ENGIE : Transcript H1 2021

H1 2021 RESULTS TRANSCRIPT

30 July 2021

Aarti Singhal

Good morning, everyone. It's my pleasure to welcome you to Engie's first-half 2021 results.

In terms of the agenda for this morning, as usual, first you will hear from our CEO, Catherine MacGregor. She will be followed by our CFO, Judith Hartmann. Catherine will then come back to conclude the presentation. And, following which, as usual, we will open the lines to Q&A. And my team and I we're here to assist you, so do please reach out if we can be of any help. And now I hand you over to Catherine.

Catherine MacGregor

Thank you very much, Aarti. Before I start discussing the H1 results, I would like to acknowledge with deep sadness the news of the tragic accident two weeks ago involving employees of Sigdo Koppers Ingeniería y Construcción (SKIC), a subcontractor of Engie Brasil Energia. SKIC is engaged in the construction of the Novo Estado transmission line in Brazil. You will be aware that seven workers tragically lost their lives in this accident, and four we hospitalized. All our thoughts are with the families of all those affected in this very difficult time. As you would expect, safety is our number-one priority at Engie. A very thorough investigation is underway, prior to safe resumption of activities, and to ensure that every lesson is learned to maximize safety for all workers.

As we now move to the financial results, I am pleased to report a strong performance for H1, with a strong recovery from last year. On an organic basis, EBIT increased 44% to €3.1 billion, and Net Recurring Income Group share grew 67% to €1.4 billion. This major improvement is a testament to the commitment of our teams, who helped drive a strong operational performance.

We also maintain our focus on delivering on our strategy towards net-zero and wider ESG goals. One of our key targets is to increase the Renewables capacity in our portfolio. And, with an additional 1.2 GW commissioned in H1, total Renewables capacity increased to just over 32 GW.

We are progressing on our coal-exit plan. Most recently, with exclusivity rights signed for the sale of the Jorge Lacerda thermoelectric complex in Brazil, which includes a coal plant.

And, on gender diversity, we are 24% women in management, and this of course remains an area of focus for us in the coming years.

And now a few words on the guidance upgrade, before I discuss H1 performance in more detail. Our results have benefited from a strong overall operational performance, where we were able to largely offset the impact of the Texas extreme weather event and achieve high levels of availability for our Nuclear assets. In addition, the effect of colder temperature in France in H1 and a more favorable pricing environment are contributing to

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higher expectations for the full year. As a result, we are upgrading the guidance for 2021. We now expect Net Recurring Income Group share to be 200 million higher, in the range of €2.5 billion to €2.7 billion, and this is based on a revised EBIT indication of between €5.5 billion to €5.9 billion.

Alongside this strong financial performance, we maintain continuous momentum on the strategic plan that I presented to you in May. Group simplification and improving the business mix are at the heart of our plan, and we have taken several important steps forward. EQUANS was created as scheduled. And today we have announced the partial sell-down of GRTgaz. The partial sale of GTT was completed in May and the sale of Engie EPS was completed in July.

We have also progressed on geographic rationalization, with agreements to exit a further four countries in H1, and we are targeting to be operating in under 30 countries by 2023.

Since the start of this year, we have stepped up on performance improvement and we are enhancing efficiencies across businesses and support functions. We have achieved €50 million of net EBIT contribution through procurement cost savings and operational actions. And so we are on track for €100 million of net EBIT contribution for the full year. Overall, our target remains to achieve 600 million net EBIT contribution by 2023.

A major pillar of our simplification program is the creation of EQUANS, a new leader in multi-technical services that is truly empowering transitions. With competencies that include electrical installation, HVAC and cooling, as well as digital, EQUANS is operating in sectors that benefit from strong tailwinds.

From 1 July this year, EQUANS is a separate division within Engie and we are moving now, at pace, on the future shareholding structure. There is strong interest in this business. The process is underway. We will continue to consider all options and select the best one that maximizes the future growth potential and the value of EQUANS. We expect to be in a position to update you in H2 with the completion targeted in 2022.

Operationally, EQUANS has driven a strong recovery from last year's Covid impacts, with growth in both order intake and backlog, and Judith will cover the financial performance later.

This morning, we announced another important milestone in the execution of our strategic plan, to rebalance exposure from French gas networks towards Renewables and other infrastructure assets. Engie has entered into an agreement with our longstanding French partners Caisse des Dépôts and CNP Assurances for the sale of an 11.5% stake in GRTgaz. This transaction implies valuation to RAB of 148% and evidences our shared vision with our partners on the long-term role of gases, that will become increasingly renewable and will enable net-zero through a balanced energy mix. This is absolutely essential for ensuring affordability, flexibility and system resilience. This transaction will reduce Engie's net financial debt by €1.1 billion and is expected to be completed before the end of this year.

