Good morning. It's my pleasure to welcome you all to the Ignitis Group earnings call for the first quarter of 2021. Today, we are joined by the Company CEO, Darius Maikštėnas, CFO, Darius Kašauskas, Infrastructure and Development Director, Dominykas Tučkus, and Head of Corporate Finance, Jonas Rimavičius. At first, the management will run through the Q1 2021 highlights, results, and outlook for 2021, and then open up for your questions. Let me kindly remind and encourage you to send through your questions during the presentation. With that, Darius Maikštėnas, the floor is yours.
Good morning. First quarter of 2021 for Ignitis Group was really successful. Despite challenging environment related to COVID-19, we showcased resilient performance for first quarter. Adjusted EBITDA grew by 18.6% to EUR 91.9 million compared to first quarter of 2020. Solid growth was supported by installed capacity expansion in Green Generation business segment, high distributed volumes in Network segment, and better results of commercial activities in flexible generation. We paid dividends in line with the dividend policy, and we were very consistent with our strategy. We showcased tangible progress on green generation installed capacity expansion. We also selected smart meter infrastructure supplier with expected mass rollout of smart meters across the households by 2023. We continued to increase our sustainability reporting as per GRI requirements.
In our Networks business segment, we delivered 13.6% adjusted EBITDA growth, which was supported by higher distributed volumes as the result of colder weather, also RAB value growth. We also started to participate in consultations with regulator on parameters of new regulatory model for upcoming electricity part regulatory period, which is starting in 2022. In first quarter, investments in Network segment decreased due to the unfavorable weather conditions and ground frost. Investment are not expected to affect overall planned annual investment level. Electricity distribution quality indicators deteriorated a bit compared to the planned level due to extreme snow conditions in January. While higher distributed volume affect the level over the course of the year, we maintain positive growth outlook of the segment's performance over the course of this year.
Turning to Green Generation segment, we continue to work diligently on expanding the installed capacity and added another 43 MW as the result of commissioning of Kaunas CHP and Vilnius CHP waste-to-energy units. Worth noting that 19 out of 43 MW of installed capacity were added since the end of 2020. This has translated to the robust adjusted EBITDA growth of 34.7%, also supported by better results of Kaunas HPP due to the higher captured electricity prices. Green electricity generation also marginally increased as the result of commercial operation of Kaunas CHP and Vilnius CHP test runs, as the plant was commenced in the end of March. In terms of pipeline, we are excited to share that we approved expansion of plan of Kruonis PSHP expansion for additional unit of 110 MW.
Construction works of Vilnius CHP biomass unit is in line with the schedule with expected COD around fourth quarter of 2022. Mažeikiai Wind Farm construction works are in line with the schedule. As planned, we completed construction works in Pomerania Wind Farm in first quarter and started commercial operations this week. While investments in first quarter were significantly lower comparing to the first quarter of 2020, this was largely driven by launch of Kaunas CHP and Vilnius CHP waste to energy projects and Pomerania Wind Farm construction completion in March. Overall, investment levels still in line with our guidance. Turning to flexible generation, we have strong performance also recorded in this segment.
Segment adjusted EBITDA grew by 80% to EUR 8.1 million as the result of most five times increased electricity generated, which was driven by positive spark spread of CCGT gas commercial activities. As expected, underperformance in customers and solution business segments compared to first quarter of 2020 was recorded. Compared to first quarter in 2020, adjusted EBITDA was 43.8% lower as the result of negative one-offs due to the B2C electricity supply deregulation, related cost, and lower regulated profitability. Negative hedging results, mainly due to unusual spreads in proxy hedging in March 2021. On the regulation of B2C energy supply, it is ongoing and expected to be finished in 2023. That being said, during stage 1 of choosing electricity providers, 66% of customers were retained. NPS scores were somewhat lower as the result of all the changes which were happening in the market.
With that, I pass the floor to Darius Kašauskas.
