EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results of the 2021/2022 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 '21/'22 financial year. The European energy sector experiences a crisis of historic dimensions. The extraordinary situation started in summer 2021, already with post-COVID demand and price hikes. Then volatility increased due to the war in Ukraine and growing inflation made things further worse. The impact on these developments on EVN and our integrated business model have been varying. Power supply business in Austria and our activities in Southeast Europe, the market environment has been extremely challenging. In Bulgaria and North Macedonia, our activities were especially impacted by rising cost for network losses. Both countries, extraordinary government expecting 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 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 2 combined sludge fired heat and power plants in Moscow. In the fourth quarter, impairment has resulted in impairment losses to, among others, the natural gas network in the roster to reflect the lower reactivity in the new regulatory period, as well as to the district heating assets in Lower Austria and Bulgaria. All in all, we are reporting today group net results of EUR 209.6 million, which are well in line with the range which we had predicted for this financial year. Our investment level reached historic highs. CapEx were up by 35.9% at EUR 564 million. To put this into perspective, until 2 years ago, our annual investments were below EUR 400 million. This year's strong increase is in line with our strategy to invest heavily in networks and renewable generation in Lower Austria, both of which are key building blocks for green and secure energy future. This rationale is underscored by the EU Taxonomy Regulation. For the first time, we were required to report information on our taxonomy eligibility of our business activities. In addition, we decided voluntarily to report 1 year earlier than legally required, the KPIs for our taxonomy-aligned activities. The share of taxonomy-aligned CapEx was 85%, which means that such high share of our investments are directed to ecologically sustainable activities as defined by the Taxonomy Regulation. For the sake of completeness, the 2 other taxonomy KPIs are 27% for turnover and 75% for OpEx. At the first time, the turnover KPI may seem low, but please note that a large part of the non-taxonomy eligible revenue of about EUR 2.3 billion is attributable to energy trading and supply, which is allocated to other economic activities in accordance with the EU Taxonomy Regulation. Our ambition in contribution to climate protection was just the other day confirmed by one of the leading international ESG rating institutions. CDP published its 2022 ratings and EVN received an upgrade to A-. This means that we reached the leadership level. The CDP ratings consists of 8 rating levels and A-, it presents the second-best grade. We believe that our recent commitment to the Science-based Target Initiative and last year's final exit from Walsum 10 plant, and therefore, from coal-fired electricity production, were the main drivers for the rating improvement. Our investment focus for the future remains unchanged. Therefore, our investments will remain high. This means at a level of even above EUR 500 million per annum. Climate change and the current crisis in our sector, these are the 2 recent -- I will remain committed to contribute actively to the transformation towards a CO2-neutral energy system. Based on our high CapEx level and today's group net results, we will recommend to the 94th Annual General Meeting, the payment of a stable dividend of EUR 0.52 per share. I confirm that EUR 0.52 per share represents the minimum level for future distribution in line with our dividend policy. And I would also like to confirm our commitment to appropriate participation of our shareholders in future earnings growth. Let me now continue with the key financials of the reporting period. The group's revenue was up by 69.6% year-on-year. The main reason for this development was the sharp rise in electricity prices, which had a strong impact on revenue in South East Europe, as well as from renewable generation. In Austria, the higher network tariffs set by E-Control in Austria as of the 1st of January 2021 and 2022 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 offsets the reduced revenue due to the disinvestment from the Walsum 10 power plant. Growth was also recorded in the international project business. I would like to remind you that last year we had one-offs from the takeover of an additional electricity procurement right from the Walsum 10 power plant and the subsequent sale of our share in the power plant company. Other operating income included a positive one-off, while depreciation was increased by a required impairment. The cost of electricity purchased from third parties and primary energy expenses were substantially up at EUR 2.3 billion. The main driver were higher energy procurement costs in South East Europe corresponding to a revenue growth. Other factors include the more frequent use of the Theiss power plant and higher procurement costs for our heating business. The cost of materials and services rose by 38.9% to EUR 707.1 million, in line with the revenue growth in the international project business. The share of results from equity-accounted investees was down by 58.7% at EUR 98.9 million. Most of this decline was due to the price pressure on our supply company, EVN KG. In addition, in the previous year, this item included revaluations to at equity consolidated hydropower gas assets in Germany and Albania. Based on these developments, EBITDA was down by 9.8%, at EUR 754.8 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. At