Fortum Oyj Corp Ord

everyone and welcome to Fortum's webcasted news conference on our second quarter 2021 results. My name is Ingela Ylves and I'm the head of IR at Fortum. This event is being recorded and a replay will be provided on our website later today. With me here in the studio is our CEO, Markus Rauramo, and for the first time also today, our CFO, Bernhard Günther, who then together will present Fortum's second quarter and first half year figures and the group's performance. After the presentation, we will open up for questions in the Q&A session over the teleconference. So with this, I will now hand over to Markus to start.

Thank you very much, Engel, and good morning also on my behalf and welcome to our half-year 2021 results call. I will first go through briefly the market environment, the highlights from the first half of the year and our overall performance. I will touch on our strategy and then hand over to Bernhard to walk you through the numbers in more detail. I start with setting the frame. The macroeconomic outlook is improving with the IMF forecasting 6% growth in 2021 versus a 3.3% contraction in 2020. Fortum managed the year 2020 reasonably well despite the general COVID-19 impact. Improvement from last year is thus not as steep as with some other market players. This stable underlying performance has continued. Power demand normalized in Europe Nordic demand did not drop in 2020 due to COVID. Commodity prices have increased lately, coal, gas and CO2. On the regulatory side, I'm very happy that the European Union is showing leadership with its ambitious Fit for 55 package, which will set the EU to the right path to reach climate neutrality by mid-century. The package outlines the tools to reach the 55% emission reduction target by 2030 and climate neutrality by 2050. Overall, we welcome the package. What is very positive is the strong focus on carbon pricing and the extended role for the EU ETS. Where we have main concerns is that the package is not technology neutral, but takes strong bias towards certain technologies like new RESS. The positive development has also reflected on the EU ETS price that has continued to set new records in 2021. Now I want to guide your attention on the key pillars of our strategy. We want to deliver sustainable financial performance and drive the clean energy transition. The determined execution of our transformation strategy continued during the spring and summer. We have taken substantial steps in active portfolio rotation and have further accelerated our decarbonization efforts. This has also been supported by solid operational performance across all segments. We deliver on our plans. First half year results have been remarkably solid. All segments are up compared to previous year. Just last week, Uniper reiterated their full year guidance which they have increased already in Q1 following an outstanding first quarter. One should not be irritated by weaker summer quarters as this is the nature of their business and the just described increase in commodity prices might even more pronounce the well-known seasonality. Second, we deliver on our strategy by continuing to optimize and rotate our portfolio. Our announced divestments now add up to 5.2 billion over the last 18 months. The efficient implementation of our chosen strategy has strengthened Fortum's balance sheet. The closing of all disclosed divestments will further lower our leverage this year, measured as financial net debt to comparable EBITDA well below our target of below two times. Thirdly, The execution of our decarbonisation strategy is also proceeding well. We set to end the use of coal in our Russia division by the end of 2022. In our Uniper segment, we disclosed the decision to accelerate our coal exit in the UK by closing the first block of the Ratcliffe coal-fired power plant as early as September 2022 and the remaining three units by the end of 2024, all ahead of schedule. And we have been successful in the call exit auction in Germany. And I will return to this in a moment. All of those mentioned efforts, strong performance, divestments and decarbonization efforts have not gone unnoted as both rating agencies, Standard & Poor's and Fitch, have now removed the negative outlook for Fortum. And we are very pleased that they revised their long-term ratings to BBB flat with a stable outlook. Then over to the headline KPIs. At the first glance, a fairly strong first half, but a weak second quarter. But before judging on our performance, let me highlight a series of relevant topics. First, there are some consolidation effects at play that must be considered. Uniper has been fully consolidated starting from Q2 last year and has been included as an associated company before. Comparable earnings per share for the first half 2020 also included the Q4 2019 Uniper-associated results. Second, in 2020, we had good performance despite COVID-19, which was not the case for all of our peers. Taking all this into account, the like-for-like comparison of the first half comparable EPS 2021 gives the clearest picture, showing an increase from 91 cents per share excluding the €18 from Q4 2019 to €1.03 per share. This is an increase of 13% for the first half. With regards to the leverage target of financial net debt to comparable EBITDA or below 2, we currently stand at 2.4, taking the earnings of the last 12 months into account. But the 2.4 does not include our latest announced disposals, and therefore this indicator will be materially better in the course of the second half of this year. Now over to the second quarter. Q2 profit was operationally solid across the segments. Those of you who have followed the Uniper call last week know that there are facing effects at