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Edited Transcript of DRX.L earnings conference call or presentation 24-Jul-18 8:00am GMT

Half Year 2018 Drax Group PLC Earnings Presentation

London Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Drax Group PLC earnings conference call or presentation Tuesday, July 24, 2018 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Den G. Jones

Drax Group plc - Interim CFO

* Dwight Daniel Willard Gardiner

Drax Group plc - Group CEO & Executive Director

* Jonathan Kini

Drax Group plc - CEO of Drax Retail

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Conference Call Participants

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* Christopher Robert Laybutt

JP Morgan Chase & Co, Research Division - Research Analyst

* Dominic Charles Nash

Macquarie Research - Head of European Utilities Research

* Iain Stewart Turner

Exane BNP Paribas, Research Division - Analyst of Utilities

* James Brand

Deutsche Bank AG, Research Division - Research Analyst

* Mark Freshney

Crédit Suisse AG, Research Division - Research Analyst

* Pandelakis Athanasiou

Agency Partners LLP - Equities Analyst

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Presentation

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [1]

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Can you guys hear me okay? Apologies for the construction in the background. Why don't we -- let's kick off. It's actually, for those of you who are here now, it was a lot harder last night when we did our rehearsal, so not too bad. So I'll kick off with a review our operations and of the business and then Den will come back, look at the financials and then I'll close with a session on the strategy.

So our EBITDA in the first half of the year was not as strong as we would've liked. That being said, there are clear reasons for that, specifically 2 unplanned outages at the power station. Beyond those issues, the business has been performing well. Our Pellet business almost doubled its production. The Power Station had a strong second quarter, and our B2B Energy Supply business has grown its customer meters by 9% year-on-year.

Power markets have been stronger, allowing us to sell a portion of our future generation at higher prices. In the second half of the year, we expect this improved performance to continue. Our Pellet business should continue to grow production and earnings, as should our B2B Energy Supply business. Margins should be higher at the Power Station. We will have the benefits of the unit 4 biomass conversion and also of higher capacity payments on our coal units. For all these reasons, our expectations for full year earnings remain unchanged.

The board's confidence in the future earnings and cash flow of the business is strong. Today, we are announcing an interim dividend of GBP 22 million and expect to declare a full year dividend for the full year 2018 of GBP 56 million. At Drax, we're committed to delivering strong operational and financial performance and sustainable returns for shareholders. We also believe that the changes we are seeing in the U.K. power system are creating attractive opportunities for us to invest and to do more. As we go through the presentation, I'll be highlighting those opportunities.

Safety and sustainability are at the core of what we do. We work in challenging environments. Both coal and biomass must be handled carefully or they can pose significant safety risks. We have talked about the small fire we had in December. Over the course of the first half, we have completed an exhaustive review to understand the root causes of the incident. The first key point is that the equipment, systems and processes we have in place are fundamentally sound. At the same time, there is always more that we can do, so we're continuing to invest in enhancements to our equipment and processes to reduce the risk of the event reoccurring.

The second issue we had in February was a more traditional generator fault, not related to biomass, and this has now been resolved. Overall, our safety record continues to be strong and in line with prior years.

The biomass that we use must be sourced sustainably to ensure that it delivers the appropriate level of CO2 reduction, while at the same time, we support the habitats in which we operate. We continue to deliver on our commitments to sustainable biomass.

Finally, it's worth noting that the EU has adopted RED II, an update of the Renewable Energy Directive, and we are pleased that the policies it has implemented are in line with best practices and the way that we operate.

Drax Biomass has delivered an excellent performance. We earned GBP 10 million of EBITDA for the half year, a GBP 14 million increase on the first half of 2017. We increased our production by 80% to almost 700,000 tonnes. Our nameplate capacity is about 1.5 million tonnes, so we're getting close to that. This is both due to excellent performance at Monroe and Amite, the 2 plants that we built ourselves, but also due to LaSalle, the plant we purchased last year, coming on stream ahead of plan.

We are reducing costs, and that is DBI's #1 strategic imperative so that we can make biomass viable without subsidy. Increased volume plays an important role, as we spread fixed cost over a larger base. We're also seeing the benefits of our dry shavings investments, which allow us to use cheaper feedstock. We have streamlined our operations by moving our headquarters from Atlanta to Monroe. We will continue to develop projects to expand our capacity at our own sites. Those projects have excellent returns and have the added benefit of reducing our Pellet Production cost. We will also look opportunistically at acquisitions.

As I have mentioned, the first half was challenging for Drax Power, given the 2 significant unplanned outages. That being said, the team has responded well and has a strong platform for delivering our full year plan. If we can deliver availability in line with our history, we should be in a good position to do that, given the improvements both in the market and in our overall business that I have just been through. We continue to be the U.K.'s largest single source of renewable energy, generating 6.3 terawatt hours in the first half. Coal has become increasingly uneconomic in spite of the increase in power prices. Carbon prices have also increased substantially, as you know. As a result, only 6% of our revenue in the first half came from coal-fired power sales.

