Fortum Oyj Corp Ord

Good morning, everyone. A warm welcome to Fortum's joint webcast and news conference for the investors and media on our third quarter and January-September 24 financial results. My name is Ingella 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 Rauramo, and CFO, Tiina Tuomela. Markus and Tiina will present the group's financial and operational performance during the third quarter and first nine months of this year. After the presentations, we will open up for questions in our Q&A session. I now hand over to you, Markus, to start.

Thank you very much, Ingella. A warm welcome to our investor and media call also from my side. I will start by going through the key elements of our financial performance, market fundamentals and follow up on our strategy implementation. After that, Tiina will provide more details, especially on the financials and how this turned into our results. Let me now start with the quarterly highlights. The third quarter is typically a seasonally low quarter with lower volumes and power prices. In July and August, Nordic spot prices were pressured by high precipitation, good nuclear availability and increasing wind and solar output. In September, drier conditions and nuclear outages due to both planned maintenance and unexpected technical issues increased the prices. On a very positive note, Nordic power demand has now recovered to the pre-crisis levels and non-industrial demand is strong throughout the Nordics. During the last 12 months, power demand in the Nordics has reached 401 terawatt hours. However, Finnish and Swedish industrial demand is still lagging and we have seen more postponements or delays in industrial investments, especially in green transition projects. A couple of days ago, Fingrid, the TSO in Finland, published its latest power demand forecast where they somewhat lowered the expectation of demand growth. They expect power demand in Finland in 2030 to be 126 TWh compared to their previous estimate of 131 TWh. Today, annual power demand in Finland is approximately 85 TWh. The lower spot price is affected especially the result of our generation segment, but with our versatile and competitive CO2 free generation fleet, successful hedging and a good optimization premium, our achieved power price reached a good level and we recorded resilient results again. We continue with our strategy implementation. On our strategic priority to deliver reliable and clean energy, we focus on optimizing and strengthening our core operations for power generation. As already highlighted in connection with our second quarter results, the Pielax PPA became effective on the 1st of July. At our Lovisa nuclear power plant, we reached an important milestone in August in securing reliable Western alternative fuel supply as we loaded the first batch of nuclear fuel from Westinghouse. The lifetime extension of our Lovisa nuclear power plant is also progressing well. Most recently, we announced that we upgrade the automation of the turbine protection and control systems of both power plant units. Regarding longer-term power demand, we are very happy to see that there is demand for long power purchase agreements, also for nuclear power, in other parts of the world. We are well positioned as the Lovisa lifetime extension provides an additional 1,000 megawatt of capacity for 22 years or approximately 177 terawatt hours of reliable CO2-free baseload power until 2050 that we can offer to our industrial customers. Fortum has, together with the other owners of our co-owned nuclear plants, decided to investigate extensions up to 80 years of the operating lifetime of the Oskarsham and Forsmark nuclear power plants. Also, as announced today, Fortum's coal exit continues with the decarbonization in Poland at our Czestochowa combined heat and power plant. We are committed to exit coal by the end of 2027, and we will now invest approximately 100 million euros in Chestohova's retrofit with biomass technology. This will decrease Fortum's coal capacity and further reduce our direct CO2 emissions. The investment starts now and is expected to be ready by the end of 2026. This has no impact on the current CAPEX guidance. On our strategic priority to drive decarbonization of industries, we continued the development of several potential sites across Finland that can be offered to our customers for data center or industrial use. One of these is a site in Rauma where we are developing a site for a sustainable synthetic aviation fuel, ESAF, plant together with Norsk E-Fuel and Port of Rauma. We have been very active in site development and now several sites are already reserved. On our third priority, transform and develop, progress has mainly been done regarding divestments of non-core assets and efficiency improvement. The strategic review of our circular solutions business took a huge step during the third quarter. In July, we signed an agreement to sell our recycling and waste business to Summa Equity for approximately 800 million euros. Closing is expected to take place in the fourth quarter. In September, we signed an agreement to sell our ownership in Kempolis Oy, including all of Fortum's biobased solutions business and our shares in the holding company of Assam Bioethanol PVT Ltd in India, to AM Green Technology and Solutions BV. The transaction will not have material financial impact on Fortum Group's result. We continue our efforts in the efficiency improvement program with the target to gradually lower our annual fixed cost by 100 million euros, excluding inflation by the end of 2025 and a full run rate from the beginning of 2026. Last week, we initiated legal proceedings against our former Russian subsidiary, PAO Fortum, to recover approximately 800 million euros in intercompany loans, including interest. It is good to note that this legal case only has upside potential, as there is no impairment risk. This process, which is separate from the already ongoing arbitration proceedings against