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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to PKN ORLEN Quarter 4 2017 Consolidated Financial Results Conference Call. I will now hand you over to Mr. Dariusz Grebosz, IR Director. Sir, you may begin.
Thank you, operator. Good morning, everybody, and thank you very much for joining us today. It's good to talk to you again. Welcome and I wish you a very successful new year. Welcome to PKN ORLEN's conference call presenting our financial and operating results for the last quarter of 2017 and we will take this advantage to briefly discuss the full year achievements. And seems like we are opening the reporting season at the Warsaw Stock Exchange and I presume that you find useful such early announcement. The results will be discussed for you by Mr. Miroslaw Kochalski, Vice President of the Management Board; Mr. Rafal Warpechowski, Executive Director for Planning and Reporting; and myself, Dariusz Grebosz, Head of IR. The presentation which was mailed to you and is available on our web page will be discussed firstly. Immediately after the floor for Q&A session will be open. And with no further delay, I hand over to Mr. Miroslaw Kochalski. Please go ahead.
Thank you, Dariusz. Welcome everybody who join us today for the results for last quarter 2017. Of course, we are [ inform ] about the result for full year. So first of all, I would like to say that it was first year of executing new strategy, which has been announced in December 2016. It is important for us. From this point of view, as a result, we could see as we focus on main figures, they are [ 3 ], EBITDA LIFO PLN 10.4 billion. That is a very good result of our retail division, over PLN 2 billion and of course, net financial gearing, [ 2.5% ]. What has impact on this EBITDA LIFO PLN 10.4 billion? First of all, to focus on this throughput of crude oil, a record. We [ processed ] more [ at ] 33 million tons crude oil. It means that of course, we use our assets to deliver product and to build our market share. Very important part of the business is retail. With satisfaction, I can say that we realized EBITDA LIFO over PLN 2 billion. That is not only the question that we are delivering value satisfaction for oil clients, no, but I think we are on the way [ at the same time ] to deliver -- to outperform our -- needs of our clients in prospective 5 to 10 years. It is important fact for us and I repeat with satisfaction, the growth of sale of our retail division, about 8%, in fact on the Polish market where we had the same number of gas stations, [ plus 10 ], my colleagues will present detail. It means that we have the keys to deliver more value, more satisfaction, better offer, new products, new services. So of course, what next? Next, of course, people. And what -- I want to say that we show in presentation some awards, some ranking, but I want to thank all employee, managers, engineer, oil company. I can say that PKN is consolidated, it's stable -- it has a consolidated stable foundation to deliver value, to realize strategy, to develop oil company. I want to thank again for all our key engineers, managers, workers. Of course, there is not -- it results for our financial situation, where cash flow, operation, more at PLN 8 billion. It means that of course our financial strength, it is very, very good. Finally, in my introduction before my colleagues will present some details about financial results, I can say that we have skills, that we have the potential to realize responsible development of our company this year, in 2018, in next year. At the moment, thanks for this time, and my colleagues will present details and finally, I will give some outlook for 2018.
Thank you. Good morning, ladies and gentlemen. Let me first comment on global macro environment we operated in 2017. As presented on the upper graph on Slide 5, our model downstream margin decreased by $0.5 per barrel year-on-year and still amounted to very healthy $11.5 for the quarter. From the table on the right, we can see that it was caused mainly by drop in heavy heating oil margin and crude oil price increased by $12 per barrel year-on-year, reached $61 as an average for the quarter, while yearly average amounted to $54 and was higher by $10 per barrel year-on-year. We also observed significant strengthening of Polish zloty versus U.S. dollar and euro, which also put some pressure on our model downstream margin when converted into zloty. But at the same time, it resulted in gains on the revaluation of our debt and balances in foreign currencies, which we recognized in financial activity, both in Q4 and whole year. Still we should underline that despite this drop in Q4, average model downstream margin of $12.8 per barrel for the whole 2017, which is 1.1 higher year-on-year, definitely was a very solid level and thus very supportive for our operations. On the Slide 6, we continue with information on macro, but more related to markets we are operating, crucial for our performances, GDP trend and as visible, we enjoyed growth on all the markets we are operating, which is followed by higher fuel consumption. In Poland, we already see, let me say, more normalized correlation between GDP and fuel consumption as Q4 2016, as we all remember was the first whole quarter of the implementation of new regulations called fuel package, aiming at limiting so-called grey zone in fuels trade in Poland. Still, dynamics in Q4, not only in Poland but also in other markets were very solid and created a great potential for sales growth that we managed to utilize. So to summarize this part, macro environment was less favorable in Q4, while fuel consumption was still very strong. As for the whole year, we may say that we enjoyed both high macro and fuel consumption growth, especially in Poland, where grey zone was visibly limited, so we were able to deliver record high results for the year. And the next section, starting from Slide 8 is exactly financial results, consolidated group results. Our sales revenues in Q4 increased by 8% year-on-year, which includes 5% volumes growth in all operational segments and also higher product prices due to just mentioned crude oil quotations increase. EBITDA LIFO for Q4 amounted to PLN 2 billion, was PLN 0.6 billion lower year-on-year. Major elements of that change is lower macro, as just commented, and partially offset by higher volumes and lack of one-off type element from Q4 2016, namely insurance income that we recognized in Q4 2016 in Unipetrol in relation to steam cracker shutdown, as you remember. And worth to say that EBITDA LIFO for