Our earnings from system support and flexibility were down in the first half by GBP 12 million. This is because our Black Start contract this year has significantly lower value than the year before. Longer term, we continue to see a significant and growing opportunity to deliver returns through system support and flexibility.

Our strategic projects, the unit 4 conversion, the repowering and the Open Cycles, are all proceeding well.

Our B2B Energy Supply business continues to perform well, with EBITDA increasing to GBP 16 million from GBP 11 million in the prior year, in line with our plans. We have delivered this while absorbing the costs associated with a more challenging business environment for our customers, both as a result of a more difficult economy and also Brexit, but also due to the structural changes arising from more shopping online and the resulting impact on the high street. As a result, the bad debt charge was higher than in prior years.

We also experienced significantly higher gas consumption when gas availability was tight during the so-called Beast from the East weather system. That also hurt our earnings. But more fundamentally, we continue to grow. We increased meter points year-on-year by over 9% to almost 390,000. Our renewable energy proposition is doing well, as almost 60% of our sales are now renewable.

We are in the process of implementing a new IT platform. The first piece of that went live at Haven in the first half of the year, a new finance and procurement system. We are rolling the full system out progressively through Haven and subsequently Opus. It will enable us to continue scaling the business and offering innovative solutions to customers in a smart meter world.

Finally, we are seeing growing interest from our larger I&C customers for energy services. This is starting with demand-side response, which we can help them provide with a grid. Our approach to this market will be very much customer-led, and we are starting to create the capability to provide the solutions that customers are looking for.

Now let me turn it over to Den.

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Den G. Jones, Drax Group plc - Interim CFO [2]

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Good morning, everyone. Will has given you a good summary of the group's performance, and I'll now go through the numbers.

Financial highlights. EBITDA of GBP 102 million was lower versus the first half of 2017. I'll come on to the detail of this shortly. This principally reflects 2 specific outages in the Generation business, offset by growth in Pellet Production and the B2B Energy Supply. Notwithstanding these outages, I would note that our expectations for the full year remain unchanged.

The board has declared an interim dividend of 5.6p per share. This is equivalent to GBP 22.4 million, a 12% increase on the first half of 2017. And we expect to pay an ordinary dividend of GBP 56 million for the full year. This is a level which is sustainable through the business cycle and which we expect to continue to increase as the strategy delivers higher levels of EBITDA and cash in the future.

We've also made progress with the previously announced GBP 50 million share buyback program. At the end of June, we had purchased 4 million shares at a cost of GBP 13 million and remain on track to complete the program ahead of the 2018 full year results.

Cash generation has remained strong. And with GBP 112 million of net cash from operating activities, alongside strong cash management and investment discipline, this leads to the continuation of an operating cash conversion rate of over 60%. To support the strategy, we also completed a refinancing of our floating-rate debt, replacing it with long-dated fixed-rate bonds, which will provide greater certainty of our interest payments and an extended maturity profile and an attractive all-in interest rate.

Our balance sheet is in a strong position, with cash in hand of GBP 245 million and net debt of GBP 366 million, a slight reduction from December 2017. Underlying earnings of 1.6p per share reflect lower Generation earnings.

Moving on to the detail of the income statement. Revenue growth principally reflects the acquisition of Opus Energy and renewables support. I will come on to the components of EBITDA in the next slide, but below this figure: Firstly, a charge of GBP 84 million for depreciation and amortization, down GBP 6 million year-on-year. This excludes a charge of GBP 27 million in relation to coal-specific assets following commencement of work to convert a fourth biomass unit.

Net finance costs of GBP 16 million reflect interest charges on a higher level of debt following refinancing and movement on foreign exchange balances. This figure excludes GBP 7 million related to the refinancing of our floating-rate, high-yield bonds, which took place in April.

Now the small underlying tax credit includes the benefit of tax refunds claimed under the U.K. Patent Box regime. This will continue to reduce our headline corporation tax through to 2027. Taken together with the lower level of EBITDA, this leads to underlying profit after tax of GBP 7 million compared to GBP 9 million in the first half of 2017.

I'll come on to cash in more detail, but to summarize, the balance sheet is strong, with net debt of GBP 366 million. And this reflects healthy cash generation from our core operations and working capital inflows.

Our operating cash conversion, excluding working capital improvements, has been over 65% for the last 2 years. And this will continue to increase, as the Energy Supply and Pellet Production businesses contribute increasingly to EBITDA.

Okay, I thought it would be helpful here to do a bridge between the first half of 2017 and the first half of 2018. This is the graph on the top of the slide here. I'd also give you a sense of the key drivers for the remainder of 2018 and these are the bullet points at the bottom of the slide. So if we go to do the waterfall diagram at top. Power Generation was lower due to 3 areas: Firstly, biomass generation, where we had 2 biomass outages in the first quarter. The first of these was a fire at our biomass rail unloading facilities at the end of 2017, which extended into January and restricted biomass operations on 2 ROC units.

The second was a non-biomass-related generator outage in February, again on one of the ROC units.

Secondly, Ancillary Services, where we received a lower level of systems support, which reflects a specific 1-year Ancillary Services agreement for the provision of Black Start services between April 2016 and March 2017.

