Societatea Energetica Electrica S.A. (EL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. The Electrica teleconference is starting now.

Hello, ladies and gentlemen. I'm Raluca, Head of Investor Relations and together with the entire Electrica management team, I'd like to thank you for joining our conference call and live webcast to present and discuss the first quarter of 2024 financial results, which are prepared according to IFRS-EU in anticipation of the upcoming capital market legislation changes. Those of you who are connected only by phone, please download the presentation in PDF format available on our website on the Results and Presentation section. The participants connected online can address written questions on the live webcast or can intervene live on the Q&A session. You can also e-mail us at ir@electrica.ro, if you have questions at this time. Kindly note that since the entire conference is being recorded, [Operator Instructions] I remind you that the recorded presentation will be available on our website starting latest tomorrow, but most probably -- and the transcript as well as soon as possible. We kindly ask you to see the disclaimer on Slide 3 of the presentation. Now we'll begin the presentation followed by a questions-and-answer session. At this time, I'd like to turn over the conference to Mr. Chirita, Electrica's CEO, to begin the presentation.

Thank you, Raluca. Good afternoon, ladies and gentlemen. As always, I'm happy to welcome you all today. Today marks 2 years since I became the CEO of Electrica, and I am once again happy to welcome everybody. Certainly, you saw Electrica latest financial report list on Wednesday for Q1 2024. At consolidated level, we have an increase of both net profit and EBITDA up to around RON 127.7 million. and also by -- to RON 400.8 million. Marking a decade since the double listing on Bucharest Stock Exchange and the London Stock Exchange, we celebrate with significant achievements and major transformations. The current performance give us confidence that we are on the right path to continue the positive trend in the future. The EBITDA and net result growth was mainly driven by the operational performance of the distribution segment on the back of the increase in electricity distribution revenues generated mainly by the increased distribution tariffs as well as the decreased electricity cost to cover the network losses. Electrica's financial performance demonstrates our team's ability to adapt and progress in a still very dynamic economic environment. The EBITDA increase of 170% and the net profit notable improvement of RON 170.7 million, highlighted our operational and strategic efficiency consolidating our market position and underscoring our commitment to generating added value for shareholders. Investment continues to be a priority across the entire group with a strong focus on the distribution area reflected in a 40% increase in the value of works commissioned in Q1 compared to Q1 last year. The average degree of execution of CapEx investments in the first quarter of 2024 is 144% of the planned value at 3 months, estimated to RON 216 million of the planned RON 150 million, respectively, 25% of the planned annual value. These investments are essential for both the modernization and development of the infrastructure we manage for providing high-quality services for our customers as well as for supporting the transition to increasingly sustainable energy sources. The group continues to pursue the expansion of its portfolio of electricity production from renewable sources. At this time, we have projects in different phases of execution with a capacity of approximately 300 megawatts. Referring to Vulturu project, the first part built by us, the commissioning test will start in approximately 2 months. And with respect to Satu Mare 2” project, the works have begun. We are evaluating other projects and as always, we'll share details as soon as we can. On the supply, according to the latest and only annual report available for this year, January and February 2024, our supply subsidiary is the largest supplier of electricity in Romania, again, with a total market share of 16.36%. And of course, Electrica Furnizare is still the largest supplier by number of consumption places, 3.5 million. Another success story this quarter is the entry of Electrica shares in the FTSE Russell indices series, starting 18 of March, which is a confirmation of the improvement of liquidity on the Bucharest Stock Exchange. Also, the appreciation of Electrica shares this year is notable. After the share price almost doubled by the end of last year from 2 years ago when I took the helm of the company, our shares have increased this year by about 20% more than the increase of almost 15% of [indiscernible] year-to-date. In fact, as we speak, the share price reached [ RON 14 ], it hasn't reached since 2017 with a few exceptions of a couple of days. As for the next strategic steps for this year, we are waiting for the final methodology for the fifth regulatory period for our distribution to be finalized. It should be approved by ANRE mid -- in the early of Q3 of this year, and we will revise our strategy for the next 7 years, as we said, we launched it in December last year. And last, but not least, you probably saw our announcement last evening, we have signed an MoU yesterday with Esyasoft, a very large provider of network grid modernization and automation solutions globally with the purpose of finding the latest technologies and innovative solutions for our grid modernization and automation. We are confident that our new partners, together with the continued efforts of our entire Electrica Group team will bring added value to our distribution and production operations, which all translate into better serving our customers and into adding value for our investors. I will hand over to Stefan now, our CFO, to provide you with a detailed breakdown of our financial results.