the whole year, as Mr. Kochalski just mentioned, PLN 10.4 billion was both record-high and confirms that we were able to effectively utilize the good macro conditions that we faced during 2017. LIFO effect, PLN 0.7 billion, just a direct result of dynamic growth of crude oil prices that we observed in the end of the year, and as reported EBITDA for Q4 amounted to PLN 2.6 billion. [indiscernible] net financial results, as I said, interest and settlement and reevaluation of financial instrument was net by positive foreign exchange differences. And so after taxes, we delivered PLN 1.6 billion net profit for the quarter. And again, record high net profit for the whole year of PLN 7.2 billion. On the next Slide #9, we present split of EBITDA or contribution by operational segments to EBITDA. As in prior quarter, downstream continues to be the biggest in terms of EBITDA LIFO, it is PLN 1.6 billion, and that's also the segment with this decrease. PLN 0.7 billion lower EBITDA year-on-year comes from drop in macro, as I said, lack of positive one-off in Unipetrol from 2016 and already the straight increase in sales volumes. PLN 0.5 billion profit in retail, higher by PLN 51 million, thanks to positive change in all major parameters. So volumes and both non-fuel and fuel margins were better, so all companies in that segment improved results year-on-year. Upstream EBITDA, lower year-on-year, but it comes mainly from lack of prior year positive one-off impacts related to purchase price allocation after acquisition of FX Energy that we recorded in Q4 2016, while we may say that from operational side, negative macro change due to drop in gas prices in Canada was offset by higher production of 13% year-on-year. And thank you for this part. Let me turn the presentation over to Dariusz for operational results.
Thank you, Rafal. Moving on to Slide #10, starting from our biggest segment, downstream. As Rafal has already flagged, the result of our downstream, biggest segment, amounted to PLS 1.6 billion in Q4. It was achieved at 5% growth of crude oil throughput and full capacity utilization and sales volumes were higher by 4%. We achieved higher sales of our main key products; gasoline, LPG, olefins, polyolefins and diesel oil was on a comparable level. Please notice that we are obviously discussing consolidated results for the whole group. And in Poland only, the diesel oil, in terms of the volumes, was up by 13%. Talking about the sales, at the same time, PTA, PVC and fertilizers recorded lower sales. And on one hand, as I said, the key products sales were higher, but on the other hand, as it was already said, we experienced worsening of macro environment and naturally, it was mainly reflected in this biggest segment result. Mainly there were lower Brent/Ural differential. There was a higher cost of internal usage, which is stemming from higher crude oil prices. And there was also worsening of margins for polyolefins and heavy fractions, which was, again, result of the crude oil prices increase, but also strengthening of Polish zloty, which Rafal also already flagged. Partially it was offset with higher margins of fuels and olefins. It shall be noted as well that 4 quarter results a year ago, the results included PLN 0.3 billion from receiving interest for steam cracker at Unipetrol, which was not the case for this quarter. And this is reflected in the others on the bottom left-hand graph. Moving to the next slide, Slide #11. As it was said and it's reflected on the top left-hand graph, volumes went up by 4% and throughput of crude oil went up by 5% in Q4, which was contributing to the highest-ever annual result in terms of crude oil throughput for the full year for the whole company. Utilization ratio went up by 5 percentage points, resulting from increase by 11 percentage points growth in Plock in our main refinery, in ORLEN Lietuva by 7 percentage points. And this growth in Plock and Lithuania was stemming mainly from the good market environment and demand. In Czech, we experienced decrease by 9 percentage points in terms of utilization ratio, due to unplanned POX maintenance and plant maintenance at Litvinov. Higher throughput and capacity utilization obviously resulted in volume growth, but it has to be indicated also that in Plock we experienced growth of sales volume, also due to the fact that in the fourth quarter of 2016 there was a maintenance turnaround of olefins, which we had not this effect this year. In Czech, growth again mainly in terms of petchem products as a result of steam cracker relaunching and availability of FCC unit. In Lithuania, higher sales volumes were responding to the favorable market conditions and we managed to limit seaborne sales and redirect volumes more into the inland sales. And moreover, we continued exploring synergies effects; I mean, covering demand for diesel oil in Poland by importing diesel oil from ORLEN Lietuva. Moving on to our next segment, retail, Slide #12. Fourth quarter again is flat with the highest-ever result of this segment, contributing significantly to the full year results, which is also another year in row record high and this was supported by the growth of volumes by 11%. And market shares were up in Czech, in Germany, and in Lithuania and fuel margins increased in Czech and German markets. There were comparable levels of fuel margins in Lithuania and lower margins year-on-year on fuels in Poland. In terms of non-fuel margins, we experienced growth in Poland and Czech and a comparable level in Lithuania and Germany. The result is close to PLN 0.5 billion. And as Rafal already mentioned at the beginning of the presentation, the result was supported by all 3 key elements; volumes, margins on fuels and non-fuels. The volumes contributed positively. The growth was around PLN 60 million comparing year-on-year. The non-fuel sales contributed positively or increased by PLN 40 million, and the growth was by PLN 10 million from fuel margins. However, higher sales, and we have mentioned this higher volumes in this segment, generates also higher cost of fuel stations running and this element decreased the result by around, roughly speaking, PLN 60 million. Anyway, in the end of the day, PLN 0.5 billion result of the segment is awesome. Moving on to Slide 13, the [ second slide ] discussing retail. As I mentioned, higher volumes means higher market share and most remarkable growth is in Czech where market share exceeds 20% and the number of filling stations exceeds 400. But here we have to notice that the significant part of this growth is due to launching into the network, filling stations which we acquired from OMV. We continue our non-fuel offer development. In the fourth quarter of last year, we opened 40 new Stop Cafes, new outlets, and currently, I would say, nearly all our network is equipped with Stop Cafes. Roughly speaking, we have 1,800 Stop Cafes. 