HELLENiQ ENERGY Holdings SA
ATHEX:ELPE
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Ladies and gentlemen, thank you for standing by. I'm Gelliga, the Chorus Call operator. Welcome, and thank you for joining the HELLENIC PETROLEUM conference call to present and discuss the first quarter 2018 financial results with the management of the company. [Operator Instructions] And the conference is being recorded. A presentation will be followed by a question-and-answer session [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Andreas Shiamishis, Deputy CEO and CFO; and Mr. Vasilis Tsaitas, Investor Relations Officer. Gentlemen, you may proceed.
Thank you very much. Good afternoon, ladies and gentlemen. Thank you for joining this call. We are here with Vasilis Tsaitas, with Ioannis Psychogios and George Alexopoulos aiming to try and give you a full picture of the first quarter results and performance. And without further ado, I will go through this presentation.
Starting off with the key highlights on Page 2. Our performance for the quarter has been a strong one, not as strong as last year as expected because of the lower benchmark margins, and of course, because of a much weaker USD versus the euro, which affects the gross margin, which means that our EBITDA at EUR 149 million is roughly 35% down on last year and the adjusted net income of EUR 62 million is down by 51% versus last year's first quarter.
On production and exports, we had record numbers. We have the higher exports on record, it's 15% up on last year, which is driven by mainly the utilization of the refineries and the fact that domestic market, especially heating gasoil, has been lower due to weather conditions, of course, in 2018. That's also in terms of comparing with last year, in the specialties market, which is effectively the power generation and the Army fuel is the fact that in the first quarter of 2017 we had abnormal situation with respect to power supplies, which meant that we had increased power generation coming from diesel units and also from natural gas-fired units, which we don't have this quarter.
On the positive side, we have auto fuels up by about 4% as you will see later on. This is driven both by gasoline and also diesel. And of course, it is something which is quite important given that these are the highest premium products.
In terms of the refining performance as in Refining, Supply & Trading, we have a consistent what we call over performance or higher than the benchmark margin performance of just under $6 per barrel, which is consistent with the last few quarters in terms of over performance in the units.
On a reported basis, our net income at EUR 74 million is, again, down year-on-year, as expected, but still a very positive number. The reported results are clearly affected by the crude price evolution. The increase during the first quarter, which continued in the months up until now, has generated a positive contribution to the reported results. We estimate -- these are our estimated in there, effectively subject to the quantity sold, about EUR 20 million of positive inventory effects on the reported results.
A good thing is the continued reduction of financial expenses. We are reporting about 17% reduction year-on-year and that is a result of both lower interest rates as well as lower debt.
On DEPA, as I mentioned earlier, we had the abnormality in 2017 of the first quarter and in 2018 we have a slightly more normal conditions with respect to power generation, and of course, the warm weather, which meant lower natural gas demand for retailers.
On cash and balance sheet, we have on operating cash flow, which is a definition that we explained, effectively the adjusted EBITDA minus CapEx, what we'll need on a cash basis to run the business, at EUR 122 million, a strong number. It continues to be strong, it has been strong for the last few years. And net debt at just under EUR 2 billion as a result of seasonality on the working capital and an increase in terms of receivables and stocks.
Another positive thing for the quarter is that we have refinanced all of the 2018 facilities. We have improved maturity profiles for debt. We have reduced the cost of debt by roughly 2 percentage points versus last year. And this will be more visible as we move into the second and the third quarters of 2018.
Turning on to Page 3. We have some key developments, which relate to the sales process of HELLENIC PETROLEUM. As announced here today, we had the expression of interest by 5 consortia, 5 interested parties. Very early in the day to be able to comment on that, that's why I'm making this comment upfront. We don't have anything more than has been announced by TAIPED and our shareholders. However, what we do have and we have announced is that the agreement for the sale of 66% of DESFA was also approved by the HELLENIC PETROLEUM EGM, and as a result of that, we expect that this transaction is moving forward probably with a completion of the requirements within 2018 and a closing of the transaction, if everything goes well, in the first quarter of 2019.
Staying on the DEPA and the natural gas group. We have DEPA announcing the sale of a 51% participation in the EPA Thessaloniki-Thessaly to Eni. Eni was a shareholder of 49% and it's controlling the retail gas company there. The transaction was completed with a consideration of EUR 57 million. We expect the closing for this transaction to take place within 2018 and further transactions in terms of restructuring DEPA Group post the DESFA sale completion in progress.
Finally, we have the upstream projects, which are in progress, and we have submitted offers for 2 offshore areas, one with Total and ExxonMobil and the other one with Repsol. The assessment, the first -- the preliminary assessment is actually taking place quite soon. It has actually started, and we expect this to be completed in the next few weeks.
