E.On Se S/Adr

Hello, everyone. Dear analysts and investors, welcome to our first quarter 2024 financial results call. Thank you for taking the time to join us today. I'm here with Mark Spieker, for whom this will be the last earnings call as CFO before he takes over his new role as Chief Operating Officer Commercial. Mark, thank you very much for our successful earnings calls together. At the same time, I'm excited to have Nadia taking over as CFO in June, and I'm looking forward to having her join the earnings calls from our H1 results onward. As for today's calls, as usual, we will leave enough room for your questions after the presentation. With that, over to you, Marc.

Thank you, Iris, and a warm welcome from my side as well. I will save my goodbye words for later. Let us straight dive into the Q1 results, and let me start with highlighting the key messages for today. First message, Q1 came out in line with our expectations for all businesses. Key drivers of our slight EBITDA and net income increase were investment-backed earnings growth and strong operational execution, more than offsetting the unwind of prior year one off and timing effects. Second message, our planned capex ramp up is progressing well. We have accelerated again our spending by almost 25% year over year and are well on track in terms of quarterly fill rates across all business segments. Third message, our Q1 economic net debt came in as expected, showing the typical Q1 cash flow seasonality and the final outflows related to the unwinding of the positive one of working capital effects that we have been reporting to you as of our 2022 results. And I'll come back to that later. And final message, we have a strong conviction in the relevance and long-term growth path of our energy infrastructure solutions business. To make our ambitions more visible, we are moving the business into a standalone segment from this quarter onwards, as announced. Finally, our guidance is fully confirmed. On to our Q1 EBITDA development. Our adjusted EBITDA came in at 2.7 billion euro, up 1% year over year, despite the lack of significant positive impacts from one-offs that we had seen in the prior year quarter. As expected, our energy networks business is slightly down in Q1 due to unwinding positive regulatory account effects of 2023, such as the benefit from lower redispatch costs, as well as slightly higher than expected costs from upstream networks in Germany. Additionally, we have changed the accounting for our Slovakian VSE business to an equity consolidation, which leads to a technical reduction in EBITDA in our Central Eastern Europe business. No impact on net income. All those effects are economically neutral, and they were largely offset by strong RAP-driven earnings growth across all regions and the positive uplift of regulatory parameters in Sweden. Regarding network losses, Sweden and Slovakia have now completed their recoveries, while additional recoveries are now only happening in Southern Eastern Europe. You may have noted that we have now split our reporting of the CEE and Turkey segment into Central Eastern Europe and Southeastern Europe. This shall give you more transparency on our geographically well-diversified portfolio of networks businesses. The Central Eastern Europe segment covers Czech Republic, Poland, and Slovakia. The Southeastern Europe segment includes our activities in Hungary, Romania, and Turkey. Moving on to energy infrastructure solutions. New project commissioning is leading to EBITDA growth, as you would expect, supporting our 13% EBITDA accumulated average growth rate target from 2023 to 2028. This development is masked in Q1 by the absence of a positive one-off effect from last year and by a changed intra-year maintenance schedule with a stronger focus on Q1 this year. With a change in maintenance schedule, we are partly mitigating also the negative effects from mild weather that we have been observing during the first quarter. In energy retail, the significant year-over-year EBITDA increase was primarily driven by positive price adjustments since Q1 last year. Additionally, we benefited from the improvement in our B2B segment in the UK, which is successfully continuing its margin over volume strategy. Those positive effects were partially offset by the lack of procurement optimization benefits that we had seen in Q1 last year, and it's a very favorable commodity price background last year, and lower weather-driven volumes in Q1. Corporate functions and other segments saw an expected slight EBITDA decline, driven by the lower results from our Turkish generation business due to the development of commodity prices also in Turkey. Moving on to our adjusted net income, which showed an increase of 2%, which broadly follows the year-over-year EBITDA development. All earnings elements below EBITDA have developed in line with our expectations. The share of minority income sits at around 19% for the first quarter, as expected, and with that, materially below prior year. We expect this share to continue to go down and be lower for the full year as we communicated in our full year 2023 earnings release. Looking at the development of our economic net debt, I would like to highlight three points. First, our promised capex ramp-up is being executed like clockwork. We increased our Q1 investment spending by close to 25% year-over-year. I can assure you that we continue to be fully focused on ensuring a frictionless ramp-up, managing closely our operations and supply chains. So far, we do not see any critical bottleneck on the horizon. We have seen the typical operating cash outflow in Q1, which is driven by our seasonal business patterns in both energy retail and energy networks, specifically energy networks in Germany. As expected, this outflow was slightly amplified by the