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

Welcome to Enerjisa Full Year 2021 Results Conference Call and webcast. I now hand over the call to CFO, Michael Moser and IR, M&A Tax Director, Gözde Çullas. Dear speakers, please go ahead.

Thank you very much for handing over. Hello, everyone. This is Michael speaking. And I hope everyone is healthy and doing well. Let me start today's earnings telephone conference by providing an overview of the past year 2021. And now I go to Slide 2 of the executive summary. In 2021, we had a robust performance. And this is thanks to our sound risk management processes, resilient balance sheet, accelerated investments and the impact of higher midterm inflation expectations. Underlying net income grew by 29% year-over-year in 2021. CapEx increased by 56% during the same period. We are happy to see that our Customer Solutions gross profit reached TRY 100 million mark increasing fivefold compared to 2020. We have significantly outperformed our operational earnings and underlying net income guidance for 2021 mostly on the back of higher midterm inflation assumptions. Meanwhile, the cash flow in 2021 was below guidance. This is due to a sharp increase in electricity procurement costs in the second half of 2021. While the increase in regulatory tariffs during the same period was limited and working capital impact related to distribution CapEx in an effort to mitigate supply chain related risks for 2022 CapEx. In retail, the deviation between the actual cash collection via regulatory tariffs and the required collections to reflect actual cost is corrected with price equalization mechanism, including a financial compensation in 2 quarters. This means under collection only has a timing impact on retail cash flow. Meanwhile, distribution cash flow impact will also reverse in due course. We will propose TRY 1.24 dividend per TRY 1 nominal share representing a 29% year-over-year increase to the AGM. The proposed dividend distribution date is 11th of April. We are proud to demonstrate concrete progress towards our sustainability goals. Our rankings and sustainability indices is improving, reflecting our initiatives in this area. We completed our green finance framework in 2021 and received the relevant second-party opinion. Additionally, we signed a new inclusive and green focused loan agreement with EBRD in November in Turkish lira equivalent to USD 110 million. For 2022, we expect a strong growth in retail and customer solutions. Meanwhile, the supply chain vulnerabilities and uncertainties in electricity markets continue leading us to provide a cautious consolidated guidance for 2022. And now, I flip to Slide 3. High natural gas and coal prices have led to higher power prices across markets. In Turkey, quarterly average day ahead power prices increased by around 175% year-over-year and around 60% quarter-over-quarter in the last quarter of 2021. Given the mix of our business, and predominantly regulated nature of the retail business, our P&L has been protected against such fluctuations. The change in electricity prices has very limited impact on our distribution earnings, except for theft and loss related performance driven by higher prices. Our gross profit in regulated retail segment is cost plus with 2.38% gross margin. Therefore, higher cost means higher absolute gross profit. Meanwhile, if the increase in electricity cost is not reflected in the regulated national tariffs within the quarter, this impacts our cash flow, which is compensated with 2 quarters lag with financial compensation as per the regulatory price equalization mechanism. During times of high volatility in electricity sourcing costs, some negative impacts on liberalized segment profit is possible, which is partly compensated via higher gross profit in the regulated segment. When regulatory tariffs are most reflective and there is stability in the market, the impact of higher electricity sourcing cost is positive. In net, the impact of electricity costs on our consolidated earnings has been limited in 2021. We expect the robust growth in 2022 and retail operational earnings on the back of increases in sourcing costs and the impact of expected shift of customers to the liberalized market as supported by the recent regulated tariff increase. Now let us go over the financial highlights of 2021, which you can find on Slide 4. In 2021, we had robust earnings. Operational earnings growth was 34% year-over-year, exceeding the average inflation. Including exceptional CapEx reimbursement, the growth was 42%. Meanwhile, underlying net income increased by 29% year-over-year to TRY 2.4 billion, exceeding average inflation increase of 20% in 2021 and far exceeding our guidance. Our free cash flow after interest and tax was around TRY 110 million compared to around TRY 500 million last year. The negative free cash flow in the second half of the year is driven by mostly price equalization impact in regulated retail segment due to higher increase in electricity procurement costs than regulated tariffs. The gross price equalization impact in the second half was around negative TRY 2 billion. We have a healthy balance sheet. Our financial net debt to last 12 months operational earnings ratio is down from 1.7x in December 2020 to 1.2x in December '21. Please take now a look at the market environment on Slide 5. Inflation continued to increase in Q4, reaching 36% in December. Interest rates peaked with 2-year government bond rates reaching 23% in December, realized yearly inflation in June, which is the reference for our regulated tariff indexation, which was 17.5%. Electricity consumption demonstrated strong growth in 2021 and increased by around 8% year-over-year. The increase was driven by economic recovery and to some extent, hot weather conditions in the summer. I will not go over the electricity prices as we discuss them in detail in the previous slides. In this slide, we see the planned regulated sourcing costs increased by 156% year-over-year in December, which was far above the increase in regulated tariffs as tariffs did not change after the first of July. Meanwhile, as of January 1, the regulated retail industrial tariffs has increased by 157% on commercial tariffs has increased by 168%. For residential tariffs, the 2-tier tariff structure was introduced for daily consumption of 5-kilowatt hours, the prices has increased by 68% and for consumption above 5-kilowatt hours, price has increased by 184% as of January 1. The limit has increased to 7-kilowatt hours of February 1. Adjusting for the impact of limit increase to 7-kilowatt hours, we estimate the average price increase in residential tariffs is around 90%. For the total regulated portfolio, the weighted average price increase is around 120% to 130%. There are plans to shift to a tiered tariff structure and commercial tariffs as well, but the details are not finalized yet. On the other hand, the distribution component of the tariff has increased by 24% in January. These changes highlight overall strong prospects for growth in Retail segment. Currently, we see in Turkey undifferentiated statements around the recent increase in the energy cost. We simply want to make sure that such a temporary public atmosphere will not be fueled by too pushy statements around growth and profits. And therefore, you were reading less from us in the past days. Now coming to a more detailed explanation on our operations, which you can see on Slide 6. On the distribution side, CapEx was around TRY 2.8 billion in 2021, with a 56% increase compared to the same period of last year, reflecting the increase in CapEx allowance in the fourth regulatory period. Our CapEx spending was slightly below the allowed CapEx limit set by the regulator as some of the projects have been work in progress by the end of this year. We have been highlighting the supply chain constraints and the investment execution is in line with our guidance. New investments in 2021 slightly exceeded CapEx reimbursements, including exceptional items. Our RAB grew by TRY 1.9 billion compared to the year-end also reflecting revaluation of opening balance with inflation. Efficiency and quality earnings increased by 11% in 2021 with a strong performance and CapEx outperformance, while theft and loss and quality-related performance was slightly weaker than last year. In our liberalized retail business, volumes continue to increase, while margins declined due to the impact of sharp increase in procurement costs. Our gross profit from the free market accounted for 15% of our retail gross profit in 2021 compared to 39% in 2020 with the decline driven by a sharp increase in electricity procurement costs. As an important development, our Customer Solutions business accounted for 8% of retail gross profit in 2021, compared to just 2% of the same period last year. Coming to Slide 7. Operational earnings has increased by 34% year-over-year to TRY 7.5 billion. Distribution was the main contributor to that performance. These figures does not include TRY 455 million exceptional CapEx reimbursement. We will discuss the details in the subsequent slides. So therefore, please turn to Slide 8. In the Distribution segment, operational earnings growth was 38% year-over-year in 2021. The growth in financial income was 43% in 2021. The financial income growth accelerated in the second half with the impact of higher midterm inflation assumptions. CapEx reimbursements, excluding exceptional reimbursements, increased by TRY 759 million due to inflation impact, higher CapEx ceiling and at 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 reimbursement, meaning overspend CapEx, not reimbursed in the third regulatory period due to the regulatory mechanism for the overspend CapEx. We are receiving this amount over 2 years. The amount reimbursement through distribution tariffs was TRL 454 million in 2021. This figure does not include financial income compensation. Total efficiency and quality earnings increased by TRY 104 million in 2021, compared to the same period of last year. Theft and loss outperformance was slightly below 2020 level, mainly due to the lower theft and loss threshold level in the fourth regulatory period, resulting in lower theft and loss target, which was set by the regulator. Theft accrual and collection earnings decreased only slightly, although we need -- and we now have to retain 50% of the theft usage accruals at collection compared to 75% in the previous year. CapEx -- OpEx outperformance in 2021 was TRY 102 million, slightly higher than in 2020. Meanwhile, OpEx