E.On Se S/Adr

Hello, everyone. Dear analysts and investors, welcome to our full year 2022 financial results presentation. I hope everyone is healthy and doing well. Thank you for taking the time to join us. Today, I'm here together with Leo and Mark. Leo will give you the strategic update, followed by Mark walking you through the financials. As before, we will leave enough room for your questions after the presentation. With that, over to you, Leo.

Thank you, Iris. Warm welcome also from my side to all of you. Really, a lot has happened since the last year, and I can honestly say that even with my 25 years in the sector, I have not ever experienced such a year. So where do we stand now? Well, the winter season has turned out, luckily, to be mild. But let me be clear, we are not through the crisis yet. However, especially we at E.ON are much better off than we have been previous year at the same time. And we continue to work hard to mitigate the risks which are still existing and to serve our customers through the hardship that they are partially suffering through. We are staying focused on the opportunities ahead and we will continue to deliver as we have delivered. We are the energy transition company. So let me kick it off with my four messages for you today. First, we have performed during the crisis. We have delivered a strong operational and financial year 2022. And this despite severe macroeconomic challenges. We have proven to have a really resilient business model with an excellent portfolio. And you as investors will benefit from our strength as well. We'll increase our dividend payout for the eighth consecutive year. And Mark will later show you that at the same time we have strengthened our balance sheet as well. Second. In times of unprecedented uncertainty, we have gained increased relevance for our customers, for our societies in which we operate. We are the largest operator of critical infrastructure for the energy transition in Europe. We take care of security of supply and affordability of energy for one of the largest customer portfolios in Europe. We actively support shaping the energy market and contribute to keeping Europe a strong economic player. We are a part of the solution for a climate-neutral energy future. And this increased relevance and this part of being a solution can also turn into tangible upside for you. Third, with our growth strategy based on sustainability and digitization, we will capture the even stronger tailwinds for a faster decarbonization, which we are right now observing. And we did not only manage the crisis in the last year, we also became more sustainable and more digital. And fourth and final, all this means that we face massive opportunities and we have the financial capacity and resources to ramp up the investments for profitable growth. Provided that the remuneration framework is right, I'm confident that this will be the case. And now let me just talk you through these points in a little bit more detail. First message, strong delivery. Across the segments, we have finished earnings at the top end of the guided ranges. We have delivered what we have promised to you 12 months ago. And I'm really proud of our teams who have done a great job in a challenging market environment that has been really characterized by unprecedented and immense volatility. Both our core businesses have proved to be highly resilient. When it comes to networks, the earnings delivery has been mainly impacted by temporary effects during the year related to higher costs for network losses. And as we have pointed out previously, those impacts have started to reverse already. The price volatility has likewise also affected our energy sales business. Nevertheless, our digitally integrated business model proved to be rock solid, and it helped us to mitigate the risks that we have seen in the last year rapidly and successfully. A clear example of that is the speed at which we have reduced the time to market in the German sales business. Now able to bring new tariffs into the markets within a couple of days and before the crisis. This took us weeks and that would have been a severe challenge in the crisis. Earnings in the division have also been backed by continuous strong demand for our decarbonization solutions for industrial customers and cities as well as for retail solutions for our residential customers. On a group level, also the non-core business has contributed, again at the top end of the guided range. We have mainly benefited here from higher achieved market prices, but only because we also had world-class operators being able to exploit the opportunity. Altogether, this means we have been able to achieve an EBITDA of more than 8 billion euros for the group. Also, in net adjusted income, we have seen above 2.7 billion. So for both KPIs, we have delivered above our guided range. And this success will be translated into a continued strong dividend payout proposal for 51 cents for fiscal year 2022. So strong delivery. And this brings me now to my second message, increased relevance. E.ON is operating 1.6 million kilometers of energy networks. And this makes us the largest operator of critical energy infrastructure in Europe. E.ON reaches 20% of all citizens in continental Europe and in the UK. And this makes us the owner of one of the largest customer portfolios in Europe. And both facts, networks and customer solutions, have made us the natural partner for governments to solve problems the current crisis. Our relevance increased with the understanding that we are an essential part of the solution. Because we at E.ON, we assume responsibility when it matters. And we have actively contributed to mitigate an unprecedented crisis which you see on this chart in Europe. I've been personally a dedicated member of one of the gas crisis teams of the German government. Across all our regions, our local managers have been in similar situations. I'm also the president of Euroelectric, actively contributing to the market design discussions on the European levels. We really try to make our part happen that the energy crisis can be solved. And all of these activities have led to good outcomes in the interest of both our customers and also our shareholders. The support schemes that have been developed in all our markets are now in full swing, including special measures for our most vulnerable customers. We are convinced that these efforts such as price caps and our direct support, including offering of payment schemes, cannot be the solution in the long term. We have to invest ourselves out of the crisis in the long term. Nevertheless, they have helped the customers in the short term. This brings me to my third message. We have the right growth strategy. We will capture the stronger tailwind for faster decarbonization. We will continue to successfully operate in 2023. And why am I so convinced? Because we have managed not only to deliver performance, financial performance, which you have already seen. We have also delivered growth. And on top, we became more digital and more sustainable. So let me just give you some proof points of that. Last year alone, requests for renewable connections grew by 40% in our German network business versus prior year. So already 22% versus 21% plus 40%, and the trend is unbroken going up. Outside of Germany, the number of requests for new grid connections is strongly growing as well. For example, in Sweden, in the Czech Republic, we see triple-digit growth rates year over year for connecting residential solar. Additionally, we see immobility picking up at extremely high speed. We also see demand for sustainable infrastructure solutions, our so-called ICE business, with an increase of investment of almost 30%. And we expect a similar trend for 2023. And finally, in residential customers, we've seen more and more requests for independent energy solutions on the journey to get to net zero. and revenues of our retail solution business grew by around 25% year over year, and it exceeded €1 billion in 2022, and I might say profitably, not just in whatever it takes. So next, digitization. We are also becoming more digital. and all digital company in all our operations. And this will be the driver of efficiency and productivity, and this will ensure that we are also in the future competitive in the energy market. Again, some proof points. In energy networks, we have increased the number of smart secondary substations to digitally steer and monitor our assets in low voltage. We have reduced operational costs for connection of renewables and accelerated our planning processes. In customer solutions, we achieved a much faster time to market. I just gave the example of Germany. And this has happened via digital sales platforms. And as prices will remain high and volatile, this will become a real differentiator also going forward. Last, sustainability. We have fully implemented sustainability in all our steering processes in the company. It's also now fully integrated in our annual report going forward, and you can actually look at it yourself. It has been a real effort to come to this integrated perspective on business and on reporting. We keep on also progressing with our customers, reducing more than 100 million tons for the last year. And I just want to emphasize that obviously it's now also part of our targets, part of our steering, taxonomy targets, larger 95%, SBTI obviously approved, 1.5 degree compliance, et cetera. Be assured, however, in 23, we will not rest on all these developments. Our strategic pillars, growth, digitization, sustainability, will continue to be our compass. And we will work hard to make further progress day by day. And this brings me now to my last message, growth. The crisis has brought forward the need for an even faster decarbonization. We are now seeing increased targets for renewable build-outs all over Europe. This is great for our networks. Every windmill needs a connection. Every connection more and more needs a reinforcement in the backbone. But it's not only our networks. With our energy infrastructure solution business, we benefit from the heat transition that we see in cities, municipalities, local communities. And 2022 has also left a clear mark in end customer behavior. Demand for heat pumps, for PV panels and electric vehicles is promising. significant additional growth opportunities. So basically growth above what we observed in 21, in 22, and further accelerating in all our core businesses. Now this is clearly the time in which we want to accelerate our investments to capture these green growth opportunities and within our CAPEX plan we have reserved 33 billion euros until 2027 to participate in that growth momentum. Obviously subject to an adequate regulatory return. Adequate means attractive for capital owners that have to consider the increased cost of capital, the interest environment, which has changed significantly, 22 versus 21. With this investment plan, we will be in the position to increase our RAP growth from 6% on average to at least 8% on average until 2027. But again, we will invest in a reasonable way. We have the financial capacity and the resources to invest, provided that the remuneration framework is right. We are confident that this will be the case, as we have just seen the German regulator making a first proposal for an improved cost of debt calculation last week. However, to be clear here, this can only be the starting point. And this brings me to my final message for today. The market is ready to accelerate on all fronts. We are ready to cope with debt speed and to do our utmost to deliver our contributions for Europe's targets. to become carbon neutral, and I'm convinced that we will do that while still growing both earnings and dividends. And with that, over to you, Mark.

