EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first 3 quarters of the 2019/2020 financial year. [Operator Instructions] Let me now turn the floor over to your host, CEO, Mr. Stefan Szyszkowitz.

Good morning, and welcome to the conference call on EVN's results for the first 3 quarters of the '19/'20 financial year. We are reporting sound results today. Group net result for the period is up by 25.2%. EBITDA and EBIT also exceed prior year's level. This positive development was mainly supported by the recovery of our supply company, EVN KG. After implementing 2 price increases in 2018/'19 and changing the methodology for accounting of hedges, we managed to bring the operational result of the equity consolidated company, EVN KG, back to a normalized level. Therefore, I can confirm our full year guidance. We expect group net result for the '19/'20 financial year to range between EUR 180 million and EUR 200 million. Such outlook is made under the assumption of the average conditions in the energy business environment and a stable situation in connection with the corona crisis during the fourth quarter of this financial year. Our integrated business model and both customer diversification proved the resilience so far and served as establishing -- a stabilizing factor during the corona crisis. During the third quarter, there were only some limited negative impacts of the pandemic. In particular, lower electricity demand, especially from industrial customers, is visible in energy demand and network distribution volumes. However, the volume effects in the network will be offset in future tariffs in accordance with the Austrian regulatory network. Another negative impact related to the pandemic are impairment losses, which already became necessary in the second quarter due to increased country risk premiums. In total, these negative noncash effects amounted to roughly EUR 50 million. I would like to stress that we are highly committed to fulfill our investment program as previously planned and announced, irrespective of the corona crisis. We aim for an annual investment level of about EUR 400 million, thereof EUR 300 million are dedicated to Lower Austria, but focus here is on the regulated network business, the expansion of renewable energy and growth of our drinking water business. There have been sporadic delays in some projects due to the lockdown, but these shall be recovered as soon as possible. We are currently working on the construction of a new wind park with an installed capacity of 8.4 megawatts. Commissioning is scheduled for the end of this calendar year. Our past efforts to expand our renewable generation capacity are visible when looking at the share of renewable generation, which was almost 60% in the reporting period as compared to 43% a year ago. This progress to reduce our CO2 footprint was, of course, also supported by the termination of coal-fired generation in June last summer. In the international project business, I'm highly pleased by the success achieved in the area of thermal sludge incineration. Based on the group's excellent experience in wastewater treatment and thermal waste incineration, it was just a logical step to further develop the Plovdiv business. We anticipated a window of opportunity for thermal sludge incineration at an early stage when Germany changed the laws with the aim to strictly spreading of sewage sludge on field and at a later stage called for phosphorus recycling. Today, I can inform you that we received 3 new general contract assignments for thermal sludge incineration projects in Germany, Berlin, Hanover and Straubing. I will provide you with further information details later in the call. Further good news for the future development of our international project business is the closing of the wastewater treatment project in Kuwait by the end of July. Now all requirements are met to start with the realization of the project. The construction of the wastewater treatment plant will take 2.5 years. In parallel, we will be responsible for the construction of a new panel infrastructure, which will take up to 4 years. On the shareholder level, on the 5th of August, the closing took place for the transaction between Wiener Stadtwerke and EnBW. Wiener Stadtwerke acquired 51 million EVN shares previously owned by EnBW, which corresponds to a stake of 28.4% in EVN. This makes the Viennese utility company our second largest shareholder after the province of Lower Austria, which owns a majority stake of 51%, the remaining 20.6%, 3% free float, including 1% treasury shares. Let me now continue with the key financials in the reporting period. The group's revenue declined by 6.8% year-on-year. The main reason for this development are the decline in thermal generation as well volume and price effects in the Networks Segment. In contrast, Energy revenue in Bulgaria and the international project business showed a positive development. The recovery of EVN KG supported the improvement of the share of results from equity-accounted investees. In addition, there were positive one-time effects in RAG and the Energie Burgenland. In contrast, there were negative earnings contributions from EnergieAllianz