Fortum Oyj Corp Ord

Good morning, everyone. A warm welcome again to Fortum's joint webcast and news conference for the investor community and media on our second quarter 23 results. My name is Ingela Ulves, and for those who don't know, I'm heading the investor relations at Fortum. This event is being recorded and a replay will be provided on our website later today. With me here in the studio, I have our CEO, Markus Rauramo, and our CFO, Tiina Tuomela. Markus and Tiina will present Fortum's second quarter and first half 23 figures and the group's performance. After the presentations, we will then open up the Q&A session for your questions. Okay, I now hand over to Markus to start.

Thank you very much, Ingela. A warm welcome to our investor call also from my side. For the first time in a long time, we now have a more normal quarter for our core business. I will start by going through our second quarter events, then talk about the strategy execution, market fundamentals and development, and then how this turned into results in the quarter and first half of 2023. After that, Tiina will walk you through the numbers in more detail. Let me now start by commenting on the second quarter. The second quarter is typically a lower result quarter due to the seasonality of our business. Winter quarters yield higher results than the summer quarters. Q2 is typically also characterized by flooding caused by melting snow, which affects the hydro reservoirs and hydrovolumes. This year in Q2, the generation segment performed well and made robust results, while consumer solutions and the other operations segment were behind compared to last year. We progressed in our strategy execution and continued to reshape our organization to better support our renewed business structure. Following the seizure of our Russian assets, we have now deconsolidated our Russia segment in Q2 and have fully written down all Russian assets. Today we also announced that we will initiate a strategic review of our Circular Solutions business. In connection with the strategy launch in March this year, Circular Solutions was classified as a non-core business, and the logical next step for us is to review what we will do with these businesses going forward. The main part of Circular Solutions is our recycling and waste business, which comprises municipal waste treatment, plastic recycling, hazardous waste business, and battery recycling business. We will look at all options, including potential divestments for the various businesses, and we expect that the strategic review can take up to one year. Then a bit more about strategy execution on the next page. In the earlier quarters in 2022, I highlighted three key priorities and challenges that we had to solve in order to continue full speed with our strategy execution. These three issues were to conclude the Uniper divestment, exit from the Russian market and improve our financing balance and return to the bond market. We have now concluded all three objectives, although the exit from Russia obviously was not the kind we would have preferred. We have a solid financial platform with a strong balance sheet and low net debt. And our focus is now on profitability and building capabilities and pipelines for future growth to enable value creation. Let's look at the strategic development during the second quarter. First, on our priority to deliver clean energy reliably, Our focus continues to be on ensuring uninterrupted supply of power to our customers and the societies around us. In this context, I'm very pleased that TVO's long-awaited third Olkiluoto nuclear power plant unit in Finland started regular power generation in April and commercial operation in May. This supports security of supply in the Nordics as it adds to the baseload capacity. We will also continue our efforts to decarbonize our operations that are not yet carbon neutral. For example, by building sustainable waste heat solutions. We will invest 225 million euros in decarbonization of our district heating as a part of the ongoing Espoo clean heat program. This means that we would be off-takers for Microsoft's waste heat from data centers that Microsoft is planning to build in Espoo and Kirkkonummi. The target is to cover approximately 40% of the heat demand in the Espoo area with this waste heat. In June, our consumer solutions business acquired Telia Energi, one of the top 10 retail businesses in Sweden. This is a good fit to our business and increases our retail customer base. We expect to be able to finalize the transaction during the third quarter. Then a few words on our priority to drive decarbonization in industries. During Q2, we signed new cooperation agreements within the sphere of our nuclear feasibility study with Korean KHNP and the US-based Westinghouse Electric Company. In the feasibility study, Fortum explores the prerequisites of investing in new nuclear in Finland and in Sweden. We examined the commercial, technological, societal, including political, legal, and regulatory conditions for both small modular reactors, SMRs, and conventional large reactors. On hydrogen, we are happy to have announced a joint feed study with SSAB to explore the possibilities of producing hydrogen-reduced, fossil-free sponge iron in Raahe in Finland. Any possible investment decisions on these nuclear and hydrogen projects will be made at a later stage. Finally, a few words on the ongoing internal changes. Our Renew program has two objectives. To build an efficient and fit-for-purpose operating model and to develop our culture and leadership to support strategy execution. Since we got our new leadership team in place in the spring, we are adapting the rest of the organization to the new business structure. This also enables us to take a more customer centric approach. The implementation of the new operating model progressed in Q2 with the appointments of second level senior leadership. The next level appointments are now ongoing and the target is to have the entire organization fully operational by the end of this year. Then to the markets. Although the Nordic power system is largely based on clean power, it is still affected by the volatility of gas, coal and carbon prices. As you recall, during spring and summer last year, we saw gas prices climb to unprecedented levels as Europe pushed to refill gas storages in preparation for winter under extreme supply challenges and high uncertainty of their future development. In the fall, prices started to ease with higher filling levels