Thank you very much, Leo, and a warm welcome from my side to everyone as well. We want to make it super simple for you today. Strong strategic momentum translates into strong operational and financial delivery. What should you take away? First, the year 2022 has been successful despite the challenging macro environment. We did not only deliver bang in line with our initial guidance, we were also on top of our group guidance and we also kept a close eye, a very close eye on cash. Second, we see boosted growth prospects for all our businesses. This means significant investment opportunity and earnings growth potential for E.ON over the next five coming years and beyond. Third, increased investments stand on very solid financial footing. Our upgraded green growth program will be delivered together with a debt sector target of up to five times. With that... we will comfortably ensure our capital structure target of a strong BBB, BAA rating. This sound financial position also allows us to pay a dividend of 51 cents per share for the fiscal year 2022 and to also reaffirm our long-term dividend growth policy of growing our dividend per share every year by up to 5%. Let's start with the details of our full year operational performance. Our group EBITDA came in at 1.8 billion euro, around 250 million euro above the upper end of our group guidance. Core EBITDA came in at 6.9 billion at the upper end of the forecasted range, which we updated in November. In our energy networks business, we were able to achieve an EBITDA of 5.5 billion euros. Key positive drivers were additional efficiencies and investment-driven growth. These were partly offset by high energy prices leading to additional costs for network losses and milder weather and energy savings having an impact on our wheeling volumes. Each of those two negative effects, which I just mentioned, led to a low triple-digit million-euro burden year over year. Both effects reduce earnings in 2022, but will be recovered over the next years according to the established regulatory mechanisms. Our customer solutions business performance was strong and provided €1.7 billion of EBITDA. The main driver for this was our capability to actively and dynamically adjust our procurement strategy in line with amended weather forecasts and consumption patterns. we were also able to sensibly pass on increased wholesale prices to our customers. Our energy infrastructure solutions business continued to grow very robustly by 19% or around 90 million euros year over year to around 570 million euros. All in all, our group and core adjusted net income came in at roughly 2.7 billion euro following our EBITDA earnings development. Now moving on to an update on our debt development. First key message. Year over year, we still do not see any material change in our actual customers' payment behavior in any of our markets. Second important message, we have increased our earnings-effective additions to bed-debt provisions in a year-over-year comparison by about €300 million. With that, we also stay prepared for an adverse outcome during this year or the future. Let me now turn to the development of our economic net debt. Compared to our nine-month figures, economic net debt has been reduced by another €1 billion, down to now €32.7 billion. This is largely due to an exceptionally strong operating cash flow, resulting in a cash conversion rate for the full year of 151%. Our strong financial position at year-end led to a debt factor of 4.1%. What does that mean for our capital structure going forward? E.ON remains fully committed to its capital structure target of a strong BBBAA rating. This remains unchanged. However, rising interest rates will set respirables and over time, increasingly burden rating ratios. With our new debt sector target of up to five times, we fully anticipate this effect already today. Even more important is that we will stay comfortably in line with this new target, also including our upgraded CapEx program. And why are we so confident? Because we will continue to keep a close eye on cash. Our working capital in 2022 strongly improved by around 4 billion euros. This improvement is of course to a certain extent rooted in temporary effects that will reverse in 2023. However, to a considerable degree, it also stems from working capital excellence measures. From today's point of view, we see a cash conversion of 80% for 2023, which will thereafter swing back to our average of 100% in subsequent years. And with that, you should take away that about half, that is 2 billion euros, of the cash improvement which we have seen in 2022 will stay with us for good. The portfolio optimization program with disposal proceeds of 2 to 4 billion euro by 2026 is also unchanged. In 2022, we already made substantial contribution to this with the partnership around our German broadband business in the Western German area with ICNEO infrastructure partners. I also want to reiterate that we will pursue a series of minor transactions. So no big bang, a series of minor transactions over time. Let me now turn to our guidance on investments. As elaborated by Leo, the growth opportunities for all our businesses are shooting up. We will capture these prospects and will gradually but significantly ramp up our capex over the next years. We have the financial capacity to invest, and we will deploy these resources, provided that the remuneration framework for our energy networks business is right. We upgrade our five-year CAPEX delivery plan by more than 20% to €33 billion. The bulk of the CAPEX upgrade will be invested in energy networks, where we see accelerating investment opportunities from the clean energy transition. We additionally intend to invest more within our energy infrastructure solutions business, where we are particularly excited about the future prospects. We also increase our capex budget within energy retail, with future energy home and charging infrastructure exhibiting significant growth potential. All our investments are required to meet strict internal hurdle rates, broadly