Earnings Transcript for ENGIY - Q3 Fiscal Year 2019

Operator: Good morning, ladies and gentlemen and welcome to the conference call on ENGIE Financial information as of September 30, 2019 organized by ENGIE along with Ms. Isabelle Kocher, Chief Executive Officer of ENGIE and Ms. Judith Hartmann, Executive Vise President and Chief Financial Officer. For your information, this conference is being recorded. Thank you for holding. Ms. Kocher, I now hand over to you.

Isabelle Kocher: Good morning. We are very happy to share with you our good nine months results. We are here together with Judith Hartmann, our CFO; and Paulo Almirante, our COO. We will start with a short presentation and then we'll be happy to answer your questions. So our nine months 2019 results show, as expected, an acceleration in earning growth. We are very proud of these results. They show that our strategic choices are bearing fruits. We confirm our full year 2019 guidance and 2019 is the first year of a new period after three years of in-depth restructuring and strategic repositioning. And we then enter in a net growth phase, following our in-depth transformation. As I have mentioned, the last quarters have demonstrated a sustained upturn in performance over the last quarter. On the Nuclear front, we have delivered the major improvement in our operational availability, as promised, and this is a key achievement. Our momentum in Renewables, wind in particular, has accelerated dramatically providing clear evidence of our execution success towards achieving our aggressive ambitions for growth in capacity and profit in the coming years. Looking at the first nine months of 2019. Our impressive organic core growth of 14% was driven by

Judith Hartmann: Thank you, Isabelle, and good morning, everybody. Let's now look at our nine months performance by business line. First, Client Solutions. Our businesses have delivered a sustained trend improvement since the first quarter. Commercial development is positive with nine months revenue up 10%. COI increased 4%, excluding the favorable €50 million settlement between SUEZ and the Argentine government earlier this year. This result was driven in part by higher decentralized energy tariffs and good on-site generation performance. Certain service segments are seeing some margin pressure and like Isabelle just mentioned, we are working on shoring up our operational activities there and industrializing our offerings and operations. This will create greater cost efficiency as we scale up, driving operating leverage and higher profitability. We are also further scrutinizing the economics of each service sector and becoming more selective in where we compete, focused on differentiation in our capabilities and solutions. Meanwhile, we are seeing sustained growth in business volume and profit across most of Europe. Operationally, we continue to increase our installed district heating and cooling capacity to 5.6 gigawatt and backlog continues to rise reaching close to a year of revenues. Looking ahead to the full year outlook. We expect a continuation of a similar rate of COI growth as we've seen year-to-date. This is in the mid-single-digit range towards the lower end of the range we communicated at H1, in light of new and increased business development costs and the competitive dynamics that I've mentioned. With respect to strategic business development, I would highlight that our launch of ENGIE Impact is a milestone, furthering our industry leadership in designing and enabling the zero carbon ambitions of our clients. Finally, I would like to draw your attention to our upcoming quarterly investor seminar next week, focused on Client Solutions. Our business line and IR teams look forward to setting out a strong and transparent platform of insight for the investor community. They will focus on the details of our growth strategy and how the business works operationally and financially across several complementary business models. Let's now move to Networks where COI was down 8%, primarily driven by gas transmission as in the first half. This is in line with our expectations and due to two factors for gas transmission

Isabelle Kocher: Thank you, Judith. So in conclusion, I would simply reiterate our key takeaways for today. First, our nine month 2019 results show as expected an acceleration in earning growth. We are very proud of these results. And I would like to thank all my colleagues who have driven this remarkable acceleration in performance, not just for our notable success this year, but more importantly for the steady progress that we have achieved in recent years in building the underlying strategic and capability platforms, which are responsible for this much improved momentum. And I have great conviction that this progress will continue to deliver sustained underlying performance momentum well into the future. So let's now take your questions. Operator over to you.

Operator: Thank you. [Operator Instructions] We will now take our first question from Emmanuel Turpin of Societe General.

Emmanuel Turpin: Good morning, everyone. My first question is on customer solution please. I would love to understand what has deteriorated in the business during the summer that drew you to reduce your guidance outlook for the full year. You did mention some problematic businesses in Canada that was already highlighted in the first half. Did the situation -- is the situation worse than you thought in those contracts? Or are there other headwinds that have materialized across the board? I would love to get more granularity there. Second question would be a quick one on renewables. Would you help us quantify the farming down gains booked in nine months last year or nine months this year? Or if you can give us an absolute number for the two periods maybe the delta between the two years? And lastly how much do you expect to book in the fourth quarter in terms of U.K. capacity mechanism revenues please? Thank you very much.