Thank you, Darius. Good morning from everyone. It's a pleasure to present the interim results for Q1, another successful quarter for us. As mentioned, in Q1 to 2021, we delivered solid performance and further demonstrated the resilience of our business. That translated into a substantial adjusted EBITDA and net profit growth compared to the first quarter of 2020. In terms of adjusted EBITDA, the 18.6% increase to almost EUR 92 million was mostly driven by launch of Kaunas CHP and Vilnius CHP waste energy unit, better results of commercial activities of CCGT unit, and the higher distributed volumes effect in Networks segment. However, Customers and solutions segment decreased as the segment's electricity business underperformed compared to Q1 2020. In terms of adjusted net profit, we saw a healthy increase of 7.3% year-over-year due to higher adjusted EBITDA, which was partly offset by higher income tax expenses.
Adjusted EBITDA bridge illustrates development of each core business in Q1 2021. While growth was captured across most business segments, in absolute terms, the network business was the largest driver of adjusted EBITDA growth, contributing EUR 7.1 million to the overall growth. Green generation contributed EUR 5 million to the overall adjusted EBITDA for the first quarter of 2021, while flexible generation added another EUR 3.6 million. Customers and solutions segment reduced adjusted EBITDA level by EUR 3.2 million. Consolidation adjustments also increased adjusted EBITDA by almost EUR 2 million. As a result of better performance, return indicators were improved a bit. Looking at the return profile in Q1 2021, we grew our adjusted return on capital employed to 7.7%. It is an increase of 1.3 percentage points compared to Q1 2020. Growth was largely the effect of increased adjusted EBIT.
Our adjusted ROE has marginally decreased by 0.6 percentage point to 8.1%, driven by the increase of capital during IPO in Q3 of 2020. Turning to our investments in Q1 2021. Overall investment level halved to EUR 28 million compared to Q1 2020, as major projects were near completion or already completed, including Vilnius CHP, the waste energy unit COD in March, Kaunas CHP launched in August 2020, and Pomerania Wind Farm construction completed in March this year. Lower investments in network expansion were driven by colder winter, ground frost, and heavy snowfall. As for our free cash flow and net debt metrics, we have further improved our results compared to Q1 2020. Specifically, our free cash flow increased by 78% as a result of higher EBITDA and lower investments, while net debt decreased by 3.5% due to higher EBITDA.
Looking at the net debt more closely, higher funds from operations led to a decrease in net debt and overall improvement in leverage metrics. Our net debt to adjusted EBITDA has decreased from 2.1 to 1.9 times, while FFO to net debt was increased from 52% to 58%. This allows us to better position ourselves to maintain a healthy balance sheet, support growth, and ensure a credit rating of BBB+ or above. Finally, revisiting our outlook for 2021. Q1 2021 results put us on a solid footing and reaffirming our expectations of EUR 300 million- EUR 310 million adjusted EBITDA for a full year of 2021.
On the back of a strong Q1 2021, further growth is expected to be driven by launch of Vilnius CHP waste energy unit, COD of Pomerania Wind Farm in Poland, full year result of Kaunas CHP, which was launched in August 2020, and growing value of RAB. With this, I hand back to Darius Maikštėnas to sum up our achievements for Q1.
Thank you, Darius. Summarizing a very strong first quarter for Ignitis Group. We showcased resilient performance for first quarter and progressed well in line with our strategic priorities. We also followed through with dividend policy. Operationally, we have successfully expanded our green generation installed capacity and made progress on remaining pipeline. Additionally, we improved our sustainability reporting by incorporating GRI requirements. That said, we maintain our full year guidance reinforced by green generation and networks growth. Thank you.
This concludes the presentation, and now we open up for your questions. We will begin from the questions received in advance. The first question was.
Do you comply with Ignitis long-term strategic goals, looking from today's perspective?
Thank you for the question. It's too soon to comment on progress of four-year targets raised through 2024. We progress well on both operational and financial goals. In line with our schedule, we launched Vilnius CHP waste to energy unit, selected smart meter infrastructure supplier. On financial target side, we also delivered robust growth reflected in our key KPI, adjusted EBITDA. We paid out dividends of EUR 85 million for 2020, as per our dividend policy and kept credit rating of BBB+ with a stable outlook. We believe being well on track to reach long-term goals set out in strategic plan for 2021-2024.
Thank you, Darius. The next question is.
Does the company have leverage management or decrease of its strategy?