Let me now briefly touch on the EU Fit for 55 roadmap, with which our strategy is so fully aligned. Obviously, this is a positive development for Renewables. Around 40% of our pipeline is in Europe and we should benefit from this improved Renewables framework.

Energy Solutions has expertise in energy efficiency and low-carbon distributed energy infrastructure. It's well positioned to drive this decarbonization effort. One of our key targets for this GBU is to develop additional capacity of 8 GW in low-carbon distributed energy infrastructure by 2025.

Our Gas networks are working towards building a strong position in renewable gases, especially in hydrogen. We are aiming to have renewable hydrogen production capacity of 4 GW by 2030.

And Thermal, which will continue to play a key role in facilitating Renewables growth through mitigating intermittency.

Four global business units, strongly positioned for this welcome Fit for 55 roadmap.

Turning now to operational progress in H1 this year, starting with Renewables, a strong focus for the Group, with organic growth being the prime driver. In H1, Renewables output rose by 22%, with higher production across all of our technologies (Hydro, Wind and Solar). We commissioned 1.2 GW, mainly in Western Europe, Brazil and the US.

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On the construction program, our teams are managing through the cost inflation and pressures on global supply chain, and we are progressing on delivering the 3 GW in 2021.

Ocean Winds, our joint-venture with EDPR for offshore wind, continues to progress in this high-growth market. Recently, they secured a 25-year Contract for Difference for offshore projects in Poland, totaling 370 MW. We signed a further 1.4 GW of green corporate PPAs, mainly in our priority regions of North America, Europe and Latin America. We continue to see strong demand from a range of clients across consumer goods, technology and industrial sectors.

Commercialization of Renewables requires expertise, and particularly around market and customer access, hedging and risk management, portfolio management optimization and forecasting. We are convinced that Engie has a competitive edge here, and we have built this expertise not only through the growth of our own Renewables portfolio but also through our presence of over 20 years in energy markets. Through our GEM activities, we have market access to a base of over 800 large multinational clients.

A few words now on the performance of the Networks global business unit, which has been marked by cold weather, particularly in France, where we distributed higher volumes and also saw record withdrawal from gas storages, demonstrating, once again, the importance of gas during periods of high energy demand.

In France, we continued to progress on the deployment of gas smart meters, with over 1 million installed in H1, taking the total number of smart meters installed to over 8 million.

Sixty-seven biomethane sites were connected to our networks, taking the total to 271 units. Overall, France is targeting, for biomethane, to reach 10% of the gas mix by 2030.

Outside France, the integration of TAG has progressed well, and TAG is expanding commercially. We are progressing on the construction of Gralha Azul. With first testing in July, the power line is on track for COD in the fall of this year.

Our Energy Solutions GBU is helping clients with their decarbonization targets. Through France Relance, for example, we secured projects with industrial clients totaling 100 MW of low-carbon onsite generation, more than doubling the historic win rate.

These projects benefit from average contract duration of 15 years and with double-digit margins. And, since last year, our total distributed infrastructure capacity has increased by 800 MW.

Energy Solutions is also focusing on performance improvement through various initiatives, which include geographic rationalization, contract management to improve margins, and a stronger cash focus.

And now I will pass it over to Judith for a review of our financial performance. Judith.

Judith Hartmann

Thank you, Catherine, and good morning, everyone. Thanks for joining our call today.

Indeed, we had a very strong H1 and I'd like to thank our teams for their tireless work to enable this level of performance. Before going through the financial figures in detail, let me take a step back and remind you of the value creation framework we presented in May. Our focus is to create value using three levers.

First, we are driving simplification by exiting non-strategic activities and geographies. Our 3-year target of 9 to 10 billion disposals is clearly on track. Catherine shared the great progress made in H1. On GRTgaz, I'm particularly pleased to continue our longstanding relationship with our French co-investors Caisse des Dépôts and CNP Assurances based on a shared vision of the value and future role of gas networks.

Our progress this half means that we are now expecting our full-year 2021 disposals to be around 2.5 billion while maintaining the related dilution at up to 100 million. Strategically, disposals enable us to simplify and reallocate capital.

