Fortum Oyj Corp Ord

and warm welcome to Fortum's joint webcast and news conference for the investor community and media on our full year 23 financial results. My name is Ingela Ulves and I'm the 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 Lauramo, and our CFO, Tiina Tuomela. Markus and Tiina will present Fortum's financial statements for 2023 and the group's performance. This morning, we also provided some clarifications to our strategy focus, and Markus will also go through that. After the presentations, we open up for 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. I will start by going through our performance, then talk about our strategy and execution, including the clarifications we have announced this morning, as well as market fundamentals and development. After that, Tiina will tell you more in detail how this turned into results in the fourth quarter and for the full year 2023. Let me now start with the highlights of the year 2023. Last year was very much about stabilizing Fortum's operations. Despite the volatile market environment, we strengthened our financial position and our financial performance was solid. Our hedging provides visibility and stability against the very volatile prices, and we have developed our risk management through a new risk framework. Our balance sheet is strong with very low leverage. In May, we returned to the bond markets, which normalized our funding structure and balanced our debt maturity profile. We closed our books on our Russian operations for good. Due to the Russian authorities' unlawful seizure of our Russian assets, we lost control, impaired the assets in full, and deconsolidated the Russia segment. As Russia's actions are a crude violation of the International Investment Protection Treaties and deprive Fortum of its shareholder rights, we sent a notice of dispute to initiate claims against Russia. Our generation fleet ran well, and we got Olkiluoto 3 online in May. Following good availabilities and higher generation volumes from our power generation and lower share from condensing generation, our specific emissions for power generation decreased to 16 grams per kilowatt hour from previous years already low level of 25 grams per kilowatt hour. With this measure, we now rank number two as the second cleanest utility in Europe. Following the Uniper exit, we launched our new strategy, a new operating model and business structure, as well as a new leadership team and fully new organization in March. I will come back to more details on strategy execution later on. With the strong financial foundation and good results for the year, our board of directors proposed to the AGM a dividend of 1 euro 15 cents per share. This corresponds to a 90% payout based on our dividend policy of a 60 to 90% payout ratio of comparable EPS. So despite the very busy year with a turbulent market environment, we managed it well. And big thanks naturally goes to our committed personnel who have made this possible. Next, I will go to our main figures very shortly. What you see here are the comparable headline KPIs for Fortum Group's fourth quarter and full year 2023 continuing operations. The fourth quarter comparable operating profit was below previous year's result, but due to the very strong result in the first quarter, our full year result was only slightly lower than a year ago. Our comparable EPS was lower in the fourth quarter, but for the full year, we exceeded the 2022 performance. The operating cash flow decreased in the fourth quarter, but for the full year, it was at the good level seen in the previous year. And finally, the balance sheet and most importantly, our leverage. Defined as financial net debt to comparable EVDA, it was at 0.5 times, a slight improvement from 0.6 times previous year. The low leverage provides us a solid platform to continue to develop Fortum. I'm especially satisfied with the performance of our generation segment, as our outright power generation shows all-time high comparable operating profits. Then over to the strategy execution. In March 2023, we launched our new strategy. After that, we have continued full speed with our strategy execution. Let's take a look at the strategic development during the year 2023. First, on our priority to deliver clean energy reliably. We announced several projects in 23 that enhance our best-in-class operations, such as the Lovisa nuclear power plant lifetime extension until 2050 and upgrades of our hydropower plants, for example, Untra in Sweden. A hugely important event was the start of commercial power generation of the Olkiloto 3 nuclear power unit, of which Fortum owns 25%. The acquisition of Teli Energy, one of the 10 largest clean energy providers in Sweden, is a very good fit with our consumer business, increasing our consumer and enterprise customer base by 150,000 and further strengthening our position as the largest retailer in the Nordics. The construction of our Pielax 380 megawatt wind farm, Finland's third largest wind farm, is progressing on time and budget and will be commissioned in second quarter this year. During the winter months, Finland's last coal-fired condensing plant, Meripori, operated on commercial basis to support security of supply in the Nordic power market. We signed an agreement with National Emergency Supply Agency, NESA, to transfer it to production reserve for emergency situations from March 2024 until end of 2026. As mentioned, 98% of our total power generation was carbon-free. So for the small part of our operations that are still not decarbonized, we continue our efforts. One example is building of sustainable waste heat solutions. Last year, we decided to invest 225 million euros in decarbonization of our district heating as 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 they plan to build in Espoo and Kirkkonummi. The target is to cover approximately 40% of the heat demand in the Espoo area by this carbon-free waste heat. The total capital