CEZYY - CEZ as (CEZYY) Q3 2023 Earnings Call Transcript
2023-11-10 16:24:11 ET
CEZ as (CEZYY)
Q3 2023 Earnings Conference Call
November 09, 2023, 10:00 ET
Company Participants
Martin Novak - CFO, Deputy CEO, Operations & Executive Director
Pavel Cyrani - Vice Chairman, Deputy CEO, Strategic Development and Chief Sales & Strategy Officer
Conference Call Participants
Piotr Dzieciolowski - Citigroup
Arthur Sitbon - Morgan Stanley
Petr Bartek - Erste Group Bank
Presentation
Unidentified Company Representative
Hello everyone, and welcome to 9 Months 2023 Results Conference Call. It's my pleasure to welcome here Martin Novak, Chief Financial Officer; and Pavel Cyrani, Chief Sales and Strategy Officer. The call will have 2 parts. First, gentlemen will go through the presentation, and then you will have the opportunity to ask questions. Now I'm handing over to Martin to start the presentation part.
Martin Novak
Good afternoon. Good morning, everybody. So I'll start with, first, with financial highlights and our selected events. So when you look at Slide #3 actually that is now on the screen, you can see that our operating revenue has grown by 17%; our EBITDA, probably the most important number, by 6% to CZK 95 billion; net income to almost CZK 30 billion; adjusted net income, CZK 31.4 billion; operating cash flow, significant growth, mainly due to margin requirements that were coming back, to CZK 133 billion; capital expenditure, 31% growth to CZK 27.9 billion. We actually are increasing our financial outlook, as you will see later on, our guidance on EBITDA to CZK 115 billion to CZK 120 billion, and we maintain an estimate of net income of CZK 33 billion to CZK 37 billion.
On next slide, you can -- the year-on-year changes between 2022 first 3 quarters and 2023. Generation income, or income from our power generation operations, is actually CZK 6.7 billion better with 2 significant items actually embedded in this number, and it is power prices that are still growing compared to last year average actually achieved prices growing, and it helped us about CZK 16 billion. On the other hand, we are paying actually -- or we are subject to caps on power prices, and this cost us CZK 8.7 billion. So in total, CZK 6.7 billion positive.
Our trading activities are, this year, budget, but on the other hand, below 2022, which was exceptional year that will probably never repeat itself unless we have another year with daily volatility on power prices, which I hope we don't. And we made actually CZK 6.8 billion this year, which is CZK 6.9 billion lower than last year. There are also a few other items actually that are included in last year and not in this year. So CZK 6.9 billion [indiscernible] income. Mining operations are CZK 3.9 billion better, although we mined less tons of coal, significantly less coal price as a function of power prices. So -- and actually, they are [indiscernible] in the sales contracts for coal. So coal prices are higher and therefore, helped us with CZK 3.9 billion. Distribution, a little variance.
Sales business, plus CZK 3.9 billion, and it's mainly coming from just winning actually a court case against state-owned Railway Authority that was a central purchasing power for railways -- central purchasing for railway operators. And in 2010, 2011, they actually ordered electricity, but then they didn't buy it. We had to sell it on the market at a lower price at that time. It was lower price than when they contracted it, and the damage was CZK 1.2 billion. So we got it actually back, paid from them as a result of 10 years or 12 years of court discussions. We also have a positive impact on purchases and sales of renewable electricity in the Czech Republic. ESCO, CZK 700 billion -- CZK 700 million, better margin on power prices, and increase in energy services of CZK 600 million. So in total, after intra-group eliminations, we get actually to CZK 95 billion.
On the next slide, you can see actually line items that are below EBITDA. We have somewhat higher depreciation due to on some of our assets. Then we had asset impairment. Actually, we booked CZK 2 billion impairment on our mining activities on coal mining companies, Severoceské doly. Last year, as some of you may remember, we actually increased the value of this investment due to almost fantastic times in the mining and coal industry due to high power prices. Now actually, the situation looks somewhat different. So we are actually taking an impairment of CZK 2 billion. We have a positive impact of interest income and expenses. We actually have higher income than expenses. The main reason is that we are still -- we have still accumulated a significant amount of cash. We paid quite low interest rates. So most of this cash is actually from long-term bond issues. And actually, we received significantly higher interest today on [indiscernible].