outperformance is negative in Q4, mainly due to shifts in spending between quarters and to some extent, the impact of increase in commodity costs and FX. CapEx outperformance improved with increase in CapEx investments and our contract structure with fixed terms set in the beginning of 2021, providing us the opportunity of -- to benefit from the increase in commodity prices and the price escalation mechanism in the regulatory framework. Since Q1, we are recognizing in-house sourcing incentive and incentives for publicly listed companies on our income statement. The quality income recognition in Q4 is lower than historic levels as the remaining scope in Q4 was more limited and the criteria for the eligibility of the remaining items became stricter together with decreasing calculation base as per defined for the fourth regulatory period. Other items in 2021 was TRY 171 million, slightly lower than TRY 193 million last year. We have TRY 126 million net hedging gains in this item compared to TRY 14 million in 2020. We have a significant improvement in free cash flow before interest and tax. Operating cash flow before interest and tax increased significantly by strong operational earnings. Pro rata reimbursements related to previous regulatory periods and also the impact of higher than forecasted distributed volumes. Cash effective CapEx increased by around TRY 1.3 billion due to significant increase in CapEx. We also have negative payable carryovers to 2022 as we have relaxed our payment terms to our contractors in an effort to support our supply chain. Finally, we also increased our inventories beyond normalized levels in an effort to ensure supply security in 2022. As you see on Slide 9, our retail business showed an operational earnings growth of 13% year-over-year in 2021 despite many challenges throughout the year. In 2021, we had completely different dynamics compared to 2020. The growth in 2021 was mainly a result of increase in gross profit of regulated market segment and customer solutions and improvement in the collections related items. Regulated gross profit increased due to higher electricity prices and higher retail service revenue, meaning due to increase in OpEx around mainly driven by higher inflation. Despite higher volumes, liberalized gross profit declined due to competitive activity early in the year and more importantly, increase in sourcing costs. We were stressing a potential decline in margins compared to last year due to high base. The decline was higher than our expectations due to the extent of increase in sourcing costs, while tariff increases unmatched the sourcing costs increase. Nevertheless, the increase in regulated gross profit more than compensated for the decline in liberalized gross profit. Customer Solutions gross profit increased TRY 54 million to TRY 105 million, mainly due to new solar projects. We strongly believe in the strong growth potential in that segment and therefore, will further expand our activities in this area. The bad debt related income increased from TRY 42 million in 2020 to TRY 152 million as doubtful provision expenses decreased mainly due to improvement in payment behavior. The operational cash flow decreased from around TRY 780 million in 2020 to around negative TRY 230 million in '21. This is due to price equalization impact as the tariff price increases were lower than procurement price increases. This impact will be corrected with 2 quarter lag. There were increases in net deposit additions with the slowdown of shift of customers to the liberalized segment. The working capital impact is positive as we expected our payment terms. Now let me come to the bottom line development on Slide 10. Our underlying net income grew by 29% to TRY 2.4 billion in 2021. Below the line item operational earnings, the main effects were as follows: net loan interest expense increased by TRY 245 million, average loan interest rates increased by 4.1 percentage points per year-over-year to 16% in 2021. Net loan interest expands includes FX losses on operational items of TRY 262 million, which is partly compensated by TRY 126 million hedging gain in other items of distribution segment. Excluding the FX impact, the increase in financing costs is 1 bp per year-over-year. The revaluation expense of both our bonds and our customer deposits was higher due to higher inflation compared to last year. Tax expenses increased by growth in pretax earnings. Corporate tax rate increased to 25% for 2021 and 23% for 2022. As the increase is a temporary implication. We treated this as a one-off, and we have booked for the increase in tax expenses and extraordinary items. The regulator has allowed reflection of this corporate tax increase to tax correction component of revenue ceiling. This income has been treated as exceptional item in Q4. Turning to Slide 11. Our economic net debt stayed unchanged at TRY 11.3 billion in December compared to December 2020. Meanwhile, our financial net debt to operational earnings ratio is 1.2x, compared to 1.7x last year. Free cash flow before interest and tax was around TRY 2.8 billion in 2021, while net interest payments were around TRY 1.4 billion. We have TRY 1.3 billion of tax payments in 2021. The tax payment is higher than tax expense as the one-off financial income reimbursements just start to be booked in statutory accounts in 2021 while they were being accrued in IFRS accounts in the previous years. We had a dividend payment of TRY 1.1 billion in the second quarter. We have other items of negative TRY 1 billion, mostly due to hedging gains on our derivatives. Our balance sheet is healthy, 55% of our gross debt has fixed interest rates. 