U.S. markets close in 3 hours 12 minutes

Edited Transcript of EVN.VA earnings conference call or presentation 27-Feb-20 9:00am GMT

Q1 2020 EVN AG Earnings Call

Maria Enzersdorf Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of EVN AG earnings conference call or presentation Thursday, February 27, 2020 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Stefan Szyszkowitz

EVN AG - CFO & Spokesman of the Executive Board

================================================================================

Conference Call Participants

================================================================================

* Peter Crampton

Barclays Bank PLC, Research Division - Research Analyst

* Teresa Schinwald

Raiffeisen CENTROBANK AG, Research Division - Financial Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, ladies and gentlemen, and welcome to the conference call on EVN's results for the first quarter of 2019/2020 financial year. (Operator Instructions)

Let me now turn the floor over to your host, Mr. Stefan Szyszkowitz.

--------------------------------------------------------------------------------

Stefan Szyszkowitz, EVN AG - CFO & Spokesman of the Executive Board [2]

--------------------------------------------------------------------------------

Good morning, and welcome to the conference call on EVN's results for the first quarter of 2019/'20 financial year. We have started with a strong performance in '19/'20 financial year. After finishing the first quarter at the end of December, EBITDA, EBIT and group net results are above the previous year.

Most importantly, we delivered the envisioned normalization of our supply business. Last year, our supply company, EVN KG, suffered from higher wholesale prices, both in terms of reduced margin as well as the valuation of hedges. After implementing 2 price increases since 2018/'19 and changing the methodology for the accounting of hedges, we managed to bring the operational results of the equity consolidated company, EVN KG, back to a normalized level.

I would also like to highlight that the share of the group's renewable generation rose 50% in the first quarter as compared to 34% in the previous year. Partly this is a rise in renewable generation as a result of last year's expansion of our wind power capacity. As you know, we now have an installed capacity of 367 megawatts.

In addition, the termination of the coal-fired generation Dürnrohr last summer contributed well to the substantially less due to intensive production mix. With our setup, EVN group is in the best position when it comes to enabling the transformation of the energy system.

Dwelling on this topic, we plan to increase our communication efforts to the general public and to investors in special. EVN shall be recognized as the enabler of the energy transition. In the coming years, we will further expand our renewable generation fleet. It will not only include wind, but also large-scale photovoltaic for the later. We have identified the potential of up to 100 megawatt for the group. We've currently assessed locations and best timing to implement such photovoltaic potential.

Distribution groups are the backbone of the transformation of the energy system. Therefore, the major portion of our investment program is dedicated towards upgrading the network infrastructure for the integration of growing volatile and decentralized electricity generation from wind and sun. Let me remind you that EVN is #1 in others -- in biomass heating and that we have a strong footage in the environmental business. In a nutshell and to conclude, we think that all of these activities will create further demand from ESG or investors.

I would also like to use today's call to provide some information on our new project in Kuwait. So let me turn to the next slide now. In January, the contract was awarded by the Umm Al Hayman wastewater project. The project consists of 2 parts. First is the contract for the construction and realization of the wastewater treatment plant within the framework of the public-private partnership. Our German subsidiary, WTE Wassertechnik, will serve as the general contractor. The contract value is about EUR 600 million.

The capacity of the plant is for 500,000 cubic meters a day, which corresponds to the baseload of about 1.7 million people. In the past, WTE already have realized projects of comparable size, for example, in Warsaw, Prague, Zagreb or Istanbul. According to the PPP structure, WTE's customer under the EPC contract will be a project company, which further receives project financing from consortium of banks, including the German KfW IPEX.

The majority shareholders of the project company will be Kuwait institution. WTE will be a minority shareholder with a stake of 20%, though we expect equity contribution to be invested is about EUR 30 million. This equity contribution is covered by a state guarantee from the Federal Republic of Germany. The construction period of the plant is 2.5 years. Thereafter, WTE will be responsible for operation of the plant for a period of 25 years.

