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

Welcome to Enerjisa First Quarter 2021 Results Conference Call and Webcast. I now hand over the call to CFO, Michael Moser; and IR, M&A, Tax Director, Gozde Cullas. Dear speakers, please go ahead.

[Foreign Language] Hello, everyone. This is Michael speaking. I hope everyone is healthy and doing well. Let me start today's earnings telephone conference by a quick overview of the first quarter. And by this, I want to guide you to Slide #2. In the first quarter of the fourth regulatory period, we performed in line with our targets, thanks to our sound risk management processes, strong balance sheet and supportive regulatory system. The underlying net income grew by 48% year-over-year compared to the same quarter of last year. In April, we distributed TRY 0.96 per share as dividend. This marks a 60% increase compared to last year. As you know, COVID continues to affect Turkey with a number of cases peaking in April. In order to address that, lockdowns are being implemented across Turkey since the 29th of April and will continue until the 17th of May. While 2020 results demonstrated the resilience of our business, we continue to undertake all the risk measures to mitigate any potential impact. Meanwhile, corporate tax rate has increased from 20% to 25% for this year, 2021 and 23% for 2022. We are assessing our 2021 guidance for the impact of increase in corporate tax rates and pandemic-related developments. However, we do not expect a material change in the outlook. Let us go over the financial highlights of first quarter of 2021 on Slide 3. In the first quarter, we had a strong earnings growth and strong cash flow despite some impacts of COVID-19, thanks to lower financing costs, strong operational performance and prudent balance sheet management. Operational earnings growth was 28% year-over-year, exceeding the inflation. Including for exceptional CapEx reimbursements, the growth was 36%. Meanwhile, underlying net income increased by 48% year-over-year. Our free cash flow after interest and tax was around TRY 325 million compared to negative TRY 640 million in the first quarter of last year. Our balance sheet is very healthy with no unhedged FX exposure. We have no funding needed until 2022 and therefore, have low exposure to unfavorable interest rate developments. Our financial net debt to last 12 months operational earnings ratio is down from 1.9x in March 2020 to 1.4x in March 2021. Please take a look at the market environment on Slide 4. Inflation continued to increase in Q1, reaching 16% in March. Interest rates peaked with 6 months TR labor increasing to 20% in March. This is a result of increase in inflation and Central Bank's change of monetary policy to control the weakening of the Turkish lira. Our balance sheet has low exposure to the recent interest rate increase as we have financed our funding requirement for 2021 prior to the rate hike during the low interest rate environment of 2020, while also extending maturities. With respect to energy procurement costs, we see an increase in the sourcing cost quarter-over-quarter due to increasing FIT, reflecting higher FX rates. Meanwhile, end-user tariffs for Q2 2021 have been announced. Broadly, the end-user tariffs are unchanged quarter-over-quarter. On the other hand, regulated U.S. tariffs are reduced. We expect this to be counterbalanced by FX impact, leading to increase in fee and tariff costs and the higher impact of fee and tariff costs on total procurement costs due to seasonality, i.e., the share of renewables in energy mix is higher in the second quarter due to hydrology. Now coming to a more detailed explanation on our operations on Slide 5. On the distribution side, our CapEx was TRY 306 million in the first quarter 2021, which more than doubled compared to the same quarter of last year with the increase in CapEx allowance in the fourth regulatory period. Meanwhile, the first quarters are seasonally low in terms of investments. And as we have revised our supply contracts during the first quarter, accordingly, the first quarter realization is lower than the average planned CapEx for the rest of the year, which is in line with our plans. Also, CapEx reimbursements in the first quarter have exceeded new investments. Our rep grew by TRY 1 billion as the opening balance has been revalued with inflation. We incorporated an inflation rate of 12.4% in revaluation calculation, and this figure will be adjusted in the second quarter, reflecting June inflation. Efficiency and quality earnings have increased by 11%. I will discuss the underlying factors on the next slide. In our liberalized retail business volumes continued to increase while liberalized corporate margins started to normalize from the high base of last year. Our gross profit from the free market accounted for around 38% of our retail gross profit in the first quarter of 2021. Coming to Slide 6. Operational earnings have increased by 28% year-over-year compared to the first quarter 2020, exceeding TRY 1.6 billion. Both distribution and retail segments contributed positively to that performance. The figure does not include TRY 109 million exceptional reimbursement. We will discuss the details in the subsequent slides. Please see details of our distributed business on Slide 7. In the distributed segment, operational earnings growth was 26% year-over-year