EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to EVN's results for the first half of 2023, 2024 financial year. [Operator Instructions] Let me now turn the floor over to Stefan Szyszkowitz.

Yes. Good morning. Welcome, everybody, to EVN's conference call on the results for the first half year of this current financial year. The first six months of this financial year were again marked by very mild weather conditions. This March, for example, was by far the warmest March in Austria's measurement history. Temperatures in all our three core markets were significantly warmer than both the long-term average in the previous year. In turn, water flows in Austria, North Macedonia and Germany developed very positively and exceeded the long-term average in each case. In Austria, wind conditions were also above the long-term average and well above last year's level. In Bulgaria, however, wind supply remains slightly below the previous year. We are also still observing changes in customer behavior towards a reduction in energy consumption through energy saving measurement and increasing own generation volumes from customer-operated photovoltaic equipment as well. In addition to the weather and consumer-related effects, wholesale market prices continued to decline. Thanks to our intense investment in [indiscernible] and the good wind and water conditions, we can report a robust business development for this reporting period. As of the end of this March, we had an installed wind power capacity of 478 megawatts, and we expanded our photovoltaic capacities to roughly 80 megawatts. I also confirm our total annual investments, which will remain within the level of EUR 700 million to EUR 900 million. [indiscernible] account for around 3/4 of this, which almost half earmarked for the networks infrastructure. Let me now continue with the key financials for the first half year. In the first six months of the current financial period, group's revenue was down by 70.7 year-on-year to EUR 1.8 billion. The main reasons for this development were the lower valuation effects from hedges in Austria due to the downward trend in wholesale prices. Additionally, the reduced use of our Theiss power plant for network stability as well as price and volume effects in gas network volumes negatively affected revenue. In Southeast Europe, revenue was negatively affected by the drop in electricity prices and a reduction in the network tariffs in Bulgaria, which reflects the regulatory adjustments of the overcompensation of additional costs for covering network losses in the previous year. In addition, revenue at the international project business also declined in a year-on-year because of the already largely completed base water treatment plant in Kuwait. The cost of electricity purchases from third parties and primary energy expenses were down year-on-year, mainly due to the decline in wholesale prices and lower procurement volumes for electricity in Southeast Europe and lower primary energy cost for electricity and heat generation. The cost of materials and services also decreased and reflect the development of revenue in the international project business. Personnel expenses increased by 16.8% compared to prior year, which reflects the necessary increase in workforce and adjustments according to the collective bargaining agreements as well. Other operating expenses went up by 12.6%, containing an impairment loss on the outstanding receivables from the project in Budva, which was already recognized in the first quarter of this reporting period. The share of results from at equity accounted in [indiscernible] improved, but it is still negative with EUR 42.9 million in the reporting period after minus EUR 143.3 million in the previous year. The main factor for this development is an improved, but still negative earnings contribution from the supply company, EVN KG. Declining gas tariffs led to a depreciation of natural gas inventories that we -- that were produced in the past as a strategic reserve to ensure supply security for our customers. The earnings contribution from EVN KG in the reporting period totaled minus EUR 128.5 million, after minus EUR 223.1 million in the prior period. In total, group EBITDA amounted to EUR 453 million. Scheduled depreciation and amortization increased by 5.3% year-on-year, reflecting our higher investment program. Hence, group EBIT totaled EUR 281.6 million. Financial results slightly improved to minus EUR 25.1 million, mainly due to the better performance of our fund for pension obligation. In addition, last year was negatively affected by foreign exchange effects. In total, we generated a solid group net result of EUR 199.3 million in the first 6 months of this financial year. Now let's move on to the next slide, which provides information regarding the group balance sheet structure. Balance sheet total decreased by 7.2% compared to financial year-end '22, '23. The main factors for this development are the decrease in other investment that mainly resulted from the share price of [indiscernible] as the end of March '24, the declining development of equity accounted investees and the reduction in rate receivables