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Edited Transcript of SRS.MI earnings conference call or presentation 30-Jul-19 2:30pm GMT

Q2 2019 Saras SpA Earnings Call

Sardinia Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Saras SpA earnings conference call or presentation Tuesday, July 30, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dario Scaffardi

Saras S.p.A. - CEO, GM & Director

* Francesca Pezzoli

Saras S.p.A. - Head of Investor & Media Relations

* Franco Balsamo

Saras S.p.A. - CFO

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Conference Call Participants

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* Alessandro Pozzi

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Alexander Jones

BofA Merrill Lynch, Research Division - Analyst

* Henri Jerome Dieudonne Marie Patricot

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Joshua Eliot Dweck Stone

Barclays Bank PLC, Research Division - Analyst

* Massimo Bonisoli

Equita SIM S.p.A., Research Division - Analyst

* Monika Rajoria

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Saras' Second Quarter and First Half 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Francesca Pezzoli, Head of Investor and Media Relations of Saras. Please go ahead, madam.

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Francesca Pezzoli, Saras S.p.A. - Head of Investor & Media Relations [2]

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Yes. Good afternoon, ladies and gentlemen, and thank you for joining us today for this Conference Call on Saras First Half and Second Quarter 2019 Results. All the documents, including the press release, the analyst presentation and the half-year financial report are available on our website that is in the home page and in the section dedicated to investor's financial results.

Our agenda today will be the usual one. Mr. Dario Scaffardi, Chief Executive Officer and General Manager of the Saras Group, will start with the highlights of the period, followed by a detailed review of the results of each business segment. Afterwards, Mr. Franco Balsamo, Chief Financial Officer, will discuss the few financial figures and then back to Mr. Scaffardi for the outlook.

And finally, we will have the Q&A session. At this time, I would like to hand over to Dario.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [3]

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Thank you, Francesca, and thank you, ladies and gentlemen, for joining us today in our conference call. I must say that the market in this first 6 months of the year has been extremely challenging and volatile. The issues continue to be more or less the same. There is a tight supply of heavy-sour grades driven mainly by geopolitical factors as was mentioned before in our conferences mainly regarding Iran and Venezuela and the OPEC cuts, and there doesn't seem to be any change in dense situation. So the results, the refinery results on the benchmark have been affected by this scenario and particularly with extreme volatility on the prices of products. I remember that we started the year with a negative crack on gasoline, but we've moved now to a much more favorable territory. Having said this, the results of this quarter are quite good given the overall scenario. The Q2 comparable group EBITDA was EUR 76.9 million, broadly in line to the same level to that of the last year mainly due to the refining and marketing results, which have posted some excellent results given the environment.

Notwithstanding a very low cracks on the gasoline and the diesel, we've been able to optimize the refinery fully in the market, the activities, and this has been able to compensate the very unfavorable scenario. The comparable group net result was EUR 4.2 million versus the EUR 6.3 million of the same quarter of last year.

During the first quarter of this year, we had a very large technical turnaround on refinery that was completed perfectly. And in the second quarter, the refinery has performed in excellent manner. So this has by large offset the negative scenario.

If we look at the situation on the crack spreads, the gasoline crack remains disappointing compared to the historical average. But I think it's worthwhile to point out that comparing cracks among years is risky because the value of the crack is dependent on the absolute value of the underlying product. So crack at $60 is very different from a crack at $120. So making a meaningful comparisons by -- between the various years is tricky.

If we look at the diesel, I would say that the diesel in the first 6 months has been disappointing. Everybody was expecting a little bit more strength on the cracks due to the impending IMO. This strength is starting to come into the market now. So towards the end of June, we saw a significant rise in the value of a low sulfur fuel oil, decrease in the value of high sulfur fuel oil and an increase in the cracks of the diesel.

On this slide, which is a little bit dense and that contains a lot of information. Basically, we try to give, first of all, the ratios of the product, which are a little bit more meaningful in terms of as a metric in order to gauge the level of refining margins. So as we can see, the -- particularly, the green line, which is the unleaded, has gone through almost a negative value at the beginning of the year, and now it's back to more or less historical ranges.