Thank you for question. We aim to have optimal capital structure and debt-to-equity level. However, to manage leverage risk, we are committed to BBB+ credit rating for a period of 2021-2024 and to solid investment-grade rating of BBB or above in the long run. In addition, we target to lower than 4 times net debt to EBITDA ratio. Thank you.
Thank you, Darius. The next question.
What is the current split of GDRs versus shares? How it has changed since IPO? Jonas?
At IPO, the proportion of GDRs was around 68%, while the shares accounted for 32%. There was some conversion of GDRs to shares caused by the price gap between Vilnius and London. Significant majority is still in the GDRs.
Thank you, Jonas. Our next question.
What are the reasons behind share price being stuck at the EUR 20 level?
There are plenty of factors involved in share trading that affect share price in short term. We think that our share price has plenty room to grow, and we believe that fair value is higher than current price level. We expect over the time when we deliver our strategy, including track record of green generation assets, the market will realize that.
Thank you, Darius. Our next question is.
What are the future plans of Ignitis Renewables? Are there any plans to expand the company by consolidating all renewable assets, Vilnius CHP, Kaunas CHP, and hydro plants? Afterwards, it might be worth to do this segment IPO as renewables-only companies trading at a higher multiples compared to integrated utilities, thus creating value both for the Group as a whole and its shareholders.
You're right that green generation multiples are higher than the ones for the whole group. We do not plan renewable energy arm IPO. We think that the better way to maximize value is through asset rotation strategy, which means that we will be selling up to 49% stake in each individual green generation asset, except hydro, in order to both earn additional premium and recycle capital for further growth.
Thank you, Darius. The next question.
In relation to the strong company's results, could we expect to see higher than minimum level of dividend growth stated in the dividend policy?
Based on our dividend policy, 3% is a minimum level of annual dividend growth. We have flexibility to distribute excess cash, if available, based on growth of the business, financial strength of the Group, and investment opportunities available. All the decisions on the dividend amounts are and will be made on the yearly basis.
Thank you, Darius. The next question.
How the company is planning to implement the acquisition of its own shares, making a tender offer at a fixed price through auctions or by purchasing shares directly in the market? Or maybe it will be solely bought from the stabilization manager?
Stabilization ended on 6th of October, resulting in 10% of offered shares to be bought by stabilization manager. There are a few possible alternatives how stabilization shares could be treated. One option is we will buy back these shares and cancel them. Another one is stabilization manager would sell shares to the market. No decisions have been made yet with regards of treatment of stabilization shares. If any, it will be announced to all investors at once through the Nasdaq and London Stock Exchange news platforms.
Thank you, Darius, for answering. Our next question.
Does the company have any liabilities to IPO stabilization manager, for example, to cover their potential losses in case selling their holdings at a lower price compared to the purchase price?
Yeah. The stabilization agreement is structured in a way that the stabilization manager does not make a gain or loss on stabilized shares. In case the stabilized shares are sold at a loss, stabilization manager is compensated. If stabilized shares are sold with a gain, stabilization manager returns it to the company. The gain or loss is measured against the average stabilization price of EUR 21.5 per share. Just to illustrate, assuming that the current market price of EUR 20 is used for realization of the shares, Swedbank would be compensated EUR 1.5 per share, which is the difference between EUR 21.5 and EUR 20, while the company will keep a profit of EUR 1 per share, which reflects the difference between the IPO price of EUR 22.5 per share and stabilization price of EUR 21.5.
Thank you, Jonas, for answering question. Our next question is.
What is the situation with the Pomerania Wind Farm? Has it started generating electricity and revenue? Are all turbines operational? If not, why? What is the expected commercial operations date?
Yeah. The construction of Pomerania Wind Farm has been completed in March this year. All 29 turbines are erected, and the wind farm is expected to start full commercial operations this June. With the first electricity actually already generated yesterday, and also worth noting that we are well ahead of the schedule given the allowed delays by Polish authorities in the context of COVID restrictions.
Thank you, Dominykas. The next question.
How does the CFD tariff subsidy scheme work? Does it work both ways? For example, if the electricity is generated when market price is higher than indexed CFD tariff, does the difference have to be returned by the company to subsidy scheme operator?