from EVN KG from liquidity settlement by the EVN Group and investments in cash funds, which was mitigated by an increase in receivables from hedging transactions. As of the end of March, EVN's net debt amounted to EUR 1.4 billion and was at the same level as the end of September '23. Correspondingly, gearing ratio stood at 21.8%. Our financial flexibility remains solid. As of the end of this March, we have contractually committed undrawn credit lines in the amount of EUR 786 million. Our declared goal is to maintain a solid A category ratings in the future. To achieve such ratings, we are strictly monitoring the adjusted target ratio of both our rating agencies. Therefore, we use the net debt to FFO ratio as a KPI to manage our financial performance, investment and capital structure. Currently, the ratio is about 1.1. With growing investments over the coming years, the ratio will slight increase. However, our aim is to keep net debt to FFO within a range of 1.5 to 2x. Just recently, both rating agency confirmed their view on EVN's credit worthiness. Moody's reaffirmed its A1 rating with stable outlook in April. And Scope again rewarded a rating of A+ stable outlook in May. On the next slides, I will present the developments of our segments in more detail. First, the energy segment. This reporting period was characterized by significantly mild temperatures in all our core markets. Hence, energy volumes to end customers dropped year-on-year. This development was intensified by the challenging framework conditions we are currently confronted with, particularly as the sales company, KG. Increasing competition as well as energy saving efforts by our customers and their growing own generation from their photovoltaic systems have further identified the decline in energy sales. Hence, volume forecasts are becoming more and more difficult. In the first half year, revenue dropped to EUR 454.2 million. The main factors for this development, on one hand, lower wholesale prices and the resulting lower valuation effects from hedges. On the other hand, the reduced use of our power plant Theiss. Operating expenses decreased year-on-year by 14%, which mainly reflects lower primary energy cost for electricity and heat generation. The earnings contribution from equity accounted investees amounted to minus EUR 122.6 million after a loss of minus EUR 240.4 million in the previous year. This is mainly resulting from the supply business in EVN KG. In particular, the supply company suffered from declining wholesale market prices, which led to lower gas tariffs and necessity and impairment of natural gas inventories by EUR 61 million that we have produced in the past as a strategical [indiscernible] to ensure supply security. The earnings contribution totaled to minus EUR 128.5 million in the reporting period. In the previous year, it amounted to minus EUR 223.1 million. In total, segment EBITDA amounted to minus EUR 53.6 million, and EBIT totaled minus EUR 63.3 million. Based on these developments in the first six months of this financial year, we had to adjust the outlook for the energy segment. The write-down of natural gas inventories required at the end of March and the challenging framework conditions will have a negative impact on the sales company, EVN KG. Hence, the return to a positive earnings level, which was originally anticipated for this financial year, will be delayed. Let us now turn to our generation segment, which has shifted almost entirely to renewable energies over the years. The shares of renewal generation rose to 83% in the reporting period. This is a historic high. This underlines our efforts to support the energy transition. The remaining nonrenewable part comprises our generation plants and our Theiss power plant, which is only used upon request of the Austrian network transmission operator to stabilize the grid. Electricity generation volumes in the segment increased by 18.1% year-on-year due to the raising of renewable generation volumes. The main reason for this positive development are the year-on-year increase in wind and water flows and the expansion of renewable energy capacity. Volumes on thermal energy sources further declined year-on-year due to a further reduced use of our Theiss power plant by the Austrian network transition operator for network stabilization. As you know, the continuous expansion of wind capacity is a key pillar of our strategy 2030. Our focus on realizing projects in Lower Austria and the legal framework in Austria enables us to develop and realize profitable projects. To give a better understanding, we'll share additional information on the remuneration of our wind parks. A new slide is included in today's presentation and in our Investor Relations presentation. We currently have a total wind capacity of 478 megawatts. All wind parks are in Austria, apart from a 16-megawatt park in Bulgaria. Historically, all our wind projects were relet under the feed-in tariff scheme of the Austrian Green Electricity Act, which provided for fixed remuneration for 13 years. 