Diesel is not so bad, although it's slightly disappointing, but improving. The significant factor here, I would say is, first of all, the relative strength of Brent and the relative strength of low sulfur fuel oil. This is all changing due to the IMO regulation, which is starting to make its effects out. One of the big -- bigger event is, of course, the premium discounts of the various crudes, which due to the reasons that we mentioned before, have been unreasonably strong. If I can give a metric, Arab Light, for instance, in 2016 was trading at a discount of minus $4, not trading, it was the official selling price. And today, in 2019, this number is minus $1. So -- and this increase of about $3, roughly speaking, is constant for all the major grades, some grades even more than $3. And this is one of the headwinds of the refining sector, of course.

If we look at the Saras' margins, here I think the picture is a little bit brighter. In the second quarter, the EMC benchmark has had a very, very low level to $0.2, not the lowest in history, but certainly among the lowest levels. While in the first quarter, it was $1.1. In the first quarter, we had a strong maintenance, so the premium that we've added to this was only $1.4. But we were able to add $3.1 per barrel in the second quarter, notwithstanding a very unfavorable scenario. And as I mentioned before, this was mainly due to the stellar performance of the refinery and the marketing sector combined and our supply chain management. I remember that our whole activities are integrated one with the other.

If we go through the sectors, I think I already mentioned the highlights before on the refining sector. Here you can see that notwithstanding a change from one quarter or the other. I mean from Q2 of 2018, the benchmark was $2.1, if I remember. And in the same quarter of 2019, it was only $0.1. So a $2 difference. The difference in EBITDA in the refining sector was only EUR 4 million. So I think this is mainly due to the brilliant performance of the refinery to the excellent marketing margin in terms of trading to the effect of our cost-cutting programs. And lastly, but not least, all the digital programs that are just starting to kick in. So we are starting to feel an improvement in -- a definite improvement in the performance.

If we look at the type of crudes, this reflects basically the markets. I would say that the highlight here, if we look at the full 6 months, is that our slate is 30.6 compared to 33.7 of last year. So almost 1 full API point higher. And this is due exclusively to commercial reasons. There is no technical reason behind this. There have been more opportunities. What I was saying before was that the average crudes are significantly more expensive. The more opportunity crudes, I would say, are more in the Light sector. So between the light sweet and the extra ones, there are more opportunities. So we have increased runs of light crudes exclusively for economic reasons and reduced the heavy sour, of course because the price scenario has been unfavorable. This is a reason why we have lightened our API slate, which I would say, is consistent basically what is happening in the marketplace.

And you can see this also on the products, where we have tried to maximize the middle distillate slate and minimize the gasoline slate, of course. Fuel has been low mainly due to maintenance to one of our toping units and vacuum units that is a big producer of fuel oil. On the other products, there are no significant changes.

If we look at the cost structure, I would say that you will start seeing some of the effects that I was saying before. Costs were EUR 124 million compared to EUR 143 million of the previous 6 months for the reasons that I was mentioning before. In terms of variable costs, no big difference, but the variable costs are retaken into account in our refining margin, which is net of variable costs.

If we look at Power, the electricity -- in the second quarter of 2018, we've had a large maintenance on the gasifier, particularly 2 of the gasifier combined cycle turbines were under maintenance. And one of the gas washing trains -- the gas washing trains are trains which purify the steam gas produced by the gasifiers removing all the pollutants, the sulfur and so forth. One of the 2 lines was in maintenance, so we had to reduce production. So basically, we had about 20% less production of electricity and power compared to the same period of last year. And that is the reason why there is a lower performance in the quarter and all the various linearization effects tends to smoothen out over time these differences. From a cash point of view, there's been less cash generation in this quarter, but maybe Franco can be a little bit more precise on these later on during your questions, also regarding the effect of CO2 hedging derivatives, which I think are overall forward quarter-by-quarter.

And in terms of some very low costs, there is nothing in particular to mention. The marketing side has been very positive. First of all, I would like to remember that on the 24th of July, we had signed the final closing of the sale of our retail network in Spain to Kuwait. It's taken a little bit longer than what we expected, but it's been a very careful process, so there is no pending matters. We're also very happy that all our people or staff have been taken over by Kuwait, who appreciated the way the network was operated.

In Spain, we will concentrate there exclusively on our deposit in Cartagena and on our wholesale marketing activities. So we will have a smaller or that will operate in conjunction with our operations in Italy, which have been moved to Rome, to be closer to the main hub of this activity in Italy.