Moving on to Page 4 with the financials. I will not go through the page with all the numbers. What is new to this format is that we have added a last 12 months column, which we will be updating on a quarterly basis. This gives a slightly more recent KPI, if you will, of the performance of the company with the environment prevailing over the last 4 quarters. So as you can see, the performance of the first quarter of 2018, the EUR 149 million, is effectively substituting in the 12 months the EUR 229 million, which was 2017 first quarter results. So the full year performance, if you will, if everything was frozen at this point in time, would be around EUR 740 million of adjusted EBITDA, which, again, is a result of the weaker refining markers that we are experiencing. You can see the contribution of associates being lower. As I mentioned, we have -- the primary driver is the DEPA Group results, which are weaker this year because of the weather and the abnormally high nat gas power supply in 2017, and that's actually the same for Elpedison as well.
Financing costs, as I mentioned, 17% down, and we have an adjusted net income of EUR 62 million and a reported net income of EUR 74 million in 2018 Q1.
If we move to Page 6, on the environment. The recent developments on crude oil price have moved the, if you will, the indicator, the index that we are following, the ICE Brent price quite higher in the last few months. We see that since the third quarter of '17, we have experienced an increase in the average, and these are all averages, average price of crude oil. Q2 is expected to be even higher than Q1, which, of course, drives improved quarterly results compared to adjusted numbers, higher working capital requirements and slightly different economics so there's [indiscernible]variables with higher crude oil prices.
The other factor, which is important is the weakening of the U.S. dollar, which affects pretty much 80% to 90% of the gross margin of the group. Very few sales, I think, probably we're referring to engineering and petchems, which are driven by euro, everything else is driven by the dollar gross margin, which means that a weaker dollar will have a negative impact on the results.
The crude differentials here, you can see we track the Brent-WTI, and of course, the Brent-U code, which is a bit higher for Q1 at $1.7 per barrel.
Moving on to Page 7. We have the margin outlook -- hydrocracking margin outlook. The only positive thing for the quarter relates to the diesel cracks, which have been maintained quite strong. As you know, this is beneficial for the Elefsina refinery, which is reporting even better results, and of course, as a group with a middle distillate yield slate of over 50%, it is something which helps us to perform better than refiners who have a bias to gasoline.
On Page 8, we have the evolution of the domestic market sales. Clearly, the first quarter has been driven by the heating gasoil demand growth by more than 20% -- 22% and the increase in the auto fuels sales, both diesel, which is the main driver, and gasoline. In all honesty, one would have to wait for another quarter or two before making a conclusion on the increase of auto fuels given that the gain of 2017 has a distortion because of the increase in tax, in custom rates in January '17, which meant that some of the sales were moved to 2016. So again, the comparison may not be 100% representative, but clearly the positive sign is there and it's very good news.
On Page 10, we have a summary view of the performance at an EBITDA level -- adjusted EBITDA level. It's quite self-explanatory in that the change from last year's Q1 is almost entirely accounted by the lower benchmark refining margins and the weaker dollar. We have clearly improved performance in the refineries, but still this is not enough to offset the weaker environment.
Page 11, we have the financing in slightly more detail as explained earlier. Gross debt is down by EUR 170 million and the refinancing transaction that we discussed earlier are effectively shown here. We have completed the financing for 3 facilities: one is a EUR 400 million new facility, which effectively replaces the EUR 380 million syndicated facility with significantly better terms; a new $0.25 billion facility, which is a 3-year facility, which will help to manage the asset liability, currency exposure, that we have; and a new line for roughly EUR 300 million, which was put in place a few months ago and that is being used to repay a standby facility of EUR 240 million that we set out in 2016.
So as you can see, we have a very even and improved debt profile, maturity profile. The 2018 is expected to be rolled over for another 18 months. It has been rolled over in the last 3 to 4 years, which means that the maturity profile of the group is looking quite healthy.
Moving on to the individual business units on Page 13. We have the details for the domestic Refining, Supply & Trading. Again, a very good performance in terms of operations, and even in absolute terms, the reported results are very positive. However, we have 16% loss on benchmark margins and 16% loss on the euro-dollar exchange rate. So there is not much we can do to offset these big swings.
In terms of operations. The production of the refineries is at the highest level, almost 4.5 million tons for the quarter. And you can see the composition of crude and feedstock on the bottom of the page and the refineries' yield for the quarter with more than 50%, 51% at the site being middle distillates and almost 80%, 85% being premium products, i.e., gasoline and naphtha.
