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Edited Transcript of IGY.DE earnings conference call or presentation 9-Aug-19 10:30am GMT

Half Year 2019 Innogy SE Earnings Call

ESSEN Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Innogy SE earnings conference call or presentation Friday, August 9, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernhard Günther

innogy SE - CFO & Member of Management Board

* Verena Nicolaus-Kronenberg

innogy SE - Head of IR

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Conference Call Participants

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* Alberto Gandolfi

Goldman Sachs Group Inc., Research Division - Head of European Utilities Research

* Christopher Robert Laybutt

JP Morgan Chase & Co, Research Division - Research Analyst

* Deepa Venkateswaran

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Lueder Schumacher

Societe Generale Cross Asset Research - Equity Analyst

* Samuel James Hugo Arie

UBS Investment Bank, Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Welcome to the innogy Conference Call. Bernhard Günther, CFO of innogy, will inform you about the results of H1 2019. I will now hand over to Verena Nicolaus-Kronenberg, Head of Controlling and Investor Relations.

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Verena Nicolaus-Kronenberg, innogy SE - Head of IR [2]

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Hello, everybody. Many thanks and good morning to everyone on the phone and webcast. Welcome to innogy's results presentation on the first half of 2019. Bernhard will now run you through the key topics, and we are happy to answer your questions afterwards. With that, over to you, Bernhard.

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Bernhard Günther, innogy SE - CFO & Member of Management Board [3]

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Yes. Thank you, Verena, and good morning from my side as well. You are familiar with our streamlined presentation. So let's directly jump to Page 2. H1 financials are down year-on-year as expected. Adjusted EBIT decreased by 16%, and adjusted net income is down 26%. As you already know, this is mainly driven by the development of npower and the sale of our Czech gas grid business in Q1. Overall, our operations show a stable development against our expectations and the challenges we face we have already anticipated. This is why we feel comfortable to achieve our full year guidance for the group adjusted net income of around EUR 850 million. To give more context around the actuals development, let's turn to Page 3.

As said, the decline of adjusted EBIT comes as expected and is already reflected in the full year guidance. The 3 business units show the following development. In Renewables, we benefited from higher market prices and improved wind levels year-on-year. Assets commissioned in 2018 and 2019 also contributed to H1 earnings. Adjusted EBIT of Grid & Infrastructure Germany is stable year-on-year. Positive one-offs are on a comparable level to prior year. In Eastern Europe, the declined results from the divestment of our Czech gas grid business in Q1. Retail operations remain challenging. The increase of electricity and gas wholesale prices in Germany, which could not be fully passed through, were, again, the main reason for the drop in adjusted EBIT there. In our Q1 communication, we already informed you about the regulatory interventions in our other markets, such as the price cap in the U.K., on amendment of the supply regulation in Poland and Hungary, the utilities are currently no longer able to pass through increased procurement costs.

Especially in Poland, the ultimate financial burden of the adverse political intervention is still unclear, but it shows a negative impact on our earnings. Looking at adjusted net income, you can see that the main negative impact comes from the EBIT decline. The residual drivers are broadly on last year's level.

Slide 4 shows cash flow development and net debt composition. The working capital development, driven by seasonality and cut-off date was leading to negative cash flows from operating activities, similar to Q1. The significantly higher proceeds from asset disposals stem largely from the sale of the Czech gas grid. Taking into account CapEx and dividend payments results in a much smaller budget deficit year-on-year, which is, however, still negative, and thus, drives net financial debt. However, our financial liabilities rose due to the first-time adoption of IFRS 16. Although we recorded a counteracting effect from the redemption of bonds and low liabilities. Furthermore, pension obligations were higher due to a reduction in discount rates in Germany and in the U.K.

I promise to be brief on the actuals. So let's now have a quick look at our guidance on Page 5. We confirmed the 2019 outlook for the group and our divisions. The outlook is in line with our guidance given in March 2019. So thank you very much. And now I'm looking forward to your questions.

