EnBW Energie Baden-Württemberg AG (EBK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining EnBW's Investor and Analyst Conference Call on the Full Year 2019. [Operator Instructions] I would now like to turn the conference over to Ingo Peter Voigt, Head of Finance, M&A and Investor Relations. Please go ahead, sir.

Thank you very much, and very good afternoon, ladies and gentlemen, here from Stuttgart this day. Thank you for joining us this afternoon for today's investor and analyst conference call for the full year figures 2019. As always and hopefully as expected from your side, our CFO, Thomas Kusterer, is with us and will guide you through today's presentation. He'll outline the main developments in the fiscal year '19 and explain the main effects. The forecast for '20 and the strategic outlook will sum up today's presentation. After that, we look forward to your comments and questions. With this, I hand over directly to Thomas to take you through the relevant figures and slide. Thomas, go ahead.

Ingo, thanks a lot. Ladies and gentlemen, I would like to join Ingo in welcoming you to today's conference call. Allow me to start by naming the factors that we consider to be the most important in 2019. With an adjusted EBITDA of EUR 2.43 billion, we attained and in fact slightly exceeded our target of an operating result of EUR 2.4 billion, 1 year earlier than scheduled in our EnBW 2020 strategy. 2019 was also a year in which we did considerable groundwork for the future of our company. Construction of the 2 wind farms, Hohe See and Albatros was on time and within budget. Both wind farms are now feeding power into the grid with total capacity of 609 megawatts. It is the biggest offshore wind project in Germany. At the end of 2019, we decommissioned Block 2 of the Philippsburg nuclear power plant as scheduled. Therefore, Block 2 in Neckarwestheim is now EnBW's last nuclear power plant in operation. Moreover, in 2019, we invested in growth earlier than we had originally planned. We made use of 2 unique investment opportunities and acquired the 2 companies, Valeco and Plusnet. The acquisition of Plusnet, a broadband provider, marked a key step for EnBW in building a strong position in the German national telecommunications market. Together with our subsidiary, NetCom, Plusnet delivers broadband Internet to households and B2B customers. By acquiring Valeco, an onshore wind and solar project developer in France, we were able to significantly expand our international footprint in the Renewable Energies business segment by adding about 130 megawatts of existing capacity to our group portfolio, another almost 280 megawatt consolidated at equity and a pipeline of more than 1,700 megawatts, predominantly in onshore wind. With the Hohe See and Albatros project and Valeco, the main focus of our investment in 2019 was on climate-friendly sustainable projects. That clearly demonstrates our consistent continuation of our corporate strategy focused on sustainable business model. As a consequence, green financing has become a core part of our financing strategy. By issuing our 2 green hybrid bonds with a volume of EUR 1 billion last summer, we have now totaled EUR 1.5 billion in green finance. With our 5-year green hybrid, we set a record, the lowest coupon ever achieved for a hybrid bond. On the other side of the equation, the low interest rate environment means lower discount rates on pension and nuclear provisions and, therefore, a substantial increase in our net debt. To sum up, we are well positioned overall coming up through the finishing line of our 2020 strategy. In 2019, all our business segments performed in line with our guidance, and we are well prepared for our next strategic time phase to 2025. More on this at the end of the presentation. So let's get started with a brief look at our adjusted EBITDA on Slide #2 and at how each of our segments contributes to our operating results. As already mentioned, adjusted EBITDA at the group level increased by 13% to over EUR 2.4 billion. This performance means we are firmly within our guidance range of between EUR 2.35 billion and EUR 2.5 billion for 2019. And all segments contributions to adjusted EBITDA are likewise within our forecast range. In addition, I would like to highlight the increased share of our low risk business. The share of adjusted EBITDA accounted for by our 2 segments, Grids and Renewable Energies, increased from 68% in 2018 to almost 74% last year. Now let's take a closer look at our segmental performance on the following 4 slides. On Slide 3, let's first have a look at our sales segment. Adjusted EBITDA increased compared to the prior year period at EUR 294 million. It is 10% above the figure for 2018. Operationally, our underlying sales business delivered