Transcript H1 2021 results earnings call

Transcript
H1 2021 results earnings call
31 August 2021, 11:00 am Vilnius / 9:00 am London

Disclaimer
In case of any differences between Lithuanian and English versions of the document, English version should be
referred as main.

Corporate participants
Darius Maikštėnas, Chairman of the Board, CEO
Darius Kašauskas, Member of the Board, CFO
Jonas Rimavičius, Head of Corporate Finance
Ainė Riffel-Grinkevičienė, Investor Relations Officer

Presentation
Ainė Riffel-Grinkevičienė, Investor Relations Officer

[Slide No 1]

Good morning, and welcome all to the Ignitis Group H1 2021 Earnings Call. I am Ainė Riffel-Grinkevičienė and
today I will host this call. Together with us we also have Group CEO Darius Maikštėnas, CFO Darius Kašauskas
and Head of Corporate Finance Jonas Rimavičius. Our management will firstly introduce you with the most
recent business highlights, then financial results and full year outlook for 2021. Afterwards, we will have a
questions & answers session. Please, I encourage you to participate. You can send your questions on your
screen, or just dial in on the line.

[Slide No 2]

So, thank you, and Darius Maikštėnas, please begin.

[Slide No 5]

Darius Maikštėnas, Chair of the Management Board, CEO

Thank you, Ainė. Good morning. Second quarter of 2021 was another great quarter for Ignitis Group. Therefore,
we finished the first half of this year with very strong financial and operational results. EBITDA growth was 30.5%,
up to EUR 168.4 million in adjusted EBITDA. The growth mainly was driven by new capacities of Green
Generation. We also had some temporarily positive results on Networks segment due to increased volumes.
Those effects will level out until the end of the year. Also, we had better results in Customers & Solutions.
Therefore, we reiterate our guidance for 2021 to reach adjusted EBITDA of EUR 300–310 million. Also, we are
continuing our commitment to our shareholders on returns. We are aiming to distribute dividends for the first half
of this year, subject for EGM approval, amount of EUR 43.75 million. And we are continuing to maintain a very
robust financial position with our BBB+ stable outlook rating from S&P.

Strategy-wise, we are continuing to build our new project portfolio. This time we have a significant event of
entering renewables market of Latvia by adding three new early-stage-development wind projects in Latvia with a
total amount of 160 MW. We have some deviations in developments of Pomerania and Polish solar portfolio I, but
overall, all the rest projects are in line with expectations.

On Sustainability & Governance, we are continuously progressing on climate action, we are streamlining our
activities on social and governance and, therefore, we are getting recognition. We are very proud to see that our
goal to improve our ESG rating with MSCI by 2024 is already reached and we already received a rating of ‘AA’,
which puts us among the leaders in this industry and significantly above utility group average, which is ‘BBB’.

[Slide No 6]

A few more words about Networks. Adjusted EBITDA growth was 13.4% higher, comparing to the year before. As
I said, it was impacted by two factors: one is the higher RAB value due to investments, and also some effect of
higher volumes, which is to level out by the end of the year. We have higher CAPEX investments, the majority of
those we dedicated to resilience and improvement to the networks and maintenance. We also had some

2 | H1 2021 results earnings call

rescheduling of smart metering project. The contract with the main contractor and supplier is already signed, and
we made some adjustments to the project schedule to improve security and reliability of the entire system, and to
comply with the highest standards of cybersecurity, and also to have reasonable costs for our customers and the
network while implementing those 1.2 million smart meters. Therefore, the project will last until 2025. Having said
so, I should note that already in 2023, about 80% of all electricity distributed in Lithuania will be measured and
accounted already by installed smart meters.

[Slide No 7]

On the Green Generation, we have significant growth in EBITDA, which is driven by increased capacities and a
launch of Kaunas and Vilnius CHP units, waste-to-energy units. So, the total capacity increased by 43 MW, while
investments, if to compare with the first half of 2021 to 2020, is significantly lower due to the fact that we already
finished the largest projects of construction of both Kaunas and Vilnius waste-to-energy units as well as
Pomerania. Looking further to the pipeline, we are progressing quite well, according to our expectations to reach
1.8–2.0 GW by 2024 and 4 GW by 2030.

