Dear ladies and gentlemen, welcome to the conference call on the half year results 2019 of VERBUND AG. At our customers' 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. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Peter Kollmann, CFO, who will lead you through this conference. Please go ahead.
Thank you. Ladies and gentlemen, let me welcome you to the presentation of VERBUND for the first half year 2019, and let me thank you for joining today's conference call. I'm here with Andreas Wollein, our head of finance and investor relations. Before we move into the analysis of the business development of VERBUND, 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 a 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 five years have certainly supported this positive development.
Our strategic positioning as a CO2 free, renewable good use 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 2019. 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 coefficients, 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 2018. The results were also positively influenced by higher contributions from the grid segment, 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. The impact of these factors on the key figures in the first half year 2019 are as follows. The reported EBITDA increased by 36% to EUR 685.9 million. The reported group result increased by close to 50% to EUR 338.2 million. The adjusted group result increased by 53% to EUR 340 million. The operating cash flow was very strong at a level of EUR 690 million, which is a plus of almost 44%.
The free cash flow after dividends was very positive at a level of EUR 355 million, representing an increase of 100% and allowed us to reduce the debt level further. Net debt therefore increased by 5% to a level of EUR 2.433 billion compared to the year-end 2018. 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 2019, we now expect an EBITDA of approximately EUR 1.18 billion-EUR 1.25 billion, and a group result between approximately EUR 530 million-EUR 580 million. The payout ratio will be between 40% and 45% of the adjusted group result. On the next page, 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 hydropower generation of the run-of-river power plants, was 3% points above the level of 2018 and 11 percentage points above the long-term average. Production from annual storage power plants decreased by 8.6% due to reduced lowering of water levels and less turbining. Home production from hydropower as a result only slightly increased by 231 gigawatt hours or 1.4% compared to the first half year 2018. Generation from thermal power plants was down by 18.3%, or 112 gigawatt hours, mainly stemming from the decreased use of our Mellach 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 are the average achieved contract prices at the end of the first half year 2019. Based on our hedging strategy, we achieved a contract price for hydro generation of EUR 38.5. Please note that we have already hedged approximately 90% of the volume for 2019. On a mark-to-market basis, as of July 17, we calculated with a price of EUR 39.6. As you know, EUR 1 ± has a sensitivity of approximately EUR 25 million 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 pump 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 EUR 71 million in the first half year 2018, we registered a value of approximately EUR 47 million in the first half year 2019. The decrease stems mainly from lower contributions from congestion management. Please note that since October 2018, our Mellach CCGT has been put into a strategic reserve. That's a mechanism in Austria, 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 three years. For 2019, we keep our guidance for flexibility products at approximately EUR 90 million.
On the next page, on our grid, the Austrian high voltage grid with a system length of 7,000 kilometers and interconnected capacities into seven neighboring countries is strategically of high importance for the group because of its growing importance in the European grid system, but also, of course, because of its regulated, stable character. Under IFRS, in contrast to local GAAP, we have volatility as a result contribution that cannot be avoided because as we have often discussed in the past, IFRS, in contrast to local GAAP, does not allow to apply the regulatory account, which balances surplus and shortfalls to the regulated return, which is approximately 5%. We have a chart on the left-hand side which provides you with a comparison between the EBITDA according to local GAAP and EBITDA according to IFRS for the first half year 2019 compared to the first half year 2018.
Those includes our guidance for 2019. EBITDA from the grid business under IFRS increased to EUR 156 million, 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 EUR 230 million to EUR 260 million. 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 EUR 285 million. That's a surplus on the account, 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 non-recurring effects.
In addition to some very small impairments amounting to EUR 0.3 million 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 Donaukraftwerk Jochenstein amounting to EUR 2.4 million. After considering the impact from the non-recurring effects above on taxes amounting to EUR 0.7 million. The overall non-recurring effects on the group results level amounted to a very small EUR 2.1 million. We also show the non-recurring effects in the first half year 2018 in comparison for your information. Next page is my colleague, Andreas Wollein, will take you through the key financial figures and the financial liability situation of VERBUND.