The second part of the Kuwait project is the general contractor assignment for the construction of the respective sewage infrastructure. This means pipes and pumping station to transport the wastewater to the plant and the purified water back to be used for irrigation requirement. The sewage infrastructure has a total contract volume (sic) [value] of about EUR 950 million. W's share in this contract is 2/3. And payment of this EPC contract will be directly financed by the State of Kuwait. Construction for this part of the project is scheduled to extend up to 4 years.

Let me now continue with the key financials of the reporting period. The group's revenue declined by 3.3% year-on-year. The main reason for this development are the decline in thermal generation as well as the volume and price effects in the Network segment. Contrasting factors include the increase in energy revenue in Bulgaria and revenue in the international project business.

The recovery of EVN KG as well as a sound performance in South East Europe supported an improvement in EBITDA. It was up 16.8% at EUR 190.6 million. The basis for scheduled depreciation was higher due to the investments in the revaluations we had to do after the impairment testing at the end of last financial year. The Group's EBIT increased by 21.9% to EUR 118.8 million. In total, we generated a group net result of EUR 82.9 million during the first quarter this financial year, which corresponds to an increase by 40.3% on a year-to-year basis.

Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Our communication regarding capital structure and financial investments remains unchanged. We believe that net debt will remain at a level of about EUR 1 billion for the time being, subject to some seasonal fluctuations.

As at the end of December 2019, net debt stood at EUR 1.1 billion. Please note that the increase of the net debt was also due to the recognition of noncurrent lease -- prior lease liabilities in connection with the initial application of IFRS 16, which had an effect of about EUR 70 million in the first quarter. Gearing was 25.4% in the first quarter of the financial year. Our strong balance sheet structure forms the basis of pursuing organic growth opportunities in our regulated and stable Austrian activities.

We plan to invest approximately EUR 400 million per year over the coming years. Therefore, roughly EUR 300 million annually have dedicated towards networks, renewables, biomass heating and drinking water in Lower Austria. Before I go through each of these segments in detail, I would like to give you a general overview on the EBITDA development of our business segments. The overview of the EBITDA development by segment illustrates the key drivers of our performance during the reporting period.

On the positive side, you can see improvements in the Energy and the South East Europe segment. In contrast, performance of the Generation and Networks segment remained below the prior year, which is well in line with the segment outlooks which we gave in December.

With this very general, let's now move to the next slide, which covers the Generation segment in more detail. The conditions for renewables were mixed, water flows in the Danube and the Inn Rivers, which are relevant for our electricity purchasing rights, were above the previous year. In contrast, there were below average hydrological conditions for our small hydropower plants.

Wind flows in Austria were above the long-term average, but below previous year. However, last year's commissioning of new wind plants led to an increase in wind generation.

In total, electricity generation from renewables in the Generation segment exceeded last year, whereas thermal generation volumes declined.

This was due to the closure of our coal-fired plant in Dürnrohr and lower use of our gas-fired plant in Theiss for network stabilization. In total electricity generation volumes in this segment were down by 32.3% year-on-year.

Segment revenues declined in line with these developments. Generation segment also reported lower EBITDA of EUR 34.5 million.

Scheduled depreciation went up due to the investments and revaluations, resulting in a lower EBIT of EUR 17.9 million.

On the next slide, I will continue with the Energy segment. Revenue in this segment was by 22.7% below the previous year. This was primarily due to the decline in marketing of own electricity generation and a reduction in natural gas trading.

The lower usage of primary energy carriers were driving operating expenses down by 33.6%.

Energy sales volume showed contrasting development. Volumes in electricity were up 10.4%, following higher supplies to larger customers in Austria and Germany. In turn, natural gas sales volumes were down by 1.9%.

As already mentioned, our electricity and natural gas supply business, which is handled by EVN KG, recovered and returned to normalized earnings levels. EVN KG's contribution to equity result was EUR 6.3 million in the first quarter after a loss of EUR 16 million last year, which was caused by higher procurement costs and negative effects from the valuation of hedges at the same time.

