Fortum Oyj Corp Ord

Good morning, everyone, and a warm welcome to Fortum's joint webcast and news conference for the investor community and media on our second quarter and half year 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 later today on our website. With me here in the studio are our CEO, Markus Raurama, and our CFO, Tiina Tuomela. Markus and Tiina will present the group's financial and operational performance during the second quarter and the first half of this year. After the presentations, we will open up for questions, and we will start with the capital markets audience and international media, after which, if needed, we switch to Finnish and take potential questions from the Finnish media. Okay, I now hand over to Markus to start.

Thank you very much, Ingela. A warm welcome to our investor and media call, also from my side. I will start by going through our financial performance, the market fundamentals and our strategy execution. After that, Tiina will provide more details, especially on the financials and how this turned into results in the first half of 2024. Let me now start with the quarterly highlights. The normal patterns applied to the second quarter, which is seasonally smaller result-wise. Typically, power prices are low at this time of the year due to melting period and warm weather. This was also the case now. Our second quarter performance shows resilience, and despite lower power prices, we managed to record relatively good results supported by successful hedging and physical optimization. Considering external factors, I am satisfied with our performance. During the second quarter, we continue to implement our strategy determinedly. One of our strategic priorities is to deliver reliable clean energy, and we focus on optimizing and strengthening our core operations for power generation. This includes investments like Lovisa Nuclear Power Plant's low pressure turbine modernization as part of the plant's lifetime extension. This modernization, announced in May, increases both the total capacity of the plant and the output during its lifetime. As part of the Espoo Clean Heat program, we closed down our last coal-fired unit used for district heating production in Suomenoja in Finland at the end of April. This means that our heating and cooling business phased out coal in Finland one year earlier than planned. In May, we inaugurated our wind farm in Pielax on the west coast of Finland, which is the third largest in the country. From the beginning of July, it started its commercial operations through the power purchase agreement with Finnish Helen. Our second strategic priority is to drive decarbonization of industries. During the second quarter, we announced the development of several potential new sites across Finland, among others in Jyväskylä. These we can offer to customers for data center or industrial use. We have a new slide on the site developments in our latest investor presentation, if you would like to dig deeper into this topic. We also started preparations for a two megawatt hydrogen pilot production plant to be built in Lovisa, scheduled for commissioning in late 2025. Within the scope of our third strategic priority, to transform and develop, we continue the implementation of our efficiency improvement program with the target to gradually lower annual fixed cost by 100 million euros, excluding inflation, by the end of 2025 with the full run rate from the beginning of 2026. In addition, we successfully divested our stake in the 185 megawatt solar portfolio and recorded a sales gain of 16 million euros in our comparable operating profit. This was our last operational renewables business in India. The remaining businesses are a renewables development platform, EV charging services, and some bio-based solutions. As the strategic review continues for the circular solution businesses, we are also evaluating alternatives for these other remaining Indian operations. The remaining net assets for all of these businesses total approximately 130 million euros, of which the Indian net assets, including guarantees, amount to approximately 30 million euros. In July, after the reporting period, we signed an agreement to sell our recycling and waste business to Summa Equity for approximately 800 million euros. Based on the balance sheet at signing, we will record a tax-exempt capital gain of approximately 110 million euros. However, the financial capital gain will depend on the balance sheet value at closing, which is expected to take place in the fourth quarter of this year. Following this divestment, we continue with our priorities for capital allocation. We have a very strong balance sheet with very low leverage. In the current investment climate, our investment outlook for next years is limited, and we continue to apply shareholder returns based on our dividend policy with a payout ratio of 60 to 90% of comparable EPS. And as always, the board of directors will decide on the dividend proposal to the AGM in connection with the full year results 2024, which takes place on 11th of February 2025. Next, I will go through our main figures. These are the familiar compatible headline KPIs for Fortum Group's second quarter and first half year of 2024. All numbers in this presentation are for continuing operations, if not otherwise mentioned. Last year, we had higher power prices. So this year, our comparable operating profit was lower, both for our first half year and second quarter. The main reasons being lower spot and hedge prices in the generation segment. On a positive note, our hydro volumes increased, and both the consumer solutions and other operations segments improved their comparable operating profits. Our comparable EPS declined slightly in the first half of this year, but increased by 25% in the second quarter. Our operative cash flow decreased somewhat compared to last year and was 876 million euros in first