as well as an impairment loss on our investment in Ashta hydropower plant in Albania in the second quarter due to the higher country risk premiums. EBITDA was up by 17.9% at EUR 513.6 million. Scheduled depreciation went up. This was due to investments, revaluations we had to do after impairment testing at the end of last financial year and the initial application of IFRS 16. In turn, higher country risk premiums of South East European countries due to the COVID-triggered impairment losses on assets in Bulgaria and Northern Macedonia in the second quarter, the group's EBIT increased by 20.3% to EUR 284.5 million. In total, we generated a group net result of EUR 210.7 million during the first 3 quarters of this financial year, which corresponds to an increase of 25.2% year-on-year. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. As of the end of June 2020, net debt stood by around EUR 1.1 million -- billion. Please note that the increase of net debt was also due to the recognition of noncurrent lease liabilities in connection with the initial application of IFRS 16. This had an effect of about EUR 70 million. Our financial flexibility is very solid. We benefit from low net debt and sufficient committed unowned credit facilities, which amounted to EUR 595 million as of the 1st of July. Gearing was up from 2020 (sic) [ 22% ] to 25.1% in the first 9 months of the financial year. Our strong balance sheet structure forms the basis for pursuing organic growth opportunities in our regulated and stable Austrian activities. Before I go through each of the segments in detail, I would like to give you a general overview on the EBITDA development of our business segments. The overview of the EBITDA development per segment illustrates the key drivers of our performance during the reporting period, which are well in line with our segment forecast. On the positive side, you can see improvement in the energy in South East Europe segment. In contrast, performance of the Generation, Environment and Networks segments remained below the prior year. With this very general overview, let's now move on to the next slide, which covers the Generation Segment in more detail. Electricity generation volumes in the segment were down by 38.5% year-on-year. Renewable generation volumes were slightly below the previous year, whereas last year's commissioning of wind -- new wind park supported an increase in wind production, water flows declined. Thermal generation dropped. This was due to the closure of our coal-fired plant in Dürnrohr last year and lower use of our gas-fired plants in Theiss for network stabilization. Usage of the Walsum power plant was below previous level 2. Segment revenue declined in line with these developments. The Generation Segment includes impairment losses, which I mentioned earlier; the Ashta hydropower plant, which is equity consolidated in the Kavarna wind park in Bulgaria. Scheduled depreciation went up due to the investment in previous year revaluations. In total, the Generation Segment generated a lower EBIT of EUR 49.4 million. On the next slide, I will continue with the Energy Segment. Revenue in the segment was 33.7% below the previous year. This was primarily due to the decline in the marketing of our own electricity generation and reduction in natural gas trading. The reduced usage of primary energy carriers and lower procurement prices were driving operating expenses down by 39.7%. Energy sales volumes showed contrasting development. Electricity sales volumes were up by 6.4%. The overall positive development of sales to industrial customers was, however, slowed by a corona-related temporary decline in sales to industrial customers. Natural gas sales volumes were down by 3.8% due to a warmer winter and an increased competition. Our electricity and natural gas supply business, which is handled by EVN KG, recovered and returned to normalized earnings levels. EVN KG's contribution to equity result was EUR 35 million in the first 3 quarters after a loss of EUR 41.8 million last year. You will remember, this was caused by higher procurement costs and negative effects from the valuation of hedges at that time. Based on these developments in the Energy Segment, reported EBITDA of EUR 72.9 million and EBIT of EUR 57.4 million. On the next slide, I will present the development in our Networks Segment. As I already mentioned at the beginning of today's call, electricity consummation declined due to COVID-19, especially in the segment of industrial customers. Consequently, network sales volumes were down, too. However, this volume effect will be offset in future tariffs in accordance with the Austrian regulatory method. The natural gas distribution volumes declined, too. The main reason for this was the reduced use of thermal power plants in Lower Austria. I would also like to remind you that the lower WACC electricity distribution network, which was implemented on the 1st of January 2019, is, for the first time, applied for the full financial year. Based on this volume and price effect, revenue went down by 4%. Based on the stable development of operating expenses, EBITDA in the Networks Segment declined by 8.5% and EBIT by 