[Slide No 8]

New additions of early-stage wind farms in Latvia, adding to the pipeline, while on Pomerania, due to the typical
development project risks, we are experiencing about 6-months delay of COD, and that will happen in Q3 vs what
was expected in Q1. The farm is already constructed and is producing electricity, just the final COD date and
issuing of the licence is expected to be later. In Polish solar portfolio I, we are initiating negotiations with the
developer to make some adjustments to our agreement due to the fact that during the last CfD auctions no tariffs
were acquired, so we are initiating negotiations to update the bidding strategy and the pricing of the projects. All
the rest of the developments: Kruonis fifth unit, preparation for offshore wind development and Mažeikiai WF
development are well on track as expected.

[Slide No 9]

A few more words about Flexible Generation: here we see also growth of 20.8% of adjusted EBITDA, comparing
to the first half of last year. That was impacted due to the higher clean spark spread in the market, so good
results for Flexible Generation in this part of the year as well.

[Slide No 10]

On the Customers & Solutions: We also have growth that was mainly driven by our gas activities and, in
particularly, quite significant impact is from revaluation of gas inventories. Also, on the Customers & Solutions,
we are progressing very well on liberalisation project while maintaining strong leadership positions in the B2C
segment overall and as an independent supplier. With that I would pass the floor to Darius Kašauskas, our CFO
to talk more about financials.

Darius Kašauskas, Member of the Management Board, CFO

[Slide No 12]

Thank you, Darius. I am pleased to present financial highlights of Ignitis Group. As Darius already mentioned, we
progressed well in H1 2021, which is also reflected in our financial results. In terms of adjusted EBITDA, we
delivered more than 30% growth, reaching EUR 168 million, mostly as a result of, first of all, our developments in
Green Generation segment with the launch of Kaunas CHP and Vilnius CHP waste-to-energy unit, and better
results from Kaunas hydro-powerplant. On top of that, growth was also driven by favourable changes in gas
market prices in the Customers & Solutions business segment, better results of commercial activities of CCGT
unit in Flexible Generation and higher distributed volume effect in Networks, which will level off during the year.
As a result of higher adjusted EBITDA, our adjusted net profit number was also attractive, as it recorded more
than 40% growth, driven by higher adjusted EBITDA. Reported net profit decreased by 32%, mainly driven by
Kaunas CHP option fair value decrease, which is, in essence, a one-off and a non-cash item related to
accounting matters.

3 | H1 2021 results earnings call

[Slide No 13]

Breaking down our adjusted EBITDA, we can see that Green Generation and Networks were the largest
contributors to the overall adjusted EBITDA level. Specifically, Green Generation contributed EUR 14 million and
Networks added another EUR 13 million. Meanwhile, Flexible Generation was the smallest contributor to the
EBITDA.

[Slide No 14]

Turning to returns: Our adjusted return on capital employed number was higher on H1 2021, compared to the
same period last year. The increase, compared to H1 2020, was mainly driven by increase in adjusted EBITDA of
last 12 months. Looking at the right side, our adjusted ROE also increased by 1.2 pp to 9.3%.

[Slide No 15]

Our investments in H1 2021 decreased by 59%, compared to last year, as major projects are near completion or
are already completed. Meanwhile, our portfolio of new investments projects is in a stage where CAPEX is still
less intense. Additionally, for Vilnius CHP biomass unit, the majority of investments will start in H2 of this year.
Investments in Networks segments grew by EUR 7.9 million, compared to the last year, as a result of
maintenance of CAPEX of electricity distribution network.

[Slide No 16]

As for our free cash flow and net debt metrics, we showcased solid performance in H1 2021 as well. Specifically,
our free cash flow increased by almost 300% as a result of lower investments and higher EBITDA. Meanwhile,
our net debt decreased by 4.8% due to positive free cash flow and partly offset by paid dividends for the second
half of 2020.

[Slide No 17]

Finally, looking at the net debt bridge, higher FFO was the largest driver of net debt reduction in H1 2021, and
overall improved our leverage metrics. Thus, our Net debt/Adjusted EBITDA ratio decreased from 2.1 times to 1.7
times, and our FFO/Net debt ratio increased from 52% to almost 56%. With this I will give back to Darius
Maikštėnas to conclude the presentation.

Darius Maikštėnas, Chair of the Management Board, CEO

[Slide No 19]

Thank you, Darius. So, this strong financial performance let us to continue with our guidance for 2021. We
maintain our guidance to reach the adjusted EBITDA by the end of the year for the entire year of EUR 300–310
million. Main drivers of this growth and the results are, as I said before, good results and capacity increases in
Green Generation as well as growth in Networks segment.