36% has variable interest rate and around 9% is CPI linked. Variable interest loans includes our TLREF index loans and bonds, which accounts for 30% of our borrowings. Our borrowing rate on TLREF bonds is TLREF plus 1.4%. We have committed lines of USD 110 million equivalent as part of loan agreements with EBRD as of December 2021. These loans are indexed to TLREF and the majority is 7 years. And now let's go to Slide 12 to talk about the impact of inflation. I'm sure that you would have questions on impact of higher inflation on our financial performance. In Turkey, distribution companies are not the legal owners of the networks and receive guaranteed investment return components. As a result, our distribution companies are subject to the application of IFRIC-12, IFRS standard that governs accounting for service concession arrangements. Accordingly, we account our license to operate and invest in the networks as a financial asset. The calculation of IFRS financial income using nominal RAB, WACC and inflation is an illustration to explain to basics of our business model. However, this model is not representative when there is high volatility in the market. In the financial asset model, financial income has calculated basically as IRR times financial assets, where IRR is a nominal value calculated over the lifetime of our concession assets. The IRR figure is different than WACC plus current inflation as it also takes into account the long-term inflation expectations. Our IRR was 22.6% in September 2021. And with the increase in inflation expectations, it has increased to above 26% as of December. The increase in IRR will be effective for the long term even when we see a decline in inflation. The increase in IRR due to the reflection of change in macro estimates has been the major driver of better performance in 2021 than our guidance. Our financial assets as of December 2021 was TRY 12.9 billion. And now please go to Slide 13. Regarding our 2022 guidance, please note that the current market environment in some areas is volatile. Items like the macroeconomics, supply conditions, such as CapEx unit prices and therefore, related adjustments and tariffs are moving parts, providing in detail and specific guidance at this stage would not be prudent and would require adjustments in case of material changes. Therefore, we provide you today with an operational earnings and net income guidance, which you might see as a conservative floor. We will revisit these items in the next quarters with a specific guidance on CapEx, RAB and cash flow. We expect minimum 30% growth in operational earnings. The growth in operational earnings is supported by strong growth in retail. Distribution operational growth is lower than retail growth as we cautiously do not incorporate any CapEx outperformance to our estimates at the prices we have in the market is higher than unit price set by the regulator. This is caused by high volatility in the market and supply constraint, leading to a decline in the correlation between local and global material prices. Given the high volatility we see in new financing costs, we prefer to provide a cautious in underlying net income guidance as well, which should be taken as a floor. Our underlying net income guidance is above TRY 2 billion. The increase in operational earnings does not fully reflect to the bottom line due to increase in borrowing costs as our debt with 1 year majority accounts for 60% of our gross debt as of December 2021. Moreover, we expect a sharp increase in our deposit expenses due to increase in inflation. Given the volatility in the supply market and supply constraints, we are carrying out discussions with the regulator on unit prices for our distribution CapEx investments. Until progress with these discussions, we decided not to provide guidance on CapEx and RAB. With -- we expect to share CapEx guidance with the first quarter results. Meanwhile, we are taking actions to ensure flexibility to manage potential changes in CapEx volumes. The regulator has said the expected yearly inflation for June 2022 at 25.8%, which would impact our cash flow if unchanged. The impact of deviation in actual and forecasted inflation on cash flow will be corrected in 2 years with financial compensation as per T+2 correction mechanism. We are carrying discussions also on inflation item with the regulator. Moreover, high volatility in energy-related costs and supply conditions, including volumes allocated by state-owned generator for regulated segment can lead to deviations in our cash flow estimates for retail, which will be corrected in 2 quarters. Until some visibility in these items, we decided not to provide a cash flow guidance. However, it is important to highlight that any deviation in cash flow related to these items will be corrected with financial compensation. Thank you all very much for your attention, and we can now take your questions.