made up of project-specific WEGs plus risk-adjusted spreads. We will continue to strictly adhere to these benchmarks. Turning now to our 2027 outlook as we roll forward our five-year guidance. The CapEx opportunities allow Aon to be fully committed to its growth promises. We are committed to generating €9 billion EBITDA. This will translate to around €0.97 per share in 2027. With that, the negative impact from higher interest rates will be more than offset. Our Poison Electra operations are classified as non-operational as of January 2023, will hence no longer impact our adjusted earnings. Our Turkish generation joint venture is now reported under corporate functions other. Our outlook demonstrates the value-creating potential of our green investment plan. It also shows the sustainability of the diverse growth drivers across our segments. For 2023 specifically, we forecast EBITDA of 7.8 to 8.0 billion euros and adjusted net income of 2.3 to 2.5 billion euros, already taking a big leap towards our around 9 billion euro EBITDA and 97 cents EPS target for 2027. As Leo pointed out, we do not view the European energy crisis as being over yet. In our assumptions for the 2023 guidance, we prudently assume that a cold winter 23-24 and or a re-acceleration of global LNG demand in the coming months could reignite an energy scarcity in Europe. For investors, this means that our businesses will continue delivering their financial targets even in tough times. The flip side of this is, should commodity prices stay where they are today, and demand should come back faster to pre-crisis levels, then this would translate into significant upside for us. As mentioned before, our earnings outlook is well supported by our three business pillars. For energy networks, we expect to generate an additional €1.1 billion EBITDA over the next five years, reaching an outcome of 6.5 to 6.7 billion in 2027. This increase will be reliably driven by continuous regulated asset-based growth while closely managing the productivity of our cost base. For 2023, we will see a jump in profitability beyond what the mentioned drivers should make you actually expect. And I will add more colour to this dynamic on the next slide. Energy infrastructure solutions are expected to generate an extra EBITDA of 300 million euro by 2027. This demonstrates the segment's ability to translate organic growth capex into sustainable earnings. For 2023, the segment is expected to generate 500 to 600 million in EBITDA. We envisage our energy retail segment to grow from 1.1 billion euro EBITDA in 2022 to 1.5 to 1.7 billion in 2027, with growth coming from additional efficiencies on our way towards the long-term margin level of 2 to 4% across the portfolio. We will also continue to grow our future energy home and e-mobility solutions activities, together adding €2 billion of revenues and €200 million of EBITDA by 2027. The underlying earnings growth trajectory in our network segment is straightforward, as you should expect it. Based on our growth capex plan, we will be growing our asset base year over year by about €3 to €3.5 billion on average during the next five years. At current allowed returns, this will translate into more than 200 million Euro additional EBITDA every year. In addition, we expect growth from investments into adjacent, largely quasi-regulated activities, such as smart meters, in the amount of 40 to 50 million EBITDA per year. And on top of that, a bit like the icing on the cake, we will continue to ruthlessly focus on efficiency to ensure both that returns from additional growth investments will flow one to one into our bottom line, but also that our regulatory outperformance will at least be maintained. So far, so simple. Another positive feature of our network's activities is that revenues are shielded against variations in demand, and commodity prices, and even largely against changes in inflation. As we have outlined in the past, the financial recovery of some of these variations caused temporary shifts in earnings. And this is particularly true for the recent variations in wheeling volumes and network losses, where we do expect recovery of past losses, specifically during 2023 and 2024. But it also applies to certain effects relating to pension liabilities, specifically in our German network businesses. Because inflation rates moved sharply, our pension liabilities under German regulatory gap were significantly inflated during 2022. And this inflation-driven increase in liability will cause a positive one-off compensation by the regulator in T plus 2, and that is in 2024. So, what should we take away? First, economically, all these effects are a wash over the midterm. Cash-effective upside in 2023 and 2024 offsets cash-effective downside of prior years. Second, what really matters in terms of value creation is our underlying performance built on growing our power rep and managing tightly for efficiency. Third, our guidance is cautious as it reflects no adjustment to current regulatory returns. Lastly, We are confident that regulators will recognize our commitment to increase CAPEX and accelerate the energy transition in Europe by adjusting allowed returns more responsibly to the massive shifts in macroeconomic variables that we have seen during the last 12 to 18 months. And this should provide for further upside potential also at the long end of our guidance. Let me now summarize the updated financial framework for E.ON. As you have heard before, we are accelerating our CapEx plan to 33 billion euro. That translates into 9 billion euro of EBITDA. That translates into 97 cents earnings per share by 2027. We remain fully committed to our strict internal investment hurdle rates, which will translate into an average return on capital employed of 7 to 8%. And we are also fully committed to our dividend policy of growing the dividend every year by up to 5%. And we adjusted debt factor leverage guidance to up to five times, underpinning our commitment to the unchanged rating target of a strong BBBAA rating. And with that, back to Iris.