Also in August, we're going to start with our bunkering activities, which is the sale of marine fuels crew ships. We have received all relevant authorizations from the authorities. And the vessel, which we have chartered, which is a state-of-the-art vessel coming from Denmark, will arrive in the second half of August. And there is a lot of interest from all the major ship owners in our capability of supplying this fuel, which we have already been producing our experimental level.

So marketing. Notwithstanding, we have contracted volumes a bit in Spain because we want to concentrate only on the segments, which have higher margins, and this is reflected in the numbers that have been extremely interesting in the quarter.

If we look at Wind. Wind is -- there is -- not in particular, it's been an average month usually. In the second quarter, it's a little bit windier. But it's been a particularly mild second quarter. We have received -- as I mentioned before, we have started work on our wind farm in the South of Sardinia, where we are building 9 new towers, each of -- 3 megawatts each. So we're adding almost 30 megawatts of power to our wind farm. And we are also going to start a program of reblading of changing the blades of our existing wind farm, which is 48 towers, which will increase not nominal top capacity, but will increase the efficiency of these turbines. So we will be able to produce more in -- during average conditions.

I will pass on to Franco to give a little bit more detail on financial numbers.

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Franco Balsamo, Saras S.p.A. - CFO [4]

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Great. Thanks. And a few comments below the EBIT line. In the second quarter, the group financial income were positive for EUR 7.8 million. As the combination of the interest expenses for EUR 3.2 million, that is in line with the same period of the previous year, and the EUR 10 million positive on other financial income. That is the combination of gains on foreign exchange, hedging for EUR 8 million and EUR 2 million on the other derivatives on commodities. That is the combination of EUR 10 million for realized gain and EUR 10 million on unrealized.

Skipping at the next page in order to comment the adjustment in the income statement to the -- between reported and comparable. We have adjusted gains on inventories for EUR 34 million negative as effects of the reevaluation of products. And the realized and unrealized hedging derivatives and net Forex and CO2 derivatives are counted roughly EUR 24 million, and the impact on CO2 derivatives is about EUR 19 million. This accounts at the end in term of reported net result for EUR 28 million and comparable adjusted net result positive for EUR 2 million.

In term of cash flow, the operations generated in the 6 months EUR 31 million of net cash. We have -- we had CapEx for EUR 204 million and EUR 9 million of net interest expenses. We paid EUR 75 million of dividend. We also had a positive contribution of working capital for EUR 185 million. This is the combination of operating working capital that generated EUR 130 million of liquidity. And one-off effect is represented by the increase of duties on VAT for EUR 70 million that will be released in the third quarter, other minor effect. So the net financial position is -- at the end of the period, is positive for EUR 77 million that becomes EUR 28 million, taking in consideration the importance of the introduction of the IFRS 16 for EUR 49 million. For the year-end, taking in consideration the positive effect driven by the new margin and the other for consequences, we foresee to close this year with the net financial position positive in line with the end of the year.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [5]

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So thank you, Franco. If you look at the outlook, we expect a significantly stronger market in the second part of the year due to the Marpol regulation, the famous IMO regulation, which is starting to make it felt on the market. We see strong demand for diesel. We see very strong demand for ultra-low sulfur fuel oil. So I think we will start seeing a change in the market. What the effects are going to be on the prices of crudes? I think still has to be determined because textbook theory would say that decrease in the price of heavy sulfur fuel oil, this should be reflected in the value of a high sulfur crudes. This will not necessarily be the case that you discussed here at the moment of these type of crudes due to political reasons. So this is going to be, I think, the ponderable and interesting part. As a company, we are fully equipped to take advantage of the variety of situations. So we will maintain our attitude of wait and see and try to take advantage of wherever opportunities may arise. We maintain our guidance of premium over the benchmark within $2.4 of -- and $2.8 per barrel. And that the maintenance, I remember that the EMC at the moment is the range of about $3. On the Power side, we have completed the main activity in the first part of the years. So we expect the second part to be fully in line. Marketing has been extremely promising. And I would say that our organization is starting to bear fruit. So quite an optimistic outlook. There is no major maintenance of the second part of the year. It will be a little bit of maintenance on the petrochemical plant in -- towards the end of the year.

So thank you very much for being with us today, and we are ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Alex Jones with Bank of America Merrill Lynch.

