EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the 2020-2021 financial year. [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 2021 financial year. EVN showed a sound performance in the reporting period. EBITDA, EBIT and group net results are above the previous year. The corona crisis only had selective negative impact on our operating results. Our integrated business model and a widely diversified customer base continued to be stabilizing factors. I would like to remind you that our outlook for group net result was in the range of about EUR 200 million to EUR 230 million. We raised the outlook in an ad hoc release on the 2nd of November, and today's group net result of EUR 325.3 million is in line with the increased guidance. The main drivers for our higher results are noncash nonrecurring effects. In particular, we had 3 evaluations to previously impaired equity accounted investees. Last year, our 30% stake in [indiscernible] suffered from an impairment loss of EUR 20.7 million. This year, this was contrasted by a revaluation of EUR 25.3 million, which was based on an increase in electricity forward prices. Also last year, we recognized impairment losses of EUR 4.9 million to the 50% stake in the Ashta hydropower plant in Albania. Again, this year, this was offset by a reevaluation of EUR 23.8 million, which was due to a decline in the country risk premium after COVID-19-related increase. Finally, our supply company, EVN KG, benefited from improved operating results as well as the valuation effects from hedges. And [indiscernible] returns to a normalized level after the negative effects of the corona crisis in the previous year. Based on these developments, results from an adequate consolidated investees with an operational nature were up by EUR 145.5 million and stood at EUR 239.6 million. I just wanted to give you this initial overview for a better understanding of our results and reasons why we were well above our initial guidance. I will provide further details on our financials and segments in course of the call, but let me now continue with some future further highlights. A key message which I would like to put at the beginning of the call is that we will propose a higher dividend to the AGM. We intend to pay out EUR 0.52 per share, which corresponds to an increase by EUR 0.03 per share. We also tried to further specify our dividend policy, which states that we aim to hold the annual dividend at least constant. We now add to the policy that we are also committed to appropriate participation of our shareholders in future earnings call. I do hope that today's increase in the dividend support such commitment, especially as the increase comes in line with an earnings growth, which was mostly noncash. To conclude on dividend policy, my intention is to reconfirm the message that EVN is a highly stable dividend stock. However, in this earnings call, we will let shareholders participate. Please note that our AGM has been rescheduled to the 3rd of February. The new dividend payment date will be the 11th of February. A year ago, I informed you about our strategy update, as we had previously developed our Strategy 2030, which has the motto: more sustainable, more digital, more efficient. In this strategy process, we developed a very clear view at climate change and how it impacts the transition of the energy system, political goals, legal regulatory frameworks, wholesale prices, demand patterns, et cetera, will be a key factor of the EVN strategy and future business model. Let me confirm that we share the understanding and views of SEG's investors. Therefore, the next logical step was to develop based on the Strategy 2030, what we call the EVN climate initiative. It consists of 3 pillars. The main pillar, and this is also a key achievement of the past month, is that we agreed decarbonization targets for EVN with the science-based targets initiative. Today, the science-based target initiative will publish that EVN has joined this international renowned initiative and has committed to actually 5 targets and committing to making a contribution to the Paris climate goals and defining CO2 reduction goals for the group, it was always important for me that we aim for an alignment with internationally accepted standards, external validation, transparency and core variability. Therefore, I am proud that we received the sign-up from the science-based targets initiative. I also believe that this will make us even more attractive for SEG's investors. For further details on our targets, please take a look into our full report. It goes without saying that the decision to disinvest from Walsum 10 power plant is also well in line with our Strategy 2030 and our climate initiative. End of September, we completely stepped out from this project as we transferred our 49% stick to our partner and terminated all power purchase agreements from Walsum 10. So I can confirm that EVN is not engaged in any coal-fired electricity generation active anymore. This is also a very important measure to many stakeholders above all to SEG's investors. I would also like to use the opportunity and update you on our expansion targets for renewable generation. According to our strategy, we plan to increase our installed wind capacity from currently 400 megawatts to 750 megawatts by 2030. In order to achieve such targets, we will pursue projects in Lower Austria, but also in Bulgaria. In Austria, we still struggle with delays realizing projects. At the moment, we actually face 2 issues. The first issue is with the new Austrian Renewable Energy Expansion Act. Although it has been amplified by the Austrian Parliament, we are still waiting for a specific regulation on roughly 30 topics, which must be prepared by different ministries and are essential for our industry. And the official notification by the European Commission regarding compliance of the new subsidy mechanisms is still outstanding. Amendments are likely and will require a new resolution by the Austrian Parliament. So we are still on hold with the development of new projects when it comes to the new legal framework and subsidies. The second issue is the backdrop already developed approved projects. The [indiscernible] called in the past years as the annual budget for subsidy was all used creating a waiting list. While being on waiting list, technology developed further and next generation of turbines became more efficient. Clearly, we would like and have to switch to such improved technology. This, however, requires a maintenance procedures of previously approved wind project. Meanwhile, public acceptance of wind projects deteriorated such as each project from those previously approved has to deal with some sort of appeal which delays the project. As part of our strategy, we also aim to expand our photovoltaic portfolio. Here, we are still at an early stage, but we aim for installed