very stable earnings in 2019. And in addition, Plusnet contributed to earnings from the beginning of the third quarter. When we have a look at the development of our sales volumes in 2019, we can see that they were pretty much in line with our expectations. Electricity sales volumes decreased by 4% to approximately 35.3 terawatt hours, while gas sales at 73.6 terawatt hours increased by 8%. In the B2C business, electricity and gas sales were almost at the prior year level, as expected, due to a decision we took back in 2016 to close our electricity B2B commodity business. There was a sharp fall in B2B contracts in 2019. B2B electricity sales volumes therefore declined by 1.4 terawatt hours. On the other hand, B2B gas sales increased by more than 5 terawatt hours, mainly due to an increasing number of customers and higher sales volumes. On Slide 4, we you can see that adjusted EBITDA in our Grids segment increased by 11%, mainly due to higher grid revenues. They notably rose due to the investment in reliability and security of supply in our transmission as well as distribution networks. Furthermore, the first-time application of the new leasing standard IFRS 16 in 2019 had a positive effect, in particular, in the Grids segment. As expected, the Grids segment continues to be the segment with the highest earnings contribution, which is in line with our forecast. As you can see on the slide, transmission volumes for electricity decreased by 3% while transmission volumes for gas increased by 3% compared to the previous year. Let's now turn to the Renewable Energies segment on Slide 5. As expected, we're able to generate substantial growth in earnings, with adjusted EBITDA increasing significantly by more than 62% to almost EUR 483 million in 2019. This positive performance is in line with our expectations based on the fact that Hohe See was connected to the grid at the beginning of the fourth quarter and started to contribute to earnings in Q4 2019. In addition, in 2018, as you might recall, we not only had poor wind conditions but also low water levels, so better wind conditions at our offshore and onshore wind farms and higher water levels at our run-of-river power plants compared to the previous year contributed to the positive earnings performance in 2019. Generation volume went up by 22% in total. In addition, Valeco has been contributing to earnings since the beginning of the third quarter. Finally, let me comment on the development of our Generation and Trading segment on Slide 6. As expected, adjusted EBITDA decreased by almost 11%. On the one hand, forward prices for electricity sales on the wholesale market were significantly above prior year levels and nuclear power plants had a higher availability compared to 2018. On the other hand, these positive impacts were offset by the following effects: compared to 2018 earnings related to other accounting periods were significantly lower in 2019; 2018 recorded high prior period earnings, predominantly relating to electricity procurement contracts. And since VNG sold the E&P business in 2018, there is no longer an earnings contribution from that business. This brings me to the next slide, development of our FFO on Slide 7. Our FFO increased by almost 19% to more than EUR 1.5 billion, mainly due to higher cash EBITDA. Other positive effects were a positive contribution to dedicated financial assets and lower paid interest rate in the reporting period. This was offset by high income tax payments in the reporting period. Moving to the next slide, Slide 8. FFO increased in 2019 and so did our RCF. Just to remind you, the reimbursement of the nuclear fuel tax in 2017 has been, and continues to be, used for debt repayment as well as for future investments in the period 2018 to 2020. Therefore, as in previous years, we have adjusted our RCF. Our gross investments amounted to almost EUR 3.3 billion in 2019. 85% of that was spent on growth projects, mainly on the acquisition of Valeco and the construction of Hohe See and Albatros. Moreover, it was spent on the expansion of the electricity and gas transmission grid, the expansion and renewables into distribution networks and investments in electric mobility; and thirdly, the acquisition of Plusnet. Our divestments of almost EUR 678 million mainly related to the sale of the remaining share in EWE. Consequently, net investments amounted to more than EUR 2.6 billion in 2019. For 2019, we have adjusted net investments by EUR 831 million for the early growth investment in Valeco and Plusnet, which contribute to the EnBW 2025 strategy. Despite this adjustment, our internal financing capability was at 83%, still falling slightly short of our target of at least 85% for 2019. For 2020, we expect our internal financing capability to be around 