1,600 of these are located in Poland, 200 in Czech and 20 of all our out filling stations in Lithuania are offering Stop Cafes. Moreover, in Poland, within this 1,600, close to 200, [ 189 ] are in a new format of O!SHOP. We may simplify and say that each O!SHOP, our convenience store, includes upgraded format of Stop Cafe. So -- and this is delivering very, very nicely, as you could see on the previous slide in the results in terms of the non-fuel contribution. Moving on to Slide #14 and 15, which are discussing upstream. Upstream recorded 17% production growth, mainly due to growth of the production on our Canadian assets. Despite the production growth, we recorded decrease of the segment result. It is mainly related to the lower gas price, which accounts for more than half of our production. Lower gas price is stemming mainly from 2 elements. Growth of supply in Canada, higher production in Canada, and also in the U.S., because Canada is important of gas and the supply was growing. On the other hand, we had in the fourth quarter last year, relatively mild winter, which caused a decrease of the demand. The price of gas went down by, roughly speaking, 42% to CAD 1.6 per gigajoule. Let me remind that in our assumptions for the strategy, we assume [ CAD 2.4 ], which was also a slight decrease comparing to 2016, but this was a really significant drop. And moving on to Slide #15. To summarize operationals of our assets in Poland and Canada, you have the split on the left hand that figures characterizing Polish assets, on the right hand, Canada. What is worth to note and underline that we notice significant growth of our 2P reserves, mainly stemming from the growth of 2P reserves in Canada. In total, currently, we have 152 million boe 2P reserves. And in fourth quarter, the average production from our -- in both countries amounted to 16.2000 boe. EBITDA of the segment in the fourth quarter was around PLN 80 million. CapEx was at the level of PLN 160 million for the whole segment. In terms of the full year results, the average production in the last year was amounting to 15.6000 boe per day, EBITDA was at the level of roughly speaking PLN 300 million and the CapEx of PLN 800 million. So I would say that's according to our plan. In the fourth quarter only, we made 5 new drillings, 7 wells were fracked and 5 wells were included into production. And moreover, we continue the works on extension of infrastructure for the transportation and storage of hydrocarbons. In Poland, we also in the fourth quarter made some operations. There were 2 new exploration wells drilled and 3 new drills have been started. So this is about our segment. Thank you very much and I hand back to Rafal.
Thank you, Dariusz. Coming back to financial situation, let me comment on the cash flow on the Slide #17. In Q4, we delivered PLN 0.9 billion of operating cash flow, which was based on PLN 2 billion EBITDA LIFO, partially spent on working capital increase and payment on income taxes. In terms of working capital change, it comes mainly from inventory increase and that's why it should be used with this [ PLN 0.7 billion LIFO ] net with this PLN 0.7 billion LIFO adjustment, so -- as it comes mainly from crude oil prices increase. Just as a reminder, we still have over PLN 4 billion, which is roughly 30% of our inventory, as obligatory reserves and that's why fluctuation in crude oil prices are impacting our reported results by this LIFO adjustment. We spent PLN 1.1 billion on investment activity, which includes CapEx of PLN 1.7 billion, partially reduced in terms of financial outflow by change in investment payables and dividends from equity investments and some other items in financial activity -- in investment activity. And finally, on the bottom graph, we present summary of cash management for the whole year. This is record high EBITDA, on the left-hand side, PLN 10.4 billion, which covered working capital increase, net of LIFO impact in the amount of PLN 1.2 billion, net investment activity for the whole year of PLN 3.9 billion, PLN 1.4 billion dividend payment and other elements like taxes, interest, operational, foreign exchange, differences totaling to PLN 1.3 billion. And still, we were left with PLN 2.6 billion that enabled us to decrease net debt of the company comparing to the end of 2016. Next slide confirms our strong financial position. This generated free cash flow just presented, decreased net debt to PLN 0.8 billion, net gearing to 2.2% in the end of December 2017. And we have very stable structure of debt. As represented on the bottom graph, it is mainly in Europe, which creates kind of a natural hedge for our economical exposure. What is also important is that our debt is long-term, maturing on average in 2021, which secures financing for investments that we declared in the strategy. And we are also very pleased to say that we were awarded by Global Finance for the second time in a row as Best Managed Company in terms of foreign exchange management in Central and Eastern Europe, which we are very proud of. And now section related to CapEx, which amounted in 2017 to PLN 4.6 billion. For sure, we continued with all major growth projects, like Polyethylene 3 unit in Unipetrol, Metathesis and CCGT plant in Plock and also maintenance spending in downstream amounted in total to PLN 2.9 billion. It is worth mentioning that we successfully tested CCGT plant in Plock, so -- and we expect to complete this project in Q1. So from the -- already in H1, maybe from the second quarter, we should recognize some contribution to EBITDA from that investments. In retail, we utilized CapEx both on modernization, new stations opening and at the same time, for expansion of non-fuel offer, including new Stop Cafe and O!SHOP locations which very highly contributed to those record high results of the segment. In upstream, we continued both in Poland and in Canada, concentrating on the most profitable projects, delivering higher contribution year-on-year, despite the pressure from macro. And obviously, the CapEx is under constant monitoring -- was on the under constant monitoring kind optimization and that's why we ended slightly below our initial expectation. But as I said, all major projects are continue. And now let me turn the presentation to Mr. Kochalski for guidance on our expectations for 2018.
