Enerjisa Enerji AS

IST:ENJSA.E

Earnings Call Transcript 2023-Q3

[Murat Pinar, executive]

Good afternoon, everyone. This is Pinar Saatçioglu, IR Manager of Enerjisa Enerji. Welcome to our quarterly earnings call, and thank you for attending. The call will be presented by our CFO, Dr. Philipp Ulbrich and Treasury, Risk, IR and Tax Director, Cem Gökkaya. Following the presentation, we will open the floor to Q&A. Philipp, the floor is yours.

[Philipp Ulbrich, executive]

Thank you, Pinar. Good afternoon. This is Philipp Ulbrich, CFO of Enerjisa Enerji, and I also welcome you to our quarterly performance call. Being more than 5 months in office now by view on the company and on the market, Enerjisa Enerji's operating have sharpened. This is allowing me to see many meaningful opportunities for profitable growth. Let me come back to this positive outlook after guiding you through the key financials as of Q3 2023.

In the last quarter, Enerjisa Enerji showed once more a strong operational and financial performance that is delivering on its targets despite a challenging environment. Let me explain how this translates into the major financial KPIs. Cumulative operational earnings of Enerjisa Enerji compared to last year's same period are up by 53% and stand now at close to TRY 16 billion. Cumulative underlying net income compared to the same period of last year is even up by 69% with now almost TRY 4.3 billion. The corresponding investments we made during the first 9 months amount to almost TRY 9 billion.

This is 268% up compared to the last year's same period and already by far outperforming the overall investments in 2022, which accounted for TRY 4.6 billion. We will explain you in more details during this call the benefits that we expect from gearing our investments this year, even we are currently operating in a high interest environment. Our leverage, this is financial net debt over operational earnings, stands now at approximately 4.9x compared to 1.1x at the end of Q3 last year, and 4.6x at the end of Q2.

The significant increase since last quarter reflects our success in deploying profitable investments. The continuously comparable low leverage for an infrastructure business allows for far more investments that we are prepared to carry out if financial market conditions become more stable. When it comes to cash, first of all, with more than TRY 11 billion, a record high operating cash flow before interest and tax has been delivered, which is more than 200% up compared to Q3 of last year. This is showing our strong operational performance.

Free cash flow after interest and tax is driven by profitable investments and the related interest costs, thus lower compared to last year. This is minus TRY 5.2 billion compared to minus TRY 2.7 billion at Q3 2022. I would like to state very clearly that this free cash flow development is no point of concern for us as spending is based on robust as well as profitable business cases. We will explain this later in the call and also how diligently we are managing at cash Enerjisa Enerji.

Overall, we are delivering strongly on our financial targets, and we just reconfirm our guidance for 2023. It is worthwhile to mention that Enerjisa Enerji is delivering on its targets, even the financial markets in Turkey remained very challenging. Let me address how we manage these challenges from a financial point of view. Firstly, the still remaining scarcity of funding is not limiting us. We are managing this challenge by having broadened our funding sources well in advance.

The sites entering or renewing loans, which are especially impacted by regulation, we take advantage of our good relations with multinational financial institutions, like EBRD or IFC, both offer funding in Turkish lira. Thus, we are not entering into unwanted FX risks. Also, a very effective source of financing proved to be our access to the bond market. In the 9 months until the end of September 2023, we issued TRY 12 billion in bonds and by this, have become the most important issuer in the real sector in Turkey. This means other than banks.

We just received the authorization for TRY 15 billion of additional green bond issuing, which is a very clear signal of the systematic support of our funding and with this also for our investment policies. There are 3 principles that apply here in our steering. First, maintaining multiple sources of funding that allows us to realize our investment plans by still being able to choose the more suitable funding in terms of interest rates and durations. Second, we only enter into funding when the profitability of the related investments is ensured. Third, we only finance with durations that would allow us to take advantage of lower investment rates that we are expecting in the midterm in line with the plan of Turkish government for fighting inflation.

Let me add here that the management of Enerjisa Enerji is fully supporting these policies as they aim at achieving a stable financial framework with significantly lower interest rates and inflation. Both would provide us with the conditions to invest even more in the distribution networks of the 3 regions we are operating in and also offering customer solutions to B2B customers. For this, we will be able to make use of our strong balance sheet and by this, leverage our equity, thus increase also the return to our shareholders. For the time being, it is still too early to fully swing to higher gearing.

Having been on an equity roadshow to London, mid of October, we, however, took note of the positive outlook of many of the most important emerging market investors regarding the Turkish stock market, if orthodox publicities prevail. It was highly appreciated that Enerjisa Enerji further reinforced relationships with the international investors as the company has a clear investor story and especially with its distribution at its customer solutions business is operating in 2 growth businesses, leading significant investments in Turkey's journey towards higher energy efficiency, while also our retail businesses offer many upsides when markets get deregulated. With this positive midterm outlook, let's now have a closer look at the Q3 financials.

