Fortum Oyj Corp Ord

Good morning, everyone. A warm welcome to Fortum's joint webcast and news conference for the investor community and media on our third quarter 2023 results. My name is Ingela Ulves and I'm head of 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 are our CEO, Markus Rauramo, and our CFO, Tiina Tuomela. Markus and Tiina will present Fortum's third quarter and year-to-date 23 figures, as well as the group's performance. After the presentations, we will open up for questions. Maybe also good to know that we have reserved one hour for this event today. With this, I now hand over to Markus to start.

Thank you very much, Ingela. A warm welcome to our investor call also from my side. As you know, Q3 is typically the weakest quarter in our sector, and it seems that this trend continued. As you have seen this morning, we have announced the start of an efficiency improvement program, which I will explain. I will, however, start by going through our third quarter events, market fundamentals and development, then also talk about the strategy execution and then how this turned into results in the quarter and nine months of 2023. After that, Dina will walk you through the numbers in more detail. Let me now start by commenting on the third quarter. The third quarter is typically a lower result quarter due to the seasonality of our business. Winter quarters yield higher results compared to the summer quarters. Our result was impacted by lower spot prices compared to last year, but was resilient, supported by higher hedge prices and higher volumes. Our balance sheet is very strong as our leverage is low, only at 0.2 times financial net debt to comparable EBITDA. We have sufficient buffers with liquid funds of more than €4 billion and ample undrawn credit facilities. We continue our strategy execution and further reshape our organization to better support our renewed business structure. Considering the softening market sentiment, our two-faced strategy serves the current market situation well. I'm also pleased to say that Fortum has submitted the official commitment letter for the science-based targets initiative and is committed to setting near and long-term company-wide emission reduction targets in line with SBTI's climate science. We are now waiting for the completion of the SBTI internal due diligence process and the disclosure of our commitment on their website. Once we get there, the timeframe to finish the validation process is a maximum of two years. In order to improve our profitability, ensure our competitiveness and adjust to Fortum's current group size, today we also announced that we initiate an efficiency improvement program. This is the picture we showed in March when we launched our new strategy. It describes how we already then saw that the strategy is two-phased. First, manage the uncertainty and second, electrify and grow. We continue to live in uncertain times at the moment, and we need to act prudently, be disciplined and plan our actions accordingly. As we see it now, Fortnum's operating environment and the general economic sentiment have weakened after the summer with further escalation of geopolitical tensions. This means that uncertainty has further increased, there is lower market visibility and industrial investments are postponed, while inflation and interest rates continue to be high. As we also said, our focus is to ensure our competitiveness and maintain our best-in-class operations while the growth phase comes later on. We constantly optimize our operations and how we operate our generation fleet. We renewed our dividend policy and we refined our debt portfolio as we successfully returned to the bond markets this spring. Already in March, we said that we need to transform and develop to fit our new structure. Considering that we were 20,000 people one year ago with Uniper and Russia still part of the group, today we are approximately 5,000. This means that we need to rebase our operations to match the new reality. Now we put even more focus on earnings and cash flow, while at the same time continue the disciplined capital allocation. At this moment, we do not see large investments in the near future. However, we will continue with the ones that are ongoing. We naturally will prepare for future growth in clean energy in the Nordics and aim to build optionality through a sufficient investment pipeline. Let's look in more detail at the efficiency improvement program. The program is both about fixed cost and cash flow, i.e. we will cut cost, but we will also lower our capital expenditure as we see softer and lower industrial demand at the moment. We will gradually reduce our annual fixed cost by 100 million euros until the end of 2025. This corresponds to approximately 10% of our fixed cost compared to the level in 2022. This obviously will have a positive effect on our earnings and cumulative cash flows. We cut our guided growth capital expenditure by 500 million euros for the years 2023-2025. So we could spend up to 1 billion euros in growth capex during these years