And then we have a few items in other sections that are explained actually in other income and expenses. So income tax, significantly higher. This is something that will not be unnoticed. It used to be CZK 11 billion. Now it's CZK 33.6 billion , actually purely devoted to windfall profit tax basically, which booked actually -- windfall profit tax is CZK 21 billion for first 9 months of this year. Adjusted net income, CZK 31.4 billion, adjusted for those CZK 2 billion in mining assets.
Let's switch to the next slide. So this is actually our guidance that I've already touched on. We are increasing our guidance from CZK 105 billion to CZK 115 billion to current CZK 115 billion to CZK 120 billion and narrowing the range. The main reason for increasing our guidance is that we have a higher contribution from trading activities than originally budgeted. Although it is lower than last year, it is still higher than we originally anticipated. We have also improved financial results of our sales and distribution segments, and we have higher availability of our nuclear facilities.
Our adjusted net income stays the same. Again, it's a range [indiscernible] moving in the range, and there are many questions why actually we are not changing the net income. First answer is that it is a range. So [indiscernible] between bottom and upper part. And second, there is -- due to windfall tax, there is actually significant taxation. So CZK 1 billion pretax is only after tax. And with many items below EBITDA actually, like interest income and depreciation and so on, we are actually falling into the range of CZK 33 billion to CZK 37 billion.
On the next slide, you can see selected events in the past quarter. We have received 3 binding offers on October 30 from -- or at the end of -- on October 31 actually from 3 bidders: EDF, Korean nuclear company and Westinghouse. All of them submitted actually their bids on time. All of them are part of the tender now. We expect to carry the evaluation until the end of February, and then we will hand over to State that will further take it for their decision. We also decreased prices for end customers. So now actually our prices are 20% below the guaranteed by the government. This is a function of power prices going down.
We have commissioned the largest heating project actually in the last decade, a hot water pipeline from nuclear plant Temelín to city of Ceské Budejovice, where we are actually heating up to 1/3 of the city through our heating from our -- actually heat generated by the nuclear plant that will normally end up in a cooling tower as a waste heat. So now we can actually use it for heating the municipality. ESG, we received international award in sustainability and validation of our key climate goals by SBTi. Details are provided actually on the slide. And as a result of development of renewables in the country by not only the large hotel but also retail, we connected 42,000 photovoltaic power plants, which equals 488 megawatts, to the grid.
Now, we'll switch to details of segments, and it's our power generation and mining segment. When you look at Slide #9, you can see actually generation segment EBITDA. That has improved by 10% as a function of growing prices. Average price -- average sales price is higher than it was in -- during last year. Now we are actually at €124 to €129 of average achieved price for full year 2023. Nuclear , 16% higher; renewable, somewhat lower; and emission-generating facilities, actually 24% higher or CZK 2.7 billion. Trading -- as I said, trading had a good year, and trading results, still lower than extraordinary result in 2022. The details actually are also provided below the table.
Now mining activity, as I said, you can see actually that our -- we have increased our EBITDA by CZK 3.9 billion or 77% year-on-year, same for the third quarter. Mining volumes went down by 14% or 16% for the third quarter, respectively. So that's what I already explained.
Generation activities -- or volumes. Actually, year-on-year, on nuclear and renewable generation, it is 0%. So minus 1% on nuclear, plus 7% on renewables, with actually details provided. Full year expectation is actually a slight decline of 1%, 2% attributable to nuclear due to longer scheduled outages and 9% up for renewables mainly coming from Germany and Czech Republic hydro plants.
[Indiscernible] generation from coal. We have a significant reduction in our coal generation, 18%. 26% actually on Polish coal assets, 9% on gas; in total, 18%. The main reason is actually the fact that the power that was not sold on a forward market and we kept it for spot market was actually -- the conditions were actually much more difficult than last year. So the power plants were not running at full speed as they were last year, for example, because of the market conditions, especially talking about power prices and carbon credits. Same expectation basically for full year, 10% reduction on the coal and 24% reduction on Polish plants. We don't show here estimate for gas plants. Gas plants have generated so far 1.6 billion. But -- and they will definitely generate more, but we have adopted actually this format of not showing the estimate because it's -- those are plants, and we really don't know how much it will be. So minimum 1.6 billion, which has already produced very likely more than that.
Important slide on emissions of CO2, SO2 and NOX. As you can see that both quarter-on-quarter and estimated year-on-year, we are reducing our carbon footprint. We should be aiming at 0.27 tonnes of CO2 per megawatt hour produced of our carbon intensity, which is 78% of emissions of new CCGT, 42% of emissions produced by the marginal generating facilities in Germany. Same for sulfur dioxide and nitrogen oxides in thousand tons. So we are following our ESG targets in emissions as well.