expenditure of the Espoo clean heat program amounts to approximately 300 million euros. In 2023, 31 million of these investments materialized. Secondly, a few words on our priority to drive decarbonization in industries. In the second quarter, we signed new cooperation agreements within the scope of our nuclear feasibility study with the Korean KHNP and the US-based Westinghouse Electric Company. In the feasibility study, Fortum explores the prerequisites for investing in new nuclear in Finland and Sweden. We examined the commercial, technological and societal, including political, legal and regulatory conditions for both small modular reactors, IESMRs, and conventional large reactors. We have gained a very good overview of the new nuclear vendors during the first year of our feasibility study. We have evaluated 11 different plant designs, both large nuclear power plants and small modular reactors. We continue the study this year and we will focus on identifying potential new build sites, de-risking measures, shortlisting potential vendors, as well as the pre-licensing process. And finally, a few words on the priority to transform and develop that mainly relates to ongoing internal changes. Our target is to build an efficient operating model that fits Fortum's changing operating environment and our new scope and purpose. At the same time, we develop our culture and leadership to best support strategy execution. The full reorganization was completed last year, and now we implement our new governance processes. In the summer, we also initiated a strategic review of our circular solutions businesses which is expected to take up to a year. As a part of the ongoing transformation, we launched the efficiency improvement program to cut fixed costs by 100 million euros to improve efficiency. Then a couple of words about the commodity markets. You see the main drivers of the commodity markets on this slide, but my intention is not now to go through these. Instead, I would like to raise a couple of facts about Nordic power market, as there has been quite vivid discussions lately also in the public domain. In 2023, Nordic power consumption was 386 terawatt-hours, while the power generation was clearly above 400 terawatt-hours, leading to power exports of 41 terawatt-hours from the Nordics. Consequently, the Nordic power market, which basically already is decarbonized, is exporting clean and cheap power to neighboring countries, enabled by the interconnectors. So the Nordic market is oversupplied and does not need any new power capacity at the moment. This is also reflected in the Nordic forward prices, which currently are at the level of 40 euro per megawatt hour. Wind and solar with LCOE or levelized cost of electricity at this level are not economically viable, as they, because of their generation profile, get only approximately 80% of the average price or slightly above €30 per MWh in this example. And it is good to note that wind and solar have the lowest LCOE of all generation technologies at the moment. The Nordic spot market works as it was designed for. Extreme and volatile prices are not a consequence of a dysfunctional market. High prices are a consequence of imbalances in supply and demand and lack of capacity, especially with peaking prices. The main reason is the increasing share of intermittent wind power and lower share of firm and flexible capacity. This causes extreme price volatility, even with negative prices during windy days, but also temporary constraints regarding security of supply. On the other hand, wind capacity does not help if the wind is not blowing. This has been the case lately when we have had days with prices up to 900 euros per megawatt hour as a daily average. Currently, the market does not need more capacity. However, the current high price volatility is not beneficial for producers, suppliers, or consumers of electricity. We do see that over time, decarbonization through electrification of other sectors, heating, transport, and industrial companies will create more demand for power. We need to solve the issues with the current market model, and this requires broad societal discussions on how to incentivize investments for baseload and flexible power to have a balanced energy system when demand increases. To conclude, the Nordic power market is already decarbonized. Fortum is almost decarbonized already today, does not have fossil capacity to be replaced, and will be carbon neutral by 2030. As our strategy is to supply clean energy reliably and drive decarbonization of other sectors, this shows that we are well positioned and in line with our strategic ambitions. Now let's take a look at our business portfolio and how we think about it in more details. As we announced this morning, we have specified our business portfolio further. I want to go through this to explain what the clarifications mean. Fortum Core is our core businesses in hydro and nuclear, customer business and heating and cooling, i.e. our generation segment and consumer solution segment. We have an established market position and these generate almost the entire group EBDA. Based on our core competencies, we run these businesses in an efficient way with the aim to constantly develop the performance and develop the asset base. The geographical scope is mainly the Nordics. We will strengthen and selectively grow these core areas while capitalizing on the market volatility. Demand-driven renewables means that we could build new onshore wind and or solar capacity if there is demand from customers. We will not build new capacity without the customer offtake agreement, i.e. PPAs or LTCs. For now, we do not have any intention to invest in new capacity as the market currently is oversupplied. However, we develop a ready-to-build pipeline to have the preparedness to meet future customer demand when demand picks up. It is good to note that PPA supported projects allow slightly lower weighted average cost of capital and