Enerjisa Enerji A.S. (ENJSA) Earnings Call Transcript & Summary

Welcome to Enerjisa's 4Q 2020 Results Conference Call and Webcast. I now hand over the call to CFO, Michael Moser.

Thank you very much. Hello, everyone. This is Michael speaking, and I hope everyone is healthy and doing well. So let me start today's earnings telephone conference by a quick overview of last year 2020. 2020 was characterized by COVID, which made it, of course, a challenging year for every single person and for every company and still does in this year. Nevertheless, we outperformed our guidance and created value for all stakeholders, thanks to a supportive regulatory system, our sound risk management and devoted efforts of our employees. To give you a few highlights, first, underlying net income grew by more than 60% year-over-year. We proposed TRY 0.96 dividend per share, representing a 60% year-over-year increase and a strong real growth rate. The main tariff parameters for the fourth regulatory period has been announced. We have a regulatory framework supporting investments, governance and quality in the new period. Now we have a high visibility and a good overview on all risks and opportunities for the next 5 years. Despite the strong base impact, our outlook for 2021 is solid. The outlook is reinforced by our expectation of a record high cash flow and continuing deleveraging despite high increase in the dividend payment. Our strong balance sheet is also appreciated by creditors and rating agencies. Fitch has recently upgraded the national long-term ratings of Enerjisa in our subsidiary, Baskent, from AA to AA+. We have not only focused on the short-term financials, but also on sustainability to ensure long-term value for the stakeholders and let the transition to the new energy world in Turkey. In 2020, we have undertaken important steps towards our goal to become best-in-class in corporate governance. See, for example, our recent announcement regarding the new human rights policy for our new code of conduct. But we also want to be best-in-class in enterprise risk management and in sustainability. In the years to come, we will update you on any further material ESG activities, which we deem important for you to know. Let us go over the financial highlights of 2020 on Slide 3. In 2020, we have an outstanding earnings growth in 2020 and a strong recovery in cash flow in the second half. Operational earnings growth was 22% year-over-year, exceeding the inflation growth. Overall, our 2020 results show a strong growth in earnings despite some impacts of COVID-19, thanks to lower financing costs, strong operational performance, prudent balance sheet management and lower effective tax rate. Our free cash flow after interest and tax in 2020 was around TRY 500 million for the full year. Adjusted for the positive one-off impact in the retail business in 2019, we had significant growth in cash flow. Our balance sheet is very healthy. We have no unhedged FX exposure. Our financial net debt to operational earnings ratio is down from 1.9x last year to 1.7x this year. Our Board proposed a dividend of [ TRY 0.96 ] to the AGM as per our commitment to return sustainable dividends to our shareholders. And this marks the 60% increase compared to last year and 60.37% payout ratio. Please take a look at the market environment on Slide 4. Inflation started to pick up in Q4, reaching 15% in December. Meanwhile, interest rates have sharply declined until August and since then, bounced back with 6 months TR LIBOR reaching to 18% in December. This is resulting from Central Bank's change of monetary policy to control the weakening of TL, which has been well received by the market in terms of the risk sentiment and Turkey's CDS. In 2020, using the low interest window, we repriced our loan portfolio at lower rates. Our balance sheet will be less sensitive to the recent increase in interest rates as we extended majorities of our fixed rate loans even to 2023 during the low interest rate environment. With respect to the energy procurement costs, we have seen a continued increase until May, mainly due to TL depreciation impacting feed-in tariff costs. This trend will reverse with decreasing feed-in tariffs and U.S. costs, leading to a slight decline in sourcing costs compared to last year. In 2020, despite the sharp contraction in volumes in Q2, the volumes in our distribution [ reaches an ] overall flat year-over-year. Meanwhile, end-user tariffs for Q1 2021 have been announced. Regulated retail tariff component increased by around 1% to 3%, and distribution tariff components increased by around 16% quarter-over-quarter, leading to a 6% change in end-user prices compared to last quarter. Commercial and industrial tariffs set above residential tariffs and last resort tariff mechanism allow for the continuation of the liberalization process for these segments. On the other hand, the tariff structure for residential customers still does not support liberalization in this segment. Now coming to a more detailed explanation on our operations, which you can find on Slide 5. On the distribution side, our investment was around TRY 1.8 billion in 2020. We have 26% year-over-year growth despite some negative impacts of COVID and limitations with strict lockdowns, especially