Thank you very much, Mark and Leo. And with that, we come to our Q&A session. And I'd like to kindly remind you that please stick to two questions per person. And with that, we'll start with the first question. The first question comes from Wanda Savinovska from Credit Suisse. Wanda, please.

Hi, good afternoon. Two questions for me. The first one is on the EC proposal that was announced yesterday on the new power market design, which seems to put a lot of focus on the end customer protection. It seems that there will be an obligation for more conservative hedging at the supplier side. Consumers will have an option to sell the excess of electricity to other consumers, something that is not the case right now. And big retailers would need to offer a fixed price contract. So any thoughts, any initial thoughts from you on how this can impact E.ON retail business? And the second question is on energy infrastructure solutions. Leo, you mentioned last year that demand was very strong, but there were some supply side constraints. Have you seen any improvements on the supply side, heat pumps, solar panels?

Yeah, Amanda, thanks for the questions. Number one, on the EU market design. First, I would say, considering where the consultation started in the last year, or even before the consultation, The current proposal is, I would say, a reasonable starting point for a good discussion. I think we have seen last year proposals that would have really changed the market and had side effects which would have been hard to understand and quantify. But the current proposal on the table, I think, is more a glass half full than half empty and we can work with it. I agree with you that we have to study in detail and we have to follow the trilogue discussions in depth. Because there are lots of changes in there. It's actually lots of words, lots of small changes, and each of them matters. On the hedging, I'm actually pleased with the outcome because whilst in the beginning there have been debates about a very prescriptive hedging, like we have seen in other markets, like in the UK, with very negative effects. It has been understood that actually to be too precise on the hedging is not beneficial for customers because it forces all the participants in the market to behave in the same way at the same moment in time, which obviously leads to an increase in volatility, completely undesirable. So, therefore, what I foresee right now is that there might be some obligations which will, however, not change fundamentally the business we at E.ON are doing. And also, there have been now no exceptions put into the proposal for smaller players, which would have been really distortive to the market. So in total, I would say glass half full. We can work with it. The most dangerous and most difficult proposals have not been put on the table by the EU Commission. So I'm confident that we will see rather a targeted, somehow reasonable amendment of the current frameworks rather than a revolution of the framework within a too short time period with all possible side effects. Now, on the EIS, completely changing EIS supply chain, yes, we have seen challenges in the supply chain. We are seeing, you know, a partial relief. For example, you've all seen that chip scarcity is slowly getting better, and therefore, you Right now, I would argue the biggest bottleneck we have is twofold, which is having enough engineers to deliver the project and having sufficiently enough standardized approach to scale the business to really benefit from the growth momentum, which we are seeing.

Okay, thank you. Can I make a very quick follow-up? Okay, quick one, Wanda.

Very, very quick one, I promise. You mentioned the hedging, but don't you see a risk from a volume risk point of view? If you are forced to make a longer-term hedging for a higher share, would you still see 2% to 4% EBIT range as a kind of sustainable?

This is exactly the case that we made to the EU Commission. You will always understand the changes in liquidity in the market slower than the market because you're not in the market, you'll always be behind the market. So if you actually give a very detailed hedging, you know, guidelines three years out, two years out, one year out, then actually all you're doing is you might force suppliers to buy into an illiquid market driving prices up. And I think that argument has resonated. So, therefore, yes, the danger is still there, but at least the argument has been heard, and we have seen, you know, now we are seeing the proposal that countries might put obligations on their suppliers. I hope that this will be done in a very reasonable and, let me call it, cautious way.

Okay. Thank you, Leo. Thank you. Next question comes from Harry Weybert from Exxon.

