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Edited Transcript of PKN.WA earnings conference call or presentation 30-Jan-20 10:00am GMT

Q4 2019 Polski Koncern Naftowy Orlen SA Earnings Presentation

Warsaw Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Polski Koncern Naftowy Orlen SA earnings conference call or presentation Thursday, January 30, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Armen Konrad Artwich

Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management board

* Iwona Waksmundzka

Polski Koncern Naftowy ORLEN Spólka Akcyjna - Executive Director of Strategic & IR

* Patrycja Klarecka

Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer

* Zbigniew Leszczynski

Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of the Management Board - Development

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Conference Call Participants

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* Andrzej Kublik;Gazeta Wyborcza;Journalist

* Bartlomiej Sawicki;BiznesAlert;Deputy Editor-in-Chief

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Presentation

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Iwona Waksmundzka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Executive Director of Strategic & IR [1]

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Good morning, again. And welcome to today's conference, which will be devoted to the presentation and discussion of the financial performance as well as operational performance of PKN ORLEN after the fourth quarter of 2019. Today's presentation will be delivered by a number of new presenters, starting with Mr. Zbigniew Leszczynski. He'll discuss the presentation and our performance. Joined by Mrs. Patrycja Klarecka and Armen Artwich, who will be available to you as well during the Q&A session.

My name is Iwona Waksmundzka-Olejniczak, and I will be moderating today's meeting. A very warm welcome to our webcast viewers as well who are watching and listening to us live over the Internet. We're also available at Twitter. The official hashtag of the event is #ORLEN4Q19.

I'll give the floor over now to Mr. Zbigniew Leszczynski.

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Zbigniew Leszczynski, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of the Management Board - Development [2]

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A very good morning to you, and a very warm welcome to the conference, which will be devoted to the presentation and discussion of our financial results and the performance of the fourth quarter of 2019.

Before we move on to the discussion of our quarterly results, I would like to summarize briefly our performance last year. In 2020 -- 2019, we delivered more than PLN 9.5 billion of EBITDA based -- of LIFO-based EBITDA, which is a very good performance, especially considering very challenging macro conditions, which, may I remind you, is beyond our control. At the same time, in 2019, we delivered record-breaking results in both retail and power sector segments.

Our crude throughput stood at 33.9 million tonnes, which translated into high record-breaking sales at 43.3 million tonnes, which was up by 1% year-on-year.

Our retail segment is also worth mentioning, and the operational results of our retail segment stood at more than PLN 3 billion. Our power segment in 2019 also delivered very high and record-breaking result at PLN 1.6 billion. These are the 2 segments of our operations, which delivered great results. And it is a confirmation of the decision of both our President, Daniel Obajtek, and also, in general, our management Board to bet on further development of those 2 segments.

We also maintained financial strength in 2019. Our revenue stood at -- or grew to PLN 111 billion. Our cash flows from operations stood at PLN 9.3 billion, which means that they were up by PLN 4.3 billion year-on-year. Our CapEx stood at PLN 4.4 billion (sic) [PLN 5.4 billion]. Considering the leases according to International Financial Reporting Standards 16, it was up and stood in general at PLN 5.4 billion. We paid out a record-breaking dividend at PLN 1.5 billion or PLN 3.45 (sic) [PLN 3.50] per share, going up from PLN 3 per share, which was paid a year before. As a result, our net debt went down by PLN 3.2 billion, down to PLN 2.4 billion at the end of 2019. And our financial gearing stood at 6.3% and our covenants at 0.26. These are very safe levels, much more safe than assumed in our current strategy. The confirmation of our financial strength is the fact that our investment rating both by Fitch and Moody's was maintained.

Among the key facts or events in 2019, I'd like to highlight the fact that we have currently consistently continued to diversify the supply -- source of supply of our crude oil. And as a result, we have already 40% of our supplies coming directions other -- sources other than Russia.

We continued the activities concerning the acquisition of the Lotos Group. We filed a formal application to the European Commission. At the beginning of the August, the European Commission decided that it needed more time to -- for more in-depth analysis. Therefore, the second phase of this event was postponed to the second half, February 2020. However, European Commission decided to stop the clock in the autumn of 2019. This is standard procedure to make sure that PKN ORLEN has more time to compile necessary materials and information, and the European Commission will have more time for an in-depth analysis and to take the official -- and the official decision on, in our opinion, the stop-the-clock procedure should be -- the hold imposed by the stop-the-clock procedure should be eliminated pretty soon. And acquisition of the Lotos Group will -- should be completed by the end of this present year. We also announced a tender offer, a tender call, for 100% of the shares of Grupa Energa. We expect it to be close by 2020, and the subscriptions will be launched tomorrow.

