Manawa Energy Limited (MNW) Earnings Call Transcript & Summary

Welcome, everyone, to Trustpower's results announcement for FY '21. As I was saying earlier, not sure if you heard it, hopefully, you've got an hour set aside in your diaries this morning to hopefully listen and ask all sorts of questions. So my name is David Prentice, and I'm Chief Executive. And also with me this morning is Kevin Palmer. We've got a presentation that we'll step through. Hopefully, you've all seen a copy of that already because it's up [indiscernible] at the NZX this morning. We'll try and get through this as quickly as possible. We'll try and get through it maybe '20, 25 minutes because we do want to leave as much time as possible at the end for you, of course, to ask questions. So in terms of what we'll talk about today, look, it's fairly standard. I'll kickstart for the first 10 minutes, give a brief overview of the result, talk a little bit about the strategy and a bit of an update on that and then hand over to Kevin. Kevin will step us through in a lot more detail around the generation, the retail performance and, of course, [ to help you ] sort of fiscal year 2021 financial results. Now I probably don't need to tell any of you this because we're all fairly used to Zoom calls now. But just as a brief reminder, there are kind of 2 ways that you can answer -- ask questions, sorry. [Operator Instructions] So without any further ado, let's go into the results. So really, at a high level, there's probably 2 or 3 themes that have come through in terms of the result this year. So first of all, we are certainly sitting here fairly pleased this morning with the result at its highest level, certainly a very strong performance, and both generation and retail has contributed to that F 2021 result. As I said, from a generation perspective, there's probably a couple of themes that have come through that won't be as a surprise, I think, to anybody listening in this morning. And that, of course, is the fact that we've had pretty significant extended dry sequences, which have impacted inflows nationwide, particularly over the last 4 months. And I've got a slide, in 2, 3 slides' time, that actually shows that graphically. However, I guess, as I said, from our perspective, we have got 25 hydro schemes around the country, which allows us a degree of diversity and resilience and allows us to manage astute placement of that product despite the very difficult market situations that we find. And we can do that through careful management of our portfolio, both through dispersion run of river and, of course, high storage volume generation. So from a retail effective, we've had a very good retail result, as we will come on to that in a minute. A couple of key -- probably 3 kind of key themes in there. One is the -- obviously, through the challenging conditions we had, particularly as a result of COVID, I think our commitment to a high-value customer base has showed a great deal of resilience last year where our channel remains -- channel levels remain at pretty low levels. That, in addition to our customer migration to high-value fiber plans and the introduction of mobile through a bundled product, saw a very good retail result, which I will step on to now. So as you can see here, this is a kind of 2021 snapshot, and I won't go through all of this in detail. I know that Kevin will pick out some of these points a little bit later. And particularly, he'll talk about that one on the top left corner in terms of the group NPAT result, which just probably requires a little bit of explanation. But in terms of headline result around EBITDA, our result is just north of $200 million, which when compared to last year is up 7.3%. And as I said, that is despite record low hydro inflows last year, great deal of uncertainty around Tiwai and, of course, dealing with the pandemic. So as I said earlier, we're pretty happy with that result. Generation result, as I said, is pretty much flat on prior year, which in itself is a good result because you've got to remember that if -- so that is actually -- in prior year, that had a decrease of $8 million, which we didn't have this year as a result of the major asset business that we sold. So to actually have a result that's flat on prior year, certainly from our perspective, is a pretty good outcome. And of course, from a retail perspective, our EBITDA is up 33% to $47 million. And all of that led to the Board being able to declare a final dividend of $0.17 and -- which included -- and that on top of a $0.015 special dividend as a catch-up from last year brought the full year [ dividend ] to $0.355 per share. So we've now got some nice smiley photographs there of the Board and senior leadership team. We've actually had quite a few changes over the past year. We had a couple of long-standing directors. Many of you will know they are. Sam Knowles and Geoff Swier, they've been in the Board for the last 14 years, and they stepped down last year. And again, just like to take this opportunity on behalf of all of Trustpower and the Board to thank them for their leadership and commitment over those 14 years. We're very lucky that we were joined on Board with David Gibson and Peter Coman, who replaced Sam and Geoff, respectively. We've also had 3 changes on the senior leadership team. So Sara Broadhurst joined us in October 2020 last year, and Matt van Deventer and Paul Bacon were both promoted into the positions of General Manager Technology & Delivery and General Manager Markets, respectively. So very pleased to see all 3 of those join us on senior leadership team. In terms of the strategic update, probably important at this stage just to pause and give a bit of an update on the strategic review. I'm presuming that most people listening in will be aware of the strategic review that we announced in late January this year. And the review, of course, is aimed at testing market interest in the sale of our mass market retail business and, of course, exploring the business case for a stand-alone generation business. We announced couple of weeks ago that we had entered into a due diligence phase with a number of interested parties, and we are still in that due diligence phase as we speak. So unfortunately, I'm sure some of you have got a few questions around that strategic review. But I'm sure you'll also be acutely aware there's probably very little that we can say on that other than what's on that slide just now. So just a little bit about the weather. As I mentioned earlier, we had to deal with some pretty adverse conditions this year, and we thought