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Earnings Call Analysis
Q1-2024 Analysis
RWE AG
RWE had a solid beginning to 2024 with an adjusted EBITDA of EUR 1.7 billion, a slight decrease from the previous year. This was driven by positive performance in the offshore and onshore wind sectors, despite normalized market conditions compared to the exceptional previous year.
The offshore wind segment delivered an adjusted EBITDA of EUR 548 million, benefiting from better wind conditions. Onshore Wind and Solar contributed EUR 341 million, with gains attributed to organic growth and the full incorporation of the CEB assets.
RWE's flexible generation business saw an adjusted EBITDA of EUR 552 million, reflecting a return to typical market conditions after an exceptional previous year. Meanwhile, the Supply & Trading division had a strong start with Q1 results of EUR 251 million.
RWE reaffirms its full-year guidance at the lower end, anticipating an adjusted EBITDA between EUR 5.2 billion and EUR 5.8 billion, adjusted EBIT between EUR 3.2 billion and EUR 3.8 billion, and net income ranging from EUR 1.9 billion to EUR 2.4 billion. They also expect to maintain their dividend target of EUR 1.1 per share.
The adjusted operating cash flow for Q1 was minus EUR 379 million due to seasonal factors. Net debt increased to EUR 11.2 billion, influenced by investments, with EUR 2.3 billion invested net into growth activities, including significant offshore projects like Norfolk from Battenfeld.
RWE expanded its presence in the U.S. debt market by issuing $2 billion in green bonds, with strong investor interest. They plan to be a regular issuer in this market, leveraging the funds to finance growth at favorable rates.
RWE's management remains optimistic about their long-term prospects, especially in renewable energy projects. They also signal potential flexibility in investments and strategic divestitures to optimize their capital allocation and strengthen financial health.
Welcome to the RWE conference call. Michael Muller, CFO of RWE AG, will inform you about the developments in the first quarter of fiscal 2024. I will now hand over to Thomas Denny.
Thank you, operator, and good afternoon, ladies and gentlemen. Thank you for joining the Q1 2024 RWE Investor Analyst Conference Call today. Our CFO, Michael Muller, will guide you through our key highlights and financial performance for the first quarter and the outlook for the current year. And with that, let me hand over to you, Michael.
Yes. Thanks, Thomas, and good afternoon to all of you. First quarter was a solid start into 2024. Adjusted EBITDA stood at EUR 1.7 billion, driven by good wind conditions in our offshore business, capacity additions in the onshore business and a good trading performance. Earnings in flexible generation were lower after exceptional market conditions in the previous year. We confirm our full year guidance at the lower end of our guidance range. We've also made significant progress on offshore portfolio optimization. We have derisked our 3 gigawatts DogaBank South project by selling down 49% to our partner Mazda, and we have acquired the highly attractive 4.2 gigawatts Norfork project portfolio from Battenfeld. These well-developed U.K. offshore projects are eligible for CFD auctions in the coming years. In April, we issued the first U.S. green bonds. With this transaction, we have successfully reentered the U.S. debt market. In the future, we want to be a regular issuer in the U.S. bond market. The USD 2 billion bond has maturities of 10 and 30 years. We saw a high demand from investors with the bonds being oversubscribed 3.8x. The final book order book volume was close to USD 7.6 billion. The high level of interest demonstrates our ability to access debt capital markets, enabling us to finance our growth investments at attractive rates. Let's now take a closer look at the Q1 2024 financials. After the exceptional earnings in the first quarter of last year, EBITDA in Q1 2024 stood at EUR 1.7 billion, thanks to a good performance. In offshore wind, adjusted EBITDA was EUR 548 million, and earnings were up mainly on the back of better wind conditions. Onshore Wind and Solar recorded an EBITDA of EUR 341 million. This was driven by organic growth and the full contribution of the CEB assets. Adjusted EBITDA of the flexible generation business was EUR 552 million. As expected, we have seen a lower earnings development in line with normalized market conditions after the exceptional year in 2023. Our Supply & Trading business had a good start into 2024, and Q1 results stood at EUR 251 million. On the back of the strong operational performance, adjusted net income amounted to EUR 801 million. The year-on-year adjusted financial result is almost stable. For adjusted tax, we applied the general tax rate of 20% for the RWE Group. And finally, adjusted minority interest reflects lower earnings contributions from minority partners. The adjusted operating cash flow was minus EUR 379 million at the end of Q1 and is mostly driven by seasonal effects in operating working capital. Changes in operating working capital were marked by the seasonal purchase of CO2 certificates compensated by positive effects from the reduction of trade receivables and withdrawals for gas in storage. Net debt increased to EUR 11.2 billion due to investments and by timing effects. In total, we invested EUR 2.3 billion net into our grain growth. This includes the acquisition of the Norfolk offshore projects from Battenfeld and our sell-down of 49% of the Docavan-South