work, causing comparable operating profit and the comparable EPS to decline on quarterly level. The decline in operating cash flow in the second quarter is due to income tax paid and the changes in working capital. Before we come to the next slide, one word on the Q2 reported EPS, even though that is not shown on this slide, but worth mentioning. The reported EPS was distorted by changes in fair value of negative 852 million, mainly because Uniper is not applying hedge accounting. And now over to the segment overview. The overview of the comparable operating profit on a divisional level shows in essence, again, three things. All segments have been contributing positively year on year. Uniper is the main driver for the increase based on the highlighted full consolidation in 2021. And generation and city solutions show a strong uplift. Same applies to consumer solutions. What the picture does not show is that the Russia division showed a stronger underlying performance with higher prices and volumes. But the weakness of the ruble covers the improved performance picture that we are nearly flat year on year in Euro terms. To sum it up, I'm satisfied with the performance across the group. If we look at the isolated quarter, the overview of the comparable operating profit on a divisional level shows clearly that the year on year deviation is determined by the Unifor segment. The main effect in the isolated quarter comes from the global commodities business international portfolio that was significantly below previous year. In the isolated Q2 2020, a significant positive hedging result settled that we did not see in the isolated Q2 this year. Generation and city solutions show a strong uplift based on good operational performance and market fundamentals. Russia and consumer solutions were flat despite stronger underlying performance. Bernhard will give further details in his section. Before I hand over to Bernhard, let me give you a brief overview where we are with our strategy execution on the next slide. Our priorities have been and are to strengthen the balance sheet, to decarbonize our portfolio and to drive profitable growth without compromising on Fortum's dividend and financial strength. Fortum has been a frontrunner in creating clean energy generation for decades, but has not been shy to invest in older, less efficient, fossil-based systems, but at low multiples. We invested in these platforms, converted them, cleaned them up, created state-of-the-art clean systems with the best available technology, and we are taking the next steps in building up renewables. We are following the same logic even today. After finalizing such a conversion successfully, we have to ask ourselves if we can further enhance the value of these assets or if, at this stage, Other investors are more appropriate and should we redeploy our capital? Over the past one and a half years, we have determinedly executed our strategic transformation and sold mainly district heating assets and businesses worth approximately 5.2 billion euros. Most recently, we announced the divestment of our 50% ownership in Stockholm Exergi, the sale of solar power assets in India, and close the sale of Baltic district heating. With these successful divestments, we have yet again demonstrated that we are constantly creating value for our shareholders and that we deliver on our strategy and our priority of maintaining a financially strong group. When it comes to decarbonization, we accelerated our ambitious coal exit plans. We target to be decarbonized as the whole group by 2050 in line with the Paris Agreement. In Europe, we are advancing fast. In our Uniper business in Germany, we were successful also in the third round of auctions for the closure of coal-fired power plants. The bid for the closure of Solven C power plant was accepted, which makes it the third success in three auctions held so far. And Uniper's third coal-fired power plant to be closed ahead of our previously announced already ambitious schedule. Uniper contributes one fourth of all capacity selected in Germany and more than from any other company. And as I mentioned already, we have been able to accelerate our decarbonisation in the UK as well. This means that we have been able to announce the accelerated closure of almost 40% of our coal-fired generation capacity in Europe within less than one year. This acceleration translates into a carbon emission reduction of up to 6 million tonnes. But we also recognize that the Russian activities need to be decarbonized over time. We announced in July a clear path to cease the use of coal in our Fortum Russia segment by the end of 2022, with an annual CO2 emissions reduction of approximately 2 million tonnes. We agreed to divest our Argajas coal-fired combined heat and power plant, and as we announced earlier this year, We switched the fuel of the Chelyabinsk CHP-2 unit from coal to gas. This leaves the group Russian operations with only one coal-fired power plant without a clearly communicated exit path, the Berezovska 3 power plant of the Uniper segment. So, what can we expect from us going forward? We are looking for balanced growth that is a triangle based on earnings power, with stable and over time increasing dividend and a stable BBB flat rating that is necessary in our capital intensive industry with access to low cost debt. All those elements should mutually support each other and not have one corner dominate. After the successful strengthening of the balance sheet, the question is where to best deploy our capital. This will be growth in clean energy and gas as highlighted in our December capital market day. And with this, I would now like to hand over to Bernhard with the financial section. Bernhard, welcome.