Based on these developments, the Energy segment reported an EBITDA of EUR 31.7 million and an EBIT of EUR 26.7 million.

On the next slide, I will present the developments in our Networks segment. The Networks sales volumes showed a different development, whereas volumes for electricity were slightly up. The natural gas distribution volumes declined in view of the reduced use of the thermal power plant in the last year.

I would also like to remind you that the new regulatory period with a lower WACC resulted for electricity distribution efforts in January 2019. This means that, that lower WACC was applied in our first quarter '19/'20. Based on volume developments and in view of lower tariffs, revenues went down by 5.3%.

As expected, the Network segment generated lower EBITDA of EUR 68.6 million, which corresponds to a decline by 14.7%. EBIT was down by 27.4% at EUR 36.2 million, due to a higher scheduled depreciation.

With the beginning of the new year calendar, the Austrian regulatory as always determined new network tariffs, where tariffs for electricity were increased by 0.3% on average, those for natural gas were reduced by 8.1% on average.

On the next slide, I will continue with the South East Europe segment. Whereas energy sales and network distribution volumes suffered in this region from mild temperatures, we're reporting today a sound performance of our South East Europe segment. One supporting factor was lower procurement costs for network losses in Bulgaria. In total, EBITDA of this segment was up EUR 33.3 million and EBIT at EUR 15.5 million.

I would like to conclude my presentation of the segments with the Environment segment. I already gave a detailed overview of the Kuwait project at the beginning of the call. Therefore, let me now focus on other main developments in the international project business.

As of the end of last December, we were working on 8 general contractor assignments in Lithuania, Poland, Romania and Bahrain. The order book was about EUR 259 million. This number does not yet include the Kuwait project, as the contract was only awarded in January. The development of the order book has a positive impact on the development of revenue in the segment. The rise in revenue from the international project business was accompanied by a corresponding rise in operating expenses.

The share of results from equity accounted investees with an operational nature was below the previous year. Please remember that last year still included final earnings contribution from the wastewater project in Prague. In total, these developments led then to a decline in EBITDA to EUR 5.5 million and in EBIT to EUR 2.5 million.

Finally, I would like to update you on the recent developments in connection with the termination of the wastewater treatment project in Budva in Montenegro. This topic has been ongoing since May 2018, when we determined the contract and started negotiations with the representatives of the municipality of Budva and the Republic of Montenegro.

Last December, the enforcement of claims led to payment of the guaranteed amount of EUR 29.3 million by the Republic of Montenegro and municipality of Budva still has not paid its obligations. This is the reason why in January 2020 the arbitration proceedings defined in the guarantee contract with the municipality of Budva were initiated to enforce further claims against Budva.

As at the end of January 2020, WTE Wassertechnik also ended its interimistic operation of the wastewater treatment plant, which has been continued since May 2018 and handed it back over to the municipality. With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of our group cash flows.

Gross cash flow fell by 29.9% to EUR 140.7 million in the first quarter of this financial year. This was caused by lower dividend payments from equity-accounted investees. Due to the negative development of our working capital as of the end of December, cash from -- cash flow from operating activities amounted to minus EUR 28.9 million. Cash flow from investing activities reflected net investments in the first equity tranche of the Kuwait project. This was contrasted by this investment of cash funds and the guarantee payment of the Republic of Montenegro for the wastewater project in Budva. The cash flow from financing activities reflected the scheduled repayment of loans. The net change in cash and cash equivalents amounted to minus EUR 90.4 million.

I would like now to conclude our today's call with the outlook for the group. Based on today's first quarter results, we confirm our full year guidance. Assuming average conditions in the energy business, we expect that the operating result will remain constant. This brings us to expect that the group net result for '19/'20 will be in the range of EUR 200 million to EUR 230 million. When comparing the outlook with our results for the last financial year, please bear in mind that this include the positive valuation effects of approximately EUR 110 million after tax.