that this slide effectively showed just how challenging that was. So what the kind of blue band shows are portfolio inflows, and each band shows the kind of average inflow over a number of years, from kind of 5% all the way up to 100%. And of course, the red line there is the actual from last year. And what that does is it shows that across our portfolio, that the actual inflow last year was really pretty much at the lower end of that scale. And indeed, a couple of points, August last year and particularly February this year, the actual inflow was just about a drop below historic levels. So again, as I said earlier, what we were able to do because of the diversity of our portfolio around the country, we were actually able to achieve a very strong peaking factor from our diversified generation, which obviously resulted in an increase in the average cost of generation sold, which obviously then offsetting the reduction in volume that was available to us. Moving on to Slide 11, just talking about climate change here. There's obviously been a lot of interest, a lot of talk around climate change. A couple of things I want to make -- comment on. First of all, we are very pleased to see the draft advice come out from the Climate Change Commission in March this year, and we have since put a detailed feedback on that. In general, Trustpower is fully in support of our march towards net zero by 2050, but we remain concerned around the target of trying to pursue 100% renewable electricity target. And there have been a number of reports that have come out over the past 2, 3 years on that. And indeed, the Climate Change Commission has also suggested that there should be an aspirational target more than anything else, and we are certainly very much of that view. But regardless of that, we are -- as I said, we are certainly of the view that if we are to get to net zero carbon emissions by 2050, then the electricity sector has to play a significant part in that because if we are going to seek to electrify a set of the transport fleet, then we are going to need approximately 50% to 70% new electricity generation over the next 15 years. So as I say, we will play a part in that. What we do -- and this is a key part of the feedback that we provided to the Climate Change Commission, what we do see is far more aligned regulatory settings, which provide greater certainty and transparency around investments, and we don't believe that we have that at present. In terms of freshwater management, TPM, again, under that broad category of society and regulatory change, we were probably -- first of all, TPM, we've talked about this at length in prior sessions that we've had. Probably doesn't need any more information here today other than to say that we are going -- ensure everybody online is aware that we remain significantly concerned around the implications of this. And we do not consider the authority's decision to approve the new TPM guidelines was well justified, thus the action that we have taken with the EA, where we have sought a judicial review. So we are going through that process just now. We understand that, that will be aired later on this year. So we look forward to getting some resolution on that. In terms of freshwater management, again, we're certainly acutely aware of the need to address freshwater issues in New Zealand. There is absolutely no doubt, a lot of work needs to be done around that. There needs to be a lot of understanding of the various different uses of that resource, and all that we would ask as a generation provider is that we advocate for recognition that renewable energy generation takes a critical role in the transition to a low emissions economy. And so hydro and water needs to be appropriately recognized and provided for. And we remain concerned certainly in some of the draft reforms that we have seen that will have significant implications on that. Nearly there before I hand it over to Kevin. So a couple of more slides. Look, generation strategy, we have probably -- to be honest, we have probably talked about most of these things here. It's probably just worthwhile pointing out a couple of points. We've talked in the past around the fact that we have a program of enhancements, where we are targeting 67 gigawatt hours of additional output from our existing portfolio over the next 5 years and have actually made really good progress towards that over the last year, where we've realized close on 10 gigawatt hours, which is great work. We've also taken some time this year to develop a full asset management policy and practice, which we've had in the past before. But we realized that we probably needed to understand exactly what our asset is and what opportunities we actually have in that. And so we engaged some outside help to do that. And so I think you'll actually be able to see a lot more transparency around our asset management going forward from here. In terms of retail, as I said earlier, I think that one of the key points from a retail perspective is the fact that we have got a high-quality customer base that certainly helped us through a very, very competitive retail environment last year and led to very strong results in retail. And of course, as I said earlier, very pleased that Trustpower Mobile -- we'll have Kevin to talk in a detailed slide on this, so he'll go into much detail. But certainly, the launch of Trustpower Mobile certainly has been a big success for us. So -- sorry, this is the last slide. So what this slide actually shows is last year, we also took the time to update our strategic aspirations, and I don't want to go into this in too much detail just now. And the reality is, we actually can't do that until we go -- until we get the outcome of our strategic review. But what we wanted to do is basically give everybody a bit signpost as to where we're heading. So we've come up with these, I guess, what we are calling our strategic aspirations, and none of these will be of particular surprise to anybody listening in here. But we have developed detailed underlying targets, which we will publish in due course, as I said, when we get the outcome of that strategic review published as well. And we will start to report on our progress to those targets across all of those 6 aspirations. And the key point of these is that they are meant to provide strategic attention in terms of how we manage our business. So maybe that's -- probably that's enough for me. We'll have a whole bunch of questions on that a little bit later. But I'll hand over to Kevin to deal and to leave you with more detail on that. Kev?