in Europe, higher LNG supplies and curb demand stemming from fuel switching and efficiency measures caused by the high prices. The winter period 2022-23 was mild, which resulted in lower gas prices and consequently lower power prices. At the end of the first quarter this year, gas storages were approximately 55% filled, and at the end of Q2, filling levels had increased to approximately 77%. At the end of July, they were already at 86%. During Q1, it looked like the European gas market found a new balance. For most of Q2, this balance remained intact, but the reduction in Norwegian pipeline flows to the continent combined with seasonally lower LNG arrivals reminded us that the new European gas balance is very fragile. Although renewed concerns over security of supply in the short term halted the decline of gas prices, we didn't see any extreme price spikes. Thanks to the consistently good gas storage levels, the market is now much calmer about Europe's ability to meet the winter demand compared to last year. As said, the lower gas prices reflect also on the power prices. The Nordic system price, both spot and futures, declined steeply in sync with the continental European and UK power prices. The products for the rest of the year 23 are currently trading around 57 euros per megawatt hour and 2024 around 55 euro per megawatt hour. Although we are talking about much lower levels than last autumn, it is good to keep in mind that forward prices are still elevated compared to the historical price range. And then over to the second quarter financial KPIs. What you see here are the comparable headline KPIs for Fortum Group's second quarter and first half 2023 continuing operations. So these are excluding both Uniper and Russia, which are now both discontinued operations. The second quarter comparable operating profit was exactly on the same level as last year. And due to the very strong result in the first quarter, our first half year result was clearly higher than a year ago. Our comparable EPS was lower in the second quarter, but in the first half of the year, we clearly exceeded the 2022 performance. The operating cash flow improved in the second quarter, mainly due to the higher cash released from working capital. And finally, the balance sheet and most importantly, our leverage. Defined as financial net debt to comparable EBITDA, it was at 0.3 times for the last 12 months. The main reasons for the improvement are the good results and cash flow. The low leverage provides us a solid platform to continue to develop Fortum. To sum it up, I'm satisfied with the group's positive performance in a continued volatile market. So with this, I conclude my part in this first section and hand over to you, Tiina.

Thank you, Markus. Good morning, everyone, also on my behalf. I will now go through our financials in more detail and we'll start with the development of the second quarter. With this, let's move to the key financials for our continuing operations. As Markus already mentioned, the RASA segment is now deconsolidated and reported as discontinued operation as a one liner. So these numbers do not include anything from the RASAN operations. So let me now comment on some of the comparable KPIs for continuing operations. Our comparable EBITDA amounted to 344 million euros and was slightly down in the second quarter. On a last 12 months basis it totalled 2.4 billion euros. The comparable operating profits was flat at 262 million euros in the second quarter, while the comparable net profit decreased from 199 million euros to 147 million euros. You will see that our comparable EPS in Q2 is somewhat lower than last year at 0.16 cent. The reason for this was lower income from associated operation as a result of inflation adjustment in nuclear waste related provisions in Sweden. Our comparable EBS for the last 12 months was strong at the level of 1.43 euros. Also, our cash flow was strong in both second quarter and in the first half, mainly thanks to the good result and especially in the second quarter, the positive change in working capital. On dividend payment in the second quarter, we paid half of the 91 cent dividend for 2022. Despite the payments of 46 cents, our net debt decreased from 0.9 to 0.7 billion euros due to the strong cash flow and leverage. The ratio for financial net debt to comparable EBITDA for the last 12 months decreased to 0.3 times. On a more technical note, I also want to highlight that at the end of June, the last transfer of Fortum's parent company guarantee facility of 1 billion euros granted to Uniper was released. This was the last outstanding application related to Uniper. Now over to the segment overview. This one again shows that the result improvement was entirely subject to the performance of our generation segment, which reported a comparable operating profit of 304 million euros. In the second quarter, we recorded a clearly higher achieved power price, even though spot prices were significantly lower compared to the last year. Our generation segment achieved power price increase by 5.2 euros per megawatt hour to 57.5 euros per megawatt hour, driven by higher hedge prices. At the same time, the spot price is more than half compared to Q2 last year and declined from 97.9 euros to 44.5 euros per megawatt hour. However, the quarterly physical optimization premium was lower compared to last year. Volume-wise, we were at last year's level. Hydrovolumes were marginally lower, while nuclear volumes were slightly higher. However, you need to know that volumes from Olkiluoto 3 are not as profitable as the other nuclear volumes, and that Oskarshamn plant annual outage was longer than last year. Consumer solutions result half to 10 million euros mainly due to losses resulting from customer outflow from certain hedge contracts. This means that customers which out from certain contracts, either the spot contracts or to other service providers, and this resulted in overhead position that created these losses. This was also the case in the first quarter of 2023. And finally, very briefly on the other operator segment, the comparable operating profit decreased by 10 million euros to total minus 52 million euros. The main reason was that the comparison period was affected by a positive one-time impact from changes in pension fund arrangement in Sweden. Now we move over to a waterfall of the first half of the year. This picture further highlights that the strong result improvement is entirely created by our generation segment, which reported