EVN AG (EVN) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, and welcome to the conference call on EVN's results for the first 3 quarters of the 2021, 2022 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 results for the first 3 quarters of the '21/'22 financial year. We are operating in an energy environment, which is characterized by historic distortions. Last summer, we started to witness post COVID price hikes. Since then, energy market prices continuously reached new record highs. The war in Ukraine and the growing inflation made things worse, and there are still no signs of a turnaround and the normalization. The impacts of these developments on EVN and our integrated business model are wearing. For generation, higher prices are positive and provide for a certain upside. For our energy supply business, however, higher prices turned into a burden. In Southeast Europe, the higher electricity prices are a challenge for the whole energy sector there. Our activities especially impacted by rising costs for network losses. In both countries, extraordinary government, respectively, regulatory measures were introduced as partial compensation for the significant rise in energy procurement costs. The remaining additional costs should be reflected in future tariff decisions by the regulatory authorities. Due to the recent deterioration of the geopolitical and economic environment above all for global supply chains, we had to reassess the risk and the earnings expectations for EVN Group of the international project business of WTE. This resulted already during the second quarter in impairment losses to goodwill in the international project business and to the residual carrying amount of the two combined large fire heat and power plants in Moscow. Our investment level in the reporting period was high. We were able to increase investments by 26.5% to EUR 324.3 million. This is in line with our commitment to further increase CapEx. The focus of our investment remains on networks, renewable energy and drinking water in Lower Austria. With this, we clearly contribute to our climate strategy, our science-based targets and energy future in general. We are also actively working on our target to further increase renewable generation capacities. We are currently working on 4 wind power projects and 1 large scale for 2 tag project, which will add a total of 90 megawatts to our generation portfolio. Let me now continue with these key financials of the reporting period. The group's revenue was up by 64.6 year-on-year. The main reason for this development was the sharp rise in electricity prices, which had a strong impact on revenue in Southeast Europe as well as from renewable generation. In Austria, the higher network tariffs set by E-Control in Austria as of the January 1, 2021 had a positive influence on network revenue. The more frequent use of the Theiss power plant by the Austrian transmission network operator for network stabilization offset the lost revenue due to disinvestment from the Walsum 10 power plant, both was also recorded in the international project business. I would like to remind you that last year in Q1, we had a one-off from the takeover of an additional electricity procurement right from the Walsum 10 power plant. Other operating income included a positive one-off with depreciation was increased by a required impairment. The cost of electricity purchases from third parties and primary energy expenses were substantially up at EUR 1.7 billion. The main driver were higher energy procurement costs in Southeast Europe corresponding to the revenue growth. Other factors include the more frequent use of the Theiss power plant and higher procurement costs for our heating business. The share of results from at equity accounted industry was down by 35.1% and EUR 100.7 million. Most of this decline was due to the performance of our supply company, EVN KG. Based on these developments, EBITDA was down by 11.8% at EUR 578.1 million. As already mentioned, we had to record impairment losses in the second quarter on the goodwill in the international project business and two combined heat and power plants in Moscow. These impairment losses were contrasted by a revaluation of EUR 6.4 million to the Kavarna wind park in Bulgaria, which we recorded in the first quarter. The previous year was affected by impairment losses totaling EUR 113.3 million to the Walsum 10 power plant, as already mentioned. In total, the group's EBITDA declined by 0.6% to EUR 290.2 million. Financial results was up by EUR 2 million at EUR 4.8 million, an increase in the dividend from Verbund from the 2021 financial year and the decline in interest expenses following the scheduled redemption of Verbund in April 2022 were contrasted by weaker performance of the R 138 fund and negative foreign exchange developments. In total, we generated a group net result of EUR 228.4 million, which represent a slightly year-on-year increase by 1.7%. 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 to EUR 1.1 billion. Gearing ratio amounted to 14.4%. Our financial flexibility is solid. We benefit from lower net debt and sufficient committed undrawn credit facilities, which amounted to EUR 622 million as of the end of June 2022. In April, we redeemed our corporate bond with a nominal amount of EUR 300 million. As refinancing measures, we issued a registered bond with a nominal value of EUR 155 million in April and an approximate load loan with a nominal value of EUR 157 million in July. Let's move on now to the next slide, which covers the Generation segment in more detail. Electricity generation volumes in this segment were down by 8.3% year-on-year. The reason was the absence of Walsum 10 following the disinvestment of our stake last year. On the other hand, our Theiss power plant was called more frequently by the Austrian transmission network operator for network stabilization. The share of renewable generation increased to roughly 64% compared to last year's 60%. Above average wind flows partly offset the decline in hydropower. Revenue was up year-on-year. Higher electricity prices compensated a decline in electricity generation. EBITDA amounted to EUR 204.1 million. Also due to the revaluation of the Kavarna wind park in Bulgaria, segment EBIT increased to EUR 179.2 million. On the next slide, I will continue with the Energy segment. Revenue was up to volume and price effects from the marketing of our own electricity production. In addition, higher sales volumes and price adjustments supported revenue growth of our heating business. Therefore, segment revenues rose sharply and stood at EUR 571.6 million. Operating expenses reflected costs for primary energy carriers for the increased use of the Theiss power plant as well as higher procurement costs for the heating business. According to our contracts in the heating business, higher energy costs will be passed on to customers once or twice a year based on price index missions, so there's a certain time lag. The sales volume showed different developments, whereas electricity sales remained stable, natural gas sales declined due to milder temperatures and saving effects by customers. The earnings contribution from an equity consolidated