the Russian Federation, are expected to take some years. Then over to our main figures. These are the familiar comparable headline KPIs for Fortum Group's third quarter and the first three quarters of 2024. All numbers in this presentation are for continuing operations, if not otherwise mentioned. Considering all external factors, I'm satisfied with our performance. The result is well supported, especially by our optimization. Last year, power prices were at the higher level. So this year, our comparable operating profit has declined both for the quarter and on a cumulative basis. The main reasons were lower spot and hedge prices, which mainly affected the result of our generation segment. In the third quarter, comparable operating profit at group level amounted to 158 million euros. Our comparable EPS also declined both on quarterly and cumulative basis. Our operative cash flow decreased somewhat compared to last year and was 1.2 billion during the first nine months and 349 million euros in the third quarter. And finally, the balance sheet, and most importantly, our leverage. Defined as financial net debt to comparable EBITDA, leverage was at 0.4 times for last 12 months compared to 0.5 times at the end of last year. Then over to the commodity markets. I want to say a few words about the market development, and here you see the main commodities. European gas prices increased quarter on quarter, but remained in the 30 to 40 euro per megawatt hour range during the quarter. The volatility within the quarter can be attributed to supply side risks, like significant Norwegian maintenance, loss of Russian pipeline gas via Ukraine by December 2024, and weather impact on LNG supply. The gas price volatility was reflected in continental power prices, while the impact on the Nordic power prices was limited. In the Nordics, high precipitation amounts in July and August led to well-filled hydro reservoirs in some of the key hydro areas. This resulted in very low spot prices in August before a gradual recoil upwards took place in September. In addition to that, good Nordic nuclear availability during the summer months and 3 terawatt hours higher Nordic wind supply in the third quarter contributed to the lower July and August spot prices. In late August and September, the Finnish power balance became very tight, as Halkiluoto 2 faced an unplanned outage at the same time as large planned transmission restrictions from Sweden and Lovisa 1 maintenance took place. In Finland, the price also coupled strongly with Estonia on low wind days, especially after the Estlink 2 transmission line came back online in early September after a long break. During periods with low Finnish wind power output, prices spiked, creating another month with high spot price volatility. And then over to the financial KPIs, and I 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. The comparable operating profit for the third quarter amounted to 158 million euros and was 921 million euros for the first nine months. Looking at the last 12 months, comparable operating profit totalled 1.280 million euros. In the third quarter, our comparable net profit and comparable EPS decreased. That was mainly due to the lower result in the generation segment. The main reason for the lower result was lower spot power and hedge prices. Our comparable EPS for the last 12 months was at 1.17 euro compared to 1.28 euro in 2023, so slightly down. The only KPI which improved was leverage. As Markus already said, our leverage continues to be very low, being at 0.4 times at the end of the third quarter. Let's move over to the income statement and look at certain items in more detail. As we have communicated our own efficiency improvement program, you can see that our annual fixed costs are slightly above 1 billion euros. The target is to reduce the fixed cost base by 100 million euros, excluding inflation. Now the trend has turned and our fixed costs show a small decrease. Our actions to start to have an effect and the fixed cost base have slightly gone down. Items affecting comparability for the quarter turned negative from last year, however, was related to fair value changes. In the third quarter, our finance cost net was 3 million euros positive and included net interest expense of 5 million euros offset by positive impacts from nuclear-related items. On a cumulative basis, finance cost net was also 20 million euros positive, impacted by one-time items from the second quarter, i.e. interest income from the Belgium tax case, which we won. We have managed to get some higher interest income for our cash. Simultaneously, our loan amount is lower compared to the year-end, which is reflected in lower interest costs. Taxes have been at a normal guided level this year, around 19%. And finally, just noting that in our balance sheet, we have now recorded the asset in the recycling and waste business of 768 million euros as asset held for sale. Then over to the result, waterfalls for comparable operating profit. Let's look at the waterfall at the third quarter comparable operating profit for our segments. Compared to previous year, the result for our generation and consumer segment decreased, while other operation segment improved. In the generation segment, comparable operating profit decreased by 86 million to 176 million euros, mainly due to the lower spot and hedge prices. Lower hydrovolumes to the lower inflow and somewhat higher cost for the co-owned nuclear production negatively affected the result further. The result contributor of the Peelax wind farm was marginally negative. The district heating business improved its result mainly due to the higher sales price for power in Poland. In our consumer segment, comparable operating profit decreased by 4 million to 6 million euros, mainly to the lower gas sales margin, the effect of which was partly offset by the reduced scope of the regulated price gap for the end users in Poland. In another operation segment, comparable operating