in Q1. The financial income growth was soft given the declining WACC. Note that the impact of decline in WACC on 2020 was reflected in Q4 2020 in lump sum and is not included in the first quarter 2020 financials. Adjusting for the impact of WACC decrease, which is not included in Q1 '20 financials, the growth in financial income was 16%. CapEx reimbursements include -- excluding exceptional reimbursements, increased by TRY 166 million due to higher CapEx ceiling and as the regular compensation for overspend CapEx of the third regulatory period started as of January 2021. CapEx reimbursements reported in operational earnings does not include the exceptional reimbursements, meaning overspend CapEx not reimbursed in the third regulatory period due to the regulatory mechanism for the overspent CapEx. We will receive this amount over 3 years. The amount was TRY 109 million in the first quarter, which is reimbursed through the distribution tariffs. Total efficiency and quality earnings increased by TRY 20 million in Q1 2021 compared to the same quarter of last year. Theft and loss related performance was lower with lower field activities amidst COVID-19 and the decrease in the theft accrual earnings, as we now retain 50% of test usage accruals at collections compared to 75% in the previous year. CapEx outperformance improved with increased CapEx investments and lower procurement costs. It is worth to highlight that we made our bookings on an accrual basis, assuming same methodology as 2020. While EMRA, so the regulatory authority, has recently disclosed CapEx unit prices on the 30th of April. Nevertheless, we do not expect a significant impact. We started recognition of some components of quality bonus in Q1, namely in-house sourcing incentives and incentives for publicly listed companies. For these items, we do not need to wait for year-end for the eligibility assessment. Accordingly, the quality income recognition in Q4 will be lower than historic levels as the remaining scope in Q4 will be more limited and the criteria for eligibility for remaining items became stricter, together with decreasing calculation base as per defined for the fourth regulatory period. Our revenue requirement for FX-based CapEx purchases are linked to FX-based commodity indices. And for those without the perfect match, we carry out hedges. The gains for these hedges are classified in other items. We had a very strong performance in that item in Q1 2021 as well. Moreover, we had lower net operational financing expenses due to better operational cash flow. We had a significant improvement in free cash flow before interest and tax. Operating cash flow before interest and tax increased significantly by strong operational earnings and pro rata reimbursements related to previous regulatory periods. This reimbursement includes financial income related to the third regulatory period, which is accounted in financial income, not yet cash effect. Meanwhile, exceptional CapEx reimbursements is reported under net working capital. Cash effective CapEx decreased by around TRY 40 million despite the higher CapEx as we have lower carryovers from the previous year compared to Q1 2020. As you see on Slide 8, our retail business showed a very strong operational earnings growth of 44% year-over-year in the first quarter of 2021. The growth in Q1 was mainly a result of increase in gross profit of liberalized and regulated market segments, sound OpEx management, prudent contract management with hedging of FX-based costs and improvement in the accounts receivable related income. Regulated gross profit increased due to higher retail service revenue, meaning Q2 increase in OpEx allowance and inflation effect. Liberalized gross profit increased due to higher volumes, while we started to see a normalization in margins, especially in corporate segment, where we have higher competitive activity. This trend is in line with our expectations, which we shared during Q4 results release. Customer Solutions gross profit doubled to TRY 10 million, mainly due to a new solar project. We target to leapfrog in our customer solutions business, especially focusing on e-mobility, PV, so solar, and CHP. We believe that this business has the potential to deliver over TRY 1 billion annual revenues by 2025. The share of liberalized corporate volumes within total corporates reached 70% in Q1 due to the tariff structure incentivizing liberalization. And last, we saw a tariff mechanism. We continued switching mid-corporate and SME customers from the regulated market to the liberalized market due to attractive profitability levels. However, the pace of the shift softened due to impact of COVID on SME volumes in Q1. OpEx growth was slightly below inflation, while we expect it to increase given the increase in OpEx allowance and as we will continue to invest in sales channels for switching customers to the liberalized segment. The bad debt related income was higher than last year as doubtful provisions expenses decreased due to improvements in payment. Late payment income started to increase as decline in late payment interest rate is now in the base. The retail cash conversion was higher compared to last year due to increase in operational earnings. Other factors are: There were increases in net deposit additions with the slowdown of shift of customers to the liberalized segment. Higher net