Thank you, Alex. Going to the numbers, I'll propose that we go directly to the -- we'll skip the slides related to the presentation and efficiency purposes, we go to the point 2, group financial results to the Slide #13. And I'll make some comments related to this slide. First of all, the decreasing revenue both in terms of the year-on-year and quarter-on-quarter is mainly due to the decrease of the prices of energy in the energy market. As you will see in the slides to follow, we managed to keep our margin, energy margin stable in supply and to improve our energy margin in the distribution. I would also mention the evolution of the net result and net result margin, which is benefiting in 2024 by the elements related to focus on operational cost reduction but also on the fact that we benefit on the distribution side of the increase of tariffs related to expiration of [ chapter ] from the past, from year 2022. In terms of EBITDA growth and margin performance, we are back to a margin of EBITDA close to 18%, which we believe it's more close to the normalized performance of our businesses. Before 2021 and the situation with the volatility in the market that we faced till then. In terms of net debt by cash, net debt or net cash position, we have a temporary increase of RON 4.7 billion, which is related to the fact that we drew RON 1 billion from EIB, which is money to be used for financing the CapEx plan in the distribution subsidiaries for this year, but also [indiscernible] following regulatory period. What we forecast is that following the reimbursement of the subsidies that we expect during the year. This level will fall down to a similar value with the one at the end of 2023 by the end of the year. So it's a context related to the fact that we wanted to secure this funding at a very good rate. Now if we go to the next slide and the analysis of consolidated EBITDA and net result evolution. I would mention that the variation of EBITDA compared with the first quarter of previous year is of RON 252 million, and this is mainly due to the positive variation. [Technical Difficulty] Okay. Sorry. Now we better? In technical point of view, for I think. Okay. So the positive variation of the energy margin is of RON 285 million, out of which as I've mentioned in...

[indiscernible]

Sorry? Sorry.

We have some technical difficulties.

The management can proceed.

Okay. I hope you can hear us now. Apologies for the technical difficulties.

