EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Conference Call on EVN's Q1 to Q3 2020-2021 Results. [Operator Instructions] The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Stefan Szyszkowitz.

Good morning, and welcome to the Conference Call on EVN's Results for the First 3 Quarters of the 2020-'21 Financial Year. EVN showed a sound performance in the reporting period. 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 development in our Environment Segment, in particular, the start of the Kuwait project. The Networks Segment also reported higher results. This was due to the positive volume and price effects. The corona crisis only had selective negative impacts on our operating results. Our integrated business model and the widely diversified customer base continue to be the stabilizing factors. Our investment level was high. We were able to increase investments by 27.5% to EUR 256.3 million. This in line with our commitment to further increase CapEx. Our plan is to invest on average up to EUR 450 million per year in the future [ or up to Q4 ] will be directed towards regulated and stable activities in Lower Austria. The key investment focus now and in the future is on network infrastructure. These investments are for 3 strategic objectives: we secure supply security; enable a carbon-free energy future; and provide for further growth of our regulated business. Further investment areas are renewable generation, biomass and drinking water. In wind generation, we made further progress to grow our installed capacity, which is almost 400 megawatts by now. I would like to remind you that EVN is Austria's second largest wind power producer. The recent increase was made through the acquisition of an existing wind park in Lower Austria with an installed capacity of 18.5 megawatts. Closing of this acquisition took place at the end of June. To be precise, the group's installed wind capacity is now 394 megawatts. When we announced our Strategy 2030 in last December, we always stated very clearly that it is our will and ambition to make a substantial contribution to limit the consequences of climate change. It is therefore our plan to further reduce the specific CO2 emissions from electricity production. As part of this strategy, I would like to inform you that we are currently negotiating with our joint venture partner, STEAG, and the consortium of banks to prematurely exit from the hard coal-fired power plant project Walsum 10 in Germany. Subject to the necessary approvals, we aim for stepping out of the project in the course of this financial year without incurring any negative financial effect. Let me now continue with the key financials of the reporting. The group's revenue was up by 12% year-on-year. The main reason for this development is the start of the construction of the wastewater project in Kuwait. Other positive factors included increase in energy sales in Bulgaria and higher network sales due to the cooler weather in all 3 core markets as well as the higher network tariffs set by E-Control in Austria as of 1st of January 2021. Contrary factors were lower effects from the valuation of hedges for electricity generation and a decline in revenue from natural gas trading. The main reason for the rise in EBITDA was higher earnings contributions from equity accounted investees. Higher investments led to a rise of scheduled depreciation and amortization. In connection with the takeout of an additional electricity procurement right and an impairment loss of EUR 130 million recognized on the Walsum power plant already in the first quarter. For a year-on-year comparison of effects from impairment testing, please bear in mind that higher country risk premiums for South East European countries due to the COVID-19 had triggered impairment losses of EUR 14.5 million in the previous year. Based on this development, the group's EBIT was up 2.6% and amounted to EUR 291.9 million. Financial results improved EUR 2.8 million supported by, among others, the higher dividend from Verbund for the 2020 financial year. In total, we generated a group net result of EUR 224.6 million, which represents an increase by 6.6% over the previous year. I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. EVN's net debt amounted to EUR 770.9 million. Gearing ratio was down to 13.1%. Our financial flexibility is solid. We benefit from the lower net debt and sufficient committed undrawn credit facilities, which amounted to EUR 531 million as of the end of June 2021. Our strong balance sheet structure forms the basis of pursuing organic growth opportunities in our regulated and stable Austrian activities. Before I will go through each of these segments in detail, I would like to give you an internal overview on the EBITDA development of our business segments. The EBITDA's development per segment illustrates the key drivers of our performance during the reporting period. With the exception of Energy and South East Europe segment, all other segments showed improvements in comparison with the previous year. Let's move now to the next slide, which covers the Generation Segment in more detail. Electricity generation volumes in this segment were up by 3.1% year-on-year. Renewable generation benefited from good water flows, and thermal generation exceeded the lower prior year level. Good water flows and higher market prices for electricity led to an increase in revenue from renewable generation despite a decline in wind power. EBITDA was up at EUR 148.8 million. This increase was mainly due to a positive one-off effect related to the takeover of an electricity procurement right which took place in the first quarter. In addition, there was a reevaluation of our equity consolidated investment in the Ashta hydropower plant in the amount of EUR 9.6 million. In the previous half year, we had to record an impairment loss of EUR 4.9 million due to higher country risk premium at that period of time. Both effects were driven by country risk premium at a discount rate. In the previous year, it increased; and this year, it went down again. Scheduled depreciation and amortization increased as a result of higher investment. In total, the Generation Segment generated a higher EBIT of EUR 88.3 million. On the next slide, I will continue with the Energy Segment. I would like to remind you that the development of revenue in the Energy Segment depends primarily on the marketing of electricity generated in EVN's power plants besides [indiscernible] revenue from our domestic heating business. For the first 3 quarters, higher revenue from the marketing of our own thermal electricity production and from our district heating company only partially offset the year-on-year decline in the valuation effects from hedges in natural gas trading. Therefore, revenue was down by 21.2%. Operating expenses were nearly at prior year level, but these were influenced by various contrary effects. Firstly, the takeover of an additional electricity procurement right led to a positive one-off effect, which was during the year followed by provisions of onerous contracts. Secondly, there was an increase in procurement costs for our heating business. Finally, there was a reduction in the procurement costs in line with the decline in revenue from natural gas trading. The Energy sales volume showed positive developments. 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. Please bear in mind that there was a temporary decline in sales to industrial customers due to COVID-19 in the previous year. In this year, corona did not have any material negative effect on energy demand. The share of results from equity accounted investees with operational nature improved by EUR 44.7 million. This increase was supported by a sound operating performance of EVN KG and positive effect on valuation of hedges. Based on these developments, the Energy Segment reported EBITDA of EUR 50.7 million and EBIT of EUR 34.7 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 Lower Austria. Another reason was that the demand for electricity was negatively influenced by COVID-19 in the previous year. This year, there was no material negative effect on the network sales volumes from the COVID-19 pandemic. With the beginning of the new calendar year, [ the Austrian network tariffs ] for electricity then increased by 6.3% on average. And also, natural gas increased by 6.4% on average. Based on these volumes and price development, segment revenue increased by 6.4%. EBITDA in the Networks Segment was up 16.8%; and EBIT, up 28%. On the next slide, I will continue with the South East Europe Segment. Temperatures in South East Europe were below both previous year and long-term average, which has positive volume effects. 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 an increase in network sales volumes, whereas Energy sales volumes nearly matched the previous year. Segment EBITDA was below the prior year level. Higher revenues was constant, contrasted by rising energy procurement costs and lower sales margins in the regulated supply business in North Macedonia. In contrast, segment EBIT was slightly up. As already mentioned, higher country risk premium for South East Europe encountered due to COVID-19 triggered impairment losses of EUR 14.5 million in the previous year. I would like to conclude my presentation with the segments with the Environment Segment. In our international project business, we can rely on a solid order book of about EUR 1.3 billion as at the end of June. In total, WTE Wassertechnik is currently working on 9 projects in Germany, Lithuania, Poland, Romania, Bahrain and Kuwait. In addition to our joint venture company, sludge2energy, it's currently working on 3 sewage sludge treatment project in Germany. The financial performance of the segment is in line with the international project business. There was a corresponding rise of both revenue and operating expenses in this segment. However, I would also like to note that national lockdowns, travel restrictions, interruptions in the international supply chains caused delays in the international project business. All in all, the segment benefited from the start of the construction of the Kuwait wastewater project, which is accounted for according to the percentage of completion method. In addition, there was a positive one-off effect at our Lower Austrian water supply company. In total, these developments led an increase in EBITDA to EUR 52.8 million and an EBIT to EUR 23.5 million. With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of our group cash flows. Gross cash flow was substantially up at EUR 700.9 million. This was mainly due to a receipt of a compensation payment for the takeover of an electricity procurement right. A further factor was the higher balance of dividends from equity accounted investees. For a year-on-year comparison, please also bear in mind that last year, the dividend from Verbund AG was only received in the fourth quarter. 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 a year-on-year increase in investment in property, plant and equipment and the change in investment in cash funds. The cash flow from financing activities reflected the scheduled repayment of loans and the dividend payments to our shareholders' noncontrolling interest. And contrary factor was the issuance of a green private placement. The net cash -- the net change in cash and cash equities amounted to EUR 63.8 million. I would like to conclude my presentation with the confirmation of the outlook of the group. Assuming average conditions in the energy business environment, we expect a group net result in 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 effects could have a negative influence on individual business areas at EVN and, in turn, on the development of earnings for the entire group. I can also 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] We already have one question that comes from Mr. Peter Crampton of Barclays.

