Manawa Energy Limited (MNW) Earnings Call Transcript & Summary

Well, good morning, everybody, and welcome to Trustpower's Half Year Result for 2021. My name is David Prentice, I'm the Chief Executive of Trustpower. And I'm here with Kevin Palmer, who is our Chief Financial Officer. Hopefully, everybody can hear me okay. Hopefully, everybody can see the front slide up on your screens. What we're going to do is we're just going to give it a minute or 2 just to allow people to log in to the session. And then we'll get kick-started straight afterwards. So hear from me again in maybe a minute's time. Okay. So we've just been monitoring people coming in. It looks like we're up to the numbers that we expected. So as I said, good morning again, and welcome to our presentation here this morning. Hopefully, you will have had an opportunity to have a very brief look to the presentation that was loaded up onto the NZX this morning. And you are -- you've already come with a number of questions. What we thought we would do this morning is similar to prior -- previous presentations is we'd probably spend somewhere between perhaps 20 minutes and half an hour, talk through some of the key aspects of the presentation at a reasonably high level but certainly allow plenty of time for you all to ask questions at the end. Now I know probably, most of you on this call are more than used to this type of technology at present. [Operator Instructions] So as I said, hopefully, we invite plenty of questions towards the end of presentation. I will now -- as you can see on the slide in front of you, we are intending to just give a brief overview on governance. I'll talk a little bit about COVID-19 update. I'll then move into a little bit about kind of a strategic update. And then I'll hand over to Kevin, who's going to take us through a lot more detail in terms of the operational overview and the FY '21 financial review, before we close off with an outlook. And as I said, that should all take up about 25 minutes to half an hour. So firstly, in terms of a governance update, so we've had a couple of changes, a few changes to our Board this year, which were obviously signaled 6 months ago when we announced our full year results for the prior year. But just to remind those that might have missed that, we've had David Gibson, came -- he joined our Board effective 7th of September. And David is from -- is also a Director of NZME and Rangatira Limited and has got a background in corporate finance. I'm sure some of you will know David. And also, Peter Coman has joined our Board effective this week. And Peter is Head of Social Infrastructure at Morrison & Co and is also Chair of RetireAustralia and the Infratil Infrastructure Property. And Peter has a background in property investment and management. So we certainly welcome both David and Peter on to our Board. At the same time, we're also sad to see Geoff Swier, who has been a long-standing Director on our Board for the last 13 years, retire from the Board. He had his last Board meeting with us yesterday, and we'll certainly, without a shadow of a doubt, miss his wisdom and insight. And I think on behalf of all the Board, I'd like to thank Geoff for all the work that he has done -- put in to supporting Trustpower over his time on the Board. Lastly, just a brief update. We had Sara Broadhurst. She joined the senior leadership team a couple of weeks as General Manager, People and Culture, and we're delighted to have Sara onboard. Just the last point on that slide that I just wanted to highlight is that the -- talking about the Board, the Board and senior leadership team, that we made a decision earlier on this year that -- to address some of the hardships that many of our communities that we work in are facing around the country, that we decided to forgo a portion of our FY '21 earnings and are very proud to have been able to support what is -- what we believe is a fairly substantial sum to the 6 charities or the 7 charities that you can see at the right-hand side of the screen. So we've got a lot of work into our communities all around the country. And as I said, I'm very proud to have been able to feel as if we can support in hopefully a meaningful way. So going on, just to give a bit of an update on, I guess, our result, but also to talk a little bit about some of the external challenges that we faced. So I guess the first thing to say is that we're very, very pleased and very proud actually of the result that we are reporting here today, small improvement on prior year. But considering the external challenges that we've had to face, as I said, we're certainly very pleased with where we have landed. As the top of the slide says, we demonstrated ongoing resilience and capability in terms of the COVID-19 pandemic and very dry conditions. And they are really the overarching kind of key messages. As I said, 6 months ago, when we presented our half yearly results, I've been relatively new to the organization, having started in this role in January. I've been absolutely amazed at how we have been able to so quickly transition, particularly in our Tauranga office, where we've had circa 600 people, to so quickly transition those people to be able to work from home with literally 0 impact on customer service. And we've actually continued to do that. So if you have a look at our office today, we've actually made the decision that we want to encourage people, we want to encourage people to be able to feel free and flexible to work from home. And that it's a testament, I think, to the leadership and the capability but also the systems that we have built up over the last 5, 6, 7 years in Trustpower that has enabled us to do that so seamlessly. In terms of our ongoing COVID-19, the impact on our business, I think the best thing I can say is that like many other organizations in March or April this year, we prepared a number of scenarios. I think we've prepared 4 scenarios. And the reality is where we're at, at present is significantly better than even the best-case scenario. So our pay on time rates remain at 2019 levels and again supported by robust payment support processes, all ensuring that debt remains well-managed and within expectations. As I said, our investment over the -- in the automation and capability over the past 5 years have really helped provide that seamless transition. From a generation portfolio perspective, obviously, we had a couple of unplanned outages last year, which were unfortunate. So I'm very pleased to see that we've had absolutely no majority outages at all this year. And the all-planned maintenance has gone according to plan, which is very pleasing. Well, that there just gives you some very nice photographs, smiling faces of our Board and leadership team. I obviously spoke a little bit about David Gibson, Peter Coman and Sara Broadhurst, who are new to the team, and you can see them at the bottom there. And we'll move on from that. Thanks, Kevin. So moving on to a little bit about just an FY snapshot. And