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Alexander Jones, BofA Merrill Lynch, Research Division - Analyst [2]

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Three questions, if I may. The first two on guidance. On your CapEx guidance, the fourth quarter results, you guided to around EUR 280 million. For the full year and year-to-date, it looks just over EUR 200 million have been spent. Can you give us an update on the full year outlook? And why that might have changed? And then similarly for the Power EBITDA guidance that was at EUR 200 million. Is that reconfirmed for the full year? Or you're making any revisions there? And finally, just on IMO compliant fuels, how is the testing going of the blend you'll be offering to marine customers? Have you done any tests with customers? So far, most of the feedback being like.

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Franco Balsamo, Saras S.p.A. - CFO [3]

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Okay. Thank you for the question. In terms of guidelines for CapEx as year ended, we foresee to have CapEx for EUR 30 million higher than the budget. This delta is in relation to some accelerations we had in these years as not a matters of cost. So purely in anticipation of cash that we can't forecast in the region about EUR 30 million. As far as your question on the -- our expectations in term of our EBITDA. At the end of the year, as we have seen, the level of the gas price that is taking into consideration for the CIP 6 tariff, now are a lower. So we have the negative effect on the tariff. And on the other side, we can take benefit driven by the lower electricity cost. We can foresee that the combinations of the 2 effects could be in the region about EUR 20 million.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [4]

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Alex, on the IMO question. Yes, we have made extensive testing of our product, which has been tested in our laboratories and also in the laboratories of some of the world's major engine producers and it's been found fully compliant. The issue of compatibility and between fuels or something that at the moment has not yet been resolved, I mean worldwide basis, of course. But we are confident that our product is fully responded. We have sold 4 cargoes. We have not sold any small cargoes because we didn't have yet the vessel to be able to do this and this is going to start -- let's say, our retail activity is going to start in -- by the end of August, hopefully. And the prices going around for this fuel at the moment are being talked and something in the range of $30 to $50 above. The quotation of the most sulfur fuel oil, which is 1% fuel. But I would say that at the moment, the market is extremely variable, so volatile. So it's difficult to pinpoint a value for the time being.

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Operator [5]

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Our next question is from Alessandra Pozzi with Mediobanca.

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Alessandro Pozzi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [6]

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Two questions, the first one is on the premium to the EMC, which has been quite stronger in Q2. But I was wondering whether there's more of a function of EMC being too low because of the fuel oil cuts and new oil as well. And therefore -- I mean if you look at Q3, I mean can we add the -- there's almost $4 per barrel EMC to the premium of a $3 per barrel for Q3? So if you can give us maybe your thoughts on that as well. And on the second question fuel oil. I was just wondering -- can you give us an update on whether you're going to be planning to be fully compliant in terms of a fuel oil before year-end? And how is the pricing that you just mentioned, first, to your initial guidance of -- I think it was $6 to $8 per barrel crack for the low sulfur fuel oil?

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [7]

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Yes. Thank you, Alessandro for your questions. Well, first of all, as we mentioned before, the premium to the EMC is a function in itself of the absolute values of the products and differentials, so it is influenced by the absolute prices. So what you pointed out that EMC was particularly low due to the fuel oil, is absolutely correct. It's not always easy to distinguish the 2 factors. Of course, the thing that interests us mostly is sum of the 2. So as long as the sum of the 2 is sufficiently strong, we are happy. But I would say that trying to average out the various effects, I would say that for the third quarter, we should be able to achieve something that is close to the $3 on the EMC. Although, we maintained the guidance between $2.4 and $2.8 because of the variability of the premium on the benchmark itself.

In terms of -- instead of the fuel oil, yes, our fuel oil, the ones that we will produce is fully compliant with the IMO regulations, so it's going to be 0.5 sulfur. The IMO regulations are well known, so that is not an issue. The guidance that I gave before, I hope there will be not a confusion between dollars per ton and dollars per barrel. When I say $30 to $50, I was meaning $30 to $50 per ton. Fuel oil in the Mediterranean is traded on a metric ton basis. So today, we are talking that the value of low sulfur fuel oil is $420. So on top of that, it's $30 to $50. If you look at it on a barrel basis, that is roughly $6, $7 per barrel. So the numbers are $6 to $8 per barrel. So the numbers are more or less consistent.

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Operator [8]

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Our next question is from Joshua Stone with Barclays.