capacity of about 300 megawatts by 2030. Our plan is to realize projects in Lower Austria, Bulgaria and North Macedonia. Overall, we plan to raise our annual investment up to EUR 500 million over the coming years. The key investment focus remains on network infrastructure. These investments fulfill 3 strategic objectives: a secured supply security, enable carbon-free energy future and provide for further growth of our regulated business. Further investments in areas are renewable generation, including biomass heating as well as drinking water. Let me now continue with key financials of the reporting period. The group's revenue was up by 13.6% year-on-year. The main reason for this development is the start of construction of the wastewater project in Kuwait. Other positive factors included an 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 tariff space control in Austria as of the 1st of January 2021. Revenue growth was also supported by an increase in electricity generation and by higher electricity prices. Contributing factors were lower effects from the valuation of hedges for electricity generation. The cost of electricity purchases from third parties and primary energy expenses rose up by 19.9% to EUR 1.467 million. Reasons were higher energy procurement costs in Southeast Europe and for our heating business. Other factors are the increased use of primary energy to the higher thermal generation volume as well as rising wholesale prices. Effects from the valuation of hedges had a contrasting effect. The main reason for the rising EBITDA were higher earnings contributions from equity accounted indices, which I already explained earlier. Higher investments led to rise of scheduled depreciation and amortization in connection with the takeover of an additional acquisitive procurement right and impairment loss of EUR 113.1 million was recognized to the Walsum 10 power plant already in the first quarter. Based on this development, the group's EBIT was up by 41.5% and amounted to EUR 386.4 million. Financial results declined to minus EUR 20 million, due to the premature termination of an interest rate hedge in connection with Walsum Part 10 power plant and the termination of the rated bank financing. In total, we generated a group net result of EUR 325.3 million, which represents an increase of 62.9% 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 amounted EUR 813.8 million. Gearing ratio was down and amounted to 12.4%. Our financial flexibility is solid. We benefit from lower net debt and sufficient committed undrawn credit facility, which amounted to EUR 552 million as of the end of September 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 the segments in detail, I would like to give you a general overview on the EBITDA development of our business segments. The EBITDA development per segment illustrates the key drivers of our performance during the reporting period. All segments showed improvements in comparison with the previous year, which however, is partly due to one-off effects. Let's move on to the next slide, which covers the Generation Segment in more detail. Electricity generation volumes in this segment were up by 7.5% year-on-year. Renewable generation benefited from good water flows and thermal generation exceeds the low prior year level. Good water flows and higher market prices for electricity led to an increase in revenue from a renewable generation despite the decline in wind power. EBITDA was up at EUR 262.5 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, EBITDA growth was supported by the reevaluation of our at equity consolidated stakes in[ TabundinGasverke ] and the Ashta hydro power plant. Scheduled depreciation and amortization increased as a result of higher investments. In total, the Generation Segment generated a higher EBIT of EUR 182.2 million. I would also like to give you an outlook for each of the segments. For Generation, please keep in mind that today's segment results are significantly influenced by positive one-off effect. Therefore, under the assumption of average wind and water flows and lack of positive one-off results in this segment are expected to decline. However, higher electricity prices could moderate this decline. 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 electricity generated in EVN's power plants. Besides, it includes the revenue from our domestic heating business. Higher revenue from the marketing of our own thermal electricity generation and from our district heating company only partially offset the year-on-year decline in the valuation of the effects of hedges. Therefore, revenue was down by 18.8%. Operating expenses were lower in total, but were influenced by contrary effects. The increased use of primary energy due to higher thermal generation volumes and the higher procurement costs for our heating business were contrasted by the lower valuation of hedges for primary energy carriers and CO2 certificates, as well as the use to provisions to onerous contracts. The energy sales volumes were above the prior year level due to colder temperatures and a return of demand to pre-COVID levels. The share of results from equity accounted investees with operational nature improved by EUR 81.5 million. This increase was supported by a sound operating performance and the positive effects from the valuation of hedges in EVN KG. Based on these developments, the Energy Segment reported EBITDA of EUR 188.6 million and EBIT of EUR 166.6 million. Now for the outlook of the Energy Segment, price increases on the wholesale markets are a challenge for all our energy supply activities. For electricity, there will be a price increase on customer contracts as of the beginning of January in order to cope with increased purchase prices. In addition, please bear in mind that future earnings will not consider any effect from the Walsum 10 power plant anymore due to our exit from the project and termination of electricity procurement. Excluding the positive one, nonrecurring effects from the termination of the onerous contracts, which we had at the segment level, only results from '21, '22 for the Energy segment are expected to be substantially lower than in the previous year. On the next slide, I will present the development in our Network Segment. Network sales volumes increase supported by stronger demand for electricity and natural gas in the household customer segment due to lower temperatures and with demand back to the pre-COVID levels. With the beginning of the new year calendar, the Austrian regulator determined new network tariffs. Tariffs for electricity were increased by 6.3% on average, and those for natural gas increased by 6.4% on average. Based on these volumes and price development, the segment revenue increased by 6.9%. EBITDA in the Networks Segment was up by 18.7% and EBIT by 36.3%. The development of earnings in the Network Segment