21.5%. On the next slide, I will continue with the South East Europe segment. Energy demand in Southeast Europe suffered from mild temperatures and, more recently, the corona crisis. Consequently, energy sales and network distribution volumes declined year-on-year. However, the financial performance in this segment was sound during the reporting period, one supportive factor by lower procurement costs of network losses in Bulgaria. This segment includes the other 2 impairment losses, which were triggered in the second quarter by higher country risk premiums due to the COVID-19. One was for our district heating in Bulgaria, TEZ Plovdiv; and the other for the customer base in Northern Macedonia. Total segment EBIT stood at EUR 39.1 million. As always, in summer, the regulatory authorities decided a new regulatory electricity prices for household customers. In Bulgaria, which effects of the 1st of July 2020, the prices for household customers in EVN supply area were increased by an average of 4.2%, following an increase by 3.5% in July 2019. In Northern Macedonia, the tariff decision became effective of the 1st of August 2020. It provide -- it provides for an increase of roughly 7.4% for customers of our supply company, EVN Home. In last year's tariff decision, there was no price adjustment. But please note that these price increases are contrasted by higher procurement costs. I would like to conclude my presentation of the segments with the Environment Segment. I already mentioned some success in our international project business in the beginning of today's call, so let me briefly repeat. In Kuwait, the closing of the wastewater treatment project took place at the end of July. Now all requirements are met such that we can start with utilization of the project. Due to the percentage of completion method, we will now be able to report results according to project progress. We were very successful in the acquisition of general contractor assignments for thermal sludge utilization projects in Germany. WTE Wassertechnik was awarded the contract in Berlin. The contract volume is about EUR 190 million. EVN's share will be roughly 50% of the contract volume. Please note that the realization of the Berlin project will start only in autumn 2021. In the thermal sludge utilization, we're also active through our joint venture, sludge2energy. WTE Wassertechnik partnered with the German company, Huber. sludge2energy received contracts for 2 new projects, one in Hanover with a contract volume of around EUR 40 million; one in Straubing with a contract value of about EUR 50 million. This is a lot of potential for these projects in Germany. Therefore, the projects in Hanover, Straubing and Berlin will add well to our track record in this area. In the international project business, WTE Wassertechnik is currently working on 10 projects in Germany, Croatia, Lithuania, Poland, Romania, Bahrain and Kuwait. The order book was about EUR 445 million at the end of June. This number does not yet include the Kuwait project as the closing only occurred at the end of July. Finally, I would like to inform you that the contract for the operation of the thermal waste incineration plant #3 in Moscow expired at the end of June and that the plant was transferred in accordance with the contract. The financial performance of the segment is in line with the development in the international project business. There was a corresponding rise of both revenue and operating expenses in the segment. The share of results from equity-accounted investees with operational nature was below the previous year. Please remember that last year's earnings from the wastewater project in Prague were included. In total, these developments led to a decline by EBITDA to EUR 14.1 million and an EBIT of EUR 5.3 million. This concludes the presentation of this segment. On the next slide, I will continue with the development of our group cash flows. Gross cash flow fell by 17.3% to EUR 392.3 million in the first 3 quarters of this financial year. It was caused by lower dividend payments from equity-accounted investees. In addition, gross cash flow was corrected by the dividend from Verbund, which was paid in July after the balance sheet closing date but was approved in June and therefore already included in EVN's financial results. Through this development of working capital at the end of June, cash flow from operating activities amounted to EUR 205.8 million. Cash flow from investing activities reflected a partial delay of investments due to the COVID-19, disinvestment of securities in one of our funds and the guarantee payment from the Republic of Montenegro for the wastewater project in Budva. This was contrasted by the equity contribution for the Kuwait project and increased investment in cash funds. The cash flow from financing activities reflected the scheduled repayment of loans and the dividend paid for the previous financial year. The counter effect there was the issue of green promissory note loan. The net change in cash and cash equivalents amounted to minus EUR 75.8 million. With that, I would like to conclude my presentation. We are ready to take our questions -- your questions.