Great. Thanks, David. My plan today is to talk to the 2 main segments of our business, which are generation and retail. I'll talk about, firstly, the operations. Then I'll walk you through the financial results. So starting with generation. This graph shows the controlled water storage for our generation schemes. The key for any hydro generator is to have highly available generation to generate at the optimum times. So availability is still measured in 2 things. One is having machines really when you need them, and the second is having the fuel really when you need it. And this graph sort of demonstrates 2 of those key principles. You'll see in the first half of the year, we drove our storage down a bit. That was responding to higher prices in autumn last year and also in preparation for some planned outages that were going to occur in spring and summer of this year -- or last year and this year. I'm going to talk about those planned outages in a minute. But I guess the message of that we want to leave you with here is that, whilst our storage is a little bit below average, it's actually well positioned for us even despite having very poor hydrology, as David just mentioned. And these are the prices that we've been responding to in terms of generation. You can see the higher prices in June and July, forced now by the extremely high prices we've seen over summer. I'll start to make a retail point here because many people know that Trustpower is a long retailer, i.e., we have about 2x as many fixed price retail sales as we do generation capacity. And it's important that you have a really robust risk management strategy when you come into an environment like this. Now part of that is generation availability, but part of it is also synthetic key management process. So if you're sitting here now as a retailer without good risk management, that would be a very bad form. So that's my whole lecture on hedging. I'm going to move on and talk a little bit about the upgrade opportunities we had. This one here is an interesting one. Many people will know that our generation schemes are very old, some of them 100 years old. This one had an upgrade, this is Waipori, had an upgrade in the '60s and '70s, where essentially, a concrete block wall was added to the top of the dam to make it a bit higher. And we did very detailed seismic testing on that. And although the probability of the wall falling down was incredibly low, we felt that was a risk that we couldn't take. And so we have now dismantled that add-on and reversed it back to the original size dam that was built in early 1900s. The second upgrade is our Cobb upgrade. This is a replacement of runners. We've -- the runners look similar, I guess, in terms of shape and size but are actually far better in terms of their reliability and sustainability. This is a big job, and to do it safely and on time and on budget is a credit to the team. So moving on to retail now. David spoke earlier about mobile. You can see the graph there. Probably launching in the middle of COVID was not in our business case. But nevertheless, we did it. And as a result, we sort of launched mobile on with-fries-with-that approach, as in we have offered it up as a proposition to people we've already talked to about broadband and electricity. And to have get -- to have received nearly 8,000 -- we'll be doing our 10,000 celebrations. So as a credit, we will -- we'll look to use mobile as an acquisition strategy in itself in 2021. But that's the new product. The strategy of bundling is so we can still remain successful. Our customer size and total number of customers is around the same, but the share of wallet has improved significantly as we're growing our telco penetration into our customer base. And you can see that our sort of regional mix has gone -- we have a much higher metro penetration than we would have done 5, 6 years ago. Churn. Our churn in general is low, below average for the market. But churn in bundling, yes, it is still lower than churn for energy-only customers. And that is a strategic plan that we have invested on into our retail business. I guess as everyone would know, COVID created an opportunity to demonstrate customer experience excellence. And for us, we reaped the benefit of years of effort in terms of digitization. So 75% of our contacts are handled without human intervention, so purely digital. What that means in COVID was that we could -- our team, our human team could focus on answering the calls that matter, the times that