EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first half of the 2022, '23 financial year. [Operator Instructions] Let me now turn the floor over to your host, Mr. Stefan Szyszkowitz.

Welcome, everybody, to EVN's conference call on our first half year results. We have certainly taken note of our announcement of the special dividend last week. As we have communicated to you in the past, we are committed to ensuring you that our shareholders participate appropriately in any additional earnings growth. As a result of the full dividend that has now been approved and while preparing our half year report, we now have more forecast clarity. Hence, we announced on Monday last week to propose to the 95th Annual General Meeting a special dividend in the amount of EUR 0.62 per share in addition to the ordinary dividend for the financial year '22, '23. The ordinary dividend will amount to at least EUR 0.52 per share. Additionally, we specified our guidance for this financial year. Based on the currently available information for the first half year and expected business development, we expect group net result to be at the upper end of the previously communicated range of around EUR 250 million. Now let's come to EVN's first half year result. In the reporting period, EVN achieved a sound financial performance despite some still unfavorable framework conditions. This period has been marked by very mild weather conditions in all our 3 markets that affected the energy demand. The still volatile business environment affected our segment results to different degrees. Overall, we can report a positive development in our group net result in the first half year of -- in the first half of this year, thanks, in particular, to the Generation in Southeast Europe and the Environment Segment. Unfortunately, results from our equity accounted energy distribution company, EVN Wärme, still remain under massive pressure. Our ambitious investment program for the expansion of renewables is progressing faster than considered in the budget. Over the coming years, annual investment will be increased to over EUR 600 million with 3/4 going to Lower Austria, mainly in the field of network infrastructure, renewable generation and drinking water supplies. In the second quarter, we commissioned the Windpark, Japons as part of repowering and photovoltaic plant in Grafenwörth. Currently, 3 broader wind parks and 3 large-scale photovoltaic project with a total capacity of roughly 110 megawatts under construction. In line with our CO2 emission reduction targets set under the science-based targets initiative, our goal is to further grow our renewable generation portfolio. Wind capacities will be expanded by another 350 megawatts to 750 megawatts by 2030. Additionally, we will build up a photovoltaic portfolio of about 300 megawatts within this decade. Let me now continue with the key financials of this reporting period. In the first half year, the group's revenue was up by 3.1% year-on-year to EUR 2.2 billion. The main triggers for this development were price effects in renewable generation, valuation effects of hedges and higher prices at EVN Wärme. In Southeast Europe, revenue decreased due to lower network and energy sales volumes and declined electricity prices. The decline could partly offset by higher network tariffs and the unscheduled increase of electricity prices for the regulated household customer segment in North Macedonia. Focus on the major project in Kuwait has also positively influenced group revenue. The cost of electricity purchases from third parties and primary energy expenses dropped year-on-year by 22.1% to EUR 1 billion. This development reflects the decline in volumes in Southeast Europe. In contrast, higher costs for network losses and upstream network cost for Netz Niederösterreich as well as higher energy procurement costs for EVN Wärme were recorded. Please be also aware that in the previous year, expenses were reduced by compensation payments of the Bulgarian government for the network losses. Operating expenses increased mainly due to the levy on the surplus proceeds earned from electricity generation, which has been payable in Austria since December last year. The share results from net equity accounted in the declined significantly to minus EUR 143.3 million. The earnings contribution from EVN [ KG ] sharply dropped due to the rise in procurement cost and valuation effects of hedges. Please keep in mind that higher cost can only be passed on to customers with a delay. Additionally, the provision for a pending losses from contractual delivery obligations were increased. Negative effects also resulted from the valuation of natural gas inventories that were purchased in the previous year had significantly higher wholesale prices to protect supply security in few of the threatening stopping gas delivery. In total, group EBITDA amounted to EUR 466.4 million. Scheduled depreciation and amortization increase slightly according to our investments. Please be aware that prior year's figures reflect EUR 50.9 million from impairment testing. Group's EBIT rose to EUR 303.8 million in financial result improved to minus EUR 27.5 million despite increased interest expenses and foreign exchange valuation effects. In total, group net result amounted to EUR 270.4 million. Now let's move on to the next slide, which provides some information regarding the group's balance sheet structure. Balance sheet some decrease due to the substantial decline in the carrying amount of equity accounted indices, which resulted primarily from the operating loss of EVN [ KG ] and negative valuation of hedges helped by EVN [ KG ] and [indiscernible] at the end of the reporting period. As of the end of March, EVN's net debt increased to EUR 1.7 million. Besides the higher investment program, this is mainly related to the working capital primarily for the liquidity settlement for EVN [ KG ]. Correspondingly, gearing ratio amounted to 27.4%. Nevertheless, our financial flexibility remains solid. EVN AG has committed or on credit facilities in the amount of EUR 666 million at the end of March. Both rating agencies confirmed that UV credit workmen just recently. Moody's, reaffirmed its A1 rating with stable outlook and