100%. Therefore, over the period 2017 to 2020, we are sticking to our prudent financial policies and are still aiming for an adjusted internal financing capability in the ballpark of 100%. As announced last year, with the transition to our growth strategy, internal financing capability will be replaced as a top performance indicator from 2021 by debt repayment capability. Debt repayment capability is targeted to be within the range of our rating positioning. On Slide #9, let me comment on the development of our net debt. Net debt increased significantly by almost EUR 3.3 billion as of 31 December 2019 compared to 31 December 2018. Let me illustrate the factors in this development, this waterfall chart. Our working capital increased by more than EUR 760 million, mainly based on the following 2 effects: the sharp decrease in our German Renewable Energies Act balance -- bank balance and inventories increased due to high volumes in our gas storage. The acquisition of Valeco and Plusnet in June 2019 added about EUR 1 million to our net debt. Investments, acquisitions and divestments totaled to almost EUR 2.9 billion. The equity component of the 2 hybrid bonds issued at the end of July 2019 had a positive impact on net debt. In addition, the first-time application of IFRS 16 increased our long-term debt by EUR 700 million. Other effects are primarily down to discount rate changes. The discount rate for pension provisions had to be reduced from 1.8% as of 31 December 2018 to 1.1% as of 31 December 2019. And the discount rate for nuclear provisions had to be reduced from 0.6% to effectively 0, precisely 0.03%. At the same time, the adjusted underlying assumptions regarding future cost increases remain at 2.4%. Hence, the net discount rate spread decreased from minus 1.8% at the end of 2018 to minus 2.4% at the end of the fiscal year 2019. Therefore, pension and nuclear obligation increased by EUR 1.1 billion. The change in net present value of our noncurrent provisions has no cash flow impact. Our group net profit and dividend proposals are shown on Slide 10. First of all, I would like to point out that in view of the spread of the coronavirus, this year's Annual General Meeting will not be held as planned on May 12, 2020. We already announced this last Monday. The Annual General Meeting will be held at a later date. A date will be set and communicated according to the further course of the infection and in accordance with legal requirements. We continue to aim for a dividend payment ratio of between 40% and 60% of adjusted net profit. Our adjusted group net profit attributable to the shareholders of EnBW AG increased by 80% to EUR 787 million. However, since valuation effect according to IFRS 9 in the financial results have a major impact on the adjusted group net profit in the financial year 2019, the Management Board and Supervisory Board have decided to propose a dividend of 40% calculated on the group net profit adjusted for this effect. Accordingly, the Management Board and Supervisory Board will propose to the Annual General Meeting a dividend of EUR 0.70 per share for the financial year 2019, which is EUR 0.05 above the dividend for the year 2018. The total dividend payout will amount to EUR 189.6 million. The postponement of the Annual General Meeting also postpones the resolution on the appropriation of the net profit available for distribution and consequently the dividend payment. On Slide 11, let's now take a look at the current fiscal year. For 2020, we expect a significant increase in adjusted EBITDA. It is expected to be in a range between EUR 2.75 billion to EUR 2.9 billion, which represents an increase of 13% to 19% compared to 2019. How is this reflected in the individual business segments? In the sales segment, we expect an adjusted EBITDA between EUR 325 million and EUR 400 million in 2020, mostly driven by the telecommunications business. For our Grids business, we expect a stable earnings contribution in the range of EUR 1.3 billion to EUR 1.4 billion. Adjusted EBITDA in the Renewable Energies segment will increase significantly due to additional in-store capacity in 2019, most notably, our 2 offshore wind farms, Hohe See and Albatros. Further expansions in our onshore wind and photovoltaic business in 2020 will also have a positive impact on earnings. We therefore expect an adjusted EBITDA of EUR 825 million to EUR 925 million for the Renewable Energies segment. For the Generation and Trading segment, with an adjusted EBITDA of EUR 425 million to EUR 500 million, we expect an increase in earnings. It is obvious that the decommissioning of Block 2 of the Philippsburg nuclear power plant at the end of 2019 will have, to some extent, a negative earnings impact, but it will be outweighed by the fact that we sold our electricity deliveries for 2020 on the forward market at a higher wholesale market price than in the previous year. So for 2020, overall, we expect stable earnings in the Grids and increased earnings in the other 3 segments. We currently assume, despite all the uncertainties, that the corona pandemic will not have a significant impact on our operating results in 2020. Market prices are currently down. We also expect that the, in fact, already announced, cuts in the industrial output will potentially mean a risk of low electricity consumption and therefore a reduction in our electricity revenues. But because EnBW's entire generation volume for 2020 has already been sold, there's basically no direct impact on our EBITDA guidance for 2020 from the decline in the market prices. On the sales side, any reduction in B2B demand and any increase in credit risk could have a negative impact on earnings. This risk is, however, rather limited. Because of the high share of income accounted for by regulators and therefore predictable earnings in our Grids and Renewable Energies segment, we generally do not expect any significant impact on earnings this year. We are monitoring the situation very closely, however, and will decide on any measures necessary according to the duration and severity of the corona crisis. So much for financial year 2019 and our forecast for 2020. Ladies and gentlemen, this brings me to the last slide, Slide 12. As announced at the beginning of the presentation and as stated before, we will continue our successful EnBW 2020 strategy by combining our business portfolio into 3 strategic focus areas as of 2021 as part of our 2025 Strategy. We have stated specific earnings targets for these areas in our Annual Report 2019. In the smart infrastructure for customers' business area, with the expansion of our telecommunications and broadband activities and fast charging infrastructure for electric mobility, we aim to earn around EUR 600 million by 2025. This will be a plus of around 50% compared to 2020. In the business area, system-critical infrastructure, we will continue to expand our transmission networks with a key project, SuedLink and ULTRANET. We will also continue to expand and modernize our distribution networks. System-critical infrastructure is planned to contribute EUR 1.3 billion to earnings in 2025. Our third business area, sustainable power infrastructure, mainly focuses on the expansion of renewable energy. EnBW has more than tripled its onshore wind power capacities since 2012, and we want to further expand this area. However, the reform to the EEG, the German Renewable Energies Act in 2017, has put certain brakes on this upward trend. Despite these challenges and challenging conditions, we will continue to push forward the expansion of onshore and offshore wind power projects. Until 2025, we want to increase our wind power capacities to 4,500 megawatts. We are planning, for example, to construct the EnBW He Dreiht offshore wind farm in the North Sea with an output of 900 megawatts, for the first time without state subsidies, by the end of 2025. Moreover, we are working together with selected international partners to target new growth opportunities abroad. This strategy of selective internationalization has already shown initial success in France. I've already given you details on Valeco and in Sweden. Moreover, we are going to develop a portfolio of large-scale photovoltaic projects. Technical improvements and a significant reduction in prices for solar modules are opening up interesting perspectives. Under certain conditions, photovoltaic power plants can already be operated today without subsidies. This is why we have decided to make photovoltaic another pillar of our renewable energy alongside onshore and offshore wind power. Currently, we are building Germany's largest solar park with an output of 180 megawatts, in Weesow-Willmersdorf in Brandenburg. We plan to develop a solar energy portfolio of 600 megawatts across Germany by 2025, and in addition, we are also looking at sites abroad. In total, sustainable generation infrastructure is expected to contribute EUR 1.3 billion to earnings in 2025, which again will be a substantial increase of close to 50% compared to 2020. Developing EnBW into a sustainable and innovative infrastructure partner, we have now updated our adjusted EBITDA target for 2025 from greater than or equal to EUR 3 billion to EUR 3.2 billion. This growth strategy is to be financed out of retained cash flow and also, if necessary, by external debt financing. We continue to aim for a balanced financing structure, a solid financial profile, and therefore, solid investment-grade ratings. And with this, I would like to hand over to Ingo to kick off our Q&A session.

Thanks, Thomas, for your, as always, in-depth remarks and comments. And with this, I hand over back to the operator to open up the Q&A.

[Operator Instructions] First question comes from the line of Andrew Moulder with CreditSights.

I have to ask you more about COVID and the coronavirus. I mean, I saw that you said it was too early to sort of talk about financial impacts, and you don't seem to think there's going to be very much. But it does strike me that you're in the industrial heartland of Germany. Surely, you must be seeing massive declines in the -- certainly, the use of electricity by industries. Can you perhaps give me any idea of what sort of declines you're seeing there? I mean, particularly in the auto industry, where we're seeing a lot of them closing plants for, what, the next 3 weeks or so. So perhaps you could just give me an idea there. And maybe one other thing you could touch on there. E.ON made an interesting point yesterday when they said that the margin they earned on their industrial -- sorry, on their residential customers, in the supply business was about 6x the amount they earned on industrial customers. Is that the same sort of measure, same range really for you? So I think those are my sort of main questions. And maybe just one more. On the supply side, if you do see huge reductions in demand, then surely that means that the power that you bought forward for those businesses, you'll need to sell back onto the market, and you already said that market prices were down quite significantly, so isn't there sort of a potential loss there on the supply side?

Andrew, happy to answer those questions. Let me start with the first question. As of today, actually, we do not see a significant reduction in demand. However, we do assume that given the already announced potential closures or closures of the production sites, we will see a significantly reduced demand over the next couple of weeks. So I do agree. However, currently, we do not see that yet. In terms of our exposure, we just said residential margin 6x of industrial margins. Let me comment that a bit differently. That's why we closed our industrial B2B business back in 2016, and that's why we do not have a significant exposure to industrial demand, as we speak. So we are in a different position here compared to other competitors. So we do have an exposure to, let's say, commercial customers and also of course residential customers. We might be seeing also a reduction in demand regarding the commercial customers. But that's not really significant in the overall picture when we look at our sales. Our main exposure is towards residential customers. And if anything, we see stable or even slightly increasing demand in that area. So we don't see a risk actually of buying back bigger volumes of electricity because we've sold more in supply business than -- it's now -- and we now are seeing demand. It's a totally different thing compared to the situation we were facing actually back in 2008, the financial crisis. If I may remind you, at that time, we had 5 nuclear power stations up and running, a significant outright position and a big B2B business, that's gone. And that's why today a totally different situation. We don't think that we are heavily impacted by these volume reductions. Power prices as such, if I may add that, we sold all our electricity from the power stations already on the forward market for 2020. So the current price decrease you're seeing in the market is also not really relevant for us for 2020. Andrew, does that answer your questions?

Yes. But can I just come back, I mean, because when I look at Slide 3, which gives your electricity sales volumes, you've got 20 terawatt hours on the B2B side and only 15 terawatt hours on B2C and yet you tell me you've got no exposure to industry really. So what is that B2B sales of 20 terawatt hours?

Yes, that's right. That's what I -- when I commented on it, that's basically, actually, commercial exposure and not big industries.

Okay. So small and medium enterprises, I guess?

Small and medium enterprises, exactly.

Can I just perhaps ask one more question? You talked right at the beginning about having debt repayment capability as a key metric going forward. Can you just tell me exactly what that is and what it means?

Basically, it is a metric which is also used by the rating agencies and what we are aiming for, and that's basically to be in our -- to keep our rating positioning, we're aiming for 14% of debt repayment capabilities of operating result compared to our net debt to ensure that we can meet our obligations going forward within our current rating metrics. That's why we are using that going forward in a growth situation as our key performance indicator. Does it make sense to you?

Yes, it does. And the operating result you're using there, is that adjusted EBITDA or adjusted EBIT or reported EBIT?

No, it is EBITDA.

If I may add, Andrew. It's exactly what you see from the ratings agencies where you have got an adjusted EBITDA to net debt. So that's why what we translated into our debt repayment factor as a new KPI simply to reflect the increasing EBITDA levels year-by-year, which gives us a certain leeway or headroom to increase our net debt as well.