in Q4. With new investments exceeding CapEx reimbursements in 2020 and revaluation of opening balance, our RAP grew by TRY 1 billion compared to 2019 year-end. Meanwhile, we have around TRY [indiscernible] million impact on RAB Q2 tariff out of the third tariff due to third tariff period related retro perspective adjustments. This is mostly due to differences in interpretation of methodology on treatment of the scrap sales and connecting fees with the regulator. Efficiency and quality earnings have slightly increased. I will discuss the underlying factors on the next slide. In our liberalized market, volumes continue to increase. Accordingly, our gross profit from the free market accounted for around 40% of our gross retail profit in 2020. Coming to Slide 6. Operational earnings have increased by 22% year-over-year compared to 2019, reaching TRY 5.6 billion. We have a very strong performance in retail. The contribution of retail to operational earnings increased to 15% in 2020 from 12% in 2019 with a very strong performance in the liberalized segment. We will discuss the details in the subsequent slides. Please see the details of our distribution slide on Slide 7. In the Distribution segment, operational earnings growth was 70% year-over-year in 2020. The financial income growth was soft as we have a lower nominal return rate compared to last year given the decrease in WACC as well as lower growth in RAB. It is important to note that Q4 numbers is impacted with retroperspective adjustment to the full year. So the financial income in the quarter does not reflect the underlying performance due to IFRIC 12 model. The impact of retroperspective adjustment on Q4 was around TRY 130 million. Total efficiency and quality earnings increased by TRY 39 million in 2020 compared to last year. The main factor behind the increase was higher CapEx outperformance and quality earnings, while theft and loss related performance was lower with lower field activities amid COVID-19. This is also a natural progression due to already strong P&L outperformance in our Baskent and Ayedas regions. CapEx outperformance improved with increased CapEx investments and lower procurement costs. As in the last year, quality bonus income was recognized for the full year in December. In 2020, we were eligible to receive a bonus of 3.4% of the regulated revenue requirement, which is almost flat compared to last year. Our revenue requirement for FX-based purchases are linked to FX-based commodity indices. And for those without the perfect match, we carried out hedges for 2020. The gain for these hedges are classified in other items. We had a very strong performance in that item in 2020. Moreover, we had lower net operational financing expenses with decrease in payables and interest rates. We had a significant improvement in free cash flow before interest and tax. Operational cash flow before interest and tax increased significantly by strong operational earnings and improved working capital structure, reinforced also by price equalization impact. Meanwhile, cash effective CapEx increased by approximately TRY 600 million. As you see on Slide 8, our retail business showed a very strong operational earnings growth of 57% in 2020. In the fourth quarter, we see an annual growth rate of 131%, which is further supported by a lower base in Q4 '19. Meanwhile, there is some normalization in operational earnings on a quarter-over-quarter basis. The growth in 2020 was mainly a result of a significant increase in the earnings contribution of the liberalized market segment from around TRY 100 million last year to around TRY 480 million this year. This improvement has been achieved through favorable market dynamics in our effective portfolio management, leading to a strong growth in profitable segments, namely in SME. On top of these, our prudent contract management with hedging of FX-based costs has played a critical role in that performance. Corporate customers with consumption above the last resort tariff limit switch to the liberalized market in the beginning of this year. The share of liberalized corporate values within total corporates reached 60% in 2020. We also proactively switched mid-corporate and SME customers from the regulated market into the liberalized market due to attractive profitability levels. OpEx growth was about inflation, mainly driven by investments in sales channels for switching customers to the liberalized segment. Nevertheless, OpEx growth was significantly less than the increase in total gross profit of the retail segment. The bad debt-related income was lower than last year as doubtful provision expenses increased due to higher end-user prices and impact of slight deterioration in payment behavior, which led to a decrease in customer credit scores and impacts of lockdown. At the same time, the late payment income was flat compared to last year as late payment interest rate was reduced to the lower interest rate environment. The retail cash conversion was lower compared to last year. We had a high base impact due to significant price equalization collections of around TRY 800 million in 2019. There was also some decline in net deposit additions with the shift of customers to the liberalized segment. Lower net working