scope, again, awards a rating of ARPU stable. Let me now present our segments in more detail. First, the Energy Segment. The first half year of this financial year was characterized by mild temperatures both year-on-year as well as compared to long-term average. Hence, Energy sales volumes to end customers declined compared to the previous years. Energy savings by customers' additional decreased volumes. The development of revenue in the Energy Segment depends mainly on energy trading, the marketing of electricity generated by EVN, the segment includes the revenues from our domestic heating business. Previously revenue of this segment increased significantly to EUR 660 million. This development was primarily due to the devaluation effect of hedges as of the balance sheet date as well as price effects in the marketing of our own electricity production in our heating business. The increase in operating expenses reflected higher procurement costs for the heating and business and for natural gas. Unfortunately, as already mentioned before, results from our equity accounted energy distribution company, EVN [ KG ], remains under massive pressure. The earnings distribution contribution declined and the half year loss amounted to minus EUR 223.1 million. Higher procurement cost can only be passed on to customers with delay in a changed competitive environment. Additionally, negative effects had to be a quarter due to the following points. Firstly, lower valuation of hedges as of the balance sheet date. This is an amount of EUR 83.2 million. Secondly, provisions from pending losses from contractual applications were increased. This is an amount of around EUR 143 million. And thirdly, the lower valuation of strategic natural gas inventories had a negative effect to protect supply security of our customers in few of the threatening stopping gas deliveries we were forced in the previous year to purchase natural gas at significantly higher wholesale prices, and this has a negative amount of around EUR 51 million. All in all, this means that earnings at EVN KG are expected to remain negative in the current financial year. Based on these developments, segment EBITDA amounted to minus EUR 46.4 million and EBIT decreased to minus EUR 57.1 million. Today, I will also provide an update to our segment outlook, which we published last December. You may also find an overview of all segments in the appendix of this presentation. For the Energy segment, we had to adjust our guidance as the ongoing difficult market environment or distribution will still have a negative effect on the development of earnings in this segment throughout the entire financial year. Therefore, segment earnings are expected to be negative and we generally reflect the previous year. However, effects from the valuation of hedges as of the respective reporting dates could lead to divisions. On the next slide, I will present the developments of our Generation segment. Electricity generation volumes were down by 25% compared to last year. The main trigger for this decline was a decrease in the use of this base power plant by the Austrian network transmission operator for network stabilization. Moreover, significantly lower wind flows couldn't be offset by higher equity production from hydro power. The share of renewable generation increased year-on-year by up to 72%. Revenue increased to EUR 253.6 million, higher electricity prices were able to offset the decline in electricity production. Operating expenses increased by 71.5% due to the energy crisis contribution for electricity. The Austrian law became effective at the first of December last year and will apply for a limited period until the end of the year '23. The price cap for the tax is EUR 140 per megawatt hour and can be increased up to EUR 176 per megawatt hour, subject to investments into renewable generation assets and energy efficiency measures. However, as of the beginning of May this year, the thresholds were reduced by federal government resolution to EUR 120 per megawatt hour, respectively, EUR 156 per megawatt hour beginning in June '23. The effect of this first half year amount to EUR 18.5 million and is expected to increase to about EUR 50 million in the first financial year. This is, of course, based on [indiscernible] resolutions currently in force. However, the directives by the ministry regarding the concrete calculation [indiscernible] are still pending. EBITDA of the Generation Segment increased to EUR 154.7 million. Segment EBIT also increased year-on-year to EUR 132.7 million. But please bear in mind, last year the evaluation of the Kavarna windpark Bulgaria that amounted EUR 64 million as of the end of March. The decline in generation volumes and the current decline in electricity prices have required an adjustment of the outlook of this segment. Earnings for this financial year are expected to remain at high levels but will be lower than previous year. Let's continue with the Networks Segment. The mild temperatures in the first half year of this business segment also influenced our Network Segment. Network distribution volumes decreased year-on-year for both the industrial as well as the household customers. Additionally, customers energy saving efforts negatively affected the volumes. Nevertheless, the main trigger for the decline in volumes was related to the lower use of our Theiss power plants for network stabilization by the transmission grid operator ABT. Segment revenues in the reporting period was up to EUR 356.9 million, positive price effects for electricity could offset the volume-related decline in revenue from natural gas. The positive revenue contribution was also recognized by our subsidiary, [indiscernible]. Operating expenses increased year-on-year because of the prevailing high inflation. This led to significantly increased costs for network losses and upstream network costs. In total EBITDA slightly increased to EUR 156.3 million and EBIT increased to EUR 82.8 million. I confirm the guidance for the Network Segment earnings before tax are expected to be below the previous year to the lower WACC in the new regulatory period for natural gas distribution. Additional factors include customer savings in electricity and natural gas consumption and