Polski Koncern Naftowy Orlen SA
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Polski Koncern Naftowy Orlen SA
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Ladies and gentlemen, welcome to PKN ORLEN's Fourth Quarter 2018 Consolidated Financial Results Conference Call.
I will now hand you over to Ms. Iwona Waksmundzka, Head of IR. Madam, the floor is yours.
Thank you, operator. And good morning, everybody, and thank you very much for joining us today. Welcome to PKN ORLEN's conference call presenting ORLEN Group consolidated financial results for the fourth quarter 2018.
Today's presentation that was emailed to you and is available on our website will be delivered to you by Mr. Konrad Wlodarczyk, IR Director. Immediately after, the floor for Q&A session will be opened. During the Q&A session, there will be directors from planning and reporting, strategy and controlling department and able to answer your questions.
With no further delay, I hand over to Mr. Konrad.
Konrad, the floor is yours.
Thank you, Iwona. Good morning, ladies and gentlemen.
Before I will jump into Q4 details, I would like to summarize the whole 2018. So moving to Slide #3.
Last year was a very good year for PKN ORLEN. We achieved PLN 8.3 billion EBITDA LIFO, out of which retail delivered astonishing record-high results in the level of PLN 2.8 billion EBITDA LIFO. High results were achieved despite challenging macro environment. And just to remind you, the crude oil price increased by more than 31% year-over-year. However, we were utilizing our facilities at 95%, processing record-high amount of crude oil, 33.4 million tons. Higher production and sound demand was reflected in record-high sales, almost 43 million tons of sold products.
In 2018, we maintained strong financial position. We generated PLN 5 billion cash flow from operations. We realized investments, spending 3 -- PLN 4.3 billion CapEx with the minority shareholders buyout in Unipetrol for PLN 4.2 billion. We paid PLN 1.3 billion dividend. And we were diversifying sources of financing, completing bonds issued program for individual inventors of total value PLN 1 billion.
At the end of the year, net debt amounted to PLN 5.6 billion, and gearing was at the level 15.7%. So these are safe levels significantly lower than assumed in the strategy. It's worth to mention that good results were appreciated by Fitch rating agency, maintaining investment grades BBB- with a stable outlook.
In 2018, we also made many strategic decisions. We started a lot of acquisition process. We announced petrochemical development program till 2023. We completed the Unipetrol minority shareholders buyout. We improved situation in ORLEN Lietuva. We launched CCGT in Plock. We further diversified crude oil supplies. We launched first long-term program for individual inventors in Poland called ORLEN PORTFELU and updated strategy for years 2019-2022.
And good financial results for last year and business decisions taken were reflected in numbers of awards. Just to mention a few of them: first place among the largest Polish companies by Rzeczpospolita List 500; S&P Global Platts top 200 (sic) [ 250 ], 45th place among the largest energy companies in the world; and the most ethical company; as well as top employer in Poland.
Going smoothly to fourth quarter results, I will start from macro environment, which is presented on Slide #5.
So in Q4, we recorded increase in downstream margin by USD 0.6 per barrel year-on-year. This increase comes mainly from better cracks on medium distillates and heavy refining fraction as well as olefins. In addition, it was supported by weaker Polish zloty against foreign currencies. Crude oil increased in Q4 by $8 per barrel year-on-year, which caused higher costs of internal usage for own energy needs. We also recorded lower margins on light distillates, polyolefins and PVC.
Slide #6, so market-oriented data. We still enjoy GDP growth of all the markets we operate in. Poland is definitely a growth leader, which is reflected in fuel consumption, 7% to 8% diesel and 5% gasoline increase. Dynamics in the Czech Republic were slightly weaker but still satisfying. In Germany, we have been experiencing a decline in fuel consumption for several quarters, but the German market has slightly different specifics, yes. It's a major market where we clearly see a drop in demand for diesel cars. Additionally, in the fourth quarter, fuel consumption in Germany was affected by logistical strain due to low water level on the Rhine river and the shutdown of Bayernoil. However, it's worth to underline that ORLEN Deutschland performed much better than the market, increasing sales volumes by 8% year-on-year and improving fuel margins.