And lastly here, a reduction in coal operations reflecting the continued challenging market of coal operations in the U.K. In the U.S., Pellet Production has been strong, increasing volumes of wood pellets produced and sold by 80%, driving revenue growth and EBITDA of GBP 10 million versus the GBP 4 million loss in the first half of 2017.

Now Energy Supply, now a meaningful and growing part of the group's earning profile, saw revenues increase from GBP 0.9 billion to GBP 1.1 billion and reported EBITDA of GBP 16 million, in line with expectations. And this is inclusive of an increase in bad debt, reflecting a more challenging operating environment for some customers, and the impact of a tight gas supply during the exceptionally cold weather we experienced in the first quarter of this year.

Now central costs have reduced and this reflects tight corporate cost management, consistent with a cost base of around GBP 30 million for the full year. With regard to other, this is principally the elimination of intra-group balances related to biomass cargoes between the Pellet Production and Generation businesses at the balance sheet date.

Now moving to the bottom half of the slide and the outlook for the rest of 2018, where we expect Generation to benefit from improved biomass availability versus the first half, stronger margins and optimized biomass generation with the commissioning of the fourth biomass unit, in addition to the start of T-4 capacity payments for coal. Given the strong contracted position in place for Power sales, we do not expect further value from the improved commodity environment in 2018, although this does not provide a benefit -- sorry, this does provide a benefit in future years. In Pellet Production, we expect growing volumes of pellets from LaSalle, savings from the reallocation of our offices in Monroe, and with a closer operational focus, the opportunity for further reductions in cost per tonne of pellets produced.

Lastly, in B2B, we expect market share to increase, while focusing on margin, which will be supported by the rollout of our new platform to serve customers.

Now these factors underpin our expectations for the full year, which remain unchanged.

So to cash flow, an area where we remain strongly focused. The small improvement in working capital reflects a number of things: Firstly, a reduction in inventories due to lower biomass operations in the first quarter of the year; lower receivables due to seasonally low summer sales and an increase in payables, reflecting a new corporate procurement facility; last, increased ROCs held-for-sale, which is typically higher in the first half of the year, given the nature of the compliance period. Taking this together with EBITDA, debt service of GBP 18 million and a tax credit of GBP 7 million, gives net cash from operating activities of GBP 112 million. After acquisitions, refinancing, capital investment, which I'll come on to next, and an increase in dividend payments, we had cash on hand of GBP 245 million at the half year, with net debt at GBP 366 million.

Moving on to investment. Total asset additions in the first 6 months were GBP 46 million, with our expectations for the full year remaining unchanged at GBP 100 million to GBP 110 million. This includes GBP 50 million of maintenance and GBP 30 million associated with the development of the fourth biomass unit conversion. The balance being focused investment in improving -- improvement projects, which will support growth and deliver attractive returns. Just to give a few examples of these, these relate to: Enhancements to our Generation assets, where we know that modest improvements to efficiency will deliver fast payback; continued developments of our B2B Energy Supply IT platform, which we expect to support growth and reduce our cost to serve our customers; and as part of our aim to reduce long-term biomass costs, we expect to invest GBP 15 million in a rail spur at LaSalle BioEnergy, allowing us to move pellets, cargoes to our Baton Rouge export facility by rail rather than truck.

Once operational, this investment will deliver operational efficiencies, a reduced carbon footprint and economies of scale, leading to lower biomass costs and an attractive return on capital. More from Will on this shortly.

In Pellet Production, we continue to target a self-supply capacity of 30%, either organically or through acquisition, and to that end, we remain alert to sector opportunities.

On financing, we have continued to enhance our access to capital. During May, we completed our already-strong balance sheet with a successful refinancing of our GBP 200 million floating-rate notes with $300 million of fixed-rate notes, extending the maturity profile of our debt to November 2025 and providing protection from an increase in interest rates.

When swapped back in sterling, the bonds offer us an attractive rate of interest of around 5%. At 30th of June, there were no amounts drawn on the central RCF. Now these are all components of work we have done over the last few years to structure our business, financing and trading arrangements to operate successfully as a sub-investment-grade entity. The bonds are rated BB+ by S&P and Fitch, a level we remain committed to and which is robust to low points in the cycle.

As we have previously said, we remain focused on opportunities to optimize our balance sheet and the use of working capital across the group, which we believe is good discipline in driving returns on assets.

We are committed to making disciplined capital allocation decisions as well as driving operational excellence across the group. A strong balance sheet remains a priority, and we continue to define this as being net debt-to-EBITDA of around 2x. We will continue to invest in our core businesses and to drive our strategy.

The board has confirmed an interim dividend of 5.6p per share, as I previously said, and this is 40% of our expected full year dividend of GBP 56 million for 2018. Now this represents a 12% increase on 2017.

The growth in the level of the ordinary dividend is a measure of the board's confidence in the ability of the group to pay a sustainable and growing ordinary dividend as part of our strategy for growth, whilst delivering returns to shareholders. However, the precise level of growth will vary year-to-year depending on the operating environment and investment needs of the business. If there is a buildup of capital in excess of the group's investment needs and balance sheet requirements, the board is committed to returning this to shareholders using the most appropriate mechanism.

