EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to EVN's Conference Call for the Results of the 2022/2023 Financial Year. [Operator Instructions] Let me now turn the floor over to Stefan Szyszkowitz. Please go ahead.

Welcome, everybody, to EVN's conference call on the results for the financial year of '22-'23. The financial year '22-'23 was remarked by very mild weather conditions in all our 3 core markets. We also observed a change in customer behavior towards a reduction in energy consumption through energy saving measures, or even by generating their own energy from photovoltaics. These developments once again underpinned the transition of the energy system. Let's come now to EVN's full year's result of '22-'23. In the reporting period, we achieved a strong financial performance. This comes as no surprise as we already communicated the new outlook at the beginning of November. Group net result amounted to EUR 529.7 million, mainly due to earnings improvement at the South East European segment. Besides that the significantly higher Verbund dividend for their last financial year, contributed EUR 158 million to the Group net result. And in the previous year, negative effects from impairment tests were included in the results. Unfortunately, our supply business was under pressure and showed a negative result of EUR 240.3 million. However, we expect a recovery for the '23-'24 financial year. We are proud at roughly 88% of all our investments in this reporting period are officially classified as green under the EU Taxonomy. And we are also in line with the target reduction path of CO2 emissions set in accordance with the science-based targets initiative. Based on these strong results, we will propose the payment of a dividend of EUR 0.52 per share, plus a special dividend of EUR 0.62 per share to the next Annual General Meeting in February '24. It is our declared aim to give our shareholders an appropriate share and profit growth. In this reporting year, we also have reached a new record levels of investments. Total investments in the reporting period increased by 23.1% to EUR 694.1 million. Over the coming years, annual investment will remain with this very high level of EUR 700 million to EUR 900 million. Around 75% of the investment will go to the Lower Austria, and almost half of it is budgeted for the network infrastructure. In '22-'23, we have already made considerable progress in expanding our renewable energy capacities. As at the end of September, we had an installed wind power capacity of 247 megawatts, and we will commission to further projects and add total output of roughly 30 megawatt to the grid by the end of calendar -- of the calendar year. We also made great efforts to expand our photovoltaic capacities. Here we had a roughly 42 megawatt peak at the end of this past September and this volume will double by the end of '23 with the commissioning of large-scale plants in Durnrohr and North Macedonia. Let me now continue with the key financials of this year. Group's revenue in the reporting period decreased to EUR 3.8 billion. This development is mainly due to lower revenues in South Eastern Europe due to decreased energy market prices and the international project business and the Kuwait project has already reached its peak. In contrast, revenue was positively affected by price and volume effects in renewable electricity generation, valuation effects from hedges, higher revenue from natural gas trading, increased selling prices at EVN Warme and higher network tariffs. The cost of electricity purchases from third parties and primary energy expenses grew up compared to the prior year. This mainly reflects declining wholesale prices in South East Europe, which relate to the regulatory compensations for additional costs for covering network losses. Please be aware that such surplus in the compensation will be offset in the following years. This decline was contrasted by higher costs for network losses and upstream network costs in Lower Austria as well as higher electricity procurement cost from Verbund Innkraftwerke and higher energy procurement costs for EVN Warme. The share of results from equity accounted investees decreased to minus EUR 67.6 million. As already said, the sales company EVN KG recognized a significant total loss in the reporting period of EUR 240.3 million. In contrast, higher earnings contributions received from RAG, Verbund Innkraftwerke and Burgenland Energie. And for the Ashta power plant in Albania, we had to consider a reevaluation of EUR 11.1 million based on the impairment testing. All in all, Group EBITDA amounted to EUR 869 million. The high level of investments led to an increase in scheduled depreciation and amortization. Please consider the significant reduction of impairment losses, which amounted to EUR 114.8 million in '21-'22. In total, Group's EBIT rose to EUR 528.5 million and financial results increased to EUR 127.6 million, mainly reflecting the dividend payment from Verbund at the amount of EUR 158 million. All these developments resulted in an increase in Group net result of EUR 529.7 million. Now, let's move on to the next slide, which provides information regarding Group's balance sheet structure. The balance sheet sum decreased due to the substantial decline in the carrying amount of equity