Dear ladies and gentlemen, welcome to the conference call on the Half Year Results 2019 of Cybod AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Peter Coleman, CFO, who will lead you through this conference.
Please go ahead.
Thank you. Ladies and gentlemen, let me welcome you to the presentation of Fabun for the first half year twenty nineteen. And let me thank you for joining today's conference call. I'm here with Andreas Walllein, our Head of Finance and Investor Relations. Before we move into the analysis of the business development of Frubond, let me make a few general comments.
The year 2019 continued well for Verbund after an already strong 2018. Our results were positively impacted by increasing contract prices for electricity and the hydro coefficient still far above the long term average despite a heat wave during the last weeks of June. Our key figures reflect this favorable energy market environment. Our low cost base and the restructuring efforts of the last 5 years have certainly supported this positive development. Our strategic positioning as a CO2 free renewable produce of electricity with stable returns from the high voltage grid anticipate the requirements of the new energy future.
The recent positive development of Verbund has increased our resilience, the resilience of the business model vis a vis any headwinds. The financial flexibility of the group has improved dramatically as a result of very strong free cash flow and low debt levels. Against this background, let me now present the figures for the first half year twenty nineteen. At the beginning, let me highlight the most important influencing factors for the results development in the first half year. Following the positive development of long term futures prices at the Electricity Exchange and based on our hedging strategy for our own generation, the achieved contract prices were higher.
The hydro coefficient, as you know, determining the generation from our run of river hydropower plants was considerably higher than the long term average and even above the levels of Q1 to 2018. The results were also positively influenced by higher contributions from
the Grid
segment, but negatively influenced by lower contributions from Flexibility Products. We also saw a positive contribution from our cost cutting and efficiency improvement programs, which we implemented in the past. Now the impact of these factors on the key figures in the first half year twenty nineteen are as follows. The reported EBITDA increased by 36 percent to $685,900,000 dollars and the reported group result increased by close to 50% to 338,200,000 dollars The adjusted group result increased by 53 percent to 340,000,000 dollars The operating cash flow was very strong at the level of $690,000,000 which is a plus of almost 44%. The free cash flow after dividends was very positive at a level of $355,000,000 representing an increase of 100% and allowed us to reduce the debt level further.
Net debt, therefore, decreased by 5% to a level of 2.433 $1,000,000 compared to the year end 2018. Now based on the results developments and the increasing level of our hedging, we are able to increase the guidance range for 2019. Based on average hydro and average wind conditions in the second half year twenty nineteen, we now expect an EBITDA of approximately $1,180,000,000 to $1,250,000,000 and the group result between approximately $530,000,000 to $580,000,000 The payout ratio will be between 40% 45% of the adjusted group results. Now on the next page and in the following charts, I will explain the influencing factors in more detail. Let me start with the analysis of our generation volumes.
With regard to the hydro coefficients, we saw a very good first half year. At 1.11, the hydro coefficients, which you know is an index quantifying the hydro power generation of the Run River power plants, was 3% points above the level of 2018 and 11 percentage points above the long term average. However, production from annual storage power plants decreased by 8.6% due to reduced lowering of water levels and less turbine. Home production from hydropower as a result only slightly increased by 231 gigawatt hours or 1.4% compared to the first half year twenty eighteen. Generation from thermal power plants was down by 18.3% or 112 gigawatt hours, mainly stemming from the decreased use of our metal of CCGT for congestion management.
Generation from wind power increased by 63 gigawatt hours or 14% as a result of more favorable wind conditions in basically all wind markets, namely Germany, Austria and Romania. The second important factor, the average achieved contract prices at the end of the first half year twenty nineteen. Based on our hedging strategy, we achieved the contract price for our hydro generation of €38,500,000 Please note that we have already hedged approximately 90% of the volume for 2019. So on a mark to market basis, as of July 17, we calculate with the price of €39,600, as you know, €1, plus or minus, has a sensitivity of approximately €25,000,000 in our EBITDA line. On the next page, flexibility products.