instead of the previously guided up to 1.5 billion euros. It's good to note that with the ongoing investments, 800 million euros is already committed. On top of this, it's good to remember that the annual maintenance capex is around 300 million euros. The EBDA for the last 12 months was 2.2 billion euros, which means that these actions will have a meaningful effect on results and cash flows. The efficiency program also includes strategic prioritization and assessment of allocated resources, as well as turnaround actions for underperforming businesses, which mainly relate to development initiatives in our circular solutions. To reach the target, it is unfortunately expected that the actions will also include personnel reductions. The planning of the more detailed execution of the program starts now, and we will provide more details later on. With all this, we want to ensure that we are in good shape and have the required preparedness to maneuver in all market scenarios and can respond to demand when it picks up again. Then over to strategic topics. Our strategy builds on the priorities to provide clean energy, and drive decarbonization of industries, which makes the strategy really relevant to enable the energy transition. We continue this determined work. Let's take a quick look at the ongoing strategic actions that we have announced earlier. We have announced several projects that enhance our best-in-class operations, such as the Lovisa nuclear power plant lifetime extension and upgrades of hydropower plants. Our wind farm in Pielax is expected to start commercial operation in the second quarter of next year, and we continue the planning of selected solar and wind projects, while at the same time we work on our last parts of the coal exit. We also work together with industrial customers, serving them in the best possible way. Our nuclear feasibility study includes both technology providers and industrial customers. Another key topic for us is to balance and de-risk our outright generation portfolio. And in Q3, for example, we announced a PPA together with a Norwegian customer. We see that there is good demand from our customers. However, there is a gap between the indicative demand and the materialization of long-term power supply agreements. Finally, a few words on the ongoing internal changes to transform and develop. Our internal renew program has two objectives, to build an efficient and fit for purpose operating model and to develop our culture and leadership to support the strategy execution. I also want to say a few words on the market development. In the first half of this year, gas prices decreased. Due to various reasons, renewed concerns about the security of supply first re-emerged in June and then repeated in Q3 and even intensified as several factors came together and revived the gas price and volatility. However, these price spikes cannot be compared to the levels we saw last year due to the subdued demand and very comfortable European gas storage levels above 90%, even close to 100% ahead of this winter. During the first part of 2023, the Nordic system price, both spot and futures, declined steeply. In Q3, the Nordic spot prices came under heavy pressure due to high precipitation, which in combination with the warm weather and strong renewables growth led to high inflows. In late Q3, reservoir levels in the Nordics were very high. This resulted in spot prices from time to time being close to zero. The power spot price was also negatively affected by the new supply from the commissioning of Alkiloto 3 and significant growth in installed wind capacity. Looking at the forwards, the Nordic Q3 2023 product declined by 40 euros and the year 2024 product 29 euro per megawatt hour during the third quarter. Products for the rest of the year 23 are currently trading around 50 euro per megawatt hour and for 24 around 46 euros per megawatt hour after a recall upwards in October. It is still good to note that although we are talking about clearly lower levels than a year ago, forward prices are still at the higher level compared to the historical prices. Then over to the financial KPIs. What you see here are the compatible headline KPIs for the group's first nine months and the third quarter. I will comment on the cumulative numbers and Tiina will go through also quarterly numbers later on. On a cumulative basis, our performance improved. Compatible operating profit increased to 1.186 million euros or billion euros, mainly due to better hedge prices. At the same time, the trend continued in comparable EPS, which was up by 14 euro cents during the first nine months. While comparable EBITDA improved by 192 million, operative cash flow improved by 295 million, mainly supported by changes in working capital. As our financial net debt decreased during the quarter, our leverage continued to come down and was at 0.2 times at the end of September of this year. I am pleased with the financial performance and our financial position. So with this, I conclude my part in this first section and hand over to you, Tiina.