Now I will present PKN ORLEN financial and operating results for the fourth quarter. So moving to Slide #8.
In Q4, we recorded a significant -- revenues increased by almost 20% year-on-year, but this is obvious the result of higher quotations of refining and petrochemical products, which follows crude oil price increase, as I've mentioned earlier. We generated over PLN 2 billion EBITDA LIFO, which is a comparable result to the previous year. So on the one hand, we noted a positive macro impact and higher trading margins in both wholesale and retail. On the other hand, we've had a negative volume impact and negative effects of net realizable value, so inventory revaluation and due to usage of more expensive inventories of crude oil and products during maintenance period. However, clearing the result from noncash impact of net realizable value, EBITDA LIFO increased by PLN 0.4 billion. Due to increased in crude oil price, we have a negative LIFO effect of PLN 0.8 billion, which caused of the lowering of reported EBITDA to the level of PLN 1.2 billion.
Financial result in the fourth quarter amounted to PLN 0.1 billion mainly due to negative net balance from FX differences, limited partially by positive impact of settlement and valuation of [ the resulting ] financial instruments.
And as a result, in the fourth quarter, we achieved a net profit of PLN 0.8 billion, and in the whole 2018, over PLN 5.5 billion.
Next slide, Slide #9. On this slide, you can see EBITDA LIFO split by segments: downstream PLN 1.3 billion, so decreased by PLN 0.3 billion year-on-year; positive impact of macro and higher trade margins limited (sic) [ limited by ] negative impact of volumes and effects from net realizable value and due to usage of more expensive inventories of crude oil and products during maintenance periods. In retail, record-high level of PLN 900 million, increased by over PLN 400 million year-on-year as a result of positive impact of higher sales volumes and higher fuel and non-fuel margins year-on-year. Upstream PLN 66 million, decreased by PLN 12 million year-on-year mainly due to negative impact of macro and balance on other operational activities like settlement and valuation of derivative financial instruments, with a positive impact of higher sales volumes year-on-year. Corporate functions, higher costs mainly due to negative impact of change in other operational activity year-on-year.
Going into the details, Slide #10. Downstream, so our biggest segments, delivered over PLN 1.3 billion in Q4. Macro improvements by almost PLN 400 million year-on-year included mainly positive effects of higher B/U differentials; cracks improvement on middle distillates, heavy fractions and margins of olefins; as well as weakening of Polish zloty versus foreign currencies. At the same time, we recorded negative impact of higher own consumption costs as a result of higher crude oil price; and lower margins on light distillates, polyolefins and PVC.
Despite the increase in total downstream sales volumes by 1% year-on-year, we recognized over minus PLN 200 million negative volume effect due to shutdowns of petrochemical installations, including cyclical olefin unit shutdown, PTA shutdown in PKN ORLEN as well as extended shutdown of steam cracker in Unipetrol after cyclical maintenance from Q3, which reflected lower sales of petrochemicals products by minus 13%, 1-3 percent, year-on-year. This impact was partially offset by higher sales volumes of refining products by 3% year-on-year. It's worth to highlight that diesel sales in Poland increased by 8% year-on-year.
Others includes mainly negative effects, of which minus PLN 0.4 billion from inventory revaluation and minus PLN 0.3 billion from processing more expensive crude oil and products inventories during maintenance shutdown periods; and positive impact of higher trade margins year-on-year.
Next slide, Slide #11, shows operating data of downstream segment. So in Q4, despite maintenance shutdowns, as I have already mentioned, PKN ORLEN processed 8.7 million tons of crude oil, which is 98% utilization ratio. Despite the very high throughput, we recorded lower utilization by 1 percentage point, of which Plock minus 8 percentage points due to shutdown of H-Oil and olefin units; in Unipetrol increased by 13% due to lack of cyclical shutdown in Litvinov refinery from the previous year; and in ORLEN Lietuva decreased by 2 percentage points due to tests of maximum utilization of installations taken in the previous year.