that the power demand needs to be in the same price area as the potential supply in order to manage the price area exposure. With Explore, we mainly refer to research and development potential. These are potential future shaping businesses such as hydrogen or innovation and venturing that need further studying and validating before they can be developed into economically viable business opportunities. Annual costs in this area are limited to a maximum of 20 million euros per year. Non-core businesses are not in the core of Fortum's strategy. As we announced last year, the circular solutions business businesses are under strategic review. Then over to how we look at the timeline of our strategy execution. The world around us is currently uncertain, volatile, and unpredictable. The supply-demand balance will change over time, and also market prices and building costs will change over time. This low visibility is the reason why we have split our strategy execution in two phases. As we do not see profitable new investment opportunities in the near term, sharpened focus is put on the core businesses to optimize the existing best-in-class operations, especially the generation portfolio, as well as managing business risks, for example, to decrease the share of merchant exposure. Fortum continues to be prudent and disciplined in its capital allocation to maximize value creation from flexibility, efficiency, and cash flows. During this phase, we prepare for future growth to be ready when demand picks up. With these actions, Fortum continues to build preparedness for long-term growth, which will be driven by decarbonization through electrification of other sectors. With its already decarbonized generation portfolio, Fortum will partner and over time grow with industrial customers in clean energy with focus on efficient capital allocation, attractive returns, balanced risk exposure and sustainability. While we closely follow the market development, at the same time, we continue our disciplined capital allocation. As said, our priorities are linked to how we use our balance sheet, make investments and distribute dividends to shareholders. The balancing of these with focus on cash flows. Our key objective is to ensure a credit rating of at least triple B flat. As we have outlined, our maximum leverage can be two to two and a half times. Currently, our balance sheet is very strong with leverage closer to zero. The logic of our capital allocation is that if there are limited investment possibilities and we do not make any sizable investments, we will allocate more capital on shareholder distribution. And if and when there are good investment projects, we would allocate less capital to shareholder returns and more to attractive projects. Tina will go through the details on our capex. As I today have also explained, we do not see that there in the near term are new attractive investment opportunities that meet our investment criteria. And as demand currently sluggish, the demand situation does not support investments into new capacity. When it comes to investments, it is always about building profitable megawatts. It is also good to acknowledge that our dividend policy does not aim for stable dividends between the years. The payout ratio of 60 to 90% will be used so that the upper end of the range of the payout ratio is applied in situations with a strong balance sheet and low investments, while the lower end of the range would be applied when leverage is higher and or making significant investments and we have high capital expenditure. Consequently, our current priority is to pay dividends. This is also reflected in the dividend proposal to pay 90% of comparable EPS, i.e. at the top of the payout ratio of 60 to 90%. Today, we have also disclosed new strategic targets with clear KPIs to measure our progress and actions. We have set targets for four key strategic areas to be developed in order to ensure optimal performance and risk management. First, to strengthen our Nordic leadership, we need to ensure that our nuclear and hydro fleet has high availability. This is also supporting the security of supply. Our fleet availability has a very good historical track record, and now we set targets to further improve and to keep it constantly at the high level. Our target is to keep our nuclear fleet availability above 90 and our hydro fleet availability above 95. Second, our flexible hydro assets are a clear competitive edge for us, and we generate additional margins depending on how we run the assets. This optimization premium we have guided to be between 6 to 8 euros per megawatt hour compared to the historical level of 1 to 3 euros per megawatt hour. This margin comes on top of the hedge price and is included in the achieved power price, so it is a significant result driver, steadily adding to our income streams. Third is the aim to stabilize income streams. We manage our power price exposure by hedging our outright portfolio to have predictable and stable cash flows. As we have said before, we aim to increase the share of long-term, more than five years, power supply agreements, IEP, PAs, or long-term contracts. Now we have set the target to have a minimum of 20% of rolling 10-year outright volumes locked in by the end of 2026. At the moment, we have hedged 15% for the years 2024, 2033. The fourth KPI is related to preparedness for longer term growth when demand picks up. We are developing a ready to build pipeline for onshore wind and solar. Our target is to have more than 800 megawatts ready to build by the end of 2026. At the moment, we have a pipeline in various stages, which is much larger than the target. However, they are not ready to build yet, which also is in line with the current market sentiment. This was a short run through of our strategic actions until now and new strategic specifications, how we will proceed. Now I would like to hand over to Tiina to go through our financial performance in more detail.

