E.ON SE (ENAKF) CEO Johannes Teyssen on Q3 2019 Results - Earnings Call Transcript

E.ON SE (OTCPK:ENAKF) Q3 2019 Earnings Conference Call November 29, 2019 3:30 AM ET

Company Participants

Carsten Thomsen-Bendixen - Interim Head of Communications and Political Affairs Group Spokesman

Johannes Teyssen - Chairman and Chief Executive Officer

Marc Spieker - Chief Financial Officer

Conference Call Participants

Operator

Ladies and gentlemen, welcome to the Telephone Conference of E.ON. This conference is being recorded. During the presentation, your lines are muted. After the presentation, you will have the opportunity to ask questions. [Operator Instructions] The conference will now start.

Carsten Thomsen-Bendixen

Yes. Good morning, ladies and gentlemen, dear colleagues. Welcome to the presentation of the third quarter results. It's Sunny here in Essen. We are in an excellent mood here. We have our CEO, Johannes Teyssen; and CFO, Marc Spieker. Mr. Teyssen will give you a general introduction and then Mr. Spieker will talk about the figures.

Johannes Teyssen

Well, thank you very much. Good morning from Essen, ladies and gentlemen, and welcome to the presentation of our nine-month results. The takeover of innogy is complete. A few days after the European Commission’s clearance, we took ownership of RWE’s stake and the stock tendered to us in the voluntary public takeover. Together with the innogy stock acquired, we now have a 90% stake in innogy, which is thus a majority-held E.ON subsidiary. We are now preparing for the merger squeeze-out that we announced.

We are on time. Our team put the 18 months since the announce of the transaction to very good use in preparing for the integration. It’s like running. If you warm up properly, you can get off to a fast start.

The future executive positions in the first and second levels below the Management Board are almost filled completely, almost equal shares with employees of E.ON and innogy. We increased the number of female executives in the first level below the Management Board by approximately 25%. We met with our current and future executives two weeks ago. The mood was and is excellent. Our executives’ high degree of motivation and their eagerness to shape the future were palpable.

As decided at E.ON’s Annual Meeting in May 2019, after the completion of the innogy takeover, we increased the Supervisory Board to 20 members for the time being. And E.ON appointed RWE, Rolf Martin Schmitz, entrepreneur Ulrich Grillo, and U.S. management consultant, Deborah Wilkens as shareholder representatives. In addition, Monika Krebber, Stefan May, and René Pöhls joined the E.ON Supervisory Board as employee representatives.

The leadership remains in the hands of the current members of the Board. Going forward, innogy will be led by Leo Birnbaum, who will remain a member of the E.ON Management Board and be responsible for the integration of innogy, together with Bernhard Günther, and Christoph Radke. We replaced the side of innogy’s Supervisory Board, I am now the Chairman.

We’ve now also made important decisions regarding our business locations. We announced that Essen and Dortmund will remain key locations. Essen is our corporate headquarters and also houses the management functions for our network business and other countries where we operate. Essen will also be the home of our innovation center. Dortmund will remain the headquarters of Westnetz, which is by far E.ON’s biggest distribution system. Munich will also continue to be an important location for E.ON’s sales operations and house key functions of our nationwide power and gas business in Germany.

You can see that from the timing of these decisions we continue to move forward at a rapid pace. In view of our competitive environment, we can’t and don’t intend to spend a lot of time focusing on ourselves. Many of our competitors are agile and aggressive and it’s good. Our focus in the new energy world is on customer solutions and distribution networks.

If want to be successful in this new world, we must be fast and become even faster to always do our best for our customers and stay ahead of the competition. Until the integration is fully completed, we have a marathon ahead of us. But from time-to-time, we’ll have to pick up the pace, and sometimes we’ll be running straight uphill. But we trained forward intensively for 18 months.

We have a clear vision of the new E.ON’s future, but of course, we cannot. Few weeks after day one, give you a comprehensive strategic outlook. That will take some more time. Today, we want to give you a first look at the new E.ON’s finances. In many respects, our nine-month numbers, to which innogy contributed for just 13 days, necessarily present a distorted picture.