matter. And there was a lot of an increase in terms of hardship. Of course, people who had never ever been on a benefit before found themselves on benefit. And having a proactive approach and availability of people to do that was a great thing in terms of customer response and also in terms of, from a financial perspective, actually paying their bills. The next slide here is about customer voice, about us listening to our customers, responding to their views and tweaking our proposition. We think that this program ongoing will drive significant increase in customer satisfaction. All right. So on to the money. This is an overview of the whole company 1 year to the next. You can see we've gone from EBITDA of $186 million to EBITDA of $200 million, just a good growth period considering the challenges of hydrology and COVID that we faced during the year. I've got detailed slides on both generation and retail, so I won't go into it in here. But I will talk briefly about the net profit after tax result that David mentioned earlier. One of the opportunities that accounting standards present to us is the ability to fair value our financial hedges. Some of the fair value goes through the balance sheet, and some of it goes through the profit. Interesting for us this year, about half of it, we -- all the upside ones went through the reserves and the balance sheet, and all the downside went through the profit. So -- sorry. Now how are we going to explain this? I don't really know if I can explain the accounting standards or the rationale behind that. But nevertheless, what we have done to help people out is we've created this thing called underlying earnings, which is the net profit after tax where we've taken out these sort of one-off unusual things. And what you can see there is that we've actually had a significant uplift in our underlying earnings. We now have $94 million underlying earnings [ as yet ], which is more reflective of the overall EBITDA uplift. So my recommendation would be, I guess, is to use that to benchmark our performance. But moving on. Most of this uplift that we've seen in EBITDA has been driven by our retail business. We've got -- sorry, we had a reduction in acquisition costs mainly because we stopped campaigning during COVID. We can see that we've got a good uplift in electricity gross profit, which is especially pleasing because when you see on the next slide, you'll see that the generation business, which sells all of its output to retail, has had a price increase that's been passed through. And we've been able to successfully manage that increase. Telco gross profit is a growth area, both with customers using more and increasing to higher-value programs but also just having more telco customers. So here we go, generation. Although this is a line for $154 million to $154 million, this is actually a very positive result because $7.8 million of that was a business that we'd sold the year before. And so we're actually looking at a $7.8 million increase overall, mainly driven by increased price and offset by the reduced volume because of the hydrology. A lot of that price has been passed through to the retail business. Final dividend. So as I said, we have declared an ordinary dividend of $0.17 topped up with a special of $0.015, which is a catch-up of the $0.015 reduction last year. This is a BAU approach. We will update the market with a revised dividend approach if the strategic review that we're currently undergoing results in sale of the retail business. But until then, our dividend policy remains unchanged. Overall debt capital management, we feel like we're in a good place. We are slightly higher this year because we've had to put margin calls in the ASX for our sales. But those should unwind over the next few months. And our gearing ratio will go close to down towards 3, 3x debt to EBITDA. We've got some good long-term gears, and we'll be looking to refinance the 0 to 1 years as part of the ongoing treasury policy but will obviously [ be impacted ] by the strategic review. Our guidance. Normally, we would give guidance on our profit and our CapEx. But this year, because of the strategic review that they all got too hard, we're expecting to announce results of the strategic review in the next month or 2. And at that time, we'll give detailed guidance on profit and dividends and CapEx. All right. So that's the scheduled presentation. I'll just put up the slide on how to ask questions. And I think we can probably open up, [indiscernible].