Thank you, Markus. Good morning, everyone, also on my behalf. I will now go through our financials in more detail. Let's start with the key financials for our continuing operations. So let me now first comment on some of the comparable KPIs for our continuing operations. In the fourth quarter, our comparable EBITDA declined and amounted to 459 million euros. For the full year 23, it totaled 1.9 billion euros, also slightly down. The comparable operating profit also declined and was 359 million euros in the fourth quarter, while the comparable net profit decreased from 370 million euros to 317 million euros. Comparable net profit for the full year increased to 1,150 million euros. As you can see, our comparable EPS in Q4 was 35 cents, somewhat lower than the previous year. But for the full year 2023, comparable EPS stood at 1.28 euros and was higher than in previous year. Comparable EPS is the base for the dividend proposal. Looking at the cash flow, the net cash from operating activities declined from 451 million to 149 million euros. The main reason was lower comparable EBITDA. For the full year, net cash from operating activities was in line with the previous year's despite 122 million euro lower comparable EBITDA. The main reason for this was the positive impact from the change in working capital. Our balance sheet strengthened somewhat with the slight improvement in our leverage. The ratio for financial net debt to comparable EBITDA was at 0.5 times. Now over to the segment overview. Let's look at the waterfalls for compatible operating profit for all our segments starting with Q4. Compared to the previous year, all segments were lower. The main reason for the decline in the generation segments are lower at the price, lower condensing generation from Meripori power plant and higher cost in co-owned production companies. These negative effects are partly offset by higher hydro and nuclear volumes and lower depreciation due to the lifetime extensions of the Lovisa power plant. It is good to remember that the district heating business is also reported in the generation segment. The renewables and district heating business was loss-making in the fourth quarter. The result of the district heating business was negatively impacted by clearly lower power prices and higher fixed cost. Comparably operating profit in our consumer solution segment more than halved. This was mainly due to the lower electricity sales margin and regulated electricity price gap set for end users by the Polish government for the year 2023. The reason for lower electricity margin resulted from customers migrating to lower margin spot products. There was also positive impact from the high sales margin in value-add services and lower fixed cost. Comparably operating profit of other segment decreased by 5 million euros, mainly due to the development cost for the new operating model and higher cost in enabling functions, the negative effect of which was partly offset by improved performance of the circular solution business, especially in the metal business. Now let's move to the waterfall of the full year. This picture shows that the result was relatively stable, however, only the generation segment improved. The higher result in the generation segment came from the higher achieved power price, higher hydrovolumes and lower depreciation for the Lovisa nuclear power plant in the power generation business. This was partly offset by lower generation of condensing power from Meribori power plant, as well as higher cost in go-on production companies. The Meribori power plant ran clearly less hours during 2023 compared to 2022, which meant that it was loss-making. The renewables and district heating business was clearly loss-making. The result of the district heating business was negatively impacted by lower power prices and higher fuel and CO2 emission allowance prices and higher fixed costs. The year 2022 result included approximately 36 million euros from the divested Norwegian district heating operation and tax exempt sales gain of 9 million from the divestment of the 250 megawatt Rajasthan solar plant in India. In 2023, the achieved power price of Generation Outright portfolio was 63.1 euro per megawatt hour. This is a new record, the highest ever achieved. Comparable operating profit for the consumer solution segment decreased by 59 million and was 38 million euros. The main reason was lower sales margin, which was partly offset by higher sales gas margin and lower fixed cost. The lower electricity sales margin were to a large extent the result of losses from customer outflow in certain hedge customer contracts because of very volatile and high price market condition, especially during the first half of the year. The regulated Polish power price gap for the year 2023 set for end users by the Polish government also had a negative impact on result. Comparable operating profit for other segments decreased by 57 million euros and amounted to minus 173 million euro. The main reasons were lower results in the recycling and waste and battery businesses, especially from higher costs from largely ranging from the expansion of the battery recycling business, 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 changes in pension fund arrangement in Sweden affecting group's enabling functions. As part of the Efficiency Improvement Programme to reduce fixed cost and turnaround loss making businesses, this segment is now under special attention to address the result performance and increased fixed cost level. So let's take a closer look on the efficiency improvements and capital expenditures. In the third quarter, we launch our Efficiency Improvement Programme. We target to reduce our annual fixed cost by 100 million euros gradually until the end of 2025. As we said in Q3, the Efficiency Programme includes strategic prioritisation and evaluation of resources, as well as turnaround actions for underperforming and loss-making businesses. As we reported, both the renewables and decarbonisation