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Edited Transcript of EBK.DE earnings conference call or presentation 15-May-20 11:00am GMT

Q1 2020 EnBW Energie Baden Wuerttemberg AG Earnings Call

Karlsruhe May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Enbw Energie Baden Wuerttemberg AG earnings conference call or presentation Friday, May 15, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ingo Peter Voigt

EnBW Energie Baden-Württemberg AG - Head of Finance, M&A and IR

* Thomas Andreas Kusterer

EnBW Energie Baden-Württemberg AG - CFO & Member of the Management Board

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Conference Call Participants

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* Andrew Moulder

CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining EnBW's Investor and Analyst Conference Call on the Q1 Results 2020. (Operator Instructions) I would now like to turn the conference over to Ingo Peter Voigt, Head of Finance, M&A and Investor Relations. Please go ahead.

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Ingo Peter Voigt, EnBW Energie Baden-Württemberg AG - Head of Finance, M&A and IR [2]

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Yes. Thank you very much, and very good afternoon, ladies and gentlemen, here from (inaudible). Thank you for joining us even in these unusual times for this Friday afternoon investor and analyst conference call. And we hope you all fine.

As always, we have our CFO, Thomas Kusterer, with us, who will guide you through today's presentation. And as you can expect, in counting the corona pandemic, outline the main developments and effect in the first quarter 2020. After that, we look forward to your comments and questions.

With this, I will hand over directly to Thomas to take you through the relevant figures and slides. Thomas, go ahead.

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG - CFO & Member of the Management Board [3]

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Ingo, thanks a lot. And ladies and gentlemen, I would like to join Ingo in welcoming you to today's conference call. As you know, we have systematically implemented a portfolio transformation at EnBW in the last few years. Today, EnBW has a robust business model with stable cash flows in its operating business. That paid off, especially at times like this. Needless to say, the corona pandemic will not leave us completely untouched. But with earnings from low-risk businesses making up about 70% of the total, our earnings structure today is highly resilient.

Discontinuing our large customer B2B business just over 3 years ago also means that our end customer business is now much more stable. About 2 years ago, we launched a comprehensive digitization offensive at EnBW, modernizing our IT structures and making them more flexible. In the current situation, we are now benefiting from that. As of today, we still have about 10,000 employees working from home, around 18,000 team meetings are held each day. Everyday office workflows are digitalized, and our operating assets, power plants and grids are running smoothly, too. So all in, operationally, we are coping well with the corona pandemic-induced situation.

But now to the developments of the first quarter 2020. The renewable energy segment has, as expected, grown significantly. The total capacity of 609 megawatts, our 2 new offshore wind farm, Hohe See and Albatros now contribute to earnings, while other businesses are showing stable developments as well that underscores the resilience of our business, as just mentioned. Our operating results show no material impact of COVID-19 in the first quarter. Our adjusted EBITDA is up 21% on the first quarter 2019, and our retained cash flow even increased by 45%. Especially in the current situation, the resilience of our business model is also reflected in the confidence shown in us by our investors. As you know, at the beginning of April, we issued a EUR 500 million senior bond on what we consider to be very attractive terms: a coupon of 0.625% and a 5-year term to maturity.

Let's now go through the Q1 figures in detail. Let's get started with a brief look at our adjusted EBITDA and group net profit on Slide #3. As already mentioned, our adjusted EBITDA at group level increased by 21% to EUR 945 million, mainly due to the following two reasons: the first time full effect of our 2 new offshore wind farms, Hohe See and Albatros, and also higher wholesale market prices.

Group net profit was down in the first quarter. This is very much linked to considerable losses on the capital market, which led to a large expense from the mark-to-market valuation of securities. Consequently, our adjusted group net profit decreased by almost 80% to EUR 78 million.

But now let's take a look at the performance of our 4 business segments on the following 2 slides. On Slide 4, let me get started with our sales segment. Our adjusted EBITDA in the sales segment increased significantly compared to the prior year period at EUR 78 million. It is 16% above the figure for the first quarter 2019. This positive development is mainly due to the fact that Plusnet, our nationwide telecommunications company, has contributed to earnings since the beginning of the third quarter 2019. Adjusted EBITDA in our Grids segment decreased by 3%. This slight reduction in earnings is mainly due to lower revenue in the gas distribution grid related to milder weather compared to Q1 2019. At EUR 416 million, the grid segment continues to be the segment with the highest earnings contribution.