Okay. So the evolution margin, in terms of the supply segment, we managed to have a roughly stable margin of the energy. As you see, it's a plus RON 9 million difference. Basically, the benefit from the decrease of the cost of electricity purchase for supply, plus RON 1.1 billion is compensated by the decrease in the subsidies, revenues from subsidies and the revenue from electricity and natural gas sold to the customer. So we managed to keep the margin fixed. In terms of distribution segment, we have RON 276 million positive effect on the distribution segment on the energy margin, which is mainly coming from the fact that we have basically 2 consecutive increases and that we benefit in quarter -- in quarter 1. Basically last year in quarter 1, we didn't benefit of the increase of tariffs [indiscernible] the network losses coming from 2022. It only started from 1st of April. While now we have the second increase applied to the tariff after the 1st of January. Also, there is the positive effect related to the benefit of MACEE mechanism for the acquisition of the energy, and then there is also an effect related to the increase in the volumes of electricity distributed of approximately 3.4%, which is mostly in the low voltage. In the low voltage, we have the household. So we see that with the prices going down and with the more confidence of the population in relation to that, we see that consumption -- energy consumption to the population is slightly increasing. In terms of other elements impacting the results, we have the RON 18 million positive result from other revenues, which is composed of some smaller elements, for example, the increase in margin on the study of the rentability for IFRIC 12 from 3% to 4.35%, and we have some increase in rent revenue, some penalties for late payments from customers, and these are composing this impact. And then in the negative variation of OpEx, overall, there is a minus RON 51 million effect, which is coming from two components, the negative impact of RON 28 million from valuation of salaries in the distribution segment. And then RON 21 million from operational expenses from supply segment due to some contractual penalties cost increase. As we go to the net profit, the variation is RON 171 million, which is positive variation, mainly due from the positive evolution of EBITDA of around RON 252 million mentioned above. And this effect is slightly alleviated by the negative impact of the financial result, increasing the RON 15 million from quarter 1 last year. Basically, we need to continue to finance the subsidies and the support scheme and the banks are having costs, which are increasing with the capital allocation and the requirements of capital allocations with this financing. And then we have an increase of the amortization and depreciation of assets of RON 24 million -- minus RON 24 million. This is coming from the revaluation of assets that we have done at the end of the year. And then there is also the new entries in the asset base from the investment of the distribution subsidiaries. And on the other side, we have a negative impact in profit tax of minus RON 42 million. It's a reduction of the benefit with profit tax following the decrease in the previous fiscal year loss for which a benefit of deferred tax was registered, basically distribution segment registered fiscal loss in quarter 1, 2023. Going to distribution segment, Next on Slide 15, I will mention just to keep focused on the elements which were not discussed already. I'll mention the fact that in terms of operating expenses, we have a favorable impact of approximately RON 16 million, mainly as a result of the decrease in utility expenses. And then I will also mention in terms of evolution of net results, RON 185 million. This is mainly from the positive evolution of EBITDA. And then in terms of unfavorable effect, we have an impact in the financial results -- of the financial result in terms of interest cost has slightly increased. And then increase in expenses with amortization and depreciation of assets of RON 23 million, as mentioned before, and then the profit tax, which is also aligned with the explanation before. Important to mention here is that the favorable impact for the distribution segment results from the decrease on network losses costs, by RON 40 million, from RON 368 million net value in quarter 2023 to RON 328 million net value in quarter 1, 2024. This is being generated by the decrease of the prices of energy purchased for the network losses. Most importantly, due to the legislative changes related to the introduction of MACEE mechanism, but we also see the prices in the market go down significantly in terms of also purchasing on forward contracts outside MACEE. In terms of net debt, we have an increased net debt of RON 571 million compared with the end of the 2023. And this comes from the increase of the bank borrowings, but the most important is the RON 1 billion borrowed from EIB, and it's competitive on the other side with the decrease in the overdraft, and there is a minor decrease in the financial lease. Turning to the next slide, you have the operating performance of the distribution segment detailed. I will just go through this, then with Slide 17, the usual analysis that we are doing, Slide 17 and 18, going from the regulated RAB calculated for 2024 and then going through the various corrections to the total regulated profit variation and then regulated -- from regulated profit to the net result under the statutory RON 209 million and under IFRS RON 238 million. Then the next slide, we have the analysis starting from net revenue and going to the IFRS result for the quarter 1. And here, you can see the elements that we've mentioned, what is very important is that network losses capitalization, it's only RON 26 million. So as you see, we have a very low difference between the ex-ante price that we get in the tariffs for the network losses and what's the effective price for acquisition due to the MACEE and the positive evolution of the prices of energy. Then we have dissipation on the 3 regions, with the details. I would also mention on the Slide 23, that making the detail compared with what is mentioned also in the summary of results. In CapEx, we achieved a CapEx value of RON 70 million, which is some 2.2% more than the plan in 2020 -- for the quarter 1, but it's almost 40% -- approximately 40% more than the CapEx in quarter 1, 2023. It's also related to the fact that during 2023, we had some delays in CapEx due to the challenges of liquidity in respect of refinancing the difference in price network losses. Supply segment, Slide 24. I we have slightly the same EBITDA like previous year. It's a difference -- minor difference of RON 9 million in EBITDA compared with quarter 1, 2023, which is mainly due to the factors related to changes in the energy margin. As I mentioned, decrease in the revenue from the supply of electricity and natural gas due to the decrease of price of energy, corroborated with the other operating income decrease in the subsidies, income from subsidiaries, were compensated by the positive effect related to decrease of purchased energy costs. Net profit decreased by RON 18 million, mainly from the negative evolution of EBITDA, but also with the impact from financial result increasing with RON 11 million, which is -- the effect which is diminished by the decrease of income tax by RON 3 million. Net debt increased by RON 166 million, is the variation of the loans of the overdraft depending on the collection of the amounts from customers or from the subsidiaries. We have a decrease of cash and cash equivalents of RON 136 million and increase in overdrafts RON 30 million. Going further, you have the data about market quota for Electrica Furnizare and you can see there that basically for the first month of 2024, we have the largest market quota on the supply market. Then Slide 26, you have the evolution of the key operational results in the previous 3 years, operational results for 3 months, 6 months, 9 months and annually. And the evolution of the volume of electricity supplied on the retail market. What we can see is that if we compare with 7.8 terawatt hour supplied in 2023 total year, we do have 2 terawatts supplied in quarter 1, 2024. So we could say that we are -- at least we could say that we are pretty much stable in terms of quantity supplied in the market. On the next slide, Slide 27, you have the details related to how this volume split on -- how are these volumes split on the types of market, universal service, supplier of last resort and competitive market. And then also the split in terms of volumes and number of consumption basis on household and non-household. You can see that basically, it's close to 50-50 in terms of volume split between household and non-household. Also, although in terms of numbers out of 3.5 million customers, 3.3 million are household. The next slide, 28, it has details about the gross margin on energy and also some details about the evolution of the legislation series of legislation in terms of support scheme. On Slide 29, you have the evolution of the impact of the energy prices. You can see evolution for 2024 before going down and also compare to the previous year. I would like to mention here what's a very important element. You see that the evolution of the prices in the market will also help us in terms of reducing the amount that we are requesting under the support scheme. So basically out of the RON 2.2 billion, which are in the balance sheet as subsidies, RON 1.9 billion are requests, which are already placed with the authorities and the difference is basically representing the quarter 1. So we're having like RON 300 million for quarter 1, full quarter. In the past, we're having RON 300 million per 1 month in one request for reimbursement. So this makes us confident in terms of the operation of the subsidiary in the future. Electrica Serv, the energy services supply. We have a result of RON 1 million in quarter 1. We continue to put them to advantage of this contract in the market where a lot of the companies and a lot of projects in the energies, especially in the solar field that are being developed and to get the result in this kind of project for either sourced from the customers of the group or also directly sourced. Slide 31, we have highlight on the Production segment. Mentioning the situation of the companies of the respective SPVs of course. And this is a project in development. Basically, we are in the startup phase in various moments of development for the project. The result is a negative result, but it's minus RON 1 million. It's -- we should mention that for a total of almost 40 megawatts, we have construction phase ongoing. In terms of Group Liquidity, Slide 32, you see with the impact of the liquidity that we utilized from EIB, we have the best position in 2022 because basically, we were able to -- the financing, which is very good terms enabled us to repay some of the overdrafts, and now we have a significant amount of liquidity available. Yes, I would end the presentation now and wait for your questions. Turning to answer them. Thank you.