final unwind of our 2022 one-off working capital benefits. It's a long time ago, not everyone may remember, but our 2022 full-year cash conversion set at a very benign 151%, significantly above the 100% we normally target. And as communicated in March, for 2024, we are foreseeing a conversion rate of around 90%. And with that, the final reversal of these positive working capital effects from 2022. After 2024, we expect cash conversion to then swing back to the guided 100%. Third message on E&D, our strong balance sheet position has recently been confirmed by two of our rating agencies. We have received a rating upgrade by Standard & Poor's and a full rating confirmation by Moody's. As communicated before, in line with our commitment to a strong BBBAA rating, we have additional balance sheet capacity to fund further investments needed for a successful European energy transition if regulatory conditions further improve. Considering the balance sheet, it is also worth highlighting that we have already issued €3.3 billion of bonds in the first quarter. With that, we have already fully covered our funding needs for 2024 and partially already pre-funded 2025. Moving on to energy infrastructure solutions, as announced, we will report this business as a standalone segment from this quarter onwards. Strategically and with a view to future growth, this segment is all about exploiting the huge business opportunities from decarbonization and to a large extent electrification of the heating sector. The segment comprises our activities in designing, building, owning, operating and optimizing sustainable energy infrastructure assets for cities and business customers. Our solutions are based on modular standard building blocks which are configured and digitally connected to fit specific customer needs. Technologically, our offerings include firstly renewable on and off-site generation assets like photovoltaic and wind. Secondly, gas or biomass fired heat and power engines. Thirdly, heat pumps and geothermal solutions. Fourthly, waste heat recovery technologies. And finally, high and low temperature heating and cooling grids. From a business point of view, we distinguish two clusters within energy infrastructure solutions. First cluster is district heating and cooling, which is about running low-carbon heating and cooling networks in urban areas. Second business area is our industrial and commercial solutions business, offering on-site energy infrastructure for industrial and commercial customers. We have decided to also include our UK smart metering business in this segment. While technologically obviously different in nature, it is a quasi-regulated business and hence of similar nature when it comes to financial visibility and resilience. Let me remind you of some more financial and business characteristics relevant for our energy infrastructure solutions business. Geographically, we are present in 15 countries, the key ones being Germany, Sweden and the UK. Our pan-European coverage and strong regional anchoring represent a unique advantage to address our customers' needs for locally optimized energy infrastructure. Our strategy to standardize our offerings in a modular way will allow us to scale our solutions. Therefore, out of the 5 billion capex plan for the next five years, 80% will be dedicated to growth investments. Through long-term contracts with customers, commodity price volatility and inflation are effectively passed through, for instance, via price escalation clauses. We ensure that any new project is targeted to deliver an internal rate of return spread over WEC of between 120 to 350 basis points. Furthermore, our rigorous focus on operational excellence ensures high asset availability. This is supported by digitalization, which helps to steer, monitor and effectively maintain and optimize a fleet of more than 6,000 assets. We expect annual EBITDA growth of 13% on average. Keep in mind that the municipal heat transition across Europe is still at an early stage, so there is more, much more to come, but too soon for us to quantify what the impact will be over time. Let me close today's presentation with slide 8, what you essentially should take away from us today. First, Our extremely solid Q1 outturn supports our expected earnings delivery for 2024. Second, our investment ramp-up is progressing well, which fully underpins the delivery of our mid-term organic growth targets. Third, our balance sheet remains very healthy. We will continue to focus on delivering an attractive total shareholder return based on value-creative organic growth and an annually growing dividend per share. With that, let me move to a personal note. We announced in March that I would be moving on to take over as a Chief Operating Officer the responsibility for our energy infrastructure and retail businesses from June onwards this year. We deliver what we promised, so inevitably today is my last results call as CFO. It has been close to eight years as CFO in the Board of Management of E.ON, hundreds of roadshows and exactly 30 results calls. I am not going away, but I will be focused on different things going forward. Great news for you is, our investors and analysts, that with Nadja Jacobi, I have the best successor I can think of. I know that with her, you, your interests, and most importantly, your investments, will continue to be in safe hands. Dear Iris, I would also like to express my thanks to the best investor relations team I can think of, And finally, it has been a privilege for me to represent our company in the capital markets. I'm extremely grateful for so many deep and thoughtful conversations during roadshows and other formats. And a big thank you to all of you for that. Before we get too sentimental, there's still business to be done. So let's move on to our Q&A session.