accounted investees, which resulted primarily from the operating loss of EVN KG and negative valuation of hedges held by EVN KG and EnergieAllianz. Furthermore, the price development of Verbund share on a year-to-year led to a decline in other investments. As of the end of September, EVN's net debt increased year-on-year only by EUR 120 million to EUR 1.4 billion despite our high investment level and due to our strong operating cash flow. Correspondingly, gearing ratio increased to 21.1%. Nevertheless, our financial flexibility remains solid. EVN AG had committed undrawn credit facilities in the amount of EUR 686 million as at the end of September. Moreover, our declared goal is to maintain solid A category ratings in the future. To achieve such ratings, we are strictly monitoring the adjusted target ratios of both of our rating agencies. These are in line with the net debt FFO range, which was communicated in October. Let me now present our segments in more detail. First, the Energy segment. The past financial year was characterized by extremely mild temperatures in all of our core markets, not only compared to the cooperative period, but also compared to the long-term average. Hence energy sales volumes to end customers dropped. Additionally, energy savings by customers and an increase in customers' own energy generation from photovoltaics decreased volumes. On top, we had to face an increased competition within the Electricity and Natural Gas customer segment. Revenue in the Energy segment is mainly influenced by the energy trading, [ also through ] optimization of the EVN gas storage facilities, the marketing of electricity generated by EVN. Besides, it includes the revenue from our domestic heating business. In this period, revenue increased to EUR 1 billion. This positive development was primarily due to valuation effects of hedges as of the balance sheet date, higher revenue from natural gas trading, price effects in the marketing of our own renewable electricity production and higher sales prices at our heating business. Operating expenses were higher year-on-year and reflected increased cost of energy purchases from third parties. Furthermore, the rise in procurement cost for biomass and the prevailing inflation negatively affected our operating expenses. This [ development ] was contrasted by valuation effects from hedges. As already mentioned, in the past financial year, earnings contribution from our equity accounted energy distribution company EVN KG was under massive pressure. Its result sharply declined in the reporting period amounting to minus EUR 240.3 million. Based on these developments, segment EBITDA amounted to minus EUR 63.6 million and the EBIT decreased to minus EUR 90.1 million. The outlook of our Energy segment for this financial year is mainly determined by the marketing of our own electricity production, by the heat sales from our subsidiary EVN Warme, and by the equity accounted energy supply business of EVN KG. We expect segment EBIT for '23-'24 to be at the lower end of the range of EUR 45 million to EUR 70 million, as we could have seen as a gradual decline in spot and forward prices during recent months. Hence, the energy supply company EVN KG is expected to again generate positive earnings. I will present the developments of our Generation segment. Electricity generation volumes declined year-on-year by 14.4%. The main trigger for the decline was a drop in the use of the Theiss power plant by the Austrian network transmission operator for network stabilization. Production from renewable sources were slightly above last year's level because of higher volumes from hydropower. Positive volume effects were also related to the Verbund Innkraftwerke because of the recommissioning of a plant. At the same time, wind flows were unfortunately clearly below average. The share of renewable generation increased year-on-year to around 77%. Revenue increased to EUR 481.9 million, mainly due to higher electricity prices, which could offset the decline in the electricity production. Operating expenses also increased because of higher cost for electricity purchases, that also relate to the volume increase of Verbund Innkraftwerke. It is important to note that this development also has a corresponding impact on revenue. Besides inflationary effects, the Austrian law on energy crisis contribution, it had already become effective for a year now, also negatively impacted operating results and amounted to EUR 25.1 million in the reporting period. All in all, EBITDA of the Generation segment increased to EUR 300.4 million. The result was in addition positively affected by higher earnings contribution from the equity accounted Verbund Innkraftwerke. Our investment in this segment reached a new historical high. Hence, depreciation and amortization increased in the reporting period. But please still bear in mind, the absence of last year's revaluation of the Kavarna wind park in Bulgaria that amounted to EUR 9.6 million. Segment EBIT amounted to EUR 255 million. Segment outlook for Generation segment is based on wind and water flows reflecting the long-term average. Therefore, we expect segment EBIT to be slightly below the prior year level in '23-'24 due to the decline in electricity prices. Let's continue with the Network segment. Our Network segment