47% of our wind capacities are still within such a feed-in tariff scheme. The next wind park to expire from the feed-in tariff will only be in October 2031. The remaining expires will be between 2033 and 2043. The fixed in feed-in tariffs for the individual parks range between EUR 81 to EUR 95 per megawatt hour. 30% of our wind feed was ready expired from the support scheme and are now being operated as merchant plants. We hedge up to 80% of the plant production on a 12- to 18-month rolling forward prices. The remaining 23% of our wind capacity are governed by the Renewable Energy Expansion Act from 2021, which is now the valid legal framework in Austria. It is a market premium system, which provides for a guaranteed floor. The floor for our project range between EUR 82 and EUR 93 per megawatt hour. The market premium system also foresees that results gained to above floor prices stay with the company. With this, I will continue with the financial developments in the Generation segment. Revenue decreased despite higher production volumes by 3.8% to EUR 243.9 million. The main reason for this development were declining market prices. Operating expenses were up year-on-year because of inflation effects. Higher personnel expenses due to the increase in workforce, which is related to the capacity expansion and higher cost for electricity purchases. In contrast, the energy crisis contribution on electricity to up to EUR 10.6 million compared to the same period last year has no contribution was due in the second quarter of the financial period. This generally the Austrian government announced an amendment of the law. The threshold, which includes eligible investment rate to EUR 200 per megawatt hour. Hence, we do not expect this to result in any further financial obligations. The earnings contribution from equity accounted for Burgenland Holding AG also increased year-on-year. All in all, EBITDA amounted to EUR 147.1 million. Considering a higher scheduled depreciation and amortization because of our investment [indiscernible] segment, EBIT stood at EUR 123.7 million. We confirm the given outlook on the Generation segment. EBIT is still expected to be below the previous year's level at the recent downward trend in electricity market prices continues. Let's continue with this Networks Segment. The mild weather conditions and the change in consumer behavior in terms of energy savings on one hand, and the increased proportion of consumers on the other hand, also impacted our Network segment. Because of these developments and the lower use of our Theiss power plant for network stabilization, network distribution, volume for electricity and natural gas decreased year-on-year. Despite the lower distribution volumes, segment revenues increased to EUR 367 million due to the higher system network tariffs for electricity, which compensated lower revenue from natural gas. Positive revenue contribution was also recognized by cable TV, Internet and telecommunication services. Operating expenses decreased due to lower upstream network costs because of decreased tariffs. In total, EBITDA was up to EUR 177.8 million. Talking into account higher depreciation and amortization due to the high investment level EBIT totaled EUR 94.8 million. As of the beginning of this year, the new regulatory parameters for electricity distribution network became effective. In the appendix of this presentation, you will find an overview of the current regulatory parameters for both the electricity and the natural gas distribution network. With the beginning of this calendar year, E-Control adjusted system network tariffs for household customers. Network natural gas decreased by 15.2% and for electricity increased by 12.7%. The [indiscernible] is mainly driven by cost for network losses. After the first six months of this financial year, we confirm the outlook for the Network segment. EBIT is expected to be slightly below last year's level. Let's move to the Southeast Europe segment. Electricity generation volumes in the segment decreased year-on-year. Water flows in North Macedonia were above the long-term average, but still below the high level of the prior year. Energy sales volume slightly declined compared to the prior year, mainly because of the higher temperatures in Southeast Europe, which were also well above the long-term average in the reporting period. In Bulgaria, temperatures were even warmer than last year. In contrast, network distribution volumes increased due to higher sales volumes to household customers in North Macedonia. Revenue decreased to EUR 746.5 million due to the downward trend in electricity prices and lower network tariff in Bulgaria. The data I used to offset the over compensation of costs from network loss coverage in the prior year in accordance with the [indiscernible] method authority. Corresponding to the development of revenue, operating expenses are lower due to a decrease in cost for third-party electricity purchases and energy carriers and lower natural gas procurement costs for the cogeneration plant in [ Toplofikatsia ]. All in all, EBITDA amounted to EUR 160 million, and segment EBIT totaled EUR 74.8 million. We also confirm the given outlook for the Southeast Europe segment. Based on the first half year, EBIT for this segment