This informed our decision to initiate a GBP 50 million share buyback program and is a commitment from the board to deliver a strong balance sheet, with investments in growth and returns to shareholders.

So in summing up, EBITDA in the first half is lower due to specific outage issues, but with good operational performance, improved Generation margins and further growth across the group in the second half, our expectations for the full year remain unchanged. We have further strengthened our balance sheet with financial structures to support growth and at the same time, implemented opportunities to improve operations and profitability, reduce costs and CapEx and optimize the use of working capital. Through these measures, we have put in place a framework to allow us to develop a strategy for flexible, low-carbon growth aligned with the U.K.'s energy needs, whilst delivering attractive returns to shareholders.

And with that, I will hand you back to Will.

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [3]

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Thank you, Den. Okay, so let me just talk a little bit about delivering the strategy. So the U.K. is transforming to a low-carbon economy. Greenhouse gas emissions are down by 43% compared to 1990, but more needs to be done to achieve the government's target of 80% reduction by 2050. While much of that will be done in industry, transport and heat, there is still more to be done in power. We expect that renewables and nuclear will be 75% of the U.K.'s generation mix in the long term. They generated about 50% of the U.K.'s power last year. The other 25% will still need to come from large-scale spinning plants, largely gas, but also biomass and other things like pumped storage. Coal will soon be off the system. This type of generation will earn significant returns, not just in the energy market, but from the value of flexibility, and we see significant opportunities for us in this area.

Higher power prices, as well as increasing confidence in the value of flexibility, are making gas plants more attractive and some have begun new projects on that basis. The capacity market has yet to clear at levels that would incentivize a significant amount of new gas. We continue to be convinced that it will, but are not sure that the changes made so far by the government will be sufficient to do so. Investing in gas is a priority for us, as we believe Drax has a key role to play in providing lower-carbon generation and system support in the U.K. This is very much consistent with our purpose.

We also believe that we can earn sustainable and attractive returns for shareholders in this area.

The second area is biomass. The conversion of unit 4 is an excellent project for us and for the system, as we will now be able to support the system when it needs it the most, and importantly, support it with renewable generation. In addition, we are working hard to reduce the cost of biomass generation. This is focused on reducing the cost of our own Pellet Production in the first instance, because as you know, we procure most of our pellets from third parties, with contracts that tend to increase in cost over time. Now while we still have a lot of work to do and there are many variables outside of our control, fundamentally, I do believe that we have every opportunity to make biomass economic without subsidy, and I'll talk more about that in a minute.

We will also go into these topics in quite a bit more detail at our Capital Markets Day at the Power Station in the autumn. I'd also like to say a quick word about carbon capture. So we have renewed our interest in that area. We believe it will be a key part of a solution to climate change. That being said, several things have changed that make us more optimistic that there may be a route through to doing so in a viable way.

First, the government has reinvigorated its efforts and has called for the U.K. to achieve carbon neutrality and has made funding availability to see how CCS can help contribute to that. They have also sponsored work to define the infrastructure, business and regulatory model to enable that. We are closely involved in that process, which we find promising.

Secondly, new technology is becoming available that may make carbon capture more affordable. We're trialing several of those technologies at the Power Station now. And while the work is early, it's, again, promising.

And finally, there is increasing talk not only of storing carbon but using it. And ultimately, that could make the model for carbon capture significantly more interesting, and we are looking at opportunities in those areas as well.

Many of our strategic initiatives, as you know, are geared towards enabling a coal-free future, and they are progressing well. Unit 4 conversion is on track, and we expect it to return to service as a biomass unit later this summer. We continue to progress the options to build 4 Open Cycles and will again enter 2 of those in the capacity auctions early next year. Our coal-to-gas repowering project has had its planning application accepted by the Planning Inspectorate, and if all goes to plan, we would be ready to begin building in late 2019.

Finally, we are investing small amounts of capital, about GBP 400,000, in carbon capture as well as working with the government to support their efforts in that area.

Just a quick word to reiterate the case for the fourth unit conversion. The capital cost is relatively low. It will cost us about GBP 30 million to convert the unit. And this is because we are reusing a significant portion of our co-firing infrastructure. We are not going to receive a significant number of additional ROCs, about 125,000, for the original generation associated with unit 4. Instead, we can now spread all of our ROCs across 3 units, and -- whereas in the past, ROCs were unit-specific. So overall, this means that generation will only be marginally higher than it was with 3 biomass units, but we should be able to achieve higher prices by operating 3 units when the system needs us most, as opposed to 2 units all the time. By way of illustration, you can see from the chart the peak winter prices are substantially higher than those in the summer, and to the extent that we're now running more in the winter as opposed to on average across the year, we again should be able to achieve higher prices.

Finally, having 3 units available for ROCs also helps us manage our supply chain and effectively provides insurance against unplanned outages.

Let me provide a little bit more color on how we think we can reduce the cost of our own wood pellets. There's 4 areas that we're exploring. The first major one is reducing the cost of feedstock by using more residues and also over time, expanding our fuel envelope to things that go beyond wood pellets. Now Hunt Forest Products is a good example of how we're using more residues, and I'll talk that through in a minute.