Thank you very much, Mark. And with that, we will start our Q&A session. Let me remind you all briefly, as you all do know, please stick to two questions each so that most of you have the chance to ask the questions. If there's anything we can't answer today, then the IR team is always there to also answer further questions from you. With that, the first question comes from Alberto from Goldman Sachs. Alberto, here you go.

Iris, thank you. Good morning. And Mark, thanks for all the help and all the best. I guess we need to lean on you even more of the execution of all these 20 billion CapEx plans. So congratulations and thank you once more. Two questions on my side. The first one is a borderline very boring, but can I understand, please, in the first quarter, what type of non-recurring items we have? in networks and in customer solutions. I'm trying to go to the underlying earnings power. So as I understand, you released some provisions. The weather was very mild. Can you tell us if you booked negative and positive network losses, either recovery or cost? That is the first question. I have the feeling the underlying is stronger. That's why I'm asking. The second question is, I've seen a DSO plan that implies that potentially if feasible, which I understand from what you're saying is not, your CapEx plan could be 50% higher than what you presented in March. What underpins the plus 50%? Is it possible you give us a view on what assumptions we would have to flex to have even more investments? Is this driven by power demand, electrification, more renewables, data centers, just to have a feel for it? And thank you once more.

Yes. So I've got to let me start with the non-recurring items. Compared to last year, we had a lot of positive one-offs. Q1 this year is much less impacted by any one-off effects. If you look at our energy networks business, I think the remaining piece that we see here is a mid-double-digit million-euro amount of final recovery for network losses, essentially relating to 2022. So there's still a minor positive one-off in our energy networks business. For energy retail, essentially we talk about weather impact, which you may now call kind of extraordinary one-off or not. It's basically a symmetric risk, which will hit us every year kind of in a positive or negative way. In Q1, due to the mild temperatures, actually record mild temperatures, that was the second warmest Q1 year. I think, during the last 50 years. Not that I recollect that, but what the statistics tell. And that was a mid-double-digit million-euro negative impact. So across both segments, then, it's the wash net nil impact from one-offs, essentially. Your question to CapEx plans is very valid, and with it you're referring to a publication that we have also done about the National Allocation Plan, which is kind of an exercise which is regularly done by the DSO in close alignment with the German regulator. where basically on a regular basis we look at what are actually the political targets for renewables built or for development of the energy system, Germany specifically relevant ISTA package, and then it's broken down in a technical way. So what are, if you implement those targets as they are written, what would technically have to be done in order then to allow for these targets to be executed? And in that sense, this 50% upside to which we refer to is to be taken with special care. First of all, it just reconfirms what we have been telling our shareholders also with our full year results, that when it comes to our networks, growth plans, there is room for more. if economic conditions are right. And this is what we are working on. In that sense, there is no change to our communication and our plans that we will continue to be working with the relevant authorities to make sure that economic incentives are the right ones to support this. which is one of the constraints, by the way, which this national allocation plan does not include, but which by legislation is actually given. Secondly, it is a technical plan which does not take into account practical constraints. And we have seen these practical constraints particularly playing a role when it comes to permitting, just to mention one. And it would be unrealistic in our view to now assume that the technically possible, in an unconstrained way, can be delivered with all the constraints which we have in a practical way. And in that sense, what you should take away is there is a huge potential for E.ON to further invest and accelerate our investments over time. And as you have seen with our results, we also have the financial means to do this if the conditions set by the regulators fit.

