IR director, Mr. Grebosz, are now alive and kicking and able to function again. That was a joke because Mr. Dariusz Grebosz is a well- known runner, while me, I'm a walker rather than a runner. But coming back to our results, ladies and gentlemen, I am very happy and very satisfied to tell you that we have never had any -- we have never had such good results after the first quarter in any of the years at PKN ORLEN's -- at PKN ORLEN. We have had a record-breaking LIFO-based EBITDA at PLN 2.3 billion, with a growth in revenue of 14%. In the first quarter of 2017, just as before, our results were supported by regulatory environments, which related to the actions taken in order to reduce the grey zone and honest and regular participants of the fuel sector benefited from those regulatory measures. Year-on-year, we have reported an increase both in diesel and gasoline, which contributed to higher value-added tax contributions to the governments -- to the government. We need to remember, however, that we need to continue to strengthen -- strengthening our position, including the efficiency of our assets. In the past quarter, we launched the fist-breaking project, which will strengthen and enhance -- further enhance the throughput of crude oil. We are also continuing the petrochemical and energy investments in Poland and in Czech Republic and the upgrade projects in retail across all our markets. We continue to grow and maintain a stable financial position, thanks to which we're able to flexibly respond and adjust our operations to the market developments. We have increased our crude throughput by 7% and the average production by 8%.

Once again, I am here and I'm very proud to tell you that we have been named again as the Most Ethical Company, as the best -- Poland's best employer, as well. And 2 days ago, I received the bill of the budget title and Poland's largest company from [Polish Business Daily]. And again, I need to stress as usual that people are our most valuable assets. Our good financial position was the basis for the recommendation by the Management Board of the highest ever dividend per share, which was recommended by PKN ORLEN of PLN 3 per share. And once again, I feel very proud to tell you that our market value has exceeded a record-breaking level again, which I am sure is well received by our shareholders and we have also been given the highest-ever rating from Moody's at BAA2, with stable outlook. Mr. Slawomir Jedrzejczyk will now take over to discuss those results in more detail.

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Slawomir Robert Jedrzejczyk, Polski Koncern Naftowy ORLEN Spolka Akcyjna - VP of the Management Board and CFO [3]

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Let us start with the macroeconomic environment -- macroeconomic environment, and we know that the Downstream margin increase and the crude price increase is something we need to focus on. As we can see on this slide, Slide #5, crude oil price has increased by USD 20 per barrel, which is in line with our strategic assessments. We can see that the crude price is stabilizing in the assumed corridor and this all has contributed to a good position -- our good-positioned result in the Downstream segment. Well, at $12 for the Downstream margin, which is much more than we expected, up by $0.18 and the Downstream margin included higher cracks and also higher results on petrochemical production, which both contributed a good result.

PLN has strengthened compared with our situation at the end of 2016, which resulted in the revaluation of our liabilities.

The next slide is, I believe, more important, Slide #6 presents consumption and you can see one figure which stands out, which is the consumption of diesel oil in Poland, up 19%, which is the best proof that our fight with the grey zone and the government's fight with the grey zone is effective. We know that this fight is still far from being over but we do see that the effect of enforcement of the new regulations by the government is effective and our sales in diesel oil in Poland was up more than 40% in Quarter 1 2017 year-on-year, while gasoline sales went up by 10% year-on-year. Both these figures are good indicators of our sales performance and we do believe that the fight with the grey zone, that the tackle with the grey zone will be effective in the future as well. In other markets, as expected, we have had a higher consumption of diesel oil, which was either equal or a little bit higher than the GDP.

Moving on to our financial and operational results. Slide #8 presents our financial results. We have had higher revenues by more than 40%. If this situation persists, we believe that we will exceed PLN 100 billion in revenue a year from now. Of course, revenue is important but LIFO-based EBITDA is a more important indicator. I mentioned the figure -- we mentioned the figure at PLN 2.3 billion, which is a record-breaking figure compared to the first quarter of 2016, which was -- the main contributor was mainly good results in sales and especially in retail. The LIFO-based EBITDA of course was reflected -- the good position of our LIFO-based EBITDA was reflected by our other indicators. We had positive LIFO results and, all in all, we have had the LIFO-based EBITDA result at PLN 2.3 billion and more than PLN 2 billion in net results.

