EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the half of 2020-2021 financial year. [Operator Instructions] Let me now turn the floor over to your host, Mr. Stefan Szyszkowitz.

Good morning, and welcome to the conference call on EVN results for the first half of the 2021 financial year. We are reporting today a sound performance for the first half of our financial year. EBITDA, EBIT and group net results are above the previous year. The main drivers for these improvements were the earnings contribution from equity-accounted investees. In particular, our supply company, EVN KG, and developments in our Environment Segment, in particular, the start of the COVID project. The corona crisis only had selective negative impacts on our operating results. Our integrated business model and a widely diversified customer base continue to be stabilizing factors. Our investment level was high. We were able to increase investments by 21.3% to EUR 155.8 million. This is in line with our commitment to further increase of CapEx. Our plan is to invest on average up to EUR 450 million per year in the near future. Thereof, up to 3/4 will be direct towards regulated and stable activities in Lower Austria. The key investment focus now and in the future is on network infrastructure. These investments focus 3 strategic objectives. They secure supply security, enable a carbon-free energy future and provide for further growth of our regulated business. Other investment areas are renewable, generation, biomass and drinking water. I would like to explain our recent progress in these areas. End of December, we started operations on a new wind farm with an installed capacity of 8.4 megawatts. This increased our installed wind capacity to 376 megawatts, and we are confident that before this summer, we will have around 400 megawatts under management. In Krems, which is the fifth-largest town in Lower Austria, we will construct a new biomass cogeneration plant. Investment volume is about EUR 40 million. Upon commissioning, which is planned for early 2023, this plant will supply renewable electricity to approximately 15,000 households and natural heat to 30,000 households. In the international project business, we were awarded a new contract in Romania. As a general contractor, we will be responsible for the modernization of a plan for drinking water supplies. The contract value is approximately EUR 12 million. I'm also pleased to inform you that EVN is back in the Vienna Stock Exchange index, ATX, since mid-March. Let me now continue with the key financials of the reporting period. The group's revenue was up by 7.6% year-on-year. The main reason for this development is the start of construction of the wastewater project in Kuwait. In addition, temperatures were colder than last year, which led to slightly higher network sales in all 3 core markets. Contrary factors were lower effects from the valuation of hedges for the electricity generation and the decline in revenue from natural gas trading. In the second quarter, the deterioration of the clean dark spread led to a creation of an additional provision for onerous contracts in the amount of EUR 35.5 million into the electricity production in the Walsum 10 power plant. The main reason for the rise in EBITDA were higher earnings contributions from an equity accounted investees, higher investments led to a rise of scheduled depreciation and amortization. In connection with the takeover of an additional electricity procurement right, an impairment loss of around EUR 113 million was recognized to the Walsum 10 power plant already in the first quarter. For year-on-year comparison of the effects from impairment testing, please bear in mind that higher country risk premiums of South Eastern European countries due to the COVID-19 had triggered impairment losses of EUR 15.5 million in the previous year. Based on these developments, the group EBIT was up by 10.3% and amounted to EUR 254.5 million. Financial results were up by 27.8%. In total, we generated a group net result of EUR 176 million, which represents an increase by 15.3% over the previous year. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. EVN's net debt has remained constant by approximately EUR 1 billion. Gearing ratio was down and amounted to 17.9%. Our financial flexibility is solid. It benefit from lower net debt and sufficient committed undrawn credit facilities, which amounted to EUR 551 million as of the end of March 2021. Our strong balance sheet structure forms the basis of pursuing organic growth opportunities in our regulated and stable Austrian activities. The rating agencies recently published their annual updates and confirmed our current credit ratings. It's an A1 rating for Moody's and an A rating from S&P. Both ratings are well in line with our goal of having ratings in a solid A range. Before I will 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 EBITDA's development per segment illustrate the key drivers of our performance during the reporting period. With the exception of the South Eastern Europe segment, all other segments showed improvement in comparison with the previous year. Let's move on now to next slide, which covers the Generation Segment in more detail. Electricity generation volumes in the segment were down by 4.1% year-on-year, whereas renewable generation suffered from poor wind flows, thermal generation decreased and to the lower use of our gas-fired plant in Theiss for network stabilization. EBITDA was up EUR 802.7 million. This increase was mainly due to a positive one-off effect related to the Walsum transaction in the first quarter. In addition, there was a revaluation of our at-equity consolidated investment in the Ashta hydropower plant in the amount of EUR 9.6 million. In the previous half a year, we had to record an impairment loss of EUR 4.9 million due to the higher country risks premiums at that period. Both effects are driven by country risk premiums in the discount rate. In the previous year, it increased, and the year before, it went down. Capital depreciation and amortization increased as a result of higher investments. In total, the Generation segment generated a higher EBIT of EUR 60.5 million. On the next slide, I will continue with the Energy Segment. The development of revenue in the Energy Segment depends primarily on the marketing of the electricity generated in EVN's power plants. Therefore, due to, among others, lower thermal generation, the year-on-year decline in valuation effects of hedges, revenue was down by 26.3%. The Walsum transaction in the first quarter also had a positive one-off effect on the EBITDA in the Energy Segment. This effect was contrasted by the additional provision for noise contracts in the second quarter, which I mentioned before. Energy sales volume showed positive development. Electricity, natural gas and heat sales volumes were above the prior year level. The increase in demand for natural gas and heat resulted from colder temperatures. The growth in electricity sales was supported by an expansion of the customer base and stronger demand from household customers. The COVID-19 pandemic did not have a material negative effect on energy demand. The share of results on equity-accounted investees with operational nature improved by EUR 44.3 million. This increase was supported by a sound operating performance of EVN KG and positive effects from the valuation of hedges. Based on these developments, the Energy Segment reported EBITDA of EUR 67.4 million and EBIT of EUR 56.7 million. On the next slide, I will present the developments in our Networks Segment. Networks sales volumes increased, supported by stronger demand for electricity and natural gas in the household customer segment due to lower temperatures in our core region in Lower Austria. This was contrasted by a slight decline in electricity consumption by commercial customers. There were no material negative effect on network sales volumes from the COVID-19 pandemic. At the beginning of the new calendar year, they also determined new network tariffs. Tariffs for electricity increased by 6.3% on average, and those for natural gas increased by 6.4% on average. Based on these volume and price developments, segment revenues increased by 5%. EBITDA in the Network Segment was up by 11% and EBIT by 15.5%. On the next slide, I will continue with the South East Europe segment. Temperatures in South East Europe are lower than the unusual mild previous year but still higher than the long-term average. In Bulgaria, we are facing stronger competition following the market liberalization for commercial customers as of October 2020. Based on these developments, we are reporting today an increase in network sales volumes contrasted by a decline in energy sales volumes. Segment EBITDA was below the previous year level. The reasons for the decline were higher energy procurement costs as well as lower sales margins in the regulated supply business in North Macedonia. In contrast, segment EBIT was up. As already mentioned, higher country risk premiums for South Eastern European countries due to the COVID-19 had triggered impairment losses of EUR 15.5 million in the previous year. I would like to conclude my presentation of the segments with the Environment Segment. In our international project business, we were awarded a new contract in Romania regarding the modernization of a plant for drinking water supplies. The project has a contract volume of about EUR 12 million. In total, WTE Wassertechnik is currently working on 9 projects in Germany, Lithuania, Poland, Romania, Bahrain and Kuwait. The order book was about EUR 1.4 billion at the end of March. In addition, our joint venture company, sludge2energy, is currently working on Greece sewage sludge treatment projects in Germany. The financial performance of this 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. All in all, the segment benefited from the start of construction of the COVID wastewater project, which is accounted for according to the percentage of completion method. In addition, there was a positive one-off in our Lower Austrian water supply company. In total, these developments led to an increase in EBITDA to EUR 39.5 million and in EBIT to EUR 19.9 million. With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of our group cash flows. Gross cash flow was substantially up with EUR 591 million. It was mainly due to the compensation payment for the takeover of an electricity procurement right. A further factor was the higher balance of dividend from equity-accounted investees. And the increase in cash flow from operating activities was even higher in comparison due to the developments in the working capital. Cash flow from investing activities was influenced chiefly by year-on-year increase in investments in property, plant, equipment and higher investments in cash funds. The cash flow from financing activities reflected the scheduled repayment of loans and dividend on our previous financial year. A contrary effect was the issuance of a green private placement. The net change in cash and cash equivalents amounted to EUR 1.8 million. I would like to conclude my presentation with the confirmation of the outlook for the group. Assuming average conditions in the energy business environment, we expect that the group net result 2021 will be in the range of approximately EUR 200 million to EUR 230 million. However, the further cost of the corona crisis and the resulting macroeconomic effect would have a negative impact on individual businesses areas at EVN and, in turn, on the development of earnings for the entire group. I confirm our dividend policy. It is directed to holding the absolute amount of the dividend at least constant at EUR 0.49 per share. I'm now looking forward to answering your questions.