On the Supply & Trading on the sales part, we have on Page 15 the breakdown between the 3 main channels being the domestic market, the aviation and bunkering, which going forward we're considering splitting into 2 because they are 2 different markets, and of course, exports through our own companies into third-parties. You can see that exports is up by 15%. It's the highest number for the quarter that we have reported in the group.
Page 16 shows the consistency of the overperformance of the improved realized margin compared to the benchmarks. This effectively goes to support the claim that in any petroleum there's not only a shift from old refinery, which is very efficient and very complex, but also has the benefit of being able to extract and deliver higher value per barrel as a result of either of technical overperformance or crude oil optionality or commercial premium that we enjoy in the domestic markets.
Page 18 has Petrochemicals, which is effectively a vertical value integration business on the refinery. Relatively consistent, we have EUR 26 million of adjusted EBITDA for the quarter, marginally down versus last year. But given the relatively low capital expenditure requirement, this is a very cash-positive business.
Moving on to Page 20, on the domestic Marketing front. We have a performance, which is pretty much at the same level as last year despite the fact that we have much lower sales volume as a result of the heating gasoil season. The related business in Greece is a little bit weak in the first quarter given the seasonality we have and Q2 and Q3 being the highest quarters in the year, aided not only from petrol station performance but also from aviation and bunkering, which really picks up towards the middle to the end of the second quarter every year.
International Marketing on Page 21. International Marketing delivered slightly improved results, mainly as a result of improved retail margins. Some wholesale volumes in Bulgaria have been lost, but usually this is relatively low-margin throughput, which doesn't have a huge impact on the country's profitability. Having said that, it is quite obvious that the metrics for the international Marketing business are totally different to Greece given that it's a different model, it's a [ como ] model versus a [ doto ] model, which is a big chunk of the networking grid. This is something that is being addressed and it is something that we gradually move to more contribution and participation of [ como ] petrol stations in the network for Greece as well.
Finally, moving on to Page 23 and 24, we have the power generation. The performance of Elpedison has been affected by the lower gas-fired units participation in production, and of course, the delay of tax, the capacity and flexibility remuneration mechanism, which is expected to be implemented for the new year with a few months delay. So we expect that to take place over the next few weeks.
On DEPA, we are still reporting the results of DEPA as if we consolidate on an equity basis all of the DEPA group, which includes DESFA. The results of the group lower than last year simply because we have a drop in the sales volume mainly because of weather, and of course, the lower power generation that I mentioned earlier.
In terms of privatization developments, we have the transaction approval by the sellers and we have the process for making sure that we obtain all the regulatory approvals required and hopefully be able to conclude the transaction by the end of the year and have the closing and the cash change in tax in the first quarter of 2019. In this year, however, we are expecting to receive a dividend of EUR 16 million coming from DESFA plus any dividend, which will be added from the DEPA results.
With that, we come to the end of the presentation of the main business units and we are available to take any questions or comments you may have. Thank you.
[Operator Instructions] The first question is from Grigoriou, George with Pantelakis Securities.
Two questions, if I may. Your management is going to think further to beat estimates. The first question relates to CapEx. If you can comment what happened during the quarter, it was actually a bit increased versus your usual run rate. And the second question relates to your effective tax rate. If I'm calculating right, it was a bit lower than usual or typically, if you like, in the first quarter.
Thank you very much for the question, George. You're absolutely right on both legs of the question. CapEx is up from 2017. The EUR 27 million is more representative for the full year. We expect to have a full year CapEx, which will be around EUR 120 million to EUR 150 million. So it has to do with the phasing of the projects. Last year's CapEx was higher because we had a major shutdown. We will have a couple of smaller shutdowns, which are coming in the next few months, one of them is taking place now. But the CapEx number is probably more representative. So why would expect on an even basis to have around EUR 30 million to EUR 40 million in per quarter? As you can appreciate, these things tend to have a slightly abnormal phasing, which is why we cannot sort of smooth it out. On tax rates, you're absolutely right, it's a very valid question. We have the pleasure for the first time in many years to be able to claim that we have been proven right for the treatment of certain taxes. I think going back to 2004, 2005, which had to do with some special reserves for CapEx, we were asked to make a payment back then. It was probably back in 2008 that we actually made the payment. We resorted to legal proceedings to claim that tax and we were finally -- we indicate this in the first quarter of 2018, receiving back about EUR 7 million or EUR 8 million of taxes, which affect the income tax expense line and effectively drive the effective rate down by about 6 to 7 percentage points. So it's a valid point, yes, you're right.
I'm sorry, I didn't have enough time to go through your accounts and I could actually read it through as well here, sorry. Just to go back on CapEx and the shutdown as you mentioned, a follow-up 2 questions. I can see you've got about EUR 16 million acquisition of further equity just in the subsidiary, you're right. If you could give us some more detail on that? And the second thing relates to the shutdowns you mentioned or is your scheduled shutdowns for each of the 3 refineries in 2018.