as I said, Kevin will talk to this from an operational perspective in a lot more detail. But I guess the overarching themes here is, as I said earlier, very pleased that our -- we're up to be reporting a group EBITDAF which is up 3% on prior year. And as I said, that's despite the many external challenges that we've had to face obviously from COVID, as I've just spoken about there, but obviously from some of the key influences on the electricity sector, in particular, that we've had this year, none more so than what has been effectively a 100-year drought, which we'll come on to in a minute. So as I said, very pleasing that we've been able to increase our EBITDAF by 3%. Even more pleasing is that we had a challenging year last year in retail. So it's fantastic to see that from a retail perspective, we've managed to increase our EBITDAF by 38%. There are a number of reasons for that. Again, Kevin will talk through those in a little bit of detail later. Obviously, with our generation volumes dropping by 4%, while there was an increase in spot prices, simply as a result of our volumes coming down and also the fact that we've got less revenue coming from our metering business and continued impacts of ACOT, what that meant was our generation revenue dropped by 3%. So let's move on. So in terms of a strategic update, look, I've just 5 more slides that I just want to talk about here. And I just want to talk a little bit about Tiwai Point closure. And I'm almost certain we'll get some questions from some individuals online around what our view is around Tiwai Point. And I think I will answer it now that we don't know probably any more than anybody else on the call. But certainly, as -- our view is that the most likely scenario now, and certainly what the market seems to be pricing, is that the smelter will close down over an extended period. However, I think it's fair to say there is still significant uncertainty around future operations. Sorry, Kevin. Yes, next slide, next slide, and I'm going move on to Tiwai Point. What that means is that we are having a very close look at our peaking capability. And while we have done some early work on this, and I must say that it is relatively high level at present, but certainly, from a directional perspective, our belief is that our peaking capability and North Island generation will, on average, show a slight value increase, whereas across the South Island, the generation will become slightly less valuable. And this is a relatively complex piece of work, as I said, that we need to work through in more detail because it comes down to effectively the what and the where, as we say in that second bullet point there, whereas in simple terms, our peaking factor and our location factor. So I won't say any more about that just now because Kevin's actually get a more detailed valuation slide a little bit later on. So I'll leave that to Kevin to talk in a bit more detail. But I guess from a Tiwai Point closure, so we've got -- as I said, in summary, we are working through what that means with respect to the valuation of our assets. But certainly, the sooner we can get clarity on what that looks like from an operational perspective, the better. So moving on to the other kind of big -- the kind of major factor really over the last 6 months of the year is the fact that while we have a diverse generation portfolio which was able to absorb the impact, we are still facing what has effectively been a 1-in-100-year drought. And that graph there at the bottom of the slide, I think, really shows that in stark detail, whereas you can get the kind of light blue line show the average inflows over the last 12 months and what the actual inflows have been. So you can see particularly over the last 4 to 5 months, we have been well below average in lakes around the country. Now as you can also see is that is starting to creep up. So in a number of our lakes, certainly down in the South Island, in particular, some of those are starting to creep up to what are average levels, but there is no -- for this time of year. But there is no doubt that on an average perspective, across our portfolio, that we are still down in terms of our lake. Kevin, we'll move on to the next one. So regulation. Look, as most of you listening in will be aware, we have -- we are in the process of appealing the new Transmission Pricing Methodology. This won't be something that's new, I would imagine, to anybody because we have held a firm stance in this over a number of years now. And really, this slide is really just to give you an update on where things are at. So we've launched proceedings in the High Court for an appeal on points of law and judicial review on the decision, and we now expect that to be heard in quarter 4 2021, so in roughly a year's time. Obviously, in the meantime, Transpower is progressing to develop the actual Transmission Pricing Methodology in accordance with the guidelines. And we will continue to work with them as best as we can, although I do note that there are continued restrictions put on Transpower by the EA. And I guess the point I would make with this is that the reason that we are taking such a firm stance on this is that we are just -- we are seeking a fair and balanced decision for everybody. And at present, we believe that the process that has been undergone has not resulted in that. So that's the reason we're putting in the effort. Of course, from the other regulation perspective, with the National Policy Statement on Freshwater Management, again, there are some quite significant implications on us potentially with that. So we're keeping a very close eye in that as well and will continue to update everybody as that progresses. Moving on to the penultimate point, just wanted to talk a little bit about generation asset management. So the team in Trustpower have been doing a fantastic job over the last 12 months but particularly over the last 6 months, as we've sought to develop a more strategic view on asset management. So what I would say, I think the team have done -- our generation team, in particular, have done a fantastic job in maintaining and looking after our assets. But what we're really wanting to do is move from a more reactive maintenance mindset to more of a proactive one that considers all-of-life costs, where we're seeking to maximize life cycle value and, of course, prioritize both our -- the quantum of what we spend, but also the quality of our spend and where we spend that. And how we do that is we have to, first of all, develop what is -- what will be a proactive asset management philosophy. So we're well advanced in that process and look forward to giving everybody a bit more of an update on that, hopefully, in the next 6 months. I think it was really just to remind everybody that we continue to focus on that. Lastly -- Kevin? No. I'm still -- it was at KPMG. And some of you may recall that 6 months ago, when we last spoke to you, we mentioned the fact that we had engaged KPMG to come in and just...