Despite lower crude oil processed, as I've already mentioned, we recorded volumes increase by 1% year-on-year. And going into details split market by market: So in Poland we recorded sales volumes increase by 1% year-on-year, higher refining sales volumes limited by decreasing sales of petrochemical products due to cyclical shutdown of olefin unit. In the Czech Republic we recorded lower sales by 2% year-on-year, lower petrochemical sales volumes due to production limitation whilst partially offset by higher refining volumes. And in ORLEN Lietuva we recorded sales volumes increase by 3% year-on-year, so higher sales, mainly heavy refining fractions due to worsening of production yields.
Slide #12. Retail, so our flagship, delivered again astonishing record-high results over PLN 900 million EBITDA LIFO, which is 87% higher year-on-year. And such a great result was achieved due to positive impact of both higher sales volumes and higher retail margins year-on-year, what you can see on the bottom graph. Significant sales increase by 6% year-on-year recorded on all markets, signaling increase in market shares. In terms of margins, higher fuel margins achieved on Polish and German markets and non-fuel margin increase on Polish and Czech market.
Slide #13 shows operating data of retail segment. And at the end of Q4, we had more than 2,800 fuel stations, out of which more than 2,000 were equipped with non-fuel concept Stop Cafes; and of course, increasing number of fuel stations by 20 year-on-year. And very healthy demand was reflected in higher sales volumes by 6% achieved on all markets. Market share as well increased on all markets year-on-year. The highest was recorded in the Czech Republic by 2.1 percentage points year-on-year due to including fuel stations acquired from OMV into Benzina network and in Poland by 0.6 percentage points year-on-year.
Please also have a look on positive dynamic growth of non-fuel offer. So another 69 locations were opened in Q4 at the end of 2018. And we were running 2016 food and beverage corners, including convenience stores under our own brand O!SHOP. In the fourth quarter, we opened the first fuel station in the drive-through format in Poland. And this is a unique solution on the European scale as a result of the clients' expectation for fast and efficient service. So you can refuel a car, order non-fuel products and pay for all of the services without leaving the car. We also provided a new functionality in ORLEN mobile application, thanks to which drivers can pay for fuel directly at the pump station. So this system has been implemented in Poland and in Benzina stations in the Czech Republic.
Next slide, Slide #14. Upstream delivered in Q4 PLN 66 million EBITDA LIFO, which is lower by PLN 12 million year-on-year, mainly due to negative impacts of macro and related to decrease of crude oil, gas and NGLs prices in Canada; and also settlement and valuation of derivative financial instruments. The negative impact of the abovementioned factors was partially limited by the increase in sales volumes year-on-year.
In the fourth quarter, we recorded an increase in average production by 25% year-on-year, mainly due to our Canadian hubs. So in Canada, average production increased by 4.3 (sic) [ 4.3 thousand ] BOE per day year-on-year. And growth comes mainly from higher crude oil and NGLs production.
Slide #15 shows more operational data regarding upstream. We have more than 150 million BOE 2P reserves based on the calculation from the end of last year. Business report for Canada as of the end of 2018 is under preparation. Average production in Q4 has shifted 20 points to 1,000 BOE per day. And in the fourth quarter, we spent on upstream almost PLN 190 million, which is in the whole year PLN 740 million.
Please let me mention some key operational facts. In Poland we completed drillings of 2 wells. On one of them we started works aiming at preparation for gas productions. We started drilling 1 well on Bieszczady project. We completed termination on Sieraków project, and we also completed acquisition of seismic data on Edge project. In Canada we started drilling of 7 wells. 7 wells were fracked and 10 wells were included into production; moreover, with continuous works on expansion of infill [ production] in Kakwa area.
Slide #17, so coming back to financial and cash flow data.
In the fourth quarter, cash flows from operations were negative and amounted to minus PLN 0.8 billion mainly due to higher demand for working capital. And working capital increased in Q4 by PLN 1.5 billion, was mainly due to the faster payments of liabilities for crude oil and trade liabilities of ORLEN Deutschland for employees. The remaining PLN 0.5 billion, negative, include mainly taxes paid, and they amount minus PLN 0.2 billion; and change in settlements from derivatives, hence cash flows in the amount of minus PLN 0.6 billion. We spent PLN 1.1 billion. The change in liabilities, this in the amount of PLN 0.3 billion, results from the settlement of derivative instruments not designated for hedge accounting purposes.