We also completed the construction of metathesis at Plock and PPF Splitter at ORLEN Lietuva, which, by the way, has been using the new trucks, which were brought back on stream recently.

We are also consistently developing our network of service stations and the co-branding activities and the co-branding projects. We were named once again The World's Most Ethical Company and Top Employer Poland, which is a proof that our employers' standards have been maintained.

In terms of the promotion of our brand, I'd like remind you that on the 1st of January 2020, PKN ORLEN was named the titular sponsor of Alfa Romeo Racing.

So in summary, in terms of the financial year of 2019, on behalf of our President and CEO, Daniel Obajtek, I'd like to extend my heartfelt thanks to all the employees of PKN ORLEN for your hard and devoted work and your involvement and engagement. Thank you very much.

Let me now move on to the consolidated results of PKN ORLEN for the fourth quarter of 2019 in more detail, starting with Slide #4, which presents our macro environment that we operate in 2019, the last quarter.

As you can see quite clearly, it was worse than a year before. Unfortunately, as I mentioned before, this is way beyond PKN ORLEN's control. We have no control over the macroeconomic factors.

In the fourth quarter of 2019, due to the worsening macro environment, we reported lower downstream margin, down by $3 per barrel year-on-year as a result of worsening or lowering margins on heavy fractions going down twofold, down to minus $252 per tonne as well as worsening margins on distillates and petrochemical products. Those negative effects were partially offset by weakening PLN currency exchange rates to foreign currencies year-on-year. Low prices of gas -- natural gas due to heavy stocking were -- was a positive factor. In the fourth quarter of 2019, the prices of gas went down by more than 40% year-on-year, which was combined by lowering prices of -- or falling prices of electricity, which resulted in a higher spread, that is the difference between the price of energy, electricity and gas, and supported our performance in the power sector -- segment. As I mentioned before, our power segment delivered the LIFO-based EBITDA at PLN 1.6 billion, which was up by more than PLN 900 million year-on-year.

The next slide, Slide #6, presents fuel consumption across all our markets. In the fourth quarter, we saw a growth in GDP across all our markets. However, its dynamic -- dynamics year-on-year were slightly more lower. The leader in terms of GDP growth was obviously Poland, which means that also, our fuel consumption in terms of both diesel and gasoline went up. Across all our markets, we also reported satisfactory growths.

Slide #8 presents our financial results in the fourth quarter of 2019 across all our capital group. In the fourth quarter, our revenue went down by 7% mainly due to lower results reported for petrochemicals and refining products, which resulted mainly from crude oil price decrease. We reported a decrease of LIFO-based EBITDA, down by PLN 0.6 billion year-on-year. On the other hand, we also had a negative effect of PLN 900 million of the macro effect and also lower retail margins, fuel margins, combined with also higher overheads and labor costs. On the other hand, however, it was offset -- those results were offset by higher volumes, up by PLN 300 million, and also higher trading margins in wholesale as well as revaluation of our inventories year-on-year.

Due to the increase of crude oil in the fourth quarter, our LIFO-based effect, our LIFO effect went -- it was at PLN 200 million, and the reported EBITDA was at PLN 1.67 billion.

Our financial results stood at PLN 0.2 billion mainly due to positive impact of net foreign exchange differences and also the positive impact of the settlements and valuation of derivatives and also interest costs. As a result, our net result was at PLN 0.8 billion for the fourth quarter and nearly PLN 4.5 billion for the entire year of 2019.

Moving on to the next slide, which presents LIFO-based EBITDA by segment. Starting from our key segment, that is Downstream. The LIFO-based EBITDA stood at PLN 1.1 billion, down by PLN 3,000 million due to high overheads and limited effect of volumes and also revaluation of our inventories. In terms of retail, LIFO-based EBITDA at PLN 0.6 billion, down by PLN 0.3 billion due to the effect of lower volumes and also higher nonfuel operating margins.

In terms of upstream, we stood at PLN 68 million (sic) [PLN 69 million], which is comparable to the previous year, also mainly due to the volume and also the balance for other operating activities, including both settlement of derivatives and also the macro effect year-on-year. Corporate functions, the last segment, reported lower costs mainly due to positive impact of changes in other operational activities year-on-year.

