HELLENiQ ENERGY Holdings SA
ATHEX:ELPE
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Ladies and gentlemen, thank you for standing by. I am Konstantinos, your Chorus Call operator. Welcome, and thank you for joining the Hellenic Petroleum conference call to present and discuss the first quarter 2019 financial results with the management of the company. [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 for the introduction. Good afternoon, ladies and gentlemen, and thank you for joining the call for the first quarter of 2019 results for Hellenic Petroleum group. We're here with a group of senior managers who will be assisting in this presentation and here to cover any issues, which relate to the specific areas of expertise.
Without further ado, let me just go through the presentation on Page 2. What we have in the first quarter is a good set of results. We have an EBITDA of EUR 123 million. Adjusted EBITDA for the quarter, which is down versus the respective first quarter last year. However, taking into consideration the environment and you will see that a lot of other refineries who have already published results equally, if not more severely, affected by the environment and a couple of more shutdowns that we had during the first quarter, they are considered to be a good set of results.
In terms of the environment, so explaining a little bit more about the environment. We have one of the lowest complex benchmark margins that we have seen for some time in our region. That compounded by the crude supply and specific types of crude, which have been affected by logistics issues, the transportation of the crudes into the Med. And of course, certain producers who are no longer in the market this first quarter compared to last quarter have led to this tightening in -- of the crude market, and of course, the effect on margins.
On the positive side, we have a pickup in the heating gasoil demand for Greece. This is mainly well driven, and we have seen some pickup in the aviation more specifically on the bunkering fuels market, which we will see later on.
In terms of numbers, in terms of our results, we have the adjusted EBITDA of EUR 123 million. As I mentioned at the beginning, we've had lower utilization on some of the refinery units. We haven't seen -- we haven't experienced a complete refinery shutdown in the first quarter, but we had various sporadical unit-specific maintenance shutdowns, which of course affect the production and the utilization of the refineries.
The overperformance has been, to a large extent, able to cover the weaker benchmark environment. And of course, a stronger dollar compared to euro has also helped to mitigate that effect as well. As you would expect, our 2019 numbers include the IFRS 16 impact in all of our captions, and that effectively has an uplift of EUR 9 million on the adjusted EBITDA. It's quite material simply because the marketing business has a lot of petrol stations which are leased rather than owned. And hence, the classification impact between EBITDA, depreciation and interest is material.
On a net income basis, we have 2 further things to comment. The first thing has to do with the lower financing charges in the quarter. On a like-for-like basis, our financing costs are down by 16% compared to the first quarter of '18, and the projection is for an even better performance later on in the year.
On the associates, we have a slightly different picture compared to last year simply because the DEPA Group has undergone a number of quite drastic changes in the business model. First of all, we don't have DESFA in the results. The regional retail and distribution businesses have changed. So from an equity consolidation, we have moved to full consolidation of the EPA Attiki and the EDA Attiki business. So the comparison between this year and last year is not as straightforward as one would expect. However, the DEPA performance plus an improvement in the Elpedison performance has helped to give a bigger contribution of associates at the net income line.
On a balance sheet level, our net debt remains at similar levels to the year-end, EUR 1.5 billion of net debt. We're still carrying a sizable amount of cash, just over EUR 1 billion. And that's going to be reduced in the next few weeks, given that we have the repayment of EUR 325 million eurobond, which will be taken care -- out of our existing cash reserves. So again, that is fixing the balance sheet, and of course, reducing the negative carry of idle cash.
Moving to Page 3. You can see our numbers by business unit and with a little bit more granularity. The main contributor remains to be the Refining, Supply & Trading business, which has been affected by the slower utilization in the refinery margins' environment.
In terms of petrochemicals marketing and other businesses, on a comparable basis, we have pretty much a stable performance. Marketing appears to be higher than last year simply because we have a huge impact compared to the baseline of IFRS 16 affecting the 2019 numbers. You can see the associates and the financing cost numbers, which include -- in terms of financing cost, it includes the IFRS numbers. So on a like-for-like basis, the benefit on financing cost is actually bigger. We are sort of comparing the EUR 39 million of expense last year with EUR 32 million -- EUR 32.5 million of comparable expenses this year.
Again, on a balance sheet basis, you can see the reduction in the capital employed because of the DESFA transaction, and of course, a different working capital number. And in terms of capital expenditure, we are spending just over EUR 30 million. The projection for the end of the year is clearly in line with what we have given in the past. The 100 -- and I would say, EUR 130 million to EUR 150 million of capital expenditure, excluding development projects, is a number that we expect to see materializing.
