EVN AG

VSE:EVN

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first quarter of the 2017/'18 financial year.

[Operator Instructions]

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

[Stefan Szyszkowitz, executive]

Good morning, and welcome to the conference call of EVN's results for the first quarter of the 2017/'18 financial year.

We are reporting today improvements in our result despite lower revenue. Generally speaking, the business development in the reporting period was characterized by different, partly contrasting factors. On the positive side, the renewable generation was strong due to favorable wind and water flow. In addition, we commissioned a new windpark in October 2017, which increased our wind capacity to 279 megawatt. Let me use the opportunity to update you on how we plan to proceed with our ambitious strategy to further expand our wind portfolio.

Already this spring, we will reach 314 megawatt when commissioning our new windpark Sommerein. As a next milestone, we aim to reach 370 megawatt by the end of the business year 2019/20 financial year. This will also be possible due to a special quota of subsidies which was passed by the Austrian parliament last year and was meant to reduce the waiting list of already approved project such as ours. Thereafter, our mid-term target is 500 megawatt. Subject to appropriate framework conditions, we will continue with our project pipeline, which still contains [indiscernible] advanced projects.

After this brief update on our wind strategy, I will now return to the developments in the first quarter '17/'18.

The demand of our thermal power plants remained high. We continued to play an important role in ensuring network stability. For the first time, all of our Austrian thermal power plants are contracted to support the thousand Southern German transmission networks during the winter half year '17/'18. The temperature-related energy demand declined during the reporting period. In comparison to last year, it was much warmer in Austria, Bulgaria and Macedonia. These weather effects in particular have negative impacts on our energy sales and network volumes in our South East Europe segment.

Let me now continue with the key financials for the first quarter of our new financial year.

The group's total revenue declined by 2.7% to EUR 590.9 million. The development of revenue was influenced by contrasting factors: revenue recorded growth and renewables production; marketing of thermal power plants to ensure network stability; the heating business and the regulated network business in Lower Austria. Now these positive developments could not compensate the decline in the natural gas trading activities as well as lower energy and network distribution volumes due to the warmer weather in South Eastern Europe. In addition, there were negative valuation effects from hedges in the energy business. Finally, lower revenue was also recorded in the international project business as compared to last year.

The cost of energy expenses declined in line with lower weather-related demand for natural gas in Lower Austria as well as for the energy in South Eastern Europe. In addition, there were positive valuation effects from hedges. A decline in revenue in the international project business was also reflected in the reduction of costs of materials and services. Based on improved energy business results, we are reporting today an increase in EBITDA by 5.4% to EUR 231.6 million.

The group's EBIT was up by 32.5% to EUR 166 million. This increase reflects the fact that, in the previous year, EBIT contained an impairment loss on the Gorna Arda hydropower plant project in Bulgaria. Financial results were down by EUR 3.2 million to minus EUR 11.8 million, which was due to the absence of prior year's positive nonrecurring effects in the interest results.

In total, group net result increased by 17.7% and amounted to EUR 112.2 million.

Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Supported by our strong operating performance, our key balance sheet indicators improved again in the comparison with the values reported as of the 30th of September 2017. Net debt, including noncurrent personnel provisions, was reduced by EUR 80.7 million to EUR 1.1 billion. Gearing decreased from 38.5% to 34.6% during the reporting period.

Before I will go through each of the segments in detail, I would like to give you a general overview on the EBITDA development of our business segments. They were a big chunk of our good operating performance as well as the negative weather impacts also reflected in the EBITDA development of the segments. Whereas the Generation, Energy and Network Segments report improvement, EBITDA in South East Europe declined due to warmer temperatures. In the Environment Segment, EBITDA went down compared to last year due to the developments in the international project business, but it is very general.

Well, let's move on now to the next slide, which covers the Generation Segment in more detail. In the Generation Segment, renewable production benefited from highly favorable wind and water flows as well as from the commissioning of another 10 megawatt in wind capacity. Therefore, renewable production in segment was up by 13.2%. Our thermal power plants in Lower Austria are again under contract for Southern Germany during the winter half '17/'18. For the first time, all of our Austrian thermal power plants, which corresponds to capacity of almost 1.1 gigawatt, are serving as a contractual reserve capacity.