The second area is improving our logistics and overall processes. And the LaSalle rail spur investment, again, is a good example I'm going to discuss shortly.

The third area is improving plant performance, i.e., the performance at the Power Station. And we are signing an agreement with Siemens to upgrade our turbines. And this will increase their efficiency, effectively reducing the cost of biomass-generated power.

And finally, we'll be looking at using technology. So we're exploring ways that we might be able to increase the yield of our feedstock effectively using technology.

Let me tell you how the Hunt Forest Products deal works. So they wanted to build more sawmills in the U.S. They make most of their money from selling lumber, the finished project, but residues, as in bark, chips and dry shavings, are also a significant source of value for them. If they have the committed offtake, it clearly helps them with the economics of building a new plant. So the deal that we've done with them is effectively to sell them some land adjacent to our biomass pellet plant in LaSalle. That's again, that's not an insignificant part of the economics here, but more importantly, we have a long-term offtake agreement with them for the residues, again, at quite attractive prices, given the long-term nature of the contract, but also given the fact that there's no transport cost, i.e., the pellets -- or I'm sorry, the residues are effectively adjacent to our plant. And this allows us to change the way that we make pellets. And again, this is very much similar to the dry shavings projects that we've discussed before. But anyway, we don't need to use the woodyard, as you can see at the bottom of the chart there, you don't need to use the chipper and for some of the feedstock, you don't need to use the dryer. That takes, obviously, significant steps in the process out of the way, and as a result, cost, but also not to mention that the actual material is quite good value anyway.

This also, though, offers us the opportunity to increase our capacity at relatively low cost. So effectively, if we build a truck dump and some silos and then add pelleting capacity, we can increase the capacity at LaSalle, at again, significantly lower cost than what it would have cost to build initially. And we'll be looking at doing more of these. We think we can probably do this also at our other 2 plants.

Secondly, let me tell you about the LaSalle rail spur. And again, this is not a complicated investment. We currently truck our pellets from LaSalle to Baton Rouge. By building the rail spur, we can access the intercity rail infrastructure, which on a per tonne basis is significantly lower cost than trucking. We're investing about $15 million. The project should be operational next year and it should save us more than $10 a tonne. So given we'll be shipping 0.5 million tonnes a year or more from LaSalle, as we grow, the payback is quite quick and the returns are very attractive.

Before concluding, I wanted to remind everyone of our ambitions for 2025. We believe we can increase our EBITDA to GBP 425 million in 2025. And we have many different projects underway to help us achieve that. So first, the growth in our Pellet business and the associated reduction in the cost of those pellets. If we can reduce our cost to a point where biomass is viable without subsidy, that will have a significant impact on that GBP 425 million, not only in 2025 but beyond. And secondly, the growth in our B2B Energy Supply business. Third, our Open Cycle projects; and again, fourth, the repowering. And our increasing competence in being able to deliver those earnings are fundamentally supporting our board's decision to announce a GBP 56 million dividend for 2018.

So in summary, we are making a lot of progress as a group. Our Pellet business is producing well and costs are decreasing. Our B2B Energy Supply business is also growing nicely. Our Generation business, while it had a difficult first quarter, is well set up for the full year, and our new projects are coming along well. So while EBITDA was lower in the first half of the year than it was last year, our expectations for the full year remain unchanged.

And with that, I'll turn it to questions. So if you direct your questions to me, let me know who you are, I will then either answer them myself or I turn them to someone else.

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Questions and Answers

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [1]

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Mark?

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [2]

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Mark Freshney from Crédit Suisse. Two questions. Firstly, on the biomass costs. The baseline that they're at now, you allude to them being 12% lower in the presentation. Is that 12% lower versus the GBP 8.10 per gigajoule [will], just to get an idea of where the baseline is? And secondly, on the capacity auction, you're very much dependent upon a decent clearing price. You've got players sanctioning assets, taking FID on assets without a capacity payment, the lower equipment prices are available to many players across the market. What gives you confidence that it's going to clear above GBP 8.40 per gigawatt -- per kilowatt year this year?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [3]

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Okay, so on the first one, the baseline, I think the GBP 8, sort of [GBP 8.15] per gigajoule is probably more of an average, all right? I would say the cost base at DBI is probably, I mean, that average converts roughly to that GBP 75 is roughly to GBP 150. It's, yes, broadly in line, maybe the DBI cost base is a little bit higher. Secondly, on the capacity auction, I guess, probably worth exploring that a bit more. The -- so the government sort of came out announcing last week a couple of things. So they -- we've been talking a lot about the need to look carefully at interconnectors and what the de-rating was for those. And so they did, sort of, I guess the right way to say it, increase the de-rating for a couple of them, Netherlands and Belgium. Didn't do the same on France. That actually, we were -- that was not -- we were a little bit surprised at that. So we think there's more that they could have done there, if they had so chosen to do. And the other thing they did is they significantly decreased the amount of capacity that they would expect to procure. So as I said in my remarks, I'm not sure that, that actually is necessarily going to get us to a level that we need to have for that [fuel] . We'll have to wait and see. But more -- and to be honest, I mean, clearly, there's multiple objectives that the government's got there. They want to get the capacity at the lowest cost, which is clearly an important objective, but they also, I think -- well, we think there's a need for new build as well. So fundamentally, I guess, my view still remains that over the long term, the capacity market will need to clear at a higher price if it's going to incentivize significant amounts of new gas. Chris?