In terms of the breakdown into segments, you can see that we have had an increase of more than PLN 400 million in LIFO-based EBITDA, with a good contribution from the Downstream segment of more than PLN 260 million, but also Upstream and Retail. As a result, we have had the record-breaking EBITDA of the first quarter ever. The Upstream segment as I mentioned, we have already had -- we have already recorded PLN 80 million in the Upstream segment so we can expect that this upstream -- this segment will be a major contributor over the year -- throughout the year, 2017. As well as costs are concerned, the cost level is comparable year-on-year.

In terms of the breakdown into segments, let us start with the Downstream segment. You can see that there are a number of contributors to our better results in Downstream. The macro effect is negative. However, the volumes are on the positive side. The sales volumes went up by 4%, mainly in Poland, 13%, in the Czech Republic, by 8%. In Lithuania, the volumes went down due to the maintenance shutdown.

Slide #11 shows operational results of the Downstream segment. Let us start with the data shown on the right-hand side. The utilization ratio is optimum. On the one side, we completed a major overhaul after the fire of the steam cracker and the breakdown of the FCC unit. However, you can see that at Plock, we show a 90% utilization with -- after a number of unplanned shutdowns. In Lithuania, ORLEN Lietuva, 86%. We have had a regular maintenance shutdown, which was completed in April 2016, which is still visible in Quarter 1 and will be visible in Quarter 2 2017. In terms of our petrochemical units, we also had a number of unplanned shutdowns, which contributed to the level -- utilization ratio at the level of 82% at Plock and 66% at Unipetrol. However, in general, you can say that the positive contributor was the crude oil throughput, which was very positive and contributed greatly to the increase in our sales volumes of 4%.

Slide #12 presents our power results, power and the energy industry. We launched the preliminary startup in mid-April at Wloclawek, this is the CCGT unit at Wloclawek. We do hope that this preliminary startup will be successful and the CCGT unit will be brought on stream in Quarter 2, which will allow us to present its results from the Quarter 2 on. As far as Plock CCGT unit at Plock is concerned, everything is going on as planned. Everything is on schedule. We believe that we will bring the CCGT unit in Plock onstream as well as in Quarter 4 and both units at Plock and Wloclawek will be in full swing in 2018.

In terms of retail, which is presented in 2 subsequent slides, we have had a record high results in detail of PLN 372 million with all parameters on the positive sides, both fuel, nonfuel, margins and volumes. Let me focus on the volumes in the Czech Republic, with a 20% increase. A number or a dozen of OMV stations included in the fuel stations network in the Czech Republic, they are subsequently added to the fuel stations network and it is visible, it is obvious that the Czech Republic -- the situation in the Czech Republic is very positive and makes us really hopeful for the future.

A number of operational data on the next slide, Slide #14. As I said, Slide #14 presents our situation across all markets. You can see that in the Czech Republic, our market share -- we have the market share of 1.5 percentage points increase year-on-year. And important data is shown on the left-hand side, which shows the number -- the graph shows the number of Stop Cafes and Stop Cafes bistros in Poland. We only have 200 fuel stations without the Stop Cafes or Stop Cafes bistros but this will be improved throughout the year. We are introducing the new Eat Shop concept in 2017. We plan to introduce or implement 100 such projects in the next year.

The next 2 slides discuss Upstream. You can see that there was a major increase in LIFO-based EBITDA, more than PLN 80 million in Quarter 1 2017, after a major peak of the fourth quarter of 2016 after we have purchased FX and the GN Kicking Horse, namely the assets in Poland and Canada. We are increasing our production steadily, up 8% in the first quarter of 2017 year-on-year. Our LIFO-based EBITDA in Upstream also went up by PLN 53 million. So again, all the indicators for the Upstream segment were on the positive side.

Slide #16 presents a breakdown between Polish and Canadian assets. The overall goal is comparable. We do have 2P reserves, both in Poland and in Canada, 11 million BOE in Poland and 103 million BOE in Canada. Our goal is to increase our 2P reserves and also boost our production so we are continuing the analysis of the seismic data as well as well drilling to improve those parameters. You can see that the average production in Poland is 100 -- is 1,300 barrels of oil equivalent per day as well as a LIFO-based EBITDA. These are also -- these indicators also present both in Poland and in Canada.

Slide #18 presents our effect of cash flow and both from operations and investment but we need to also stress that our sales volumes are going up, the crude price is going up as well and we have also repaid our financial liabilities, which went down at the end of March 2017 compared with the previous quarter. Therefore, we had a net effect on our cash flow from operation of PLN 0.7 billion. We spent PLN 900 million on investment and as a result, our debt in quarter first -- in the first quarter went up. Our debt is at PLN 0.3 billion. However, we are still on the safe side. Our financial gearing is at 11% and our debt is also on the safe side, which was confirmed by the Moody's, who assigned the highest ever rating to PKN ORLEN at BBB, which used to be unlikely in the past. Another agency, Fitch, also assigned a good investment rating to ORLEN.