also impacted by the mild temperatures within this financial year. As a result, network distribution volumes fell compared to last year. Additionally, consumers' energy savings efforts also negatively affected volumes. The decline in gas distribution volumes was caused by the reduced use of our Theiss power plant for network stabilization. Segment revenue increased compared to last year to EUR 637.9 million. This development is mainly driven by higher network tariffs and a positive revenue contribution by our subsidiary kabelplus. This was partly offset by the substantial reduction in natural gas network sales volumes. Operating expenses of the Network segment also raised year-on-year due to the still high inflation and increased costs for network losses and upstream network costs due to higher energy market prices. In total, EBITDA slightly decreased to EUR 235.4 million. The high investment level in this segment has led to an increase in scheduled depreciation and amortization. Investments in this segment will remain high. Electricity network capacity is expected to double from the current level of approximately 3,000 megawatt to 6,000 megawatt by 2030. Last year, an extraordinary effect in the form of an impairment loss of EUR 32.9 million was recognized at Netz Niederosterreich. Segment EBIT amounted to EUR 78.6 million. Regarding the segment outlook for electricity networks, a new regulatory period begins from the 1st of January '24 during which we expect a lower WACC. Combined with end customer ongoing efforts to reduce energy consumption, which are currently observing in the negative macroeconomic effects, segment EBIT in this financial year is expected to be lower than in the previous year. Let's move on to the South East Europe segment. As already mentioned before, temperature also in South East Europe were significantly below the previous year and also the long-term average. This led to a decline in network distribution and energy sales volumes. Additionally, we had to face an increased competition in liberalized markets. In contrast, electricity generation volumes increased due to higher water flows as well as newly commissioned photovoltaic plants in North Macedonia. Segment revenue declined to EUR 1.5 billion because of lower network and energy sales volumes as well as lower wholesale prices. This development couldn't be offset by higher network tariffs in Bulgaria and higher regulated household electricity prices in North Macedonia. Operating expenses in this segment dropped in the reporting period, mainly due to declining wholesale prices in South East Europe. This related to the regulatory compensation for additional cost for covering the network losses. However, please note that the surplus in compensation will be offset in the following years. In total, segment EBITDA amounted to EUR 239.4 million. Please consider the absence of last year's impairment loss at TEZ Plovdiv of EUR 16.7 million. EBIT amounted to EUR 159.5 million. For this financial year, segment outlook is expected to decrease compared to the '22-'23 financial year. Segment EBIT will reflect a normalized range of EUR 70 million to EUR 90 million. The forecast decline will reflect the compensation of the positive pull-forward effect in the following year, in line with the regulatory mechanism. This relates to the compensation of additional costs for covering network losses, which contributed to the unusually high segment results in '22-'23. And finally, the Environment segment. In our international project business, we currently work on 12 projects in the field of wastewater treatment, drinking water treatment and thermal sludge treatment. We are also making great progress with our project in Kuwait. At the end of September, the wastewater treatment plant was almost complete and 2/3 of the wastewater infrastructure have already been finished. In total, order book, as on the end of September, amounted to EUR 873 million. In September, we announced in an adhoc release, the intention to de-invest WTE. A structured bidder process was started to WTE, which is responsible for our international project business. Our revenue decreased compared to last year to EUR 532.3 million. This development reflects the progress made in the Kuwait project that the peak has already been reached. Correspondingly, operating expenses declined. The Kuwait project via the project holding company also had a positive effect on the earnings contribution of equity accounted investees. In total, EBITDA increased to EUR 62.2 million, taking into account, impairment losses in the international project business last year at the amount of EUR 58.4 million. Segment EBIT in '22-'23 amounted to EUR 29.5 million. Financial results increased year-on-year due to the negative foreign exchange effects in the comparative reporting period. Hence results before income tax increased to EUR 8.6 million. The development of earnings in the Environment segment is significantly influenced by the progress of the international projects. Segment outlook for this financial year is expected to reflect the prior year's level. The next slide shows the development of our Group cash flows. Gross cash flow in the reporting period was higher compared to the prior year at EUR 1.1 billion. This is due to the higher results before