During the reporting period, we received power requests on 46 days to stabilize the networks, which in the same number of the days as last year. However, thermal generation volumes in this segment declined by 22.1%. On the one hand, there was an unscheduled downtime in the Walsum 10 power plant due to a special inspection during the reporting period. And on the other hand, I would like to remind you that, in the last winter, there was a strong demand for thermal generation capacities. Some French power plants are not available during -- due to inspections, and demand for electricity in Europe was extraordinarily high due to the cold temperature.

Based on these developments and one-off effects last year, revenue in this segment was up by 29.9%. Operating expenses declined due to the lower use of primary energy carriers in line with reduced thermal production.

The results from equity-accounted investees improved due to a higher earnings contribution from Verbund Innkraftwerke, whereas based on these developments, EBITDA doubled to EUR 48 million. The already mentioned absence of prior year's impairment loss on Gorna Arda project is also positive, reflected in the segment EBIT, which amounted to EUR 35.8 million.

On the next slide, I will continue with the Energy Segment. Whereas an increase in the heat sales volumes partly compensated lower electricity sales volumes, natural gas volumes declined by 11.2% in view of warmer weather condition. Despite these volumes effects, the segment reported an increase in revenue by 8%. This development was supported by higher revenue from the heating business and the valuation of hedges as of the balance sheet's closing date. Internal operating expenses were higher, which was mainly due to the absence of positive nonrecurring effects. The shared results from equity-accounted investees with operation in nature remained almost stable. It contains the earnings contribution from our electricity and natural gas sales company EVN KG, which was slightly below last year's level.

In total, these developments led to an improvement of EBITDA by 5% to EUR 48.5 million and on EBIT by 5.2% to EUR 43.6 million.

On the next slide, I will present the development in our Network Segments. The network distribution volumes showed different developments in the reporting period. Whereas volumes in electricity distribution grids were up by 1.3%, those in natural gas declined by 4.3% due to warmer temperatures.

In view of positive tariff decisions taken by the Austrian regulator in the beginning of last year, revenue increased by 5.9%. Based on lower operating expenses, the EBITDA increased by 13.6% to EUR 98.3 million. EBIT amounted to EUR 68.8 million, which corresponds to an increase by 18.5%.

1st of January 2018 marked the beginning of a new regulatory period of natural gas distribution networks, despite the appeal filed by several parties against the decision of E-Control. Austria will continue to have an advanced incentive regulation, which forms the basis of continued investments and the efficiency gains in our stable regulated grid activities. Without going in every detail of the new regulation, I would like to explain its key parameters.

The weighted average cost of capital, which defines the return on the regulated asset base, was lowered to reflect the long-term interest rates levels. However, the regulator assess the weighted average cost of capital, the so-called WACC, of a company according to its efficiency. The WACC for average-efficient companies was set by 4.88%. More efficient companies can benefit from a higher WACC, which is the case of EVN's group company. Furthermore, the WACC on new investments in [indiscernible] had 5.2%. Finally, please note that the regulator has also lowered the general productivity factor from 1.95% to 0.67% per year.

With the beginning of the new calendar year, the Austrian regulator has also determined new network tariffs. Electricity network tariffs for household customers are up by an average of 2.4%, whereas natural gas network tariffs are down by an average of 16.2%. This sharp reduction reflects the correction of higher network volumes in the past years and are already considered the new level of weighted average cost of capital. The new tariffs will impact our Austrian network business as of the second quarter of this financial year.

On the next slide, I will continue with the South East Europe Segment. The business development in South Eastern Europe was influenced by substantially warmer temperatures in both Bulgaria and Macedonia during the first quarter '17/'18. Therefore, network and energy sales volume remained below prior year's level. The decline in volumes is also reflected in lower revenue, which decreased by 6.1% to EUR 239.9 million. Operating expenses declined in line with lower energy demand. In total, EBITDA in the segment declined from EUR 35.6 million to EUR 15.6 million. Based on a stable depreciation, EBIT amounted to minus EUR 0.2 million as compared to plus 86 million -- EUR 8.6 million in the previous period.