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Chris Laybutt, JPMorgan. Just 2 questions, please. First, just in terms of, Will, your expectations for full year are unchanged. Could you give us a sense of your comfort around the current level, at least in Bloomberg consensus, of GBP 250 million EBITDA? And then, secondly, just maybe expanding on the capacity market conversation, just in terms of your view on how you feel the SSE deal recently announced does impact the economics and the dynamics of that market? And how has your marginal cost moved recently? And do you think your marginal cost in terms of the level you need that capacity market to be at, is that coming down?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [5]

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Yes, okay, so the -- in terms of the full year expectations, I mean, I think that sort of the Bloomberg would be not a bad reference. I think also, if one thinks about 2019, I think the numbers are probably already capturing a lot of the sort of benefits that would have come from higher power prices. That's probably already in there as well. In terms of the capacity market, the -- what's the impact of the SSE deal on the market. I think I'll -- I don't know the answer to that. I mean, fundamentally, I think that's a question for how the government will set the capacity that they require. I think that maybe the important thing I could say there is I don't think we are, at this point, to a point where we said we'd go ahead and build without a contract. I think we still think it's important that we have that contract underpinning the economics and that's probably what I would say there.

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [6]

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Lakis Athanasiou, Agency Partners. Two questions, please. One on Pellet Production. I may be missing something, but I don't get why this is attractive. I see your revenues when you, this half year, you're talking about GBP 8 per gigajoule FOB, with Gulf, getting it into Drax is going to be considerably higher than that. Full year last year was a lot higher. And yet you're close to full production now. So I can't see why you'd want more pellet clients, because they seem to be completely out of the money versus your average costs. There seems to be a significant cost subsidization from Drax. Second question is IT systems in Haven. Can you expand a little bit about what's left to do and which bits are left to do which are customer-facing? Because this is an area which I think gives all of us a lot of concern, because there doesn't seem to be any successful rollout of new IT customer relatings and billing systems. Forget about mass markets, I think business systems, when Centrica tried to do theirs, they became a complete cropper. And recently, United Utilities and the Severn Trent Water business, it's absolute mayhem there. So can you talk a little bit about that, please?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [7]

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Yes. So I'll take the one on pellets and then I'll ask J.K. to take the one on the systems, yes? So I mean, the -- there are lots of things that we are doing to drive the cost of our pellets down. That ranges from moving our headquarters from Atlanta to Monroe, those benefits have not come through. It includes bringing in more dry shavings, those benefits have not come through. It includes bringing -- building things like the rail spur, those benefits have not come through. And I am very confident that the, both the returns and the level of ultimately, the sort of absolute level of those pellets will be significantly lower than what the average cost is. I have -- fair warning, we need to prove that to you, I'm -- fair question. But I expect that we will. On the IT systems, I mean, I think my -- the broad question, or I think maybe a broad answer in terms of the way we think about that philosophically is, no question it is a major project that we have to make sure we manage very carefully. And that's -- and the other -- the way I think about that is, it means making sure you do things in small pieces and make sure you don't end up with sort of massive risks by having to do -- and we're small relative to these guys. Doesn't mean it's any specifically less complex, but it's also smaller in scale. So maybe I'll ask J.K. to give you some more detail.

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Jonathan Kini, Drax Group plc - CEO of Drax Retail [8]

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Yes, and I think there's a consideration at the point of going into any one of these complex build activities. Sort of 2 areas where real challenge appears is mass legacy. So people like some of these big sort of, I suppose, public disasters, have come off the back of real complexity in old billing systems and multiple billing systems. And then the second thing is about migration of mass customers to those -- to one new system. And the reason why you get this one new system is because digitization drives a need for common processes, and so everything has to converge on one system. So one of the things we did, and we were quite clear with this, is to make sure that you buy the system that you bought and you don't over-customize. To give you an indication, most IT implementations take 500, 1,000 customizations to meet your own processes, and ours is about 35. So we have ensured that actually the customizations we're making are very small and we are changing our processes to meet that. And then the final point is about how you get your people, basically, to get ready for the change. So as Will said, we're implementing over a slow long period. We implemented the first release of our software earlier this year, which was the finance and procurement system at Haven. We're now into our third month-ends and we feel very confident and that's gone in successfully. Our people are very engaged in that and they've been part of the process. And we now step forward into the billing system itself, which we'll expect to see later this year. And again, we will bring customers over onto that in a very controlled manner. And as we build confidence in both our people and our customers, we will then start to increase the migration in a very controlled methodology in order to bring that across well. So we believe we've got all the conditions, we feel, are there for success. But clearly, we remain very focused on that activity.