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Verena Nicolaus-Kronenberg, innogy SE - Head of IR [4]

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Thank you, Bernhard. We will now start the Q&A session. As always, just be reminded of the 2 questions per person rule. With that, I would like to hand back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Deepa Venkateswaran, Bernstein.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [2]

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I wonder if I can have an exception to your 2-question rule, given you've finished your presentation really quickly or happy to go back in line. So my 3 questions were, firstly, working capital is almost at the same level where it was in Q1. You mentioned seasonality, where do you end -- where do you expect this to land by the end of the year? Secondly, on German retail. You've mentioned that one of the pressures was your inability to pass on price -- the commodity price rises. Could you let us know whether you plan to or have already raised any of these tariffs, i.e., do you see the situation improving? And lastly, maybe just a qualitative comment on where you see yourselves within the divisional ranges for each of the segments, given that you're halfway through?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [3]

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Deepa, so -- yes, this is indeed 3 questions. And by allowing you to do this, I'm well aware that I would be setting a kind of negative incentive for myself to be less crisp in my presentation the next time. So -- but nonetheless, I'm happy to answer. So working capital versus Q2 versus Q1. I think these seasonal effects are, as we said, not structural in their nature. So our full year guidance -- on our full year outlook, we don't give a formal guidance on net debt also, it's not really affected by this earn. Please bear in mind that, for example, with the sale of our Czech gas grid business, one of the -- or the second largest grid activity has fallen away, which contributed at least to a significant extent to these typical seasonal fluctuation patterns we've seen in previous years in working capital. So for this very reason, this year is a bit exceptional in that respect. On German retail, yes, the statement I've made about our inability to pass through procurement price increases, both on the commodity side and on the grid side, this applies to the past, and this might well change within the future. But please understand that this is not the right time or place to announce any potential price increases. But of course, we are watching the competitive dynamics of the retail market in Germany very closely and constantly. Overall on the level or on the -- where we stand in our 3 segments, I think in Retail and Grid, I'm very comfortable that we are in the middle of our overall range. In Renewables, it's a bit further south, given that the full year guidance assumed a normal weather year, especially normal wind conditions and then those areas where we have the most wind exposure. 2019 so far, at least, has been below average, slightly, not as bad, as I said, as 2018, but somewhat below average, nonetheless.

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Operator [4]

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The next question is from Alberto Gandolfi, Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [5]

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The first one is about net debt and -- sorry, the line broke down a bit earlier, but I think you did not give a guidance for year-end net debt. Could you please help us out navigate, the bond is down again since the end of Q2? So maybe if you can help us out and that will be great. And the second one, if you can help us out understand what are nonrecurring items in the first half that may be expected for the full year included in your guidance? Because this year, you are still supposed to release provisions, have capital gains, and I was wondering if you have already booked some restructuring charges, perhaps? So if you can have maybe bit of an itemized answer on that will be fantastic.

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Bernhard Günther, innogy SE - CFO & Member of Management Board [6]

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Yes. Alberto, first on your question with regard to net debt. As you rightly said, we don't give a formal guidance on net debt, but we are able and willing to at least provide you with some broader thinking on how it would develop. So I think it would be reasonable to assume if interest rates stay where they are, that the net debt level end of the first half of the year is a good estimator for where we would end up with the rest of the year, or at the end of the year. So -- and on nonrecurring items, this is, of course, I mean, some of the nonrecurring items by their nature have somewhat less predictability than recurring items. So this is all to be taken with a grain of salt. So the -- on Retail, as we, I think, also already guided earlier, the level of one-offs compared to previous years, this year will be lower, and we would still assume this to materialize until year-end. In grid, the overall level is similar to prior year. So -- and in terms of restructuring charges, this is the main area there is the U.K. where we've booked already in the actuals, and where we also forecast for the full year restructuring charges for the headcount reduction we announced in January this year of around 900 FTE.

Okay. So is the line is still open? Or any questions from your side, Alberto?