Let's now turn to the renewable energy segment on Slide 5. Adjusted EBITDA increased significantly by 94% to EUR 236 million in the first quarter 2020. The main reason for this positive development, as already mentioned, is the start of operation of our 2 north sea wind farms who we see early in the fourth quarter 2019 and Albatros in the first quarter 2020. Both of them are now contributing substantially to earnings. The two other notable factors increasing our first quarter earnings were better wind conditions at our offshore and onshore wind farms compared to the same period in the previous year and higher water levels at our run-of-river power plants.

Finally, let me comment on the development of our generation and trading segment. In the first quarter, adjusted EBITDA increased by 27% because, firstly, we supplied our electricity at higher wholesale market prices than at this time last year. And secondly, increased volatility in the wholesale market caused an additional positive contribution to earnings from trading. These 2 effects more than offset the loss of earnings -- of earnings contribution from our Philippsburg 2 nuclear power plant, which was decommissioned as planned at the end of 2019.

This brings us to the development of our retained cash flow on Slide 6. As mentioned at the beginning of the presentation, our RCF increased by 45% to EUR 778 million, mainly due to the following two effects: the higher cash EBITDA and lower income taxes paid in the reporting period. Unchanged, the retained cash flow reflects our internal financing capability. Until the end of 2020, this is the indicator we use to monitor our credit rating. From 2021, we will enter into a growth phase with our Strategy 2025. Because of this, we will then switch to a new growth-oriented indicator, which is the debt repayment potential. This KPI is defined as retained cash flow over net debt. It is required to be greater than 14% to ensure EnBW achieves its rating targets. The target will -- the target level of this debt repayment potential will be examined annually based on the requirements of the rating agencies.

Net debt increased by a little more than EUR 800 million as of March 31, 2020, with compared to December 31, 2019. Let me illustrate the factors in this development on Slide 7.

Our working capital increased by more than EUR 960 million, mainly based on the following two effects. Firstly, a sharp increase in margins on securities, mostly margin payments due to current market price fluctuations and the respective positions held in the market. Secondly, trade receivables increased mainly for the following two reasons. As expected, due to seasonal factors, receivables at our sales companies increased because the first quarter installments are lower than consumption. Moreover, receivables increased relating to the Renewable Energies Act. In addition, the mark-to-market valuation of noncurrent securities went down by more than EUR 380 million, mainly due to the corona crisis related overall financial market development.

On Slide 8, let's now take a look at our forecast for the current financial year. As already mentioned, our operating results show no material impact of COVID-19 in the first quarter. The earnings impact of the corona pandemic over the rest of the year, however, cannot yet be reliably quantified. In the sales segment, we expect to see falling purchases in the B2B segment and some value adjustments on receivables. In the grid segment, there will be a negative impact from lower peak loads and lower use of grid. If necessary repair works at our offshore wind farms could not be carried out, there could be a negative impact also in our renewable energy segment. And finally, for the Generation and Trading segment, we see increased volatility in the wholesale market. But as a result of our hedging activities, we have already sold our entire generation volume for 2020 and almost the entire volume for 2021. And in propitiatory trading, market volatility normally has, if anything, a positive effect.

However, the net earnings impact of these effects will be negative. We expect to be able to provide more reliable, quantitative figures by the end of the second quarter.

Our adjusted EBITDA guidance for the group therefore continues to apply as a range between EUR 2.75 billion and EUR 2.9 billion. However, we expect to end up at the lower end of this range. Our guidance for the individual segment also remains unaltered.

As stated at the beginning of the presentation, as a result of our portfolio transformation, a large share accounted for by grids and renewable energy ensures resilient stable cash flows in the operating business. This is certainly to our advantage in the current situation. Against the backdrop of the corona pandemic, we decided at the end of March not to hold this year's Annual General Meeting as planned on May 12. At the beginning of this week, we announced a new date, our AGM will take place on July 17 as a virtual event. At our annual press conference on March 26, we published our dividend proposal of EUR 0.70 per share for the financial year 2019. And due to the postponement of the AGM, the EnBW Board of Management and Supervisory Board decided to pay an advanced payment of EUR 0.35 per share. Following the approval of the Supervisory Board on May 11, the advance payment was paid out to shareholders yesterday. The remaining half of the proposed dividend is to be paid 3 days following the AGM resolution, and thus on July 22. To sum up, we keep on monitoring the current situation very closely and will decide on any further measures necessary according to the duration and severity of the corona crisis.