As you know, one of the major trends in the new energy world is increasing volatility in our grid system, not just in Austria, but in the entire European grid system, which comes, of course, from the massive development of renewables. We have a very flexible asset base consisting of CO2 free, low cost pumped storage power plants and the most modern CCGT in Austria. Therefore, we are best positioned to benefit from this trend through the sale of various flexibility products. After a result of approximately $71,000,000 in the first half year twenty eighteen, we registered a value of approximately $47,000,000 in the first half year twenty nineteen. The decrease stems mainly from lower contributions from congestion management.
Please note that since October 2018, our Mella CCGT has been put into a strategic reserve. That's a mechanism in Austria, which where we receive a fixed capacity payment and a payment for the generation. As a consequence, we have changed an unpredictable, volatile cash flow into a secure, stable, regulated cash flow for a period of 3 years. For 2019, we keep our guidance for flexibility products at approximately €90,000,000 On the next page on our grid, the Austrian high voltage grid with a system length of 7,000 kilometers and interconnected capacities into 7 neighboring countries is strategically of high importance for the group because of its growing importance in the European grid system, but also, of of course, because of its regulated stable character. Under IFRS, in contrast to local GAAP, we have volatility to the result contribution that cannot be avoided because as we have often discussed in the past, IFRS in contrary to local GAAP does not allow to apply the regulatory accounts, which balances surplus and shortfalls the regulated return, which is approximately 5%.
Now we have a chart on the left hand side, which provides you with a comparison between the EBITDA according to local fab and the EBITDA according to IFRS for the first half year twenty nineteen compared to the first half year twenty eighteen. Those include our guidance for 2019. EBITDA from the grid business under IFRS increased to $156,000,000 mainly due to high contribution margins from cross border capacity auctions and the initial application of IFRS 16. Please note that we also charted our IFRS guidance for 2019 upwards from 230,000,000 euros to €260,000,000 What I would like to stress is that based on the surplus gains, which we had in the past, a regulatory account currently holds approximately €285,000,000 That's a surplus on the accounts which will be reduced in the coming years. And as a consequence, the results from the grid business under IFRS will be negatively influenced.
On the next page, we have the nonrecurring effects. In addition to some very small impairments amounting to €300,000 in total. There was a negative one off effect in the other financial results stemming from the measurement of an obligation to return an interest in connection with the Kronergarftwerk Jokenstein amounting to €2,400,000 after considering the impact from the nonrecurring effect above on taxes amounting to €700,000, the overall nonrecurring effect from the group result level amounted to a very small €2,100,000 We also show the nonrecurring effects in the first half year twenty eighteen in comparison for your information. Next page is my colleague Andreas Wallerlein will take you through the key financial figures and the financial liability situation of the bond.
Yes. Thank you. So on Slide 8, you see the development of the most important figures of the bond. So based on what Peter already mentioned, reported and adjusted EBITDA both increased, whereas the coma by more than 36%, the latter by more than 36% also by more than 36%. These increases, among others, are attributable to the Renewable Generation segment, which was up by close to €180,000,000 mainly due to the aforementioned increase in the sales process for own generation.
As you remember, they were up by around €10 per megawatt hour. And also because of capital hydro availability in Q122. The EBITDA in the grid segment in Q122 2019 was also up again from the already increased level by €17,500,000 due to higher contribution margins from the gross quarter capacity auctions and the initial application of IFRS 16. In addition, the cost reduction and efficiency increased programs of Perpaz had also positive impact on the results development. Depreciation increased by 16.6 €1,000,000 due to the initial application of IFRS 16.
As I mentioned already, the financial result improved due to the higher results from our participation in the provincial utility in Kellogg and also because of lower interest or because of debt repayment. The reported group result, therefore, increased by €110,000,000 or 48 percent to 3 €38,000,000 The EBITDA margin increased as well from a level of from already high level of 36.7% to 37.4%, reflecting the above mentioned effects on EBITDA. The EBIT margin showed a comparable increase from 25% to close to 28%. Finally, I would like to mention the additions to tangible assets, which were based on our CapEx plan above the previous year's level of €132,000,000 When we move on to the next slide, you see here a very, very strong development of the operating cash flow. We're very proud of that.