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [7]

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I was wondering, maybe more -- I think last year was closer to EUR 200 million positive provision releases or capital gains in networks and retail. And I was wondering more like on the numeric side, if we're going to be closer to that EUR 185 million, or a little bit lower this year? And then I understand your restructuring charges for 900 people is what, about 100 or so maybe there's -- what, plus 150, plus 200 positive, minus 100 negative?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [8]

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The restructuring charges in -- for the U.K. in pound sterling are in the -- rather in a low to medium double-digit million euro amount. So it's not 100, and in the remainder of our grid and retail business, as I said, for -- the overall order of magnitude is not too much different from last year, but we see it lower on retail and roughly same order of magnitude as in grid. So overall, it might be particularly lower. But again, this is hard to predict yet because some of this -- when it comes, it comes, but if you could forecast it, you would already have booked it.

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Operator [9]

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The next question is from Lueder Schumacher, Societe Generale.

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Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [10]

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Two questions from -- on my side, 2.5 really. The first one is on U.K. retail. We heard sort of where E.ON sees the free cash flow and free cash flow breakeven. Where do you see free cash flow for npower for 2019? And also what's your experience with churn rates? It seems to be quite different among the various players, that E.ON SE is increasing massively, other players see it stabilizing, what do you see? And the kind of second question is on Poland. The grid there was declared strategic, which, I think, only matters if there is a change of control, which is coming up. I just wondered, I've been -- we hear nothing at all on this. There are no headlines. Has there been any kind of -- are the Polish authority sort of raising some kind of concerns or demands? It's just there appears to be complete radio silence ever since the decision was made to declare it strategic?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [11]

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Yes. Lueder. First, on your -- well, 2 questions on retail. I think we would stick to our tradition of not giving free cash flow guidance for the segment. But of course, given the EBIT actuals and our full year EBIT guidance, it doesn't take too much fantasy also to assume that free cash flow is negative. And I would also expect it to -- that this is a structural phenomenon, even if you deduct the restructuring expenses we have, unless the margin situation in the U.K. improves, which currently -- it doesn't yet. And this -- maybe later.

Over to your second question regarding churn rate. The churn rate in the U.K., as we observe it is similar magnitude as it was in the year before, roughly. The -- so for us, it has not increased and compared to some of our competitors, I think our customer losses, at least in absolute numbers, are somewhat lower. The -- of course, quite a few industry players, including us, would have expected churn rates to go down with the inception of the price cap on the SVT customers, which they haven't. I think this is the disturbing observation for all of the big 6 to some extent that this, so far, hasn't happened. Maybe it might still materialize but so far, it hasn't.

On Poland, yes, you're right. Our Polish grid has been put on the list of strategic assets by the Polish government, which poses some conditions on change of control treatment if it should happen. And well, with all the limitations to what I can say, I am -- we are very happy that this topic has so far been dealt with very professionally without causing much media coverage so far on all sides particularly. You can be assured that all relevant players have it on their radar.

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Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [12]

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Okay. So that's interesting. So it is actually something you are dealing with, you're just, well, keeping it quiet. And -- now that...

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Bernhard Günther, innogy SE - CFO & Member of Management Board [13]

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I think, yes. I mean, clearly, in any grid business, no matter how exactly the regulation looks like, the public authorities on the state with its different agent is a -- it is an important stakeholder. So you're always well advised in such a situation like Energies and E.ON to maintain a close contact with these relevant stakeholders.