taxes. Cash flow from operating activities amounted to EUR 942.4 million. Triggers for this development were the liquidity settlement of EVN KG and the related capital commitment for working capital. Negative effects were higher receivables from taxes and from hedges. The cash flow from investing activities significantly increased to [ '22-'23 ] to minus EUR 929 million. This position reflects the higher investment level and the capital contributions to EVN KG. In part, this was contrasted by the increase in network subsidies that accompanied the higher volumes of network investments. Cash flow from financing activities amounted to EUR 1.6 million. It includes the dividend payments to our shareholders for the '21-'22 financial year. This position also contains scheduled repayment of financial liabilities in the arrangement of our 4 long-term bank loans. The net cash -- net change in cash and cash equivalents amounted to EUR 14.9 million. Additionally, EVN has committed undrawn credit facilities of EUR 686 million as of the end of September. Let's come to the outlook for the next financial year. As already communicated and mentioned before, we will propose to the Extraordinary General Meeting in February '24 an ordinary dividend of EUR 0.52 per share, and in addition, a special dividend of EUR 0.62 per share for the financial year '22-'23. Under the assumption of a stable regulatory and energy policy environment, we expect the Group net result for the financial year '23-'24 to be within a range of EUR 420 million to EUR 460 million. You may also find an overview of the outlook of all segments in the appendix of this presentation. In view of our investment in growth perspectives up to 2030 and beyond, we specified our dividend policy. Future dividends will equal at least EUR 0.82 per share and we are committed to let our shareholders appropriately participate in an additional earnings growth. In the mid-term, we are aiming for a payout ratio of 40% of Group net result. The dividend proposal as well as our future dividend policy consider our ambitious investment program. As already mentioned at the beginning of today's presentation, total annual investment will be in the range of EUR 700 million to EUR 900 million. The core areas are investments in network infrastructure, besides that renewable generation and drinking water supplies. We are committed to invest up to EUR 450 million per year for the further development of Lower Austrian network infrastructure. Approximately EUR 100 million will go into a new renewable energy capacity each year. These investments by EVN are crucial for a successful transition of the energy system. EVN understands itself as an enabler for an emission-free energy future. The following are the core cornerstones we have based our Strategy 2030 on. Our high level of annual investments especially for expansion of wind and photovoltaic capacities will make a measurable contribution to containing climate change. We will increase output from renewable generation from currently 1 terawatt hour to 2.5 terawatt hour by 2030. However, energy transition can only be successful if the network infrastructure has expanded accordingly. The necessary integration of volatile renewable generation from many decentralized sources, above all photovoltaics and in combination with completely new consumption patterns like e-mobility for instance make network expansion crucial. EUR 3 billion CapEx will be invested in the electricity network infrastructure in Lower Austria in the next years. This will increase our aggregated asset base in Lower Austria by 75% by 2030. In the field of e-mobility, we have been active since 2010. We have already gradually built up comprehensive network throughout Lower Austria in recent years. Today, we are the largest charging station operator in Austria with over 2,500 charging points and our customers can use more than 7,500 charging points throughout Austria with the EVN charging card. In course of last year's financial year, we received contracts on construction and operating of charging infrastructure for 2 large supermarket chains by 2026 and we see further growth potential in this business area. We are also working on innovative solutions for flexible management of energy requirements, especially for higher demands during winter month. The cross-sector use of energy is a key factor here. We are therefore working on several projects, which concepts the integrated electricity and heat generation to warm water storage or heating pumps. We are also partnered in a joint venture project with our subsidiary RAG in the operation of electrolysis plants for the conversion of solar energy into green hydrogen, which can be changed back into electricity as needed. We call them green molecules. On the top of these points and as part of our Strategy 2030, we are committed to science-based reduction goals for our greenhouse gas emissions. Starting from a well below 2 degrees goal, we are now in the process of evaluating a more ambitious 1.5 degree reduction target. Greenhouse gas emission reduction is a key aspect in our climate initiative and emphasizes the importance of climate protection in all our activities. This is what we stand for. I've now reached the end of this presentation and I'm looking forward to answering your questions.