Moving on to the environment, Page 5. We have a couple of points to make here. They relate to the crude markets and especially to the crude differentials. As you see on the bottom part of the page, we have the widening of the Brent WTI prices, which is something that we monitor. We don't see that being a critical factor for refinery utilizations, especially in Northern Europe yet, but still it is something which has been happening for the last few quarters. And given time, we may see a structural shift in the crude supply into the Med that might be accelerated by the IMO introduction, given that U.S.-sourced crudes are better suited to produce these -- the new bunkering fuel product.
The other thing which is important is the closing of the Brent-Urals spread. Actually, it's not closing. We have for the first time after quite a long time, I don't recall when it was the last time that we had negative Brent-Urals spread. So Brent is actually cheaper than Urals, which affects the benchmark margin calculation, given that our benchmarks are calculated on the basis of Urals as fee.
That is also seen on the following page where we have the refining margins. Three main messages. You have the light products weakness in terms of cracks on gasoline and NAFTA, and you have a relatively stronger diesel and HSFO cracks, which more or less would tend to balance out for the configuration that we're on. Different impact on the different refineries. For example, on Aspropyrgos, we see at the top part of the page, we have a different impact compared to Elefsina, which does not produce any fuel oil at all. So in a way, Elefsina is penalized compared to Aspropyrgos as a result of that. The underlying trend, given that we're using Urals as a source of crude for the calculation of these margins is clearly negative, given that the Brent-Urals spread has closed, as I explained a minute ago.
On Page 7, we have the domestic market environment. The impact of the heating gas oil is quite evident. We have a 5% increase of market compared to last year. However, it is important to know that the gasoline demand has dropped in this quarter by about 5%. Now there may be a substitution into diesel, which is showing as being flat, but this is something that we need to monitor as we move into the next 2 quarters, which are more important in terms of consumption.
On the bunkering business, you can see this growth, which is effectively international freight demand mainly from Piraeus, and you see a more but continuously improving growth on the aviation market as well, and that is something that is driven by tourism as well. So we expect to see that behavior of that in the next couple of quarters.
Moving to Page 9, we have a snapshot of, if you will, a very simple comparison of this year compared to last year's first quarter. We have tried to simplify even if it means that we miss some of the details, but at the end of the day, this is what makes our business tick. We have refining margins benchmarks, which are worse than last year, so we lose about EUR 20 million. That's compensated partly by the foreign exchange and partly by the overperformance of the refineries, which is included in the performance caption of the page. There we have the giveaway from these small maintenance shutdowns, which is roughly 0.5 million tons of production during the first quarter. And the other 2 blocks relate to the IFRS 16 impact and other smaller items, which are grouped under Other.
So having reported EUR 149 million last year, EUR 123 million this year. Despite the shutdown, still a very good quarter.
On Page 10, we have the other important parts of the puzzle, which has to do with the balance sheet and the financing costs. If you recall, a couple of years ago, we communicated that we would be moving from EUR 210 million, EUR 215 million to below EUR 100 million of financing charges in the next 2 to 3 years. We're actually on track to achieve that. I don't know whether we'll be able to report below EUR 100 million this year. I think it's unlikely given that the [ MAT ] or the sort of projection for the full year is closer to maybe EUR 110 million, EUR 115 million, but it's definitely much better than what it was a couple of years ago. So there's EUR 100 million of net cash, which has been effectively saved as a result of that, and we expect that in the next year or 2 to be even better.
The other thing is that we are effectively addressing the inefficiency of the cash balance on the balance sheet by repaying one of the Eurobonds. And in fact, we are planning to reduce that even more by taking out some of the more expensive credit facilities, probably in the third quarter of this year.
As you can see, the current financing cost or the yield of the bond is significantly lower than the coupons that we issued at. So it may be a good opportunity for us to address the markets in due course.
Moving on to Page 12 where we have the domestic refining, supply and trading overview. The numbers are pretty much what we have already explained. The volume from production and sales has been driven by the lower utilization. But at the end of the day, as you can see in the KPIs, the overperformance, which is effectively a systemic thing, we have about $1 of overperformance simply because we do not use the euros benchmark, and at some point in time, we will be communicating a more relevant benchmark for the refineries, giving you a long enough time you need to be able to adjust your models. But you can see that we have a consistent $0.7 to $1 per barrel of better performance than the benchmark margin. If you add to that the actual overperformance, which is the utilization of the refineries, the cash of the refineries, the yield structure of the refineries and the commercial premium, be it domestic which is much higher, or exports, which is lower, we are still able to deliver about 9 to 10 -- $9.3, to be specific, per margin.
Being fully transparent, clearly, we have a benefit here in the overperformance part of the equation, given that the percentage of the domestic market in terms of total sales is higher than what it was last year. So that is effectively giving us a slight boost in the overperformance number in the realized margins.