Hi everyone, thank you for taking some questions from a new face. It's Harry Wybird from Exxon. So two from me, please. First on regulation. So you mentioned the German regulator had made its first proposal for an improved cost of debt calculation. So I just wondered if you could just update us on what's been exactly proposed there and what the timeframe might be for that actually to have some impact on your earnings. And if possible, whether you could give any kind of sense for how material that could actually be from an EBITDA perspective. And then the second one is on your 97 cents of EPS for 2027. I wondered if you could help us understand what refinancing rate you've assumed there, because obviously that's a very big sensitivity as to where you get to in 2027 on the bottom line. So what bond yield or finance cost have you assumed on the refi of all of the bonds that are maturing over the next few years? Thank you.

All right, so I take the regulation, Mark takes the second question. On regulation, I think German regulation, we have three real discussion points. We have one which is, I call it an investment incentive, which is the famous interest rate discussion. The second one is an acknowledgement of the increased cost of debt. which is the topic where the regulator has made a move. I'll get to that in a second. The third one is an appropriate cost audit reflecting the need for high operational cost when you grow, which is not then counteracted even if we get a generous cost audit by the requirements of big productivity increase. So the German regulator has now proposed a revised, call it equity tools or cost of debt interest rate methodology for new investments. from the business year 2024, which could lead to an EK2 of 3.9% in 2024, which is obviously much better than what we have seen before, where we actually still were working on the 2021 basis. So I think that is the first encouraging sign. Now, however, this is the proposal. What I really always want to see is Black on white, a final decision. And then, as I said, this can only be a starting point because then we have the other topics, cost audit, productivity factors, and interest rate on equity. So these are all the discussions which we're going to have this year.

Mark. Yeah, Harry, and on the refinancing assumptions, we provide full transparency on key economic variables in our capital market presentation. It hasn't made it to the front part yet, but if I recollect, it's the first patient of the appendix. And if you go in there, you will see... That we have taken what I would call a cautious approach is we assume refinancing rates to stay where they are today. That is at around 4%. While in parallel, we assume that inflation rates will actually go down to 2%. And you know that both rates are relevant for our financials and earnings. And we have to take a cautious view in keeping financing rates up while we do assume that inflation rates will come down to the ECB long-term target.

Got it. That's very clear. Thank you. And just to clarify on the cost of debt, you mentioned in the first question that's not included in your guidance, right? So if you do get that in black and white and it's finalized, then that would be some upside to your guidance in networks? Yes. You get a double confirmation.

All right.

Thank you, Harry. So next question comes from Peter Wichtiger from Bank of America.

Yeah. Hi. Good morning. Thanks for taking my questions. Good afternoon, in fact. So two, just reconciling some of the increases in your guidance, please. First one focusing on energy retail. So previously you were looking at 1.2 to 1.4 billion of EBITDA in 2026. You're now guiding 300 million higher than that for 2027, which is a pretty substantial jump. So I'd just like to better understand the building blocks behind that, please. And similarly, on your RAB growth, you've gone from 6% to 8% on Power RAB. How does that split between higher inflation coming through in the earlier years and how much is genuinely higher underlying growth? And also it would be useful if you could actually break that 8% down between what you're seeing in Germany, what you're seeing in Sweden, and maybe what you're seeing in aggregate across Eastern Europe. Thank you.

So, Peter, thanks for your questions. I will tackle them both. On the retail guidance, it's essentially the upgrade of a million reflects three drivers. Driver number one is just continued growth in our energy infrastructure solutions business as we will be ramping up capex in that business. And so the growth rate in that business will increase over time and we will be at a run rate by then of approximately 100 million per year. And so that's one element where just with every year adding to the guidance, you know, you will see investment growth in that business. Second driver is that we have seen during 2022 an enormous increase in momentum in our B2C solutions business all around PV, batteries, heat pumps. Leo referred to some of the developments which have seen just a new connection request and that kind of stuff. This is the second driver. We just see significant more revenue and enhanced earnings growth momentum as these businesses are scaling up profitably. And finally, we are getting just now with one more year in, and despite a crisis, That this inspired normalization in margins of two to four percent revenue margins across the retail portfolio will be – that we will be able to comfortably implement that and that's the third driver why we see this upgrade to the target. So that's, I'd say, very solidly built on these three pillars. On RAP growth, at this stage, the large part of the upgrade in growth rates is reflecting a real growth in investment activity over time, so there is by assumption only a limited impact on inflation rates if you look at our capex. In real rate regimes we do have some inflation adjustments on the regulated asset base as well, but I guess the best indicator for you is just to look at our capex and this tells you that about $2.5 billion and then increasing per year of regulated asset base growth. will predominantly be driven by kind of increasing physics and not just increasing euro amounts. We will, of course, closely monitor that. It is obviously, as you can imagine, a big challenge and focus for us to look at our procurement strategies, how we partner with key suppliers, et cetera, to make sure that with this massive investment program, we keep inflation rates tamed.

Okay. Thank you, Mark. Thank you. Next question comes from James Brand from Deutsche Bank.

Hello. Can you hear me okay?

Yes, that's fine. We can hear you.

Okay, great. I had – it might be a two-parter. Apologies if it was interpreted that way. I have a couple of questions on CapEx. So one is for the EIS CapEx of $4 billion that you're planning over the planned period. Could you give us a bit more detail on where that's going? And then on the CapEx and networks, there seems to be a general trend of network utilities increasing CapEx quite regularly at the moment. So I was wondering how we should think about how you've gone about putting together this new program. Is this kind of an all-in number we should expect, given this increase, for it to stabilize here over the next few years? Or is it just a good idea? Yeah, there are more projects that you're going to be identifying over the next few years, and we should be expecting it to progressively increase. And then I, this might be a third question, apologies. I had a question on the long-term margin comment from Mark of 2% to 4% across the portfolio. Just a clarification, you're talking about the individual retail businesses there being between 2% to 4%. That's not a comment on the overall margin range for the retail business in general, because if so, that's a very wide range. Thank you.