Judith Hartmann: Emmanuel on the first question which is around Client Solutions. Quite frankly if you look at the actual numbers, the decrease is relatively limited of the outlook. We're talking about €10 million €20 million. And so the difference really is mostly coming from some of the restructuring that was mentioned. Canada no news. But there is a couple of other contracts that we're working on. But also never forget that we are investing into this activity and you saw our launch of ENGIE Impact and that is obviously creating some short-term costs. But quite frankly not worried about this because like I said, it is relatively small in terms of numbers of what the changes from what we said in the first half. Then you had a question on the DBSO sell-down for renewables to nine months year-to-date. And in fact it is an interesting question because there's some timing difference this year versus last year. This year it's roughly €50 million I would say in the first three quarters. There was almost nothing last year but then of course last year we had a very significant fourth quarter. And so we will see that tamper out over the total year. And then lastly, your question on the U.K. capacity market reinstallation, it is going to be roughly €60 million so quite significant and very positive for us.

Emmanuel Turin: Thank you

Operator: We will now take our next question from Peter Bisztyga of Bank of America. Please go ahead.

Peter Bisztyga: Good morning. Three questions if I may. Firstly, I was wondering if you could just quantify the amount that you expect to be clawed back in the Networks' business over the next two years from these North-South revenue transfers. Similarly for Brazil if you could sort of quantify what compensation is being deferred into 2020? Just following up on Emmanuel's question on renewables. Has your DBSO outlook for the fourth quarter changed over the last sort of three months? Are you expecting less than you were before? And if so, does that mean that there's going to be more phased in in early 2020? And then just finally on Networks, that business was down 8% in the nine months you're targeting sort of low single-digit decline in the full year. I sort of probably see TAG making up for all of that an improvement. So, I'm just wondering what else you're expecting to improve in the fourth quarter in Networks. Thank you.

Isabelle Kocher: So, Paulo on the first question.

Paulo Almirante: So, on the claw-back in transmission in France discussions are taking place with the compensation chamber. So, it is too early at this stage to give a figure for that.

Peter Bisztyga: Okay.

Paulo Almirante: On the farm -- so [Indiscernible] is a process a legislative process in Brazil which is established to compensate the dispatch of dams which are out of the merit order, but to manage the reservoirs for water use. We expect this legislation to be put in place during 2020 but it depends on several chambers in the Brazilian legislative process. And so we don't know yet when it's going to happen. We are talking here of figures of the order of €100 million.

Isabelle Kocher: Judith on the DBSO?

Judith Hartmann: A very important question. Thank you. No there's no change to our outlook in the fourth quarter. We had mentioned in the past roughly €100 million and that's what we are expecting. Obviously, the team's very much aligned on driving for this. Then you had a question on what is driving the difference between the Network's nine months growth rate versus the total year growth rate which is improving. Some of this quite frankly is a normalization because you will remember as I mentioned we had in the first half some pressure mostly on Storengy on additional cost and price adjustments. And then of course like you mentioned there will be a positive impact on TAG that is coming in in the fourth quarter.

Peter Bisztyga: Okay. Thanks very much.

Operator: We'll take our next question from Arthur Sitbon of Morgan Stanley. Please go ahead.

Arthur Sitbon: Hello. Thank you for taking my question. I have two. The first one is could you quantify and walk us through the one-offs that you benefited from in the fourth quarter of 2018? I know there were abnormal gains in asset rotation and renewables, but I was wondering if there were any other positive one-offs last year? And the second question is whether you could please comment on where consensus stands basically at €9.9 billion EBITDA for 2019 and €2.5 billion net income for 2019? Thanks a lot.

Judith Hartmann: I will take the second question first. On the total year outlook basically is your question. We're confirming guidance today very happily. What I would say is the -- you can expect the EBITDA indication also to be in line. There is as always certain risks and opportunities that we still work that could come in the typical ones foreign exchange price Nuclear. But what I would say is the teams are working -- those could be by the way upsides or downside. And the teams are really working to make sure that we secure this outlook and so very comfortably we are confirming our outlook for the total year. Then you had a question on fourth quarter unusual to last year. Quite frankly, I would mention mostly -- you mentioned yourself already the DBSO. And in addition to this I would mention the LDs that we had in Thermal in Netherlands at the end of last year which were close to €90 million.

Arthur Sitbon: Thank you.

Operator: [Operator Instructions] We will now take our next question from Aymeric Parodi of UBS.

Aymeric Parodi: Hi, good morning everyone. Thank you for taking my question. I have one question on the French hydro. Is there any update regarding the renewal of the CNR La Compagnie Nationale du Rhône concession and also including a change in the French Tax -- Hydro Tax? Thank you.