is determined by the Austrian [indiscernible]. Earnings in this segment are, therefore, reported to remain stable at the prior year level. However, Network sales volumes and in turn, earnings could be influenced by various factors such as temperature-related demand, usage of gas-fired power plants test or the overall economic development. On the next slide, I will continue with the South East Europe Segment. Temperatures in Southeast Europe were well below the previous year, which had a positive volume effect. Also here, we saw a recovery from corona-related weaker demand. In Bulgaria, we are facing strong competition following the market legalization for commercial customers as of October 2020. Based on these developments, we are reporting today an increase in network sales and energy sales volume, which had a positive impact on revenue development. Operating expenses increased due to a higher energy procurement cost, but were reduced by a decline in impairment losses to receivables in North Macedonia. Segment's EBITDA was up by 1.7%, whereas segment EBIT remained nearly unchanged to EUR 65 million. For our South East Europe Segment, outdoor is impacted by the distortions on the energy market as they may have a substantial negative influence on segment earnings. Higher energy prices led to interest procurement costs for network losses. Based on the regulatory framework, this negative effect should be offset through higher tariffs, but this compensation will only take place with a time lag in future years. This is in line with the existing regulatory mythology. I would like to conclude my presentation of 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 at end of September. In total, WTE Wassertechnik is currently working on 14 projects in Germany, Lithuania, Poland, Romania, Bahrain and Kuwait, included our sewage sludge treatment project in Germany, which are done by our joint venture companies, sludge2energy. The financial performance of the segment is in line with the development in international project business. There was a corresponding rise of both revenue and operating expenses in the segment. However, I would also like to note that national lockdowns, travel restrictions and interruptions in international supply chain caused delays in the international project business. All in all, the segment benefited from the start of the construction of the Kuwait-based water 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, this development led to an increase in EBITDA to EUR 64 million and in EBIT to EUR 26.5 million. Our outlook in the Environment Segment is always subject to the further realization of assignments in the international project business, above all the large-scale Kuwait project. Assuming decline in impact from the corona pandemic, catch-up effects and focus on project according to the schedule should support an increase in segment results of '21/'22. As renewed intensification of the corona crisis could, however, led to further project delays to lockdown travel restrictions and disruptions in the international supply chain, which would result in decline in earnings. With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of group's cash flows. Gross cash flow was substantially up at EUR 762.3 million. This was mainly due to the receipt of the compensation payment for the takeover of the electricity procurement right. The further factor was the higher balance of dividend from equity accounted investees. The increase in cash flows from the operating activities was even higher in comparison due to the developments in the working capital. Cash flow from investing activities was influenced cheaply by year-on-year increase in investments in property, plant and equipment, the compensation payment from the exit from the Walsum 10 power plant and the change in investments in cash funds. The cash flow from financing activities reflected as capital repayment of loans and the dividend payments to our shareholders and noncontrolling interest. A contrary factor was the issuance of the green private placement. The net change in cash and cash equivalents amounts to minus EUR 17.7 million. I would like to conclude my presentation with the outlook of the group and the key messages of our equity story. In view of the macroeconomic catch-up effects, the related [ InfoGeneri ] tendencies and the strong distortions on the international energy market, which were responsible for massive rise in wholesale prices for natural gas and electricity in autumn '21. Our diversified integrated business model leads us to expect offsetting effects between individual segments. Short-term forecasts are, however, difficult due to the current volatility on the energy markets. Therefore, we are currently facing additional uncertainties on top of the usual ones like temperature-related energy demand winter water flows. Therefore, we use our initial guidance for the last financial year as the starting point and we expect that the group net result in '21, '22 will be in the range of approximately EUR 200 million to EUR 240 million. Finally, let me reiterate the key messages of our equity story. EVN has transformed into a highly attractive stock for SEG's investors. We are no longer active in any coal-related energy activity and our gas-fired generation plant in place is solely active for network stabilization measures. On top of this already finished decarbonization measures, we are committed to reach new CO2 reduction targets, which we have just agreed with the international renowned science-based targets initiatives as a clear strategy on growing our wind and photovoltaic generation capacities in our core markets until 2030. And with our operations and regular distribution network, we see ourselves as an enabler of the climate mutual energy future. We are strongly positioned in regulated and stable activities in our core markets, above all as the leading supplier of energy, cable TV and telecommunication services based incineration and drinking water in our home province Lower Austria. Based on these predictable activities, we developed a reputation of being a highly reliable dividend stock. This year, we will increase our dividend by another EUR 0.03 to EUR 0.52 per share. According to our dividend policy, this defines the floor for future dividends. We are also committed to appropriate participation for our shareholders and future earnings growth. In the current period of highly volatile energy markets, the group gain stability from a diversified business model. Finally, since last March, EVN is again a member of RTX, the benchmark unit of the Vienna Stock Exchange. With a free float of a bit more than 20% liquidity and share showed the sound development in the last 12 months as it is also reflected in the share price. With this, I've reached the end of my presentation. I'm looking forward to answering your questions.