a comparable operating profit of 1027 million euros. The result improvement derived from the higher achieved power price supported by a higher hedge price. In fact, the achieved power price in the generation segment increased by 24.1 euros per megawatt hour to 72 euros per megawatt hour driven by higher hedge price, especially in the first quarter. This is great achievement. For the half year, hydrovolumes were down mainly due to the lower inflows that left the hydroreservoirs level somewhat below average during the quarter. Also currently hydroreservoirs are somewhat below the average. As for nuclear, I'm satisfied with the good operational performance and that the generation volumes were solid. The increase in volumes is coming from Olkiluoto 3. For the first six months, consumer solutions result well by 40 million euros to 16 million euros. A large part of the decline is related to losses from the customer outflow from certain hedge contracts, as I explained on the previous slide. Consumer Solutions' comparable operating profit was also negatively impacted by the Polish government's price gap implemented for end users in 2023. And finally, on the other operation segment, where the comparable operating profit decreased by 26 million euros and showed a loss of 83 million euros. This was mainly due to structural changes in the circular solution business and already mentioned positive effect of changes in pension fund arrangement in Sweden affecting last year's figures. Now over to the balance sheet. Just as a reminder, the Russian assets have been fully written down and the 1.7 billion euro impairment has negatively affected equity. Further, there is a positive effect of 1.7 billion euros from a change in hedge reserves. A total dividend of 817 million euros corresponding to 91 cents per share was already recorded in Q2 despite that only first installment of 46 cents was paid. The second installment of 45 cents will be paid in the fourth quarter. You might remember that last time we presented an illustrative balance sheet where Russian assets write-down was taken into account. Equity in that balance sheet was 8.1 billion euros. The major difference to this balance sheet are that the approximately 800 million euro dividend is now booked in full from equity, while the Q2 result of approximately 400 million euros has increased equity. As you can see, our gross debt has come down as we repaid some debt. At the end of Q2, net margin receivables amounted to 0.8 billion euros, which already is closer to historical levels compared to the levels we saw last year. We also continue to have sufficient liquid funds, 4.2 billion euros. So all in all, we can summarize that we have relatively clear balance sheet. Then a few comments of our net debt and debt portfolio. Maintaining a solid credit rating still continues to be a key objective for us. We now have a more balanced situation and continue to have a good dialogue with our rating agencies. Let's go through the reconciliation of our financial net debt during the quarter, which has further improved and strengthened. And that shows that our leverage situation is indeed very good. In the opening balance sheet at the beginning of the quarter, we had financial net debt of 900 million euros. The operating cash flow was very strong at 657 million euros. This effect was slightly offset by investment of 192 million euros. The dividend payment amounted to 413 million euros in the second quarter. And the change in interest bearing receivables was 149 million euros. So at the end of June, our financial net debt had further declined and was at only 745 million euros. Looking at our debt portfolio and the maturity profile, I want to highlight a few things. First, We have rebalanced the maturity profile of our debt. In May, we successfully re-entered the bond market and issued 1.15 billion bonds for five and 10 years, after which we also repaid some loans. Consequently, our maturity profile is very balanced and there are no large maturities in any single year. All in all, our gross debt is approximately 6 billion euros. At the same time, we have sufficient liquid reserves with 4.2 billion euros of liquid funds and 4.3 billion of undrawn credit facilities. So our liquidity position is strong. We need to have the capability to, if needed, repay any maturing short-term debt. Considering the strong liquidity, we continue to optimize our cash position and credit lines to manage any future market volatility and price situation. The overall objective is to constantly ensure an optimal balance between the balance sheet, investment and dividends. Finally, as interest rates have gone up, the interest rate for our debt portfolio has consequently also increased somewhat. Going forward, the cost for our 6 billion euro loan portfolio is 4.5%. It is good to remember that we get some interest income for our liquid funds, currently 3%. So with this, over to the outlook section. The outlook section comprises in essence three elements, guidance on hedging, CAPEX for 2023 and tax rates. Over the years, Fortum's successful hedging of the outright generation has created predictability and visibility. The hedge position for the generation segment outright for the rest of the year 2023 was 49 euros per megawatt hour, and the hedge ratio was 70% at the end of June 2023. The hedge price for 2024 increased by 3 euros per megawatt hour to 46 euros and the respective hedge ratio increased 5% points to 50% at the end of June 2023. Our capex guidance for 2023 is unchanged. We expect to spend a total 700 million euros, and this includes maintenance capex, but exclude potential acquisition. Maintenance capex will be approximately 300 million euros, which continues to be below our depreciation level. And then our tax guidance for this year. Taking into consideration also the temporary windfall tax, the group's comparable effective income tax rate, excluding items affecting comparability, is estimated to be in the range of 20 to 23% for this year. Excluding the windfall tax, it is estimated to be in the range of 19 to 21%. For 2024, the comparable effective income tax rate excluding items affecting comparability is estimated to be in the range of 19 to 21%. And just as a reminder, the Finnish windfall tax applies just for the fiscal year 2023. The actual outcome of it naturally depends on the power price and result development. So this was all for this presentation. And then we are happy to answer your question. Ingela, over to you. Thank you, Tiina.