Yes, thank you. On slide 8, you see the development of the most important key figures of VERBUND. Based on what Peter already mentioned, reported and adjusted EBITDA both increased. Whereas the former by more than 36%, the latter also by more than 36%. These increases, among others, are attributable to the renewable generation segment, which was up by close to EUR 180 million, mainly due to the aforementioned increase in the sales prices for own generation. As you remember, they were up by around EUR 10 per megawatt hour. Also because of better hydro availability in Q1 and 2. The EBITDA in the grid segment in Q1 and 2 2019 was also up again from the already increased level by EUR 17.5 million, due to higher contribution margins from the cross-border capacity auctions and the initial application of IFRS 16.
In addition, the cost reduction and efficiency increase programs of the past had also a positive impact on the results development. Depreciation increased by EUR 16.6 million 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 Kelag, and also because of lower interest, so because of debt repayments. The reported group result therefore increased by EUR 110 million or 48% to EUR 338 million. The EBITDA margin increased as well 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 at EUR 132 million.
We move on to the next slide, you see here a very strong development of the operating cash flow. We're very proud of that. The operating cash flow increased from EUR 480 million to EUR 691 million or 44%. It's a very strong increase. The free cash flow after dividends went up by about 100% to EUR 356 million. As a consequence, net debt decreased to EUR 2.4 billion and our gearing as well came down from 43% to around 39%. We move on to page 10, we show you the development of our financial liabilities. We have a debt repayment of around EUR 700 million this year. In the mid of July, after, let's say, financial close of half year result, we have repaid the debt already.
Basically the message we can give is that, let's say, we had a repayment of EUR 700 million, we had a dividend payment of close to EUR 200 million, and also CapEx for the full year expected at a level of around EUR 500 million, and we haven't done any long-term refinancing. That shows you clearly how strong the cash flow situation or the liquidity position of VERBUND really is. For the years following 2019, let's say there is only one peak, for debt repayment of around EUR 500 million in 2024. At the end of this year, we expect net debt, let's say, to be very well below the EUR 2 billion number and also the financial liabilities, we see at around EUR 900 million. It's already a very low debt level.
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&P and we are Baa1 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 a rating upgrade until the end of the year. This is basically my remarks to the development of the key figures, and I would like to hand over again 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 EUR 49.7 for 2020, which is approximately EUR 20.4 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 a level of EUR 52.3. We've also hedged approximately 8% of our hydro generation at an average price of EUR 44.3 for 2021. The mark-to-market valuation shows a level of EUR 53.4 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 1.18 billion-EUR 1.25 billion and a group result of approximately between EUR 530 million and EUR 580 million, under the assumption of average hydro and wind generation for the second half of 2019. For the financial year 2019, VERBUND plans to pay out between 40%-45% of the group results after adjustment for non-recurring effects. As always at this point, we want to highlight the sensitivities. A deviation of ± 1% in the generation from hydropower has an impact of ± EUR 3.6 million on the results. On wind power, a deviation of ± 1% has an impact of EUR 0.2 million, and a deviation of ± EUR 1 in the wholesale price has an impact of EUR 2.1 million in the group results.
Now, Andreas and I are happy to answer your questions. Please.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 02 to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question.
Okay. We have
We now receive the first question.
Okay.
Wanda Serwinowska of Credit Suisse, your line is now open. Please go ahead.
Good morning, Wanda Serwinowska, Credit Suisse. Three quick questions from me, if I may. The first one on the German auction 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 gigawatts at EUR 44 per megawatt hour. 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. My last question is on the grid surplus gains. You said that it will be reduced over the coming years. Could you please give us a bit of more details? Do you expect it to start next year?
Should we assume it will be spread over four, five, six, seven years? Any guidance would be very helpful. Thank you very much.