The bottom chart summarizes the cash flow management from the year. And as you can see, in 2018, we generated PLN 8.3 billion EBITDA LIFO, but due to increasing crude oil price from $54 per barrel in 2017 up to USD 71 per barrel in 2018, LIFO effects amounted to PLN 0.9 billion. And the amount for working capital increased by PLN 3 billion. Additionally, we carried out investments at the level of PLN 4.3 billion. We completed a buyout of minority shareholders in Unipetrol for PLN 4.2 billion. And we paid a dividend of PLN 1.3 billion, which is PLN 3 per share. Including all taxes and interests, our debt increased by PLN 4.8 billion compared to the end of last year.
Next slide, Slide #18. As for our financial strength, though, I can confirm that all indicators remain in the safe level: covenants below 0.7 at maximum level of 3.5; gearing below 16%, significantly below 30%, so the maximum levels included in the strategies. Net debt at the end of the quarter amounted to PLN 5.6 billion, which is equal to mandatory reserves that we keep in the balance sheet. The net debt in comparison to the past quarter increased by PLN 1.9 billion as a result of negative cash flow from operations in the amount of PLN 0.8 billion and investments expenditures at the level of PLN 1.1 billion, as I mentioned on the previous slide.
Our sources of financing are diversified, with an average maturity 2021, which can be seen in the bottom graph. The currency structure of gross debt has not changed. Most of the debt is in euro, which reflects our operating exposure and really the kind of natural hedge.
Next slide, #19, is dedicated to CapEx. So in the whole year, CapEx amounted to PLN 4.3 billion, below initially assumed plan, of which in Q4 we spent PLN 1.4 billion. One remark: So in the period of 12 and 3 months ended 31st December 2018, according to auditors' recommendation, we made a correction in penalties and compensation line by booking contractual penalties for CCGT Plock delays in the amount of PLN 190 million and metathesis in Plock at the amount of PLN 29 million. And we have adjusted the purchase price of fixed assets.
The largest investment projects realized in Q4 concerned building production installations in downstream, mainly speaking polyethylene unit in Czech Republic, metathesis in Plock and propylene splitter in Lithuania. In retail, CapEx was dedicated to new locations, modernizations and non-fuels concept growth. And in upstream, during the full year, we spent, as I've mentioned previously, more than PLN 700 million, of which over PLN 500 million in Canada proportionally to the scale of operations.
The last sections describes our investment plans for 2019 and market outlook.
So Slide #21. In 2019, we plan to spend PLN 5 billion, of which PLN 2.4 billion for growth. The largest part of CapEx is, of course, downstream, where we are planning to conduct the following projects: an increase of fertilizers production in Anwil, finalize PE 3 installation construction in the Czech Republic, construction of installation within petrochemical development program, preliminary works for visbreaking construction in Plock, electric vehicles chargers network development in Poland. And also, we aim to conduct preliminary works regarding building wind farms on the Baltic Sea.
In retail, we plan to invest PLN 800 million, of which PLN 500 million for growth, including 35 fuel stations, opening over 180 new locations of Stop Cafe 2.0 and implementation of new products and services. In upstream, according to our cautious approach, we plan to spend PLN 800 million, of which PLN 600 million in Canada and PLN 200 million in Poland.
Slide #22. So outlook for 2019. As for macro assumptions, we are expecting comparable level of crude oil price versus average for 2018 circa USD 70 per barrel, which is the outcome of, on the one hand, pressure for crude oil price due to economic slowdowns and higher crude oil productions in the U.S. On the other hand, we expect positive impacts on crude oil prices resulting from OPEC+ countries' meetings regarding limitation of crude oil production.
On the downstream margin, also [ we assume at ] comparable level to the average from 2018, so roughly speaking around USD 12 per barrel. On one hand, increase of refining margins, including the B/U differentials, due to rising demand for middle distillates and dropping demand for Ural crude oil, reflecting forthcoming IMO 2020 regulation. On the other hand, we expect a drop in petchem margins as the result of launching new petchem capacity.
In 2019, we expect further growth in consumption of fuels and petchem products on all markets we operate due to GDP increase, whilst we'll have a positive impact on the downstream margin.