It's Peter Crampton here from Barclays. Two questions. First one is short. If you exit Walsum, that should essentially mean that EVN is coal free, correct? And then the second question relates to the renewable kind of energy kind of plans of Austria. They're quite aggressive talking about CO2 neutrality by 2030. And I was just wondering kind of in EVN's expectation on whether that should mean more interesting kind of investment projects and whether you believe there could be kind of more government support to get there.

Thanks, Peter. First of all, this is correct. Yes, if we exit Walsum, there is no production of coal in the Scope 1 area of EVN anymore. And the second thing is, as you know, the ambitions are quite high for Europe and the global perspective. Of course, we need also framework decisions, yes, which are enabling us -- a group like ours, yes, to really have projects and to realize the project. As we tried to develop a vision, Strategy 2030, we have a clear target here regarding renewable -- further developing of renewable capacity in our home province in Lower Austria and the other markets of Bulgaria, North Macedonia and [ Vienna ]. But you also have seen and heard is that, finally, the Parliament has voted on our Renewable Energy Act. But as we have looked through the legal framework, there are around 70 directives which have to be now developed and put in force by the government. So there's a lot of things to do, which will also then define the conditions of doing our investment strategy. And as I've mentioned before, we see good opportunities, yes. We have this kind of average EUR 450 million investment program for the upcoming years. And if the framework decisions and the guidance it is giving us is more clear on that, I am also confident that we even can increase this kind of investment CapEx and still have a very stable balance sheet and financial policy.

The next questioner is Mr. Patrick Steiner of Kepler Cheuvreux.

It's Patrick Steiner from Kepler Cheuvreux. Just a quick question from my side. You reported the planned commissioning with the first section of the cross-regional drinking transport pipeline from Krems to Zwettl by year-end 2021. When do you expect the pipeline to be finished too quickly? And what are the expected implications on the drinking water business fundamentals once it is finished?