[Operator Instructions] And the first question comes from Richard Alderman.

Hi, can you hear me?

Yes. Excellent.

I just wanted to ask you about the wording of your guidance on the dividend policy as the first question. Just to understand your thinking around the base of at least EUR 0.82, and then the comments around appropriate shareholder participation in additional earnings growth. Does that suggest that you would reconsider further special dividends on top of that base in the next 2 years? I ask because obviously your EUR 0.82 comes in below current consensus of around EUR 0.93 and would imply quite low growth from '24 into '25 on current consensus. So just interested in your thinking on that. Obviously, from the commentary you had around the Capital Markets Day, we're aware that the Board doesn't expect the extraordinary levels of Verbund dividends to continue. But given the low risk nature of your CapEx, there could be scope, obviously, for higher dividends.

Thanks, Richard. Yes, I can confirm that the new dividend policy is really the base dividend of this EUR 0.82. This includes all the results from all our activities on our holdings. And as I mentioned before, this enormous CapEx program, which also leads then to a higher net debt. We have to balance this in a way, and this is the guidance, therefore, this EUR 0.82. And then let's see how the real results year on yearly basis will show us. The mid-term perspective is this 40% of Group's net result adjusted for extraordinary effects.

And the next question comes from Thibault Dujardin.

Hello, can you hear me?

Yes, excellent.

Yes. May I ask you regarding the South East Europe concerning the offset of the exceptional results this year? May I ask, how long it would last over how many years and the impact on [ most especially ] by subdivision, if possible?

Yes, as I tried to mention, we had extraordinary effects from the last year and from the next year all coming together in this year for the results of the South East dimension. Therefore, in the outlook on a general level, as we have done in the past, we raised the outlook for the South East segment to EUR 70 million to EUR 90 million. This is the new expectation, which we published for this segment.

Okay.

It's on an EBIT level, just to be clear about that.

But, sorry, the offset will last only for next year, or what should we expect in the mid-term? Sorry.

Yes. This expectation I was now confirming is around EUR 70 million to EUR 90 million for the next coming years, and offsetting by the regulatory framework will be done till July '24. So this is included in this outlook already.

Maybe a follow-up question regarding the divestiture of WTE. If you have any update, any time, calendar time?

Yes, as we mentioned this on our Capital Markets Day, we hope that we can close the deal in the year '24.

Okay. In the meantime, we didn't receive any further questions. [Operator Instructions] And the next question comes from Teresa Schinwald.

I've got 2 questions where I would like you to talk a bit more about the topic. First, about this customer behavior and the expected decline in demand. How much of that is temperature related? From what you can see already in the first winter quarter, how much is real savings, maybe also split by what's the difference between residential behavior and commercial and industrial customers? This would be my first question.

Thanks, Teresa. Well, it's very hard because it's a few projections. If you have mild winter and you have customer savings behavior, how to split this? We try to do this by normalizing the consumption. And on this basis, on a household level, the gas reduction coming obviously from customer savings behavior has been around 16%. And regarding on the electricity side, 5 percentage points to 6 percentage points were coming from the behavior of savings. The overall reduction has been, of course, quite higher because also industry is obviously needing less energy either by further pursuing energy savings measures or by less production. And there's a certain indication, if I compare November '23 -- '22 to '23, it's around 8% less energy consumption. So on this level, we have a further enhanced trend to less energy consumption by industrial production, which I think is in line also from data, which you're seeing in Germany.

Great. And the second one is about RAG, which also posted quite a nice at equity contribution. Maybe you can give us a bit more clarity about the outlook, the expectations also for this year with storage levels again being very high is -- or is -- well, what you're expecting here?

Yes, as you know, RAG is mainly active on the basis as a storage facility operator. Therefore, of course, temperature effects and also industrial consumption is pretty much influencing if they have to use the pumps to get the natural gas out of the storage facilities. And of course, this is a kind of OpEx, which is fluctuating depending how much of the gas is used. The segment itself is -- and RAG is having around EUR 40 million to EUR 50 million EBIT on a more normal basis. Therefore, what you have seen this year was pretty much influenced that the storage gas facilities have not been used as much as original they have been calculated on. So they had a onetime effect, maybe also pretty much depending now on how the winter will develop further, how long it will go the winter, because in the last years we have seen that the winter started later, but then it went to March, April, therefore, it's too early to call.

We didn't receive any further questions in the meantime. I will leave the line open for a couple more seconds. [Operator Instructions]

Therefore, thank you for joining today's conference call. We will publish the results for the first quarter of '23-'24 on Thursday, 29th of February. I wish you a nice day, joyful upcoming holiday season with your families and very best for the coming years. Good-bye from the team of EVN.