Moving on to the Downstream segment to discuss it in more detail, which is presented on Slide #10. As I mentioned, this is our -- as I have mentioned, this is our main segment and it generated a LIFO-based EBITDA at PLN 1.1 billion in the fourth quarter mainly due to in-advantageous macro situation, at which, again, we have no control over. Around PLN 900 million was the negative effect of lower margins on heavy distillates and also -- middle distillates and also heavy fractions as well as olefins, PVC and others, mainly offset by other effects such as light distillates and also foreign exchange differences. It was also offset by positive volumes even despite lower sales in the Downstream segment, down by 4% year-on-year. Across all our markets, we reported a balanced result due to lower -- due to higher sales.

In terms of petrochemicals, the sales went up year-on-year due to higher availability of our production facilities and no effect of the cyclical or regular maintenance stopover of polyolefins and PVC, which you might remember took place in 2018. We had a number of both planned and unplanned stopovers of our production facilities. The sales by volume went down by 4% year-on-year mainly due to lower sales of gasoline, diesel and LPG, offset by other effects of sales in terms of polyolefins and PVC. Other elements include mainly revaluation of inventories of NRV, for instance, as well as higher trade margins and higher labor costs.

Moving on to other operational data in the Downstream segment. PKN ORLEN's crude throughput for crude oil went up by 0 point -- went down by 0.3 million tonnes mainly due to lower throughput of oil -- of crude oil at ORLEN Lietuva, which went down by 13% due to disadvantaged macro situation. In terms of yields, the yield went up year-on-year mainly due to lower stopovers of a number of our production facilities year-on-year and also the fact that the olefins production facilities had no stopovers at all compared to 2018. At Unipetrol, our yields went down mainly due to a longer stopover of our production facilities at Visbreaking. And those results were also triggered by disadvantageous macro conditions.

Let me now move on to the Slide #11, which presents our operational data by country. In Poland, our results were offset by higher sales of petrochemical products. In the Czech Republic, our sales went down mainly due to lower sales of fuels and PVC as well as olefins due to bad market conditions. At ORLEN Lietuva, our volumes went down due to lower sales of heavy fractions, of refining products and also higher sales -- offset by higher sales of middle distillates.

Let me now move on to the next segment of our operations, which is pearl in the crown, an apple in our eye, which is obviously retail. Quarter-after-quarter, it's proved that its performance is better and better. And Mrs. Patrycja Klarecka is -- who's present to today's -- at today's conference, is the head -- is at the helm of this particular segment. Our LIFO-based EBITDA in the Retail segment stood at PLN 592 million, which in the fourth quarter went down quarter-on-quarter. However, throughout the year of 2019, the LIFO-based EBITDA of the retail segment was record-breaking. Therefore, the performance in the Retail segment is very good, in our opinion. It's very solid, in our opinion.

Let me now explain our lower performance in retail in terms of LIFO-based EBITDA. It was due to a one-off event, which took place in the fourth quarter. There were limitations of our logistics muscle in Germany, which affected our performance in retail last year, especially in the fourth quarter, and also lower fuel margins, mainly in Germany and also in Poland, which was partially offset by higher volumes of sales and also higher nonfuel margins, which can be clearly seen in the lower chart on Slide #12. We reported higher volumes in the fourth quarter, up by 3%. We also started the co-branding project in our foreign service stations. And the first step of the project, local brands Benzina and Star will be presented both -- will be presented together with our ORLEN -- PKN ORLEN's brand. We did not forget about market trends, current market trends. We invested a lot in chargers for electric cars. We built more than 50 chargers. And at the end of 2019, last year, at the end of 2019, the total number of those chargers, EV chargers, stood at 64. Next year, we're planning to build additional 50 chargers at our service stations.

The next slide presents operational data for the retail segment in more detail. At the end of quarter 4, the number of our service stations is shown on Slide #13, and most of them have the Stop Cafe format. The number of service stations went up by 33 year-on-year. Most of them were opened in Poland and Slovakia and in the Czech Republic. And continuing high demand for fuels and the nonfuel offering, obviously, was due to -- and obviously, translated into high shares and high -- our high-performance in sales. Our shares in both the Czech and the German market went up, and it is worth mentioning that our nonfuel sales went up solidly at the end of the quarter, quarter 4. We had more than 2,000 Cafes -- Cafe formats and also convenience stores of our brand O! SHOP.

Moving on to the upstream segment. LIFO-based EBITDA of the segment at the end of the year, at the end of the fourth quarter, was at PLN 69 million, which is up year-on-year. The positive effects were offset by lower sales volumes and the negative effect of the settlement of -- and valuation of derivatives. The average production, which was down to 18.7 (sic) [18,700] barrel of oil equivalent per day, was mainly due to lower production in Canada, down by 7 (sic) [1,700] year-on-year.