For this, I'm glad to hand over to Cem Gökkaya, Enerjisa Enerji's Treasury, Risk, IR and Tax Director.

[Cem Gökkaya, executive]

Thank you, Philipp. Dear investors and analysts, I extend a warm hello to each of you. As it was mentioned in the last earnings call, I have assumed the responsibility of Investor Relations at Enerjisa after Rawand's departure, bringing with me 25 years of experience in finance. Throughout these years, I have had the opportunity to explore various financial domains, including planning, controlling, treasury, corporate finance, enterprise risk management, internal control and now investor relations and tax.

I spent the last 15 years with an Enerjisa, not only in electricity retail and distribution, but also in generation, providing a good understanding of our industry and developing in me a big appreciation for the role it plays in sustainability. I want to express my gratitude to all of you for joining us today and for your continued interest in our company. I'm pleased that we will witness an Enerjisa story going forward together and looking forward to our interactions in the future.

Now I'd like to move on to the details of the financials. As you can see on Page 5, operational earnings increased by 53% year-over-year to almost TRY 16 billion. The year-on-year increase breakdown per segment of the first 9 months of 2023 operational earnings is TRY 4.3 billion from our Distribution business contribution, TRY 1 billion generated from our Retail business growth related gross profit and TRY 0.2 billion from our Customer Solutions gross profit. Per segment basis, our Distribution business generated a segment growth of 48% year-over-year, with the 3 main components highlighted in the bridge as follows: Financial income increased by TRY 2.7 billion on the back of high inflation and investments, as well as the IFRIC methodology change initiated on 1st of July 2022, aimed at more fair presentation of financial income, which contributed with TRY 1.5 billion of higher earnings.

CapEx reimbursement, which is a part of our operational earnings, but not included in the underlying net income increased by TRY 1.5 billion, reflecting our profitable growth in investment policies in past years. Our Retail segment also contributed to increased earnings with a growth rate of 41% year-over-year, generated mainly from our regulated portfolio as well as liberalized portfolio. Here, the regulated gross profit increased TRY 632 million year-over-year, thanks to higher retail service revenues. These are mainly due to increasing doubtful receivable compensation impacted by the earthquake. Also on top, operational expenses compensation increased driven by mid-year inflation escalation.

The regularized segment also contributed to the growth with an increase in gross profit of TRY 405 million in the first 9 months of 2023, mainly due to effective sales price and cost management, as well as our strong brand value attracting customers to liberalized segment even in a challenging environment. Moreover, our Customer Solutions segment generated an increase in gross profit of TRY 216 million on the back of growth observed in the solar PV and E-Mobility businesses.

Now let me elaborate on the bottom-line development on Page 6. Our underlying net income increased by 69% and reached TRY 4.3 billion in the first 9 months of the year. Our operational FX losses increased by TRY 513 million year-over-year due to a revaluation effect of procurement contracts in our Distribution business, which are denominated in FX prices. Please note that here, active hedging mechanisms are offsetting almost all of these effects. Relevant FX hedges are reported under operational earnings.

Further on, net interest expenses of loans and bonds, including the impact of cash and derivatives increased year-over-year by TRY 357 million due to increasing interest rates. Our average financing rates for long-end bonds increased from 24% in the first 9 months of 2022 to 27.7% at the same period of this year due to increasing funding rates in the market. Despite challenging financial market conditions, our average financing rates were well below market average, thanks to our provisional debt management.

The reasons for this limited hype on Enerjisa's financing rates are that our average interest rate also includes some loans from the last year, which have yet not fully reached maturity and other drivers that our bond rates decreased substantially due to the phasing out of CPI-linked bonds, which were very expensive in the high inflationary environments and included in the comparison base of last year. We don't have any CPI-linked bonds anymore.

Let's now have a look at our operations on Page 7, starting with distribution. CapEx came in at TRY 7.4 billion in the first 9 months of 2023, up from the TRY 2.3 billion during the same period of last year. The main drivers for the TRY 5.1 billion increase are ramped up investments as well as higher inflation that increases the prices of the respective materials and services that get capitalized. As a consequence, our regulated asset base increased by 60% year-over-year, reaching TRY 30.2 billion in the first 9 months of 2023 compared to TRY 18.9 billion in the same period of last year.

Efficiency and quality earnings in the first 9 months of 2023 increased by 16% compared to the same period of last year and reached TRY 576 million, mainly driven by CapEx out performance turning to positive following the upward adjustments related to material prices by the regulator as well as higher contribution from theft and loss accrual and collection performance.