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Joshua Eliot Dweck Stone, Barclays Bank PLC, Research Division - Analyst [9]

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Two questions, please. First, just following up on the premium margin, you've been able to achieve and what you think you'll be able to achieve. Would you say you're seeing more opportunities on the crude sides or on the product side? Or is it just simply a combination? Maybe any other comments that will be helpful. And then second, I was hoping to get an update on your thoughts on Iran, just in light of payment mechanism we're having in stacks and whether do you think that might be a mechanism to a lot greater supply sale crudes? And would there be something fast be willing to participate in? Or the risk of U.S. sanctions is still too large?

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [10]

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Well, on the premium -- thank you. I think it's a very good question. Today, I would say that there's more optionality on the products market than on the crude market just because the crude market has become so tight. Having removed from the market so many important actors makes the market less liquid. So I would say that, by and large, there are less opportunities. Some of the opportunities lie within those sulfur crudes, particularly those that have higher TARs, higher acidity index. So there is maybe a little bit more opportunity on the sweet side than on the sour side today. On the sour side, there is not that -- I'm not sure though we're seeing some signs of improvement in the last month. So some grades are becoming a little bit more available. Coming to your question on Iran, my personal opinion is that this impacts thing is not going to work. But this is just my very personal opinion. I mean I doubt that it can be made to work. I think that the position of the U.S. is just so strong regarding Iran that no company would be willing to defy the U.S. sanction. So the banking community, insurance community would not support anything like that. So at the time being, I don't see anyway how given the current environment and if things change, of course, that we'd be very happy and very willing to do anything that is completely compliant with the legal requirements and, let's say, the commercial financial requirements, of course. Because, legally, there's nothing that prevents an Italian company from buying Iranian crude. Practically, it's impossible.

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Operator [11]

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Our next question is from Henri Patricot with UBS.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [12]

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I have one question on the refining side and one on the cash flows. The first one, I was wondering if you can give us an update on your point of views on how you see IMO 2020 playing out, especially given the discussions you've had with shipping companies recently around your new fuel oil products? How you see things playing out between gasoil and very low sulfur fuel oil? I know you would expect margins to develop over the next few months. And then, secondly, on the cash flows, can you give us a sense of how you see the working capital movements over the rest of the year? That's quite a large positive in the second quarter. So should we expect this to reverse in the later part of the year?

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Franco Balsamo, Saras S.p.A. - CFO [13]

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To start with the last question related to the cash flow. As I tried to explain before, we just don't see this positive effect of working capital not to normalize. So part of it would be recovered in the second part of the year, mainly for the VAT. That there would be -- need to be repaid in the third quarter and the normalization of the operating working capital. So we do expect that part of that positive amount will be sort of soft. Having said that, all the remaining parts of the cash flow will be fully utilized in order to cover the remaining part of the CapEx and to pay the tax at the end of the year. And for this reason, we foresee a still positive net financial position at the end of the year.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [14]

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Henri, regarding the ultra low sulfur fuel, I think, there might be just a little bit of confusion on the prices because very often in the market there's a little bit of confusion regarding prices in tons and prices in barrels. In the Mediterranean market, I would say the European market, oil products are traded on a dollar per ton basis. So if you just look at today's number, diesel is traded at around $580 per ton roughly, and 1% fuel oil is $420 per ton roughly. The ultra low sulfur diesel I said before will be sold at something on a wholesale basis or a cargo basis at $30 to $50 above low sulfur fuel. So that would put it today at something like $450 to $470, still at least over $100 below the price of diesel. If you look at that in terms of dollars per barrel, it gives a little bit of a different picture, and you might think that the 2 products are much closer to each other because today in terms of cracks we're talking a $15 crack on diesel and a $4 crack on the low sulfur. If you add $6 to that, it seems that the number becomes very close to diesel. In reality, when you count the cash, it's quite different. So I would give a word of caution on that. On top of that, of course, so you can look out a little bit in numbers, we hope not this year but let's say that once we are on a steady production mode, so 2020, to be able to produce about half a million -- initially half a million tons, and we hope to be able to ramp that up over time if the market is favorable. On top of that, we will have a marketing margin, which is the benefit arising from the sale into ship of the product, which adds a significant further margin to this.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [15]

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I guess probably just circling your comment you said much cheaper pricing for the compliant fuel oil, makes it very attractive for the shipping companies and you expect very good uptake for the product, even in the early stages of IMO 2020?