For example, our balance sheet contains innogy’s entire debt, whereas our income statement only shows two weeks of innogy’s EBIT. But the colleagues in Marc Spieker’s team have achieved something significant by working day and night. They’ve rapidly put together an initial solid overview. And that of course was only possible by the team led by Mr. Günther.

I’d like to conclude with some brief remarks about our operating business. On balance, Energy Networks as well as Customer Solutions are delivering a very solid performance. In particular, our operating in Germany, our biggest market, remains very strong. This applies to E.ON on a stand-alone basis and to innogy. Together, the two companies have added more than 380,000 customers. 380,000 customers we added with the exception of the United Kingdom, we’ve added roughly 150,000 customers in the other European countries.

I am personally very pleased that the performance of the underlying operations is fully in line with expectations. The earnings recovery that Marc Spieker announced at the end of the first quarter is well under way. Third quarter EBIT at our UK business was 20% above the prior year figure, while therefore be on our way to achieve our forecast for full-year 2019.

The truth is that the UK remains a difficult market, and not just for us. When we released our half-year numbers, Marc Spieker clearly stated that we won’t accept persistent losses and will find commercial solutions. Now, just a few weeks after day one, we are taking action. We’ve put together specific proposals for how our UK operations can be consistently profitable. We’ll now discuss the proposals with the unions in the UK.

The UK market has been challenging for several years. We’ve reported on this repeatedly. Churn rates are high, margins slim, and the price caps introduced this year have exacerbated the situation. No company operating there has been spared these difficulties. Not E.ON UK and certainly not innogy subsidiary Npower, which was already in a difficult state even prior to the regulatory agency’s latest market interventions.

At the half-year mark, we sent two clear messages. First, you won’t see an E.ON business that is consistently unprofitable. Secondly, we’ll swiftly assess Npower’s precise situation and just as swiftly find a commercial solution.

Despite all the challenges, the substantial efforts of management and employees have enabled our UK subsidiary, which has launched new, innovative products and services to remain profitable. In our assessment, however, Npower won’t be able to achieve a turnaround on its own. As you have seen, we therefore concur with innogy’s assessment. We put together proposals for our entire UK business to get back on track for success.

What are we going to do? First, Npower’s residential and small and medium-size enterprise customers will be served by E.ON UK on a shared IT platform. The industrial and commercial customers be served separately. Npower’s remaining operations will be restructured over the next two years.

These measures will enable us to leverage considerable effects, primarily in IT infrastructure, because we’ll then be operating just one IT landscape instead of two separate systems and teams. To ensure successful implementation, Mike Lewis, the CEO of our E.ON UK business, will replace Paul Coffey as CEO of Npower, thereby creating a direct bridge between the two companies. Mike Hawthorne, an experienced restructuring manager, is also joining the Npower Board.

E.ON UK is also stepping up its ambitious cost-cutting efforts without losing sight of its customers. This is based on leaner, increasingly digital processes that also improve the customer experience. This year, E.ON UK defended its market position with innovative and attractive products. Since the middle of the year, E.ON UK has been supplying only green electricity and has since stabilized its customer base.

These restructuring measures will involve an expense of £500 million. Taken together, we're striving to enable E.ON’s UK operating performance to achieve a turnaround. From 2022 forward, we expect our combined UK business to deliver at least £100 million in EBIT and thus to generate positive free cash flow.

So far my introduction. Now, Marc Spieker will talk about the figures.

Marc Spieker

A warm welcome from me as well on E.ON’s quarterly press conference. In the previous quarters, our operating business performed as expected in the first nine months of 2018. Sales rose by €1.9 billion year-on-year to €23.6 billion, increased by €1.9 billion.

Nine-month adjusted EBIT for the E.ON Group declined by 6%, from €2.4 billion to €2.2 billion. Johannes Teyssen already mentioned it because, as planned, our earnings have recovered as the year has moved forward, our adjusted net income of nearly €1.2 billion was just 3% below the prior year figure.