You're welcome, Wanda. I will start with the third one, with the grid surplus. As I mentioned before, this is surplus earnings which we had in the past. It's really up to the regulator. I would assume that the regulator is going to take a linear approach, i.e., they will not reduce the regulatory account over a short period of time, i.e., over three or four years. I could see the regulator rather using 10 years or maybe even more than 10 years to reduce the regulatory account. That is up to the regulator. We will certainly discuss the best way forward, which I think would be a steady reduction as opposed to a very quick reduction. On your second question on the 2021 hedging, when you look at the prices and price development, there was a reduction in prices in the market.
As you have said yourself, it's only 8%, when we start our hedging one and a half years before actual delivery, we use the prices which we see in the market. In that case, the average price of the first 8% was around EUR 44. We have also given you the figure in terms of mark-to-market, i.e., if we hedge the remainder, the remaining 90% with the current market price, we would basically end up with EUR 53.40. There is still some time to go and a lot of hedging that needs to be done for 2021. The first one, yeah, that's an important question, Wanda. On the border, you are right. We have now more data points. What we have seen in the first six months of the year, in the day-ahead market, was an average of around EUR 2.50.
That is looking into the past. We look into the difference in the futures market, i.e., the year ahead and the two years ahead, we see a difference between EUR 3 and EUR 4, approximately. We continue to think that in terms of a judgment going forward, anything between EUR 3-EUR 4 as 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 one year and a half ago, but when I look at your hedging of 2021 that you've made in Q2, your hedging, you added 1%, but still, the achieved power price hasn't moved. It even goes down, I think, slightly, or we can say it's unchanged. It means that basically you hedged at €44 in Q2. I think the forward curve for 2021 was well above 44. I'm just trying to understand why you hedged below the forward curve.
Yeah.
Is it just because it's not very liquid, or you are happy to secure some volumes, a very tiny share? I'm just trying to understand that one.
Yeah, 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 are slight variations 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. 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 one-year product, then we do another 20% with our quarterly product and another 20% with our weekly product, and the remainder is spot.
We basically go step by step over time, and we increase the amount which we hedge. That is just the beginning of the hedging exercise. 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 EUR 53.4, that that level of EUR 44 for around 8% will continue to go up. 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 my 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 EUR 20 million cut to your GAAP guidance for the Grid? I think you mentioned it relates to some adjustments to employee benefits. Maybe if you could provide some more details here, that'd be very helpful. Does this have any implications for GAAP earnings in 2020 and beyond? Thank you.
Duncan, it was a tax calculation which we had to use because of the lower interest rates in the market. We had to apply to the, let's say, calculation of the, let's say, social capital provisions. We had to apply a lower interest rate, and as a consequence, let's say we have this lower income or this impact on the EBIT level, also coming out from, let's say, also under local GAAP. This is the reason. It's a one-off effect and will not be seen in the coming years.
Yes. Thank you.
Thank you. The next question we've received is from Sophia Savantidou of Exane. Your line is open. Please go ahead.
Yes. Thank you 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? The second question is, 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 sheet is as well as the annual cash flow generation.
Can you give us a few more thoughts on sort of your views on how that flexibility can be used between increase in CapEx, possibly increasing the payout, and any inorganic investment sort of opportunities that you're seeing?
Yeah. Sure. First of all, on the grid, I think that it will start next year. On the financial flexibility, yeah, 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 three avenues which we will take. The first one is investment into our core business, which is hydropower and grid. On the grid side, we have investments of between EUR 2.5 billion-EUR 3 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 a grid transformation, huge investments are required. A big topic in Germany, also a topic here in Austria. 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 EUR 25, EUR 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. Again, it will be higher in 2020.
The third avenue, which I think is also an important one, we believe that as a renewable company, hydropower is not the only renewable. We have a EUR 60 million 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.
Great. Thank you very much.
Thank you. For you, as a quick reminder, if you would like to ask a question, please press zero one on your telephone keypad now. The next question we've received is from Lueder Schumacher of SocGen. Your line is open. Please go ahead.