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Operator [14]

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The next question is from Sam Arie, UBS.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [15]

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I just wanted to ask a quick question on the retail business in Germany. And I suppose, you had some good news today, in as much as you're managing to increase the customer numbers there. But I think talking to the team, there are some other reasons behind that as maybe some customers that you inherited from the supplier, bankruptcy and there's some that come from a new sales channel that you have. So I'll just be interested in a bit more color on sort of what's going on in Germany. E.ON said they were gaining customers as well. But if you could just sort of talk us through what's really driving the gains? And then I suppose the main question is, what kind of expectations should we have about EBIT development from German retail going forward? Would you expect that margin compression offsets any gaming customers or that net-net we should expect stable development or more deteriorations going forward?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [16]

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Yes. Sam, so yes. I think you already preempted much of what my answer would have been in your question. So I'm now -- I hope I can add a bit more flesh to what you already know. You're right. We gain customers, which is a good indicator, yes. And so the positive trend which, we observed for the first time towards the end of last year still persists. And we -- yes, at least we would hope that this is a manifestation of more than just a seasonal pattern. You're right that this is, A due to some competitors getting in difficulties and going into insolvency. So this means that in some areas, directly, your customers would fall back towards USD but "incumbent supplier". So the one who has traditionally covered that area, and not all of them having constantly experience of insolvency of the supplier and would immediately switch to another supplier. So this increase contribute a bit, but also additional sales channels of various kinds. We are using -- have yielded quite a significant amount of new customers. And this is a good indication because this happens against a backdrop of lower acquisition spend on those customers. So we are obviously deploying our acquisition spend much smarter and much more targeted towards customers. And we still stick to our mantra that we only acquire profitable customers. So customers where we know that over the lifetime of the contract, they amortize their cost to acquire.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [17]

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Okay. That was very helpful. And can I just push you on the sort of last part of the question. If we think about that business going forward, do you see it on balance, and setting aside anything to do with synergies in the E.ON deal. So do you think on balance, EBIT can grow there? Or is it a challenge (inaudible) be a bit stable?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [18]

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So -- I'm sorry, Sam, that I would stop short of giving now a guidance for future years, especially one for E.ON, which I'm certainly not in a position to do so. I think the overall sign of customer gains is positive, but this is also related to the commodity cycle. Yes, that -- you've seen this upward trend in wholesale prices, which, on the one hand, of course, made it more difficult for us to pass-through price increases against a falling price environment for wholesale prices. On the other hand, it also pushed some of the very aggressive new entrants out of the market we speculated on ever falling wholesale prices. So it's both a bit of a curse and a blessing at the same time. It's hard to tell which of the 2 effects will really prevail in the long run, but given that the -- I think, given that you still see market entries and given that some of those market entrants still operate on very lean business models in terms of cost to serve, especially if they are purely digital, I think it would be too soon to say that, while we have reached the trough or the bottom in German retail margins and from now on, they're going to increase again.

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Operator [19]

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There are currently no further questions. (Operator Instructions) It's another question, it's from Chris Laybutt, JPMorgan.

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [20]

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Just one question for me. You've included in the slides, just a comment, more of a cautionary statement on your stand-alone credit metrics, which I think was in the report. Could you just give us a sense to where you are on your credit metrics of the stand-alone business and perhaps the outlook, given the rise in net debt, please?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [21]

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Well, I think if you -- if you apply our full year guidance for EBIT and the concurrent estimate for EBITDA in line with it and our net debt guidance, you would see that we are also moving into the upper half of the year 4x to 5x net debt over EBITDA range, which is clearly not where we want to be in the long run. But of course, this is, as you said, a very hypothetical question because it comprises energy in its current form with Germany in all likelihood won't continue like this, especially with the very capital-intensive renewables business, which is operationally, one of the major drivers of our net debt, which would go over to RWE.

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [22]

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That's very helpful. Would you mind if I just ask one follow up. In terms of those thresholds and the impact of the lower bond yield environment that we're moving into, which is having on your liabilities, have you had any initial discussions on whether there might be some adjustment to the thresholds and those requirements within those metrics? Or is it still too early? And I guess, the stand-alone figures are becoming less relevant anyway for you?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [23]

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Clearly, the last sentence is (inaudible) in our discussions with the rating agencies. But even if you disregard this for a moment, at least our current impression is that, yes, the rating agency probably somehow recognized that not all of the increase in net debt is of immediate short-term or medium-term cash relevance because it's driven by lower interest rates and the discounting effect on pension liabilities. But so far, as we see it, they keep their cards pretty close to their chest in terms of -- we are adopting that threshold, yes. Maybe -- I don't know, time will tell. And probably, we will not know or hear the final view on this be as -- in the lifetime of energy in its current form. But probably, when we have gone over to RWE and E.ON, respectively.