The business operations at renewables transferred to RWE are included in these key performance indicators until September 18, 2019. A separate innogy segment, consisting mainly of network and sales businesses, contributes to our business performance after this date.

At the nine-month mark, Energy Networks’ adjusted EBIT of just over €1.4 billion was at the prior year level. Earnings in Germany declined, primarily because of the non-recurrence of positive one-off items recorded in the prior year period. Adjusted EBIT in Germany was also adversely affected by a reduction in the allowed return on equity coinciding with the beginning of the third regulatory period for power.

However, these effects were largely offset, primarily by significant investments and thus the expansion of our regulated asset base. We continued to benefit from a positive business performance in Sweden as well.

Adjusted EBIT at Customer Solutions declined to €224 million from €360 million in the prior year period. Nine-month adjusted EBIT in Germany was below the high prior year level. The principal factor was a narrower gross margin in the power and gas sales business in the first quarter. This decline will largely balance itself out as the year moves forward.

Adjusted EBIT in the United Kingdom was also significantly lower than in the prior year period, primarily because of the regulatory price caps that took effect in 2019, as I explained in earlier quarters.

Our nine-month earnings are line with our expectations. Due to the consummation of the innogy acquisition, we are adjusting our earnings forecast upwards. We now expect the E.ON Group’s 2019 adjusted EBIT is expected to be between €3.1 billion and €3.3 billion, adjusted net income between €1.5 billion and €1.65 billion. Previously, we’d anticipated adjusted EBIT of €2.9 billion to €3.1 billion and adjusted net income of €1.4 billion to €1.6 billion.

The decline in earnings resulting from the disposal of substantially all of our renewables business will be more than offset by the new innogy segment’s earnings. We reaffirm our dividend proposal of €0.46 per share.

Our economic net debt now stands at just over €39 billion. As Johannes Teyssen already mentioned, unlike our operating earnings, this figure already reflects the complete debt of innogy. In addition, we recorded a number of items in the third quarter related to the transaction because, as you know, the asset swap with RWE is not yet fully completed from a legal point of view.

Allow me to provide some context for the anticipated, but nevertheless significant increase of our economic debt. Our regulated network business now accounts for a significantly larger share of our portfolio. That’s why last year rating agencies clearly indicated they would accord the new E.ON a much higher debt-bearing capacity. Today, our strong operating performance and the anticipated synergies from the integration of innogy already enable us to reaffirm our objective of a strong BBB flat rating.

Structurally, approximately half of our provisions, half for pensions, half for nuclear asset-retirement account for just 50% of our economic debt. In some cases, the payment obligations related to these provisions extend over several decades. IFRS requires that we disclose these very long-term payment obligations at fair value.

Interest rates are currently very low. As a result, our balance sheet shows very high obligations, even though our payment profile in the years ahead hasn’t changed at all. Rating agencies view this effect in our favor.

The low interest-rate environment is of course also an opportunity for the other 50% of our economic net debt. For example, in October and November, in other words, after the closing of the innogy transaction, E.ON issued corporate bonds totaling €2 billion.

Following our first Green Bonds in August with a volume of €1.5 million, this was our second placement of a bond with a 0% coupon. These refinancing terms underscore the financial market’s trust in the new E.ON.

In terms of our funding, we already have an excellent example of how E.ON is already leveraging the first synergies shortly after the acquisition of innogy. The new €3.5 billion syndicated credit facility we concluded in October replaces two previously existing syndicated credit facilities, E.ON SE’s €2.75 billion and innogy SE’s €2 billion facility, and thus reduces our financing costs.

Other synergies will follow. I’d like to state again that we’re determined to achieve our objective of leveraging €600 million to €800 million in synergies by 2022.

Ladies and gentlemen, E.ON is very solid financially after the innogy takeover. On balance, we’re therefore ideally positioned to play a big role in shaping the new energy world.

That concludes our commentary on our numbers. We are now happy to take your questions.