[Slide No 20]

So, summarizing key takeaways, key messages about our results: adjusted EBITDA growth driven by Green
Generation; we are maintaining outlook of EUR 300–310 million of adjusted EBITDA for this year; in line with
Dividend Policy, we intend to pay EUR 43.75 million in dividends for the first half of the year; we entered Latvian
renewables market with new wind project portfolio of 160 MW; and we are progressing further in our ESG
position, with upgrade of MSCI ESG risk rating from ‘A’ to ‘AA’, so we are continuing to execute our strategy of
creating sustainable future, without coal, nuclear and reaching net-zero. Thank you.

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Q&A

Ainė Riffel-Grinkevičienė, Investor Relations Officer

[Slide No 21]

Thank you for the presentation and we are open now for your questions. Currently, we have only one question,
so I really encourage you to send those in. So, the first question is with regards to Pomerania WF. It’s in
Lithuanian, so I will try to translate it. Pomerania WF has yet to reach COD, but the turbines are operating. Does
it operate at the full scale? And what price Pomerania receives for electricity generated? How it will change after
that?

Darius Maikštėnas, Chair of the Management Board, CEO

Thank you, Ainė, Jonas will answer about Pomerania’s financials.

Jonas Rimavičius, Head of Corporate Finance

In terms of Pomerania, you are right. The wind farm is fully constructed, all the turbines are connected to the grid
and all of them are generating electricity. This electricity is being sold to the market, however, in terms of revenue
recognition, they are not yet recognised, but are being accrued on the balance sheet, so when the official COD is
reached, those revenues will be transferred to P&L. In terms of the price level, currently, the generated electricity
is being sold at the market prices, and after the COD, the tariff will be received. Currently, the market prices are
even higher than the tariff, so, effectively, we are earning a premium on that.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

We have one question on the line.

Telecommunications operator

Thank you. Ladies and gentlemen, if you wish to register for a question, you can always press a star, then ‘1’ on
your telephone keypad. We have one question, coming from the telephone and it comes from the line of Igor
Kuzmin from Morgan Stanley. Please, go ahead.

Igor Kuzmin, Morgan Stanley

Good morning, thank you, I would like to maybe just expand on it a little bit, back on the situation with the Polish
auctions the projects with the Sun Group. So, I think I find this incorrectly, so you are starting to renegotiate the
terms of the project, could you elaborate a little bit what does this mean, and, maybe, what were the reasons why
the project was not, sort of, selected as part of the auctions and whether there is still a probability that there is still
a chance that the projects will be selected in the future auctions, and then, if not, would you think that the project
would still would go ahead on the merchant basis? Just want to understand the situation a little bit more. Thank
you.

Jonas Rimavičius, Head of Corporate Finance

In terms of adding a bit more detail on renegotiations process, so, why the projects did not win in the last auction.
The reason is quite straightforward, you know, the bidding level was too high, and we see them economical even
at the lower levels. That’s why we opened up the renegotiations process with the developer, in order to see what
can be done in terms of amending the bidding strategy and some other conditions in order to ensure the
maximum success of this project. So, you know, in short, we still think that these projects can be successful, but
in order to do that, the bidding strategy has to be changed. And, if we are successful in renegotiating, these
projects are likely to go forward, if we are not successful, then the worst-case scenario, you know, we shake
hands with the developer and go in different directions.

5 | H1 2021 results earnings call

Telecommunications operator

Another question coming from the line of Anna Antonova from J.P.Morgan. Please, go ahead.

Anna Antonova, J.P.Morgan

Good morning, thank you for the presentation. Quick question on our side relating to the investments of this year.
We’ve seen that in Green Generation segment in the first half of this year investments totalled just EUR 14
million. You commented that there were some projects rescheduling and some other factors affecting the spend.
How should we think about the second half of this year in term of investments in Green Generation, but also in
Networks segments? Should we expect to see in the second half of this year relatively similar levels of
investments compared to the first half of this year or we may see some accelerated spend? Thank you.

Jonas Rimavičius, Head of Corporate Finance

Yeah, so I will take this one as well. In terms of the overall level of investments, we do expect to see a pick-up in
the second half of the year. However, you know, the decline in Green Generation part is kind of a natural
slowdown, because Pomerania, Vilnius CHP waste-to-energy unit, Kaunas CHP, those kinds of investments
were completed, and several of our projects are still in the earlier phase, which means that the majority of
CAPEX will be falling partly in the second half, but mainly in the 2022 or even 2023. So, in short, we expect to
see some pick-up in the second half, however, it won’t be a major pick-up, so to say.

Darius Maikštėnas, Chair of the Management Board, CEO

And on the Networks side’s investments, we expect to have continuous growth of investment level with the
CAPEX spending on the Networks. So, you can expect a bit more of growth here as well.