I would like to conclude with my presentation of the segments with the Environment Segment. The development in the Environment Segment is influenced by the acquisition and realization of orders in the international project business. These activities are cycled by its nature so whereas the international project business had shown a strong performance during the first quarter of the previous year, it was less dynamic in the reporting period. Therefore, revenue of the segment declined by 36.5% to EUR 41.8 million. The operating expenses also went down in line with the development of the international project business. Therefore, EBITDA amounted to EUR 7 million, which corresponds to a decline by 67.8%. In view of the stable depreciation, EBIT amounted to EUR 1.2 million. Financial results amounted to minus EUR 0.3 million.

After having finished the first out of 4 wastewater project in Macedonia during the reporting period, we were working on the realization of 6 general contractor assignments for the construction of wastewater treatment projects in Croatia, Macedonia, Poland and the Czech Republic as of the 31st of December 2017. The order book was about EUR 40 million.

We are pleased to report today that we were awarded a new order for a general contractor project in Bahrain in January. The contract is expected to be signed in the coming months. As part of the project of our German subsidiary WTE Wassertechnik, we'll extend the capacity of an existing wastewater treatment plant for the capital of Bahrain such that, in future, the plan for purified wastewater of about 1.6 million people. In addition, the project includes the construction of a new sludge drying and sludge incineration plant. The contract value of this project is about EUR 170 million. The construction period will be 36 month. And after completion, WTE will be responsible for the operation of the plant for a period of 10 years. Please note that we will not act as an investor in this project and that we will not be required to provide any financing.

As you know, we are also involved in the tender process of another even bigger wastewater-treating project in Kuwait. Together with our Kuwaiti partner, we are a preferred bidder and are in exclusive negotiations. We expect that the tendering authorities will formally award the contract in the course of 2018.

With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of our group cash flows.

Due to the sound operating performance, the gross cash flow rose by 17.2% to EUR 233.1 million. Cash flow from operating activities amounted to EUR 115.4 million, which corresponds to an improvement by EUR 90.1 million. This increase was supported, above all, by changes in working capital and the absence of nonrecurring effects. The comparable prior year value was influenced primarily by the reduction in liabilities resulting from the arbitration decision for the Walsum 10 power plant. Last year, the cash flow from investing activities included a similar corresponding positive one-off effect through the reduction of investment for the Walsum project. In view of the absence of this effect, the cash flow from investing activities amounted now to minus EUR 133.2 million (sic) [ EUR 163.2 million ]. The main focus of investment was on electricity, gas and telecommunication grids. Beside that part of the group's liquidity was invested in the main short-term financial assets, which is shown in cash flow from investing activities.

The cash flow from financing activities mainly reflects scheduled repayments of loans. Dividend payment took place in January and will therefore be included in half year's figures. The net change in cash and cash equivalents amounted to minus EUR 57.9 million. Please note that the net debt was reduced by EUR 80.7 million during the first quarter of the financial year.

I would like to conclude today's call with a brief update on the outlook for the group. I would like to remind you that the past financial year was influenced by a number of exceptional circumstances which had a positive effect on group net result for '16/'17. Therefore, I would like to confirm the outlook which we have given in December. Assuming average conditions in the energy business environment, group net results '17/'18 should return to a normal level that reflects the average of '15/'16 and '16/'17 financial year.

There are factors that could influence the group net result, including the regulatory background, especially in South East Europe; the proceedings currently in process in Bulgaria; the remaining proceedings over the Walsum 10 power plant project as well as the progress on the activities in Moscow.

Our investment strategy remains unchanged. And our focus continues to be on network infrastructure, renewable generation and the drinking water business. Thereby, we will further strengthen our stable and regulated activities in Lower Austria, which remain the basis for sustainable and stable earnings. All in all, we plan to invest approximately EUR 400 million in each of the coming financial years. Thereof, approximately EUR 300 million per year will directed to our Lower Austrian activities. In line with such an investment strategy, we remain committed to our integrated business model along the value chain of the energy business. We believe that our integrated business model proves to be particularly resilient in the current uncertainty and challenging market environment.

I have now reached the end of my presentation of EVN's results for the first quarter of 2017/'18. I'm now looking forward to answering your questions.

[Operator]

[Operator Instructions] And our first question comes from Mr. Peter Crampton, calling from Macquarie.

[Peter Crampton, analyst]

Two questions, if I may. Firstly, looking at your guidance for this year and your Q1 results with net income up around 18% year-on-year. There's an argument that your guidance is too conservative. And then the second question relates to the balance sheet, which is starting to look very, very strong. And I was just wondering what your thoughts were going forward, what you do with the quite substantial net debt headroom you have, whether we're looking a large acquisition or a step-up more in dividend.