half year, and 338 million euros in the second quarter. And finally, the balance sheet, and most importantly, our leverage. Defined as financial net debt to comparable EBITDA, it was at 0.5 times for the last 12 months, which is on the same level as at the end of last year. Then over to the commodity markets. I also want to say a few words about the market development. Here you see the main commodities. After having seen a significant decline last winter, European gas prices moved higher during the second quarter. This was also reflected in the continental power prices, while the impact on the Nordic prices was modest. In the Nordics, the volatility of the spot power price remained high, especially in Finland, as the market witnessed several days with very high and very low prices. The volatility was influenced by prolonged nuclear plant maintenance at Olkiluoto, significant outages in transmission capacity and strong spring water inflows. Despite the effect from these temporary issues, we believe that this elevated spot volatility will continue. The futures market overall developed sideways over the quarter, although volatility driven by weather conditions also played a part. 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 operation. In the second quarter, our comparable net profit and comparable EPS increased. That was mainly due to the better result from our associated companies. Last year, the associated company result was impacted by the lower profits of associates, mainly caused by inflation adjustment in Swedish nuclear waste related provisions in co-owned nuclear companies. All other KPIs declined somewhat, mainly affected by lower power and hedge prices. Our comparable EPS for the last 12 months was at 1.26 euro compared 1.28 euro in 2023, so slightly down. As Markus already said, our leverage continued to be very low at 0.5 times. Now over to the income statement to look into certain items a bit more detail. As we have disclosed related to our efficiency improvement program, you can see from this income statement that our annual fixed costs are slightly above 1 billion euros. The target is to reduce the fixed cost base by 100 billion euros, excluding inflation. During this year, our fixed costs have increased somewhat, but with the actions in place, the fixed cost base will start to go down. As we have disclosed, we will lower our recurring cost base by more than 50 million by the end of this year. In July, we announced the divestment of our recycling and waste business, and it is estimated to close in the fourth quarter this year. Once this is done, our fixed cost base will be approximately 150 million lower, meaning that the new fixed cost base excluding the recycling and waste business will be 850 million. Despite this new lower level, we keep our target to reduce fixed costs by 100 million euros by the end of 2025 with the new run rate from 2026. In the second quarter, our finance cost net was positive. The main reasons were the pre-tax interest income of 19 million euros from a tax case that we won in Belgium and 11 million euros from the nuclear related items. Taxes have been at the normal level this year. Last year in the second quarter, income tax expenses included 225 million euros of adjustment related to one-time tax impacts from the impairment of the Russian asset mainly recognized in Ireland and in the Netherlands. Non-controlling interest was €2 million negative in the second quarter. This is related to the Peelax wind farm. So then, let's look at the waterfall of the second quarter comparable operating profit for our segments. Compared to the previous year, the result of our generation segment decreased, while both consumer solutions and the other operations segment slightly improved. In the generation segment, comparable operating profit decreased by 40 million to 264 million euros, mainly due to the lower spot and hedge prices. Lower nuclear volumes due to the extended outage in Olkiluoto's third unit and higher fixed costs negatively affected the result, while there was a positive effect from the higher hydro volumes, which partly offset the decline. The result of the renewable business was positively impacted by the sale of our remaining share of the Indian solar power portfolio. This comprised four solar power plants in India with a total capacity of 185 megawatts. From this divestment, we recorded a sales gain of 16 million euros in connection with the closing of the transaction. This was booked in the comparable operating profit. The result of the district heating business improved mainly due to the higher sales price for the power in Poland. Lower fuel and CO2 costs supported by higher share of the electricity-based heat production in Finland also contributed to the result improvement. In the quarter, the Berlaksvin farm contributed negatively to the result. In our consumer solution segment, comparable operating profit increased by 2 million to 12 million euros, mainly due to the improved electricity sales margin. There were some negative result effects from lower gas margin and higher fixed cost. Last year, the result was burdened by the regulated electricity price gap for the end users in Poland applied in 2023. In the other segment, comparable operating profit improved by 9 million and was 43 million euros negative. The main reasons for the improvement were higher internal charges for enabling function services and higher earnings in the circular solution business. When looking at the comparable operating profit for the first half of the year, the same trend continues. The generation segment result declined, while both consumer solutions and other operation segments improved. Unfortunately, the deviation for the generation segment is much bigger. The generation segment's comparable operating profit decreased by 250 million to 777 million euros. The main reasons for the decline in the generation segment