Johannes Teyssen

Thank you very much, Mr. Spieker. We are looking forward to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Tom Käckenhoff, the first.

Unidentified Analyst

We would like to know how many jobs will be eliminated at Npower in the UK and in which period, and then we'd also know whether you also planned job reductions in E.ON UK? Well those would be my first question.

Johannes Teyssen

Mr. Käckenhoff, I think the first press releases in the UK, that's a very painful adjustment process. Npower has 1,800 employees, good number. 4,500 work in B2C functions. Now we're talking to the unions about the adjustments that will be required. That's first of all talking to the employees, co-determination and then we'll have concrete figures and I can’t say anymore today. And for E.ON UK there too, we strive for efficiencies.

So there will be a continuous adjustment process, but in view of no profitability, practically nobody earns any money in this business how the adjustments are inevitable, and of course, they will be coordinated with the unions. And the unions talk about 4,500 jobs. That really is an order of magnitude that could be, as I said, figure that would be all in B2C employees. That is the target group which of course is the target group which will be concerned by these measures, but I cannot say anymore today without speculating.

Unidentified Analyst

And now if I understood correctly that E.ON UK there will also be job reductions.

Johannes Teyssen

Well, no. Over the years, we have made intensive efforts, which have been reinforced over the years. We only communicate exact figures internally in the company. And on the E.ON side, we already announced an adjustment program which is now being implemented. So I think I should emphasize the fact that to the efforts on the E.ON side are not going to be soft, while we're talking about Npower as well. Both these processes are going parallel.

Unidentified Analyst

Now how many jobs will be lost there? Can you say any at Npower? Can you…

Marc Spieker

Once again, I would refer to what Johannes Teyssen said. Let's talk about with the – let’s talk with the unions and the works councils and then we can say more. Their assemblies at all locations and it's not right that the Board can be concrete. In the press, we first talked to the employees. We do that in all countries that way. But how many, well we'll give you the figures, the prominent figures.

Operator

Christoph Steitz.

Unidentified Analyst

Good morning from Frankfurt. I have few questions about Npower. Can you tell us why the Npower B2B business, why does that not go to E.ON UK? I can imagine why, but I'd like to hear from you and then I'd like to know it appears that Npower not much of it remains – is the Npower brand going to disappear. Well, yes, those are the two questions that I have.

Johannes Teyssen

Well, it's approximately 2,000 employees in E.ON UK at present. The B2B business is a profitable very good business at Npower and we for the moment like to position it separately and then decide which options we might use at given time. Let’s say for the moment, it's just to continue development and we leave open all other options.

Whether the brand, whether the customers will be migrated to the E.ON platform, but to what purpose you will see innogy brand in the market. The B2B business, we continue that prem to one additional question briefly. So strategic option for the B2B business of Npower, all options remain open. Thank you, Mr. Steitz.

Operator

[Indiscernible]

Unidentified Analyst

Yes, I have two questions. You just confirmed your target up to 5,000 shops maybe cut, 1,600 Essen, and Dortmund 3,400, where are the others or did you – where you are able to reduce the number. I imagine that this does not include the UK jobs. And when will you do – with the shares 9% to 10% that you do not own yet?

Johannes Teyssen

UK is not included in any programs or announcements, that's logical because when we made these announcements that Npower would go to a Scottish company, so we’re not able to include that. We're not counting on any synergies as far as the 10% of the remaining minority shareholders. In September, we already announced our plans that we're going to do. We squeeze-out that process – start that we go on the assumptions that no later than the implementation in the third quarter of 2020. We will have acquired all the remaining minority shares.

Unidentified Analyst

My main question was the 5,000 that figure remains 5,000 jobs – process of making it more concrete?

Johannes Teyssen

We always have to figure what is the most cost-effective solution in-sourcing, outsourcing. We do not announce any specific locations for the time being. And this overall target is not going to be surpassed, but could there be more jobs eliminated in Essen and Dortmund than the ones last week – a week after we made that announced, we're not going to speculate on any additional figure. So that's the situation at these locations and we talk to the employee representatives at these locations and the rest is step-by-step, either for us it's not – we cannot speculate on new figures every day.