inflation-related increase in operating costs. Let's move on to the Southeast U.S. segment. Temperature in Southeast Europe in the reporting period were significantly below the previous year and the long-term average, which led to a decline in network and energy sales volumes. In contrast, electricity generation volumes could be raised in the first half year, especially due to higher water flows in North Macedonia as well as the newly commissioned photovoltaic plant in North Macedonia in October last year. Segment revenues fell by 12.5% to EUR 901.4 million. Higher network tariffs in Bulgaria and an unscheduled increase in electricity prices for the regulated household customer segment North Macedonia couldn't offset lower sales volumes and the decline in electricity prices. Operating expenses were reduced by 22.3% because of the following facts. Firstly, cost for the third-party electricity purchases and energy carriers drop correspondingly to the development of revenue. Secondly, cost of network loss coverage in North Macedonia was reduced due to government subsidized purchases. Third, in the previous year, Bulgaria benefited from government compensation payments for the network losses caused by higher energy prices. In total, segment EBITDA amounted to EUR 117.7 million, and segment EBIT was up to EUR 77.9 million. Thanks to the positive development of business and relator measures, that we are taking to offset the additional cost of network losses, we have a positive outlook for the Southeast Europe segment. Earnings for this financial year are expected to exceed the privately communicated EBIT range of EUR 40 million to EUR 60 million. And now finally, the Environment Segment. In our international project business, we currently work on 14 projects in the field of waste water treatment, thinking water treatment and thermal sludge. In April, we received the order for the construction of a wastewater treatment plant and the sewage flat utilization plant in Skopje as part of a general contractor assignment. The contract value is around and EUR 185 million. The total order book as of the end of March amounted to roughly EUR 600 million. And our project in Kuwait, we're also making great progress. At the end of March, completion has reached roughly 85% at a wastewater treatment plant and nearly 60% of the wastewater infrastructure, at least development point to the upcoming peak of the project. Revenue of this segment increased to EUR 267.7 million, mainly as a result of good progress made at the Kuwait project. Correspondingly, operating expenses raised. The Kuwait project also positively affected earnings contribution from equity accounted investees. In total, EBITDA amounted to EUR 35.4 million and EBIT increased to EUR 18.4 million. It should be noted that the previous year was affected by an impairment loss at the amount of EUR 57.3 million. Financial results in the reporting period declined due to increased insurance expenses and negative foreign exchange effects. Hence, result if income tax to EUR 4.7 million. Based on the development during the first half year, we confirmed this segment's guidance. Earnings are expected to improve in this financial year. Please note that in the previous year, nonrecurring effects from impairment losses were included. The next slide shows the development of our group cash flow in the reporting period. Gross cash flow in the reporting period was higher compared to previous year at EUR 634.3 million. The main drivers for this development were higher earnings recorded in the reporting period and the correction of the negative earnings at the equity accounted in EVN [ KG ]. This development was weakened by lower dividend distribution from other equity accounted investees. Cash flow from operating activities decreased to minus EUR 94.4 million, triggers for this development by the higher liquidity settlement for EVN KG and the related capital commitment for working capital. A negative effect was also the year-to-year increase in income tax payments. The cash flow from investing activities increased to minus EUR 126.5 million compared to the previous year. The position includes high investments, which were contrasted by year-on-year reduction in investments in cash funds. Additionally, a capital contribution at EVN KG at the amount of EUR 128.4 million was made. Cash flow from financing activities amounted to minus EUR 72.8 million. It reflects EVN dividend payment for the last financial year as well as scheduled repayments of financial liabilities. Additionally, in the reporting year, we concluded 2 long-term bank loans totaling EUR 150 million. The net change in cash and cash equivalents amounted to minus EUR 293.7 million. As already mentioned before, EVN has committed undrawn credit facilities of EUR 666 million as at the end of March. I would like to conclude my presentation with the outlook for this financial year. As already mentioned at the beginning of today's presentation, we announced the proposal of a special dividend together due with the specification of our full year guidance on 15th of May. To wrap up again. Based on the currently available information for the first half year results and expected business development, our group net result in this current financial year is expected to be at the upper end of the previously communicated range at around EUR 250 million. In addition, this year's earnings contribution from [ profound ] amounts EUR 158 million and will additionally contribute to the group's net result. It has always been our aim to ensure that our shareholders will participate appropriately in any additional earnings growth. Hence, we will propose to the next ordinary AGM in Fab '24 a special dividend of EUR 0.62 per share in addition to the ordinary dividend as is expected to amount at least EUR 0.52 per share. The dividend proposal already considers our ambitious investment program we will exceed the previous investment level for the current financial year and subsequent years from EUR 500 million to EUR 600 million. The focal points of investments are on network infrastructure, renewable generation and drinking water supplies. I've reached the end of my presentation. I'm looking forward to answer your questions.