financial year-end, impairment testing resulted in recognition of additional impairment losses, among others, in the amount of EUR 32.9 million to our natural gas network in Lower Austria in view of lower regulatory WACC in the next regulatory period. In addition, there were impairment losses and revaluations on the Bulgarian cogeneration plant and on heating plants in Austria, such that the total effect from impairment test was EUR 105.2 million. The previous year was affected by impairment losses totaling EUR 113.3 million to the Walsum power plant, as already mentioned. In total, the group's EBITDA declined by 14.2% to EUR 331.6 million. Financial results declined to minus EUR 30.5 million, an increase in the dividend from Verbund for the 2021 financial year and the decline in interest expenses following the scheduled redemption of a bond in April 2022. We are contrasted by weaker performance of the R138 fund, negative foreign exchange developments, and their value adjustment to a loan to an equity-accounted company. In total, we generated a group net result of EUR 209.6 million, which represents the expected decline in comparison to 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 remains constant and fluctuated approximately EUR 1 billion. As of the 30th of September, we stand at EUR 1.2 billion. The gearing ratio increased from 12.4% to 17%. Our financial flexibility is solid. In addition to low net debt, we had committed undrawn credit facilities in the amount of more than EUR 600 million as of financial year-end. Let's move now to the next slide, which covers the Generation segment in more detail. Electricity generation volumes in this segment were down by 19.7% year-on-year. The reason was the absence of the 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 67% compared to last year's 57%. Renewable generation declined due to lower water flows. Revenue was up year-on-year. Higher electricity prices compensated the decline in volume of electricity generation. The increase in operating expenses reflects the absence of the previous year's positive one-off effect from the takeover of an additional electricity procurement rate. As already mentioned, the share of results from equity accounted in Theiss was lower. The reason for the decline was that in the previous year, this item included revaluations to add equity consolidated hydropower assets in Germany and Albania. EBITDA increased by 11.6% to EUR 292.9 million. Also due to the reevaluation of the Kavarna wind park in Bulgaria, segment EBIT increased to EUR 260.3 million. Today, I can also give a positive outlook on the further expansion of our renewable generation capacities in Lower Austria, which will grow by roughly 90 megawatts over the coming months. At the moment, installed wind capacity stands at 407 megawatt. We are now working on the construction of the new wind parks with a total capacity of 67 megawatts. Therefore, one project with 13-megawatt is repowering. Our aim is to expand our installed wind capacity to 750 megawatts until 2030. In Lower Austria, construction started on the first 2 large-scale photovoltaic plans. One project is special as it will be a floating photovoltaic plant. This means that the NPV equipment will be floating on the water surface of a pump. The installed capacity will be 24.5 megawatts, and our share on this project will be 50%. The segment outlook contains uncertainties to the base in the European and national levels over the reform of energy markets and the introduction of the revenue cap for electricity production. Assuming a price cap on the market revenues from renewable generation as well as average energy sector conditions, we expect a stable development of earnings in the Generation segment. In the next slide, I will continue with the Energy segment. Revenue was up due to volume and price effects from the marketing of our home electricity production. In addition, price adjustments supported revenue growth of our heating business. Therefore, segment revenues rose substantially and stood at EUR 764.1 million. Operating expenses affected costs for primary energy carriers for the increased use of the past power plant as well as higher procurement costs for the heating business. The sales volumes declined in all 3 project groups: electricity, natural gas, and heat. Reasons for this development included milder temperatures and saving effects by customers. And earnings contribution from at equity consolidated company, EVN KG, declined due to higher procurement costs. Based on this development, the Energy segment reported EBITDA minus EUR 26.7 million and EBIT of minus EUR 54.7 million. Now for the segment outlook for this financial year, we expect that earnings should return to a normalized level as we are gradually passing on higher procurement cost to electricity, natural gas and heat customers. EVN KG's general delivery terms were amended as of September '22, and now include the semiannual adjustment of supply contracts with fixed consumer prices based on the Austrian price indices for electricity and gas. On the next slide, I will present the development in our Networks segment. Networks sales volumes in both electricity and natural gas volumes declined due to the milder temperatures. In the beginning of '21 and '22, the Austrian operator increased tariffs of both electricity and natural gas. Based on these volumes and price development, segment revenues were up by 4.9%. Operating expenses rose by 8.7% following an increase in upstream network costs, which led to a slight decline in EBITDA. Impairment testing resulted in the recognition of an impairment loss in the amount of EUR 32.9 million to our natural gas network in Lower Austria in view of a lower regulated WACC in the next regulatory period. EBIT