On the next slide, we present more details in terms of our upstream segment. We now have -- we now can present our average production and also our average total reserves. Our average production stood at 17,200 barrel of oil per day. And our CapEx stood at PLN 158 million in Poland; and the total CapEx in Canada, PLN 476 million.

We completed the drillings of the Bystrowice-OU3 well. And also, Bystrowice-OU1 is ready for production in the Miocene project. We started drilling additional wells in Plotki and Bieszczady, and we completed seismic data acquisition for Miocen, Karpaty and other projects. In Canada, at the very same time, we started drilling 8 wells. 4 wells -- 10 wells were fractured and 8 wells were brought on stream. We also continued works to develop the infrastructure for both production and transmission infrastructure. We're also starting new locations for additional drillings for the future.

The next slide, Slide #17, presents our financial data and cash flows. For the fourth quarter, on Slide #17, as you can see, our cash flows from operations stood at PLN 1.2 billion mainly due to higher intensity and the higher need -- demand for working capital, mainly due to higher prices of crude oil. Our reserves of crude oil went up because we compensated or completed the mandatory reserves, which we needed to use up before when some of the crude turned out to be contaminated. We also had other effects at PLN 700 million, which includes CO2 spending and also the rights of use in accordance with financial standard and international financial standard or international accounting standard 16.

Our operational LIFO-based EBITDA result is also presented on this slide, and our demand for working capital went down. The LIFO effect was at PLN 0.1 billion, and the working capital decrease was at PLN 0.9 billion. Our CapEx stood at PLN 5.4 billion, and we also paid more than PLN 1.5 billion to our shareholders, which, as I said, stood at 4 -- PLN 3.5 per share. As a result, our net debt went down by PLN 3.2 billion year-on-year.

The next slide presents our financial strength, which is one of our pillars -- one of the pillars of our performance. All our financial strength indices are at the same -- on the same level. Our financial gearing is at 6.3%, which is way below 30, which is the maximum assumed in the strategy. Our net debt is also at the very safe level at 4 point -- PLN 2.4 billion. Compared quarter-on-quarter, it went up due to higher CapEx at PLN 1.6 billion and combined with positive cash flows in operations. Our financial sources remains to be well diversified with the average maturity of 2021, which you can see on the -- in the lower part of the slide. In terms of the structure of our debt, most of it is denominated in the euro, which presents or offers the natural hedging.

The next slide is devoted to our CapEx, capital expenditure. In 2019, our planned CapEx was at 4-point -- PLN 5.4 billion. And the actual CapEx, without leases according to International Accounting Standard 16, were lower, which was mainly due to the spending in Canada, which were lower at PLN 0.6 billion due to low hydrocarbon project prices and also shifts in terms of the timing of some of our projects as well as optimization of certain spending in the Downstream, which were move and postponed to 2020. In 2019, we started a number of projects, CapEx projects, for instance, extension of our fertilizer production at Anwil in Wloclawek, construction of the propylene glycol unit and also purchase of a license for bioethanol, second-generation bioethanol for ORLEN Poludnie at Trzebinia, and the construction of a Visbreaking plant at Plock, and also the launch of the selection of the contractor for the -- general contractor for the offshore wind projects, offshore wind farms.

In terms of more detail, I'd like to inform about -- I'd like to tell a little bit about our plans for 2020. Our CapEx for 2020 is planned at PLN 7.7 billion, of which PLN 3.7 billion or PLN 3.9 billion is for growth projects and 3.0 -- PLN 3.8 billion for maintenance and regulatory project. This will be a major challenge for us. This is the highest CapEx ever planned by PKN ORLEN. We will continue to extend the fertilizer production at Anwil. We will continue the construction of the propylene glycol unit at ORLEN Poludnie and the Visbreaking unit in Plock and also construction of our research and development center at Plock, construction of the biogas unit at ORLEN Poludnie, and continuing very dynamic projects for the development of our petrochemicals. We will also continue the preparation for the construction of the offshore wind farm on the Baltic Sea and also construction of 50 additional -- 50 new fast-charging stations for EV chargers.

In retail, we will have the development of our fuel network and also our new fuel sales network. We plan to have new own stations and also new Stop Cafes and O! SHOPs. We're planning also to spend around PLN 500 million and -- upstream segment, including both Canada and Poland.