Hello, can you hear me? [Technical Difficulty] Okay. So for some reason, David seems to have dropped off, which is challenging. But anyway, never mind, I will box on and finish off his slides because mine are coming up anyway. So KPMG review. Global experts in operating model came through essentially to ask the question, do -- is our business well positioned to execute our strategy? And they've come through with a number of opportunities. Some of them are capability developments and others are efficiency improvements, and we're working through a program over the next 6 to 12 months to implement those. Can you -- okay. So slightly just concealing. Are you there, [ Gareth ]? Can you help me? Okay. Sorry. Hopefully, everyone can see the slide that says what it all means for Trustpower. And I guess the -- without wanting to read out every bullet point on there, the sort of -- the messaging is -- here is that from an operational perspective, we're well positioned. We're managing our weather volatility. We're actively participating in our -- in the regulatory positions, and we're building our capability through the KPMG review and our digital program. But also strategically, we're working with the community and other strategic partners to take advantage of growth opportunities. So what I might do now is move on to a bit more operational performance over the preceding 6 months. I'm going to start by talking briefly about the 2 key operational areas, generation and retail, and then doing a bit more of a deep dive into the financial results. This slide here, which is the generation volume, is a repeat of a slide that we've done in the past, where we were talking to our long-run generation volumes. And you'll see that, obviously, there's a material step-up when we bought the operations of King Country Energy. And while there's variability here around the average, which we see at around 1,900 gigawatt hours going forward, there's opportunities for improving. And we'll be targeting those with some targeted capital expenditure over the next 2 to 3 years. And there's -- and we have an active hedging program to manage some of this volatility in terms of overall revenue. I'm going to spotlight 2 key generation projects that we've done in the 6 months. The first one is the Arnold G2 turbine refurbishment. Well, this is a particularly interesting one because while it's a normal routine maintenance project for us, it was planned well before we even knew about COVID-19 but transacted or implemented during the pandemic. And it just reflects and illustrates, I think, the sort of capability and adaptability of the team in terms of their -- and their commitment to the company and in terms of forming a sort of work bubble to -- in order to protect themselves and their community from the disease, but also to deliver what is, in fact, an essential service, being the generation of electricity. The second one is the Kawhaka intake enhancement. Well, I've chosen to highlight this one because of the community engagement in the project. This -- you can't hear me? Okay, cool. I'm going to carry on then. This is a project where we've worked with the local community in terms of getting a win-win solution, where the cycleway is enhanced, which means it's safer and more effective for locals to use, but also optimizes our own ability to generate and, again, produce that essential service. Okay. I think now what I'll do is I'll move on to talking about retail. Can you see retail from it? Well, hopefully, my laptop will move the slides forward soon. The key point I wanted to make about retail was the -- was just to continue the story that we've been telling for probably 3 or 4 years now around our growth in telco. Over the last 4 years, we've achieved a growth rate in telco of 22%, compound annual growth rate of 22%, which we think is, well, really good. And this year, we've launched the mobile app -- mobile product, sorry, that was unhelpfully impacted by COVID. And so it's been a bit slower to uptake. But over recent months, we're starting to see some traction now with customers, and we're probably at the end of the -- or nearing the end of our sort of soft pilot rollout. Okay. Okay. All right. All right. So there's opportunity for improvement at our end. But any mind, I'm going to keep boxing on. I'm just -- I'm now looking at the slide which is around focus on execution of proven products. I think the point that -- the key point that I'd make here is that we're now building a nationally diverse portfolio of customers with bundling. We've benchmarked our acquisition strategy against our competitors. And broadly, we're in line with our competitors in terms of "what you pay for what you get" kind of approach. We're continuing to believe that our retail customers are lower churn.