[Operator Instructions] And first up is Peter Crampton from Barclays.

Peter Crampton here from Barclays. Two questions, if I may. The first one relates to kind of the Austrian government recently coming out with comments that they would want lower energy retail bills. And just your thoughts on this and what the government could really do. And then the second question relates to your guidance for this year, which looking at kind of the half year performance and then the bond dividend looks very conservative? And maybe talking a little bit how this guidance was set and what are kind of negative factors here for the remaining 6 months that made you set the guidance where it is.

Thanks, Peter. First of all, coming out of this crisis from last year, you know that also the European Union has given additional directives and opportunities for national governments how to handle the situation. After a long debate, they concluded that they're not going to try to change the merit order, the pricing mechanism in this common market. But they also said they can be subsidized sales to different customer groups and there can be also a price regulation, a temporary one and consumer prices. So if we're discussing the proposals and profitabilities, the government could try to use, it's always the question mark how they want to target and how to focus. What they did is that they really had a quite peak program by helping to subsidize business and their energy cost on the base of last year. And they also did something for private household that in the range between 10% and 40%, it's compensated 90% of an average household is, therefore, more or less subsidized in the kilowatt-hour price, which they customize to pay. If we take this to our customer base in Lower Austria, we see that around 80% of our household customers who use electricity for electricity purpose and not for heating, 80% of them are more or less, therefore, compensated with a kilowatt-hour price of around EUR 60-something on a gross level. Therefore, in this customer base, the state has already taken measures, and therefore, it is more -- I think, the vision expectation how the inflation can be handled on a national level and what are the best mix of measure they can take. The debate is ongoing. I'm not quite sure where they are heading, but I just can report on the effects which are very well so far. And regarding your second question, the guidance, you know that the winter half is the important half of our business. And due to this extraordinary situation, we made a decision in December to split between the operative business, which, of course, is depending on a lot of different factors and Verbund. So Verbund is excluded out of the guidance of the EUR 250 million. So if you put the 2 things together, you know the kind of dimension, which we are having, which is out of every guidance we ever have given in the last 30 years of the stock listing of [indiscernible].

The next question is Richard Alderman from BTIG.

Just following up from that last question or the last answer to Peter. The consensus, I think, before you upgraded your outlook, including the Verbund contribution was EUR 337 million for group net result. And it's moved post your guidance uplift to EUR 351 million. Can you say whether there are -- you're comfortable with that move? And can you think of reasons why -- the Street could be wrong in that assumption based on your second half performance? I know you tend to be conservative at this stage of the year, so I appreciate that's the situation. But what things could go wrong that might pull you back towards or below the top end of guidance that you moved to on May 16. That's the first question. And then secondly, could you just give us some thoughts around the Board discussion on the special dividend. It doesn't look like you've passed through 100% of the Verbund contribution. It's closer to 70% despite the fact, obviously, you've had a very strong first half of the year and guided up a couple of weeks ago. So how do you think about that in terms of what the Board might be wanting to do at the end of the year? Could it increase the special dividend slightly as one way of rewarding a strong full year in total? Could the ordinary dividend be meaningfully above the $0.52 base that you gave us on May 16?

Thanks, Richard. First of all, let's do the math again, yes. So the consensus you mentioned were EUR 351 million together. We do now the guidance and put the 2 factors together, the operative target of EUR 250 billion and the Verbund, EUR 158 million and we are above EUR 400 million, yes. This is what we see if we reflect on the different factors. And we have seen also this special increase in taxation for generation. So there's a lot of things going on. So I think this EUR 400 million -- beyond the EUR 400 million is a guidance, which we we're fine with. And regarding Verbund, it has been debated last year quite extensively when the crisis hit also the end customers that the state said is it not possible for Verbund to do a special dividend. And then, of course, it was debated if they are doing a special dividend, how is EVN then able to pass it through. And we said, first of all, this is a different body, a different stuff with the company. They have to do their decisions in the AGM first and then we can decide what to do. This has always EVN been debated with all different kinds of investors also because it's is an obvious question. And when we then saw that we have the possibility to further speed up investments in especially renewable energy generation because the delay in permitting, after the pandemic was over. And we said, okay, it might be a good trade-off that we stick to our public references that we will pass through around and that we 1/3 invest in the further growth of the generation capacity because this is also something which on the mid and long term will be decisive events and group stability that we are able to increase our own generation. And we have this target to 2030. With these steps, we hope that we will accelerate our delivery on generation capacity. And therefore, this 110, 120 megawatts under construction will also in this pricing environment immediately bring us also return. So I think it's quite a fair reasoning, what to part through and what to invest in the further development of the group.