working capital inflow was mainly driven by positive effects of the [ EPIAS ] and FIT-related payables. Moreover, deposits received due to new customer additions at regulated portfolio has positive impact on our cash flow. Price equalization impact is positive due to compensation of negative effect from 2020 Q3 when actual electricity prices were realized higher than expectations. Now let me come to the bottom line development on Slide 9. Our underlying net income grew by 48% to TRY 522 million in the first quarter, exceeding operational earnings growth. Below the line item, operational earnings, the main effects were as follows: With the decrease in average loan volume and lower interest rates, net loan interest expense significantly decreased by around TRY 98 million. Our average loan interest rate was down by 4.5 percent points year-over-year to 10.4% in Q1 2021. 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 lower, driven by higher price equalization income and higher interest income related to revenue cap regulation. Tax expenses increased with growth in pretax earnings. Please note that in Q1 2021, effective tax rate booked was 20%, while corporate tax rate increased to 25% for 2021 and 23% for 2022. The increase was announced in the Official Gazette in April. This is treated as a non-adjustment event by IFRS standards and nonadjusting events occurring after the reporting period cannot be reflected to the financials of that period. Therefore, we did not book for the increase in Q1, but will do so retrospectively in Q2. Please turn to Slide 10. Our economic net debt has declined from TRY 11.3 billion in December 2020 to TRY 10.6 billion in March 2021, mainly driven by strong free cash flow. Meanwhile, our financial net debt operational earnings ratio at 1.4x is the lowest level since the IPO of Enerjisa. Free cash flow before interest and tax was around TRY 1.1 billion in the first quarter, while net interest payments were around TRY 600 million. Net interest payments were higher than interest expenses due to payment schedule and the payment of CPI revaluation of our bonds, which was redeemed in the first quarter. We have TRY 179 million of tax payments and the payment does not include the recent corporate tax increase. TRY 269 million is due to change in accruals due to payment of CPI valuation of the redeemed bond, which I've just mentioned. Other items mainly include change in fair values of derivative instruments and interest accruals. Higher FX rates resulted in higher fair value of derivative instruments. In addition, we have successfully completed the process of corporate bond issuance of TRY 400 million in Q1. The bond has a 2 years majority and TL RAB plus 140 basis point interest rate. Our balance sheet is very healthy with no unhedged FX exposure, 72% of our gross debt has fixed interest rates, 17% has variable interest rates and around 10% is CPI linked. For 2021, we do not have permanent financing needs as we are able to fund new investments and schedule loan repayments via our committed lines and operational cash flow. As of March 2021, we also had committed lines of USD 50 million equivalent in Turkish lira. Please turn to Slide 11, macroeconomic environment. As you well know, the risks regarding macro developments are limited due to the major of our regulatory regime and our strong balance sheet. Revenue items such as financial income, CapEx reimbursements and some other operational allowances are linked to inflation. Meanwhile, higher inflation leads to higher deposit valuation and increase in CPI-linked bond expenses. We have limited FX exposure to the balance sheet. Our loans are either directly TL-based or some minor non-TL loans are hedged. Procurement activities not being paid in TL are mitigated by the regulatory regime such as escalation of CapEx unit prices and cash flow hedges. We have a limited interest rate exposure in our balance sheet as 72% of our gross debt has fixed interest rates. We extended majorities of our fixed rate loans even to 2023 during the low interest rate environment. So our balance sheet is quite resilient against the interest rate increase in 2021. Regarding the risks of electricity volumes. On the distribution side, earnings recognition is not linked to consumption volume, except for theft and loss-related performance. Any temporary impact of volumes on the distribution cash flow is to be recovered via the regular correction mechanism with a 2-year time lag through increased tariffs to be reflected to end usables, and this will include a compensation for the time delay. On the retail side, which accounts for around 15% of our operational earnings, the impact of volume fluctuations on earnings is limited from a consolidated perspective. Additionally, any cash flow impact due to under-collection is recovered with just 2 quarters lag. Regarding the 2021 guidance, we are assessing the impact of corporate tax increase and the COVID-19 related developments, while we do not expect a major impact on the outlook. Accordingly, for now, we maintain our 2021 guidance, which is double-digit growth in operational earnings, at least TRY 1.9 billion underlying net income, year-end RAB of at least TRY 10.9 billion and at least TRY 1.7 billion free cash flow after interest. Thank you very much for your attention and attention particular, and we can now take your questions.