Thank you very much, 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 third quarter. With this, let's move to the key financials for our continuing operations. Our comparable EBITDA declined and amounted to 318 million euros in the third quarter. on a last 12 months basis is total 2.2 billion euros. The comparable operating profit declined from 354 million to 226 million euros in the third quarter, while the comparable net profit decreased from 279 million to 204 million euros. Our quarterly comparable EPS was somewhat lower than last year at 0.23 cents. The reason for this was that the spot price in our price areas was clearly lower at 33 euros per megawatt hour, which is as much as 133 euros per megawatt hour below the level compared to last year. During the third quarter, our funding cost decreased while interest income increased. This is the reason for the modest interest expenses. In taxes, there was some positive impact from restructuring of internal legal entities. Our comparable EPS for the first nine months was 0.93 euros and for the last 12 months 1.34 euros. Our cash flow was strong both in the third quarter and for the first nine months. Mainly thanks to the good result, especially in the first half year and the positive change in the working capital. On dividend payment in the second quarter, we paid the first half 46 euro cents of the 91 cent dividend for 2022. Now, by end of the third quarter, the ratio for financial net debt to comparable EBITDA for the last 12 months decreased to 0.2 times. The second part of the dividend of 45 euro cents was paid in October in Q4, so it is not visible in the cash flow figure. Now over to the segment overview. This shows that the result in the third quarter declined in all the segments. The result of the generation segment, which reported a comparable operating profit of 262 million euros, decreased by 95 million euros for last year. This is mainly a consequence of clearly lower achieved power prices. The achieved power price decreased by 12.7 euros to 51.2 euros per megawatt hour. Also, the optimization margin was much lower compared to one year ago. I will come back to more details on the optimization margin later on. It is still good to note that last year power prices were at extremely high levels. Despite the decline in price and earnings this year, prices are still elevated compared to the historical levels. The outright volumes increased by 1.4 terawatt hours. However, there is an earnings effect as the olkiluoto tree volumes are not as profitable as the rest of the hydro and nuclear fleet. The result of the district heating business was negatively impacted by lower electricity prices and higher fixed costs, which was partly offset by higher heat prices and lower fuel costs. The comparable operating profit in the consumer solution segment decreased from 17 to 10 million euros. This was again an effect of lower electricity sales margin somewhat offset by higher gas sales. The main reason for the lower electricity sales margin was that customers, especially in Sweden and Norway, have been migrating to spot products which have a lower margin. The comparable operating profit also continued to be negatively impacted by the regulated price gap set for end users in Poland during 2023. And finally, briefly on the other operating segment. The comparably operating profit decreased by 26 million and was negative of 46 million euros. mainly due to the weaker result in circular solution, especially the recycling and waste business, write downs of certain IT project and development cost for the new operating model, as well as higher cost in enabling functions. Now we move over to a waterfall of the first nine months. This picture further highlights that the entire result improvement is created by our generation segment in the first half of the year, as we saw that the third quarter was lower than last year. The comparable operating profit for generation was 1289 million euros, an increase of 343 million from the last year's 946 million euros. The result improvement for the first nine months resulted from a higher achieved power price and higher hydro volumes. The achieved power price in the generation segment increased by 12.2 euros to 65 euros per megawatt hour, driven by higher hedge prices. Year to date, hydro volumes were up, and this is mainly coming from the record high water inflows in the third quarter. The result of the district heating business was positively impacted by higher electricity and heat prices and the use of recently commissioned electric boiler heat production in Espoo, which partly replaces earlier used fossil fuels. This effect was partly offset by higher fuel and CO2 emission allowance prices. The comparison period in 2022 includes approximately 41 million euros from the divested Norwegian district heating operation and tax exempt sales gains from a divested solar plant in India. Consumer solution comparable operating profit increased by 46 million and was 27 million euros, mainly due to the lower electricity sales margin, the Polish price cap, increased cost and lower sales of value added services. There were some positive effects from higher gas sales margins. And finally on the other operating segment where the comparable operating profit decreased by 53 million euros and showed a loss of 130 million euros. This comes from higher cost in the circular solution business and more specifically the expansion of the battery recycling business. Other contributors to the losses were the write downs of certain IT projects, development cost for the new operating model and higher cost in enabling functions. The comparison period included structural changes in the circular solution business and one time positive impact from the changes in pension fund arrangement in Sweden, which affected the group's enabling functions. Now I will go into some more details in our optimization premium. Lately, there has been a lot of discussion around one of our competitive advantages, namely the ability to create value through optimization. As you all know, in addition to hedge and spot price effects, the optimization premium is one component in our Achieve Power price. There are several elements that contribute to the optimization. The main ones are, however, flexibility and environmental values. These features add value and lately the value has actually increased. Let me try to explain this to you. First, it is the flexibility. There are two main components in the value creation from flexibility. The main one is our physical optimization. This means how we allocate our hydropower fleet to peak hours on an hourly, daily, weekly and seasonal basis. As the market price volatility has increased, the potential for optimization has also increased, which you