projects to Mazda. Other changes in net financial debt amounted to EUR 1.9 billion. This includes timing effects from hedging and trading activities. Our net position from variation margins for power generation hedging stood at minus EUR 1.4 billion, representing an outflow of EUR 2.8 billion. This includes net variation margins from the sale of electricity as well as purchases of the respective fuels and CO2 certificates. We expect other changes in net financial debt to revert over the course of the year. For 2024, we confirm our outlook despite the faster normalization in European commodity markets. Adjusted EBITDA is expected to be between EUR 5.2 billion and EUR 5.8 billion. Adjusted EBIT is assumed to be between EUR 3.2 billion and EUR 3.8 billion and net income will range from EUR 1.9 billion to EUR 2.4 billion. We expect adjusted EBITDA, adjusted EBIT and net income at the lower end of the guidance ranges. The dividend target is EUR 1.1 per share for this year. And with that, let me hand back to Thomas for Q&A.
Thank you, Michael. We'll now start the Q&A session. Operator, please begin.
Thank you. Ladies and gentlemen, if you would like to ask a question [Operator's instructions] we'll pause for just a moment while waiting for the queue for questions. Thank you. We'll now take our first question from Robert Pulleyn of Morgan Stanley.
Two questions from me, please. Firstly, revisiting a theme that's been going on a year. May we ask what benefit, if any, you're seeing from rising power demand from the data center theme, both in the U.S. and in Europe. And of course, in your European markets, what this might mean for long-term power demand trends? And secondly, if I may, given a U.S. politicians comment about offshore wind over the weekend in the U.S., may we ask how you assess the risks for that industry under the next U.S. administration from 2025. And in particular, do you see permitting risks if RWE is indeed successful in the New York and New Jersey auctions this year. And assigned to that, do those auctions have flexibility on the commissioning date would be very interesting.
Yes, Rob, thanks for the question. Let's start with the data center topic, which is a hot topic currently in all the discussions. I mean, I can confirm you that we obviously are also strongly engaging with tech companies around PPAs. And actually, we are about to communicate another PPA we signed with a big tech company just recently over 400 megawatts at an attractive price. And that brings us overall to almost half of the volume of our U.S. capacities under construction being contracted to tech companies. So indeed, we do see strong interest for those companies in greening up their portfolio. And maybe that brings me also to the next aspect around offshore. I mean, obviously, we have also read the announcements. We don't have any more insights into the exact campaign. But if we look at the U.S., we see a continuing strong trend for green electrons. It's on the PPA side, we just discussed, but the same is true. I mean if you think about New York, I mean, if New York wants to decarbonize, they essentially need offshore wind. So therefore, we see the trend for offshore as yes, unbroken, so it stays intact. I mean, you already hinted to the right point. I mean, if you think about our New York portfolio, we have a lease there. And now we have the options to go into CFD auctions and to develop the project. I mean we still see demand for those projects. But at the same time, we also do have flexibility in developing the project and also looking for different offtakes. So it is something we'll observe, but it's nothing where you see me today being nervous.
Okay. Thank you very much.
The next question comes from Alberto Gandolfi of Goldman Sachs.
Thank you, thank you for taking my questions Michael and Thomas. My first question is on guidance. If I look at your Slide 8, you're really stressing everywhere, lower end, lower and lower end. But if I take your net income for Q1 and I simply add the E.ON dividend you're due to receive, you'll be at EUR 1 billion, so you'll be at more than 50% of the full year. So can I just ask you, I mean, in hindsight, where you to rush perhaps in downgrading guidance on the 25th of January. And again, with the benefit of hindsight, why sticking to the low end and not essentially mark to market the fact that commodities, pulp prices are going to spread have expanded a little bit, and the outlook appears even better on the horizon as we discussed, more PPAs, better returns. We are hearing from many players, power demand inflecting. So I'm just curious to see why you stick to such a cautious message. If there's anything that I'm not seeing here? And the second, I know you don't comment, but if we may not talk specifically about Amprion, but it's been reported that it's potentially for sale. But let's say, if it's not Amprion, is there anything that perhaps you may consider noncore that is perhaps for sale? And I'm quite intrigued by this route because it as far as I understand, it was besides the typical asset rotation, none of this was included in your CMD. So if you were to divest an asset that gives you proceed of a couple of periods, what would that be used for? I see that you're talking about net debt normalizing by year-end. So is RWE going to reduce leverage further. Is there a special dividend you're thinking or something else? Any cash return to shareholders? Or are you going to use this to create your own dignit foundation because perhaps the government has been dragging their feet?