Price for 2023, I said already, it is €124 to €129 per megawatt hour. This will be average achieved price. We are fully -- we are -- we don't need to buy any more carbon credits. We have still 2% of our position open towards the end of the year. And of course, we expect that, that will be the result. As of -- generation revenue and hedging as of September 30 actually for 2023, we achieved €125 average achieved price.
On next slide, it's an important slide for the future, and you can actually see what is our position in our carbon credits and also sales of power. So we are using our standard hedging line, and the average achieved price for 2024 on 77% of sold production is €130, 51% sold for 2025 at €127 and 20% sold for '26 at €108. Corresponding numbers for carbon credits are on the left side. So this is all for generation and mining, and now I will hand over to Pavel, who will go through distribution and sales.
Pavel Cyrani
Well, thank you, Martin, and hello, everyone. Let's have a look at the distribution and sales. Obviously, the variations are typically lesser than in the case of generation, but still. On the distribution side, we see a 5%, CZK 0.7 billion, decline year-on-year. It's, to some degree, driven by the increase of operating expenses. But the underlying dynamic is lower consumption that we see here and we also see then later in the sales segment. Obviously, the expectation -- or the decrease in the consumption gets factored in tariffs , let's say, on the way it's expected. And it will be -- it will come back to us in the form of, what I call, a correction return in . But what we do see, we do see overall a decrease in consumption, both in electricity and gas. What we see is that the savings that have been started last year not only remain, but people still continue in finding ways to save both electricity and gas.
In terms of the sales segment, we actually have a very high year-on-year growth. You see more than 100%, CZK 3.9 billion, on the first 3 quarters of the year growth. There are some one-off factors and some kind of continuing growth of the business. In the retail segment, CEZ Prodej, this year-on-year growth is mainly driven by the fact that we have collected the proceeds from litigation with the railway operating company, this litigation that dates back to 2010 and 2011 when the company refused to offtake electricity and we were suing them for the mark-to-market value of the unused electricity. And we have won, obviously.
It kind of goes back and forth, for those who don't remember the whole story. But we already once collected the money, then we had to return them. And then again, we won in another stage of the litigation, and we collected the money again. This CZK 1.2 billion is for only 1 year, and there is basically a similar amount being litigated for the other year and this is still in the making. Otherwise, we would see a pretty much flat result where we have lower electricity and gas sales driven by the lower consumption and also a somewhat lower margin. But we have a better result in the loss from trade receivables and also in the photovoltaic plant installations and fixed expenses.
We see a significantly higher growth on the B2B segment. There is kind of a gradual annual growth in the energy services, both in Czechia and Germany, and we plan to continue in the future as well. We have a very good result both in absolute terms and year-on-year in the sales of commodity. This is actually driven less by sales of commodity, but we have an excellent result from the purchases from renewables. We were able to contract the electricity from renewables at very good prices for this year, and this is the profit we are .
On Page 19, you see the development of our supply, which, as I said, is driven to a large degree by the consumption pattern. You see that in terms of the number of customers, the number is pretty stable. We grew by more than 300,000 customers a year ago, and now we are keeping this stable. But the consumption goes down in the natural gas more than in electricity. This is mostly driven by the fact that the place where you can save the easiest for the consumers is in heating, and gas is used more for heating than other uses in relative terms than in the case of electricity.
In terms of the revenues from the sales of energy services, we see a significant growth, around 30%. Obviously, it is driven by the organic growth, but also some of the acquisitions. I say that it is all driven by only our activity, but I that obviously, pretty high inflation also factors in the revenues. So therefore, we do see growth in the EBITDA, but not as high as you see on the earning side. Anyway, the business is going well. And obviously, as I said, the consumption is going down, but we are turning this into installing more technology solutions for our customers to save electricity, which kind of offsets each other.
And with this, thank you for the attention, and we'll turn to the Q&A session, right?
Question-and-Answer Session
A - Unidentified Company Representative
[Operator Instructions]. And the first question comes from Piotr Dzieciolowski.
Piotr Dzieciolowski
Can you hear me now? It's Piotr Dzieciolowski from Citi.
Unidentified Company Representative
Piotr, yes, we hear you now. Ask your question.