is expected to be at the upper end of the range, between EUR 70 million and EUR 90 million in this financial year. And finally, in Environment segment. In our international projects, the business, we are currently working on 9 projects. At our project in Kuwait, we reached the peak in the summer of the previous year. The wastewater treatment plant was completed at the end of December, and the first test run was successfully finalized. The second part of the project, which relates to the infrastructure of the pipe system is also about 2/3 complete. I would also like to inform you today about the status quo of our intention to invest WTE. On the 4th of April, we announced a top determination of the structured sales process. This announcement was necessary, as all bidders have either withdrawn the interest in the acquisition of WTE or were rejected by us during the process. We are now evaluating the implementation of further strategic options as it remains unchanged for the EVN Group to focus on its Energy business in the future. Against the backdrop of all this development, revenue in this segment decreased year-on-year to EUR 209.3 million. This is a result of the advanced project status in Kuwait. Correspondingly, operating expenses declined. In addition, an impairment loss of EUR 22.5 million was recognized on the outstanding receivables from the project in Budva in the first quarter of this reporting period after the decision of the Geneva Court of Arbitration. In total, segment EBITDA dropped to EUR 10.6 million and EBIT amounted minus EUR 1.2 million. Financial results nearly matched last year's level and stood at minus EUR 30 million. All in all, result before income tax amounted to minus EUR 14.2 million. Based on the business performance in the first six months of this financial year, we have to adjust the outlook of the Environment segment. It is also expected to be below previous year's level. The next slide shows the development of our group cash flows. Gross cash flow was lower year-on-year at EUR 580.3 million. The main drivers for this development were lower earnings recorded in the reporting period, noncash earnings components, in particular related to the earnings contribution from EVN KG, which are still negative in the reporting period but improved compared to last year, and higher dividends from equity accounted investees. Cash flow from operating activities totaled EUR 414.9 million, reflecting the development of working capital. Please also consider last year's negative effect caused by the liquidity settlement for EVN KG and the related higher capital commitment for working capital. Cash flow from investing activities was positive at EUR 49.7 million. The increased investment level was compensated by the sale of cash fund. The high investment were also contrasted by higher construction and network subsidies in the network and heating business. The composition cash flow from financing activities amounted to minus EUR 446.3 million and included [indiscernible] payments and the dividend payment for the previous financial year. The net change in cash and cash equivalents amounted to EUR 18.2 million. As already mentioned, EVN has committed undrawn credit lines of EUR 786 million as of the end of March, as we concluded a EUR 500 million revolving credit facility in May in order to replace the EUR 400 million facility, which should have become due next year. Let's come now to the outlook for this current financial year. After the first six months of this financial year, we confirm our outlook for this financial year. Under the assumption of a stable regulatory and energy policy environment, we expect the group net result for this current financial year to be within the 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. Mid of May, Verbund paid its dividend for its '24 financial year. The earnings contribution amounted to EUR 182 million, which exceeds last year's dividend by EUR 24 million. Please keep in mind that the dividend is already included in our guidance for the full year. Additionally, I again want to highlight our dividend policy. Future dividends will equal at least EUR 0.82 per share, and we are committed to let our shareholders proportionately participate an additional earnings growth. In the midterm, we are aiming for a payout ratio of 40% of group net result. As already mentioned at the beginning of this presentation, total annual investments will be the range of EUR 700 million to EUR 900 million. The core areas are investments in network infrastructure, renewable generation and drinking water supplies. Finally, I would like to inform you that we plan a virtual event for investors and analysts in early October. The energy future requires various initiatives and innovations to make it happen. We would like to inform you on EVN's positioning and how EVN will engage and benefit from these opportunities. Early October, we will also give you an update on our midterm financial ambitions. And finally, a new Executive Board team will be complete, so we will then introduce you to our new CTO and new CFO. That's the end of my presentation and look forward to answering your questions.