Yeah, maybe first on CapEx, also just giving a little bit of color, we are seeing an increased need for investments across the board in all regions. So in all our businesses, also in energy networks, but not only confined to Germany. So we are seeing similar growth rates actually across Eastern Europe with slightly different drivers then. But so the momentum is a European one. It's not a German story, which we're telling here. It's number one. Number two is we are seeing currently a continued acceleration of the program. So actually, if anything, we're seeing a continuous increase of the investment opportunity, which we have not factored in yet. For example, if you have heard about the German Easter package here, We're still trying to understand what this Easter package, which would be a further acceleration of the renewable rollout, what that would really imply. But the point is also for us it makes no sense to actually include it until we have seen an improvement on the regulatory framework because only then would we actually be in a position to say it makes sense for our shareholders to grab this opportunity. Or to put it a bit bluntly, to invest a lot you need to earn even more. And unless we can see that we can make these earnings, there's no point in actually just increasing the stakes. So it's a European momentum. It's an increasing momentum. We are confident that this will provide further upsides over the year to come, but only if we can see the remuneration on the regulatory side coming. This year is an important one because especially in German regulation, we have some fundamental decisions up. We discussed that already in this call. And so, if anything, I look actually quite optimistic forward.

Yeah, James, and let me briefly get back on your question about CAPEX in our energy infrastructure solutions business. So the big, big focus during the midterm, it's the next three, four years, will be on providing industrial and commercial customers with carbon neutral or low carbon heating solutions. It's been a big momentum during last year. So it's been a big shift in demand away from gas-fired CHP solutions to renewables-based low-temperature heating. And that has developed into a very healthy pipeline, which we will monetize during the next three, four years. On top, but this will be rather further out, we also see a lot of momentum now coming up from the decarbonization of municipal heating, specifically in Germany, but also again across Europe, which we expect to provide them further growth momentum, but further out as typically the lead time for those projects is a bit more extended. And then you asked specifically about the 2% to 4% revenue margin target. How you need to interpret that is that this is something which you would see across the portfolio, so there will be variations region by region. But there will also be variations year by year. Depending on when price changes, et cetera, will be implemented. You can also have inner market changes from year over year. But what our investors can expect that we will deliver is these 2% to 4%, which is kind of the benchmark for us to make these operations for us a profitable business. But I think you should also take away from our performance during 2022 that we are the right owner to deliver on to that ambition.

Mark, just that Germany, we estimate for ice to be 50% roughly. The rest would be outside Germany. District heating, if you take a different cut, not by region, but more by business, district heating, one-third and two-third for other solutions like a low-temperature solution Mark just alluded to. So that's a bit to split on ice.

Mm-hmm. Great, thank you. And I should say at the beginning, thank you and well done on such a great and clear presentation. Thank you.

Thank you very much. The next question then comes from Vincent Dairal from J.P. Morgan.

Yes, good morning, and thank you for taking my question. Good afternoon, actually. I'd like to ask a question regarding, first, the non-recurring elements or the temporary boost from the recovery. So you've got network loss and volume recovery. You show that on your slide 15. It looks to be about around $200 million for 2023. And then for 2024 – You've got this general local gap pension inflation adjustment, and it seems to be an additional 400 to 500 when looking at the chart. We'd be quite keen to get another magnitude to actually get more accurate forecasts on that. Then the second question I have is regarding press reports saying that the German government is looking at consolidating for electricity transmission networks. That includes DEMET, 50 Erbs, Transnet, and Prien. And basically would have, therefore, a broader strategic question. The overall energy network landscape in Germany is extremely fragmented. Do you see these press reports as potentially the first wave towards a consolidation of the space over the coming decade? Basically, given its lean position, E.ON could be an enabler in such a transformation. How do you see this prospect? strategically, financially, politically, basically, while they're adults.

Thank you. Let me start, Vincent, with the second question. First, we are seeing government actually acting on the transmission level, and to be clear, this is actually what is the norm across Europe, so it's not really a fundamental change, so if we have, I would say, if we have a German government rather than a Belgium and Dutch government, that doesn't fundamentally change the picture. I do not see a consolidation on the DSO side. If there's one way how the German government could really miss the target of infrastructure building out is to embark on a quest to convince 800 municipalities to consolidate. I will just give you one example. On the saving banks, on the Sparkassen, they have been failing consistently for the last 50 years. They will not do this. I'm actually quite confident because then the whole municipal sector would be busy for the next 10 years without making any progress. If that would happen anyway, I see upside from that because the increased complexity of the DSO business will require more partnerships, and obviously the partner will be predominantly players who can actually contribute something to the more complex operations of the future, and that will be us. So, no, I don't fear the consolidation on the DSO level. Actually, I see rather more partnerships coming, and I see them more as an opportunity. And to give you some indication, just one proof point, we have seen over the last two years competition for concessions going down significantly because it's now clear that this is not a game in which everybody can participate at will without risk and which has been also beneficial for us as EON. So that would be my takeaway on your second question. Give to Mark on the first one.