Regulations that I want you to pay attention from a PKN ORLEN point of view are Sunday ban -- trading in Poland. Of course, this does not apply to the fuel stations. Emission fee and the National Index Target rising from 7.5% to 8.0%, but PKN ORLEN will be able to take advantage of possibility to reduce this ratio down to 5.58%.
So that's all from my side. Thank you very much, and we are ready to take questions.
[Operator Instructions] Our first question is from Tamas Pletser, Erste.
I've got several questions, but probably I would only give you only 3 questions, and all of them are regarding your retail performance. First of all, I'm very curious how sustainable your excellent retail performance. How much do you owe, from this performance, to the shutdown of Bayernoil refinery as well as the low water levels in the Rhine, of this total more than PLN 900 million EBITDA? Also, I wonder whether you have changed some of your accounting practices or not. Or is it the same throughout the previous quarters? And finally, I was just wondering, when I saw your presentations, about your Baltic presence. I mean you have a refinery there. You have a population of 10 million. Do you have any plans to expand your retail in the Baltics? I mean in Lithuania we have only 5% market share, so I suppose you have probably some chances to expand over there.
So answering the first question, so significant increase in retail margin. So Q4, I think it was extraordinary that it is due to logistic programs on the Rhine and this Bayernoil shutdown. As you said, the logistical strains were also in export of products from Germany to Poland, so this created both high trading margins in wholesale and the retail. Out of this margin increase, you may say that majority comes from Germany market. So ORLEN Deutschland generated significant results. Just to give you some numbers: Only in Q4, it generated PLN 251 million EBITDA LIFO, comparing to [ PLN 63 million ] in Q4 '17. So also in the whole year you see a huge boost in EBITDA from PLN 286 million up to PLN 537 million, so we may say that the EBITDA doubled. So in my opinion, you should expect that the situation will mitigate in retail. And Q1, a seasonal quarter, one of the weakest ones, should be definitely weaker than Q4 '18. Can you repeat the second question?
I remember. So the second question, about Baltic countries and our presence. And Tamas, as you remember, we always monitor situation of home markets, retail, and potential development and neighboring countries. So it's exactly this is the way you should be in Lithuania and around, but it's one of the difficult markets to develop. And we can always say that we constant monitor developments regularly.
Can you repeat that question about the accounting...
Yes, yes. I just wanted to ask whether you have changed the accounting practices. I mean the segment prices and things like that. Was there any reason for this, for the better retail performance, or not?
No, we haven't changed.
There was no change in accounting standards and accounting rules.
So there was a change concerning these penalties for our subcontractors concerning CCGT project [ and fatalities ]. So penalties for contractors due to delays lowers our CapEx. And it was a recommendation from December from our auditor. That's why we changed the number for CapEx, but actually we had higher CapEx -- higher development CapEx than we report. Instead of PLN 2.1 billion, we had PLN 2.3 billion spend as CapEx. And this PLN 0.2 billion is due to penalties, which lowered our CapEx.
However, this does not touch retail the same.
Yes, yes. So it does not reflect the segment, but it reflects change in accounting standards. Or -- so it's...
Okay. It's very clear. Just on a follow-up on this Lithuania and Baltics situation. How is the retail market looks like over there? So do you have -- do you see any chances to expand? Because it would make -- it would be a logical issue, in my view, to expand over there. You have a refinery. And you can basically repeat this success, what you have done in Poland and Germany and Czech Republic over there.
So Robert Sleszynski speaking. Well, when you take a look at the Baltic states, you have 3 major players in retail. This is [ Mazda], Circle K, these are 2 brands; and then a couple of additional big players, Lithuanian ones, for example, like Baltic Petroleum. And as just said, there are changes, and we do monitor any changes which appear in the market. However, I will say that I wouldn't expect in the near future a very significant change, but our goal is to expand our network on Baltic within organic growth. And you will see some changes in the future. But we do monitor the situation and we see some changes in the markets. And I'm not in a position to comment more details now. However, we do monitor, and we see changes [ in this part ].
Our next question is from Henri Patricot, UBS.