Can you see any of these slides?

No. Yes. All right. Here we go. I think I'm back in business now. Can everyone see the thing that -- this slide, focus on execution of proven projects? Hopefully, that's working now. And now we're on -- I'm -- now I'm talking about lower churn. So this is a slide that anyone who's been to any of these presentations in the past will have seen many, many times. But the message remains true. We're still seeing a reduction in churn due to the bundle. We are seeing, in our own customer base, a reduction in churn occurring across energy-only customers. And we're also observing that same reduction occurring nationally across all of our electricity competitors as the churn rate in electricity customers is slowing over the last 2 to 3 years. Overall, our view is that the cost of very high churn is material for the industry and not really that good for customers and have been overall, but never less. So now I'm looking at the slide around quality customers. The point here I'd like to make here is that Trustpower has been careful in the customers that we've been targeting, around the ability to be resilient and stay with us, and that the loyalty of our customers has been borne out through the pandemic. You can see from the graph that people paying late in 2020 is virtually identical to the same proportion of people paying late in 2019, so completely unaffected by the global pandemic. And that is a very strong endorsement of the quality of our customer base. The -- this slide, again, will be familiar to many, the continued effort on digitization. That was particularly useful through the pandemic, where we saw 86% of our volume come through virtual agents. Overall, only 22% of our contacts are now directly with a person, albeit that people tend to use digital contacts more often than they would over the phone. So overall, the stats here are showing where we think a virtual contact has mitigated a staffed contact, not every digital contact. Anyway let's move on to having a look at the numbers. So this bridge graph, what I've tried to do here is identify some of the sort of ongoing parts of the business and distinguish them from some of the one-off things. So obviously, the -- people will recall that we sold our business -- our metering business last year. So the revenue from that, that was in last year's half year is no longer available to us. So that's a $6.7 million drop. And the other 2 orange bars at either end of the graph are the noncash implications on our acquisition costs, which I have normalized out for those of you who wish to look at our business on a sort of more cash flow basis. So when you do that, you see that generation performance was actually an improvement, which is a reflection primarily of increased price because volume was materially down, as David has spoken to. Other revenue was down. That's mainly because of avoided cost of transmission price per unit has dropped. And then we've seen a material growth in our retail business, which I'll talk to in a minute. So yes, generation, as I said before, on a normalized basis, we're showing a slight increase. But of course, the metering business revenue was in the segment before. And we're seeing an uplift in energy revenue, driven by higher prices. The other things are very, very similar. Retail. Now we're seeing a breakdown of the retail thing. Electricity gross profit has been driven by the fact that we've passed through some of the high material increases in energy costs that occurred in '20 -- financial year 2020 that were able to be fully passed through and now being passed through. Telco gross profit is reflecting the increased customer numbers that I showed on that graph earlier. Acquisition costs are materially lower this year than the half year last year. That's mainly driven by the fact that we deferred our acquisition campaigning through the COVID lockdown, and also that we spent quite a lot of money last year on retention and other things in preparation for the Rugby World Cup. Other items are fairly immaterial. Generation asset values. There's been a number of moving parts since we've revalued in March, the main ones being the announcement by New Zealand Aluminium Smelters that they're intending to close the smelter at Tiwai Point. From our perspective, if we have -- the market is currently predicting a slow closedown of that plant. And that price is what we have used in the valuation. That will be materially better for us than a fast shutdown. As David talked to before, the Electricity Authority has announced its final decision on Transmission Pricing Guidelines. And albeit that we are challenging those, we have, in terms of the valuation, assumed that the avoided cost of transmission will be gone from 2024. And there's been a significant fall in interest rates affecting our discount rates, which has increased the value of our assets. Then the overall net effect of those things is that the valuation is materially the same. The emerging theme that we are working on is around our peaking factors or the ability for our flexible hydro fleet to generate in higher price periods. In general, we expect that in the South Island, prices -- the price differential between winter and summer will be materially more marked once Tiwai leaves. And that means that generators such as Waipori with large lakes or large capacity will be able to move generation from summer to winter and take advantage of higher prices. Debt capital management, not a great deal to see here. We've been -- worked hard on our debt capital management in the early part of the calendar year, but we're now well positioned. Interim dividend. The Board has declared a interim dividend of $0.17 per share fully imputed. This is in line with our historical dividend payment of $0.34 per share per annum. The Board considered the operations, which -- and the impact of COVID, and there still remains some uncertainty around COVID. And so they've determined to -- that performance has been sufficiently improved to -- in order to go back to our historic levels. At the year-end, they will revisit that and may well increase that.