Anna Antonova, J.P.Morgan

Understood, thank you, very much.

Telecommunications operator

Once again, ladies and gentlemen, if you need to register for questions on the telephone, you can always press a
star, followed by ‘1’ on your telephone keypad. Our next question from the line of Ekaterina Smyk from Bank of
America. Please, go ahead with your question.

Ekaterina Smyk, BoA Merrill Lynch

Yes, good afternoon, actually I have submitted the questions, you know, via online form, but I will still ask them. I
mean, I have three questions. The first one is on your guidance for 2021, which remained unchanged, and
expected adjusted EBITDA growth of 3–6% compared to 30% delivered in the first half. I mean obviously you do
expect the decline in the second half so I just wanted to understand, where this decline will mainly come from?
The second question is on the CAPEX for the smart metering programme in Networks segment. So how this one
changes, because of expected delay in completion to 2025 vs 2023 expected previously? Does the total amount
change and, if no, how this CAPEX should be received across years? And the third question is on Vilnius
biomass unit, you know, the one that was delayed, what is the status of that one? When do you expect to see the
completion of the project? Have you been able to find the developer post the issues with the previous one?
Thank you.

Darius Maikštėnas, Chair of the Management Board, CEO

Thank you. So, I will start from the last question about Vilnius biomass unit. So, it’s going according to the
schedule of the rescheduled plan, and we are planning to launch by the end of next year. On the guidance, there
are mainly two effects taken into account, why we are still keeping the level of conservatism in our guidance.
First, I mentioned that the growth, which was driven on the Networks segment by the volume increase has to
level out by the end of the year. The second one, which has some level of uncertainty is related to results of
Customers & Solutions of revaluation of inventory of gas assets. So, therefore, we keep this guidance

6 | H1 2021 results earnings call

unchanged. And the first question about the smart metering programme, the amount of smart meters and level of
CAPEX remains unchanged. Just the start of the actual roll-out is starting a little bit later due to the requirements
related to cybersecurity issues. So, overall, the CAPEX will be deployed during the second half of 2022, down to
the end of 2025, in more or less linear manner.

Ekaterina Smyk, BoA Merrill Lynch

Understood, thank you. And just following up on the guidance question: what is the rough impact of the higher
volumes on the Newtorks segment, the one that you expect can be levelled out in the second half?

Jonas Rimavičius, Head of Corporate Finance

So, it’s around EUR 10 million, in that range.

Ekaterina Smyk, BoA Merrill Lynch

Understood, thank you, so much.

Telecommunications operator

We have a follow-up question, coming from the line of Igor Kuzmin from Morgan Stanley. Please, go ahead, sir.

Igor Kuzmin, Morgan Stanley

Thank you, just wanted to stay on this topic of Networks segment adjustments in the forthcoming period for the
extra profit that are being generated in the first half of this year due to a higher demand. So, if I understand
correctly, some of the adjustment could happen in the second half of this year. Could there be some adjustments
spilling over into 2022, and if yes, by how much, roughly? Thank you.

Jonas Rimavičius, Head of Corporate Finance

So, in terms of the adjusted EBITDA, we will show the fully adjusted, and the full impact will show this year. In
terms of the reported EBITDA, some of it might fall over to the next year. But in the annual numbers, in the
adjusted EBITDA, you will see the fully eliminated volume impact.

Igor Kuzmin, Morgan Stanley

So, the total cumulative, sorry, it’s just I make sure I understand this, but the total cumulative effect is still EUR 10
million, right?

Jonas Rimavičius, Head of Corporate Finance

So, currently, because we only know the volumes for the first half of the year, right, so that impact is EUR 10
million, so this will be eliminated. What will happen in second half, you know, it’s still unknown. Maybe we will
catch up naturally, so there will be no falling over to the next year, and maybe it will increase even further. So,
you know, the second half is still unknown. In any case, remember, that the Networks business is effectively RAB
times WACC plus depreciation, that is fixed.

Igor Kuzmin, Morgan Stanley

Yes, perfect, thank you. And if there is by any chance the parameter which have been released, just one follow-
up from me, which have been on the press release from Ignitis Group on the 3 August, with the new WACC
parameters starting 2022. Is there any chance that these parameters may change still into the year end, or this is
pretty much final?

Jonas Rimavičius, Head of Corporate Finance

No, this is fixed, the WACC level is fixed for the next year.

7 | H1 2021 results earnings call

Igor Kuzmin, Morgan Stanley

Right, thank you, that’s all from me.