And the last slide I'd like to discuss is Slide #22, which presents our outlook for 2020. In terms of the macro situation, we expect to see higher oil prices compared to the average of the 2019, which is due to -- mainly due to the OPEC agreement and the expected limited crude oil production. We're also looking at the potential agreement and trade talks between the U.S. and China and also certain other geopolitical risks. However, we'd like to remember -- we will only need to remember about the slowdown of the global economy and the increase of production in the U.S.A. Our downstream margins should also be higher year-on-year compared to the average of 2019. We're also expecting the refining margin in terms of Brent/Ural differential and lower demand for middle distillates and also high sulfur oils, especially as a result of the implementation of IMO regulations from -- as of the 1st January of 2020. The positive impact of higher refining margins, including the differential, will be offset by a decrease in petrochemical margins due to the launching of the new production facilities. However, we expect that those margins in the coming years will be higher.

The margin -- the Downstream margin will be supported by the continuing demand for our fuels in -- across all our markets. We expect that the fuel consumptions will be stabilized, will stay flat and maybe slightly increase in Germany and in Lithuania and in the Czech Republic. In Poland, we expect that the demand for both gasoline and diesel oil will be increasing.

We also need to remember about the regulatory environment. And the national index target -- targets went up to more than 8%, 8.5%. However, PKN ORLEN were able to take advantage of the fact that we can reduce the ratio to 4.4% or to 5.5%.

Thank you very much for your presence and for listening to both our performance in 2019 and our expectations for 2020.

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Iwona Waksmundzka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Executive Director of Strategic & IR [3]

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And now we'll give you the -- give the floor over to you, and you'll have the opportunity to ask questions. I'd like to remind you that both us -- both me and our Executive Directors and management Board members will be available to you after the meeting if you should have any additional questions.

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Questions and Answers

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Unidentified Company Representative, [1]

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The Q&A session will now start. Mr. (inaudible) is the first question.

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Unidentified Analyst, [2]

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My question will concern, first of all, the acquisition with -- of LOTOS, of the Lotos Group. We're expected to see the European Commission's decision in the first quarter of the year. So do you have any plans of negotiations with your market partners concerning the sales of certain shares or interests in other entities?

And my second question will concern the petrochemicals development program, which is where -- which is more than PLN 8 billion in terms of its worth. What other projects, investment projects are you planning to have in this year in terms of the petrochemicals development project?

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Armen Konrad Artwich, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management board [3]

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So first question first. Of course, the consent of the European Commission can be conditional and contingent. And in that case, we'll be forced to meet certain conditions within certain time limits, which will be set by the commission, for instance, the sale of some service stations to -- fuel stations to some entities, maybe sales of some interest in our subsidiaries. However, these are just the examples. And before the actual decision of the European Commission, we cannot really tell you what those measures will look like in reality. And also, after we have filed the final version, I mean the -- received the final version of those proposals, we will have the so-called market tests. We will be -- this is an analysis which will be completed both by European Commission and ourselves and will also have the opinions from our market partners. And this is will only be launched after the stop-the-clock phase.

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Zbigniew Leszczynski, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of the Management Board - Development [4]

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And the second question, concerning the development of our petrochemicals segment or petrochemicals development project, this project is progressing as planned. It is very dynamic, and we're consistently implementing our planned activities. And we would like to strengthen both the position -- the market position of PKN ORLEN but also the economy and the position of Poland across the world. And PKN ORLEN will extend the product chain and value chain. We will sell more high value products. The construction of the modern research and development center, where we will cooperate and partner with both scientific circles and the business circles, this project will be brought on stream -- will open this year. We will have pilot installations in the -- that research and development center, which we'll be able to test new products. We will be able to drive down our production costs. We will also work on new technologies and innovative products. These are the assumptions -- these are the main assumptions of our -- of that project. This, as I said, is progressing as planned. And I do believe that by the end of the year, we will be ready to open the research and development center at Plock.

In terms of other projects under the umbrella project, we signed a contract with the company named Fluor for the advisory consulting and services for olefins, in terms of production of olefins. We are also planning to acquire a license for the phenol plant and IPA plant. Other projects and other works are also progressing as planned, as scheduled. And the project is very much on the safe side, and it will be implemented as planned.

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Unidentified Participant, [5]

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[Piotr Apanowicz] representing ISBnews. I have 2 questions. First of all, concerning the dividend, will you uphold the announcement that the dividend will be continued to be paid out in the light of the fact that you're planning so much CapEx?

And the other question concerns the offshore wind farm projects and the exact timing of that project.

