HELLENiQ ENERGY Holdings SA
ATHEX:ELPE
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Ladies and gentlemen, thank you for standing by. I'm Constantinus, your Chorus Call operator. Welcome, and thank you for joining the HELLENIC PETROLEUM conference call to present and discuss the third quarter 2018 financial results with the management of the company. [Operator Instructions] And the conference is being recorded. The presentation will be followed by 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 now proceed.
Thank you very much. Good afternoon. Thank you for joining this call for the third quarter 2018 results. Without further ado, I will go through the presentation and give you a brief overview of our performance over the last 3 months.
So in terms of the key highlights, we have a very strong quarter, one of the best quarters ever in terms of adjusted results. Our EBITDA at EUR 237 million, which is up from the respective third quarter in 2017. And adjusted net income at EUR 111 million, again, up from last year's respective quarter. This is particularly positive for us because this performance has been delivered against a background of weaker refining margins versus the same quarter last year, which is clearly an indication of the strong performance of the company. We've had higher production, which is also partly to the fact that we are comparing against last year's quarter when Elefsina was down for a few weeks, but still, we are almost 20% up in terms of production, higher sales and, as you will see later on, record-high exports.
In terms of the actual performance, we've been able to optimize even further the crude supply and the running of the refineries, which have resulted in a historical high of our performance versus benchmark. This is effectively an indication that we use versus a fairly standard benchmark, being the Ural crude benchmark for refining margins, which includes the benefit of different and better crude supply, better yields and of course, commercial premium.
At the same time, our reported results are also exceptionally strong. It's the best third quarter in terms of reported results, and I think the second best in the history of the group with almost EUR 260 million of reported EBITDA and a net income of EUR 135 million. Clearly, this is partly attributed not only to the strong operating results but also to the inventory effect given that prices continued to increase in the third quarter of 2018.
Our contribution from associates, being led by DESFA and Elpedison mainly, has been pretty much the same as last year, and we're continuing to include DESFA as an associated part of the DEPA Group. That's clearly going to change at the end of the year, where, without any surprises, we expect that transaction to be completed.
Another positive sign is the further reduction of the financial expenses in this quarter by about 11%. That follows the completion of the 2018 refinancing plan, which has allowed us to reduce even further the interest cost of the group.
In terms of cash flow and balance sheet, we've had a very strong cash flow, over EUR 200 million for the quarter, and that has allowed us to not only improve our balance sheet in terms of working capital but to proceed with deleveraging and reaching gearing of 40%, which is the lowest in the last few years. On the basis of performance, very strong balance sheet and credit capacity and a positive outlook, the board approved today the payment of an interim dividend of EUR 0.25 per share, which will be paid before the end of this year.
In terms of other business developments, as you know, we have the privatization process ongoing with the 2 main shareholders selling 50.1% of our venture capital. We have 2 qualified bidders, and they are in the process of due diligence. We expect that this process will be continued for the next few weeks so that both of the qualified bidders are in a position to formulate a view for the group and submit a binding offer.
DESFA spin-off is in progress. As you may know, the transaction with DESFA involves the reduction of the share capital in DEPA and the, if you will, distribution of the DESFA shares as a distribution in kind to the 2 shareholders, being ourselves and Hellenic Republic Asset Development Fund. And the minute we clear that, we will be able to close the transaction with the winning consortium, sell the shares for DESFA and collect the proceeds.
As we have indicated in the past, a significant part of that proceeds, which is just short of EUR 300 million, will go against debt reduction. So it will improve even further our balance sheet. We already pretty close to our long-term target, so this is going to accelerate that process. And a part of that proceed will be used as, of course, what we call extraordinary distribution to the shareholders.
As far as DEPA is concerned, it is going -- restructuring itself with 2 transactions, which are at the final competition authority's approval stage, being the acquisition of the remaining 49% of the Attiki business, being the commercial and the infrastructure business and also the sale of the Thessaloniki commercial business to ENI.
On E&P, we have completed the negotiation for 2 of the offshore areas in Crete. There, we are part of a JV with TOTAL, Exxon and ourselves as well as the offshore area of Kyparissiakos, which we are pursuing on our own. All of these lease agreements have been negotiated and initialed, and we're waiting for the formal signing of parliamentary approval.
Moving on to Page 4. As you can see, it's a very strong set of numbers. The main driver is clearly the Refining, Supply & Trading business, which is delivering 25%, up from last year. And you can see that the adjusted EBITDA, short of EUR 240 million, is up 15%.