Yes, Vincent, then on the one of the fixed energy networks. So you mentioned rightfully that we still have a certain volume recovery from COVID. That's a low triple digits, 100 million recovery, which we still see in 2023. We talked about network losses extensively from 21 and 22. So we will see recovery in both 23 and 24, also in a low triple digit million territory. And then when it comes to the pension compensation, This is where we indeed are moving away from low triple-digit into the mid-triple-digit region. So here we are talking about something, you know, in the magnitude 3, 400 million, which maybe then at the end see our 24 results. I just want to make two things very clear here. Number one, you know, this is really about being transparent to you that you understand where our results are driven by these kind of one-offs, as we have been pretty clean of this stuff in past years. But secondly, be aware of that these temporary shifts kind of evolve dynamically. So I mentioned earlier that we are still looking at a Guidance 23. with assumptions that we're not yet over the crisis yet. So these kind of things change that will also then provide for the dynamics how our networks earnings would look like and whether or not additional compensation would come or not. But from today's point of view, that's the transparency which we can give. And I think that should be reasonably clear for you. I hope. Thank you.

Thank you, Mark. Next question comes from Alberto Gandolfi from Goldman.

Thank you. Hopefully you can hear me. The first – thank you. Thank you, Aris. And thanks for taking my questions. The first one is on the power distribution business. I was trying to dig a little bit deeper in the underlying assumptions to 2027. And I guess the question is how far – In your plan, are you going into the electrification path of Europe? So how much of a potential Europe IRA have you included? How much of the repower you? How much electrification of households? Can you give us a penetration of... of this, how much have you put of the 240 gigawatt renewable target for Germany? And perhaps what type of increase in ROE and ROIC, if I can be 100% clear, would you really require to go ahead with this current high single digit growth rate? That's the first question. The second question, and I hope you allow me an appendix at the very end, but the second question is I think an absence of today is a discussion on cost-cutting and synergies. Your business is still relatively young. You have an integration with energy, a very large workforce. potentially we're about to see big revision in unitary labor costs, but can you maybe elaborate how much of cost-cutting have you put into your plan? What type of driver do you see? How much more to go? And this is not the first question, but in case you think it's relevant, before you cut me off, in case you believe this is relevant, is there any consideration you can tell us in terms of work in progress? So CapEx, how much of the $33 billion does not give you profits in 2027? Some people don't. frequently mistakenly take your repeat da 27 minus 22 and divide by capex not accounting for work in progress so maybe if you can just clear up the air on that one thank you so much yeah so um alberto um let me try to walk through i start with your first question um

In essence, the answer is no, we don't have no kind of this perfect foresight model. Again, we would say that's the end state, and here's our now fill rate to which we've achieved electrification, if I understood you correctly. So I don't want to disappoint you, but a lot of foresight, but not this kind of foresight. So what is it that we assume is that we look at... Only at those trends which we see materializing today. And that is, for example, it comes to the Easter package as Leo talked before. If there should be then an additional acceleration on top, this is not something which we assume or put otherwise would need. in order to deliver on the growth which we have shown. That would be additional upside if, again, the frameworks for that are adequate. On top of that, I would also just remind you that we do see a lot of change in the industrial composition in Europe. If I just look at what the connection demand is from data centers, from battery factories. It's not just about adding more renewables, it's also the electrification and change in the whole industrial system in Europe. And also here, I think we're just at the start of an evolution which we will witness. But again, we don't have perfect foresight, but what we have included in our blends is what we definitely see in terms of connection requests already today.

And indeed, this is a discussion which we are meeting in the board continuously. we have seen areas where we assume the growth will really be driven by the addition of renewables. And now to our surprise, we see exactly in those areas a significant increase also driven by load, which is again then obviously requiring network connections, but this time for the load and not for the supply. And so for us, we are really struggling to capture the full dynamics, but the result is that we have been continuously surprised by higher investment opportunities than we anticipated if we look backwards. So right now the trend is really increasing, as I said earlier.

Then your third question, the 33 billion, what sort of work in progress? You can assume that about three, three and a half billion Euro of growth capex will not be earnings effective in 2027 yet. So there is a one year time lag to most of our projects and so I guess the The best indicator I would give you is about this three, three and a half billion. And on cost cutting. Alberto, the challenge during the next five to 10 years is not going to be about cutting costs. The challenge is going to be how to allow and facilitate this massive growth, which we see. And so we are entirely focused on productivity. So when we look at efficiency, it's not about kind of where can I cut FTE and where can I cut costs? It is about how can I redeploy our FTE to the most productive way so that they pay onto our growth ambitions. And that's why also this digital fabric about which Leo talked is for us a fundamental element of how we drive efficiency and productivity in this company because it's one of the key levers which will enable us to deliver the growth without proportionately every year increase our cost base. And so with that, you can totally be assured that we have a close eye on our cost base, but our focus is making it as productive as possible. It's not cutting it.

Very clear and congratulations again. Thank you. Thank you.

Next question comes from Deepa Venkateswaran from Bernstein. Deepa, I hope I got your last name right.

Thank you so much for my questions. I am going to be following up on a couple of questions already asked. So on the German networks regulation on the cost of debt, I think you mentioned 3.9 as a proposal. What was it before? Just trying to work out what the impact could be based on your, I think, 23 billion RAB and 60% gearing. So that's the first one. And secondly, Leo, I mean, maybe just an addition to that one is on the cost audit and benchmarking, Leo, I think you were a bit fast. I didn't exactly understand what you were trying to achieve. Were you trying to improve the efficiencies compared to last period or were you trying to preserve it? And my second question is, if I look at the overall plan and also guidance for 23 and 27, probably the number that has surprised everyone is how strong and confident you are on customer solutions, particularly on the energy retail. So I just wanted to stress test, you know, the 600 million improvement from 22 to 27. You know, what can go wrong and, you know, how firm are these numbers?