Finally, I would like to inform you that based on the information provided by EnBW Trust at the end of December 2019, we note that their stake has decreased further from previously 28.6% to 28.4%. This brings us up to an free float of 20.6%, including our treasury shares of around 1%.

I have now reached the end of my presentation of EVN results for the first quarter of '19/'20 financial year. I'm now looking forward to answering your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we have the first question from Teresa Schinwald.

--------------------------------------------------------------------------------

Teresa Schinwald, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [2]

--------------------------------------------------------------------------------

I have a few. First one is you mentioned lower hedging effects in your report. How much lower were these effects compared to the EUR 40 million reported for the first quarter last year? Then the second question is on the networks. If you could give us also a value for the reduction of the transmission costs in the networks because they were lowered as well. Regarding the SEE results, they were really strong, surprisingly strong. Is this a benchmark for the rest of the year? What do you expect in terms of EBITDA for South East Europe? And the last one is a quick one. What was the nonrecurring effect at RAG and how much was it?

--------------------------------------------------------------------------------

Stefan Szyszkowitz, EVN AG - CFO & Spokesman of the Executive Board [3]

--------------------------------------------------------------------------------

Okay. So thanks a lot, Madam, Schinwald. First of all, regarding the change in the valuation of the hedges, it's around EUR 40 million. And if you have a closer look, EUR 20 million, EUR 20 million. EUR 20 million coming from KG and EUR 20 million from AG, yes? Regarding the calculation, the yearly adoption of the grid prices, actually, it is true that the transmission cost adoption is also included, but under the bottom line, this kind of small increase is what is the total calculation reflecting the cost adoption.

In the Network costs, they are higher also to higher market prices, which is always a moving calculation. Regarding South East, actually we clearly see regarding costs for balancing the agency has increased in the comparison -- year-to-year comparison of the first quarter. I would confirm that we expect an EBITDA between EUR 40 million to EUR 60 million for the year, more on the upper side. But please keep in mind that prices are always adopted at the 1st of July. And we have to raise -- clearly no more how this will develop.

Regarding RAG, last year's measures compensate this year's measures, so it was a timing effect here. It's not a change in the structural production portfolio or the expectation regarding the results there, I mean this investment in RAG which is -- was happening in the fourth quarter of last year. And therefore, with our energy results on a yearly basis, this is a timing effect.

--------------------------------------------------------------------------------

Teresa Schinwald, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [4]

--------------------------------------------------------------------------------

Okay. So if we would average the contribution in the fourth quarter and the first quarter, we could get a hint about the onetime effects. Am I right?

--------------------------------------------------------------------------------

Stefan Szyszkowitz, EVN AG - CFO & Spokesman of the Executive Board [5]

--------------------------------------------------------------------------------

Look, it's more stable than it looks if you just take the balance sheet date and the first quarter date on comparisons.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Next question comes from Mr. Peter Crampton.

--------------------------------------------------------------------------------

Peter Crampton, Barclays Bank PLC, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

We've seen a good recovery in your Energy subdivision. And I just wanted to know when do you expect this kind of negative one-offs to kind of fully have washed through? And what would be kind of a reasonable EBIT margin or kind of EBIT for the Energy division in kind of a stable state environment?

--------------------------------------------------------------------------------

Stefan Szyszkowitz, EVN AG - CFO & Spokesman of the Executive Board [8]

--------------------------------------------------------------------------------

I think we expect 1 more year we'll go to real actual volumes on this. Hedge accounting basis is coming to a more normalized level. But of course, the volatility as if we have seen over the last years is increasing to the volatility of energy markets in general. And regarding the margin, we are expecting over a longer period around 5% margin in this kind of retail business.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Stefan Szyszkowitz, EVN AG - CFO & Spokesman of the Executive Board [10]

--------------------------------------------------------------------------------

So thank you for joining today's conference call. We will publish our half year results for '19/'20 on Thursday, the 28th of May. Please join us then again, and goodbye.