Ladies and gentlemen, we will now begin the question-and-answer round. [Operator Instructions] Our first question is from Patrick Steiner from Kepler Cheuvreux.

It's Patrick Steiner from Kepler. My first question would be you increased the annual CapEx program to EUR 50 million and proposed an increased dividend of EUR 0.52 per share. You're in certainly in very attractive financial position compared to its peers. So my question would be how these announced measures would affect balance sheet development over the next years in your view?

Okay. So this is a midterm to long-term perspective. As we mentioned before, we need some decisions by the parliament to be -- we stated also that we can do this kind of investment. But as you know, with all these investments, our regulatory asset base will grow over the next year even stronger, which we have seen in the recent past. So we expect more than 4% growth over the next year. So this is one bit. And of course, with this new and environmental projects is the subsidies of the group, we will also achieve a performance which will help to grow our group net results. And with other financial guidance, we're always giving that around EUR 1 billion is the net debt, which we are monitoring quite closely on the midterm.

Very clear. Maybe one quick follow-up question. Are the additional EUR 50 million of CapEx mostly dedicated to the electricity networks? And if yes, you see even higher required CapEx dedicated to the networks in the future?

It's a very good question because this is showing how serious society will be regarding this transition period in which kind of term timing frame a project can be realized and are supported. Therefore, I would say there, around half of the investment over the experience to go into the grid and the remaining part will go into renewable energy and the further development of [indiscernible] network in lower Austria. So in the best case, we could see around a potential of EUR 4 billion to EUR 5 billion over the next 10 years as investments.