capital inflow was mainly driven by a decrease in U.S. volumes and lower prices in December 2020 compared to December 2019. Now let me come to the bottom line development on Slide 9. Our underlying net income grew by 60% to TRY 1.878 million in 2020, significantly exceeding operational earnings growth. Below the line item operational earnings, the main effects were as follows: despite the increase in average loan volume, net loan interest expense significantly decreased by around TRY 400 million, mainly as we repriced our existing loan portfolio at lower rates in the first half of 2020. Our average loan interest rate was down by 6.3 percentage points year-over-year to 11.9% in 2020. This average loan interest rate is calculated over full loan portfolio, excluding bonds. The revaluation expense of both our bonds and our customer deposits was higher due to higher inflation compared to last year. Other financial expenses were higher driven by lower interest income related to revenue cap regulation and lower price equalization income. The increase in tax expenses was lower than the growth in pretax earnings as the effective tax rate is now broadly in line with the marginal tax rate of 22% in Turkey compared to 25% last year. A few words on net income. Our reported net income was TRY 1.088 billion, lower than underlying net income, mainly due to change in fair value of financial assets, which is mainly driven by differences in interpretation of methodology on treatment of scrap sales and connecting fees with the regulator and due to nonrecurring expenses related to previous year. This is mostly related to tax correction, which we disclosed with the fourth regulatory period announcement. Nevertheless, as you know, our dividend distribution excludes extraordinary impacts. So these impacts do not have an impact on shareholder returns. Turning to Slide 10. Our economic net debt was increased from TRY 10.6 billion in December 2019 to TRY 11.3 billion in December, mainly driven by noncash CPI valuation accruals for customer deposits and bonds as well as higher FX accruals. Meanwhile, our financial net debt operational earnings ratio at 1.7x is below 1.9x in 2019 year-end, thanks to a strong growth in operational earnings, and is now at the lowest level since the IPO. Free cash flow before interest and tax was around TRY 2.2 billion in 2020. Especially, free cash flow before interest and tax was around TRY 2.3 billion in the second half of 2020 as volumes started to recover and tax was around TRY 2.3 billion in the second half of 2020 as volumes started to recover and price equalization mechanism starts to kick in. In interest payments, we have one-off prepayment fees of TRY 85 million pretax related to our refinancing transactions. [indiscernible] mainly includes noncash CPI valuation and interest accruals due to higher inflation. Our balance sheet is very helpful with no unhedged FX exposure, 68% of our gross debt has fixed interest rates, 14% has variable interest rates and around 70% is CPI linked. For 2021, we do not have permanent financing needs as we are able to fund new investments and scheduled loan repayments by our committed lines and operational cash flow. As of December 2020, we also had committed lines of USD 125 million equivalent in Turkish lira. In addition, we have successfully completed the process of corporate bond issuance of TRY 400 million. The bond has a 2 years maturity and TL RAB plus 140 basis points interest rate. On Slide 11, we want to inform you about the new regulatory period. The regulator announced the tariff parameters for 2021 to 2025 for the electricity distribution and incumbent retail companies. There is an extensive list of changes for which you can refer to our specific presentation and the announcement which we have done. Here, I will go over the most critical ones. We assess the regulatory framework as overall supportive of growth in physical network, encouraging increase in service level through improved quality mechanism and rewarding corporate governance and transparency. Overall, for our distribution business, the confirmation of 10-year reimbursement period, which is significantly shorter than that of benchmarks, an investment-friendly WACC and significant increase in the CapEx loans are key positive for future investments. 72% increase in initial CapEx loans provides predictability for us for the regulator and investors. When the CapEx allowance is set low, we need to get approval from the regulator for incremental allowance when we reach 80% of the initial approved CapEx for the 5-year tariff period. During the new period, this uncertainty is implicitly eliminated through increasing CapEx allowance. The new WACC is within the range of our base case scenarios and is not a game changer for our business and investment plans in today's macroeconomics and financing environment. If there are major changes in macro conditions and financing environment, we believe that EMRA would reassess the parameters as they did already in 2017. Slide 12 shows further details on the regulator reperiod. The initial controllable OpEx increased by 8% compared to the previous regulatory period in real terms. We see a major increase in pass-through OpEx allowance for scheduled maintenance, which