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [16]

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Sorry, Henri. I didn't catch the first words that you said. Sorry.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [17]

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Yes. Just I assumed you did now -- just get the feedback you're getting from the shipping companies and the sense that I got from your comments is that there is very strong interest given the much cheaper price versus diesel gasoil.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [18]

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Well, there is a strong interest because, of course, it's still significantly cheaper than diesel. So frankly, for anybody who has a large two-stroke diesel to run, to run diesel would be, I think, really a last resource. So everybody's going to try to find ultra low sulfur, which is still going to be cheaper by far. How much cheaper? We hope that it's going to be very expensive, but this is our point of view, of course. So yes, there is strong interest. I would say that the strong interest is also derived from the fact that there is a new player on the market. So Saras is a big player. It's positioned in the center of the Mediterranean, which has on its back a huge refinery, which is able to produce a variety of different fuels. There are shipowners who need more viscous, less viscous fuel oil. So having a refinery is a big opportunity, I guess. And also, there is, in any case, a significant market for marine diesel, marine gasoil, which is basically the same as seeking oil more or less. So all the smaller ships use this type of fuel. At the moment, they are not able to refuel in Cagliari. They will be able to do so once our lightering vessel is going to be operational next week. So there is a lot of interest, I would say, due more mainly to commercial reason for being the new and forward player in the bunkering scenario.

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Operator [19]

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Our next question is from Massimo Bonisoli with Equita.

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Massimo Bonisoli, Equita SIM S.p.A., Research Division - Analyst [20]

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Two clarifications left, please. The first one, the drivers of the good performance of the refining division in second quarter. Compared to second quarter last year, you mentioned a contribution from production execution for about EUR 25 million and EUR 10 million from the supply chain and trading. The scenario should be negative for about EUR 37 million if my calculation is correct. So there are EUR 2 million left for the cost saving program? Does this calculation makes sense or should we consider other items in the bridge? And the second on the guidance on the net financial position. Excluding the disposal of the marketing assets in Spain, would it still be positive?

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Franco Balsamo, Saras S.p.A. - CFO [21]

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As explained before, it's not taken in considerations the disposal of Spain because it was talking about the operational cash flow. Of course, the disposal of Spain is about EUR 35 million, of which EUR 30 million is already a cash in hand. So this part of liquidity will be kept into the net financial position.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [22]

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Massimo, I think, you have also another question regarding the drivers.

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Francesca Pezzoli, Saras S.p.A. - Head of Investor & Media Relations [23]

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Yes. The question was about the impact on scenario. According to our estimates, the impact on scenario is slightly higher because we have included also the effects of the more expensive heavy sour crudes. So according to our estimates, it is in the region of EUR 60 million. And then there are lower fixed costs. So the final calculation is this one. But then if you want, we can follow-up. I can give you all the details.

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Operator [24]

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(Operator Instructions) Our next question comes from Nick Linnane with [Feston].

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Unidentified Analyst, [25]

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Can you give us some color on how you're producing the 0.5% compliant fuel? Whether you're doing it largely as straight run product from very low sulfur crude or whether you're blending in VGO or kind of how roughly you're doing it, if you can talk to that?

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [26]

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Well, we don't disclose too much detail on these sort of things. But let's say that mainly we're talking vacuum bottoms coming from specific crudes, which are blended with certain streams that come mainly from the FCC units. So we're talking FCC bottoms and vacuum bottoms as -- and then a little bit of life cycle oil added on top. So this is the recipe for -- to make some good ultra low sulfur fuel oil.

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Unidentified Analyst, [27]

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And roughly can you also talk a little in terms of what sort of the opportunity cost products are? So by producing some of this fuel, what effectively are you sacrificing?

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [28]

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Well, this is -- it's a good question. Thank you. I think that Saras is ideally placed in this respect because we're now sacrificing almost anything. Basically, we have a pool of fluxant which is very low on sulfur, which before this was sold as a cutter stock, basically, at a level which was below what is the value today of ultra low sulfur fuel oil. So already this is a benefit for us. At the same time, we have the opportunity basically of deciding if we want to run the incremental barrel as a sour barrel or as a sweet barrel. And given the opportunity on this type of product, we, of course, switch to sweet barrel. So we are increasing rounds of crude like CPC Blend, like Algerian crudes, like a variety of other small niche crudes of sweet origin from around the world. And this is basically -- I mean the way we produce this product with not having had to invest very much apart from maybe running more low sulfur crude than high sulfur crude, which at the moment is really an opportunity instead of a minus. So all in all, this whole situation, as we've mentioned frequently, works brilliantly for our company and for the way our refinery is configured.