[Operator Instructions] The first question comes from Ekaterina Smyk from Bank of America.

I have a couple of questions. The first one is on your retail margins, which in the first quarter still remain quite strong comparable to [ Bankwell's ]. But then you mentioned a couple of offsetting factors going into the second quarter. So I just wanted to understand what could be the year-over-year dynamic in the second quarter? What are your expectations for the full year? And my second question is on the interest rate from sort of borrowed funds. I appreciate all the discussion you had on that side. But still just want to understand how interest rate can change in the second quarter compared to the first quarter. What could be the dynamics for the full year there as well? And my last question is on the CapEx spending without the new regulatory period, the amount of allowed CapEx for this full regulatory period in nominal terms, implies if you divide it by 5 years, implies a significant growth compared to the last year of previous regulatory period. So I just want to understand how this CapEx amount can be distributed throughout 5 years of the regulatory period? Whether you plan any increase in CapEx already this year?

Let me start with the interest rate question. It's difficult to give exact guidance on interest rates. But as we have discussed, for 2021, we are not expecting a major increase in financing costs compared to last year, only 50 percentage points variable to the average as our loans are mostly in fixed terms. Therefore, it will not be a major change. But of course, if it continues like this, that might make some impact on 2022, but you need to convert it in relation to inflation as well because if interest rates remains high, it would mean that inflation rates will be higher as well, and we should be looking to the net spread. As regarding the CapEx spending, our guidance for this year actually shows that we are planning to spend something close to -- approve lot of CapEx. As for the next year, for the time being, you should assume or expected to assume that it will be close to a lot of CapEx, but of course, we want to maintain the flexibility to close the investment spread even with the relatively high interest rates are quite attractive. Therefore, we will look to market dynamics a little bit to be able to assess going forward. But for 2021, you can assume something close to actually low CapEx and the RAB guidance broadly shows that. And the first question is on the retail margins. On the retail margin, compared to last year, the base is too high as we have stated that we expect a normalization in the margins, but it might be better to look to the total number. We are expecting a growth in the operational earnings. We expect growth to continue. The corporate segment, the margins might be volatile as we start increasing competitive activity over there, but we have a margin-focused approach, therefore we make tactical adjustments and our fore-growth segment will be SME, which still continues to provide attractive margins. Do you have any further ones?

No, understood.

[Operator Instructions]

There is an online question and it's asking about exceptional CapEx reimbursement for the coming quarters. Of course, there will be some inflation adjustments for the next year. But broadly, you might estimate similar structures compared to the first quarter, except for the inflationary adjustment, you can estimated it to be relatively stable as we will be receiving this CapEx reimbursement over the 2 years through the distribution tariffs.

Thank you very much. We have another question by phone. The next question comes from [ Alper Estimir from Azimut ].

Congratulations on the very strong results. I mean you have recorded a strong increase in your underlying net income, but I see that you haven't changed your guidance, and it seems that it is flat versus last year. So I know that you have always given conservative guidance so far, but is it related to being conservative? Or is there some kind of risks that maybe we should be aware of?