business and circular solutions were loss-making in 2023. Actions will also include personal reductions. At the end of January 2024, just a couple of weeks ago, we announced the start of the change negotiation in our consumer solution business and in IT. we say that this could result in redundancies of a maximum of 130 job positions. Total capex expenditure for the years 2024 to 2026 is expected to be 1.7 billion euros. This is 200 million euros lower compared to the previous guidance for the years 2023 to 2025. The guidance includes maintenance capex of 900 million, which is roughly 300 million euros per year. As Markus already said, the investment sentiment is currently weak. Investments are not profitable and at the same time the market is oversupplied. These are main reasons for our lowering the capex. However, we do have some large investment ongoing. On the right-hand side, you can see an indicative split of the capex per segment. The main ongoing projects are the PeerLux wind farm, Lovis lifetime extension and the waste heat recovery project from data centers. The Peelax wind farm with a total of 380 MW should be ready in Q2 2024. Currently, the operational capacity of this wind park is 245 MW. In our CAPEX guidance, we have approximately 300 million euros of uncommitted CAPEX for potential new investment decisions. As Markus also said, we prepare a ready to build project pipeline for renewables to have the preparedness when demand picks up. So the investment decisions will depend on how demand will develop and what kind of project there will be. We are not forced to spend it. Then a few comments on our balance sheet, debt and liquidity. Maintaining a solid credit rating still continues to be a key objective for us. When balancing between leverage, investment and dividend, this is what we keep in mind. Fortunately, our balance sheet is currently very strong. Let's go through the reconciliation of our financial net debt in the fourth quarter. The opening balance sheet at the end of third quarter, we had financial net debt of 474 million euros. In the fourth quarter, the operating gas flow was 149 million euros. This effect was lightly offset by investment of 141 million euros. The dividend payment amounted to 404 million euros in the fourth quarter, and the change in interest-bearing receivables was marginal at 14 million, and FX and other FX amounted to 59 million euros. So, at the end of the year, our financial net debt was at 942 million euros, and financial net debt to comparable EBITDA was 0.5 times. Looking at our debt portfolio and the maturity profile, I want to highlight a few things. First, with the bond issuance in May, we rebalanced our debt maturity profile and repaid some loans. Consequently, our maturity profile is very balanced and there are no longer maturities in any single year. All in all, our gross debt is 5.8 billion euros. At the same time, our liquidity position is strong. We have sufficient liquidity reserve of 7.5 billion euros with 4.2 billion euros of liquid funds and 3.3 billion of undrawn committed credit facilities and overdrafts. With a strong liquidity position, we will continue to optimize our cash and credit lines to manage in any future market volatility and price situation. The overall objective is to have sufficient and optimal liquidity while trying to minimize funding costs at the same time. During the year, we developed our risk management tool and established a new risk management framework. Based on this, we are constantly monitoring and adjusting our liquidity based on various scenarios to ensure sufficient liquidity in order to meet required needs. Due to the volatile power prices and market sentiment, the required needs are higher compared to the past. Our current level of 4 billion euro of cash is probably not the optimal. However, it is good to remember that margining requirements peaked at 5 billion euros in 2022, and there are also other uses for our liquidity, not only margining. Finally, the cost of our 5.8 billion euro loan portfolio is 4.3%, while the interest income we get for our 4.2 billion euro liquid funds is 3.9%. So with this, over to the outlook section. The outlook section comprises in essence three elements, guidance on hedging, tax rate, and capex guidance and cost reduction. At the end of 2023, the hedge price for 2024 remained at the same level, 47 euros per megawatt hour, and the respective hedge ratio increased by 5 percentage points to 70%. Also, the hedge price for 2025 is unchanged at 43 euros and the respective hedge ratio increased by 10 percentage points to 40%. We have today also introduced the hedge ratios for our long-term power supply agreements, mainly with industrial customers. As of the end of 2023, the hedge share of rolling 10-year outright volume for the years 2024 to 2033 is 15%. This includes the above-mentioned hedges for the 2024 and 2025. A short repetition of our guidance for capital expenditures. Our capital expenditure guidance for 2024 is expected to be 550 million euros. This includes maintenance cap, but excludes potential acquisition. As said, capital expenditure for the next three years, 2024 to 2026, is expected to be 1.7 billion euros, including maintenance and excluding potential acquisitions. Annual maintenance capex will be approximately 300 million euros, which continues to be below our depreciation level. Regarding our tax rates, we expect the comparable effective income tax rate to be in the range of 18 to 20%. And just as a reminder, the Finnish and Swedish windfall taxes were applied only for the fiscal year 2023. The actual outcome was zero and there is no new proposal for any additional taxes. Hopefully this remains the situation, as any new taxes would not be supportive of any new investments. And also, as mentioned before, we target to reduce our annual fixed cost by 100 million euros gradually until the end of 2025. This was all for my presentation, and then we are happy to answer your questions. Ingela, over to you.