So the operating cash flow increased from €480,000,000 to €691,000,000 or 44%. It's a very strong increase. The free cash flow after dividends went up by about 100% to €356,000,000 As a consequence, net debt decreased to €2,400,000,000 and criterion as well came down from 43% to around 39%. When we move on to Page 10, we show you the development of our financial liabilities. So we have a debt repayment of around €700,000,000 this year.
So in the mid of July, so after, let's say, financial close of Harvey recite, we have repaid the debt already. So basically, the message we can give you is that, let's say, we had repayment of €700,000,000 We had a dividend payment of close to €200,000,000 and also CapEx for we fully expect it at the level of around €500,000,000 euros and we haven't done any long term refinancing. So that shows you clearly how strong the cash flow situation, the liquidity position of the liquidity is. So for the years following 2019, there is only one peak of debt repayment of around €500,000,000 in 2024. So at the end of this year, we expect net debt, let's say, to be very well below the €2,000,000,000 number.
And also the financial liabilities we see at around €900,000,000 It's already a very low debt level. And based on this development, we expect also, let's say, that we have a very strong positioning with regard to our rating. We are currently rated A- with a stable outlook at S and P and will be a 1 with a positive outlook at Moody's based on the very strong cash flow development and debt repayment, we expect here more pressure to get rating upgrades until the end of the year. Yes, so this is basically my remarks to the development of the key figures, and I would like to hand over to Peter for giving you the outlook.
Thank you, Andreas. At the end of the results presentation, as always, our view to the entire year 2019, As you know, the key parameters for the development of the operational business are prices and hydro volumes. At the end of the first half year, we have hedged approximately 50% of our hydro generation at an average price of €49,700,000 for 2020, which is approximately €20,400,000 above the level of the full year 2018. On a mark to market basis as of July 17, 2019, the average achieved prices would be at the level of €52.3 We've also hedged approximately 8% of our hydro generation at an average price of 44.3 for 2021. The mark to market valuation shows a level of €53,400,000 for 2021.
With regard to the year to date hydro situation, we have a hydro coefficient of 1.08, which is 8% above the long term average. Because of the higher hedging levels and the results development, we have increased our guidance for the full year 2019 and are now expecting an EBITDA of approximately between EUR 1,180,000,000 to EUR 1,250,000,000 and the group result of approximately between $530,000,000 $580,000,000 under the assumption of average hydro and wind generation for the second half of twenty nineteen. For the financial year 2019, Verbund plans to pay out between 40% to 45% of the group results after adjustment for nonrecurring effects. As always at this point, we want to highlight the sensitivities. A deviation of plusminus 1% in the generation from hydropower had an impact of plusminus €3,600,000 on the results.
Then on wind power, a deviation of plusminus 1% has an impact of €200,000 and a deviation of plusminus €1,000,000 in the wholesale price has an impact of €2,100,000 in the group results. Now Andreas and I are happy to answer your questions. Please.
Thank you.
Okay. We have
We now receive the first question from Wanda Srivnowska of Credit Suisse. Your line is now open. Please go ahead. Good morning. Wanda Srivnowska of Credit Suisse.
Three quick questions from me, if I may. The first one on the German Austrian spread. It will be helpful if you could comment what have you seen so far, what your expectations are going forward? My second question would be on the 2021 hedging price. I was a bit surprised.
I know that you hedged an additional €200 at €44 per megawatt. Now I know this is a tiny share, but still the hedging price is well below the forward curve or the forward curve that we have seen in Q2? And my last question is on the grid surplus gains. You said that I mean, it will be kind of reduced over the coming years. Could you please give us a bit more details?
Do you expect it to take to start this year? Should we assume it will be spread over 4, 5, 6, 7 years? I mean, any guidance would be very helpful. Thank you very much.