Okay. Regarding the guidance, there is, of course, we -- it's the first quarter, end of the first quarter. And although the COVID-related development has limited impact on our business, we will need to watch out for that. And the second item is when you are making year-on-year comparison, you are looking to relatively first quarter last year. Additional thing is we have mentioned the increase in corporate tax rate as we are providing net income guidance not only operational income. Therefore, this would have an impact on our net income, but we believe that through efficiency measures and some other upsides, we can be able to compensate for this. And the third thing is that, of course, although it's a benchmark, the guidance is not an absolute number, we are think that above numbers, therefore, we would need to follow the development related to COVID. Interest rates have limited impact, but we will need to watch out for this as well. Therefore it naturally has some conservative impact, I wouldn't say that it's a very conservative guidance.

If you may allow, I want to add one comment. What we should not forget is that we have now a new tariff. The fourth tariff has different mechanism. So therefore, we are carefully always looking whether the treatment of certain new regulatory mechanisms are treated the same way as we think that EMRA sees this. So therefore, we are always very conservative on our guidances. But we are, of course, also globally watching in case there are some items where we see a need for compensation. And so far, we don't see them even of the corporate tax increase, which we have just seen. But of course, as always, we're closely monitoring. And once we see anything which we are not expecting right now, then, of course, we will let all of you know.

I see, I see. And how much impact do you expect from the increase in corporate tax rate?

The increase in corporate tax rate, you can calculate it. The gross number would be around TRY 150 million to TRY 200 million. Because of the statutory accounting of the taxes, we take into account CapEx reimbursement as well. But when we had such changes, the tax collection items is also corrected. This has been done in 2018. And we will have also efficiency measures that will bring everything together. We would not expect a significant impact in net of the corporate tax increase.

Thank you very much, ladies and gentlemen. [Operator Instructions] Your next question comes from [ Jan Alaga from QNB Finance Invest.]

Thanks for the call. I just had a trouble on the line in the middle of the call, sorry about that. Can you re-explain reason behind one-off CapEx reimbursement in the quarter? And is this going to be a subject in the coming quarters?

It is the extraordinary CapEx reimbursement. As you know, we had overspends in the regulatory period as the unpaid amount, the principal financing part started to be paid in bulk. It is repaid in 2 years and it is the TRY 3 billion we are talking about, as this one-off or exceptional CapEx re-reimbursement is the principal payment. But of course, we have the financing income as well as we expect you will see it in cash flow. Therefore, you will see this over the next 2 years. We specifically explained the detail because my reconciling to that moment, you will see that, therefore, being a specific part in our earnings presentation. So it will be over the next 8 quarters. It will reset to each quarter.

Okay. And do you have any target for your net debt level for the year-end with your churn on CapEx budget and cash generation plan?

We do not provide a target for that, but we have the free cash flow generation numbers. You know the dividend payments, the [ actual ] growth, you can make some assumption on calculation as it should be a [ quite full ] increase for the year end. Of course, we -- if you look to the quarter's developments, from the first quarter, we expect some increase in the net debt levels in the second quarter because we take dividends, as normally the second quarter are high dividend growth -- high net debt because of the dividend payment. And then we expect it gradually to ease. And the numbers, you can make your calculations as definitely, there will be a decline compared to 2020 year-end.

The next question comes from [ Alper Estimir from Azimut.]

You said that you use 12% or something inflation for the first quarter. And it will possibly be higher in June. So are we going to see the full impact of the increase in inflation assumption that you use in the second quarter?

In June, we made an adjustment in the RAB, and it also impacts the financial income, but we are working with financial asset model, therefore the short-term inflation assumption has an impact. But of course, it isn't full one-to-one because of the long-term inflation assumptions. Unless you change the long-term inflation assumptions by same measures too, you do not see the full impact naturally, but we are likely to see an adjustment in the second quarter.

Thank you very much. [Operator Instructions] There are no further questions. Dear speakers, back to you for the conclusion.

So thank you very much for all of you for your patience. I said last time, I hope to see you next time in person very soon. And I hope that now really there is a light at the end of the tunnel of this COVID-19 situation. So I wish you all a very healthy and particular time. And see you soon, speak to you soon, and goodbye. Thank you very much.

Thank you for participating in the call. Enjoy your day.

Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation.