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 first quarter 24 financial results. My name is Ingela Ylves and I'm head of investor relations at Fortum. As always, this event is being recorded and a replay will be available on our website later today. With me here in the studio are our CEO, Markus Rauramaa, and the CFO, Tiina Tuomela. Markus and Tiina will present the group's financial and operational performance and strategy implementation during the first quarter. And after the presentations, we will again open up for questions. So with this, I 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 first quarter performance and strategy execution and also talk about market fundamentals and development. After that, Tiina will tell you more in detail how this turned into results in the first quarter of 2024. Let me now start with the quarterly highlights. The winter during the first quarter of 2024 in continental Europe was mild, which in combination with healthy LNG supply and steadily increasing renewable power generation, added to the downward trend of the European gas and power prices. Even if January was cold in the Nordics and led to higher spot prices, especially in Finland and the Baltics, February and March were somewhat milder than usual. Decreasing continental European power futures and above normal precipitation levels lowered the prices of Nordic power futures. The lower Nordic power prices are also reflected in our first quarter results. The achieved power price was at a good level, but significantly lower than a year ago. At the same time, we managed well with our optimization, and the achieved price was supported by a strong double-digit optimization premium above the annual guidance of 6 to 8 euros per megawatt hour. So the generation segment's result reflects the lower achieved price, but was, however, supported by higher hydrovolumes and commissioning volumes from Pielax Windfarm. Another positive highlight is our consumer solution result. After a difficult year in 2023, the segment had a strong first quarter with more normalized results, mainly driven by higher electricity sales margins in more stable market conditions. In March, S&P upgraded Fortum's long-term credit rating to BBB Plus with stable outlook, while Fitch Ratings affirmed a long-term rating of BBB Flat with stable outlook. We are extremely satisfied with S&P's upgrade as it reflects our systematic efforts to strengthen our financial position and our strategic focus on clean energy. In February, Fortum initiated arbitration proceedings against the Russian Federation to claim compensation for the unlawful seizure of our Russian assets in order to protect our legal position and our shareholder rights. As we announced in April, Fortum has gone through the SBTI due diligence process after having submitted its official commitment letter last year. To finance potential future investments in clean energy, we launched our green finance framework in January. Then a few words on our strategy implementation. One of our strategic priorities is to deliver reliable and clean energy. Electrification of the district heating not only provides clean heating, but it's also a source of flexibility for the whole energy system. Our Espoo Clean Heat program is based on the same priorities, and we started to build more emission-free and flexible district heating in Espoo. In addition, we closed down our last coal-fired district heating unit in Espoo, Finland, in late April. This means that our heating and cooling business will phase out coal one year earlier than planned. Further, Finland's last coal-fired condensing plant, Meripori, was transferred to the National Production Reserve aimed for emergency situations as of 1st of April. Fortum's biggest and Finland's third largest wind farm, 380 megawatts in Pielax in Ostrobotnia, has been gradually commissioned and will start commercial operations in July through a power purchase agreement with the Finnish energy company Helen. Our second strategic priority is to drive decarbonization of industries such as steel, chemicals, battery factories, data centers, electric mobility, and the heating sector. For this, we build preparedness for an electrification and growth phase longer term. We actively facilitate such industry projects and offer clean and stable power for industrial customers to meet their decarbonization targets. As decarbonization drives power demand, this provides us with growth opportunities longer term through investments in new clean energy production. As one example, we announced a new PPA contract with the Swedish ferroalloy producer Varjön Alloys in April. We have and are developing several sites across Finland for various industrial purposes, including data centers. We have sites in different development phases in Pori, Inko, Rauma, Orimattila and Nurmijärvi, just to mention a few. We are pleased to facilitate site development and offer large-scale, stable and CO2-free power from different sources. from hydro, nuclear and wind to decarbonize industries. Within the scope of our third strategic priority to transform and develop, we continued our efficiency improvement program with the target to gradually lower annual fixed costs by 100 million euros, excluding inflation by the end of 2025 with full run rate from the beginning of 2026. The consumer solutions business and our IT unit concluded their change negotiations, which resulted in redundancies of approximately 70 people. As a new milestone, we expect to reduce our fixed cost base by more than 50 million euros, which is included in the 100 million, by the end of 2024. Next, I will go through our main figures very shortly. These are the familiar comparable headline KPIs for Fortum Group's first quarter of 2024. All numbers in this presentation are for continuing operations, if not otherwise mentioned. Compared to the previous year with high power prices, the first quarter comparable operating profit was lower, mainly due to lower spot and hedge prices. On a positive note, our hydrovolumes increased, our optimization premium was very good, and the consumer solutions business improved clearly. I want to say a couple of words about the optimization premium. In this quarter, the realized optimization premium was double digit and thus above our guided level of 6 to 8 euros per megawatt hour. It is good to note that there will be fluctuations between the quarters, changes in the guarantees of origin materialize with the delay, and the guidance of 6 to 8 euro per megawatt hour is on an annual level. Our operative cash flow improved compared to last year and was 538 million euros in the first quarter. 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, which is a slight improvement from 0.5 times at the end of last year. We have updated our outright portfolio volume to be 47 terawatt hours going forward. This increase is due to increased volumes coming from the Olkiluoto 3 nuclear power plant and the Pielax wind farm in Finland. Tina will go through more details regarding the consequences of this. Then a couple of words about the commodity markets. Here you can see the main commodities, so a few words on the market development. The European gas market remains stable also in the first quarter of 2024. Gas demand remains low, supply is stable and storages are well filled. However, gas prices continue to be sensitive to security or supply risk that are tangible amid the geopolitical situation in Ukraine and the Middle East. In Nordic power, we have seen quite some volatility lately. January started with very cold and dry weather, especially in Finland. Owing to a tight power balance in the beginning of January, the daily spot price rose to 890 euros per megawatt hour in Finland and Estonia, which further stimulated the discussion on fit for purpose market design model. In Finland, the highest hourly price was close to 2,000 euro per megawatt hour. During the rest of the quarter, the weather was milder, which normalized market conditions. Nordic power consumption was approximately 395 terawatt hours for the last 12 months, an increase of approximately 10 terawatt hours compared to last year, which is almost 10% in the quarter, and approximately 2.5% in annual consumption during the first quarter. So, Nordic power consumption has increased fast in the first quarter, and we are now back at previous levels, around 400 TWh per year. Generally, we expect the Nordic spot price volatility to continue. This is a natural consequence of gradually increasing intermittent power generation, and growth in electricity demand. The spot price in Q1 was a 58.5 euro per megawatt hour. This was approximately 30% lower than in the previous year, but approximately 70% higher than the pre-crisis levels, i.e. the average in 2017 to 2021. So with this, I end my part and hand over to Tiina for more details.

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. So let me first comment on some of the comparable KPIs for our continuing operations. In the first quarter, our comparable EBITDA declined and amounted to 622 million euros. Also, the comparable operating profit declined and was 530 million euros in the first quarter. The main reason for the lower result were lower spot and hedge prices. Comparable net profit decreased from 483 million euros to 430 million euros. It is good to note that our net finance costs are now lower. While in the previous year, they were impacted by the solidium bridge loan. As you see, our comparable EPS in Q1 was 48 euro cent compared to 54 euro cents in the previous year. For the last 12 months, the comparable EPS, which is the base for the dividend, stood at 1.22 euros per share. Looking at gas flow, net gas from operating activities increased from 474 million to 538 million euros despite the lower 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 0.3 times for the last 12 months. Now over to the segment overview. Let's look at the waterfall of the comparable operating profit for our segments. Compared to the previous year, the generation result decreased while both consumer solution and the other operation segment improved. The main reason for the decline in the generation segment were the lower spot and hedge prices. At the same time, hydro volumes increased and the quarterly optimization premium was clearly better. The result of district heating business improved mainly due to the lower fuel and CO2 cost supported by more electricity-based heat production in Finland. The renewables business result turned positive in the quarter driven by test generation volumes from the Perlux wind farm. Comparable operating profit in the consumer solution sector increased in more normal levels. As power price normalized, also the consumer behavior has changed and turn is slower. The result improvement was mainly due to the higher electricity sales margin and higher sales margin for value-added services, while at the same time the gas sale margin was lower. The higher electricity sales margin resulted mainly from better profitability in non-spot-related contracts. As you might remember, in 2023 this business also suffered from the regulated electricity price caps for end users that was set by the Polish government. This regulation is not implemented anymore in 2024. The other operation segment, the comparable operating profit improved by 6 million euros and was negative by 25 million euros. As part of the ongoing organization changes, the efficiency improvement measures, internal charges for enabling function services and the