E.ON SE (PNK:EONGY) Q1 2023 Earnings Call Transcript May 10, 2023

Iris Eveleigh: Hello, everyone. Dear analysts and investors, welcome to our First Quarter ’23 Financial Results Call. Thank you for taking the time to join us. Today, I’m here together with our CFO, Marc Spieker, who will give a brief update on our financials. As always, we will leave enough room for your questions after the presentation. With that, over to you, Marc.

Marc Spieker : Thank you very much, Iris, and a warm welcome as well from my side. Looking at our first quarter results, let me highlight 3 messages. First, we have seen a strong financial and operational first quarter in both our business segments, Energy Networks and Customer Solutions. As you would expect, this performance was driven by investment-backed organic growth as well as solid business execution in volatile commodity markets. In addition, we have seen positive timing effects that I will elaborate on later. Second key message, we confirm our 2023 outlook. We still keep a cautious stance on our assumptions. For our investors, this means we will deliver financially independent from market volatility or even a resurgence of the energy crisis.

Third message. The energy transition is accelerating. Our CapEx program is ramping up as planned. This fully underpins our 5-year green growth program in all of our midterm pledges. Let’s start with the details of our Q1 results. Our adjusted EBITDA came in at €2.7 billion, roughly €900 million above prior year’s first quarter core EBITDA. In our Energy Networks business, growth came from CapEx-driven RAB expansion in all countries as well as an accelerated recovery of network losses in our European business. Additionally, we are seeing temporary upside from significantly lower than assumed commodity prices. This commodity-related upside is specifically related to the so-called redispatch cost in our German networks business and is ultimately a pass-through item for our P&L.

And as usual, the pass-through comes with a time lag. Fundamentally, redispatch costs are driven by the need to curtail volatile renewables production in times of network congestion. In case of curtailment, DSOs provide financial compensation to affected producers based on actual market prices. The DSOs cost for this compensation is nevertheless is undercovered by the network tariffs. Any mismatch in the tariff assumption versus the actual outturn will be balanced via the regulatory account with a time lag of t+3 and then spread over 3 years. Thus, economically, all of these effects are neutral. The network tariffs for 2023 were for obvious regulatory reasons, already calculated beginning of the fourth quarter in 2022. We assumed much higher wholesale costs than those materializing year-to-date.

This has led to materially positive Q1 impact. Let me stress that the final impact for the full year 2023 will depend on the weather-driven outturn as well as the development of wholesale prices during the remainder of the year. So it’s going to be a volatile effect. We will keep you posted as the year progresses. Moving to our Customer Solutions business, where we achieved an adjusted EBITDA of €0.8 billion. This €400 million year-over-year increase is largely driven by a normalization of our retail margins after a particularly weak Q1 2022. It is worth mentioning that we returned to the positive earnings territory also in Romania because regulatory conditions have normalized. On top, we achieved procurement optimization gains in Germany and the Netherlands in the low triple-digit million euro area.

As announced, we stopped reporting a noncore segment. The remaining contribution from our German nuclear operations in 2023 is being disclosed now as part of our nonoperating earnings. The Corporate Functions and Other segment slightly improved year-over-year largely because the segment now includes the Turkish generation business, which formerly was reported under the noncore segment. Our adjusted net income shown on Page 4 shows an increase fully in line with our adjusted EBITDA. Notably, the economic interest result in the first quarter is still in line with prior year. Higher refinancing costs were still compensated during the first quarter by higher earnings from cash deposits. However, by year-end, we expect high economic interest expense in comparison to last year.

Now moving on to an update on our bad debt development. Despite further price increases since the beginning of the year, the payment behavior of our customers remains unchanged in all our markets. We continue to build earnings effective bad debt provisions at the same relative ratios as for the full year 2022. With this, we stay fully prepared should a recessionary scenario materialize. Looking at the development of our economic net debt, I would like to highlight 3 points. First, the typical negative operating cash flow in Q1 should not come as a surprise for you. It reflects the usual seasonal pattern in our business model. We also highlighted as part of our full year call reversals from spillovers from last year. Overall, we still expect the cash conversion rate below 100% for full year 2023, which will then swing back to 100% in subsequent years.

Second point I would like to mention. We accelerated our investments into the energy transition. Our group investments have increased by more than 30% in the first quarter year-over-year. And that provides us with full confidence to also achieve the significant ramp-up for the full year. Third message, our successful energy procurement strategy has led to a very limited cash outflow from margining even though energy wholesale prices dropped by around 30% in the first quarter alone. Overall, the increased economic net debt of €35.1 million is fully in line with our expectations. Let me now close today’s presentation with our remaining year guidance and our midterm delivery plan. Even though we saw another significant improvement in our market environment during the first quarter, we remain cautious when it comes to the remaining year guidance, which still assumes an energy crisis scenario.

We will obviously revisit this assumption as the year unfolds. Despite our cautious remaining year outlook, our strong first quarter lifts our confidence regarding the 2023 full year outturn. Therefore, we now assume to end up towards the higher end of our earnings ranges for adjusted EBITDA, net income and earnings per share. The pace on the investment side will be kept throughout the year and will lead to investments of around €5.8 billion for the green energy transition. This means that we also confirm our growth targets for 2027 and beyond. Thank you very much. And with that, back to you.

A – Iris Eveleigh: Thank you, Marc. And with that, we come to our Q&A session. And the first question comes from Harry Wyburd from Exane. [Technical Difficulty] Maybe we then go first with Wanda from Credit Suisse.

Iris Eveleigh: With that, we come to an end for today. Thank you all very much for participating and your questions. And if there are any further questions left, we are happy from the IR side to also bilaterally clarify those with you. So don’t be shy to give us a call. And with that, we’ll end our quarterly call today. Thank you all very much. Bye-bye.

Marc Spieker : Thank you very much. Bye, bye.