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Armen Konrad Artwich, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management board [6]

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Question number one, in terms of dividend, our dividend -- our strategy mentions the payout of the dividend, and we plan to uphold it this year. However, the final decision will be taken by the Annual General Meeting of our shareholders. The final recommendation of the management Board will be presented in March, as usual. I'd like to emphasize at this point that, first of all, 2018, as you might remember, was the year where we paid out a record-breaking dividends to our shareholders at PLN 3.5 per share. And the total cost of it was PLN 1.5 billion. It was the highest dividend ever since 2005. And let me remind you again, which was mentioned by Zbigniew Leszczynski before, in 2019, in general,

our situation -- our financial strength was maintained, and our cash flows from operations stood at PLN 9.3 billion. Our net debt went down by PLN 3.2 billion year-on-year, down to PLN 2.4 billion. Our financial gearing is maintained -- was maintained at a very safe level at 6.3%.

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [7]

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Of the second question, in terms of offshore wind farms, this investment is progressing as planned. We plan to start -- to launch the construction at the turn of 2023, '24. We received a number of very advantageous offerings. This is a very important question to us. This is a very important part of this project, to select the most optimum, the best contractor. So we will take our time. We sent out a number of requests for proposals. And I do believe that by the end of the first quarter or by -- at the latest, by the end of the first half of the year, we will have the decision. A number of works is -- are being carried out in parallel, at the same time, simultaneously. So we are talking about the research into the bottom of the sea and a number of other projects. We started work on the selection of the designer. However, we do not expect to have any delays in terms of the schedule and the timing of those projects.

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Unidentified Company Representative, [8]

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Mr. Kublik representing Gazeta Wyborcza.

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Andrzej Kublik;Gazeta Wyborcza;Journalist, [9]

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I would like to have more information, first of all, in terms of the Downstream performance. Saudi Aramco, the contract with Saudi Aramco, for supplies of heavy fuel oil, what does it look like? So for instance, how much -- in quarter 4, how much heavy fuel did you sell to Saudi Aramco?

And the second question concerns contaminated crude oil and the recent negotiations or talks concerning that matter. Could you please clarify this matter? I do not even remember any communication by ORLEN concerning any supplies of crude oil from Russia. Could you please remind me if there were any communications?

In terms of net debt and the fact that it went down, it's good news, obviously. But what does it mean specifically. Did you pay back any of your borrowings?

And the power sector. If EBITDA went up, is it at all related to the launch of certain installations, for instance, at Wloclawek

and at Plock, after a number of project -- of problems that we actually witnessed? So in other words, is that an organic growth? Or is it the fact that a number of plants were relaunched after certain rigs?

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Zbigniew Leszczynski, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of the Management Board - Development [10]

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Okay. So in terms of the diversification of our crude oil supplies, yes, we are consistently diversifying the sources of our crude oil from locations other than Russia. And in 2019, our throughput was as planned and there was no deficit in the Polish market in terms of both petrochemical products and fuel products, thanks to our measures and efforts. And the Polish economy was stable. And PKN ORLEN delivered stable throughput of crude oil.

In terms of the settlements for the contaminated

crude oil, we sent over our claims, our quantitative claims, were sent over to our business partners. We received compensations from them. We've already informed you about this. We also sent our claims to our suppliers and the qualitative claims to our suppliers and the qualitative problems -- or maybe in a different way, I'll put it in a different way, it includes logistics and technologies and also commercial side of the story. This is all I can comment on our contaminated oil problem. We have the Saudi -- we have a contract with Saudi Aramco, and it's in effect -- will be in effect by December 31, 2020. But we also have other contracts with other business partners, which are -- will be in effect by the end of the year and even of the year 2021. Therefore, we are awaiting more compensations from our business partners, which will be related to the contaminated oil.

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Armen Konrad Artwich, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management board [11]

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Concerning your question about lower net debt, we are talking about a drive-down in net debt. We are obviously paying our current debts as we speak. But this amount, PLN 3.2 billion, is presented in more detail on the slide which presents our cash flows. If we consider our working capital and our LIFO effect and also the payout of our dividend and a minor amount of other cash flows, including income tax and foreign exchange differences, we have the amount of PLN 3.2 billion in terms of our net debt reduction. We are managing our borrowings on an ongoing basis, and we are paying out our debts as planned. Yes, let me again emphasize the fact that our financial liabilities are paid back as planned on an ongoing basis.

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [12]

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And your last question concerning the power segment. This could result at PLN 1.6 billion. And this particular segment was not related to one-off events. They actually drove down our performance in this very segment because, as you might remember, we had a breakdown at Wloclawek. It was -- the plant was relaunched in 2019, and we also had no positive effect of the so yellow -- of the so-called yellow certificates. So that means that this amount is net of these one-offs. However, our macro -- the macro situation was -- came to our advantage mainly due to lower prices of oil and gas.