Telecommunications operator

We have no further questions on the telephone. Please continue.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you very much, for the questions and answers. We have a few more questions received in writing from the
audience. So, the first one is: could you please explain a bit in more detail the EUR 23.5 million option fair value
decrease in Kaunas CHP? Thanks.

Darius Maikštėnas, Chair of the Management Board, CEO

Jonas, can you elaborate a little bit more about mechanics?

Jonas Rimavičius, Head of Corporate Finance

Sure, so, in a way, it is an accounting thing. We have an option, right, so there is in the shareholders’ agreement,
there is the clause for deadlock situations. So, when the two shareholders cannot agree, there is a put option
granted to our minority partner and we have a call option on the other side. And, due to the accounting rules, we
have to account for that put option, and the mechanics previously was that the value of the put option is based on
the book value of the investment. Now, after the COD of Kaunas CHP, this has transitioned to the market value
of Kaunas CHP, and, since the market value is higher than the book value, this effectively means that the value
of the put option also increases. And, you know, since it is a put option and, from the accounting perspective, a
liability from our side, as the value of that put option increased, the P&L impact of that was a negative EUR 23
million impact.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you, Jonas. We have one more question: The adjusted EBITDA guidance looks quite conservative, given
the H1 performance, shall we regard this as a conservatism, or do you see a real slowdown in H2? Do you have
procedures for when guidance will be changed? Perhaps, a percentage threshold?

Darius Maikštėnas, Chair of the Management Board, CEO

So, overall, we already talked about this topic. At this point of time, we are maintaining our guidance for 2021.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you, Darius. The next question is: regarding electricity market liberalisation stage 2 and stage 3 in
progress, how you evaluate current progress results for Ignitis? How market share will change after the
liberalisation?

Darius Maikštėnas, Chair of the Management Board, CEO

So, we really are happy on our results of the first stage. We are maintaining a very strong market leadership
position, due to a very strong brand and a very strong value proposition to our customer base, and we are
expecting to continue in similar pace during stage 2 and stage 3.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you, Darius. Our next question is: hi, how much are you planning to spend on CAPEX in 2021? And could
you also give an update to the 2021–2024 period CAPEX plan, if there are any changes?

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Jonas Rimavičius, Head of Corporate Finance

Yeah, so, in terms of 2021, we are not providing a guidance, but as I mentioned previously, we expect some pick-
up compared to the H1 numbers. In terms of 2021–2024 CAPEX plan, we see no changes in that. The decline in
Green Generation CAPEX is a temporary one, and these investments will pass through to the next years. So,
effectively, we keep the guidance for 2021–2024 overall CAPEX level.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you, Jonas. One more question: at what stage now is own share buyback process? In EGM’s proposal,
you calculated the dividends per share with and without buyback. Does that mean that the probability of buy-back
to be done before the dividends are paid is rather high?

Darius Maikštėnas, Chair of the Management Board, CEO

That means that both options are possible, and, at the current stage, we are providing all the current information
that is relevant.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you, Darius, for answering. One more question: after the liberalisation stage is done in Lithuania, what are
the plans to mitigate electricity purchase price increase in the Nordpool, as these costs won’t be covered by the
governmental surcharge system as it is now?

Darius Maikštėnas, Chair of the Management Board, CEO

So, as in similar way how we deal with B2B segment, we are hedging our portfolio on the market, and in parallel,
we are growing our own Green Generation asset base, which helps us also mitigate volume and price
fluctuations in the market.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

We have further two questions: what is the latest situation with the stabilisation shares? How many shares are
still held?

Jonas Rimavičius, Head of Corporate Finance

Yeah, so, there is no change regarding that. As of now, all the stabilisation shares are held by the stabilisation
agent, so, the nominal value of these is around EUR 45 million.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you, Jonas. And the last question so far: regarding smart meters project, CAPEX will remain the same.
Are there any legal secured steps then with the provider to cap price of smart meters themselves, services? What
extra OPEX costs are planned to this project due to this delay? Could you please share at least the range?

Darius Maikštėnas, Chair of the Management Board, CEO

So, as I explained before, no changes in expected CAPEX or OPEX, so basically, what is changing is just the
schedule of the project, which is starting a little bit later and ending at the end of 2025. Same OPEX and same
CAPEX as it was planned.

Ainė Riffel-Grinkevičienė, Investor Relations Officer

Thank you, Darius. Currently, we have no further questions. So, this now concludes our earnings call. Thank you,
again, for joining us, it’s our pleasure. In case you would have any further questions, please do not hesitate to
contact our team directly. Stay safe and have a lovely day.

9 | H1 2021 results earnings call