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

Peter Crampton here from Barclays. Just one question on kind of Austria's plans regarding renewables. You've got this big ambition by 2030 to kind of reach kind of total energy transition and for lots and lots of investments to kind of happen in the renewable energy sector. Are you kind of expecting some opportunities here for EVN particularly since you do have that big net debt headroom in the balance sheet and an ability to invest more? And do you feel the framework is now good enough to do so?

Thank you, Peter, for this question. I want to confirm that we're all expecting that the parliament is voting on this new Energy Act before the summer break. As you all know, a lot of additional regulatory decisions have to be made after that. So the clear legal framework for the future development of renewable energy will be in place, I think, in autumn, yes. EVN, as I mentioned before, is hoping to have around 400 megawatts of wind under management before the summer break. We have an additional 100 megawatt on projects and different stages of confirmation, but already the contract from the old system of the regulation. And of course, we expect that society and regulatory framework has to give incentives for the further development of installed renewable capacity for wind and photovoltaic for the future. In the photovoltaic case, it depends pretty much also on the land regulation, where you are allowed to get the permits of photovoltaic. This is still debated also in the provinces. So it's not quite clear if these ambitious targets of 2030 are already reflected in a framework which is allowing companies like ours to develop this project as we would like to do. And additional opportunity, we are also pursuing now if we will look on additional renewable energy in North Macedonia and Bulgaria because there, we are already a grid operator, have access to the grid and have an organization in place.