Our financial sources are well diversified. The maturity data -- maturity of all our debts is also very safe and we have both euro obligations in retail bonds, Eurobonds, retail bonds and corporate bonds. The maturity of certain tranches from 4 years ago is coming -- is drawing to -- is drawing nearer. Therefore, we are planning additional tranches in 2018 and 2020. So the good news is that we want to repurchase or redeem all those bonds so you can rest assured, this is the message to all our investors, and the Supervisory Board approved another issue of the bond program of PLN 1 billion. The prospectus will be published very soon so all the investors who are interested in the investments in our new retail -- in our new bonds should be aware of that and should look forward to our new retail issue. Our treasury team is especially proud to tell you that global finance was granted the title -- granted -- [begin] ORLEN the title of Best Corporate FX award for the best or most efficient FX corporations of CEE or Europe, in general. We are on par with Apple or DuPont, which is great news and makes us very proud as well. In terms of our CapEx, we showed you our CapEx plans in December with a very ambitious and challenging plan on the [Brexit] objective with the highest ever CapEx figure in the company's history, but this is feasible. We will improve our operations and we believe that we can proceed as planned. The first quarter is usually the quarter where the CapEx is as at its lowest. However, the target of more than PLN 5 billion is feasible. As we've mentioned, we need to -- or we will extend our value chain in the Downstream such as -- which will include the projects such as metathesis, but we also have a number of high margin projects in our Downstream segment, refining projects, also in the Retail segment and in Upstream, as well.

To conclude, the last slide presents our market outlook for 2017. As I said at the beginning, the crude price is the single most important indicator and also Downstream margins. If the crude price continues in the quarter, it should be stable. Downstream margin has been very positive, which was due to a number of maintenance shutdowns in our petrochemical units and refinery units. So we will take -- we'll continue to have a close look at the Downstream margin. We depend obviously on the general economic indicators but Poland's economy is on the safe side. All the indicators -- economic indicators are on the increase, including the GDP. Therefore, we believe that the consumption of gasolines and diesel oil in Poland should increase as well and as we have mentioned before, all the regulatory measures to reduce the grey zone is still far -- are very effective and the fight with the grey zone is far from over. New measures will be implemented so this should improve our results in the quarters to come. Thank you very much. We are now ready to take your questions.

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Questions and Answers

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Unidentified Analyst, [1]

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[Bartholomew Brezinski], the [Business Alert Portal]. In reference to today's information published by (inaudible), I would like to ask a question about your Canadian assets and more specifically, the fact about the fact that Kicking Horse used to be a shareholder in the Goldboro Engine Project in Canada. There was one terminal which was supposed to export crude to Europe. So what is your involvement in that project? What are the opportunities for importing the crude from the U.S. and Canada?

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Wojciech Jasinski, Polski Koncern Naftowy ORLEN Spolka Akcyjna - President of the Management Board and CEO [2]

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Yes, when we purchased Kicking Horse, we were mostly interested in its Alberta assets. However, we do know that Kicking Horse is a 10% holder of shares in the project that you have mentioned. So we are a passive investor. We do not have an impact in terms of strategic decisions. This project is not really -- I wouldn't say it is suspended but we're waiting for the progress of this project. The question is whether we should or not be a strategic investor in such projects. Maybe another company should take over that project if it is feasible. At that point, I cannot give you any declaration in terms of whether or not this project will be continued and whether or not PKN ORLEN or any other Polish company will be involved in that project. We need to remember that we are Poland's largest purchaser of gas, natural gas, so we need to be interested in making sure that the conditions for gas purchases are as favorable for us as possible. We do have certain alternatives such as supplies from the German market. In terms of LNG, we will definitely be considering certain options, which will be best and most favorable for us.

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Dariusz Grebosz, [3]

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A question from a webcast viewer, you have mentioned effects of the fight with the grey zone and there is a question whether a great demand for diesel oil combined with unplanned [maint-downs] at Plock, what was the effect on the volume? Do you continue imports at the same level in the quarter? Will you continue imports in the same level in Quarter 2? Can you -- and the second question, can you tell us more about the maintenance shutdowns at Plock? Will they have any impact on the crude throughput in Quarter 2?