Unidentified Analyst

Where is the potential, where could you reduce the number of employees elsewhere?

Johannes Teyssen

It's relatively obvious. I already said the adjustment projects are very obvious in terms of the Holding Company, IT support functions, so there are many locations. We put the emphasis on all of these locations are going to concerned. Sales is also cleared, so we have double customer organizations, so those are the obvious focal points at various locations in Germany and in other countries. Thank you very much.

Operator

[Indiscernible]

Unidentified Analyst

Good morning. I wanted to ask whether you can say anything about the cost of the innogy integration overall and how much of it already falls into this year?

Johannes Teyssen

We talked about the £500 million. That's a structural adjustment. When the customers are migrated to our platform, we will buy them at market value, but that has no effect outside of our group. But of course, the minority interest of innogy, of course, as long as the sell exist are taken into account, but I think this will be the relevant order of magnitude.

Those are the figures for the UK business. And the integration of innogy all together, that's a factor of 1.2. So there you'll get €1 billion for all businesses outside of UK. 1.2, take approximately €1 billion that’s 1.2x €600 million to €800 million then €500 million for the UK business in addition.

Unidentified Analyst

Okay, thank you.

Johannes Teyssen

Are there any further questions dear colleagues?

Unidentified Analyst

Yes. Good morning. One question for UK. Yes, and Npower have how many customers right now and how many have they lost in the course of the year?

Johannes Teyssen

Innogy currently has approximately slightly over 3.4 million and E.ON has approximately 5 million customers. And the losses in this year on the E.ON side in the first nine months, we lost approximately 400,000 customers and at innogy it’s comparable order of magnitude. But these losses are already integrated in the figures we gave you today. Yes, thank you very much.

Operator

Mr. Steitz has another question.

Unidentified Analyst

Yes, I would like to hear from you about – we looked at the stock price development since 2018, and when E.ON performed much what's does – the market not understand with the E.ON transaction is this in line with what you expected or is there something hasn't been understood by investors concerning the strategic vision? What do you think about that?

Johannes Teyssen

Well, I think I really wouldn't like to speculate about stock price. It’s something obvious, where do you start? What does the market do about a company before anything happens? So I think for RWE that really gave them great amount of freedom what's their future, well, secondly if you buy a company like innogy, you pay a premium in the purchase price. And you have to finance this premium by generating synergies.

So the seller practically the owners of the company are happy that they get a premium for a business they don't need to conduct anymore and to the owners of the buyer, well, let's see whether this really works out. If it can be refinanced, is it working out, and that of course that's taken into account in the stock price. Our shareholder base is 20% bigger than before, so you have to multiply the stock price by 1.2 to compensate for the equity.

But we think it's any reason for us today to draw any conclusions. I think this is just as in soccer. If you after eight minutes, you’ll call already first results. It has to be done after 90 minutes. We're happy with our shareholder base as we’re working on keeping our promises and we’ll realize that and then talk about in this spring.

Unidentified Analyst

And then one further question [indiscernible] E.ON invested a great deal, is it good that it goes online right now?

Johannes Teyssen

I don't know whether you heard. If I look at it through very large classes, I can see that perhaps the Federal Ministry of Economy, the idea of continuing any efficient power plants for a longer time and to not permit that the – most efficient power plant in Europe go online. Well, I think you can assume that the compensation will be the highest and because the – you have to pay the entire price whereas for the older power plants that have been written off, there is very little in value that remains there. But I think environmental policy and economic sense, well, we have to accept. I think we need to go to a world without coal-fired power plants, but I think in the transitional phase, we have to use the most efficient plants.

Carsten Thomsen-Bendixen

The list of questions is empty. Are there any questions? Last call for question, the list remains empty that means we end this call here. Dear colleagues, thank you very much for your participation and your interest in our company. And we wish you a wonderful weekend. Thank you very much. Bye.

Operator

Thank you very much for your participation. The conference is now ended.