Thank you. Thank you, Kevin. So just a couple more slides left. And again, apologies for dropping out a little bit earlier. Kevin, if we could just go on to the penultimate slide, which I'm just waiting to load. There we go. Thank you. So really, just to kind of summarize the presentation. And look, apologies, I hope everybody listening and watching have been able to follow us. Again, we've kind of had some troubles our end. But as I said, hopefully, you've been able to get the gist. So I won't go through all these key points in detail, but there's 2 -- just a couple of points I was going to make before I dropped out earlier that I'll perhaps just reiterate here. So first of all, just to repeat, in FY '21, our operating results for the first half year were really very pleasing, I mean, despite being impacted by weather, and particularly pleasing was, of course, the expected lift particularly in the retail performance. We have got -- this is the point I was going to make earlier before I dropped. We are seeking to have an incremental value creation in generation, cost optimization and volume gains. And previously, we have indicated to everybody that we are targeting roundabout 60 gigawatt hours increase through a number of enhancement in our generation schemes around the country. And the last point I really wanted to make is that even despite the kind of challenges that we've got in the sector at present and just the scope, despite some of the questions that clearly Tiwai will raise, particularly around demand, we are seeking to grow. We are looking to play our part in New Zealand's push towards decarbonization because that is going to require a substantial new growth. And so we are seeking to put a lot more effort into that than certainly we have done perhaps over the last couple of years, building a network of partners and actively looking at options for participation in new generation. A lot of the other points in that slide, Kevin has just really just covered, so I won't reiterate. And we'll go on to the last slide, which is really just a market guidance update. And this is really just to confirm that we have, primarily as a result of the decrease in our generation volumes, that we are now forecasting for the second half of the year, which has dropped from circa 1,900 to circa 1,700, that we have decided to just drop our guidance range to $185 million to $205 million to reflect that. And in terms of our CapEx, we are now expecting our FY '21 CapEx to be in the range of $34 million to $44 million. And again, that increase reflects our increased focus on proactive asset management and generating the enhancements that I just spoke about. So thank you all very much. Again, apologies about that. But hopefully, we've got a number of questions that we can now deal to in the last 20 minutes that we've got left. So Kevin, I'll let -- I think you're going to moderate the session.