Thank you. Then I take the regulation before. So what we have seen, the proposal is 3.9% cost of debt, and it was 1.7 before, something like that. So in a sense, more than 2%, 200 basis points improvement. But as I said, this is now a proposal. There will be a process which now starts in April and I assume will take as always four to five months to then be ironed out and then we'll see the final results in the summer somewhere. But I just want to mention that this is just one of the critical regulation point that by far the biggest one is the cost audit which is running this year with the cost audit for the incentive regulation in power which is happening this year. And the question is, you know, do we get a sufficient cost allowance by the regulator, which is then also, if it's sufficient, not just counteracted by a productivity increase factor, which is then reducing whatever we get kind of like year over year. So this is also happening in this summer. And then the final one is will there be investment incentives for those players who are actually especially relevant for the energy transition, which is clearly E.ON, by the way, because the energy transition and the reinforcement and investment needs primarily happen in the rural areas, in the high-voltage areas, not so much in the municipal areas. I think that is important to understand. So it's more an opportunity actually for Iran rather than for, for example, municipalities. Yeah, so this, I guess, this is again the regulation story, but the move of the regulator on the cost of debt has been actually a satisfying one, and now the only debate is are we going to see this, you know, from the 1st of January next year, or couldn't and shouldn't we already see it from the 1st of January this year, which we have both not factored in, obviously, in our plan.

Then you asked about customer solutions and what could go wrong. If you had asked me beginning of last year what could go wrong, I couldn't have been more off what we then witnessed during last year, what actually happened. And despite of everything that happened last year, we have been able to deliver at the top end of the expectations that we set before knowing what we were up to during last year. And so instead of actually asking what could go wrong, my focus on the business is what can go even more right. As I said, it builds on three strong pillars. I think there can be much more momentum in low carbon and carbon-free solutions from our B2C clients. There can be much more momentum from e-mobility. I told you that both businesses for us are scaling, we see them scaling profitably. And I also can envisage an energy retail market where we do not see competition come back to pre-crisis levels because competitors went down, where we do not see the same kind of asymmetric regulation in some countries because politicians now understood how important it is to have reliable suppliers in the market and so on. So I think my view in a nutshell is much more balanced than your question seems to assume, and that's why we see our guidance for 2017 standing on very solid footing, also for customer solutions.

Okay, thank you.

Okay, we are running out of time, so we will take one last question, and this question comes from Ahmed Farman from Jefferies.

Yes, hi. I hope you can hear me. Firstly, congratulations on a strong set of results. Two questions from my side. Firstly, I was just hoping you could give us a little bit more granularity on the underlying volume or demand assumptions behind customer solutions, business for 2023, you know, sort of relative to a historic sort of average, what sort of assumptions are there and give us a bit of a sense of sensitivity if volumes are one or 2% better, what can that mean and how does it actually work, would work through the earnings? So that's question number one. Question number two, as you have rolled forward the business plan, I think the positive momentum across all the divisions is very clear. And with that, my question is that, you know, one of the sort of figures that seems to have remained unchanged is the return on capital employed at 7% to 8%. And my question is, what could be the drivers of, you know, positive sort of uplift to the return on capital employed, and is that sort of the underlying regulation that we need to see reflect the current environment for that to step up? And how are you sort of thinking about that in your own capital allocation decisions? Thank you.

First, on the volumes, now please add Mark because I'm not sure I know all the numbers, but I would say first, very different assumptions and developments market by market. So it's not uniform, for example, in Netherlands versus Germany versus Eastern Europe. We have seen very different developments, also different in power and in gas. In general, we have observed There's low reductions on the electricity side and a little bit higher reductions on the gas side. We have observed significant reductions in markets like the Netherlands where we had very relatively short hedging and prices were flowing through very fast. Whilst, for example, in our largest German market, we have seen temperature-adjusted gas reduction of 10% to 11%, non-temperature-adjusted shy of 20% on the B2C side. On the industrial side, a slightly north of 20% reduction. Whilst on the power side, our best number that we have in our areas is a minus 3% overall electricity decrease. So obviously we have factored in these new normals, quote-unquote, into our forecast market by market, but I cannot give you an average number across Europe which would make sense.

I mean, what I could add is that now just in terms of what are we assuming now for our guidance in 2023, it's essentially that we will see the same consumption patterns to continue throughout the whole year that we had seen during the last – or the second half of last year. And that's when I talked about earlier a cautious assumption for the guidance. If you look at today's price levels, that would give you a different indication if you believe in some kind of sensitivity as we've seen last year. That's what makes us believe our assumption and just assuming that 23 will more or less look like the second half of 22 is from a volume point of view a conservative assumption. Again, that's, as Leo said, different market by market, what that means in concrete numbers. Yeah, return on capital employed. I mean, I'm not sure whether I got that question correctly. So you've got to come back directly if my response now misses you, your point. If you look at our capital base, the key driver obviously is the return on capital, and the biggest driver are then allowed returns in our network's business. And so the key sensitivity for our return on capital employed is going to be how regulators will respond to rising rates. But as Leo, I think, elaborated on that most efficiently, that's the single biggest key driver we see for return on capital.

Thank you very much. And with that, unfortunately, we have to come to an end with our Q&A call. For all those who still have questions but couldn't ask them yet, from the IR side, we're happy to take your questions. But please keep in mind we're on the road the next days to meet further stakeholders, but we will definitively get back to you. Thank you very much, and all take care. Bye.

Thank you very much. Bye-bye. Thank you.