[Operator Instructions] The first question comes from the line of Andrei Ioana with Alpha Bank Romania.

I have a question regarding the budget proposal. You estimated around RON 200 million net profit for the full year, based mostly on the strong decline in the distribution bottom line, now considering that more than half of the distribution side, budgeted profit has already been achieved, and you've seen a strong recovery of this segment, but also considering changes starting with April 1st, can you give us more color on what we expect for the rest of the year. Is the budget still reasonable and therefore, you expect a strong deterioration of profitability in the next quarter? Or you consider an upward revision of the budget.

The idea is the following. When we made this budget for this year, we pointed out that it's a more conservative approach for this year, considering that at that moment, we didn't have a lot of information about the evolution of the prices of energy, but there was a discussion about how the legislation will change in terms of MACEE, et cetera, so from this point of view, let's say, we will have been more cautious. What you are saying is that at least it looks like we have done all the profit in 1 quarter or something like that, okay, it's not almost all that profit. We do consider that in terms of profitability, we are confident that we'll be able to keep up with this first quarter result and continue the good performance. However, I will not -- I'll be more -- I'll have more visibility, and I will be more realistic to have this kind of flavor that you are asking provided more at the half year, it will be the moment in which it will be more clear where we stand in terms of that. We are also doing some optimizations in the business, then we will need to see how this performs.

I'm sorry, I'm not sure I understood correctly. So basically, what your guidance is that you can continue with the same...

Right now, I'd say that we'll stick on the budget, which is published, results which is published and after half of the year, when we see the results of the half of the year, we'll be able to have a more clear position whether we will exceed the budget this year or not. In the context in which there are some changes in the market still potential to happen. So we will prepare to be more cautious.