Yes.

It's Grant Swanepoel here. Can you hear me?

Yes. We can, Grant.

Let me jump straight into questions. Just in terms of your retail price points, it appears as though you guys have struggled to get through price increases. Is this correct? And why is this contrary to what everybody else is getting through?

Okay. I'm not sure that it is correct. So in the FY '21 year, the one that we're reviewing, there were significant reductions in costs from our -- from the distribution companies, which we have passed through to our consumers, as everyone should, I think. And then we've adjusted our price for the increased wholesale prices. And so the need for those 2 in some areas may have resulted in small reductions and in other areas will have resulted in increases. We've put through our price changes for this year, which we think are sufficient to pass through the increase in wholesale costs. So I'm feeling quite comfortable about our price increases, and I think that increasing gross margin that we saw from the retail business is probably testament to that.

Can I just continue on that? In terms of your slide on Page 43 in terms of mass market netback, it would appear as though the net number has gone from about $117 down to $113. So either you didn't get net prices through or your cost to serve has gone through the roof. Can you talk to that?

Yes. Our cost to serve definitely hasn't gone through the roof.

No.

And it may just be a customer mix thing, Grant. I can't answer that, sorry, on the [ health ], I'll get back to you.

Okay. And just to continue on that theme. So if you've gone from $117 to $113 on that netback and your average retail volume hasn't changed much from 1,800-odd gigawatt hours, it would imply with your ASX contribution in terms of your transfer price, which has gone up from about $95 to about $102. But actually, the mass market contribution has gone from about $40 million according to those calculations on that page to about $18 million, but your retail contribution has gone up. So where is that $20 million being absorbed to give you a $20-plus million from a minus $20 million from mass market and you're actually reporting retail up $20 million? Is there something going on in the transfer pricing?

No. No, there isn't -- the transfer price has definitely gone up, and that's driven the increase in the generation business returns. So I think there's something gone amiss on the maths there, and it may be something to do with the C&I business driving a change in the netback. I'll have -- I can't answer that on the phone, sorry, Grant. But I'll get back to you on that.

Fantastic. Okay. Just moving on to another subject. You've got all these growth opportunities coming up. Can you talk a bit about it? Is it just in wind? Is there something in hydro somewhere? Or are you going to reveal that later at a later date?

Yes. Grant, David here. Look, it probably won't come as any surprise that some of the opportunities we are looking at present are fairly confidential. So we're not in a position today to really give any more informational details around those. But in terms of answering your question, look, we are -- we don't have a fixed view on where those opportunities will come from, other than, of course, that they will be from renewable sources. But simply -- so whether that's wind, whether that's hydro, whether that's geothermal, we're fairly open to kind of any opportunities. But certainly, from a wind perspective, that's something that we're having a very close look at now. So can't really answer that question, Grant. But certainly, as we are able to, we will be updating the market.

Okay. I've got a couple of questions on the Q&A thing. The first one is, "How does your debt-to-EBITDA target of 2.5 to 4 change post NZ IAS contract extension and the strategic review?" So the strategic review at this stage is not impacting our debt targets because it's still a review. But nevertheless, I think the answer might have been -- the question might have been if we actually committed to sell the retail business. And that's obviously a discussion which is ongoing and is of key importance with the Board. And we will announce when we sell our debt strategy. But in general, the Board's view is that we will continue to be a prudent debt manager consistent with a listed entity. So it's probable that, that range will be similar. NZ IAS extension, well, that's likely to have a timing difference between -- for a vertically integrated business, where we may have now received higher returns in our generation business. But we'll need to pass those through to retail. So I don't see that as changing our gearing structure, albeit maybe some volatility in EBITDA, if that's the way it is. And the second one is, "Can you give us a view on the timing of the strategic review?" I guess the answer to that is, we'd all like it to be quick, but we're all keen to do it right as well. So the process is complex and detailed, but we would expect to be in the next 6 -- 1 to 2 months.