Yeah, thank you, Markus, and a warm welcome also from my side. Good to be here finally in person. Yeah, starting today. With a key financial overview summarizing our key comparables, what you see here is first in the middle columns you see a comparison of our half-year figures. These show a strong improvement across the KPIs mainly due to the consolidation of Uniper to the income statement which happened in Q2 2020. Second, there's the comparison of the full year 2020. versus the last 12 months on the right-hand side, and this should give you a better grip on where we are on our journey. As Uniper has been an associate before the consolidation in Q2 2020, the full year 2020 column includes five quarters of Uniper for all but the top three KPIs. Consequently, the LTM column on the right is probably the most telling indicator for the Fortum Group in its new form. From there, one can see the current level of comparable EBITDA of 3.2 billion euros. This is broadly in line with what I showed you a quarter ago, and the same applies to the comparable EPS being at 1.61 euro, driven by improved market conditions. Our financial position has improved following the series of divestments that Markus mentioned before. Standard & Poor's, as well as Fitch, corrected their outlook for Fortum Group to stable, recognizing the substantial delivery on our promises. And on a side note maybe, which is not on the slide, our reported, i.e. unadjusted operating profit for the period was impacted by minus 875 million euros. And these items affecting comparability mainly due to changes of fair values of non-hedge accounted derivatives, especially in the Uniper segment. And that's now good for going to the segments individually. First on generation. Let's look closer at the performance of our segment And with the biggest one of old Fortum, which is generation, we see a comparable operating profit in Q2 that increased by 13%. This improvement was supported by the higher achieved power price, which very successfully reflects our physical optimization and the higher spot price. This average power price was at 38.1 euro per megawatt hour. We also see slightly higher hydro volumes, which were beneficial. And in this quarter, there was a slight increase of our cost base, the main part of which was related to nuclear cost, both owned and co-owned. And part of this cost increase is just movement between quarters, while some of it is recurring. For example, higher depreciation and some higher fuel costs. While the spot power price increased by a stunning 143% in Fortum's power generation areas, the fairly high hedge levels and a hedge price below the level of the spot price dampened this effect on our achieved price. Now on to the reservoirs and the prices in the Nordics. On reservoirs, you see that the spot price has been on a relatively good level and there has been water in the reservoirs, so hydro production has continued on a high level. At the same time, the realized precipitation has been below normal. This was impacting the inflows, obviously. All in all, this reflects in the fact that water reservoirs have dropped from 21 terawatt hours above the long-term average at the beginning of the year to nine terawatt hours below the long-term average in early August. Then looking at Nordic power prices. When you look at the graph, it is important to distinguish the spot and front-end developments from the longer-term products in the outer years. Nordic spot prices as well as coal, gas and carbon saw a strong recovery during Q1 2021. This strong momentum has also continued throughout Q2. The Nordic spot price has been supported by both commodities and continental European power prices, as well as Nordic fundamentals, such as below normal precipitation and wind production. In addition, Nordic demand has increased by two to three terabyte hours compared to Q2 2020. The increase is only partly caused by cooler temperatures. Average system spot price was 41.9 euro per megawatt hour during the quarter, which is a good price level compared to the 5.6 euro per megawatt hour we saw a year ago. And this is exactly why we hedge, which is illustrated on this slide. What you see here at the top are the chief prices for Fortum's existing outright positions, but excluding the chief prices for the 25 terawatt hours of our subsidiary Uniper. And they, as you know, published their numbers a week ago on the 11th of August. Fortum's achieved prices in the generation segment are on the way up and compared to the volatility that we experienced over the last year, again on a very reasonable level. So I should compare the upper two quadrants left to right. Spot prices have been coming up substantially lately in the Nordic area. The Hydro situation is now below average as we saw on the previous slide, so this is a bit more dry situation now. With this, over to Russia. Here, the achieved prices have also been on the way up in Ruble terms as the market has been increasing demand-wise. But in Euro terms, we see a downward trend as the Russian Ruble came down. In ruble terms, the Russia segment achieved power price increased by some 7%. And this now brings me to the Russian segment performance. Q2 2021 showed power generation volumes increasing by 13% due to higher consumption following the economic recovery from the COVID pandemic and high temperatures in the second quarter of 2021. Comparable operating profit for Q2 was flat. This effect of the change in the Russian ruble exchange rate was at minus 2 million in the quarter. And the slight negative effect of the CSAs following three units entering the step-up period, where they get higher CSA payments, while there are two units who are now out of the CSA payments range. And there was, as shown on the slide before, the positive effect from higher power prices. For the first half year, the comparable operating profit improved marginally. In Q2, sorry, Q1, there was the positive effect from the solar transaction with RDIF