Thank you, Mark.

Mark, this was very clear. If you just allow me a comment, you've done essentially, if it's clean for you, in Q1. So it seems you're leaving an easy rest of the year to Nadia from here. Thank you.

I take this as a statement, which I'm not commenting on. We move on.

Exactly. So we move on to the next question. Thank you, Alberto. Next question comes from Harry from Exxon.

Hi, everyone. And I'll also pass on my thanks and all the best to Mark. So two for me. First, can I dig in a little bit to what's going on in U.K., B2B supply. Why is it that you're earning so much? You've made so much in such a short period of time. Do you think this is an industry-wide phenomenon for the whole of the UK supply market? Or is it just something that you're doing as Eon? And can you just help us understand a bit what size of clients are driving this very good performance? Are we talking about much smaller B2B customers or medium-sized? Just a bit of colour there would be very helpful. And second one's a bit more strategic and a bit of a follow on from Alberto's questions on the CapEx. Is there any update or view from you on what your partners are doing or what others are doing in the German DNO market in terms of funding? Because I guess if we're talking about, you know, an already upgraded CapEx plan, potentially seeing even much more significant, more upside. How are your partners going to fund this? And might we get into a situation where you're effectively incentivized to put your investment into your fully owned DNO subsidiaries and not the ones where you've got partners? Because, of course, if your partners aren't putting capital in, it's harder for you to make a good return on your investment. Thank you.

Harry, thank you very much for your questions. Just on the second one, when you are referring to partner, could you just specify what partners exactly are you referring to? Are you referring to our co-investors on some of the DSOs? Co-investors, yeah. Okay, good. Yeah, shareholders, yeah. So let me start with the second question. We see across the board an extremely strong alignment between our interests and the interests of our co-investors on a DSO level, which are larger municipalities for a number of our German DSOs. And there is a very strong focus on all of our sides to make the energy transition work. And also from a funding point of view, to make whatever is then needed, then possible also then on the level of the DSO side. And generally, we do not see a particular constraint on that side or a clash of interests, none so ever. On the INC business in the UK, It follows our strategy where we have said that in most markets we want to exit large B2B customers. So to your question, what are the customers? It's large INC clients. This is not small, medium enterprises. This is around large industrial and commercial customers. And the UK is the only market where we continue to run such a segment at scale. But this is why also strategically we are very clear on that business will have to be steered on margins and not on volume. So what we have been seeing this business doing is running on a smaller and smaller book and focusing more and more on those customers, where we are able then to make a risk-adjusted fair margin if I look at the risk transformation that we're doing for these clients. I don't want to refer and can't refer now to whether that's an industry-wide phenomenon or not. What I can tell you that this is not a one-hit wonder, which has happened now in Q1. It is a development that we've been working for throughout the last four years. That was the continuous effort on managing our customer portfolio in that business.

Okay, many thanks.

You're welcome.

Next question comes from Deepa from Bernstein.

Thank you. And Mark, look forward to meeting you in person for your farewell rings. So my two questions are actually centered around your German networks. So firstly, if I'm not mistaken, you were still awaiting for some more details on the current regulatory period. I was just wondering if you can update if there's been any change on the efficiency factors or anything. And the second one was looking forward to the next regulatory period. There's obviously a consultation out from the regulator to move to WAC and reduce the regulatory period. And then there's also the live court case that you have for the current period. So just wondering how you think the negotiations will involve and should we assume that if you're successful in the court case, the regulator, I mean, is that quid pro quo between getting a better deal post-29 and leaving some money on the table for existing assets now? Or how would you think of this discussion?