Thank you. So let me start with CapEx. What we planned -- what we have planned for 2018. I can say that we have an amount, PLN 4.8 billion. What is important for us that this amount is in -- all to finance all projects what we have in our strategy, all what -- that's been announced in strategy in December 2016 and last year. This is important for us. Thus, half of this amount will be for growth and PLN 2.3 billion for maintenance. I think it is important for us because it gives our position [indiscernible] on the market in next [ year ]. So about -- main factor for us is crude oil prices. That is, of course, difficult to make any prediction for this year. If we remember well, [ decision ] OPEC, from November 2016, this is the time when this oil price -- crude oil prices month to month grow. Of course, it's a problem, because for us but a lot of factors define the situation because one is growth of oil production in the United States. We have some limitation in OPEC countries and in the countries in which we have agreement with OPEC. Finally, I think we see that this oil price which falls around on the level as in past year, in last quarter. Of course, it's difficult. After first quarter this year, I think we'll know more about this oil price, but that is our prediction. Of course, this crude oil prices will make some pressure on the downstream margin, but let me mention our assumption in strategy in 2016. Our assumption was that downstream margin, about USD 11.3. It means that what we have in last year is more, as well, [indiscernible] it’s more in some months. It was something special. It is not -- so it was extraordinary for us. And of course, it's fantastic to realize so big margin. But this USD 11 is our goal, USD 11.3. Of course, it is too short a time -- too short, 1, 2 months to put some prediction, but I think we have by chance realized this margin, of course, all depends not only on us, depends on the situation on the market. But what is positive, it is growth in the world economy. In Europe, economy, in Poland too. This is positive for us that forecast for GDP growth for Poland are from 3.6% to 4%. In Germany, in Czech, in Lithuania too. It means, of course, that should -- it should develop and it should have positive impact on consumption if you were not only in Poland but too in other countries. So I think that this global economy, this positive view should give us chance -- us to realize strategy and to achieve our goals, what has been announced in our strategy. Of course, for us, important is to -- this regulatory environment for us. Important issue is that of course that in Poland, last year, it was a big success of our government in fighting against a grey economy, especially grey economy in fuel business. Let me -- I say on the 3 figures about this situation, it's on diesel. In diesel legal business, legal data, where that in 2015 sale of diesel was 11.7 million ton, 2016 was 13 million ton and this year around of 16 million ton. Each show us that we have new situation on our market and we are fighting very strong to beat the position because of course some part of this illegal business [indiscernible]. But of course, we see that determination of our government in fighting against grey economy is so strong that it will be -- it should have positive impact on our financial results. Of course, we have some other regulation as a question of the reserves. The level 53 days, we, of course, realize National Index Target. We see these changes. Of course, we will do what is possible to use this -- reduce this from 7.5% to 5.48%. It means, of course, that we must be ready and we -- what is possible to realize on the long level in this economy. So what is important for us, of course as we mentioned in December 2016 that we in 2018, later this year, I think probably in the last quarter, we will present updating our strategy details. It was our -- we announced this in December 2016. Of course, what happened in short in this quarter, while waiting for us -- minority shareholders in Unipetrol. And of course, we want some Board of Directors to present recommendations for dividend policy for dividends for 2017. I hope that recommendation of Board of Director will be approved by General Meeting in May or in June this year. So generally, I can say that we are optimistic. Of course, margin will be under pressure, but the pressure will be not so big, so deep that we have a big impact, negative impact on our business, that we have our challenges to increase our efficiency and deliver value and I hope this year will be good for us. Thank you.
Thank you. Operator, we are ready to take the questions.
[Operator Instructions] Our first question comes from Henri Patricot, UBS.