were the clearly lower spot and hedge prices, which were partly offset by higher hydrovolumes. The result was also negatively affected by a weaker energy mix resulting from the higher cost nuclear volumes from Olkiluoto third unit. The result of the renewable business was positively impacted by the 16 million euro sales gain from the divestment of India's solar assets. The result contribution from the Peelax wind farm was slightly positive in the first half year. The result of the district heating business improved mainly due to the lower fuel and CO2 cost supported by more electricity based heat production in Finland and higher sales price for the heat and power in Poland. Comparable operating profit in the consumer solution segment increased by 38 million to 54 million euros, mainly due to the higher electricity sales margin, discontinuing of the regulated electricity price gap for the end users in Poland, effective during 2023, and higher sales margin for value-adding services. This positive effect was partly offset by lower gas sales margin in Poland and higher fixed costs. In the other operation segment, the comparable operating profit improved by 15 million euros and was 68 million negative. The improvement was related to higher internal charges for enabling function services and higher result in the circular solution business. Then some comments on our financial position, debt and liquidity. Our financial position is very strong, and this supports our objective to maintain a credit rating of at least BBB. When considering our capital allocation, we balance between the leverage, investments and dividends. We always keep the rating in mind. Next, let's go through the reconciliation of our financial net debt in the second quarter. In the opening balance sheet at the end of first quarter, our financial net debt was 528 million euros. In the second quarter, the operating cash flow was 338 million euros. This effect was slightly offset by investment of 117 million euros. In the second quarter, we paid our first installment of the dividend 520 million euros. The change in interest bearing receivables amounted to 28 million, while FX and other FX totals 5 million euros. So, at the end of the second quarter, our financial net debt was 851 million euros, and the ratios for the financial net debt to comparable EBITDA is at 0.5 times for the last 12 months. Looking at our debt portfolio and the maturity profile, I want to highlight a few things. We use bonds as our primary source of our funding. 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 5.3 billion euros, four million down during the quarter. At the same time, our liquidity position is strong. We have ample liquidity reserve of 7.4 billion euros with 4.1 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 €5.3 billion loan portfolio is 4.2%, while the interest income that we get for our €4.1 billion liquid funds is 3.8%, which means that the net interest costs are in good balance. So with this, let's look at the outlook section. The outlook section comprises in essence four elements. Guidance for outright hedges and optimization premium, taxes, capex guidance, and our fixed cost reduction program. First, a reminder that our annual outright volume is approximately 47 terawatt hours. And we have also disclosed new weights for different price areas. These were disclosed already in connection with our first quarter result, but this is just a reminder. Starting with the hedges. At the end of the second quarter 2024, the hedge price for the remainder of 2024 was at 43 euros per megawatt hour, and the respective hedge ratio was 75%. The hedge price for 2025 is at the same level than the last time at 42 euros and respective hedge ratio increased by 10 percentage points to 60%. The annual optimization premium continues to be at the level of 6 to 8 euros per megawatt hour and for the total volume of 47 terawatt hours. While the guidance is for the annual level, there might be quarterly variations. Our corporate tax rate guidance is unchanged. We expect the comparable effective income tax rate to be in the range of 18 to 20 percent. In Sweden, there will be a revision of the property taxes for next year. For Fortum, the increase of the property taxes will be approximately 25 million euros for the years 2025 to 2030. This means that the increase is 25 million euros from 2024 to 2025, and then stays at that level for a five-year period, including 2030. Then a recap of the guidance for our capital expenditures. Our capital expenditure for 2024 is expected to be 550 million euros. This includes maintenance capex of 300 million euros. As we disclosed the divestment of the recycling and waste business on 18 July, we also lowered our capital guidance from 2025 onwards. The annual maintenance capex is expected to be approximately 250 million euros in 2025 and onwards, which continues to be clearly below our depreciation level. Capital expenditure for the guided next three years, 2024 to 2026, is expected to be 1.6 billion euros, including maintenance and excluding potential acquisition. The previous guidance was 1.7 billion. Please note that if we would not disclose new investment project, our capital expenditure would go down over time towards 300 million euros after 2026. And also, as mentioned before, we target to reduce our annual fixed cost by 100 billion euros, excluding inflation, gradually until the end of 2025, with the full effect from the beginning of 2026. The divestment of recycling waste business will reduce the group's fixed cost base by approximately 150 million euros. So from 2025 onwards, the new fixed cost base will be approximately 850 million euros. Despite this, the cost reduction target of 100 million euros is unchanged. And as I already mentioned, 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 now we are happy to answer your question. So with this one, Ingela, over to you.