Yes, thank you, Deepa. So where do we have news and where do we essentially, you know, looking at the same timeline with no, as expected, no further updates? So first of all, what we have seen since the full year results is the publication of the efficiency benchmark. And the good news is that E.ON continues to be a very efficient, i.e. 100% efficient operator. And I think that underpins our strategic relevance and the efforts that we're doing in continuously focusing on operational excellence also in our energy networks business. There hasn't been a further update on then the general efficiency factor. So that stands on the efficiency front. You know, we have now a public confirmation, but we have been working towards anyhow as an ambition to be fully efficient, and we now need to see how the regulator deals with the general efficiency factor still. This has not been published yet. On the consultation, then, for the regulatory period starting 2028 for GES29 for power, no update essentially deeper that is worth relevant sharing here. I think what we continue to look at first and foremost is the – proposal by the regulator how to deal with depreciation schedules for existing gas networks. So this was one of the ideas expressed as part of the consultation paper where the regulator also had pronounced that they were seeking there a fast solution. So kind of in the pipeline to expect is then a clarification by the regulator on how They intend to deal with existing gas networks, which is obviously also relevant for the energy transition in total. And for a lot of the market players, as you know, for us, gas networks has a very small share in our rub, but this is from a regulatory point of view what we would expect to be the upcoming release. I think that's on the regulatory side.

Just the court case, could you comment on that?

Court case, also no update. So we haven't seen any specific intervention with the courts, no hearing, et cetera. So nothing to update on that side.

Thank you.

You're welcome.

Thank you, Deepa. With that, we move on to the questions from Wanda from UBS. Hi, Wanda.

Hi, Mark. All the best. Again, two questions from me. The first one is on your 2024 guidance. I mean, energy retail, You had a very strong start into the year. Q1 EBDA accounts for 50% of the full year guidance. So do you expect any reversal later this year? Or is there any buffer included in the guidance, something similar to what you did at the end of last year? And if there is any buffer, would you be able to quantify it? And the second question is on the U.K. retail. In March, Ofgerm launched a discussion paper for the future of price protection. The U.K. election is upcoming. How do you see the market structure changing as the current one with the price cap doesn't really work?

So 2024, a guidance wonder is, I think what I would stress is that we are back basically now in normal operations. So while the last two years have been very much affected by energy crisis and kind of the relief from the energy crisis, we are now more or less back in normal mode. And I think where we can take confidence from is how well we have managed the first quarter, which has been extremely mild. And, you know, this mid-double-digit million euro negative impact from weather for the second warmest quarter during the last 50 years. That is a quite good performance, but it's too early now to say at this stage what that means for the remainder of the year. So for our guidance, take that we are managing towards the midpoint as usually, and at this stage there's nothing that I would flag where we are particularly aggressive or conservative in the way we have set our guidance. And apart from that, you always know that we deliver what we promise, but the midpoint is what it is at this stage. On UK retail, It is not a lot that I would share now in this call, except for that what we see is that the UK regulator has been much more constructive during the last years reacting to the industry's needs. I think we have also seen this, you know, generally seen in Europe the recognition also of retailers of being a system-critical part of the energy value chain. And lastly, what I do see that E.ON specifically, you know, is being regarded by politicians and regulators as a company that stands in for the interests of customers and is driving the market to the benefit of the customers. And this gives us also where there are conversations, I think, a weight and a relevance in being heard in these discussions. And apart from that, it remains what I've said in the past, that the UK regulation has very little wiggle room now to become worse, because if you look at the results, which many of the operators in the UK are still achieving, it's not a marketplace where you could now easily just step in as a regulator and believe that the UK worsened conditions. I think this is still a game about improving conditions to make these operations economically viable.