I have 3 questions as well. The first one, on the working capital build in the quarter, I didn't quite catch what drove this large build. Can you expand on this and comment as to whether we should expect a reversal of the working capital build in the first quarter of '19? And then secondly, could you comment on your expectations for the emission fee in 2019, what the impact is going to be for you? And finally, can you give us some sense of your maintenance schedule for the year in both refining and petrochemicals?
Konrad Wlodarczyk speaking. Yes indeed. The working capital increased significantly in Q4 by PLN 1.5 billion, and this is mainly due to the faster payments of liabilities for crude oil. So we paid faster and as well as ORLEN Deutschland paid faster for the final products for fuel. So you may say that this situation will reverse in Q1. In terms of emission fee, emission fee, as we said, is enforced from 2019. And definitely we will be taxed according to the legislation, so we will pay this emission fee. However, please bear in mind that we underlined that our intention is not to pass this directly to the final customers. So it's the emission fee is not included in the price formula for wholesale contracts that we are signing every year. So -- but you may say that emission fee is for the whole market, so producers and importers, and having in mind that the market will behave rationally. So you may say that the initial price, so the import parity price, was significantly higher than last year. So you may say that, during negotiations of wholesale contracts, we have a capacity to obtain better conditions. In terms of maintenance schedule for 2019, you may say that definitely there will be less maintenance shutdowns, comparing to 2018. So we are assuming crude oil throughput above 34, so 3-4, million ton of crude oil. In Q1, we are starting in PKN ORLEN a CDU unit shutdown, length 1 month; and [ AGS ] unit; as well as the enlisting of -- there is hydrocracking and visbreaking. In the second quarter, we are finalizing CDU maintenance, and we are starting polyethylenes unit shutdowns in BOP. Q4, the end of Q4, we will be back with H-Oil. So this is a standard maintenance that we are conducting every year, around 1 month, also hydrogen unit around 1 month; and seeing petrochemicals, olefins will be out of order for the whole month. And in Q4, we are planning to conduct PVC in Anwil, 1-month shutdown; as well as in Unipetrol's visbreaking unit and CDU unit half of the month.
Our next question is from Jonathan Lamb, Wood & Co.
My questions have already been answered.
Our next question is from Ildar Khaziev, HSBC.
I'll have a question about electric power prices. Maybe you have some comments since we discussed this last time, but my question basically is about some reports have seemed saying that the consumers will probably have to pay up to 50% higher prices from this year because of the higher carbon costs. Could you confirm that this is the case with PKN ORLEN in Poland as well? And if possible, could you quantify the impact and which segments that you think could be the most affected?
I think it's not related to PKN ORLEN because we are producing more than our needs. So we are selling this outside. Of course, there will be some pressure on prices, definitely. In terms of CCGTs, so both Plock and Wloclawek: In Wloclawek, the whole production of steamer energy consumed internally. In Plock, 50% is sold to the grid. So you may say that revenues definitely will increase in energy segments. And energy, depending on which installation, is included on refining as well as petrochemicals.
And just to clarify. That basically means that the higher carbon price will be fully passed to the [ indiscernible] prices and there is no input from the carbon perspective when taken together with the power prices for PKN ORLEN?
I think we are on safe side because we purchased in previous year CO2 allowances. And it's now such a cost of CO2 costs are not important to our P&L and not have significant impacts to our P&L. We -- such an impact will be visible in 2021, but now it is not significant impact.
Yes. So CO2 emission in the whole PKN ORLEN Group is at the level of 15 million tons per year. So the deficit is circa 8 million tons per year, but as it was said, we have a capacity because we accumulated CO2 emission rights bought at significantly lower prices comparing to the current price on the market.
Our next question is from Michal Kozak, Trigon.
I have 2 questions. What in your opinion is the reason behind weaker fuel consumption in Germany? That's the first one. And the second one, do you see current extremely low gasoline crack and Ural/Brent differential as permanent? And what is the key reason behind this?