[Operator Instructions] The first question comes from Cenk Orcan from HSBC.

Thank you very much for the presentation. I was wondering the reason for net profit guidance, it implies your profit this year could be lower than last year, could also be higher. It's open-ended guidance, that seems a bit cautious. I was wondering why you expect operational earnings to grow at least 30% tax should not be a factor as you smooth that out in the adjusted profit is that the financial expenses item where you are cautious at this point? What could be the reason if this year's profits are lower than last year?

Okay. Thank you. [indiscernible] first take question. Regarding gross income, I'd like to have suggested the guidance which we had provided is a law -- and in the guidance, of course, the addition [indiscernible]. After have proved volatility, and we have seen financing expenses for new loans, going on to [indiscernible] levels, at now, it's gradual east [indiscernible]. There's an additional uncertainty there. And second, our financing costs -- low cost last year was very low. The formation there will be an increase. And the first item is in operational earnings. There is also CapExes, which does [indiscernible] as the growth in [indiscernible] higher than the average operational earnings growth because it's more sector inflation. But the current outlook, which we see on the financing front, it's much better than what we had last week or at least weeks ago, where we were doing our budget. Therefore, that's the reason why we said that we will cover the numbers in the first quarter results, and we might provide a lot with guidance. And the second thing we are comparing the numbers, perhaps we might need to use [indiscernible] as a reference because around TRY 400 million upside, which was surprised is caused by a reflection of high term inflation assumptions. Therefore, the base also already reflects some kind of higher inflation.

Okay. So the change in inflammation and the adjustment for that is mainly in the fourth quarter and 2021 results. But we'll continue into 2022, right?

It will continue in 2022, but it will be expressed over the -- like the high IRR, we reflect to the concession period. Therefore, EBIT decrease in inflation two years later, it doesn't mean that our IRR will direct be reduced by the amount. Therefore, higher inflation positively impacted [indiscernible] and it would passively impact the financial income of 2022, but we will not see this at a lot in my year.

Okay. Thank you. And on -- if I may ask another question on the operational earnings guidance of at least 30%. Is it possible to provide -- is that a balanced growth across different components, distribution versus retail, within distribution what items will be above average, which ones below average? Is it possible to provide some more detail on that?

[indiscernible] all the details, but we already suggest that we expect the retail growth to be quite strong and we expect the share of retail in the consolidated operational impact to increase because of the increasing [indiscernible] prices. Therefore, the growth in the retail will be better. [indiscernible] about the CapEx at performance, we have [indiscernible] number. And the other items, I think that's safe [indiscernible] distribution this function at this stage, but we can discuss later with the first quarter results.

Okay. And within retail, do you expect continuation of the regulated gross profit growth to be above that of liberalized?

It will depend on market dynamics, but not [indiscernible] we had seen in 2021. We see a sharp decline in realized gross profit because of the [indiscernible] in the market. And [indiscernible] in the market, we believe that the liberalized segment has also grown quite strongly in 2022.

[Operator Instructions] The next question comes from [indiscernible] Azimut.

Congratulations for the strong retails. We are very happy to see a strong operational performance in the past year. But I must say, I mean, we have less activity underlying net income guidance. I understand your concerns about the moving parts. But in my view of underlying net income guidance with not helping the market to assess an [indiscernible] outlook. So I want to ask this net income guidance your worst case and operational earnings guidance is your base case. So is it right? [indiscernible]?