[Operator Instructions] We have a question from Alessandro La Scalia with BlackRock.

They are non-COVID-19 related, actually. So the first one is on your EBITDA guidance in 2020. It's interesting when you compare that with your targeted 2020. As for the first published plan in 2015, it's -- there is a pretty important difference on Grids. So I was just wondering what is that, essentially that wasn't forecasted in 2020. Also considering, if I'm right, it's not about a change in consolidation, so this is something that is actually organic. But I just like to understand, I mean, what is different over there? And also if you can please remind us in terms of your 2020 forecast, how much of that is coming from the recent acquisitions that you made last year? Then -- well, in terms of expectations on net debt and you don't release guidance at this point, but it will be interesting for us to understand what you expect for 2020, also considering that you disposed your stake into EVN. I'm not very sure I saw a price coming with that that is pretty easy to get, let's say, a ballpark figure for it. So I was just trying to understand, again, considering also the disposals, where you would expect your net debt to be by the end of the year.

Alessandro, regarding your first question, when it comes to our Grids or our business and the forecast, actually we were giving it back in 2013. There is actually a scope effect included due to the acquisition of VNG, and also, actually, we had significantly higher investments in distribution as well as transmission networks, partly driven by the expansion of distributed energy, which were significantly bigger than we expected actually back in 2012 when we came up with our guidance for the 2020 earnings for the Grids business. Does that answer your first question?

Yes. Then again -- I was also asking about, let's say, in your 2020 forecast, how much is coming from the acquisition of Valeco and…

Yes, that's the second. Yes, exactly. I just wanted to make sure that your first question was [indiscernible] around your first question and answering your first question. The second question regarding Plusnet and Valeco. Together, it's around EUR 100 million. And your third question was about our net debt forecast for 2020. We don't give a guidance for that. However, actually, what we are currently seeing -- we're currently looking at kind of a stable interest rate. So we do, at least for the time being, not expect that our net debt is increasing due to interest rate impacts. So currently, I would say it might be at a kind of the same level than -- or even below what we have seen in 2019. But it very much depends, to be fair, on the further development of the interest rate environment and the impact on our pension as well as nuclear provisions. As regards to EVN, if I got your question right, your question was actually how does it impact net debt, is that right?

Yes. I mean, if you can, let's say, confirm the impact on the debt to EVN? And also, if you can comment, from a strategical point of view, what you're going to make in terms of, let's say, redeployment of that money. If you're looking at potentially inorganic options or if this is something that you're going to use essentially to shore up the balance sheet?

Alessandro, EVN is part of our CTA, so it's in our dedicated pension assets. So it doesn't have an impact on our net debt position at all. And what we're doing with it, we're looking -- we will -- basically, it's part of our dedicated investments, our financial assets, and we're looking for investments with this money to support our pension obligations going forward.

[Operator Instructions] Next, a follow-up question from Andrew Moulder with CreditSights.

Yes, just one, so actually, Alessandro asked most of the other questions I wanted actually. But I did just have one question left. You've had to postpone your AGM. Some other companies are talking about doing their AGMs remotely. So is that a possibility in Germany and is that something you're considering?

Yes, Andrew, that's something we are considering. It's not decided yet but it's certainly something we are considering. It very much depends on the further development of the corona crisis. But it's -- indeed, it's something we are currently looking at.

[Operator Instructions] As there are no further questions at this time, I hand back to Ingo Peter Voigt for closing comments.

Yes, thank you very much to all of you for attending. And thanks, Thomas, again for answering all these questions. And as always, we can only invite -- if you've got further questions, don't hesitate to come back to us. We help -- we try to help you where we can. And then we are looking forward to at least hear you, from today's perspective, we cannot say see you, we have to see how corona will develop further, on our Q1 figures '20, which is going to take place this call on May 15, '20. And for everyone on the call, take care and stay healthy, and we look forward to talking to you. Bye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thanks for joining, and have a pleasant day. Goodbye.