profit improved by 22 million euros and was 24 million euros negative. The result of circular solution business was flat. The main reason for the improvement was higher internal charges for our services of enabling functions. When looking at the comparable operating profit for the first nine months, the same trend continues. The generation segment result declined, while both consumer solution and the other operation segment improved. The result deviation is basically related to the generation segment. The generation segment's comparable operating profit decreased by €336 million to €953 million. The main reasons for the decline in the generation segment were the clearly lower spot and hedge prices, which was partly offset by higher hydrovolumes. The result of the renewable business was positively impacted by the sales gain of 16 million euros from the divestment of the remaining share in the Indian solar power portfolio of 185 megawatts. The result contribution of the BELUX wind farm was slightly positive. 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 the higher sales price for the heat and power in Poland. Comparable operating profit in the consumer solution segment increased by 33 million to 60 million euros. This is mainly due to the higher electricity sales margin, reduced scope of the regulated price gas of end users in Poland, and higher sales margin for value-adding services. This improvement was partly offset by lower gas sales margin in Poland and higher amortization of customer acquisition costs. In the other operation segments, the comparable operating profit improved by 38 million euros and was 92 million negative. The improvement was mainly related to higher internal charges for services of enabling functions and slightly higher earnings in the circular solution business. Then some comments on our financial position, debt and liquidity. Our financial position continues to be very strong, and this supports our objective to maintain a credit rating at least triple B flat. When considering our capital allocation principles, we balance between leverage, investments and dividends, while always keeping the credit rating in mind. Next, let's go through the reconciliation of our financial net debt in the third quarter. The opening balance sheet at the end of second quarter, our financial net debt was 851 million euros. In the third quarter, the operating cash flow was 349 million euros. This effect was slightly offset by investment of 140 million euros. The change in interest-bearing receivables amounted to 4 million euros, while FX and other FX totalled 16 million euros. So, at the end of the third quarter, our financial net debt was 655 million euros, and the ratios for the financial net debt to comparable EBITDA is at 0.4 times for the last 12 months. Looking at our debt portfolio and maturity profile, I want to highlight a few things. We use bonds as a 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. At the same time, our liquidity position is strong. We have ample liquidity reserve of 7.6 billion with 4.3 billion of liquid funds and 3.3 billion euros of undrawn committed credit facilities and overdrafts. With a 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. The cost for our 5.3 billion euro loan portfolio is 3.9%, while the interest income that we get for our 4.3 billion euro liquid funds is 3.5%, which means that the net interest cost is in a good balance. When looking at our cash position going forward, I would like to remind that we paid the second tranche of dividend now in October. And during Q4, we are expecting to get the proceeds from the divestment of the recycling and waste business, the settlement compensation from Vestas, the interest income from Belgian tech case and the proceeds from the divestment of our stake in the Indian 185 megawatt solar portfolio. So with this, over to the outlook section. The outlook section comprises in essence four elements. Guidance for our 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. Already in connection with our first quarter result, we disclosed new weights for our different price areas. Then starting with the hedges. At the end of the third quarter, the hedge price for the remainder of 2024 was at 44 euros per megawatt hour and the respective hedge ratio was 80%. The hedge price for 2025 is at the same level than last time at 42 euros, and the hedge ratio increased by 5 percentage points to 65%. Today, for the first time, we disclose hedges for the year 2026, 40% hedged at 41 euros per megawatt hour. There are no changes to the annual optimization premium. It continues to be at the level of 6 to 8 euros per megawatt hour 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%. I also want to repeat that in Sweden there will be a revision of the property taxes from 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 on that level for the five-year period, including 2030. Part of this cost will show up in our fixed cost line. Then a recap of our guidance for capital expenditures. Our capital expenditures 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 in July, we also lowered our capital expenditures 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. The capital expenditure for the years 2024 to 2026 is expected to be 1.6 billion euros. This includes maintenance and excludes potential acquisitions. Today's announcement of the Polish decarbonization investment does not change this guidance. Please note that if we would not disclose new investment project, our total capital expenditure would go down over time towards 300 million euros after 2026. We target to reduce our recurring annual fixed cost base by 100 million euros, excluding inflation, gradually until the end of 2025, with full effect from the beginning of 2026. The divestment of our recycling and waste business will reduce our group 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 recurring 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, over to you.