[Operator Instructions] And the first question comes from Mr. Peter Crampton for Barclays.

I'm Peter Crampton here from Barclays. 2 questions, if I may. Firstly, looking at your group net results, it's EUR 211 million. And kind of looking at your guidance, you're now already above that guidance. Were there any kind of particular reason you didn't adjust your full year outlook? And then the second question is now when we have the Wiener Stadtwerke transaction closed, is there the potential of an ATX inclusion for EVN? And what would be kind of the prerequisite for that to happen and when?

Okay. Thank you for your questions, Peter. Our financial year is following also the year regarding summer and winter. Therefore, we are now in the real summer quarter. So traditional -- this is the weakest quarter of EVN's performance. You have the fixed costs, and we have especially also the depreciation. On this basis, you cannot draw a conclusion out of this third quarter result to the guidance for the financial year. We will have a lot of end-of-the-year balance sheet date approvals of the hedges and so on, and on this basis, I cannot change the outlook we were giving for the financial year. More or less, we confirm all trends are in line with this EUR 180 million to EUR 200 million net result, which we are expecting. And the second question which you were raising, it is right. After this kind of completion of the transaction, the Vienna Stock Exchange is informed by the new owners about the new shareholder structure. Therefore, our threshold is actually above 20% following their regulation. But you know there is also committees which have to evaluate this. And secondly, of course, the volumes which are traded in comparison to other competitors are defining then our chances. But I'm confident that on the midterm, we will get back into the peaks.

The next question comes from Ms. Teresa Schinwald from Raiffeisen CENTROBANK AG.

I have 2. The first on the hedge valuation effect. And pardon if I missed it during the presentation, but could you remind us on the remaining hedge valuation effect in the first 9 months of this year? And the second one is if you could provide us with an update on the renewables energy law in Austria that is still outstanding, has been outstanding for a very long time, if there has been any progress in the past 3 months and what's ahead.

Okay. I think some help to do your evaluation is if you go to our notes and look on the equity investees and then you see EVN KG for the first 3 quarters last year and this year, how this has changed from minus 41 to plus 45, the main result for the group is coming from these changes from EVN KG. And from this result, 2/3 are coming, more or less, as a rule of thumb, from the hedges. The rest is the improved operating result. So this is, I think, gives you some guidance how important the influence of EVN KG's results for the group's results. We are very careful regarding expectation because it's the end of September. We will decide how big this effect will be on a full year's basis. But if you look on the comparison for the first 2 quarters in EVN KG, you see the difference in the turnaround, which was taking place. Operational, 1/3; and 2/3 are the changes of the market prices. Okay. So the second is the -- in the new law, yes? The new law is late because I remember when we were discussing the half year's result, yes, we were expecting that the draft for the new energy law will be submitted to the parliament before the summer, and there were some news in the summer. Now we're coming at least at the end of the holiday season. The latest informations are -- is to expect it somewhere in September because we need -- in a couple of issues, we need also clear decisions to submit them for approval to Brussels. What has not changed, and this is maybe the most important for us, there is no indication that state institutions are ready to provide more than EUR 1 billion on subsidies per year. So this is the level of support, which the public will give for the transition of the energy system on this basis because this is, in a way, in compliance also with the levels of the recent past. And the system itself got, in the past, the approval of Brussels. So on this level, it's too early to say what kind of further details will define our framework for further transformation of the renewable production, not only for Austria, but also for EVN Group. The project which we mentioned before and which we are pursuing are based on the old system of consolidation of their permits for this project. It's more about additional projects in the near future, which we would be able then to pursue. This is especially true for photovoltaic. There is no clear guidance until now what kind of support for stabilization of big photolytic industrial parks will be given. There is a certain tendency that will be a tender system but not on which basis the support will be.

There are no further questions in the queue. [Operator Instructions] We have Ms. Teresa Schinwald once again.

Sorry, I have a follow-up. Also, in the renewables here, and I know conditions in Austria are not the best for PV. But there has been an increasing push for also PPA agreements in the southern parts of Europe. And with your operations in Bulgaria, would you see a potential for solar developments under PPA contracts in Bulgaria or even Northern Macedonia?

Yes, what we not have seen so far is big-scale photovoltaic system, which would be the basis of these PPAs in the midterm. We are following this trend. We see also the publication, but we cannot confirm that in our core countries until now that this is a big change in customer, investor structure so far. It's still pretty much defined by subsidies, tariffs and first phase of support for building up renewable capacity. It's more in Spain and then in these Western European, southern countries.

There are no further questions in the queue. Therefore, I would like to hand over back to you, Mr. Szyszkowitz.

Yes. Thank you for joining today's conference call. We will publish our full year results on Wednesday, the 16th of December. Please join us then again, and goodbye. Stay healthy.