In terms of German market, as I said, it's a specific major market when -- we observed for many quarters a decrease in fuel consumption. And definitely, this is the result of, let's say, switching towards connected vehicles and gasoline vehicles. And additionally, in Q4, those logistic constraints that I already mentioned was a factor. So in our opinion, these dynamics should be sustainable, so you should expect, let's say, slight negative dynamics on the German market for both gasoline and diesel. In terms of macro environment, you asked our -- in Q1, we observed deterioration of model downstream margin from USD 12.1 down to USD 9.8 per barrel quarter-on-quarter. So this is mainly due to increase in crude oil price from USD 54 up to USD 61 per barrel. We observe, as you said, drop in both gasoline cracks by 20% and diesel cracks by 9%. And this is also due to significant inventory build in U.S. and ARA region. On high-sulfur fuel, cracks improved 13% quarter-on-quarter, with an average in Q1 of minus [ 100.04 ], but the demand from Singapore weakened recently, so you should expect a worsening. Petrochemical margins, so far, on the very top-end level and quarter-on-quarter around EUR 920 per ton. BUDs dropped significantly from USD 1 per barrel to 0. This increased demand for Urals from Baltic ports related to continued interest of refineries from that region. However, please bear in mind that the beginning of Q1 looks weak so far. However, the data are only for 2, 3 weeks of the quarter. So we believe that the deterioration will not persist in longer term. So this is the same situation that we've got after publication of Q3 results, when October was significantly under the pressure; and in November and December, macro environment [ reverts]. So...
Our next question is from Mr. Tomasz, Bank Polska.
Our -- we will take next questions from Oleg Galbur, Raiffeisen Bank.
I have 2 question. One is a follow-up on retail. You mentioned what was the contribution to EBITDA of Germany in fourth quarter last year on a year-on-year comparison. Could you please provide the same figure for the third quarter last year for Germany; and also tell us what was the contribution of Poland to the retail EBITDA in the fourth quarter '18, third quarter '18? That will be the first one. And the second one, what is the level of upstream production that you expect for this year, 2019?
Konrad Wlodarczyk speaking. So ORLEN Deutschland generated almost PLN 115 million in third quarter in 2018, comparing to slightly above PLN 19 million in third quarter '17. So PKN ORLEN definitely delivered significantly better results. So in Q4, PKN ORLEN delivered more than PLN 560 million, comparing to the last year, [ PLN 317 million ].
And in the third quarter '18...
In the third quarter '18, almost PLN 500 million, comparing to PLN 450 million last year, so Q3 '17.
We have follow-up questions from Ildar Khaziev, HSBC.
Yes, another follow-up. It's on retail. Any chance that -- in the fourth quarter, there was a main point of input from price taken as at retail divisions. I mean it normally takes time to cut prices when the market price is falling. Could you please quantify...
It's yes, yes. That's obvious. So when the crude oil price decreased sharply. So there is a time lag here when you decrease fuel prices, so you'll have inventories built on the higher prices, et cetera. So yes, I confirm.
We have a follow-up from Oleg Galbur of Raiffeisen.
Well, actually it's not a follow-up. It's just my second question which was not answered, about the upstream production.
No, no, the -- can you repeat the question?
What is the level of upstream production expected for this year?
The level of upstream production for this year is 21,500 BOE per day.
[Operator Instructions] We have a question from Robert Maj, IPOPEMA.
So I'd like to ask. What will be the management guidance for dividends from the 2018 profits?
So in our strategy, we clearly said that we would like to pay the dividend. So you'll have to wait for the management recommendation, which will be presented in full year 2018 audited results on the end of March.
Can we expect increase year-on-year in the EPS number? Can you at least say this thing?
We cannot address this question right now.
[indiscernible].
Our next question is from Tomasz Sokolowski, Santander Bank Polska.
Just one question on your result in the -- booked in the corporate function in the fourth quarter. There was a quite substantial increase both quarter-on-quarter and year-on-year. And would you please give us more color what drove that and whether this is something which we should also expect in the upcoming quarters?
[indiscernible] speaking. You are right. We observed higher and negative impact [indiscernible] from corporate function, but it is mainly caused by negative impact of other operating profit, mainly. And we observed also pressure on labor and [ chief ] costs, but the main impact is the negative operating result caused by some...
Donation.
Some donation for charity and for social issues.
So would it give any guidance for this year or next year? Is it going to be more than 200 quarterly or 250?