and higher power prices, while there was a slight negative effect from the CSAs as described for Q2. And the ruble effect was for H1 minus 23 million. So in ruble terms, there was a clear improvement. As Markus already mentioned, decarbonization actions are also taken in Russia. First, we announced the transformation from coal to gas in our Chelyabinsk CHP2 plant. And second, we announced the divestment of our Argyayash coal plant Together means that we cease the use of coal in our Fordham Russia division by the end of 2022. Coming now to city solutions, where we are happy to see an improvement after they had a tough year in 2020, which was affected both by mild weather and low power prices, but also by COVID. For the first half of 2021, the comparable operating profit almost doubled, it's plus 91%, as last year was impacted by very weak market conditions. The result in H1C saw higher heat sales volumes in all heating areas, and in Norway, it was also helped by higher power prices, which have an influence on heat prices. The decline in comparable net assets is naturally related to the district heating divestments, we successfully concluded. From a strategic perspective, there has obviously been a lot of activity this year in City Solutions. As the largest transaction, we announced the divestment of our 50% share in Stockholm for 2.9 billion euros. The transaction is expected to close by the end of this year. Further, we announced the divestment of two of our solar plants in India with a total of 500 megawatt capacity for approximately 280 million euros. Closing of this transaction will happen in three tranches, with the last one expected in the first half of 2022. And in early July, we closed the divestment of our Baltic district heating business announced in March with a total consideration of 710 million euros. And as Markus already said, this obviously has a positive impact on our leverage. Moving on to consumer solutions, who showed good results again. So the EBITDA now improved for the 15th consecutive quarter in a row. If looking at the accumulated result performance, the competitiveness continue to strengthen with active development of the service offering, including digital services and products. And the strategic review of this business as announced in December 2020 is ongoing. Coming as last of the segments, but not least of the segments to Uniper, They published their results last week and we can repeat some obvious general comments. Again, please note that Uniper has been included as associate in Q1 2020, giving some distortions when it comes to the first six month comparisons. This holds true for the shown earnings, but also for the volumes for the first half. As a general comment, I would like to highlight that the underlying performance was solid. When looking at Q2 2021 in isolation, it's good to keep in mind that last year had an extraordinary positive effect from the trading businesses. This year, the Q2 IRFS result includes some negative CO2 related phasing effects that will be netted by the end of the year. As this effect is only intra-year, Uniper reiterated their full year guidance. Uniper's European generation business slightly improved from the previous year with better hydro and fossil business generation as Ershing 4 and 5 as well as Dutton 4 are now in operation. The results of Uniper's Russian power generation business UniPro were slightly above previous year's level with the commission of Berezovskaya III in May offsetting the expiry of the CSAs for the Chatorskaya and Yavinskaya power plants and negative impacts from the change in the Russian ruble exchange rate, which we discussed before. Finally, just a brief note related to the Russian merger control filing. In March 2021, Amendments to the Russian strategic investment law were approved and based on the law, Fortum is now allowed to own 100% in Uniper. And Uniper, as you know, is the majority owner of UniPro. Following this, Fortum has considered for the time being not to pursue the FAS merger control filing and will continue to further analyze those requirements of the filing process. will come back to this in due course now over to financial debt here you find the changes in our financial net debt and main items of our cash flow during the first half of 2021 showing an increase of 645 million euros mainly related to the dividend payment of almost 1 billion euro that were paid in Q2 2021. With regards to the leverage target of financial net debt to comparable EBITDA of below 2, we currently stand at 2.4, taking the last 12 months into account. But this does not yet include our latest announced disposals and therefore will be materially lower in the course of the second half of 2021. and very much in our target range. As said before, the credit rating agencies have revised the outlook on Fortum's long-term issuer default rating from negative to stable, reflecting our solid market positioning and delivering on our asset disposals. The bond maturity profile is rather balanced. Our liquidity position is very solid with liquid funds of approximately 1.7 billion euro. We have currently 9.8 billion euros of gross debt and average interest rate for this whole loan portfolio is 1.5%. And please bear in mind that Uniper has also some interest income from their operations. Now, finally, coming to the outlook. Our successful hedging has continued, creating predictability and visibility. And you can also see here again the Uniper hedging numbers below the Fortum ones. Regarding capex for 2021, we repeat what we have already communicated. Our total group capex is estimated to be 1.4 billion euros, of which maintenance is expected to be around 700 million euros. And please bear in mind that there may always be a bit of volatility between the years as we have not provided guidance for normalized maintenance cap-heads going forward. With this, I conclude our presentation, and we are now ready to start the Q&A session. Ingela, over to you.