You're welcome, Van de. I will start with the third one with the grid surplus. Surplus. As I mentioned before, this is surplus earnings, which we had in the past. It's really up to the regulator, but I would assume that the regulator is going to take a linear approach, I.
E, they will not reduce the regulatory accounts over a short period of time, I. E, over 3 or 4 years, I could see the regulator rather using 10 years or maybe more than 10 years to reduce the regulatory account. But that is up to the regulator. However, we will certainly discuss the best way forward, which I think would be a steady reduction as opposed to a very quick reduction. On the your second question on the 2021 hedging, when you look at the prices and price development towards a reduction in prices in the market, When we start our hedging and as you have said yourself, it's only 8%, but when we start our hedging 1.5 years before actual delivery, we use the prices which we see in the market.
And in that case, the average price of the first 8% was around 44%. We have also given you the figure in terms of mark to market, I. E, if we hedge the remainder, I. E, the remaining 90% with the current market price, would basically end up with €63,400,000 But there is still some time to go and a lot of hedging that needs to be done for 2021. The first one, yes, that's an important question, Rhonda.
On the border, you are right, we have now more data points. What we have seen in the 1st 6 months of the year, in the day ahead market was an average of around €2.5 That is looking into the past. When we look into the difference in the futures market, I. E, the year ahead and the 3 years ahead, we see a difference between €3,000,000 and €4,000,000 approximately. We continue to think that in terms of judgment going forward, anything between 3 to 4 years is a price difference, is an average price difference between Germany and Austria is probably a good number.
Thank you. Just on my second question, I do understand that you have started hedging 1.5 years ago. But when I look at your hedging of 2021 that you've made in Q2, I mean, your hedging, you added 1%, but it feels that the achieved power price hasn't moved. It even goes down, I think, slightly or yes, we can say it's unchanged. So it means that basically you hedged €44 In Q2, I think the forecast for 2021 was well above €44,000,000 So I'm just trying to understand why you hedged below the forward curve.
Is it just because it's not very liquid or you just you are happy to take you some volumes, a very tiny share? I'm just trying to understand that one.
Yes, sure, sure. We have not hedged differently in the past 10 years. We have always had the same strategy, which is very much in line with our production. We always start 18 months before. We've always done that.
There is slight variation in terms of the volume, how much we do, and that can be a function of liquidity, that can be a function of market moves. But at the end of the day, we don't try to outsmart the market. We don't try to take a position. We don't try to take a trading position and a view. Sometimes you beat the market, sometimes you don't.
We have a very transparent hedging policy in the sense that we start with around 60% on the 1 year product, then we do another 20% with our quarterly products and another 20% with our weekly products and the remainder response. And then we basically go step by step over time, and we increase the amount which we hedge. So that is just the beginning of the hedging exercise. And the beginning of the hedging exercise, 18 months before 2021, that is the market price that is basically the average of the time when it was started. With the prices having gone up, we think, this is why we gave you the mark to market here as well, the 53.4 percent, that at level of 44 percent for around 8% will continue to go up.
So when we talk next quarter and we have hedged more, you will then see the new figure.
That's very clear. Thank you very much.
You're welcome.
Thank you. The next question is from Duncan Scott of Deutsche Bank. Your line is open. Please go ahead.
Hi, good morning. Thanks for taking the question. I wanted to ask about the Grid segment and in particular the guidance you've given for the Grid. I appreciate that the IFRS earnings can be quite volatile. What explains the GBP 20,000,000 cut to your GAAP guidance for the Grid?
I think you mentioned it relates to sort of adjustments to employee benefits, but maybe if you could provide some more details here, that would be very helpful. And does this have any implications for GAAP earnings in 2020 and beyond? Thank you.
No. Like and it was we had the calculation which we had to use because of the low interest rates in the market. So we had to apply to the, let's say, calculation of the, let's say, social capital provisions, we had to apply a low interest rate. And as a consequence, let's say, we have this lower income or this impact on the EBIT level also coming up from, let's say, also under local GAAP. So this is the reason.
It's a one off effect and will not be seen in the coming years.