I would -- based on strategy, we think almost the same level. So we assume a negative impact of corporate function: minus PLN 0.8 billion, PLN 0.9 billion, PLN 1 billion.
Our next question is from Igor Kuzmin, Morgan Stanley.
I have 3 questions, please. One, first question is, first of all, if it's possible, can you please provide an update on the transaction related to -- sorry, update on the LOTOS acquisition plans; if there's anything, any new information with regards to that? Second question regards the free cash flow performance in fourth quarter. So with the operating cash flow, it's minus PLN 800 million, roughly. So I was just wondering if there will be potentially some reversal at working capital level. But versus PLN 1.5 billion that you have seen in the fourth quarter and some other negative items on the P&L, how much of the -- a sort of reversal potentially you might see? Is it going to be all PLN 1.5 billion working -- I know it's hard to say, but just roughly what is reversible, and what is not; what amounts? Definitely, even if it's a one-off negative impact on free cash flow, how much of these negative effects on fourth quarter is unlikely to be reversed at all, whatever the macro situation will be? And the second -- sorry, the third question, in terms of the guidance into 2019. If I look at your sort of EBITDA run rate, I know there is a bit of a sort of volatility in terms of the retail numbers potentially in fourth quarter. So what is the run rate that potentially is realistic or kind of sensible to expect going forward into the next few quarters? So the run rate in the fourth quarter at retail level, PLN 900 million, roughly. What is sort of your sense whether it's going to be PLN 700 million, PLN 800 million, PLN 900 million or smaller or higher?
So in terms of the LOTOS question, frankly speaking, our time line is the same, it hasn't changed. So just to give you an update: Yes, our goal is to submit the application by the end of the first quarter. We have negotiated package of remedies with the European Commission. What is going on now in -- we are in really dynamic and ongoing discussions with the European Commission, and we are discussing the impact of the transaction on the market in the long run. And of course, given the discussion, we are discussing the package of remedies, we are also discussing the future of our partners, like big major oil companies, who will be probably involved in this kind of discussion when the remedy package is being negotiated. So I would really say that [ they will go with the same ], and the ongoing discussion with the European Commission is really fruitful. And we aim to submit the application of negotiated package of remedies by the end of the first quarter. And so taking into account that kind of assumption, the clearance is probable by the end of the first half of this year. So that's the answer to the first question.
Okay, regarding reversals of some of the negative impacts on the working capital. Indeed there are a few positions which we expect to be reversed in the first quarter. To give you some more details: We have the accrual of the settlement of the commodity hedges we -- as at the end of December, the amount was PLN 250 million. Then we have a prepayment executed by ORLEN Deutschland in the amount of close to PLN 500 million related to some prepayment of taxes and some prepayment to one of the supplier. And we also have a prepayment to the supplier in PKN in the amount of close to PLN 600 million. So altogether, it's summed up to PLN 1.3 billion of the reversal, which yes effectively comes back in January.
Can you repeat, Igor, the third question?
Yes. First of all, I would be quite interested to understand, I mean, the run rate that you expect in the retail segment. Because I was listening to the sort of questions and answers around retail, and it seems to me that there will be -- there were some sort of one-off factors that potentially affected Q4, be it Germany performance or anything else. So I was wondering sort of what do you expect in terms of the run rate on a quarterly basis going forward. Is that, this number that we have seen in Q4, PLN 900 million, sustainable? Or it's going to be more like PLN 600 million, PLN 700 million or PLN 800 million or something like that?
I think the number -- so EBITDA generated in Q4 was extraordinary. There were a few positive factors: so those logistic constraints on the German market and, secondly, rapidly decreasing crude oil price, which enable us to -- let's say, to use the time lag from, let's say, wholesale prices to the retails prices. So you should not expect that this will -- there will be deterioration.
Sorry. We should, I should not expect? Or...
You should not expect PLN 900 million, in my opinion.
[Operator Instructions] We have no other question at this moment. Dear speakers, back to you for the conclusions.
Thank you, operator. If there are no more questions, I would like to thank you all for participating in our conference call and, having conclude our presentation, thank you and say goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for you participating. You may now disconnect.