therefore declined year-on-year by 38% to EUR 58.8 million. In the current financial year, we believe that customers' efforts to reduce energy consumption will continue, thereby lowering network volumes. Therefore, we believe that the results in the Networks segment will be lower in '22, '23. On the next slide, I will continue with the South East Europe segment. Customer movement from the liberalized market back to the regulated and subsidized market supported growth in energy volumes in our South East Europe segment. In combination with higher prices, this development resulted in a sharp rise in revenue. As already mentioned in the beginning of this call, our South East Europe segment suffered from rising costs of network losses due to the higher market prices. In both countries, extraordinary government respective the 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 and payments in the total amount of EUR 102.7 million to cover higher costs during the financial year. The regular tariff decision as of the 1st of July resulted in an average price increase of 3.6% for household customers in the EVN supply area. In North Macedonia, the regulatory announced extraordinary increases in electricity prices for household customers of EVN Home and in the network tariffs as of 1st of January '22 as partial compensation for the significant and energy procurement costs. These were followed by a further increase of 21.8% for household customers of the EVN Home as of the 1st of July '22, and the electricity purchase prices for supply customer quantity as well for covering Network losses. The subsidized Network tariffs were also increased the second time after 1st of July. The remaining additional costs will be reflected in future tariff decisions. Segment EBITDA was slightly up by 2.3% due to the recognition of an impairment loss of EUR 16.7 million. Segment EBIT amounted to EUR 48 million. As you know, we always aim for a segment EBIT in the range of EUR 40 million to EUR 60 million. In the recent financial year, we could only meet such range because of the compensation for additional costs. Unfortunately, we don't have visibility yet on future compensation measures in Bulgaria and North Macedonia. Any delaying compensation will have immediately negative effect on the results in the South East Europe segment. I would like to conclude my presentation for the segments with the Environment segment. The geopolitical developments, being the war in Ukraine, inflation, pessimistic economic outlooks, and global supply chain issues have changed the earning expectation for the international project business of WTE. Therefore, right 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 total residual carrying amount of EUR 50.5 million of the 2 sludge-fired cogeneration plants in Moscow. The financial performance of this 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 rise in both revenue and operating expenses in this segment. EBITDA amounted to EUR 56.5 million. EBIT declined due to the before mentioned impairment losses, among others, and amounted to minus EUR 35.9 million. The future development of earnings in the Environment Segment is always subject to the progress on international projects, above all, the large scale project in Kuwait. Progress is subject to geopolitical environment, however, given that segment results in '21/'22 were influenced by negative one-offs and improvement in earnings is expected in the current financial year. With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of the group cash flows. Group gross cash flow was lower at EUR 434.3 million (sic) [ EUR 734.3 million ]. Please remember, it was unusually high in the previous year due to the receipt of a compensation payment for the takeover of an electricity procurement right. The DKN was diminished slightly by higher dividends from equity-accounted investees. The decline in cash flow from operating activities was even higher in comparison. The sharp rise in energy prices and lower investment by EVN KG and the group's cash pool were responsible for working capital effect. Cash flow from investing activities was influenced chiefly by year-on-year increase in investments in property, plant and equipment, and the change in investment and cash funds. In the previous year, this also included the compensation payment for the exit from the Walsum 10 power plant. The cash flow from financing activities included new bank loans and debt instruments totaling EUR 562 million. The repayment of a bond with a nominal value of EUR 300 million and the dividend payments to our shareholders and noncontrolling interest represented the contrary factor. A net change in cash and cash equivalents amounted to EUR 36.9 million. As mentioned before, our financial flexibility is solid, secured with committed undrawn credit facility of EUR 627 million at the end of September '22. I would like to conclude my presentation with the outlook for the group. We're still going through a period with substantial distortions and uncertain parameters which have a significant impact on our performance. However, under the assumption of a stable regulatory environment and predictable energy sector and tax waiver, we expect group net result to be in line with the previous year and within a range of roughly EUR 190 million to EUR 250 million. The earnings contribution from Verbund for the '21/'22 financial year is not included in this estimate. I confirm that our future dividend from operating activities should at least equal the dividend proposal of '21/'22, which is EUR 0.52 per share. I also confirm that we are committed to let our shareholders appropriately participate in any additional earnings growth. With this, I have reached the end of my presentation. I'm now looking forward to answering your questions.