supports improvements in the quality of the network and the delivery of quality metrics. Here, you see T&L targets for 2021, reflecting the changes in the theft and loss target threshold rate. The threshold for Baskent and Ayedas was lowered by 0.5%, reflecting the improvement in actual T&L rates. There is a decrease in retention rate of [ fast ] accruals at collection following the finalization of the legal proceedings, while the retention rate for the [ fast ] accruals at detection remains unchanged. The regulator had to prioritize among many incentives to improve the distribution system in Turkey, while keeping the incentives to reduce T&L still strong during the new tariff period. The priority for network growth, quality, governance and transparency has increased. For distribution and retail companies compared to previous bonus mechanisms based on quality performance, a bonus-malus mechanism has been introduced. Under this heading, total quality parameter bonus ceiling it as 6% of regulated revenue requirement for 2021 and 7% of regulated revenue requirement for 2022 to 2025. Penalty ceiling is set as minus 2.05% for 2021 and minus 2.8% for 2022 to 2025. As Enerjisa, we are on the right track for this measure with our sustainability initiatives, putting uninterrupted energy, good corporate governance and customer satisfaction at the core. In the new period with the new in-house sourcing incentive, if the share of in-housing sourcing is above 50%, there will be a quality incentive equal to in-house sourcing share up to 1% of revenue requirement after deducting pass-through items. All Enerjisa distribution companies will be eligible for the in-house sourcing incentive. We believe this is the right initiative to incentivize the transparency of the sector regarding the cost structure. For both electricity distribution companies and incumbent retail companies, other new incentives supporting corporate governance has been introduced. Accordingly, for the companies who have listed direct shareholders, 0.3% quality factor will be used. This is a major step to support strong corporate governance and transparency and all Enerjisa companies will be eligible for that bonus. On the retail side, there is no change in the retail margin. Feed and tariff costs will continue to be included in the margin base. There are also some positive changes, such as inclusion of the management and support service procurement expenses to regulated OpEx. Now let me finally give you our outlook before we take your questions. For this, please turn to Slide 13. As promised, we are providing our '21 outlook already with our year-end results release. For operational earnings, we expect a double-digit growth. Our underlying net income guidance is at least TRY 1.9 billion. Our year-end RAB guidance is at least TRY 10.9 billion. We expect our free cash flow after interest and tax for 2020 to be at minimum TRY 1.7 billion. This guidance reflects both reimbursements related to the previous period and the strong increase in CapEx for 2021. Thanks to our strong cash flow, we expect the deleveraging trend to continue also in 2021. Our underlying net income guidance implies a CAGR growth of at least 25% to 30% between 2019 and 2021. It is worth to highlight that EMRA has not yet disclosed CapEx unit prices and some further items. Nevertheless, our guidance for '21 already incorporates risk factors. Based on the progress through the year, we will continue to update you on our expectations. On the CapEx side, the newly implemented bonus and malus system and 72% higher initial ceiling incentivized to invest more in organic RAB growth. While the initial CapEx allowance in the new period is more generous compared to the third regulatory period. We are keeping our flexibility to even overspend and are planning accordingly, depending on other factors, such as the macroeconomic development or other market opportunities. We plan to update you in the course of this year regarding the planned RAB growth for the fourth period. During this period, we will target to have the optimal balance between efficiency and performance incentives and quality incentives by further streamlining our processes. In retail, we have an extraordinarily strong base in 2020. We target to defend our home base profitability and continue our focus on the higher-margin SME segment, while we expect the normalization in margins on the high base of 2020, and we target to grow our absolute operational earnings in the fourth regulatory period by our effective portfolio management. Our mission is to accelerate the sustainable energy transformation by building the needed infrastructure and services of tomorrow. As a part of such mission, we target to leapfrog in our customer solutions business, especially focusing on e-mobility, PV and CHP in the B2B and B2C segment. We believe this business has the potential to deliver over TRY 1 billion annual revenues by 2025. We plan to share our targets and road map within this year. Overall, we plan to share with you details of our long-term plans and strategy in Q2 or Q3 and hopefully in person. So thank you very much for your attention and for listening that long. And operator, we can now, of course, take all the questions, which everyone might have.