Thank you, David. We've got a couple of questions online, which I'll just read out and answer. The first one is what forward view should we have around C&I volumes and into the retail business? I think you'll have noted a reasonable drop in C&I volume based on our operating stats over this last 6-month period. That reflects the loss of a fairly high-volume, low-margin customer that we had. I think that it's probably reasonable to use the current quarter's volumes, i.e., the -- up to the end of September is a reasonable proxy for volume going forward. The second question is around the dividend, noting that we dropped it to $0.155 at the June dividend. And then the question is, will there be a sort of clawback of that $0.015 at full year in June? I guess the answer is that we can't commit to doing that. But certainly, the Board discussed doing that for the interim, but felt there was still significant uncertainty around COVID. It is certain that they will discuss and consider it at the year-end. What action that will take will depend on the performance of the company for the next 6 months and our forward view of the economy. And long run -- the third question is around what long-run CapEx assumptions should we use? I think if we look at the CapEx slide, which I can probably go back to, to refer to it -- sorry, here we go. So we've given guidance on where we think we will be for this year. In terms of long run, I think we're probably looking at 2 to 3 more years of asset enhancement generation CapEx and around that range. Lifestyle CapEx is higher this year because of a large outage that we currently just started on at Waipori. So I would expect that longer run, that, that lifestyle generation CapEx will be at the bottom end of that range or even slightly lower. IT and telecommunications, yes, probably circa $10 million to $12 million for the rest of it forever is probably about what we're going to do on that as well. There's lots of questions coming in. Can you -- just a bit on debts now. Bad debts provision at $5 million in FY '20, given there's no sign of this coming through, will you be adjusting the provision in the full year? Yes. Look, there's no sign coming through. There's been material extension to the wage subsidy and government support from COVID, which is only just starting to come out now. So our view was that we need to wait another 6 months before we reassess that provision. So we would expect to -- well, we're compelled to, as part of our accounting requirements, to reassess it. But yes, reasonable to expect that if there's no change in collections, then that would be reversed at the full year. But if there is or there remains considerable uncertainty, then we may well keep it for another year. Next question is, what dollars and type of savings are you targeting as a result of the KPMG projects? Were there any other cost deferrals similar to customer acquisition costs through lockdown, e.g., expense maintenance, et cetera? So let's ask -- answer the simple one first. So no, we didn't defer any maintenance through lockdown or any other costs. Obviously, our travel expense has dropped a bit as we're all stuck at home, but that's a fairly modest expenditure in relation to Trustpower's total expense. But the generation stations, as I illustrated in that example, were fully operational through the period. And our maintenance expenditure was broadly in line with what we would expect, given that it was in late autumn, early winter, which is not a high maintenance period for us anyway. What types of savings are we targeting? We haven't -- we've had the high-level strategic review from KPMG, which as a target has identified some areas where we can improve, around simplification of our IT systems, improving our procurement and improving our levels of automation. But what we're yet to do is do a fully detailed scoping exercise where we say exactly what the program of work will be and how much -- what's the size of the prize. But reasonably, you could expect to see, over the next 2 to 3 years, operating cost improvements in the low millions, up to $5 million perhaps, as a result of that and the work that we're already doing. Has anyone -- is there any other questions? [ Kyle ] is helping moderate this. Is there any other questions or anyone put their hand up to ask a viable question? It seems as though there are no further questions. I'll just wait 1 minute, in case one's furiously typing. All right. All right. Well...

There's one more.

Just as well I waited.

Stephen Hudson.

Why did resource consent compliance events go sky high? Sky high is a relative thing, right? Like we have a 5,500 resource compliance conditions. And so to go from -- you tell me the number -- into 21. Sorry, Stephen, I don't actually know why they went from 10 to 21. I can tell you that none of them are material because those are the ones that I monitor. So -- and I haven't been concerned about anything, but I'll have to get back to you on that one.

[Foreign Language]

Anyone else would like to ask a question? Okay. Well, thank you very much, everyone. I will now draw the meeting to a close.