And the next question comes from Lueder Schumacher.

Lueder Schumacher here. Three questions from my side. The first one is on EVN KG. Clearly, very strong results there. Could you maybe elaborate a bit on the drivers behind the strong performance and whether that is likely to be sustainable? Or should we look at this as more of a one-off? The second question is on something you mentioned earlier in the presentation. You said that the clear focus for CapEx is on network infrastructure. Why do you see network infrastructure as that much more of an attractive investment opportunity than renewables? Is it less competition? Is it just the regulated returns that you see as attractive? It would be quite interesting to hear your general thoughts there. And lastly, on Walsum, another provision, another impairment, negative clean dark spreads. I mean what is the investment case for Walsum with carbon prices above EUR 50 a tonne? Wouldn't it be easier to just bid the plant into the co-closure tender? And that's all from my side.

Okay. Thanks, Lueder. First of all, regarding EVN KG, that's our sales company. Of course, we have volume effects there. We have also price effects. And if you look on the results over the last couple of years, we see quite a strong fluctuation. So it's pretty much always depending how the procurement costs in the period are developing and how you can pass through additional costs regarding procurement. If the timing of increase of procurement, energy costs and pricing is in line, then there should be no big fluctuations. This has happened in the recent past, and now you see in this year that the price increases of 2 years ago are now having the full effect connected also with the temperatures which we have seen here, yes? But over the midterm, we were always looking on around a 5% kind of retail margin on the volumes and, of course, we are above this in this year. It is not sustainable as a business model. It is just a question of adopting at the right period and the right timing. Regarding the investment strategy, which I want to confirm again, around EUR 450 million. It is the total investment. This is without a grid connection. This is on the level of the next couple of years. 3/4 of them go to Lower Austria. And there, luckily, we have a broad opportunity to invest, yes, of course, in the infrastructure of the grid because the great infrastructure in -- on the electricity side has to be adopted for the further renewable production and connection. So we started originally to develop the grid on the basis of the existing customer grid. Now step-by-step, we have to invest in 110 in substation to get the additional produced renewable energy into a grid, into further develop the grid in this case. This is a regulated business with, I think, very transparent regulatory framework. Therefore, this is keeping this kind of backup of EVN's results for the upcoming years. Renewables are still also in the sense of a regulated subsidy business, of course, the -- it's the new law. We will go into a market premium, yes, so there's not a feed-in tariff system anymore. But for us, it's also in the -- for the time being, this is a regular business. And we have also stable businesses, which are not regulated, but definition to grid work similar like the water business. Therefore, I think we are quite good as an asset manager of grid infrastructures trying to have as many products, as different grid infrastructures and one overhead OpEx structure. This is the case where we believe in it and where we're also good in -- and these are also in comparison, our tariffs to the tariffs from other grid operators show that we -- they have quite a management performance, yes? So therefore, I think this is what EVN is good at, yes, in the -- independent if it's heating, if it's water, if it's telecom or if it's gas and electricity. And regarding the third point, which you have taken very well. Of course, the Walsum case is not the case anymore when we made the investment decision. In all the Prime Minister Schröder's time, we wanted to get the confidence of investors in thermal production. Times have changed, government has changed. The next government of Germany is on the way after the election in September. We are following quite closely the debate in Germany. We try also to understand what can trigger changes there. They have made a decision regarding the law, how to exit thermal electricity production. We have seen, over the last couple of weeks, even further demands. For us, as a minority stakeholder of the Walsum power plant, it is not a decision up to us. It's a decision together joint -- in the joint venture with the majority stakeholder. What we also try to understand is how the fading out of the nuclear production in '22, '23 is influencing the German energy market not only on the production side but also on the stability security side. So I would expect that we have a clear view of what we are able to do on the one -- under what conditions and what we can also get the approval by our Board and put to our shareholders, and we know more closer, which are the conditions regarding the private future of the energy system in Germany because this will influence on a legal base, on the pricing space and also on the CO2 base because as we have seen, in the last couple of months was also a speculation on the CO2 limitations volumes. So there is more than just the energy industry in the rights of this CO2 emission, yes? It sounds like financial speculation taking place. Therefore, it's very hard to judge in the moment.

There are no more questions. [Operator Instructions] And the next question comes from Ms. Teresa Schinwald. Okay. There are no more questions.

Okay. In this case, thank you for joining today's conference call. We will publish the results for the first 3 quarters of 2021 financial year on Thursday, the 26th of August. Please join us then again. Stay healthy, and have a wonderful summer. Goodbye.