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Unidentified Analyst, [29]

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Okay. And do you have any sense for kind of how much volume the industry can supply in that way because in a sense the price of this product should reflect its opportunity cost for the industry? If there's just a few people who can kind of make it with low opportunity cost. Some other people have to make with high opportunity cost, then it should have a high price. If large numbers of people can make it the way you've just described, then, logically, the price is probably going to be lower. Do you have any view on that?

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [30]

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Well, first of all, I mean there is a little extensive research done by IMO and, of course, by the refining industry that has a certain -- that the industry as a whole is able to prudence this product. Otherwise, they would have not implemented it on the 1st of January if we expect to be a block. The value of the price is going to be dependent -- I mean the oil markets are moved by very, very small increments. So a couple of percentage points more or less of a product is what's going to make the price. It's the incremental barrel that defines the price of the whole barrel. So I would say that this, at the moment, is extremely difficult, and nobody is going to be able to ascertain this in a definite manner. Otherwise, we would be able to predict in a very precise manner the way prices go, which is unfortunately or fortunately not the case. So just a couple of hundred thousand barrels a day more or less of a certain product will move the price.

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Unidentified Analyst, [31]

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Yes. Presumably that's our job, but as you say it's difficult.

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Operator [32]

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(Operator Instructions) Our next question comes from Monika Rajoria with Societe Generale.

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Monika Rajoria, Societe Generale Cross Asset Research - Equity Analyst [33]

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It's kind of a follow-up from the last one. I wish to understand if there is the technical capability to produce only the low sulfur fuel oil. And you can actually do away with the high sulfur one. Is that possible at Saras?

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [34]

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Yes. Monika, thank you for the question. Yes, definitely that's possible. It's totally dependent on the way your refinery is configured and on the type of crudes that you use. So it's a combination of these 2 factors. If you have a simple refinery, you would need to use very low sulfur crude and you would be able to make this ultra low sulfur fuel oil, just to give an example. I mean if you assume that 30% of the yield of an average crude on an average refinery is fuel oil, the crude that you are starting from would have to be something like 0.2% sulfur in order to obtain 0.5%, which you obtain as the straight run fuel oil coming from distillation process plus the blending stock that you put into it. So let's say that a simple refinery would be more or less able to produce it assuming it used very low sulfur crude, crudes like Brent, like these type of crudes, certain Libyan crudes that have a very low sulfur content. If you have crudes with the higher sulfur content, you need an increasingly more sophisticated refinery that is able to remove the sulfur along the way in some other manner. But basically to produce this fuel, you basically need low sulfur crudes because the way to destroy high sulfur crudes is through an entirely different process, which is not taking away the sulfur from the fuel oil, but is transforming the fuel oil into light product. So it's an entirely different process. I hope -- it's slightly technical, so I hope I haven't confused you more. But if you want, we can have a session with one of our engineers who will be able to explain much better than me.

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Monika Rajoria, Societe Generale Cross Asset Research - Equity Analyst [35]

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Okay. So the reason why I ask this is because I am puzzled why you did not increase your premium guidance. Because, to me, it feels that there could be higher premium just because of this fact that you can produce only the low sulfur fuel oil.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [36]

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Well, I take your point, which is a very valid point. And we do hope that the premium can be much higher. But there are many, many factors playing into this. So you have the price of the product. You have to look at the value of diesel gasoil pool. You have to look at the absolute and the relative values of crudes. So you're talking about the base value like Brent but then, of course, the various other crudes that you're buying, you're buying at plus $1 or $2 or less $1 or $2 makes a world of a difference for somebody like us and is reflected strongly in the premium on the benchmark. So it's a very complex puzzle with many, many different moving parts, sometimes moving in different direction. So we tend to be a little bit more prudent. But I am hopeful that the overall situation is extremely encouraging. And I hope that the scenario that you point out will develop.

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Operator [37]

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(Operator Instructions) Ladies and gentlemen, there are no more questions registered at this time.

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Francesca Pezzoli, Saras S.p.A. - Head of Investor & Media Relations [38]

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Thank you very much for being with us this afternoon. And for any follow-up questions, we are available. Thank you. Bye-bye.

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Dario Scaffardi, Saras S.p.A. - CEO, GM & Director [39]

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Thank you, and enjoy your rest of your summer.

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Franco Balsamo, Saras S.p.A. - CFO [40]

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Bye.

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Operator [41]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.