company, EVN KG, declined due to higher procurement costs. Based on these developments, the Energy segment reported an EBITDA of EUR 7.7 million and an EBIT of minus EUR 8 million. I would like to explain now how we deal with the current price pressure on our supply business. Roughly half of the natural gas customers and about 40% of the electricity customers have chosen a supply contract with a floating tariff, where the prices automatically adjusted on a monthly basis to reflect the development of wholesale prices. The remaining customers have selected a supply contract with prices that are fixed for a certain period. Here, the prices are based on the Austrian electricity price index and the Austrian gas price index, and we already increased for electricity as of January and for natural gas as of February. In August, we amended the general delivery terms for the fixed price supply complex. In future, these prices may be adjusted twice each year based on the mentioned price indexes. The first adjustment will already take place in September 2022. With these measures, we aim for a balanced result for EVN KG. On the next slide, I will present the developments in our Networks segment. Networks sales volume showed a slight decline in electricity, whereas natural gas volumes rose due to the increased use of gas-fired generation for network stabilization. In the beginning of '21 and '22, the Austrian regulatory increased tariffs for both electricity and natural gas. Based on this volume and price development, segment revenue were up by 5.8%. EBITDA in the Networks segment increased by 2.9% and EBIT by 3.2%. On the next slide, I will continue with the South East Europe segment. Temperatures in South East Europe were below the previous year and long-term average, which had positive volume effects. In addition, customer changed from the liberalized market supported growth in sales volumes. In combination with higher prices, these developments resulted in sharp rise in revenue. As already mentioned, in the beginning of this call, our South East Europe segment suffered from rising costs for network losses due to higher market prices in both countries, extraordinary government, respectively, regulatory measures provide for at least partial compensation for the significant rise in energy procurement costs. In Bulgaria, our distribution network operator and our heating company received compensation payments in total amount of EUR 86.3 million to cover higher costs at the end of June '22. Regular tariff decision as of the 1st of July resulted in an average price increase of 3.6% for household customers in EVN supply area. In North Macedonia, the regulatory announced extraordinary increases in the electricity prices for household customers of EVN Home and in the network tariffs as the January 1, '22, as a partial compensation for the significant rise in energy procurement costs. This was followed by a further increase of 21.8% for household customers of EVN Home as of the July 1, '22, and the electricity purchase price was set up EUR 48 per megawatt hour. Network terms also increased the second time as of the 1st of July. The remaining additional costs shall be reflected in future tariff decisions. Segment EBITDA was down at EUR 66.3 million and segment EBIT amounted to EUR 8.4 million. I would like to conclude my presentation of the segments with the Environment segment. The geopolitical developments, being the war in Ukraine, inflation, pessimistic economic outlooks and global supply chain issues, have already changed the group's risk and earnings expectation for the international project business or WTE. Therefore, already in the second quarter, we had to record impairment losses to goodwill in the international project business in the amount of EUR 52.9 million and to the residual carrying amount of the two sludge-fired controlled cogeneration plants in Moscow, which was EUR 4.4 million as of the end of March. Apart from these two plants, we don't pursue any environmental project in Russia or Ukraine. The financial performance of the segment is in line with the development in the international project business in line with the progress on the Kuwait project, there was a corresponding rights in both revenue and operating expenses in the segment. EBIT amounted to EUR 42 million. EBIT declined due to the before mentioned impairment losses and amounted to minus EUR 40.5 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 lower at EUR 589.1 million. Please remember that this was unusual high in the previous year due to the receipt of a compensation payment for the takeover of an electricity procurement right. The decline was reduced slightly by higher dividends from the equity accounted investees. The decline in cash flow from operating activities were even higher in comparison. The share price and energy prices and lower investment by EVN KG and the group's cash flow were responsible for working capital effects. The cash flow from investing activities was influenced cheaply by year-on-year increase in investments in property, plant and equipment and the changed investment in cash funds. The cash flow from financing activities included three new bank loans for a total of EUR 250 million and the issue of a registered bond with a nominal value of EUR 155 million. The repayment of a bond with a nominal value of EUR 300 million and the dividend payments for our shareholders and noncontrolling interest represented a contrary factor. The net change in cash and cash equivalents amounted to minus EUR 110.8 million. As mentioned before, our financial flexibility is solid, secured with committed undrawn credit facilities of USD 622 million at the end of June 22. We I would like to conclude my presentation with the outlook for the group. We are going through an extraordinary year with substantial distortions, which were not predictable at the beginning of this financial year. This led to unexpected deviations in some of our activities. On a group level, however, we are confident that our diversification and management measures will provide its silence to our financial performance. Hence, I confirm our guidance for this financial year. We expect the group net result in '21, '22 to be in the range of approximately EUR 200 million to EUR 240 million. With this, I have reached the end of my presentation. I'm now looking forward to answering your questions.

[Operator Instructions] The first question comes from Ms. Teresa Schinwald of Raiffeisen Bank International.

First question is on the special dividend of Verbund. Is there already a plan how to use the proceeds of the dividend? This should be my first question. .

Okay. First of all, the special dividend is just announced for Verbund for the end -- for the financial year '22. So it will be, if the AGM is voting on that, we will receive it in May '23 in our financial year, and this year we'll close them on September 30, '23. So it will be in the next business year or financial year of EVN.

Okay. So I read that as a wait-and-see position for now.

As you have to close the financial year, then you can have a proposal to your shareholders. This is what we have to follow the corporate governance very correctly.