Okay. Thank you.
The next question we've received is from Sofia Svantido of Exane.
Yes. Thanks for taking my questions. A couple from me as well. One, just staying on the grid. I understand what you're saying, and it makes sense about the regulator sort of reversing the surplus over a long period of time.
Do you have an idea or would you be willing to give any guess on when that reversal could start? Is it something you would expect from next year? Or do you think the regulator will wait for the start of the next regulatory period to start reversing this? And the second question is a comment that you made on your press statement this morning as well as you hinted in the beginning, obviously, quite a lot of financial flexibility for the group now, both in terms of where the balance it is as well as the annual cash flow generation. Can you just give us a few more thoughts on sort of your views on how that's going to
be used
between increasing CapEx, possible increasing the payout and any inorganic investments or opportunities that you see?
Sure. First of all, on the grid, I think that it will start next year. On the financial flexibility, yes, you're right. We have a lot of financial flexibility. The question really is on capital allocation, which is indeed a key question.
I think there are 3 avenues which we will take. The first one is investments into our core business, which is hydropower and the grid. On the grid side, we have investments of between DKK2.5 billion to DKK3 billion over the next 10 years. As you know, from many discussions around Europe, the energy transformation goes line in line with a grid transformation. There is no energy transformation without the grid transformation, so huge investments are required.
Big topic in Germany, but also topic here in Austria. So a lot of CapEx will go into the grid. At the same time, we are increasing our CapEx into our hydropower. With a more favorable energy environment, we see projects which we have dismissed a few years ago when we had power prices at around 25, 30, where we basically put them on hold. Those are projects which now show a good profitability.
We see a number of efficiency measures which we can take forward. Those are additional investments and those investments which we like as they are in our core business. That's the first avenue. The second avenue is dividends. We are going to pay our dividends, obviously, on the higher earnings, which we generate.
As a result of that, the payout in absolute numbers is going to be significantly higher for 2019. And again, it will be higher in 2020. And the 3rd avenue, which I think is also an important one, We believe that as a renewable company, hydropower is not the only renewable. We have $60,000,000 EBITDA contribution from wind. So we have a very strong wind business.
We feel that any expansion in terms of new renewables, I. E. Wind and PV, wherever it makes sense, is a very good addendum to our existing business model and over the long term diversifies our business model and makes us more resilient.
Okay. Thank you
very much.
Thank you. The next question we've received is from Lueder Schumacher of SocGen.
Good morning. A few questions from my side. The first one is on the mix in terms of the Austrian and the German power price. Can you remind us which price how much the Austrian price is relevant for the output you sell versus Germany? That would be an interesting percentage.
The second one is, I mean, life is clearly good. Operating cash flow is very strong. Net book is falling. You said it will be well below €2,000,000,000 I was wondering if you could give us some kind of your whole well below €2,000,000,000 you see the net level at the end of the year? And lastly, you think the hydro coefficient year to date is €1,080,000,000 I assume that's as of the end of July.
Can you confirm that?
Yes. Andreas is going to respond to your visavis debt levels. I'm going to discuss with you the mix in terms of Austria, Germany and the hydro coefficient. Yes, you're right. The hydro coefficient of slightly below 1.08 is per today.
And as far as the mix is concerned, we don't exactly give the mix in terms of how much we're selling from our hydropower plants in Germany and how much we're selling from our hydropower plants in Austria, if that was sort of like the mix you were referring to. But in terms of the difference between the prices, when you look at the data points which we had so far, there are really 3 components which I think are interesting to look at. The first component is when we look at the difference between the day ahead prices, which is something where we have the data points and where we can calculate a very exact price difference on a daily basis, almost like on an hourly basis actually. And the calculation of that price difference for the 1st 6 months of the year, that is what I mentioned, I think, to Rhonda before, was the €2.5 difference. So that is one interesting data point.
The second interesting data point is the auction results. Now the auction results are twofold. They are yearly auctions and their monthly auctions. It's basically traders that are buying a specific amount of megawatts, which they can use for hedging. And there we have seen various results, but I would say the yearly auction, which is an interesting indication, was €3.33 per megawatt hour delta between Austria and Germany.