Both are [indiscernible] or the growth phase before it's the operational [indiscernible]. So -- there's upside on that front as there is [indiscernible] related to the financing cost as we have been seen in the market [indiscernible].

Okay. Okay. And also for the fourth quarter, I calculate your average cost of bank loans somewhere above 25%. So -- has there been any decline in interest rates so far in the first quarter when you compare it to the fourth quarter? So maybe are we talking about interest rates, let's say, in the range of 20% to 25% for [indiscernible]?

The rates, which you see has been impressed by the effects in our financing costs, which we provide. There is also impact related to operational items. Therefore, it is normally, this doesn't make a major change in the financing costs you see, but in the fourth quarter due to high volatility in the market, we had some FX sources, which had been part contested by the hedge distribution operating income. And if you exclude this, this has and more than cheering impact on our financing costs. Therefore, I believe that the cost which you see in the fourth quarter is also impacted by the factors. Therefore, we should be looking with an adjusted base as well. In the first quarter, we didn't have a very, very major refinancing, but the [indiscernible] numbers again, what you see is also affected by the FX impact, which is like more [indiscernible].

So is it going to be similar in the first quarter? I mean, are we going to see the FX impact on financing costs again in the first quarter?

[indiscernible] was not really impacted because how we do hedge is related to interest. It's like it includes interest [indiscernible], but if there is an impact it would be reduced or it would continue within the year. Therefore, for the year, you should be attributes FX-related costs. And if FX-related impact, it will be counted by the operating income as well.

[Operator Instructions]

We have 2 questions. One is from [indiscernible]. The question is, do you see any regulatory risk for distribution segment due to the different [indiscernible] propositions on nationalization of distribution segment and higher wholesale electricity prices.

And I would like to before I give an answer to combine it also with Andre's question because this goes in the same direction [indiscernible]. But evening could you please briefly discuss any risk to both distribution and retail segment stemming from any potential intervention in the power prices, especially before the election. So let me say, generally one statement that we don't see any risk. We see potential on the upside, which is needed, which I will explain in short term and even midterm. And there might be temporary downsides coming, but no midterm and long-term ones. Turkey is nothing special in this respect. If we look also into other countries, the energy sector, clearly, is as the backbone of the whole industry always part of public discussions. And we also observed in many countries around the globe and increasing debate about the energy sector, if elections come even closer like we see today in Turkey. And of course, the energy industry deserves the more effect-based discussion as one fact is very, very clear, only because of the privatization of the sector, heavy investments into the energy infrastructure were built and will be initiated also going forward. And this is something which is a positive development for the whole country and normally is seen really by everyone. The new energy world is only successfully, and this is also very important to note because of companies like Enerjisa who know exactly what they are doing and who are providing since years beneficial subventions and investments into the country. If you now look at the question closer whether regulatory or legislative intervention might be possible, then this goes with my introduction that, yes, we are very close from a political end. So therefore, we could never say clearly and for -- with a guarantee nor to any potential interventions because of the nature of our business. But we expect more positive interventions as we have heard and learned. For example, the tariff is not reflecting the current prices. So therefore, we see more upside potential than really downside potential. If we look at the portion of our, let's say, what Enerjisa earns out of the energy bill, then we could clearly state that this is by far the low end of the portion. So we are talking about less than 10% overall. So therefore, also here in this respect, Enerjisa is very related.

[indiscernible] that. In the retail segment, our gross profit is just [indiscernible] increase in the prices. And the distribution, it's a small component of the electricity bill as the increase in the distribution bill was just [indiscernible]. Therefore, it has not been the business or [indiscernible] leading to increase in prices. And on the retail side, the margin is very limited.

Thank you very much. There are no more questions at the moment.

Okay. If there are no further questions, we can close the call. Thank you all for participating, and hope to see you with our first quarter results.

Thank you very much. Stay healthy and see you soon. Bye-bye.

Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may now disconnect your lines.