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [9]

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Is that a new system that you'll migrate both Haven and Opus customers on, or mostly just Haven?

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Jonathan Kini, Drax Group plc - CEO of Drax Retail [10]

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So we will start with Haven. Clearly, again, down to, as Will said, our controlled approach. We have a lot of optionality here. We have 2 good billing systems that we can hold for a while, and so essentially, we will have to move Opus to get the full efficiency that we're looking for. But again, we'll work carefully as we progress through this, and obviously, make any adjustments to our time frames based on what we see in the Haven migration.

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [11]

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James?

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James Brand, Deutsche Bank AG, Research Division - Research Analyst [12]

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James Brand from Deutsche Bank. Two questions. First is on the biomass cost target for over 30% savings. Obviously, one important ingredient in that is the pound-dollar exchange rate, at least at the moment, given that a lot of your costs are in dollars. I was wondering how that factored into that number. So is that number a sterling cost reduction at current exchange rates? Because if so, it would seem to imply more like 50% or approaching 50% savings in dollars. So I was just wondering whether you could put that into context of the exchange rate. And secondly, a question on system support and flexibility. Obviously, that number had gone down year-on-year, and you explained it was down to the Black Start and have been optimistic that over, as you say, the long term, that, that income can grow. But what's the outlook for that over the next few years? Should we expect that to be growing with a shorter-term view?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [13]

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Okay. So on the pound-dollar situation, I mean, clearly, we need to get -- ultimately, what matters is the pound number. I mean, currently -- if we look out to where we are hedging currently, probably about 1.4, if you include 4 points, so it does make it a bit more challenging. Now that being said, our -- the value of our contracts also grows with inflation, so there's a bit of an offset there. So anyway, that's how it is. We have to make sure we get there in pound terms. And I'm first to acknowledge there are lots of factors in this, which we're talking about 9 years from now, we don't know where power prices are going to be. We don't know where FX rates are going to be. So I'm not by any means promising here, but the intent to get the cost down as much as we can is obviously key for us. In terms of the way we see the market for system support, I mean, there's a couple of points here. One is we do see it -- we expect it to continue growing as the system becomes more intermittent, we think that should start to happen. It's very difficult, though, to plot that sort of on a -- it's not going be linear. So for example, there hasn't been a lot of wind in the last few months. And if they're having a lot of wind in the summer, it does offer opportunities to support the system in different ways. So it will go -- it will bounce around. And the other thing, I think there is a bit of this which is not necessarily that easy to measure, because not only are we seeing this value through specific Ancillary Services, where we might see them in the balancing market or even in the day-ahead. So some of it is there's some measurement issues there. But we're -- we are, again, quite confident it will grow.

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Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [14]

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It's Iain Turner from Exane. As a point of clarification, you were talking on the slide about the development of options, that you will start -- you could start to build something in late 2019 if the capacity market went well. Was that the OCGTs or the coal-to-gas?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [15]

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So the OCGTs, we've got 2 of them that we were put in the auction -- have already put in, and we already put them in the auction. And the next one is coming up, well, this coming February. But the coal-to-gas is the one I'm talking about for late '19, which, again, the auction may be late '19 or early '20. That's the one that's specifically referenced there.

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Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [16]

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So you -- so let me ask that question again. So you won't be -- the coal-to-gas isn't prequalified, because it doesn't have planning permission yet?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [17]

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Correct.

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Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [18]

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So how could you start building it in late '19, because you couldn't (inaudible)?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [19]

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The plan is to have the planning permission by late '19 and then get the contract and then start to build. I mean, as I said, it's quite a tight timetable, but that is what we're hoping to do. Dominic?

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Dominic Charles Nash, Macquarie Research - Head of European Utilities Research [20]

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Yes, it's Dominic, Dominic Nash from Macquarie. Couple of questions, please. Firstly -- well, actually, quick ones on carbon, kind of. The first one is on the CPS, the U.K. CPS. Obviously, with the rapidly rising European carbon price, the CPS is kind of now going back in line with the original profile. Have you been having any conversations with the government about what's going to happen to CPS when it comes to the end of its current, sort of, legislative time frame? I think it's 2021, now I think. And secondly, on -- into the CCS. Are you trying to resurrect the sort of, White Rose Project again? And the second is you've piqued my interest here, you said that you can use carbon. How we can use carbon?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [21]