Just 2 questions on CapEx and then one on the dividend. On the CapEx, the first one is, so you mentioned on presentation PLN 4.6 billion for 2017, but the cash CapEx was lower at PLN 4 billion, so does it mean that we could see higher cash CapEx in 2018, how would that compare to the PLN 4.8 billion that you guide for in '18 in the presentation? And secondly on CapEx still. On the upstream, CapEx is flat year-on-year, despite the more supportive environment for upstream via oil and gas prices, and is that deliberate decisions from you not to invest too much in the upstream, or is it due to the fact that actually you can't really increase CapEx, given your current portfolio of assets? And finally, just on dividend, I was wondering if you can give us a better idea at this stage of what the increase could be for 2017?
So in terms of CapEx, yes, CapEx itself in Q4 was higher comparing to average from the prior quarters, so PLN 1.7 billion. That's why approximately PLN 0.4 billion of this not great CapEx is change in liabilities. So you may expect that it will be realized in 2018. But obviously, the CapEx for the whole '18 is also higher than for '17. So depending on the split by quarters in the end of the year, if we have a situation like that year, again this portion of investment liabilities may slightly increase. So on a yearly basis, it shouldn't be a big difference on a first quarter or first half, you may expect some additional payments. And in terms of upstream, if I grasp the question, we still confirm PLN 0.8 billion CapEx. As you can see, allocation slightly changes, so was Canada, where the production is -- majority of our production, in fact, located. But still, we're continuing projects in Poland, which are at earlier stage, if I may say so. But still PLN 0.8 billion is just what we have in the strategy, quite comparable amount year-on-year.
About dividend, of course, as I mentioned that we want to give some recommendation. It is some traditional approach. But I can return to my statement that of course, the increase for dividend for 2016 and for 2015 increased about 50%, it was something special. But I can say and I confirm that our strategy in dividend policy that year-to-year we want to increase dividend. I can confirm, of course, it's before the decision of our Board of Directors. But I call that this decision -- this level of dividend will be -- give satisfaction. Of course, if expectations are high, we are much more restrictive and I think we can find some balance approved for all -- for our shareholders and for the needs of our company in this year and next year for projects what we want to do. So I think that will be a good amount for -- per shares for shareholders.
Our next question comes from Monika Rajoria, Societe Generale.
My first question would be on the maintenance in 2018, and my second question would be on the grey zone that you speak. So I would like to ask if you can give us some kind of guidance for what kind of maintenance can we expect in this year and what are the units that you plan to shut down, both in refining, as well as petrochemicals? My second question is on the grey zone. I would like to understand if the grey zone has been completely eliminated in Poland and what is the current situation that we see?
In terms of first question, namely maintenance shutdown in 2018, as you know, because we informed during this year we have quite a significant amount of unplanned shutdown. So from that perspective, the 2018 should be better, unless something unexpected happens. We may say that in Lithuania, the spring shutdown will be less demanding comparing to 2017. In Unipetrol, we have the shutdown in Kralupy refinery, which was not planned in '17, but still we had some unplanned shutdowns. And in Poland, we may say comparable level, we will have the cyclical every 2 year shutdown in olefin unit, then with the same with PTA. But this is something which was not planned for 2017, but still, we inform the market about some constraints in work of this installation during the year. So it should be less demanding comparing to that year.
So about grey zone what we can say, in Poland, I mentioned, of course, we see determination government fighting against grey economy, grey zone. If you will give that -- we will – that will be pressure to reduce and of course, it's clear that a small part of this business will be minimized in the shadows, but it's a question on the scale and I think the scale will be reduced this year too.
Our next question comes from [indiscernible]
I have 2 questions. The first one on CapEx guidance for this year. You said that it should amount to PLN 4.8 billion versus PLN 5.5 billion guided earlier. What is the reason for this PLN 70 million decrease effect in downstream expenditures? Is this the result of delaying CapEx to 2019 or capping CapEx for particular projects? And the second one on petrochemicals. In the fourth quarter, the results were suffered by unplanned shutdowns. Are these installations working now at normal utilization rates or the effect might be similar in the first quarter?
So the last question is about -- okay, all installations are working very well at the moment and I think of course it's difficult to put [ some ] prediction, but it's true that now we haven't any unplanned shutdown and it is a positive for us. But of course, it's difficult to put some forecast. This is one. Second thing about this CapEx project, I mentioned that of course it's PLN 4.8 billion and it's less about PLN 0.7 billion [indiscernible]. But I mentioned and my colleagues that of course, we have 2 part of our CapEx project, it is [ growth ] and maintenance. First of all, we won't -- we are focusing to find efficiency in this maintenance CapEx and a big change of this reduction, it is a reduction in this part. It's positive because it will show us that we are looking for efficiency on our projects. And second, I can confirm and I repeat that of course, we are [ realizing ] all projects, which have been planned and which have been announced for us. Of course, we know that we have -- we move some project because we want to start installation [indiscernible] in December this year. And this -- the date -- the deadline for some projects, some moved. It is one of the reason that this amount is not [ PLN 5.5 billion ]. So again, I want to say that all projects are -- will continue and we are realizing and I think this project will deliver value.