can see in the picture on the left-hand side and in the middle. The graph of volatility shows the standard deviation. Another margin component is flexibility, is ancillary services. As overall market volatility increased, while at the same time predictability of the generation in the system has declined due to the increase of wind supply, the ancillary service market has become more important and the share of it has gone up. With our flexible hydrogeneration, we can support the energy system and ensure that it is up and running as we offer intraday capacity to the market if and when needed. Second, there are environmental values. The main elements are two products, guarantees of origin and EEL certificates. Guarantee of origins are the main value enhancer for the environmental values. These are externally verified certificates for CO2-free power. They are European based and Fortum has registered its generation fleet in the system of guarantee of origins in Finland and in Sweden. Of our units, only olkilautotree is not yet registered. As you see in the picture on the bottom right, the price for hydro has clearly increased during the last year. For hydrogeneration, the price is approximately 6 to 7 euros per megawatt hour at the moment, compared to nuclear, which is approximately 1 euro per megawatt hour. EEL certificates are the system for clean power in Sweden. The market is currently oversupplied, which is the reason why the prices for EEL certificates are at a low level. Based on this and with today's information, we estimate that our optimization margin going forward could be between 6 to 8 euros per megawatt hour in our achieved power price. Naturally, this will depend on the price levels, overall market conditions, the level of volatility and other market Historically, the optimization margin has been 1 to 3 euros per megawatt hour. And during 2022, when prices skyrocketed and volatility was huge, we even managed to achieve double this year in optimization. But now margin has come down and leveled out. Now over to the balance sheet. Equity increased by 764 million euros from the end of 2022, despite the impairments of our Russian operations and dividend payments, which negatively affected equity. On a positive note, also the positive change in hedge reserves and our good result for the first nine months. The total dividend for 2022 of 817 million euros, corresponding to 91 euro cents per share, was paid in two instalments in the second and fourth quarter. As you can see, our gross debt has come down and we repaid some debt. At the end of Q3, net margin receivables amounted to 559 million euros, which already is closer to historical, more normal levels compared to extremely high levels we saw last year. We also continue to have sufficient liquid funds. So all in all, we have a straightforward and strong balance sheet. Then a few comments on our net debt and debt portfolio. Maintaining a solid credit rating still continues to be a key objective for us. Today we have a balanced financial 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. It has further strengthened and 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 745 million euros. The operating cash flow was very strong at 429 million euros. This effect was slightly offset by investment of 172 million euros. And the change in interest bearing receivables and other effects was 14 million euros. So at the end of September, our financial net debt further declined and was 474 million euros. Looking at our debt portfolio, and the maturity profile, I want to highlight a few things. First, the debt maturity profile is very balanced after our bond issue and repayment of some debt in the spring. All in all, our gross debt is approximately 5.8 billion euros. Simultaneously, we have a strong liquidity position with liquid funds of 4.6 billion euros and 4.3 billion of undrawn credit facilities, which provides the capability to repay maturing short-term debt if needed. With the strong liquidity reserve, we will continue to optimize our cash positions 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. As interest rates have gone up, the interest rate for our debt portfolio has somewhat increased from last year, but decreased slightly from the last year. Going forward, the cost for our €5.8 billion loan portfolio is 4.3%. At the same time, we also get interest income for our liquid funds of 4.6 billion. Interest income was 3.8% in the third quarter. As a last note, I would also like to highlight that we now are in the process of preparing for our green finance framework, which longer term will enable us to utilize also green bonds and loans for future investment in clean power or similar solutions. So with this, over to the outlook section. The outlook section comprises in essence three elements. Guidance on hedging, capex and tax rates. In addition, we have now also added the cost savings from our efficiency improvement program. The hedges for the generation segments outright position for the rest of the 2023 was 75% hedged at 50 euros per megawatt hour. The hedge price for 2024 increased by 1 euro to 47 euro per megawatt hour and the respective hedge raiser increased 15 percentage points to 65% at the end of Q3. Today we have also disclosed our hedges for the year 2025. The hedge price for 2025 is 43 euros and the respective hedge ratio is 30% at the end of Q3. As part of the Efficiency Improvement Programme, we also updated our CAPEX guidance. CAPEX for 2023 is reduced from 700 million to 650 million euros. We also provide CAPEX guidance for 2024, which is expected to be approximately 550 million euros. CAPEX for both 2023 and 2024 includes maintenance CAPEX of 300 million euros, but excludes potential acquisitions. As Markus already explained, at the same time, we also reduced our growth CAPEX guidance for 2023 to 2025 from 1.5 billion to 1 billion. We continue to apply the same investment hurdles that we disclosed in March. There are also some updates for our tax guidance. The group comparable effective income tax rate for 2023, including items affecting comparability, has been lowered to be between 18 to 20 percent. Due to the low power price, we do not expect any windfall tax for the year 2023. For next year, the comparable effective income tax rate excluding items affecting comparability is also estimated to be lower, between 18-20%. With the fixed cost reduction of 100 million euros, we aim to improve our profitability, cash flow and our future competitiveness. And then just a reminder of the previously presented optimization margin, which is expected to be in the range of 6 to 8 euros per megawatt hour. So with this, I would like to thank you and end the presentation. And then we are happy to answer your questions. Ingela, over to you.