And with this, I would like to hand over to Ingo again to open up the Q&A session.

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Ingo Peter Voigt, EnBW Energie Baden-Württemberg AG - Head of Finance, M&A and IR [4]

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Yes. Thank you very much, Thomas, for your remarks and comments. And with this, I directly hand over back to the operator for opening up the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from the line of Andrew Moulder from CreditSights.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [2]

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Thomas and Ingo, obviously, I have to start with working capital. I mean EUR 900 plus million in the first quarter, can you give us any expectation for how you see that evolving over the rest of the year? Do you see any of it sort of coming back? Or do you think that the effects of COVID-19 mean that, that's going to be the swing for the whole year or maybe even worse than that? And then maybe just a general question. I've listened to the EDF call, and I've listened to the Fortum call and some of the other calls, talking about outages at nuclear plants and maintenance on those plants. Are you seeing any sort of major impact on your nuclear generation or on the timing of your nuclear maintenance because of COVID? And then my final question, obviously, net debt is up this quarter. Your credit metrics are already pretty stretched. I mean you talked about how important the rating was to you, but how safe do you feel your rating is at the current level?

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG - CFO & Member of the Management Board [3]

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Andrew, first -- back to your first question regarding the working capital development, actually, it's related to cash collateral, so margin payments in our trading due to the changes in the overall market. And secondly, it's the EEG account, which is going up because the EEG levy is not sufficient actually as of this year. So it's -- so the account is going down. So our receivables are going up, which is negative impact on working capital. So that's basically what is. Now I would assume that it will be at this level through the year, so kind of flat. I don't see any further significant increase, but I don't see any significant decrease either. So it's around this number, what I would assume for the rest of the year.

Secondly, regarding nuclear. As you are aware, we have only 1 power station left, so that limits the risk to a certain extent. However, having said that, mid of June, we do have maintenance work at our GKN nuclear power station. As of today, we don't see any kind of delays. So we assume that it will take place on time in mid of June. If there is any kind of prolongation of this maintenance is not to be foreseen as of today. As of today, we do expect that it will be on time. So we have no indication that there is a delay. However, if there would be one, that could have an impact, of course, on our earnings. But that needs to be seen. As of today, we don't have any indication for that.

Net debt, yes, I mean, you made the point. It increases actually our net debt. The working -- is definitely working capital development we just talked about. Our rating is stretched, we are fully aware of that. But we think we are well placed actually that we keep our solid investment-grade rating also in the future.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [4]

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Sorry. That doesn't really answer the question. You said you think it's stretched and you think you'll keep a strong rating, but do you think you'll be able to keep the current rating?

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG - CFO & Member of the Management Board [5]

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Yes. Absolutely.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [6]

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Okay. Maybe I can ask just one more question, just be cheeky in asking another one. Can I just ask about your nuclear fund? Because you talked about capital markets declining and obviously you've got this nuclear fund where you pay into on an annual basis. I mean how has that been performing? And do you think that the -- I think it's EUR 300 million you pay annually into that fund. Do you believe that you'll have to increase your contributions in order to make sure that you cover your nuclear liabilities?

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG - CFO & Member of the Management Board [7]

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That's a good question, Andrew. No. We don't think so and we don't have to. I mean we normally assume a certain performance of our underlying financial assets of around 3% to 4%. And last year, we had -- we are looking at 8.3%, so above 8%. So no, we don't think. When you look at our long-term performance of the financial assets, you've seen above 5%, you can look at the 5-year or even 10 years, it's all above 5%. So no, we don't see any need to increase that. And having said that, most of the development we have seen in the first quarter is an evaluation impact. So we have -- don't have realized losses here. I think that's important to state. So thanks for the question. We are talking about valuation impact and not realized losses.

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Operator [8]

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(Operator Instructions) There are no further questions at this time. And I would like to hand back to Ingo Peter Voigt for closing comments. Please go ahead.

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Ingo Peter Voigt, EnBW Energie Baden-Württemberg AG - Head of Finance, M&A and IR [9]

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That's very kind of you. And if -- of course, there are no further questions, we have to thank you all for attending. And we would like to invite you for our next call on the Q2 figures 2020, which will take on July 30 this year. And if in the meantime anything comes up we can be of assistance to you, please don't have hesitate to give us a call or send us an e-mail. We'll try to help where we can. And with this, have a good, nice weekend, and stay healthy. Bye-bye.

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Operator [10]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.