Now over to Retail and Customer Solutions segment. Regulated volumes increased by 11% year-over-year, while liberalized volumes increased 4% year-over-year, driven by higher consumption caused by high temperatures, especially in Toroslar region in Q3 '23, already more than compensating for the impact coming from -- in terms of margin, regulated margins remained stable at 7.2%, while liberalized margins increased strong 3.4% to 4.2%, driven by the effective sales price and cost management, even bring challenging environment.

Our Customer Solutions gross profit increased significantly from TRY 104 million in the first 9 months of this year to TRY 320 million. This equals to a growth rate of 208% year-over-year driven by the increased in solar capacity in solar power projects where we install solar panels on our customers' facilities, providing them with access to green energy as well as continuous growth in E-Mobility business. Our E-Mobility business took a substantial leap forward as the charging plug base increased more than twofold from 603 to 1,278 plugs on the back of the fast growth delivered based on the public tender agreement secured in the second half of 2022.

On Page 8, you can see the breakdown of our investments and free cash flow development. Majority of our investments are coming from Distribution segment, while Customer Solutions and E-Charge business are also contributing at an increasing pace. Accordingly, our profitable investments more than tripled compared to the same period of last year and reached TRY 8.7 billion. I would like to highlight that free cash flow management is an integral part of our business, and we have significant expertise as strength in managing different phases of free cash flow lowness.

First of all, as Philipp mentioned in the beginning of the call, our OCF, operational cash flow before interest and tax reached TRY 11 billion, a record high level in the first 9 months of this year, fully compensating for overall investment. CapEx overspending in distribution is a conscious strategy to deploy capital in profitable investments. Our return on these investments are calculated based on midyear inflation, plus currently 12.3% real WACC and our additional cost is driven by borrowing interest.

Since the high midyear inflation is expected in 2024, we ramped up our investments to benefit from next year's potentially-high margin. As stated in the beginning of the call, our FCF after tax and interest is at negative TRY 5.2 billion as of end of September '23 due to these profitable investments and related interest costs. We would have had a far higher FCF this year without this investment. This negative FCF was already expected and signaled at the end of last quarter earnings call. Going forward, by year-end '23, we plan to continue CapEx overspending and expect current retail tariff burden, which is the negative gap between end-user tariff and power sourcing costs to continue accumulating.

Please note that the tariff burden is also increasing the financing costs, which, however, is being compensated. By Q2 '24, we expect retail tariff burden problem to be addressed by expected tariff increases and support from later via various mechanisms as realized in the past. I would like to highlight that FCF is not a short-term KPI for us as this is the nature of this business to raise financing and deploy the capital to profitable investments. In addition, in the usual course of business, there are maybe short-term relaxations in FCF due to regulatory change, but in the long run, they are sufficiently composited over time, including the respective financing costs.

Lastly, turning to Page 9. I want to walk you through the major change in our net debt position. Our economic net debt increased 68% year-to-date, going from TRY 15.2 billion in December 2022 to TRY 25.6 billion at 9 months 2023. I would like to highlight once again that the increase in borrowings is a result of our CapEx overspending on profitable investments. And without these investments, our operational cash flow is covering the items you see on the economic net debt development graph on the left side of the slide. Our leverage ratio decreased from 1.1x to 0.9x, thanks to the relatively higher operational earnings growth. Current low gearing level allows us to continue profitable investments if we consider the combined regulated and market conditions as sufficiently advantageous.

I now hand over to Philipp for providing you with our latest guidance.

[Philipp Ulbrich, executive]

Thank you, Cem. Let me now finally walk you through our outlook and comment on our guidance. Certainly, as at the end of Q2, we reiterate our midterm outlook for the period 2022 to 2025. We confirm the compounded average growth rate of 30% to 40% for our operational earnings and of 25% to 35% for our bottom line, namely underlying net income. In addition, we reiterate our 2023 guidance, which positions as follows. Operational earnings in 2023 are expected to be in the range of TRY 20 billion to TRY 24 billion.

2023 underlying net income is expected to reach TRY 5.0 billion to TRY 6.0 billion. Our 2023 regulated asset base is expected to be standing at TRY 30 billion to TRY 35 billion by end of year. And so is our investment guidance of TRY 11 billion to TRY 15 billion. We aim to end the year around upper end of this investment guidance. Please note that roughly 80% to 90% of this figure is dedicated towards our Distribution business, while the rest are investments into the fast-growing Customer Solutions segment. These investments are shown in OpEx as the assets are handed over to the customers at the time of commissioning.

The main parameters that impact our outlook remain the key energy and financial regulation rules as tariff levels and energy procurement costs as well as the inflation and interest rate environment subject to monetary policies decided by the central bank. While Enerjisa is on a long-term basis well protected from increasing inflation rates, the rapid change of interest translate into temporary deviation from our unit growth rate. At the end of the presentation, let me come back to my positive outlook I presented to you in the beginning. We expect that a stable financial and regulatory framework in Turkiye offers significant growth opportunities for Enerjisa Enerji and we are well prepared in sizing these opportunities. This will add profitable business to Enerjisa Enerji and thus create additional returns and leverage to our shareholders.