[Operator Instructions] So for the moment, we don't have any questions by phone. Okay. So we have a question from [indiscernible].

I'm not very much familiar with the company in details. But I see that when I look at the presentation, there's a difference between your underlying net income and the reported ones. And I really don't know how the analysts are coinciding that. But my question is, when we look at your reported ones, we see a net loss in fourth quarter. How could we interpret that when you look at your like the audited reports, how do we interpret this? And the other question is about the regulatory environment in the retail markets. Do you think you are aggressive or the competition is fierce in that front? Do you expect any new implementation in that area?

Okay. Thank you, [indiscernible]. And let me start with the first question. In the presentation on [ fact sheet ], there's a detailed reconciliation of the underlying net income and especially with the changes in the assumptions for regulatory periods, there might be adjustments in the financial assets related to the previous period, and this is more related to previous year's income rather than 2020 income. Therefore, we classified these items, which are more one-off nature as a part -- as one-off and we provide the reconciliation and one is related to fair value change of the financial assets and it's related to the change in reconciliation methodology as we had discussed during the presentation. And this led to a one-off impact on the value of the financial assets. And you will see in here as some changes in the fair value because each year, we look to WACC assumption. WACC assumption is unchanged usually for past years unless the regulator increases it. The other metric is inflation assumptions. Therefore, you will see in the previous years, similar adjustments for [indiscernible] magnitude was different. And the second impact is something related to tax correction. In our business, we have an item -- compensation item, which is called tax correction. As the regulator compensates for the tax difference arising from the timing of the principal CapEx reimbursement as the depreciation period in the legal law or tax law and electricity market regulation. And by the end of this period, as they have seen that our statutory income was lower than what they predicted, they made an adjustment for that. But over a long-term perspective, this does not impact the cash flow because on the longer term, this should be 0 compensation, and we had booked this as one-off as we show it as adjustments related to previous periods. And if you want to discuss the details further, we can go through the accounting mechanism because it's pretty long, and we can have a separate session, if you like.

Yes. Yes. We can do that later. Another question?

Can you repeat the second question, please?

I'm asking about the electricity market environment. How do you see the competition? Are you leading the market? Or are you being aggressive in the market in terms of pricing? And do you expect any regulation change in the near future about the implementation of the -- it's the highly regulated market, so do you expect any change that may have an impact on the markets because the electricity companies were on the retail side? They were more comfortable compared to the past, it was more distressed. Do you expect any changes that may have put some discomfort to the sector overall, not specific to you, but overall?

Okay. Regarding the regulation, the most critical part of the regulation has been announced, and we also disclosed that. Of course, I might give some follow-up adjustments because whenever there is a new regulatory period, there might some unclear items and some clarification. This might be possible but with the broad prospective, we have very high visibility regarding regulation for the coming 5 years. And regarding the competition, we might need to separate our business into 2 segments. For the distribution segment, it's a regulated [indiscernible] we should not be talking too much about competition. Regarding the retail segment, in the retail segment, as you might have seen, we had a very strong performance in the liberalized market. And this has been due to our strong portfolio management in the SME segment as we are not aggressive on the corporate segment, and we have a very high focus on the profitability. Having said that, in 2020, we had a very high base in terms of the margin, and we expect some normalization, but we should still be growing our absolute retail profits in 2021 compared to 2020 or the corporate segment is always competitive. Therefore, we do not expect any major changes over there. On the SME segment, there might be some further competition, but we are ready for that. Therefore, broadly, we shouldn't expect very major changes in the market dynamics, except for the fact that we are coming from a very strong base.

[Operator Instructions] We have a new question from [indiscernible]

I just dialed in the call, so apologies in advance if you've already talked about it, but about your [ E-Charge ] company, when do you expect your investments in this to increase? And what are your expectations on this side?

Yes, we have mentioned it. Thank you very much for your question. We are planning in Q2 and Q3 to give further details on our organic growth potential. And with this at the moment, we just say that we want to organically grow in this area.

Okay. So you're planning to give more details on this in Q2, Q3, right?

Yes, right.

[Technical Difficulty] thanks for the detailed question, and of the second quarter in July [ probably ].

We don't have any questions [indiscernible] for the moment.

Now we can finish the call. And if you have any follow-up questions, you can connect -- contact Investor Relations directly, and we will be happy to address your questions. Thank you for joining the call.

Thank you very much, and looking forward to see you soon, healthy, ideally in person with the usual roadshows, our Investor Day, which we are planning to give you more insights on our strategies and our future outlook. So take care. Stay healthy. Bye-bye. Thank you very much for your time.