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Slawomir Robert Jedrzejczyk, Polski Koncern Naftowy ORLEN Spolka Akcyjna - VP of the Management Board and CFO [4]

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I will give you a general answer. In general, we do have the strategy of the most -- of the highest possible use of our assets. When the consumption goes up in the market, especially when this is combined with both planned or unplanned maintenance shutdowns or any other shutdowns, then it is obvious that we will need to be an importer. We need to be such a player. We need to remember that we also have refineries in Lithuania and the Czech Republic. Therefore, the flow of crude -- of our feedstocks comes also from our neighboring countries and depending on the situation in the market, we will continue that strategy. You need to remember that in Poland -- at PKN ORLEN, we have 1 strategy or 1 rule of thumb. ORLEN is the key player in the market. You cannot -- you will never leave our fuel station without the fuel or diesel oil, gasoline that you wanted to purchase. So we are leveraging or tapping the opportunities in the market. However, we are also responsible to make sure that fuel is also available to our clients, to the drivers. As far as maintenance shutdowns and the shutdowns, in general, in Q1 are concerned, in the second quarter, we believe that the situation will improve. We have a major shutdown of the RW 3. This is one of our major units and this will obviously have an impact on the utilization ratio at Plock. Another shutdown was close -- came to an end in Lithuania in mid-April. Therefore, the utilization ratio will not be 100% in the Czech Republic as well. However, to conclude, we will have a certain effect on our utilization ratio in the second quarter. However, the situation will improve as we speak.

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Dariusz Grebosz, [5]

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Another question. The dividend problem at Unipetrol in the Czech Republic. What is your opinion on this problem, the dispute that is going on in the Czech Republic? Unipetrol had a record-breaking result. The dividend was planned. However, minority shareholders decided that this dividend is still too low. What is the current situation in terms of that dispute and will this dispute be resolved successfully?

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Slawomir Robert Jedrzejczyk, Polski Koncern Naftowy ORLEN Spolka Akcyjna - VP of the Management Board and CFO [6]

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I wouldn't call it a dispute. It's just a natural difference between -- there are natural differences in terms of the dividend appetite and, in general, the views on dividend. Long-term investors have a different outlook. Short-term investors have definitely a different opinion on the value -- on the amount of dividends. The trick is to meet halfway. We are waiting for the decision of Unipetrol's Supervisory Board and the management board and we are waiting for the general meeting for any final decisions. Unipetrol paid out the dividends, its first-ever dividend, last year. This is a positive signal for the investor who wants to invest in the dividend-paying companies.

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Dariusz Grebosz, [7]

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Are there any other questions?

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Unidentified Analyst, [8]

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[Cesare Dombrovsky], [Web Portal]. I do not know if you will be willing to answer my question, but my question is what is your opinion about the sale of crude oil about 2 years ago in the grey zone, around 2 years ago. Whose fault was that? Was the government's decision a failure or maybe a single minister's decisions were a failure? Because this is unbelievable, this is unthinkable to even think about it.

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Wojciech Jasinski, Polski Koncern Naftowy ORLEN Spolka Akcyjna - President of the Management Board and CEO [9]

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Ladies and gentlemen, we want to avoid such situations. We want to leverage those good opportunities. We are happy that the government has taken, well, has taken good decisions. This is all I have to say. I am very happy with the government's decisions because they contributed positively to our results and this is the only comment I can give you.

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Dariusz Grebosz, [10]

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Another question from a webcast viewer, actually 2 questions. One of them concerns innovation -- both concerns innovations. You mentioned the Knowledge Exchange and Web Portal, called innovations and startups. You wanted to have certain room for new corporation in terms of innovations and startups. What is the current progress in this area and how much did you invest so far?

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Slawomir Robert Jedrzejczyk, Polski Koncern Naftowy ORLEN Spolka Akcyjna - VP of the Management Board and CFO [11]

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Well, innovation is one of our strategic areas. We have taken a lot of measures across different areas. The web portal that you've mentioned, innovations and startups are one of those measures -- is one of those measures. Another initiative is our participation in the Hanover Fair. We are supporting Polish startups, but I would like to beg your patience with this. We need to wait a little bit for our final decisions, whether or not and how much we will invest in certain projects -- or in specific projects. Are there any questions from our participants in the room? If not, if everything is clear, then let me just take a look if any -- if there's any question from our webcast viewers. If not, then thank you very much for your participation in today's presentation and we'll see you next time. Goodbye.