[Murat Pinar, executive]

Thank you, Philipp. Now we are initiating Q&A session.

[Murat Pinar, executive]

[Operator Instructions] We have our first question coming from [indiscernible] from Gedik Investment.

[Unknown Analyst]

This is [indiscernible] from Gedik Invesment. Can you elaborate a bit on the reimbursement for earthquake-related OpEx outperformance? Do we have a clearcut outlay for fourth quarter of this year? Or are we waiting on the regulatory actions? How much of a reimbursement should we expect for [year-end]?

[Cem Gökkaya, executive]

Thank you for the question. I think the last number we provided was from our half-one earnings call, around TRY 700-plus million spending until that time. We know that 25% of these expenditures until the end of June 2023 will be provided in cash back to us this year. And the rest will come next year or the expenditures after half-one this year, we expect them to also be reimbursed next year. I cannot provide you figures now about what the figure will be at the end of the year, but the plan is to get all of the expenditures latest next year.

[Murat Pinar, executive]

Thank you. Next question comes from Umut Ozturk from Ata Invest. He has 2 questions.

When do we expect the free cash flow to turn to positive again? And the second one is how can you expect inflation accounting would affect your financial?

[Philipp Ulbrich, executive]

So this is Philipp again. The first question is clearly more a strategic one. And Umut, you might not like the answer, but it depends. So what is the background as you have seen, and the free cash flow that we are presenting is impacted by the CapEx that we are doing. And these CapEx are [indiscernible] if we do see a profitable business or if we see only limited opportunities for a profitable business. In other words, if we continue to have this very positive outlook on the return of our investments, we might see free cash flow with a negative fixed fee rating.

And this is then also clearly reflecting that we are currently operating with a very low gearing. If you compare to other downstream power enterprises that are listed, you will see that they all are operating at far higher gearing and this is what we meant that having these additional investments is, in the end, profitable due to the usage of the leverage for our investors and the road to getting to this higher gearing is clearly marked by a negative free cash flow.

[Cem Gökkaya, executive]

And for the second question, I can say that we have already announced our inflation accounting reports at the end of 2022 and half year 2023. You can follow the impacts and the differences between the financials with and without inflation accounting there. But I'm not able to give you a guidance about that going forward now.

[Murat Pinar, executive]

Thank you, Cem. Our next question comes Cenk Orcan from HSBC. Actually, he has 2 questions. First one is, can you please explain to us what impacted the very low mid-year inflation of this year have on your results? Has there been an adjustment or higher inflation? And the second one is, is there a particular region receiving most of your accelerated CapEx or evenly distributed across your 3 regions?

[Cem Gökkaya, executive]

Okay. For the first question, our OpEx spendings increased more than the current inflation rate for 2022 and 2023. EMRA, in order to compensate this high increase already increased our OpEx ceilings by 40% for '22 and 30% for '23 according to its official announcements. And we know that they are following this closely as they did also for CapEx unit prices. They are following this closely and taking actions if they see a big difference between the inflation basket of our expenditures and the general CPI. For the second question, starting on the distributors, I can say that 40% of the investments are in Toroslar region, 35% Baskent and 25% Ayedas.

[Murat Pinar, executive]

Next question comes from [indiscernible]. Do we expect any tariff change or any regulation change in the near term.

[Philipp Ulbrich, executive]

So I take this. Always difficult to predict what can be regulatory changes we see, however, and that the system that is currently operated is creating a high financial burden for the Turkish government. So this is one reason why we expect such a tariff change. And the second one is also the announcement that are also made publicly in the market that point, especially, towards more cost-oriented tariffs in the industrial and the corporate segment.

[Murat Pinar, executive]

Thank you, Philipp. [Operator Instructions]

We have one more question from Umut from Ata Invest. Do you still maintain your dividend policy of distributing 60% of your underlying net profit?

[Philipp Ulbrich, executive]

So this is Philipp again. Yes, we confirm this as part of our guidance. The reason also here is once again that we are currently having this very low gearing. So even if we are increasing our investments and we are increasing our gearing, we see also a sufficient room for continuing with this high dividend distribution policy, which is also typical for a downstream infrastructure business in the Power segment.

[Murat Pinar, executive]

Thank you, Philipp. So we don't have any questions in the pipeline, I assume. So thank you for participating into our earnings call. Last but least, we advise all of our analysts to submit underlying net income forecast in earnings surveys, not the TFRS reported net income forecast as this is the base for dividend, the underlying debt. Thank you very much for participating once again.