Our next question is from Teresa Schinwald from Raiffeisen Bank International.

I have some book leasing questions and also a clarification for the [indiscernible] delays. For -- as this year was heavily impacted by one-offs in both directions, I wonder what would be a kind of a normalized energy segment result to where you plan to return to once the roller coaster ride of energy prices has come down. And also as a bookkeeping question, could you give us an idea about the size of the revaluation effect for the hedges that was still in the books, and you already said it was lower. Then one question on the guidance. At which level was the Verbund dividend included in this guidance as the increase for next year is quite substantial and the range a bit higher than usual. And the last one on the dreaded situation, but the renewables expansion. You mentioned before that under the initial plans, that projects could be presented in kind of 2023 would start in 2024, as far as I remember. Is this schedule still achievable? Or what's about the time you think that could be the delay so far?

Thanks, Teresa. Quite a couple of questions. The first one regarding a normalized Energy Segment result. It's really hard to do this for the ongoing year. But if we take a kind of normalization based also on historical figures, just to give you kind of guidance also, the average EBITDA contribution is around EUR 40 million from the supply CAGR business. And regarding the heating business, it's around EUR 45 million. But it is a rough estimate to give you here. Regarding the renewable energy directive, as you mentioned, there is a delay. We are also missing around 30...

Ladies and gentlemen, please hold the line. We will continue in a moment. Thank you.

I'm sorry, we lost you. Everyone back? Can you hear me? Hello.

Ladies and gentlemen, thank you for patience. Let me now turn back the floor to your host, Mr. Szyszkowitz.

I'm sorry, I think there was an interruption. I hope we have not lost everyone. Teresa, are you still there?

Ms. Teresa's line is no longer here. I'm sorry.

Okay. .

And as of the moment, there are no questions. [Operator Instructions] Our question is from Patrick Stein from Kepler Cheuvreux.

The equity contribution in the Energy Segment rose from EUR 39 million last year to around EUR 101 million this year. How much of this increase is associated with an improvement in your operating business? And how much is resulting from the valuation of hedges at EVN KG? And maybe further on, how can we look at the relation of hedges at EVN KG going forward?

I think as rough estimate, 2/3 is coming from the hedges on KG. And 1/3 is separate now.

We have a question again from Ms. Teresa Schinwald from Raiffeisen Bank International.

Yes. Great. Yes, I'm back. And I think we were interrupted at the delays for the energy -- Renewable Energy Expansion Act.

Yes, absolutely. So just to try to help you on that. We have around 90 projects with around 90 megawatts, which are on the old tariff system, which we are waiting to get permits to build them even in the refurbished technology. And their remaining and from 500 up to this number of 750 will be new projects, which are now developed and pursued, but they will already be under the new Renewable Expansion Act. Therefore, there are 2 different kinds of quality in this midterm perspective. And also, on the timing side, this kind of 500 megawatts we should be with some kind of disclaimer around 2024 should be ready and then the remaining 6 years will be spent to develop the 250 additional watts. We are aiming to develop own projects primarily. This is the target.

A follow-up actually on the renewables expansion. The PPA market has grown substantially elsewhere, first, of course, in Southern Europe, but now also in Central Europe and even up North. Are you looking into that as an alternative to the subsidy schemes? Are there projects that might be interesting for you, maybe not in Austria, but Bulgaria? And what about the size looking at -- if you're looking at the PPA market?

Well, I can confirm that this market is developing and growing, but you need to partner for that. And their partner, who is also having an estimation regarding the long-term development of prices. And therefore, this market is really growing and developing, and we will try to take some part of the risk in certain projects if we find a partner who is valuing the energy in a way that is attractive for us. So I'm cautious here because it's not depending on us alone. It's also depending on markets volatilities and the willingness of industrial partners to take a risk in energy prices, which they have not been so interested in the past. But now with the climate and CO2 relevance, this market is developing and transforming.

Mr. Szyszkowitz, there are no further questions from the audience.

Okay. Then thank you for joining today's conference call. And sorry for the interruption. We will publish the results for the first quarter of '21/'22 financial year on Friday, 25th of February. Please join us then. And again, stay healthy and happy holidays.