Yes, Albert, you ask now for a complete strategic review.
Nothing less thank you.
I mean let's start with the guidance. I mean, my comment here would be, we are just a quarter into the year. And therefore, we stick to the guidance we have put forward and also our communication towards the lower end. Yes, I think what you rightly raised is kind of the commodity markets have stabilized in the meantime. So while we went with the message in January, we saw a continuing trend of lower carbon and gas prices and therefore, power prices. I mean, that went down to kind of the minimum in Feb and since then has recovered. I mean, especially on the CO2 side, it came back to, I would say, normalized levels yet days is probably more potential going forward. But yes, I mean, market prices have stabilized, and that is obviously also helping income. I mean you saw that in our full year guidance or full year communication, we showed how much of our existing fleet in renewables is still exposed to market prices. And there is still something also in 2024, and that is benefiting from higher prices. I guess the more important topic you raised is the long-term outlook where, I mean, we always said that despite we see a quicker normalization in the first years, we continue to stick to our guidance and also our view in the later years because on the one hand side, in our plans, we already baked in a normalization of prices. And at the same time, there is also some potential improvement to come. So therefore, I would say it's too early to judge about full year, and I can just reiterate that our long-term outlook for 2027 and 2030 perfectly stays intact. Talking about Amprion, I mean, let me first say, Amprion is a financial investment, which we are very happy with. I mean they are strongly performing yet unburned tonnes with a high investment need. And therefore, it's very clear that when we discuss capital allocation, we also discuss the capital that is needed with Amprion. And therefore, that's what we communicated. We are obviously and I think that's kind of usual hygiene, you should have when looking at capital allocation are looking into options around financing and in general, loss options around Amprion. So that's the comment here. I mean the other one on divestments. Yes, you're fully right. divestments, on the one hand side was leads to cash in and therefore, delever again. And at the same time, you should also expect book gains on those which we haven't baked into our plan. That's also very important to notice. I mean, I would consider divestments as being part of our capital allocation, yes? So therefore, I can just reiterate what we said at the full year numbers. I mean, when we look at capital allocation, we do see currently attractive returns. Clearly, projects are meeting the returns we have put forward at the Capital Market Day. Please bear also in mind this is kind of our return expectations. Obviously, every project should strive to outperform our return expectations, and that is also something we are seeing in projects where we actually see FID. So therefore, I can just confirm we do see valuable projects in our pipeline, and that is something we will consider when we look at capital allocation, including when we free up capital divestments.
Michael, sorry, but if I can just clarify this point, which I think is extremely important. Thank you, all very clear by the way. Let's say you were to receive, I don't know, I'm too there a number, EUR 1 billion in Amprion. Is your inclination to return this capital to shareholders or to put it at use somewhere else?
I mean, so I wouldn't talk specifically about Ampion. I mean what we said is that when we look at capital allocation, we look at where do we see investment opportunities. We currently see attractive investment opportunities in our projects. Yet we also said that if the conditions change, returning capital, more capital to our shareholders would be in the option space and something to look at.
Very clear thank you.
Yes. Thank you, Alberto.
The next question comes from Peter Bisztyga of Bank of America.
So first one, just coming back to this data center point. In ERCOT, we've seen forward curves already moved up by more than 20%. You've got, I think, 10 terawatt hours of exposure in that market. And I guess what I'm wondering is whether the clear impact of data center demand on those forward curves gives you an incentive to keep more of that business merchants going forwards? Or are you, in fact, seeing appetite for PPAs at premiums to even these higher forward prices? So that's kind of my first question. And then staying on that topic, are you seeing any difference in the premiums that data centers or hyperscalers are willing to pay for PPAs in the U.S. versus Europe, please? And are you having those kinds of conversations in Europe.