Our next question comes from Anton Fedotov, Bank of America Merrill Lynch.
Your utilization of the refiners was quite high in the fourth quarter. Can you please guide us on the expected average utilization in 2018, given all the shutdowns that you just mentioned?
So assuming the macro which is still quite acceptable and comparable with the strategy, we also expect very high utilization. As I said, the drop in utilization rather comes from unplanned shutdowns. If it is the case, if we have planned shutdowns we may prepare for them, build stock et cetera. So it should be about 19% for the group. Obviously, with macro, like we said in the strategy, this is very favorable, so like $11 model downstream margin, it is very, very good environment for us. So also good throughput in 2018.
Our next question comes from Tamas Pletser, Erste Bank.
Got 3 question. First of all, can you tell us a little bit more about this new retail concept, this O!SHOP, why it is better and why do you expect higher earnings per station due to this concept? That was my first question. And my second question would be about your fourth quarter shutdowns. What is the total cost of these unplanned and planned shutdowns for the period? I mean, how better would be your result without these shutdowns? And finally, can you tell us a little bit more about the impairments in the upstream sector? I have found that you had some impairments as your reported EBITDA was below the clean EBITDA, so what is the reason for the difference?
In terms of impairment in Q4, it's related to upstream assets as described. And basically speaking, it's related to Poland -- to assets in Poland. We may say that it comes mainly from macro assumption that external valuers, external experts took for the calculation, because in terms of 2P reserves, the number, the quantity, as you see on our slides, we still confirm over 11 million 2P reserves in Poland. So basically speaking, prediction or trend of gas prices in the future, this growth is not so rapid as assumed a year ago and that change of that parameter mainly affected the valuation. So it is non-cash, it may be reversed, it's not a write-down of any particular area. This is just kind of valuation based on future prediction of gas prices because we are talking about gas assets in Poland. But let me say -- answer for these 2 questions about O!SHOPs or its concept. Its concept, of course, convenience is important for us, because as I mentioned, retail division is one of the priority for the company. We want to win competition. We've [ other ] gas stations, but it is something what can be our new quality of restaurant, shop, coffee, other services and I think it will give a chance to increase efficiency and make a structure of margin from fuel to non-fuel or [ dislocation ]. If we ask about this results -- financial results, unplanned shutdown in last quarter 2017, of course, it's difficult and we have a policy to [ inform ] about cost, because it is not one, it's not very simple, but we are using this unplanned shutdown to realize some modifications, some modernization. So it's difficult to put some amount. I think generally, the result is so high and so good that, that is not big impact for the result.
Great. What was your, let's say, first experience with this O!SHOP? Can you tell us what is the additional profit you can get from this new setup? Can you share us any numbers?
I can say, generally, our opinion is, of course, we are analyzing every location. And I can say generally that all projects, all shops, we have our plan, we have our assumption, we have predictions, in all cases we -- the result of better expectation before starting with any location. I can say, every project achieve results better as our expectation before start. But let me -- now that I can say not more because it's confidential. And of course, competition is too on this market and I cannot say more.
Our next question comes from Igor Kuzmin, Morgan Stanley.
I have 3 questions, please. First is more of a clarification. Can I just get my head clear? So 2017 guidance was PLN 4.6 billion, it's on your Slide 19, And for 2018 you're guiding PLN 4.8 billion. So if I understand correctly, there is a certain delay in terms of the actual cash -- from the actual cash flow perspective that there is a portion of 2017 that falls into 2018. So assuming that PLN 4.8 billion is going to be spent in full in 2018, how much more on top of that figure on cash basis you will spend, which is the leftover from '17? So am I correct in assuming that in 2018 it will not PLN 4.8 billion, but possibly more? So that's the first one. Second question, working capital expectations for first quarter 2018. If you don't mind, just maybe give some sort of indication, what sort of effect you expect on a net-net basis? And question number three, in petrochemical segment the dynamic that you have highlighted in your presentation for the first 3 weeks, do you expect this dynamics to sort of be comparable -- comparably similar on a full quarter basis? Obviously, it depends on macro, but sort of what's your expectations currently? And could you possibly maybe comment on the split between the naphtha-based petrochemical operations and the fertilizers? If I understand correctly, EUR 869 per ton [indiscernible] in the first 3 weeks, that's a blended number, which includes both the fertilizers and naphtha-based petrochemical. So I just like to understand how the dynamics between the 2 sub-segments compare?