Yes. I mean, I'm sure everybody if -- yes, I think that's probably all we can say at present, hopefully closer to the bottom end of that rather than the 2 months. But I think these things can be somewhat dynamic and especially when you do it with a number of parties. So -- but I think somewhere between 1 and 2 months before we're able to come back to the market with an update is about right.

So the next question is, "The current hydro storage is down versus prior comparative period. Does that mean that generations are going to be down again in FY '22?"

Good. If someone has a crystal ball, that would be fantastic because I certainly love them. Who knows is the answer. It's kind of very difficult to predict these things. But I think what we can see with some surety is that if we -- to kind of state the obvious, if we don't get some fairly significant hydro inflows over the next 4 to 6 weeks, certainly, this winter is going to be tricky enough, let alone then coming into a potentially dry spring and dry summer and then having to deal with the same time again next year. So too early to say that at present, but certainly, the -- I guess the question of a dry '22 is -- probably, in my head, it's as important as a dry '21 with respect to a winter period. But let's just pray for rain. Certainly, in Tauranga this morning, we've had a good downpour. So -- but of course, the beautiful weather here, the sun is back up again. So anyway, sorry, can't really answer that question, but I gave you a bit of a flavor anyway.

I guess to supplement it, every year, we require to rain to meet our hydro targets. And so that's not a question of just thinking our storage is a [ lean machine ]. We need to have rain, just as everyone. So if it rains, we could easily generate more. If it doesn't, then [indiscernible]. Terrible answer.

That's brilliant.

Let's move on. Next, this question is how to think about how we manage gas and why that impacted our FY '21 margin. So gas, we manage gas by buying forward like, I guess, everyone does. We are only a retailer of gas. So we don't have any capacity to produce our own. And this year, we got probably slightly more gas customers than we were anticipating and ended up buying a bit on spot. And some of our forward contracts renewed at higher values than they had done in the past. And so you've seen a sort of a temporary drop in our gross margins for gas. We would expect that there will be a need for the whole market to pass through this increase of wholesale costs. We would expect to participate in that. So we're expecting that gas gross margin will normalize itself over time. So the next one is, "It looks like there was a drop in fixed price C&I and an increase in spot price. Can you talk about our strategy here? Should we expect a continuation of that thing?" There's 2 things here. So the spot price customers are passed through. So we buy on spot for them and pass it through at spot. Obviously, for those customers in the last few months, those bills have been quite material. And so there will be a significant increase in spot revenue because of higher wholesale prices both early in the year and later in the year. So will that continue? Well, that depends on the higher wholesale prices, the margin on those things. So our margin won't be affected by that. In terms of fixed price sales, our strategy is to only sell where we can make a margin. That means that we enter into competitive RFP processes for C&I customers. If we win, then we know we're going to make margin. If we don't, then what we do is we reduce the purchases from third-party suppliers. And so you'll see in our accounts that our volume acquired from third-party participants has reduced, roughly in line with the drop in C&I sales. So we will continue -- our strategy will be to continue to secure our supply and then try and sell it at a margin in the C&I business. And in general, our own generation is just to support the [ gas market ] business. All right. Okay. I'm sort of coming to the sort of pause here because there are no more open questions, and there are no -- there was no one with their hand up to ask a question. So I think what we'll do is we'll just pause for a couple more minutes. If we don't get anything, we'll call the -- leave it open to [indiscernible]. Could solar PV be an option for TPW generation expansion? Yes.

Yes. Of course.

I think that the interesting thing with solar is that we are seeing a decline in costs in the technology and the price point of acquiring it. And so we would expect that it's a few years away, although we do see people investing in solar farms at the moment. But solar is definitely a technology that we are reviewing and pursuing.

Well, I think as there have been no more open questions, and I'm just looking across and there's none popping up and we have been going for 45 minutes anyway, and I'm talking slowly at the moment just in case any last minute questions come through, but it's still looking blank. So I think what we will do is probably draw it to a close. So thank you all very much for dialing in this morning. Thanks for your questions. Thanks for listening. Thanks for engaging. I'm sure we will be seeing some of you, as Kevin and I have a number of meetings set up tomorrow in Auckland and Wellington. So look forward to catching up and discussing the results in more detail. But for now, I think we'll call this a day. So thank you all very much. Have a great rest of your day. Cheers.