And then the 3rd data point is when you look to the futures and you look to the difference there, what we see is approximately €3.5, €3.6 difference. So when you so in your models, when you do your calculations in terms of what we can achieve in terms of power prices and you take the and you take the €3,000,000 to €4,000,000 as a difference between Austria, Germany baseloads, you're probably right in the sweet spot. Sorry, Lula, yes?
You're essentially saying that the Austrian price is still relevant for the majority of your output without going too much deeper. So you're talking about 80% or something like that?
Correct. Yes.
With regard to the second question, Lumber, with regard to debt leverage in half year twenty nineteen. We have achieved now a net debt level of around SEK 2,400,000,000. Euros As I said before, we have repaid around €700,000,000 of financial liabilities mid of July. So if you deduct that, I would say we would be around the level of €1,700,000,000 1,800,000,000 right now. So until the end of the year, I would expect, as I said, financial liabilities at the level of around €900,000,000 with interest bearing provisions of around €700,000,000 So net debt could go down to about €1,600,000,000 around €1,600,000,000 at the end of the year, €1,600,000,000 I would say.
That would bring us to a net debt EBITDA level. If you take our new guidance range, around 1,500,000,000, 1,600,000,000.
Very clear. Thank you. Can I just ask one more question? You I think Peter has mentioned that the payout in absolute terms will be going up. Very much, it's a very strong development of your free cash flow.
Could you also see the actual payout ratio going up as well from the relatively modest 40% to 45%?
Well, I wouldn't say modest. I would say very much in line. However, when you look at the cents, we paid in $0.17 $0.42 in 20.18 $0.42 If you took the lower end of our guidance, we are talking $0.70 So that is a 50% increase in terms of almost 60% increase in terms of payout, absolute payout. At the moment, we don't see an increase in the payout ratio, but as I said, moving up to $0.70 obviously an increase in the absolute payout.
Okay.
Very clear. Thank you.
Thank you. The next question is from Peter Bartek of Erste Group. Please
go ahead. I would have one question. The other operating expenses were down by 5% in the first half, sustainable until the source of the decline?
I think it was Peter. Peter, we had a very bad line. Could you repeat your question, please?
Yes. I was asking about the other operating expenses, which are down by 5% in the first half. So what we can expect in the second half and whether it's enabled or the reasons for the decline?
Yes. We had a number of factors in terms of other operating expenses in the first half. I would not assume that other operating expenses are going to stay at minus 5%. I would when you look at the full year, I would normalize.
So it's been flat year on year for the full year?
Yes. We don't give specific guidance on the other operating expenses. But as you might remember from our cost cutting programs, we are trying to keep despite the fact that we have inflation in personnel costs and we also have inflation on the on other expenses across the board. Through our programs, we are trying to keep the core expenses both in terms of personnel and the core expenses in terms of operating expenses at the previous year's levels. However, we have effects which could come from specific businesses which we're going to develop, I.
E, if we go into, for example, an organic growth that could obviously have an impact on our OpEx.
And we've received a follow-up question from Wanda Salinaska of Credit Suisse. Hi. Just one follow-up, if I may. On the potential M and A that you mentioned, would you consider you said that you may go into more wind or more solar. But would you consider buying hydro assets?
I mean, would you consider going into the new countries which are not present, for example, Italy has hydro assets for sale right now? Any comments from you would be much appreciated. Thank you.
We would consider any asset that is interesting within Europe. We would not go beyond Europe. We would like to stay within our geographic regions. And we're looking into we're only looking into renewables, I. E, we're looking into hydro assets, PV assets and wind assets.
Okay. Thank you very much. Thank you. As there are no further questions, I would hand back to you.
Thank you very much. We appreciate your interest. We appreciate your questions. And we're looking forward to talking to you on our next conference call. Thank you very much, and have a good day.
Ladies and gentlemen, thank you for your time. This call has been concluded. You may disconnect.