lower IT costs had a positive result effect, part of which was offset by lower earnings in the circular solution business. Then a few comments of our financial position, debt and liquidity. Our financing position is very strong and this supports our objective to maintain a credit rating of at least triple B flat. When balancing between leverage, investment and dividend, we keep this in mind. As Markus already said, we are very pleased that S&P now upgraded our investment grade rating to triple B+. This shows that our hard and systematic work both on financials and on our strategy execution is recognized also by our rating agencies. Next, let's go through the reconciliation of our financing net debt in the first quarter. In the opening balance sheet, At the end of the last year, our financing net debt was €942 million. In the first quarter, the operating cash flow was €538 million. This effect was slightly offset by investment of €114 million. There was no dividend payment in the quarter as the first dividend installment was paid in April. The change in interest-bearing receivables amounted to 44 million and FX and other FX totaled 34 million euros. So, at the end of the first quarter, our financial net debt was 528 million euros and as said, the ratio for financial net debt to comparable EBITDA was at 0.3 times for the last 12 months. Looking at our debt portfolio and the maturity profile, I want to highlight a few things. Our maturity profile continues to be very balanced and there are no large maturities in any single year. All in all, our gross debt excluding leases totals 5.7 billion euros. At the same time, our liquidity position is strong. We have ample liquidity reserve of 8.2 billion euros with 4.9 billion euros of liquid funds and 3.3 billion of undrawn committed credit facilities and overdrafts. With the strong liquidity position, we will continue to optimize our cash and credit lines. The overall objective is to have sufficient and optimal liquidity while at the same time trying to minimize funding costs. We are constantly monitoring and adjusting our liquidity based on various scenarios to ensure sufficient liquidity in order to meet required needs. The cost for our 5.7 billion euro loan is 4.4%. while the interest income that we get for our 4.9 billion euro liquid funds is 3.9%, which means that the net interest costs are in good balance. So with this, over to the outlook section. The outlook section comprises in essence four elements. Guidance for outright hedges and optimization premium, tax rate, capex guidance and our fixed cost reduction program. But first a short reminder that our outright volume has increased from 45 terawatt hours to 47 terawatt hours. The reason for the increase is Olkiluoto tree and our Peelax wind farm, which now is operational. This also slightly increases our sensitivity to power prices, while it does not impact the optimization guidance. With new volumes in Finland, the split of Fortum's blended price has also changed. So based on the price areas of our normalized outright generation fleet is now approximately 46% in Finland, 37% in Sweden SE3 area and 17% in Sweden SE2 area. Previously, the split was 40-40-20. Actual outright volumes naturally vary and depend on various criteria such as outages, hydrology and other market dynamics. Last year's outright volume was 44.4 terawatt hours and already included approximately two terawatt hours volume from all kilo to three. So from now on, one should assume one additional terawatt hour. Also, Belax will increase our outright volumes by almost one terawatt hour on an annual level when fully in use. We are consolidating the Perlux wind farm as Fortum has a 60% majority ownership, while Helen has the 40% minority. Perlux will sell 65% of its generation based on a 12-year pay as produced PPA starting from the beginning of July. And then over to the hedges. At the end of first quarter 2024, the hedge price for the remainder of 2024 was at 43 euros per megawatt hour, and the respective hedge ratio was 70%. In the previous quarter, the hedge price for the full year 2024 was 47 euros. The main reason for the four-year lower hedge price for the remainder of 2024 is that the hedge price for the first quarter was clearly higher and those products have been now delivered. The hedge price for 2025 is one year lower at 42 euros and the respective hedge ratio increased by 10% points to 50%. Despite the first quarter optimization premium was double digits, We continue to guide the optimization premium at the annual level of 6 to 8 euros per megawatt hour on an annual level and for the total volume of 47 terawatt hours. While the guidance is for the annual level, there might be quarterly variations. A short recap of our guidance for capital expenditures. Our capital expenditure for 2024 is expected to be 550 million euros. This includes maintenance capex, but excludes potential acquisition. Capital expenditure for the next three years 2024 to 2026 is expected to be 1.7 billion euros, including maintenance, and excluding potential acquisition. Annual maintenance capex is expected to be approximately 300 million euros, which continues to be below our depreciation level. Our tax rate guidance is also unchanged. We expect the comparable effective income tax rate to be in the range of 18 to 20%. And also, as mentioned before, we target to reduce our annual fixed cost by 100 million euros, excluding inflation gradually until the end of 2025, with full effect from the beginning of 2026. We now complement this guidance as we say that we expect to reduce our fixed cost base by more than 50 million euros already by the end of 2024. This was all for my presentation, and we are now happy to answer your questions. So with this, Ingela, back to you.