In terms of finance cost, what I mentioned earlier, you can see that we are moving towards our medium-term target of getting our finance cost down to EUR 100 million per year. We are halfway there, given where we started at EUR 211 million a couple of years ago. We are expecting to be at around EUR 140 million to EUR 150 million for the end of the year and hopefully, in the next 12 to 18 months, be able to get to EUR 100 million. In terms of our net debt, we are just shy of EUR 1.8 billion, which gives us the -- if you will, the lowest for some time net debt-to-capital employed ratio.
Moving on to Page 6 in terms of the market environment. We've seen a further increase of crude oil prices in the third quarter, and we've seen a strengthening of the euro/dollar for us at $1.16, which is beneficial for our business.
In terms of crude differentials, it's a proxy, if you will, for the ability to deliver more dollars per barrel for our complex refineries. The Brent-WTI differential continues to be relatively high, which is clearly something which benefits U.S. refineries and may have some negative implications for European refineries. And the Brent-Urals spread has become tighter on the reduced supply on the constraints for sour crude supply in today's [ Med ], following the snapback of the U.S. sanctions on Iran.
In terms of refining margins, we see a weakening of product cracks with the notable exception of diesel, of USLD, where we have the benefit of having a refinery which produces a significant amount of its feedstock as diesel. So the Elefsina refinery has been able to deliver pretty much a constant benchmark refinery margin of 5.6. Whereas Aspropyrgos and Thessaloniki, which is not shown here, have suffered a bigger decline.
Having said that, I think it's important to have a reality check here because we're saying that the margins are lower than last year. However, these are healthy level of margins. And as you can see, they have allowed us to deliver a very strong, clean performance, which, at the 9-month stage, is over EUR 0.5 billion as clean EBITDA.
Moving on to the domestic market environment, which accounts for about 45% of our sales. So it's a totally different profile than what it used to be a few years ago. We see that gasoline consumption has further reduced. It's a trend that we have seen in the last few quarters. Whereas, diesel has moved up by a percentage point.
Clearly, the diesel market has become more critical for the auto fuels in the Greek market. And we are seeing the fuel efficiency drive from the car manufacturers as well as lower domestic consumption because we clearly have the tourism to account for a sizable part of our consumption. So if we isolate the domestic part of the consumption, it's moving down on the back of the economic situation in Greece.
Aviation and bunkers is proving to be strong. We've had a very good third quarter, particularly on aviation, which helps our business with [ Ekrom ].
Moving on to Page 10. We have the high-level view of how this quarter compares to last year's similar quarter. As you can see, we have a worse -- a weaker environment, which is the refining margins, the benchmark margins, taking away about EUR 40 million from our clean EBITDA.
The emissions provisions is also beginning to sort of eat into our operating results. As you know, the CO2 emission costs have gone up over the last year or so. So it's becoming a more important number.
On the positive side, the performance of the units has been quite positive, quite strong. And you can see that asset utilization, supply optimization and better refinery production has allowed us to deliver a very strong performance for the quarter.
On the balance sheet side, we have very good developments on all fronts. The maturity profile is very balanced. The 2018 maturity was repaid last month in October. However, that facility has been renewed and is in place, which means that not only we have a very reasonable maturity profile, but we also have ample credit capacity for the group. And you can see that financial costs are actually moving down as well.
Moving on to Page 13 and 14. We have the Refining, Supply & Trading business in Greece. Again, the key points is high utilization rates and normalized operations, especially in Elefsina. But given that we do run the 3 refineries as a system, any utilization issues in 1 of the 3 refineries is bound to have a knock-on effect on the other 2 as well. So we like refineries that work normally without any problems as it allows us to optimize the crude slate and the production in a much better way. So a very good performance for the domestic Refining, Supply & Trading business.
You can see on Page 14, it's quite evident that the utilization of Elefsina has more than doubled from 680,000 in the respective quarter of 2017 to 1.5 million tons, which is effectively what we have been saying about the downtime last year.
In terms of crude and feedstock sourcing, the key point to note is the replacement of Iranian crudes from (sic) [ by ] other crudes. We have a very small quantity, which, effectively, some of the late deliveries of Iranian crude which found their way into the feedstock in July. But other than that, we have been able to successfully replace those crudes with similar type of crudes without any financial burden to the group.
In terms of production, the refinery yield for 2018 3Q is a very healthy one because not only it shows that we have about 73% in middle distillates and gasoline, but we have only 10% in fuel oil production, mainly coming from the Aspropyrgos refinery. Elefsina is a 0 fuel oil producer, and Thessaloniki is producing feedstock for the other refineries, mainly.