[Operator Instructions] And the first question is coming from Patrick Steiner from Kepler Cheuvreux.

Two questions from my side. The first one is EVN KG. I mean, you mentioned a generally more difficult environment taking higher composition as well as customer's own electricity generation through their own PV equipment. Could you give us a bit more background information on these two points and the impact on the business? This would be the first one. The second one is, I mean, given that you confirm through your guidance and the Verbund dividend in the amount of EUR 182 million should be reflected in Q3. Why are your expectations in the second half of the year? So I mean, if you subtract the H1 net result and the Verbund dividend from your guidance, I arrived at roughly EUR 40 million to EUR 80 million for H2, which seems quite low,right?

Okay. Thanks a lot for the two questions. First of all, here, the high energy prices in the last 24 months resulted in a strong surge for photovoltaic installations. Today, in our grid area in Lower Austria, there are more than 100,000 private photovoltaic installations done. This is, of course, influencing the consumption by our supply company because of this change in behavior. And there is an additional effect regarding around 6% on the gas sales side, they are coming from lower consumption from household customers in the consequence of the warm weather. So we have, on the electricity and on the gas sales side a change in customer behavior in this ongoing current year and -- which we also expect will influence their wholesale prices during the year, especially in the summer season, much more than we have expected 3 or 5 years ago. Therefore, the kind of value of energy produced in time during the day, in the summer period will be less valuable than energy production than it was in the past. And if you take over this energy and sell it on the market, you also are not able to gain any additional kind of money anymore. And therefore, there's a change in the structure taking place. Of course, if you look on the last 24 months, you also see that the strong surge in wholesale prices led to higher end customer prices. This was coming with a certain delay. And now, when wholesale prices sharply are going down, this was also, of course, supporting strong competition. Also with the new regulatory framework and the legislation, which is not allowing us to give our customers a longer contract than 12 months, we have -- there's only two ways to service our customers, either is a 12-month contract or with a clause, which is following a monthly pricing. So these are the two main dimensions, which we can offer to our sales price. On the other side, we have the issues regarding prognosis on procurement. So this is the situation which we are facing, which will change also a lot of positioning of the group in the relationship to energy procurement in the future. And if you look on the second question regarding our expectation for this year, I said before, I confirmed our December outlook, which tried already to include Verbund's dividend in an expected level. And now, as I mentioned, it's EUR 24 million higher, but we also didn't see this necessity to reevaluate our gas inventory due to this change of gas market prices. So these are two factors which are extraordinary factors, which are influencing our overall expectation for this year. And just take into consideration, our industry is strongly framed by the winter half of the year. The second half is where we are only able to less money than in the first half year.

Very clearly. Do you expect any further negative effect from the natural storage valuation?

If we look on the market since April, yes, gas prices on wholesale markets have increased again. So March might be -- has been the low -- the lowest point in this year of energy wholesale prices for gas. And therefore, I don't see this in the near future.

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

I've got 3 questions. First one is about the story that has been resurfacing recently. It concerns about gas supply to Austria following various verdicts by arbitration tribunals. Could you remind us of your supply strategy? And any security measures you're taking when it comes to that?

Okay. This is a question which is heavily debated in the Austrian public. There are clear opinions from the regulatory authority that they don't see a crisis for gas supply in the upcoming winter. We can confirm this to our customers because our gas storage facilities are on an historic high at the end of May. So in comparison to previous years, we are on a higher level of stored gas in the facilities than we have been then. Therefore, we expect that our gas storage facilities in Austria will be two months earlier on this kind of storage level than it has been the last year. So from this point of view, there will be enough gas stored in Austria to overcome any kind of restrictions in the upcoming winter. The general situation is that we, of course, are buying gas from different suppliers. We are not importing ourselves. And therefore, there is a variety of gas supplier in the market. But it's more a question of the price, not on the volume. And EVN AG as the company has no long-term gas supply contract anymore. Only EVN KG is having such a contract, which is running out in a couple of years.

Another topic that has been in the media, because other Austrian utilities terminated their offtake contracts for private PV installations, which seems rather harsh. And I assume Austrian utilities have different contract structures actually. So at EVN, the situation might be different. But how is the situation here with the end customers? And what changes are you expecting for the whole market probably also in coordination with the regulator?

Can you just rephrase it, Teresa? I was not listening.

Yes, sure. So what's the situation with the private PV installations at the household...

Okay. I got it now, I got it now. Teresa, I got it. Yes, of course, this is a big issue, yes, because at the beginning, when PV installation were more for extra than brought used customer production facility, there were terms which we are helping these kind of PVs to get them into the market. So it was more or less we are taking over the electricity to the [indiscernible] who are paying for the electricity used in the month. It was working quite well. But with this change of structure, as we're seeing now, that due to their oversupply of photovoltaic prices, the short-term value of this energy has completely dropped. Of course, the infrastructure is changing. We're only giving our customers now any more contract, which are more or less affiliated to the monthly pricing of energy than it's EUR 0.7 relationship to that. So the price we are offering to our customers is now for same -- for EUR 0.3 per kilowatt hour. So the value of the short-term production of photovoltaic is mainly in their own consumption. And this is, by the way, also now how the stakeholders, like the Photovoltaic Association is now claiming. Photovoltaic on private level always has been meant to support their own consumption, not to participate in the market because then you have to get a market price for it.

Okay. That's very good. And the last one, it's related also to my usual question about an order backlog in the project business. It's also -- what's your take on the current interest rate environment, if you see a slowdown in project activity or tenders coming up, if you could give us some color here?