[Operator Instructions] And the first question comes from Teresa Schinwald from Raiffeisen Bank International.

It's about the upcoming regulation of the revenue cap. Can you tell us a bit about the time line you're expecting for the decision-making?

Well, it has been approved by the Austrian parliament, has now to go into the second chamber, and then it has to be signed by the president and published. Everyone is expecting that this will take place even before the end of the year, because it should be going to affect with the 1st of December this year, as this was also a given date by the European Union kind of directive. What we know so far is that the Austin parliament used the revenue cap, but also was giving an incentive to investors who are investing in renewable energy. So the cap of EUR 180, which is the limit given by the European Union, they went below this EUR 140, but they have this incentive going up another EUR 36 per megawatt hour for investment. And this will be further specified by a directive by ministry of the Austrian government, and therefore, it will be quite decisive how the definitions of these incentives are really defined. Therefore, we tried to have a rough estimate. There will be an obligation for the total EVN group, which will be in the range of something of EUR 190 million to EUR 240 million. But this is a rough first estimate, and we tried to reflect this already in our operating expectation for the ongoing year, so for the next year. Therefore, the range which I was giving before, with the EUR 190 million to EUR 250 million is more or less including already an estimation how this taxation issue will affect the group.

Okay. So just 2 follow-up questions on that. The directives are probably not expected for the same time as the law is signed by the president, it will take longer?

I think it will be not ready, but all the utilities who have, as a business year, the calendar year, will need it also to make their financial results with the end of December. So I would expect that there will be a fast forward approach on that. But some of the definitions are not in their law and, therefore, it needs this further directive by the ministry how they should be implied for producing companies.

Yes. And the renewables investments you mentioned of plus/minus EUR 200 million, they would reduce the revenue cap? How should we understand this?

Yes. It would bring the revenue cap up from EUR 140 to EUR 176. So this is the range where the definition will be effective. And therefore, I have to be very careful, but this is a first estimation we gave. It's pretty close to how decisions we have to make and going public, and therefore, the understanding that it's not easy to have a good judgment on that.

I perfectly understand that, but I think this is actually in line with market expectations, anyway.

Okay.

Second question about your renewables investments continuing. What would be needed to step up the process to exceed the EUR 90 million to significantly grow domestically in Austria in your view?

Well, first of all, the best what you can get and what is helping the most is a local acceptance of a project. In a lot of cases, it is one thing to find the land owner, the second thing is that you get the approval by the city communities. In all the projects which we are pursuing, we do this quite early. And therefore, after 1 year, when there were delays in all the kind of project permits, now we're really trying to bring this 90-megawatt during the next financial year/calendar year to the grid, which would be then, especially in this environment of high prices, a very interesting situation. We think that a further understanding also by the government regarding resources, regarding all evaluations, because in a lot of the cases the permits are just delayed because the process of decision-making is under threat due to a lack of specialized evaluations. This could really help us. This is a general topic for projects in Austria, but there's another sense of urgency now in this crisis which we are seeing now. So I think we will profit from this new backing, and we see first signs in that.

Okay. And my last question is regarding the outlook and the bond contribution, which, as I read, is not included in the outlook at all. So with Verbund deciding on the dividend probably in March, we could reckon with an updated guidance after the dividend decision, which given the current guidance and excluding any special dividend would mean almost double the contribution that EVN received last year from Verbund. Am I right?

Well, this is your evaluation. Due to the reasoning of our lawyers, we made the decision not to comment on the dividend policy of another company, especially in these high times of volatility. So we have taxation issues, the operative management, and let's see what the results of '22 for Verbund will be and what kind of dividend will be proposed to the AGM. And you are right, then we'll have a clear picture on all the different developments which are then influencing the EVN Group's total results for the ongoing year.

At the moment, there seem to be no further questions. [Operator Instructions] And the next question comes from Richard Alderman from BTIG.

Can you just talk about how you see the evolution of net debt in the coming financial year? Obviously, it's gone up quite a lot in the last 12 months. What are the drivers in terms of where you think that outturns in 12 months' time?

Richard, this is a very good question because this is really an enormous increase, yes? The reasons for that are mainly resulting from the energy market turbulence. So the working capital between higher procurement costs, expenses, and then the delayed pass through to the customers lead to a higher working capital from the customer side and also on the energy side. So we see, on different days, EUR 200 million, EUR 300 million coming and going quite easily. This is an add-on to the normal working capital management and working capital utilization. The second thing is that we have, with EUR 140 million, a higher investment program realized in this year, which is also reflecting in this, and then it's also the Kuwait project is in the strongest phase of realization, and therefore, more working capital is needed there in this phase of the project. Altogether, we're leading this change in the working capital situation. And on a mid-term expectation, our cash flow and operating activities is more or less EUR 500 million, and this is then also what we are aiming for regarding investments, dividend. And question mark is how the next year will develop. It's too early to have an estimation there, but we see a sidewise development, and especially if the winter is over, let's see if there is not an improvement in working capital.

Mr. Szyszkowitz, there are no further questions left.

Thank you for joining today's conference call. We will publish the results for the first quarter of our '22/'23 financial year on Tuesday, the 21st of February. Please join us again. And we all here wish you a Merry Christmas, good health in the coming year. Goodbye.