The first question CapEx, as we said, this year the CapEx investment liabilities amounted to PLN 0.4 billion, so increase in liabilities, because the CapEx in Q4 was higher than for the first 3 quarters. So if you see on the comparable trend year-on-year, in 2018 also some higher CapEx in the end of the year. Then you may say that from cash flow perspective it should be like [ PLN 0.8 billion ] in cash flow. If the CapEx is little more regular, it may be slightly higher, as you said, because normally we had like PLN 0.2 billion, PLN 0.3 billion of investment liabilities in the end of each quarter. So this amount will roll over year-on-year. So I wouldn't expect a huge difference between cash flow spending and the CapEx, but still, there is a potential for maybe portion of this PLN 0.4 billion from the end of this year. The second question, working capital, obviously depending on the macro evolution, but we are -- we had some increase in the end of the year. On the other hand, we have some easing of mandatory reserves in the end of the year, because we could drop to 53 days. On the other hand, we have building of some inventory, preparing for shutdowns that we will have in Q2. So all-in-all, I would say, working capital shouldn't be negative from one-off items in Q1 rather. We are already prepared in the end of the year, so that's why you also see some increase in working capital -- net working capital in Q4. So it should be more normal in Q1. We do not expect any material negative impact. In terms of model margin, in terms of petrochemical that we are presenting, it is without fertilizers. So it is built on -- in model downstream margin, we have monomers, olefin -- ethylene and propylene. In model petrochemical margins that we are also presenting, these are polymers. So this is separated. And obviously, the trend is -- the level is slightly lower than in Q4. So to the certain extent, it is seasonality, but now the level is still [ about 800 ] that we contemplated initially in the strategy, so prospects are quite okay for us.
You may say so that petchem margins are definitely slightly decreased quarter-on-quarter due to the higher naphtha prices, correlated with higher crude oil price. However, when we are talking about the fertilizers, we estimate the positive sales dynamics of fertilizer and PVC in Anwil, which will reflect, let's say, higher demand correlates with positive GDP in Poland.
So the dynamic in fertilizers is on average a bit, would you say, better than in naphtha-based petchem operations?
But it's separate business, yes. Based on naphtha, you may say that we are producing [indiscernible] petchem products and based on, let's say, the Anwil is just a production of PVC and fertilizers, so it's not comparable businesses.
No, no, for sure. But you obviously -- this is part of the EBITDA in petrochemicals, so I just want to check how much of the offsetting effects, if there is any will be in Q1, because oil prices are rising and that's narrowing down the margins in petrochemical for sure. Just wanted to check which direction...
Yes. First of all, it's just 3 weeks yet of Q1. So it's -- that may be too early to say how the margins will develop further in Q1. But currently, they are slightly under the pressure due to the higher crude oil price and this is especially visible on the polyolefins margins that we present.
[Audio Gap] from Anton Fedotov, Bank of America Merrill Lynch.
I have one follow-up question. Given that the oil price environment is much stronger right now, would you expect any reversal of your previous upstream segment impairments in the first quarter of this year or in the following quarters, if the oil price continues to be strong?
We did this -- we are doing this external valuation both in Canada and in Poland in the end of the year. That's the market practice or even requirement -- formal requirement in Canada. So we just did it. And to be honest, we do not expect changes during the year, because the valuers obviously have assumptions for 10 or more years in the future. So there is rather yearly update of assumptions unless something extraordinary happens. But it looks like there is no, let me call, problem or risk in Canada, partial decrease of valuation in Poland and we do not expect major changes rather during the year. So probably a year of observation.
We have a follow-up question from Monika Rajoria, Societe Generale.
My question is on the insurance payment. Has there been any change from the PLN 2.3 billion number that was announced 2 years back? What kind of level or what kind of payments can we expect this year? And my second question is, can you just give us a flavor of what kind of cost savings that you're getting from the CCGT plant that is currently under operation? So just to know if it has been helpful for PKN?
Could you repeat the second question? Sorry. Repeat the second question?
Yes. I would like to understand what kind of cost savings that you are getting from the CCGT plant that is currently under operation? So has it been having any positive impact on the downstream EBITDA?
So, I answer for the first question, about insurance. As you mentioned, I put statement of course that we are in negotiation processes and I mentioned that I obviously can complete this dialog, this negotiation is last quarter, past year. Of course, second thing was that of course, I mentioned that is not good from our point of view to make an impression on negotiations. So that I can say that both sides, I want to continue dialog. I think we have a chance to reach an agreement. And both sides want to discuss and are in need of compromise, we will continue. Of course, I cannot say that this [indiscernible] finalize discussion this quarter. I hope, but I can say again that we can -- I cannot make any pressure on our teams. That is one thing. Second thing, when -- both sides are continuing this discussion, we are waiting for results and for agreement.
Yes. In terms of CCGT, what was the contribution, it is exchange of steam and electricity between this plant and our operations, mainly in Wloclawek and Anwil are based on market prices. So we may say that standalone contribution of this CCGT is about PLN 30 million for the quarter. We may say that it was to the certain extent, constrained by the fact that in Anwil there were planned shutdown on the fertilizer line. So consumption was slightly lower. But still, from an operational perspective, they achieved the targeted key indicators, like efficiency of the block et cetera. So that net financial impact is slightly above PLN 30 million on a quarterly basis.
Our next question comes from Ildar Khaziev, HSBC.
Two questions on Anwil, please. Is there any impact on its performance from rising gas prices? Just to understand, are your contract prices capturing the higher bottom Gazprom prices of the past few months? And that's the first question on Anwil. And also you mentioned plans to expand capacity there. Could you provide any details about the investments and how we should model the impact on our forecast? And then finally, the third question about retail. If you could share please, what was the contribution of non-fuel operations to your gross profit last year?