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Zbigniew Leszczynski, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of the Management Board - Development [13]

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And also, you asked about heavy fuel oil in terms of our cooperation with Saudi Aramco, our sales, not purchases, but sales to Saudi Aramco, in this case. As we have communicated in a press release, we closed the partnership and we closed the sales of our heavy fuel oil to Saudi Aramco. However, we are continuing the sales of heavy fuel oils to other trading partners.

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Unidentified Company Representative, [14]

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This is (inaudible), the Gazeta Prawna daily, has another question.

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Unidentified Participant, [15]

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I'd like to come back for a while to the acquisition of LOTOS, the Lotos Group. What will be the next step that you expect in terms of the European Commission? And you have mentioned that you'll have subscriptions tomorrow, you'll open subscriptions tomorrow. I expect that those subscriptions will be at the original price, then no update of the prices expected. Am I right? And also, in terms of this particular acquisition, have you already notified the European Commission concerning this part -- the second acquisition we're talking about?

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Armen Konrad Artwich, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management board [16]

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I do believe that your first question concerns the acquisition of the Lotos Group?

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Unidentified Participant, [17]

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Yes.

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Armen Konrad Artwich, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management board [18]

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We do expect, first of all, the close of the stop-the-clock procedure, and we do believe that the European Commission will find our explanations and clarifications sent over. To date, we'll find those explanations satisfactory, and we'll be ready to take the next step. And the next step will be the so-called market test, as I have mentioned before.

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Iwona Waksmundzka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Executive Director of Strategic & IR [19]

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How about the acquisition of the Energa Group?

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [20]

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Yes, the subscriptions will start tomorrow, and it will be continuing to around mid-April. We have had -- we have filed a prenotification to the European Commission, the prenotification applications. However, we do not expect any problems from the European Commission. Energa operates in a different market segment. So I do not expect any problems comparable to the problems or issues that we have in terms of the acquisition of LOTOS.

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Unidentified Participant, [21]

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Another question concerns investments and debt. You have emphasized your CapEx, and you have 2 acquisitions in the pipeline and also the wind farm project, the offshore wind farm project and other CapEx projects. Is there any limit of your debt in terms of, for instance, net debt-to-EBITDA or also in terms of absolute values? How will you do that? What is your plan? Is it -- is this bonds or Eurobonds?

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Armen Konrad Artwich, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management board [22]

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First of all, high cash resources and also relatively low debt, we do believe that those 2 factors will allow us to have higher investments and higher CapEx, combined with the readiness to pay out dividends. I'd like to draw your attention to the fact that our financial gearing is very low. And in terms of our financing sources, we are analyzing a number of various sources in terms, for instance, of the issue of bonds or bank loans. However, the concrete and actual decisions will be taking as needed based on in-depth analysis and also based on the interests of the company.

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Iwona Waksmundzka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Executive Director of Strategic & IR [23]

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A couple of questions from our webcast viewers. One of the questions concerns our investments in sports sponsorship. You have just signed an agreement with Alfa Romeo Racing. Are you continuing -- are you planning to continue any more projects in terms of sports sponsorship?

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [24]

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Yes, our involvement in Formula One is a long-term project. This is a great platform for communication for a company such as ours because we sell our products at around 100 markets around the world. This is the second and most popular sports next to NBA around the world. So our brand recognition will be enormous. In terms of our cooperation last year in Formula One, the media equivalent in terms of the value, we estimated it at around PLN 110 million, which is a lot. This year, we actually did sign a new contract. We became a titular partner, which means that the team's name is Alfa Romeo Racing ORLEN, which is a major step for us because our exposure and the recognition of our brand is much better. We also operate in our neighboring countries such as the Czech Republic or Lithuania. We would like to operate as ORLEN in terms of as rebranding or co-branding. We'd like to strengthen the value of our brand, and the recognition of our brand in Formula One will definitely help us. And it will help us in terms of the rebranding projects.

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Unidentified Company Representative, [25]

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The editor of (inaudible) wants to ask another question, so we'll allow him to.

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Unidentified Participant, [26]

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I have 2 questions concerning the power segment. One of them concerns the offshore project. Could you please tell us how many partners are you negotiating with at this point?

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [27]

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No, we cannot.