[Stefan Szyszkowitz, executive]

Yes, thanks, Peter, for both question. As you might expect, I'm not able to change any wording, yes, which we were using because it is still the first quarter of the ongoing year. And on this basis, we are following quite closely how the weather and then the supply is developing. And on this basis and regarding the already mentioned uncertainties on the external factors, we are very carefully drafting our words here. Maybe after the first half of the year, I can give you an update regarding the outlook for this year. And regarding the dividend, as you have seen, we have increased the dividend on the background of last year's exceptional years. Let's see how the year is developing. And we are still in the cycle of high investment, as I've mentioned before, at around EUR 400 million per year. Majority goes into our core area in Lower Austria, but I think this also has to be reflected in the overall positioning of the management.

[Operator]

And our next question comes from [ Lucas Costala ], calling from Kepler Cheuvreux.

[Unknown Analyst]

Coming back to the gas network tariffs, which were down by 16% in Lower Austria. Is it fair to assume a clean effect of about 3% resulting from the underlying change to regulatory parameters and the rest being a volume effect? Also, there have been impairments in the past when network tariffs are reduced. Is this off the table for this year in the networks division? And the third question, some days ago, we see CEZ announce its sale of its assets in Bulgaria, resulting in the energy minister stepping down. Could you see EVN also pulling the trigger in SEE? Or could you also see maybe having or resulting in securities -- are there maybe any implications on the regulatory framework in Bulgaria resulting out of the energy minister stepping down?

[Stefan Szyszkowitz, executive]

Okay, I think very valuable questions. First of all, please take into consideration that the new gas tariffs are effective since the 1st of January 2018. Therefore, they are not already influencing the first quarter of our business year. So it's the ongoing year from now on which is influenced by these gas tariffs. This is a 5 years period. And now the main factors have been fixed, and the WACC has been updated. And therefore, during the current year, you will see the results and the influence, which will be seen in our results in the network business here. And regarding the second question, of course, we are following very closely the development in Bulgaria. As you can imagine, over the last 14 years, we have seen different periods. And we are still expecting the decision of the [indiscernible] from Washington during 2018. And I'm sure they will give some guidance regarding the stability of the regulatory framework.

[Operator]

And our next question comes from Teresa Schinwald, calling from Raiffeisen Bank.

[Teresa Schinwald, analyst]

Sorry for the delay. I have 2 questions. Regarding your outlook, first, for the operating result in South East Europe, what are you expecting for this year? You've been so graceful to provide us with the guidance on this segment in earlier years. And my other question relates to your hedging outlook. So you have more volatility in your hedging position valuation now. Could you provide us with some indicators? And related to that also, is there a change in your hedging strategy with the separation of the Austrian and German markets as of the fourth quarter of 2018?

[Stefan Szyszkowitz, executive]

Yes, Teresa, as we have mentioned in calls in the recent past, we are aiming at a mid-term result between EUR 40 million and EUR 60 million in South East. In this first quarter, besides of the temperature effects, we have a couple of other effects where we've drawn negatively influencing the first quarter, but I'm still optimistic that we will be between EUR 30 million and EUR 40 million [ even ] in this year, independent from ongoing decisions from regulatory authorities which we are following very closely. This is for your first question. Then to your second question regarding the hedging, we can confirm that, of course, the volatility in the energy business is also influencing our short-term optimization, but it's very hard to give there an expectation because it's defined by the date of the balance sheet. And therefore, we are conservative here, but I am not able to give you an expectation because this would be expectations regarding how the energy markets on the short-term spot markets are developing. And we have not changed our hedging policies, but we are expecting higher wholesale prices in Austria somewhere on average between 2.5 and 3 megawatt hours -- EUR 2.5 and EUR 3 per megawatt hour. This is the, more or less, expectation by the experts in the industry.

[Operator]

At the moment, there are no further questions. [Operator Instructions] There are no further questions at this time, Mr. Szyszkowitz.

[Stefan Szyszkowitz, executive]

Yes, so thank you again for joining today's conference call. Please join us again on Wednesday, the 30th of May 2018, and we will present the results of the first half of '17/'18 financial year.

Goodbye.