Yes. Peter, happy to take the questions. I mean, first of all, ERCOT, I mean, indeed, how prices has gone up. I mean we also said that already in the course of last year, we gave the clear steer to our businesses, at least on new projects that they should go for contracted businesses. And that's I mean, we said 95% of the projects that have CODs last year were contracted and also the new assets have a high share of contracted. So that stays intact. So I wouldn't say we go for more merchants. At the same time, on the existing fleet, yes, we do see upside, and that's been part of the regular hedging activities with power prices going up. And obviously, we try to capture those business, those upsides on the existing fleets. Contracting existing assets in ERCOT, via PPA. To be honest, it's not so common. So you get the better prices with new assets, and that is really also then the focus. And on the existing one, it's really then optimizing in the current environment. Is there a big difference between the U.S. and Europe? I wouldn't say so. So we're also seeing demand from data center providers to purchase power in Europe? No, actually not. And also, I mean, you could imagine that maybe in Europe, they would even be more bullish on buying green molecules. That's actually the same also in the U.S. Yes. So no big difference.
Thank you.
Thank you, Peter.
And the next question comes from Olly Jeffrey of Deutsche Bank.
The first is on debt. Obviously, it's quite a high number in Q1. We've spoken about that reversing or elements of that reversing over the rest of the year. Could you give us kind of a band where you see that net debt figure possibly landing by the year-end? That would be helpful. And the second question is just current the trading business. We had a very strong Q1, far ahead of good guidance in that business. How do you feel about the outlook for that trading business for the rest of the year? Is there a change in the development of what we've just seen in Q1? Thank you.
Yes. Olly, I mean, on net debt, I guess, that is the question. The market is really interested in. I mean, look, the big movements we have seen is working capital. So we do expect that to fully revert even more over the course of the year. When we think about other elements in the financial debt, so especially on around variation margins. We also expect that to revert over the course of the year. So I mean, if you do the math and you assume that kind of we continue with the run rate of the current investments we have, that should bring you by year-end about the same order of magnitude where we currently are with net debt so therefore, kind of balance impact the temporary effect or seasonal effect and then counterbalance by continuing investments through the course of the year. Around trading, I mean, you know that we don't, our perspective is always Q1 is pretty early. So it's not the point in time where we would kind of judge on the full year, and therefore, we keep the existing guidance intact. Obviously, we are very happy with the Q1 results.
Thanks.
Thank you, Olly. Next question, please.
And the next question comes from Deepa of Bernstein. Please go ahead. She dropped the line. While waiting for her to requeue, we shall go to Wierzbicka of UBS.
Hi it's Wierzbicka Serwinowska UBS. Two questions from me. The one is on the renewables. In Plant recently, the higher returns in the renewables project versus what they expected at the CMD in 2023? And do you see a similar trend? Do you also see returns going up versus what you saw last year? And maybe if you, would you be able to disclose some items on the latest renewable projects that you are developing to give us more confidence that basically investing renewables give shareholders a better value. And the second one is on the European data centers, would you be able to disclose how much PPA in terms of the two hours have you signed so far in Europe?
Yes, Deepa, First, on the returns, I mean, I would kind of stick to the numbers we have put forward at the Capital Market Day. I think the important point here, and that is something we also had in quite some discussions on the road is kind of the range we put forward is the range for what we call the hurdle rates, so that needs to be met in projects. Yes, what you typically would see there are projects that are also exceeding those returns. And actually, the way how we see the project is not to just meet the hurdle rate, but to exceed it. And therefore, that also gives me confidence that we do have really value-accretive projects that meet the return expectations and even go beyond that. I mean on data center demands to be fair, kind of the high ratio of tech companies purchasing power from us in the U.S., we don't see that yet in Europe. At the same time, we do have ongoing requests from data centers in Europe on PPAs. And we are also seeing data centers now being built up. I mean, you may have seen that there was in the press that we sold land in the RinesLiknite area to Microsoft, which wants to build a data center, and they also want to build a second one, I think, in the Frankfurt area. And clearly, those data centers go along with the demand for green power. And that's actually what we're also seeing. There are requests for PPA offers, and that is something I would also expect to pick up in Germany in Europe. And if I can add one shouldn't forget that also in Europe, many of the assets that we built in onshore and solar space actors because that's a very risky, very high price alternative as well.