Good morning. 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, life is clearly good. Operating cash flow is very strong. Net debt is falling. You said it would be well below EUR 2 billion. I was wondering if you could give us some kind of idea how well below EUR 2 billion you see the net debt level at the end of the year. Lastly, you said the hydro coefficient year to date is at 1.08. I assume that's as of the end of July. Can you confirm that?
Yeah. Andreas is going to respond to your question vis-a-vis 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. As far as the mix is concerned, we don't exactly give a 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 the mix you were referring to. In terms of the difference between the prices, when you look at the data points which we had so far, there are really three components which I think are interesting to look at.
The first component is when we looked 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. The calculation of that price difference for the first six months of the year, that is what I mentioned, I think to Wanda before, was the EUR 2.5 difference. 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 they are monthly auctions. It's basically traders that are buying a specific amount of megawatts, which they can use for hedging.
There we have seen various results, but I would say the yearly auction, which is an interesting indication, was EUR 3.33 per megawatt hour delta between Austria and Germany. The third data point is when you look to the futures and you look at the difference there, what we see is approximately EUR 3.5, EUR 3.6 difference. In your models, when you do your calculations in terms of what we can achieve, in terms of power prices, and you take the EUR 3 to EUR 4 as a difference between Austria, Germany base loads, you're probably right in the sweet spot. Andreas, sorry, Lueder. Yes?
You're essentially saying that the Austrian price is irrelevant for the majority of your output without going to too much detail. You're talking about 80% or something like that?
Correct. Yeah.
Thank you.
With regard to the second question, Lueder, with regard to debt level, in half year 2019, we have achieved now a net debt level of around EUR 2.4 billion. As I said before, we have repaid around EUR 700 million of financial liabilities mid of July. If you deduct that, I would say we would be around a level of EUR 1.7 billion-EUR 1.8 billion right now. Until the end of the year, I would expect, as I said, financial liabilities to be at a level of around EUR 900 million with interest-bearing provisions of around EUR 700 million. Net debt could come down to about EUR 1.6 billion-EUR 1.7 billion at the end of the year. EUR 1.6 billion, I would say, yeah. That would bring us to a net debt EBITDA level, if you take our new guidance range, around 1.5-1.6.
Very clear. Thank you. Can I just ask one more question? I think Peter has mentioned that the payout in absolute terms would be going up, bearing in mind the 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%-45%?
Well, I wouldn't say modest. I would say very much in line. However, when you look at the cents, we paid in 2017 EUR 0.42, in 2018, EUR 0.42. If you took the lower end of our guidance, we're talking EUR 0.70. That is a almost 50% increase in terms of our payout, absolute payout. At the moment, we don't see an increase in the payout ratio. As I said, moving up to EUR 0.70, obviously an increase in the absolute payout.
Okay. Very clear. Thank you.
Thank you. The next question is from Piotr Bogusz of Erste Group. Please go ahead, your line is open.
Good morning.
I would have one question to the other operating expenses are down like 5% in the first half. Is it sustainable and what is the source of the decline? Thank you.
I think it was Piotr. Piotr, we had a very bad line. Could you repeat your question, please?
I will try. I was asking about the other operating expenses, which are down by 5% in the first half. What we can expect in the second half and whether it's sustainable. What are the reasons for the decline?
Yeah, 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%. When you look at the full year, I would normalize.
It's been flat year-on-year for the full year?
Yeah, we don't give specific guidance on the other operating expenses. 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 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.
Okay.
Thank you. We've received a follow-up question of Wanda Serwinowska of Credit Suisse. Your line is now open, please go ahead.
Hi, just one follow-up, if I may. On the potential M&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 you are not present? For example, EDP 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 region. 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 will hand back to you.
Thank you very much. We appreciate your interest. We appreciate your questions. 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 attention. This call has been concluded. You may disconnect.