Page 13, we have the production by refinery. I will not go through the detailed numbers. Even with the shutdowns that we have, we are still producing 80% to 85% of premium products. So we have a very good yield structure. And given that we are moving into an IMO operation mode in the next 6 months, that fuel oil, which is mainly high-sulfur fuel oil will be reduced practically, if not 0, to a very small number.
On the sales chart, Page 14, we see the same picture that we saw earlier, marginally down on the domestic market and that is product-specific as a trend and significantly up on the aviation and bunkering. Exports, which account for more than 50% of our total sales nowadays, is down on account of the $0.5 million production loss in the refineries.
Page 15, we have the time series for the benchmark margins as we report them, which is mainly on the basis of actual fees and euros and the overperformance, which includes the difference due to the crude slate compared to euros, which are, as I mentioned, $0.7 to $1. And the overperformance element, which is how much better we can get from our own -- from our existing refineries plus the commercial premium. Before the end of the year, we will be coming out with a parallel set of benchmarks, which will help you to understand a little bit better the overperformance part and effectively be able to factor that into your models. It's effectively calling it sort of revised benchmark compared to overperformance. It doesn't change the full picture.
On Page 17, in petrochemicals, we have a pretty stable performance. Petrochemicals have been a very pleasant part of the picture over the last few years. It is effectively a value chain proposition on the refinery business. However, we have an extension into more specialized petchems like polypropylene and BOPP, which have helped to deliver an EBITDA of roughly EUR 100 million and a cash contribution which is very close to that, given that our CapEx requirements are no more than maybe EUR 5 million to EUR 10 million on a 5-year cycle per annum.
Moving to marketing. The domestic marketing business is in line with last year. As we have said time -- over and over again, the heating gasoil is something which is good for volumes. It absorbs costs. It helps our risk profile, but it does not add a lot of margin at the retail business level. It's a low-margin product. So even though we have bigger volumes, we have a 5% increase in volumes, mainly driven from the heating gasoil. The comparable EBITDA is pretty much at the same level as last year. As you know, the first quarter of the year is pretty much a breakeven quarter at an EBITDA level, and you get most of the contribution in the second and the third quarter of the year.
On International Marketing, again we have a very similar performance to last year. The IFRS 16 impact is much lower because the composition of the network ownership versus leased is different to the domestic market composition.
Moving on to power and gas. We have the Elpedison business, which has performed better than last year on account of having the capacity and the flexibility remuneration mechanism in place, which is good. It reflects part of the reality that people have to invest in order to be able to have capacity in the Greek market for energy, and clearly, contracts of what others may claim who participate in the market. IPPs are a necessary part of the production generation mix, and they have played a very important role in maintaining the system stability.
Unfortunately, even though this is recognized by pretty much everyone, we still don't have a permanent mechanism for the flexibility remuneration. And in fact, we expect the next few months to go without any remuneration at all at that level, which is not good. Clearly, the capital invested on an equity basis is not that material. However, it is a business which involves a significant capital, and we would like to see a fair remuneration on that capital invested.
On gas, we have a slightly confusing picture because what we're showing here is DEPA for 2019 has nothing to do -- as DEPA Group has nothing to do with 2018. As I mentioned that DESFA business is no longer part of the reported group results, we do not have EPA Thessaloniki and Thessaly, which is effectively half of the retail sales and distribution. And on the other hand, we have a full consolidation of EPA Attiki, which is EPA and EDA nowadays. Still, the contribution for the group results is roughly at EUR 17 million for the quarter, and we have an invested capital of EUR 365 million.
So stepping back from this picture, it's definitely a much better position, given that we can generate the same contribution to the group, and we have taken EUR 300 million off the table. So I think the nat gas performance, even though at first glance, the 17 is exactly the same as last year, is significantly improved from a shareholder and value-based management perspective.
That concludes the quick presentation of the results, and we have our group of senior managers here prepared to take any questions or comments you may have. Thank you.
[Operator Instructions] Our first question comes from the line of Grigoriou, George with Pantelakis Securities.
Quick question, please, on your CapEx plan. I was reading in the press that you might acquire Ellaktor stake in Elpedison. You might acquire DEPA commercial or whatever it's called, I don't really know yet. What should we expect for 2019 at least?
It is true that a better shareholding structure is under review and maybe we will see a change in the next few weeks. Ellaktor has decided that from a strategic point of view, this is something they would prefer to focus away from and moving to other businesses. I think they're going into a much more considerable restructuring. They're merging Anemos with the construction business. And clearly, as with EDISON, so the sort of majority shareholders, we are the natural owners of that business. So effectively, it might involve increasing our stake, but it is not that material, given that we only have 50% of that business. And if you look at Page 22, the capital invested is under EUR 40 million. So I don't think it's going to be significant from a CapEx point of view.
And as for DEPA [ emporium ] commercial, whatever it's called?