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Unidentified Participant, [28]

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But the other question concerns Ostroleka and the Ostroleka project. Should we expect a decision that this power plant will be continuing after the takeover of -- acquisition of Energa because there have a number of conflicting or contradictory announcements by ORLEN. And concerning the fact whether or not ORLEN is interested in coal as a source of power. So please tell us if the decision will be taken before the acquisition of Energa or not.

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [29]

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Well, if we became the -- if we become the owner of Energa, we will analyze all the investments of Energa and we will definitely take final decisions, specific decisions. At this point, it is very difficult for me to comment on anybody's statements or anybody's announcements such as the minister's announcements.

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Iwona Waksmundzka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Executive Director of Strategic & IR [30]

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And we cannot add anything to it.

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Unidentified Participant, [31]

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I have a question on offshore, a number of partners that we're discussing with or negotiating with. Is it a shorter list of 15? Is it still 15 partners? Is there a shortlist? Is 15 the shortlist?

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [32]

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No, I cannot give you any more details, I'm sorry.

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Unidentified Company Representative, [33]

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Mr. Sawicki representing BiznesAlert.

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Bartlomiej Sawicki;BiznesAlert;Deputy Editor-in-Chief, [34]

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I only have one question in terms of offshore as well. It was sent to the project of the act supporting the Polish wind power projects, were -- was sent to -- for public consultations. And we have a number of days where there was quite some time to have our comments. Do you have any comments on that?

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [35]

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Well, we are happy. We're just happy that there is such a project and that the public consultations are there. We have a number of comments. Those comments will be minor comments, no major comments from our part. But the idea is in line, in accordance with the way we operate.

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Unidentified Company Representative, [36]

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I will allow you to have 2 more questions, and I will invite you over after the meeting to have more questions to our executives.

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Unidentified Participant, [37]

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(inaudible). I have a number of questions of -- on retail. In terms of the acquisition for RUCH, is this project progressing? Is it -- has it been frozen? We do not know what's going on.

Secondly, I have not heard any data on the acquisition of LOTOS. How many service stations will needed to be closed by PKN ORLEN and as part of the acquisition of LOTOS? Another question concerns the sales of nonfuel offering. What does look in terms of its dynamics? And also, what is the effect of the inflation rate on it?

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [38]

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Well, first question concerning RUCH, we are waiting for the consent of the European Commission. We applied to the European Commission to issue the decision in terms of business concentration, and we keep our fingers crossed that the European Commission will give the consent. The European Commission had a number of -- numerous questions to us, and that we do expect that the Polish Consumer and Competition Protection Authority will receive the decision soon. When we have the last -- in terms of your question concerning LOTOS, right now, we're discussing still with the European Commission. And when the final decision on the measures will -- is issued, we'll be able to answer your questions on it.

And a very interesting question on the nonfuel offering that you asked. The share of our nonfuel offering in our sales on service stations is 28%, but it's been growing by the year. The nonfuel business is a developing business. It's a growing business. And in terms of the margin that we delivered last year, I would like to give you a concrete amount. In Poland, the margin, the nonfuel margin, went up by PLN 168 million year-on-year, so we're talking a 2-digit increase. So this shows that our concept in terms of the growth and development of that nonfuel offering is -- actually bears fruit and is effective.

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Unidentified Company Representative, [39]

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Last question. Mr. (inaudible), Polish Press Agency.

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Unidentified Participant, [40]

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My question concerns the strategy of PKN ORLEN. Are you updating this strategy? Are you working on it? What is the period of the strategy -- of the new strategy? And maybe a number of bullet points in terms of what it will include?

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Patrycja Klarecka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Member of Management Board & Chief Sales Officer [41]

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Yes, we are working on the strategy, on the update of the strategy, and the next time horizon is planned for 2022. We want to extend the horizon to -- for the next update, we want to extend the horizon by -- up to 2030 because our business is a long-term business. And in terms of the bullet points or the main highlights, well, development of our power segment, development of our retail offering, new fuels, hydrogen-based fuels, EV, electric vehicles, new regulations, all these bullet points, so to speak, will be included in the new update in the document. And the document will be probably released to you by the end of the year.

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Unidentified Company Representative, [42]

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Thank you very much. Thank you for all your questions. And Mrs. Iwona Waksmundzka will now close the session.

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Iwona Waksmundzka, Polski Koncern Naftowy ORLEN Spólka Akcyjna - Executive Director of Strategic & IR [43]

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Thank you very much. Thank you for your presence, for your attention, and thank you to all the executives for the presentation. And now you are warmly invited to discuss more issues and the problems with us after this session. Thank you very much. Goodbye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]