Yes, you are right. In Polish case, it works both ways, it's a two-sided CFD. The CFD tariff has been awarded for 15 years and is adjusted for inflation annually. In the case the market price exceeds indexed CFD tariff level, the difference will have to be returned to the subsidy scheme operator. That will happen at the end of the support period, which is, in this case, as mentioned, 15 years.
Thank you, Jonas. Our next question.
Can Ignitis Group incur material losses due to the decision by the European General Court to overrule the European Commission's decision to calibrate subsidy scheme for renewable projects? That is, will the company have to return the already granted subsidy for electricity generation?
Yeah. Currently, the support mechanism under decision is received by three wind farms owned by the group, Vėjų Vatas, Vėjo Gūsis , and EURAKRAS. For two of them, the support is due to expire in 2023 and 2024, while for EURAKRAS in 2027. Our exposure is quite limited. Worth noting also that Ignitis Group is not a party to the legal case. It is the Ministry of Energy, and we would not be in the position to further speculate on its potential outcome. Generally, such processes take several years to resolve.
Thank you, Dominykas. The next question is as following.
What will happen to wind farms after the subsidy scheme ends? Are they going to be beneficial financially? Do you expect additional maintenance costs after a considerable period of time since their operational start date?
Well, these wind farms will be selling electricity to the market and potentially will be matched with our supply portfolio of Customers and solutions segment. Since we see useful life of our wind farms at around 30 years, we naturally expect them to be profitable throughout this period. No material costs are expected after the end of subsidy scheme. The wind farms undergo maintenance every year.
Thank you, Jonas, for answering. Our next question.
Loans versus bonds. What is the cheaper method of finance? If loans are cheaper, why does the company issue bonds?
The company's choice between different financing methods is driven solely by associated costs, which are driven by the market dynamics. If at the moment of consideration issuing bonds is cheaper than loans, we'll use bonds as a method of finance.
Thank you, Darius, for answering. Our next question.
Do you intend to abandon internal purchasing between group companies to avoid conflicts of interest?
Currently, we do not have such plans, but it's important to understand that for related party transactions, we apply high transparency and disclosure standards. For example, high-value contracts are reviewed and confirmed by the audit committee and supervisory board. Also, all of them, including the opinion of audit committee on the transactions, are published on our website.
Thank you, Darius. There's one more question.
Green capacity additions, new deals seem to be running dry a bit since the IPO. Could you please provide some flavor on how your pipeline and green generation is developing? Thank you.
We are currently working on a number of deals and a number of projects. However, you are right, we have not yet announced anything. We will be announcing the transactions or projects when they reach the binding stages. The only thing which we can comment at this stage is that we feel comfortable with the target we have disclosed at the IPO and in our strategic plans and continue working on it.
Thank you, Jonas, for answering. Currently, we have no questions. Let's wait for a minute. There is one more new question.
Thank you for your presentation. I have a few questions. The first one is, why wind generation adjusted EBITDA in Q1 2021 was EUR 2.9 million in comparison to EUR 4.9 million in Q1 2020? What happened there? The weather? The second question is, could you elaborate on the information in the public space about the share remuneration plan that was announced in this year earlier and then canceled? What happened then? Are you intent to implement this practice in the future?
I will answer the first part of the question. In terms of wind generation adjusted EBITDA in Q1, you are right, the main factor affecting the EBITDA was the weather, which is natural to fluctuate from quarter to quarter and year from year.
For the second question, as it is the first time that SOE started to apply such an incentive scheme, it takes time for understanding of the scheme and the benefits of it. The grounds and benefits of share option schemes have been challenged, but the company, we are confident that the program complies with both the law and the best practices.
Thank you, Jonas, Darius. We have one more new question.
Ørsted and Enefit Green formed partnership to deliver large scale offshore wind in the Baltics, April 2021. Does it create any positive vibes for Ignitis?
As for this alliance, we really think that it's a good development for entire region, that strong alliance is dedicated to invest heavily in offshore development are forming, which means that this region is seen as with very high potential and also fair competition between such kind of players will result as to the good conditions for the end users.
Thank you, Darius. We are waiting for more questions. We have no further questions. This concludes the presentation. Apologies. This now concludes our presentation and earnings call. Dear all, thank you for joining us today at the first quarter of 2021 earnings call. Should you have any further questions, please do not hesitate to contact our investor relations team. Thank you again, and stay safe.