Okay. On the subsidiary, I will ask George Alexopoulos to take that question and then Ioannis Psychogios can give us some more details on the shutdowns.
George, it's George Alexopoulos here. The acquisition concerns the acquisition of the remaining 37% in EL.P.ET. BALKANIKI, which is a holding company that owns all kind of products pipeline. We acquired that from Greek banks. We are partners there, and they were required to divest in the context of their programs following the stay date they had received. So this is the acquisition you are referring to, and there, the consideration was EUR 16 million.
Ioannis?
So for the refinery's maintenance plan for the year, for 2018, what we can say is that the plan for this year is very, very light. We have, at the moment, some cata exchanges in 2 minor units in Elefsis refinery. The main units of the refinery has flexicoker and hydrocracker are in full operation. And we will have a minor fix up in Thessaloniki refinery for some cleaning of some extenders for 5 or 6 days. So it is this year, if everything goes as scheduled, we would not expect to have any other maintenance activities in the 3 refineries.
[Operator Instructions] The next question comes from Mr. Gkonis, Argyrios with Axia Ventures.
Just a few questions from my side. I'm looking on the unit OpEx on the refining operations and I also checked on the press release that you mentioned that this has been affected somehow by the increased CO2 costs. Can you give us a bit of -- can you elaborate a bit further on the cost side, are you looking on a dollar per barrel basis or euro per barrel basis, whichever you prefer. Can you give us an idea how is the CO2 cost affected? And to what extent has it been affected by the CO2 costs.
Yes, it's quite a -- it's becoming a more important topic than it has been in the last few quarters. First of all, I don't have available a cost per barrel to give you, not for any other reason but because the way the CO2 allowances work are slightly more complicated than per barrel. Effectively, we have an allowance, which is moving away and you have to buy any shortfall that you have in the year. In 2018, in the first quarter, we've seen CO2 prices reach euro per tonne going up to roughly EUR 16, EUR 17 per tonne. And in the first quarter, we have had an increase in our operating costs of, about EUR 4 million compared to last year. So it is something, which will be here for some time. We expect that the cost of CO2 allowances for the group will be higher going forward than in the last couple of years. Now whether the price remains around EUR 15, EUR 16 or whether it moves to EUR 20 per tonne it's very difficult to project. But if I were to take a view, I would say that the expectation is going to be higher than what we have now, which makes it an expense, which is going to be around EUR 25 million to EUR 30 million per year.
The next question is from Mr. [indiscernible] with [ Data Securities ].
Can you give us some color regarding the Iranian oil claim? How is this evolving? And at what level this obligation is made?
Yes, on the Iranian payables number, as you know, as you have been following the company, we are not at liberty to disclose a number because of the confidentiality agreement we have within NIOC. However, what I can mention is that -- what I can say is that, as we speak, this number is, I would daresay, not material for the group size. It's not more than probably a month's credit of crude oil from NIOC. So we have effectively settled the significant part of that payable and it is not something that should be of concern going forward.
[Operator Instructions] Ladies and gentlemen, there are no more questions registered at this time. You may now proceed with your closing statements. Thank you.
Thank you very much, once again, for taking the time to listen in to the conference call and the announcing the first quarter results. All in all, it is a strong set of results. It continues to be a proof of concept given that all the investments and the efforts being put into group is to have complex and high net cash margin refineries, which will be able to deliver anything between EUR 600 million to EUR 900 million of adjusted EBITDA year-on-year and depending on benchmark margins and euro-dollar exchange rates. The performance of the refineries has been very good in the first quarter and we hope that it's going to continue to be strong. We have a few minor pit stops, as Ioannis calls them, which we expect that will not affect the performance significantly. The markets seems to be performing, I would daresay, a bit better than in the previous couple of years. Clearly, too, is increase is a very positive thing for the domestic market and we're seeing a gradual recovery of domestic consumption and demand as well. I cannot quantify that at this point in time and say it's going to be a 2% or a 5% recovery in the market, that's taking out heating gasoil, of course. But clearly, it's a positive sign. The group is progressing through a number of strategic transactions. The natural gas DESFA transaction, is something that we have worked on for a long time, and it's finally coming to an end, which will, if you will, provide some additional capital to be used for deleveraging and some shareholder returns. And of course, we are expecting to see further developments on the natural gas business over the next few months. All in all, good quarter for the group and hopefully a quarter that will provide a positive entry into 2018 and 2019. Thank you.
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for calling, and have a pleasant day.