Piotr Dzieciolowski
So I wanted, first, to ask a question about the windfall taxes. Do you see any willingness from the politicians regarding this issue that it could be shortened out and it wouldn't affect '24, '25? So that would be the question number one. And the question number two, is there any update you can give us about this discussion? There's a number of different headlines flying around, around the restructuring and the takeover of the company. So what is the latest? And do you have any update on this from the company's side, whether you are preparing it? And in this context, as a sub question, can you please tell us -- can you imagine going ahead with the nuclear investment within the current CEZ structure, just maybe tweaking the financing around the different subsidiaries and so on?
Martin Novak
I will answer the windfall taxes, and Pavel will probably go on restructuring. Windfall taxes are set by the law for 2023, '24, '25. There is also -- there are actually also caps on power prices that are limiting our sales prices, not in retail, but on -- from our actually generation sources, mainly impacting nuclear plants. We actually -- this will cease to exist as of the end of this year, but windfall tax of 60% is actually there. There are some discussions and from time to time, politicians mention that it could be adjusted. But there is no initiative in the parliament, no legislation initiative actually that would lead to such a change. So for now, it is in place.
Pavel Cyrani
Okay. Well, and then on the restructuring in nuclear, obviously, there is nothing that we can really say to restructuring. We follow, in general, the discussion and the announcement by our shareholders, the politicians, on this topic. But at this moment, there is no active discussion that we would be aware of. Now how that -- what that means for the new nuclear projects -- at this moment, we have a valid contract with the government, which has -- for one unit in Dukovany, the Dukovany 5 unit, which has 2 possible outcomes.
Either the contract is superseded by new kind of contract for a different type of -- or offtake PPA type of contract together with a governmental loan or financing for this one unit and then in such a way that it will be viable and profitable for CEZ to build one unit, then we will proceed with it. Or if there is no such contract, the current contract ends with us selling the SPV Dukovany site to the government. It's actually already embedded in the contract that unless it is superseded, it changes into a, basically, sell off of the shares of the company.
Now at the same time, what I can say is that if there was a decision on proceeding with 4 units, then I think it would then lead to a situation where taking the nuclear project over by the government would be needed and much more likely because the financing and so forth and so on, whereas it can be suitable for one unit, but it probably would not be possible to do 4 units.
Unidentified Company Representative
Next question from [indiscernible].
Unidentified Analyst
Can you hear me?
Unidentified Company Representative
Yes, very well.
Unidentified Analyst
I have a couple of questions, if I may. The first one, is there any reason to assume maintaining this exceptionally good performance in sales segments in the fourth quarter because we have very high ?
Pavel Cyrani
Look what you can expect is that the proceeds from that litigation would be on top of a normal development. But the exceptional performance of the third quarter alone is more driven by what we call seasonal factors where you don't have a perfect alignment of the allocation of the electricity towards extra sales of electricity to the consumers, which prices throughout the year. So what I would assume is that -- I would look at the development on a stand-alone -- in the segment stand-alone, and then I would add the proceeds from the litigation on top. This is on the retail side. On the corporate side, again, we expect basically pretty much normal gradual development as in the other years in terms -- and growth on the ESCO services. And we see the commodity to be, by the fourth quarter, not adding more compared to next year, but maintaining the growth year-on-year.
Unidentified Company Representative
Maybe just to add to Pavel's answer, what we show on Slide 26 that for the whole year, we expect the wholesale segment to be up between CZK 1 billion and CZK 3 billion versus a year ago. So that, by itself, implies a much small contribution in fourth quarter.
Unidentified Analyst
Another question, you expected CapEx this year in the amount of and after 3 quarters, we have CZK 28 billion. Should we assume that this CapEx should be lower than your forecast? In which segment is it lower?
Pavel Cyrani
It will be somewhat lower but obviously not proportionate to the 3 quarters. , we are looking at about -- roughly 10% variation compared to what was the expectation. And where it comes lower is in the generation segment.
Unidentified Analyst
And could you just specify what was the CapEx separately in nuclear, renewables and fossil fuel in the 3 quarters this year?
Unidentified Company Representative
Yes. It's on the slide -- in the ...
Martin Novak
It is Slide 29.
Unidentified Analyst
Okay. But we don't see separately nuclear, renewables and fossil fuel.
Unidentified Company Representative
We comment just the year-over-year changes by the , yes.
Unidentified Analyst
Okay. And maybe the last question, should we expect that higher windfall tax this year will somewhat reduce the tax effect next year?