Let me start, my apologies. Now as we have said, the DEPA restructuring has taken place by law. We have DEPA commercial, which is wholesale and retail together. And then you have DEPA infrastructure. The plans are for DEPA commercial privatization to be launched soon. We have 35% or we will have 35% in both of these entities. What we have communicated to the market and to the stakeholders is that having a 35% stake is not an ideal situation. We will try to have a controlling stake at the right pricing with the right circumstances, the right terms or we would prefer to exit. So I think it is something that we're looking -- we're very open and very transparent about that. It is not value adding for Hellenic Petroleum to be a minority, a constitutional minority, a 35% shareholder there. So we either buy the thing or we sell with a privatization fund. And I think from the messages we get from the market, a clean transaction is probably better than having a messy shareholding structure, given the constitutional minority percentage that we have.
Okay. So you've gone about EUR 30 million in the first quarter as CapEx, what do you see the full year number being, please?
We would expect to see roughly EUR 130 million to EUR 150 million, excluding any material development plan. The maintenance CapEx is usually around EUR 100 million, give or take EUR 10 million, depending on the shutdowns and the turnarounds on the various bigger maintenance projects. But that's pretty much the number that we have in mind, roughly EUR 130 million to EUR 150 million.
[Operator Instructions] Our next question comes from the line of Gkonis, Argyrios with Axia Ventures.
Could you give us some further color on the trends in the refining market for the second quarter? What are you seeing in terms of those crude differentials and product cracks? And then would you expect the effect of the IMO regulation to start kicking into the market?
Thank you. I will ask Dinos Panas, who is the head of our Supply & Trading and probably one of the most experienced people in Greece, to sort of comment on that.
Well, we had a good start for the year and a significant pressure on gasoline and other cracks, which actually continues. Gasoline is a little bit better currently. But now we are starting to go into the driving season, and we see signs from the United States that gasoline might be a little bit more at the high side than what we've seen until now. What we have seen in the last few weeks is that the total stocks of gasoline did not stay -- have fallen significantly from 216 million barrels in February, now they are around 225 million. And let's say, the total U.S. gasoline base covered now is below its 5-year average.
So based on that and based on the fact that second half of the year is a period with a higher demand than the first half globally by about -- by around 200 million barrels per year, we would expect better margins in the second half of the year. Now once they are removed, we kick in. And what is the magnitude? It's very hard to answer. Most probably sometime in this first half of the year, you will see the impact coming in. And what is the magnitude of the impact and how will it affect the different products? The consensus is that the business margin will see an uplift while there will be pressure on the HSFO. There will be more or less a decent start, but what exactly the numbers are going to be, well, it remains to be seen.
Taking back -- taking you back on the near quarter outlook, do you see diesel remaining at current levels or facing any pressures before or ahead of the IMO season?
The second quarter most probably will be similar to the first, I think. So there's a question about Middle East, this relates on the second quarter. The cracks more or less will remain as they were during the first half. So it's a market that is volatile, I would say, and there would be some increase in the demand due to agricultural business. So it would be safe to assume that it would be somewhere well in the first quarter.
All right. And last question from my side. If you could comment a bit on the crude differentials environment that you are currently seeing?
Well, crude differentials currently are a little bit worse, I would say, than the first quarter, as you know. However, the Saudis have lowest piece of the highest level since 2013, I think. Now with euros contamination in the north, we have seen euros sort of being more expensive, and that is more or less the level of that trend. What I would say is that we start seeing more CPC coming into the market in the following month and more crudes from the United States. So the lighter crudes will be a little bit better for us. The middle-density crudes like U.S are going to be more expensive.
[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 for attending our first quarter results call. As I mentioned at the beginning, it's a good quarter against a weakening refining backdrop. We expect to see a similar challenging refining environment in the second quarter. However, things are beginning to look up. And especially as we move into the driving season, as Dinos said, we expect to see a pickup in performance. Our job is to make sure that we are focusing on getting the business performing at 100%. This means operational efficiencies, it means commercial aggressiveness and then taking advantage of opportunities. And of course, we are monitoring and effectively assessing the opportunities that we talked about with you on natural gas and power generation closely.
On that front, what I would like to highlight is that we see nat gas and power as opportunities to include a bit of nonrefining margin impact in our portfolio. It doesn't mean that it's going to change the big picture. We are still a downstream business. However, we need to expand into other business as well. To do that, we need to make sure that we have the appropriate metrics from a valuation point of view to ensure that we can maintain the performance of the company and return to the shareholders at reasonable levels. So we will not sacrifice that. And of course, we need to have the high governance and corporation structure in place to ensure that if and when we move into new businesses, we will be comfortable that we will be able to run them in the appropriate way.
With that, I thank you once again, and we look forward to touching base again in the next quarter. Thank you.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.