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [24]

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Okay. And one last question, if I may. On a slightly more positive note, in the U.K., we do have a new PM and a new administration, and we have heard that the big 6 may have already had some discussions with Downing Street. I'm just wondering whether you were privy to any of those conversations and whether you could come by -- provide any indications as to whether things might be improving for the big 6 and for the political and regulatory environment in the U.K.

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Bernhard Günther, innogy SE - CFO & Member of Management Board [25]

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Yes. Well, first of all, at least from a continental perspective, it's at least interesting that you mentioned a new Prime Minister, on a positive note. But it's, of course, life in the eyes of the beholder. But with regards to any -- or to context of the big 6 to the new government. I would prefer to remain mute on that, if I may.

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Operator [26]

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And we have a follow-up question from Deepa Venkateswaran, Bernstein.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [27]

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On the Renewables business, I just noticed that one of the explanations was a positive contribution from operational improvements of the existing portfolio, including some bonus for Galloper. Can you just quantify what this is -- presumably, it's not recurring going forward? So is it significant at all? Anything to sort of keep in mind?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [28]

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Yes. Yes, I think -- your conclusions are right, so it's nonrecurring, yes. On the other hand, if it were insignificant, we wouldn't mention it, yes. So it's a single-digit million euro amount, as a one-off, yes.

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Operator [29]

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And we have another follow-up question from Sam Arie, UBS.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [30]

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Since there weren't so many questions, I thought I might just have the opportunity to ask Bernhard -- and I apologize if you said anything about this at the beginning of the call, I did miss the opening minute. But can you say if there has been any decision about your role continuing beyond first closing? And do we know where we expect to see you again on further updates? Do you know what your role will be within the new sort of E.ON energy structure? Or is that not determined yet?

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Bernhard Günther, innogy SE - CFO & Member of Management Board [31]

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Yes. That's a nice personal question, Sam. I would be happy if I knew the answer, so my -- the visibility on my professional way forward lasts until day 1 or closing of the E.ON transaction. And yes, we will see how it evolves from then. So it's interesting times in the British sense.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [32]

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Okay. Well, forgive me for asking, but the reason I ask is, obviously, we've -- I think we've all -- usually appreciate the way you update us and frankness and clarity, always. So we got something they don't have, we have a lot more opportunities to interact with you after closing one.

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Bernhard Günther, innogy SE - CFO & Member of Management Board [33]

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That I would be hoping for as well. And I consciously refrain from addressing this actively, yes because we wanted to avoid any kind of goodbye touch to it because the business of innogy will continue, and I think that's most important. But I've been certainly also grateful for all the critically constructive interactions I had with you over the last couple of years. And if this should be my last analyst call in this role, yes, it's -- I just want to wish you all the best also for your future. I have had very interesting years, lots of roller coaster in German utilities and from a credit to great experience on innogy, which probably is the privilege of only few CFOs to both, yes, carve out an IPO, a company, which they are now dissolving just 4 years later. But this is without any bitterness, please. And let's see where we meet again, hopefully.

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Operator [34]

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There are currently no further questions. (Operator Instructions)

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Bernhard Günther, innogy SE - CFO & Member of Management Board [35]

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Sam's remark is probably difficult now to ask about pension provisions again, no?

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Operator [36]

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There are no further questions.

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Verena Nicolaus-Kronenberg, innogy SE - Head of IR [37]

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Yes. Thank you very much for everybody. And yes, let's see where we meet up again in the future. And hopefully, on roadshows and having interesting discussions going forward. Thank you.

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Bernhard Günther, innogy SE - CFO & Member of Management Board [38]

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Thank you. You have a good day. Bye.

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Operator [39]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.