Martin Novak
I'm not sure whether I understood it, higher windfall this year. Well, I think the rate is the same for this -- well, for next year actually, corporate income tax will be going up from 19% to 21%. In addition, we have 60% of windfall profit tax. And based for -- windfall profit tax is actually based on historical numbers. So it's not that results of 2023 will increase the bar. That's not the case.
Unidentified Company Representative
So now we can take the next question from Arthur Sitbon.
Arthur Sitbon
The first one is, I was wondering if the recent European Council agreement on the power market reform, if that changes anything to the group's future from your standpoint and how to think about new nuclear for the group. So that's the first question. And the second one, I'm thinking in terms of moving parts for the fourth quarter. I was wondering if there's any negative impact that maybe I could be missing to explain that the guidance on net income doesn't -- didn't go up together with the EBITDA guidance. That would be very helpful.
Martin Novak
So I will answer the second question first, and it's actually -- moving parts are always there, but they are -- but their impact is much bigger than it was in the past. If you have on your EBITDA, your tax is actually CZK 790 million. So you are only left with CZK 0.21 billion. And then, of course, those little moving parts may actually change -- may have an impact. So basically, 80% of pretax income guidance on EBITDA disappears with the tax. So an impact of anything that you make pretax is fairly small and therefore does not -- is not that visible in net income. And as we have a range of CZK 33 billion to CZK 37 billion, we are comfortable within this range actually even with the new guidance, although we increased old guidance somewhat -- EBITDA guidance somewhat. So that's the main reason. And the first part...
Pavel Cyrani
So on the , like in general, it does not impact the way we see the market development forward, but like we see 2 kind of positive developments. One is we see nuclear being fully kind of recognized as a technology, which is -- which contributes to lowering emissions. So with this, we believe that it should receive equal treatment. And secondly, we see the emphasis being put on longer-term contracts, mostly CFDs, for basically any type of technology, be it renewable or nuclear. And again, I think this is, in general, like a kind of positive development in the sense that it should stabilize both the environment for the consumers, but also it should stabilize the environment for the investors.
Unidentified Company Representative
Okay. So next question from Petr Bartek.
Petr Bartek
Can you hear me?
Unidentified Company Representative
Yes.
Petr Bartek
So maybe a question to M&A and future investments. I've seen some news regarding the lithium mining project. So if you could comment on the expected economics of this project and maybe time line. So how do you see it at the moment? And also, if there is any progress on the potential takeover of GasNet, the gas distribution network, any timing or if we can expect it anytime soon. And the thing is the dividend policy. Even after the large dividend payments for last year and after the large taxes, you are still at 1x EBITDA, I guess. So if you are considering some adjustments to the dividend policy.
Pavel Cyrani
Well, I'll start with the lithium project and M&A. Look, on the lithium project, we are now in the process of finalizing the so-called detailed feasibility study. So we are not in a position to provide more information. We'll do it in one of the next calls. But in general, what we've announced previously still holds. That means we expect, if the project was according to the plan, the production to start around year 2027 and with some kind of gradual ramp-up following that date and the investment, in general, being in the order of magnitude kind of €700 million, let's say, to €800 million, all in 100%, not now commenting on the way it will be actually financed. Now on the M&A, I can say only the following. As we have previously said, we believe there are both operational and strategic synergies between electrical networks, such as , and gas networks, such as GasNet. But we are not in a position to comment anything else on that matter. And in terms of dividend policy, Martin?
Martin Novak
Yes, dividend policy stays as it is, so 60% to 80% of our net income payout ratio. And so far, I think it's too early to make any suggestions about the dividend. But we always said that should we have a good financial condition and at the same time not having enough projects ahead of us for the near future, we will be definitely willing to be closer to 80% rather than to 60%. But again, it's too early. I think it's -- a good timing will be spring of next year.
Petr Bartek
Clarification, €700 million to €800 million CapEx would be for 100% of the project.
Pavel Cyrani
Yes, 100%.
Unidentified Company Representative
At the moment, we don't have any questions. [Operator Instructions]. Okay. So it seems that there are no further questions. Thank you for your participation. If something comes up to your mind, do not hesitate to contact Investor Relations. And if not, we will hear each other at full year results in March. Thank you very much, and goodbye.
Martin Novak
Goodbye.
Pavel Cyrani
Goodbye.
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CEZ as (CEZYY) Q3 2023 Earnings Call Transcript