So it puts us in a very good situation for the next 2 to 3 years, given the IMO, which is something that a lot of other refineries in the region will have to deal with. We will have to deal with as well, but clearly, at 10% of production, usually it's around 10% to 12% max, I think we are in a very good spot with respect to the IMO upcoming regulations.
In terms of sales, on Page 15, you can see that we have been able to source almost 100% of the domestic market sales from our own production, up from 89% last year. And you can see that the exports market is growing for this quarter as well compared to last year simply because our production has gone up.
At the same time, on Page 16, you can see that the overperformance, which is effectively our definition of the difference between the net realized margin per crude barrel -- per barrel of crude compared to the benchmark using Ural as a benchmark, as feedstock, has reached the highest ever value, which is about $7, $7.3 per barrel. So a very healthy position, especially when you consider that this quarter, the contribution of export sales is even higher, which means that the benefit of domestic market premia is actually having a negative impact on this overperformance.
Moving on to Petrochemicals, a very stable performance. For the last 2 to 3 years, Petrochemicals have been delivering about EUR 100 million of EBITDA per year and a very close number for cash flow, given that they don't have a lot of CapEx, which, again, is moving on a slightly different cycle from the refining business and allows us to have a baseline which is not entirely driven by the refining margins. Clearly, a big part of this contribution is coming from the Aspropyrgos propylene splitter. So the vertical integration of our production chain allows us to extract this value.
In terms of Marketing, domestic market is continuing to suffer in terms of demand and also in terms of profitability. We have a relatively strong quarter in the third quarter, that is, traditional, again, because of tourist and aviation. Aviation has proven to be a very strong performance in this quarter. However, it would be a mistake not to recognize that the domestic market is going through a very difficult process, and that's actually the case for most retail businesses in Greece.
On the international business, we have a slight deterioration compared to last year, which is mainly because of weaker retail margins in most markets. As we have seen, one of the reasons for the very high reported results has been the continuing increase of crude oil prices and product prices. Unfortunately, when you see that -- the end of the chain, it's sometimes difficult to pass on these increased costs, which is loaded with taxes in most countries as well, to the end consumer. So whenever you have a rapidly increasing oil price environment, it tends to create pressure on the retail end of the business.
On power and gas, we have an improved performance coming out of Elpedison. However, it's still very low. We have low contribution at an EBITDA level. And if you go at the EBIT level, it's even negative. And that's because we are having problems with the market framework, and unfortunately, it is something that has not changed in the last few years.
Independent power producers are asked to cover the supply shortage in the market. They are often asked to step in to cover other producers' problems in meeting market demand. But at the same time, they are penalized in that they are not offered the proper remuneration. So it is something which needs to be taken seriously by the framework setters and hopefully result in something better. This particularly is the case when the country and EU is making aspirational declarations about moving away from lignite and coal production into nat gas and renewables. So with economics like that, it's a bit difficult to achieve this aspiration, which we have to, by the way.
The lower gas fire production is actually taken its toll on DEPA as well. We have a lower contribution coming from DEPA. But the key messages here, first of all, the DESFA privatization, which, after a good few years, is coming to an end, hopefully, before the end of the year. And that will allow us to release capital, as I said earlier and redeploy that in a more meaningful way for us. And at the same time, it will allow DESFA to embark on a new chapter, if you will and be able to strategically develop into the future.
DEPA is in the process of being reviewed and restructured, with the retail business and the low-pressure networks being acquired. So again, this is an area where we expect to have some developments in the next 6 to 12 months.
That brings us to the end of the discussion for the group. So I will stop here and open the floor for any questions you may have. Thank you.
[Operator Instructions] The first question comes from the line of Patricot, Henri with UBS.
I have 3 questions for you. The first one is on the fuel oil, sorry, the mix down to 10% this quarter, which is the level that you haven't achieved very often. So just wanted to know to what extent this is driven by a change in the crude slate, would that be, obviously, slightly sweeter than usual or the tweaks that you've been doing to your refining system? And then, secondly, I wanted to ask about the waivers from the U.S. given to Greece this week and what it means for you if you're going to resume importing even in crude after this sad news. And finally, if you can give us some sort of guidance on how we should think about the full year dividend [ actually ] in terms of the -- some sort of payout ratio, net debt level or any other metric which you had in mind.