So in terms of contribution of non-fuel, it is -- on a gross profit level, it is approximately [ 30% ]. So as you see, it grows consequently from quarter-to-quarter. In terms of Anwil, the business this year was -- comparing to prior year, we have better situation in petrochemical side, so in PVC side rather than fertilizers. So fertilizers were slightly under the pressure, because of the first shutdown and also prices. So that's what I can say, I think. And could you please repeat the second question?
In the presentation, I think when you provided the guidance for this year, CapEx you mentioned that you -- a part of this CapEx will go to expansion of Anwil capacity. I don't think you mentioned this before, could you provide any detail about this?
Yes, this is what we contemplated in the strategy. So this is approximately PLN 0.7 billion, PLN 0.8 billion of total CapEx related to expansion of fertilizers production. But this is still -- I mean finalization is 2020, so it is still time to have it in place. We are just starting, in fact, end of 2020. And it will be increasing fertilizer production by -- like more than 400 kiloton per year. Obviously, if we think about efficiency, it will again give more than 10% return, based on our estimation on EBITDA. So this is promising business.
And just to clarify, the completion is scheduled for which year? And also on gas prices, is there any impact of high gas price -- are they actually going higher at the moment?
No. In terms of fertilizer, this is end of 2020 completion, so we are just starting the project. And in terms of gas prices, it's -- obviously we treat it as a macro, we have a contract. So majority is based on contract with PGNiG, but portion of the -- on the stock. So yes, higher gases means higher cost, but all depends on the other side, so on the demand also and volumes. So this is what I can say.
Our next question comes from Robert Maj, Ipopema.
Just wanted to follow up on the question on the CCGT contribution in Wloclawek, PLN 30 million per quarter, is it something that would be visible also going forward in 2018 on a quarterly basis? The second question on the gas prices of PGNiG. Are you having any -- kind of this comes from the PGNiG, because of the volume or rather you buy on the -- more or less on the spots, so we can track what would be the cost of it. Another question, a third one on Sunday closing when -- which is kicking in, in March, and the level of 30% on the growth from non-fuel sales in the retail segment. Are you expecting higher participation of non-fuel sales due to the Sunday closing act in Poland, or are you planning on major investments, like building big groceries close to your petrol stations, just to grab the market, which is visibly out there, appearing with the new law in Poland? And another question on ORLEN Lietuva. It's 20% higher EBITDA in 2017 year-on-year. Could you distinct and give a little bit of color on the -- how much out of this is coming from the settlement with the Lithuanian rails and how much is coming from the increased logistics and selling your own products in Poland, just that we can know how much more positive can happen here in 2018. Or is it rather that everything is consumed in 2017, and from now on this is only a play on margins and volumes?
In terms of -- starting from CCGT, this is just over PLN 30 million on a quarterly basis, should be -- you may assume for the next year it shouldn't differ significantly, shouldn't be lower at least we think. So it would be safe to assume that for the year. In terms of ORLEN Lietuva the settlement that we did was valued at PLN 100 million, roughly speaking, in the middle of the year. So this was one-off recorded in ORLEN Lietuva results. If we -- it does offer gas -- contract for gas. I can say, of course, that we are after rather bigger company which uses our gas. Of course, I cannot say about -- the discount about this details of the contract. I think that our requirements and what we have formula -- price formula is acceptable and is good for both sides, for suppliers and for PKN. So if you ask about this Sunday limitation for trading, of course, we haven't any idea to build any supermarket, big grocery, et cetera, but I think we have some expectation, not only from Poland but from Hungary. In Poland, in the year, now are existing throughout the few Sundays we have restriction. It was something special. Of course, it is not sure business increased, but it's not so significantly, this is not rapidly grow because people are shopping a day -- 2 days before when people know that there are some restrictions for Sunday trading. So it's difficult at the moment to say how big was the impact of this new regulation per se, but will be positive, but how big positive growth, this is not -- we haven't any data to put some estimation. Will be not so -- rapidly growth of sales, rapidly growth of margins for our non-fuel.
Okay. Maybe one more follow-up question on the fertilizer unit and the expansion from -- by 2020. Do you factor in, in your KPIs the [indiscernible] kind of CapEx and also investment plans, which is quite similar to yours? Do you expect an increasing competition in this segment, or calculating your IRRs for this?
So I think about this fertilizer project, I can say, of course, that we should look our situation in poly -- in agriculture. So demand for fertilizers is growing very fast in Poland. It's one thing. Second thing, we are -- all markets are under pressure, import because many companies are selling products to oil markets. Of course, I can say that oil project is a project which give a chance to achieve more efficiency because we are using oil products to product fertilizers. But other project -- other companies I think have a chance to play and our growth -- our capacity is not so big that we will be key game changer on the market.
We have no further questions. Dear speakers, back to you for the conclusion.
Thank you, operator. And if there are no more questions, I would like to thank you very much for participating in our call. Thank you very much and it will close our presentation. Thank you. Goodbye.
This concludes today's conference call. Thank you for your participation. You may now disconnect.