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Okay, so let me just take sort of those 3 questions there. So I think the carbon price support sort of through 2020 is, I think, pretty much set. And the government has also said that a firm sort of carbon price through 2025 is what they're looking for. Now what that will be, I don't think is known, and I don't have any more -- maybe [Gus] has better information? I don't have any better information, Dominic, than you do on that. I mean, clearly, we think -- or I think that a good carbon price is important for decarbonization in the U.K. and the current government, I think, is quite committed to decarbonization. So the question is how they will use the various different levers available to them, as obviously, that remains, that's their call, obviously. Second question was around, I guess, White Rose. Are we trying to resurrect White Rose? I think that's not the way I would put it. I think what we're -- I mean, it's very much -- I think it's important to think of this as a, the first stages of something that could be potentially interesting and it has to be economically viable. So the first key thing we're doing is trying to understand whether the solvents that we have, sort of people have developed, to actually capture the carbon out of the flue gas, to do so in way that is both, frankly, less toxic, but also less costly than what it would have cost before. And if you think -- I think about this as a sort of 3 or 4-stage process. One is capture. Then the second one is transport. Then you need to get the carbon somewhere. That's going to be a big infrastructure project. And the government task force that is looking at this is actually coming up with ways, I think they've sort of already said they may look at a RAV-based approach to that. And then the third question is what can you do with it, which gets to the last point. So the interesting ways you can use carbon, if we could get our CO2 to be food grade, maybe we could help solve the shortage of CO2 for the beer industry, for example. That's, frankly, that's not a big number. It's a small number. Much, I think, more relevant, I mean, there is a market in building materials possibly. The much more sort of further out and technically complicated, but much more interesting is could you actually use green CO2 as a way of combining with hydrogen or other chemicals to make green fuels. Now again, this is way out there, but that is actually something we are starting to look at with partners. And I should say, Dominic, we are obviously a small player in that game, but there are some very big -- some of the big oil companies have done a lot of work in this area and there's a lot -- there is actually quite a bit happening there.

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Dominic Charles Nash, Macquarie Research - Head of European Utilities Research [22]

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So that would be like plankton and stuff like that?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [23]

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No, no, no. This is very -- it's much more simple. So taking -- you take methane, you get the hydrogen out of that in a green way, I mean using carbon capture. Take that hydrogen, combine it with our CO2, call that green CO2, and you end up with various different types of, whether petrol, jet fuel, those types of things. Further out there, just makes sure there's -- yes?

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [24]

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Mark Freshney from Crédit Suisse. Just 2 detailed finance questions. Firstly, on the bad debts, which I believe mostly relate to Opus, can you give us an idea of the magnitude? Because it's a low-margin business and you need 1 or 2 big invoices not paid and it can make a material impact. So if you've got, sort of, like the year-on-year movement in bad debts. And secondly, just on the invoice discounting. What is the total magnitude of invoices outstanding that you've taken off balance sheet at half year?

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [25]

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Den, can I ask you to take those? Or J.K.?

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Den G. Jones, Drax Group plc - Interim CFO [26]

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Yes, sure. I mean, on the -- you're referring to the B2B Energy Supply facility that we have, the facility is GBP 150 million and we had drawn GBP 140 million. At the year-end, we'd drawn GBP 110 million. There's been a GBP 30 million. On the bad debts, there's been a GBP 9 million increase, half year on half year.

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [27]

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And that's across both Haven and Opus?

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Den G. Jones, Drax Group plc - Interim CFO [28]

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Yes, it's across both, yes.

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [29]

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Is it -- are the bad debts split, is it 1 or 2 big invoices or 1 customer? Or is it split across the customer base?

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Jonathan Kini, Drax Group plc - CEO of Drax Retail [30]

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So let me just take sort of bad debt as a whole piece. There's sort of 2 aspects going on there. So we see, the, obviously, the whole retail business as we're talking across there. I mean, what we are seeing, as Will said, is that there is a deterioration in the market. So there is a lot of, through the sort of I suppose, digitization of retail, there are a lot of difficult market conditions for businesses in that area. And we've certainly made some quite important adjustments and prudence to the approach that we had to those markets. But clearly, we have a base of those customers as well. One of the things that we've done this year is, and through some of the successes we had with Haven, was through really tight management of debt. So we were able to take a unprofitable retail business into proper over time and one of the key activities was around managing debt more effectively. And really, it's not about the sort of, I suppose, the big number, it's about the small numbers in that, where you're looking at customers that have moved from paying their bill to not paying their bill in 30 days, or then 60 days, or then 90 days. And what Opus did is it took a very average provision across customers that haven't paid after 3 months or pick customers who haven't paid beyond that. And so what we wanted to do is implement the same level of rigor and the same level of strategies that we have done within Haven. And in doing that, you have to build up a balance sheet to obviously deal with each of those components. And when I come back to the strategies, a good indication is a customer within 30 days, you'd probably talk about a payment plan and you'd work with the customer to return those monies. Whereas customers who haven't paid after 90 days, we tend to use third parties, because they are much more effective at collecting that debt. So I see this very much, as we strengthen the balance sheet, we're in a good position now, and we feel very confident that we can manage these 2 profitable businesses well.

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [31]

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And just to be clear, the GBP 9 million is actually the charge, it's not the increase in provision?

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Jonathan Kini, Drax Group plc - CEO of Drax Retail [32]

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Yes, it's the charge.

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Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [33]

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Any other questions? Maybe just on one thing, Dominic, on your question, I just want to be clear on this whole carbon capture story, because it's very early. We are not spending a lot of money. We spent GBP 400,000 so far. And ultimately, for it to work for us, it has to be something that works for our shareholders and we can get a reasonable return. So I think it is exciting. I think it will be part of the solution, but how we get from sort of A to B, there's still quite a lot of work to do to get there.

Okay, thanks very much, guys.