Thanks very much, Henri. Let me start off with the third and the second question, and then I will pass on to [ Tinos Panar ], who will talk a little bit about the fuel oil mix and the crude slate. Now on the dividend, we set a pattern of paying around $0.45 per share a few years ago. Then we went into the crisis and the big credit crash for Greece, where we sort of curtailed. And in 2 years, we actually didn't make any payments at all. I think that the intention is to at least get to that level for the full year dividend. So that is, if you will, also portrayed by the fact that our interim dividend is higher than what it has been in the past. And as I said, we need to sort of consider not only the full year results but also the DESFA proceeds payout, where we have part of that close to EUR 300 million being a candidate for distribution to the shareholders.
On the Iranian transaction waivers for Greece and another 6 countries, [ probably ] call it, 7, 8 countries, I think the only other European is Italy. I'm afraid we know as much as you do at this point in time. We've seen the announcements. We've seen the press releases. There is a lot of noise around that. But at this point in time, there is nothing which is formal that we have received. We expect that something will be coming out pretty soon. Once we know what exactly we can and we cannot do, we will assess that and act accordingly. So I'm afraid we don't have a lot more information to share at this point in time. Now on the fuel oil yield, I will ask [ Tinos ].
Yes. It is exactly a lighter slate. Our -- ELPE optimized a lot lighter slate during the quarter. And this you can see in Page 14. The CPC was -- feed was something like 25% versus 14% in the previous quarter. So it is -- this is the reason for the lowest fuel oil yield.
[Operator Instructions] The next question comes from the line of Bahl, Sanjeev with Edison Investment Research.
Two questions for me. Can you hear me?
Yes. We can hear you.
Apologies. Two questions. The first was on refining capacity additions. At the course of 2019, I think the expectation is about 2 million barrels a day of additional capacity coming onstream, predominantly, at least in China. I was just wondering whether you have taken a view on potential impact that will have on Hellenic over the course of the next 12 to 18 months. And the second question was just looking at CO2 allowance costs. They seem to be -- they seem to have peaked and started to fall. I was wondering whether you had an internal view on where those could head over the course of next 12 months as well.
Yes. We see the refinery additions all over the world and in Turkey, of course. And we have a demand -- a global demand that is a little bit lower than this. So we are concerned, but we have a view that the margins over the next few months are going to be defined mostly by the IMO situation. And as all of you have already forecasted, we are expecting very good correction to diesels. And since we have a production that is geared towards diesel, we think that we are well placed to take advantage of any opportunities that might exist. So that was the first question. And the second one was [indiscernible]...
CO2.
Oh, CO2. We do not have a view on the prices. What we are trying to do is trying to cover our deficits gradually and follow the market.
The next question comes from the line of Koskoletos, Nikos with Eurobank Equities.
Just a quick -- I think it's one of a clarity issue. Andreas, you mentioned EUR 0.45 as a number that you used to have in mind and most likely could be going towards that level for this year, for 2018. But then you had also mentioned that the DESFA proceeds could be part of it at least, to be distributed as an extraordinary dividend. Should we consider that -- whatever payment to be over and above the EUR 0.45? Or does the EUR 0.45 target include whatever extra from DESFA?
Nikos, no, I think you should include that as an additional to the EUR 0.45 or whatever the final dividend going to be.
Okay. So when we say extra, it would be over and above the operating "dividend"?
Correct. So the EUR 0.45 is the benchmark, if you will. I'm not saying it's going to be EUR 0.45. I'm just stating what it used to be. That's for a full year dividend. And then we have the special distribution which may take place out of the DESFA proceeds.
[Operator Instructions] Ladies and gentlemen, there are no more further questions at this time. You may now proceed with your closing statements.
Once again, ladies and gentlemen, thank you very much for attending this call. It has been an easy one, given that we have a very good set of numbers.
We expect that this year is going to be, again, a very strong year in terms of financial performance.
HELLENIC PETROLEUM has moved on over the last few years in terms of the size and the importance of this company, and we believe that we are well positioned. All of the investments that have taken place over the last few years and specifically, the Elefsina upgrade have put this company, this group in a unique strong position, which -- with the IMO coming up in 1.5 years from now -- 1 year and 3 months, we will be able to enjoy a decent refining margin.
We know that it's a volatile business, it's a cyclical business, but at least we have done whatever we could to make sure that this company is well positioned to take the benefit -- to capture the benefit of these cycles. We expect that over the next few months, we will see the privatization process converging to its completion, which is, again, a good thing because it will provide clarity for the company in the market, and it would allow the full value potential of this group to be demonstrated in terms of the market cap that we have.
Thank you, and we look forward to renewing this call in 3 months' time.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant day.