Thanks a lot. Thank you, Mark. With that, next question comes from Rob Pullen from Mong Stanley.

Hey, thanks very much. I have one question, which is quite high level, Mark. And that is, how does E.ON see power demand over time? Given, of course, in 2023, it remains significantly lower than we saw pre-crisis in 2021. Is this structural loss due to industry losses? But what about electrification trends you've spoken about? And also more recently, the data center demand, which we covered on the full year conference call. So I'd love to know what you think is a good suggestion for the medium term power demand run rate. We should be thinking for for E.ON from here across the decade. Thank you very much.

Yeah, Rob, it's a very relevant long-term question, but happy to address it. So fundamentally, we are positive about the growth outlook of electricity volumes in our markets. So we expect electricity long-term to be on a growth trend. Now, when we talk about growth trends in energy in developed markets, it's never high growth rates, but what we are seeing and expecting is a growth of 1%, 2% annually over time. And with that, of course, electricity will be the key carrier to replace electricity. than a number of primary fuels, specifically look at transportation, mineral oil, and if you look at heating, mineral oil and gas. So growth outlook for electricity long term, and I think that is also important, if you allow me that comment, if you look at the impact on affordability of the energy transition, then you should always keep in mind that all of these investments will be spread over time about much more volumes that will be wheeled in the system and increasingly bidirectional. So increasingly our customers will also provide their power to the system. And so from that end, we are also confident that this will play out in a decent way.

Thank you very much. And I think we all wish you all the best in the new venture. And we look forward to seeing you in London soon. Thanks very much. Thank you very much, Rob.

Thank you. Next question comes from Piotr from Citi.

Hi, good morning, everybody. Thank you from my side as well. I have two questions, really. So firstly, I wanted to ask about the B2B business. Is this just the UK situation or this is also visible? I know you don't have exposure, but this is also visible in the German or Benelux market. And why you so categorically exclude the option to participate if you have some opportunities? You see the tender where the margin would be extremely high. Why wouldn't you participate if the situation is similar in the continent? And second question I wanted to ask you about your retail customer. Where are we in the process of passing through the lower or falling commodity cost to the end customer bill? So if I'm a customer in Germany, what kind of a reduction can I expect for 25, 26 onwards? And, you know, that's the question here.

Yeah, let me start with the second one, Piotr. So as you know, we're not giving mid-long-term guidance on price developments. You know, as we are a business that passes on the fundamental costs onto our customers, what we do see is that what is relevant for our customers is the commodity piece and it's the network charges. What we've seen for this year is from this essentially a stable price outlook, we have always different customer segments that will be then adjusted. We also have market-by-market different hedging windows, so the impact of that can be from a timing point of view a bit different. But essentially, for example, look at Germany. We've seen very little price adjustments this year, and this is on the back of lower commodity prices and somewhat increasing network tariffs. So all in all, at this stage, limited impact. And then we need to see how commodity prices will develop over time, but no further guidance as usual on how we see our end customers then moving. On the B2B business, we had actually been outspoken on that earlier. for the last three, four years, that we do not regard large industrial and commercial business as a strategically relevant segment for us. And to your question, therefore, in all other markets, we have moved out of that segment. So we are not running INC retail businesses. in any of the other markets, and the U.K. is the only one, and that is due to the specific situation of the energy integration and the NPower piece, which we had there, where we first focused on then kind of moving the E.ON and the energy business together on one platform. It is actually from a branding point of view still running on the NPower brand in the U.K., And this is why this is our only material B2B position, and hence no real read-across to any other of our markets, at least what would be relevant for us. Okay, thank you very much.

Thank you very much, Mark. And with that, there are no further questions in the round. So I'll take this as a positive that we are delivering what we promised and we are well on track. If there's anything that comes up after the call, the IR team is always there to also answer any further questions that may be. With that, yeah, I will close today's call.

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

Talk to you soon. Bye-bye.