Isabelle Kocher: On the CNR situation no news. That is to say good news since we had very positive discussions with the EU Commission. And then we expect to get a positive answer from the Commission and then effectively to get the renewable the renewal of this -- or more precisely the extension of this concession for 18 years. On hydro tax Judith?

Judith Hartmann: No changes that I'm aware of. Thank you.

Aymeric Parodi: Thank you.

Operator: We will now move to our next question from Vincent Ayral of JPMorgan. Please go ahead.

Vincent Ayral: Hey good morning. I noticed that there's a fair amount of focus this morning on the change of the slight changes of the COI at the division level something we didn't really see at H1 when you increased it. So, I just wanted to check one thing mathematically speaking. We have here a slight deterioration of the COI indication versus H1. But actually if I do some math I still see a tad better overall COI indication than was done at Q1 whilst you've not -- I mean you've lost, you expect now the Brazilian compensation for 2020. So net-net you would say everything else being equal does that mean that you are slightly better still than at the beginning of the year in terms of outlook? Thank you.

Judith Hartmann: Yes. That is a fair statement. It's slightly better at the group level. Yes.

Vincent Ayral: Thank you very much.

Judith Hartmann: There are some changes in between of course some puts and takes, but it is setting out to be a very strong year.

Isabelle Kocher: I would like to insist on that. We gave some explanation on each of our businesses. And what you can take from what we say is that in each of our businesses, we have good intrinsic performance and dynamic. This is very true for Renewable because we what we see this year if we treat the hydro conditions and the French hydro conditions is that the intrinsic performance of this business line is extremely dynamic. And it will be the case also for the end of the year. Even if we have some sell downs profits that will be more for the beginning of 2020, the intrinsic dynamic is extremely strong. And for Client Solution the same I would say. We started with the Q1 that was atypical as we said. And everything we see in this business is extremely good. And our commercial performance is strong. We had a 10% increase in our revenues which is of course extremely impressive. So we are extremely confident in the ability of these businesses to be extremely strong in the years to come.

Operator: We will now move to our next question from Piotr Dzieciolowski of Citi. Please go ahead.

Piotr Dzieciolowski: Good morning, everybody. I have two questions. Can you quantify maybe the amount of the effects on the collaterals you expect in the fourth quarter how much that could improve? And also on the net debt do you see any other potential effects such as revision of the provision? Do you see any pressure of the nuclear provisions to go higher for the full year? And the second question. I wanted to ask about the cost of the TAG debt acquisition. How much is that? That seems to push the overall contribution lower to your figures.

Isabelle Kocher: Judith?

Judith Hartmann: So the line unfortunately was not very good. I'm not sure I understood your first question. I will -- let me start with the net debt. Like we said the increase is to some extent temporary because there's about €1 billion swing between what we would have done three quarter year-to-date and this year because we paid the interim dividend last year in October. Then of course there is an increase of debt because of we invested into TAG €1.6 billion as you know. And plus we are doing I would say about €1 billion of investments into Renewables. So and that obviously is translating you saw it in the big increase that we're seeing in our installed capacity for renewables. The Nuclear provision serves the triennial revision that is ongoing. It's too early to talk about it. We will -- if three years ago with any guidance on calendar we should know at the end of November at the beginning of December. All I can saying is there is constructive exchanges at this stage. And we will obviously keep you posted on this when we have more news. You had a question on the cost of TAG. It's about 5%. And then if you maybe -- if you want to maybe repeat what your question -- your first question was. Like I said the line was breaking up while you were speaking.

Piotr Dzieciolowski: Okay. I wanted to ask you --you said there would be a reversal of the collaterals on your trading positions for the net debt that can swing in the fourth quarter. Can you quantify how much would the effect assuming let's say market I know there's a huge amount of volatility. But assuming we are where we are on the different FX and commodity prices?

Judith Hartmann: Okay. Yes I got your question, okay. So indeed the CFFO like I mentioned is negatively impacted by the margin calls. Those are related to the economic hedges linked to our generation and supply activities. And they will recover over time when the related transactions will be settled. So we are expecting a favorable impact on the fourth quarter.

Piotr Dzieciolowski: Okay.

Judith Hartmann: Thank you.

Piotr Dzieciolowski: Thank you.

Operator: [Operator Instructions] We will now move to a follow-up question from Aymeric Parodi of UBS. Please go ahead, sir.

Aymeric Parodi: I think my questions were answered already. Thank you.

Operator: There are no further questions over the audio at this time.

Isabelle Kocher: Okay. So we'd like to thank you for having attended this call and we wish you a very pleasant day. Goodbye.

Operator: Ladies and gentlemen, this concludes this conference call. Thank you for your participation. You may now disconnect.