Okay. So there is no number of terawatt hours that you can give us in the for data centers in Europe in your portfolio?
No.
Okay, thank you.
And we'll now take our next question from Deepa of Bernstein.
I think there was a technical problem. So I don't know if anyone's already asked the question I'm about to ask. So I had 2 questions. One is you mentioned about the PPA in the U.S. for 400 megawatts. So more broadly, I wanted to see now that you've finished this quarter, what are you seeing in terms of PPA pricing, particularly versus where baseload power prices are trending both in the U.S. and Europe? And are you seeing a green premium from your buyers? So that was the first question. The second one, just a clarification on net debt. Just recapping my understanding is, on the one hand, you're guiding to a normalization on variation margin, probably more than a normalization of working capital with inflows but also you're highlighting that the CapEx run rate is similar to first Q, so around 10 billion-ish, which is probably lesser than most of us have in our model. So could you just clarify that? And does this mean also that if you're spending EUR 10 billion this year out of the EUR 55 billion program, then in later years, there's some farm down or something, which kind of compensates. Could you comment on that?
Yes. Deepa, I mean, let's start with the net debt and then the fund- assumptions, I couldn't have phrased it better. So everything is correct what you said. And then on PPAs, I mean, look, the difficulty is, first of all, we don't communicate prices. We have contracted with customers. And the second one, PPA prices also very much depend on where they are. So I mean, if you go to some of the East Coast states, especially the more Noel, the higher the prices get so they get pretty much sometimes even to levels you see in Europe even above that. If you go to some other areas where it's easier to build renewables, but also the costs are lower price levels are lower. And then it's a question if you go for yes, unit contingents, busbar PPAs, or what's kind of the setup is. So it's difficult to say. But I mean, what is fair to say there is demand for green molecules and that is helping, yes, to achieve attractive returns in our renewable projects. And that's in the end. I mean, in the end, I don't care so much about the absolute price of the PPA. I care about the economics of the specific projects. And that is the important view, and that is indeed something where we see, as I said, meeting our return expectations and even exceeding them.
We'll now take our next question from Harry Wyburd of BNP Paribas.
It's just 1 and a half question. Firstly, just on the debt. Could I just clarify, so you're saying that you expect year-end net debt to be where it is now at about EUR 11 billion. Is that assuming neutral variation margin? Or is it assuming the variation margin going where it is at GBP 1.4 billion? First one and the second one, on Flexion, I just wondered, given that commodity prices have rebounded, have you seen market conditions in flexible generation also rebound in the last few weeks in line with power prices? Or have you seen a divergence in profitability there from a sort of linear relationship with power prices? And are you seeing any regional differences in Flexion if you look at some of some metrics, it suggests that the U.K. market perhaps is looking a bit weaker in terms of intraday volatility than the continence. I'd be interested to know if that's something that you've seen as well.
Yes, I mean, let's first talk about the variation margins. I mean, roughly, we assume like other changes in net debt, about EUR 2 billion to revert over the course of the year. So that's roughly the ballpark number. On flexible generation, my comment would be the following. What we see is that the intraday and they have volatility, that is clearly picking up again. So while I would say maybe the fab around that. We saw a slight deterioration here still, and then we always said that this intraday that optimization is fairly stable. I mean it was maybe down to 90% of the level we would expect. And that has clearly recovered. So we see further strengthening here. The other topic is more of what we described as kind of the time value. So what we have seen is that the overall curve has come down and especially optimizing between hours that has deteriorated. We haven't seen a significant pickup here. But what is at least important is it has stabilized. So therefore, kind of the guidance that we have out there can be clearly confirmed but clearly, with now I mean, people are also a little bit more concerned around gas. I mean, going into the winter and let's see what happens, there is clearly upside because, I mean, you know our fleet is, in the end, long volatility. So in case volatility picks up again, we would clearly benefit with our fleet there.
Okay. Thank you.
Thank you, Harry.
Thank you. Once again, as a reminder, ladies and gentlemen, if you would like to ask a question [Operator's instructions] Thank you there are no further questions in queue. I will now hand it back to Thomas for closing remarks.
Excellent. Thank you all. Thanks for the good discussion and for dialing in today. If you have further questions on any of the topics, feel free to reach out to the IR team. And apart from that, I wish you a great afternoon, and speak soon. Thank you. Bye-bye.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.