Second, we're improving our business mix: in H1, growth Capex was primarily organic and allocated 90% to Renewables, Networks and Energy Solutions, supported by significant growth opportunities and, as we said in

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May, we expect growth Capex of between 15 to 16 billion in the 2021 to 2023 period. These investments should be rather evenly phased across the period, with 2021 growth Capex expected to be around 5 billion.

Third, we are enhancing our performance through operational and support functions excellence. This half, we moved swiftly on loss-making activities, on delivering procurement cost savings, and on optimizing structures in various geographies. We have already delivered 50 million of net performance at the EBIT level and we're on track to deliver 100 million for full-year 2021.

I'm very pleased with the upgraded guidance and will come back to it later.

Throughout this transformation, we will ensure alignment to our climate commitments alongside maintaining a strong investment-grade balance sheet.

Moving now to our Group figures for H1 on the next slide, EBIT was up 42% on a gross basis and 44% organically, driven by progressive Covid recovery, colder temperature and a robust operational performance.

At the EBIT level, the negative foreign exchange impact of 107 million was mainly due to the Brazilian real depreciation. This headwind was largely offset by the 87 million positive scope effect. This arose primarily from the disposal of 29.9% of our shares in Suez, which contributed negatively in H1 2020. In addition, we had the positive scope-in effect from the Hydro assets we acquired in Portugal.

I will detail organic EBIT evolution by activity in the next slides.

Net Recurring Income Group share was up 86% on a gross basis and 67% organically. Net Income Group share was also up significantly year on year, reaching €2.3 billion.

We delivered strong cash flow generation with CFFO increasing by 1.3 billion, and total Capex was slightly higher year on year. This increase was mainly driven by timing our Nuclear provision funding.

Financial net debt increased by 1.8 billion, reflecting the dividend paid in May, while CFFO is broadly offsetting gross Capex.

We improved our credit metrics, including the economic net debt to EBITDA ratio, which reduced from 4x to 3.7x compared to the end of 2020.

Let's now look at the EBIT evolution. EBIT organic growth was very strong, at plus 44%, and, as you can see on this slide, Client Solutions, Nuclear and Networks contributed significantly to the 940 million increase in total.

Moving now to each activity, starting with Renewables.

On a gross basis, Renewables EBIT evolution was slightly negative, mainly due to a negative FX impact. Renewables EBIT was up 14% organically, driven by a strong Hydro performance. Indeed, we benefited from higher achieved prices in France, and in Brazil despite the drought conditions there. The 3.3 GW Wind and Solar assets we commissioned over the last 12 months also contributed to this organic growth. In total, we more than offset the negative one-off 90 million impact from the Texas extreme weather in February 2021. I'm pleased to say that, with our integrated business model, our local systems play enabled us to largely offset this negative one-off at the Group level.

We invested 700 million growth Capex in Renewables in H1, our commissioning activity was up 38% year on year, and we brought 1.2 GW capacity online.

Let me take you through Networks on the next slide.

Networks EBIT evolution was very positive, both on a gross and an organic basis. Foreign exchange and scope effects had a limited impact, with some pressure mainly from the Brazilian real, partly offset by the scope-in effect of the additional 10% of TAG.

Organic EBIT was up 21%. This was mainly driven by around 200 million positive temperature effects in Europe, especially in France.

Networks also benefited from higher contribution from Latin America, mainly through the construction progress of power transmission lines in Brazil.

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We invested 700 million growth Capex in Networks over H1, primarily in the two power lines in Brazil, and in our gas smart meter deployment in France.

Moving to Client Solutions, you can see major recovery from the significant Covid impact in 2020. Although we still had restriction in H1 2021, they were much less stringent than last year. This, combined with our improved processes, enabled a significant but not quite full recovery, both for Energy Solutions and for EQUANS.

Energy Solutions EBIT also increased notably in district heating, driven by colder temperature. This was partly offset by lower performance of some start-up activities. There was also a positive scope effect. Again, Energy Solutions benefited from the disposal of shares in Suez, which contributed negatively in H1 2020.

EQUANS' EBIT also rose due to good performance in insulation projects. Remember that this activity is typically weighted to H2, and therefore we expect EQUANS' full-year EBIT to be similar to 2019 levels, in the range of 350 to 450 million. EQUANS' commercial performance led to a strong increase in order intake and a higher level of backlog.

The following slide shows the evolution for Thermal and Supply activities.

Thermal EBIT was impacted by a negative foreign exchange evolution due to the US dollar. EBIT was down 7% organically, mainly due to a drop in energy margins in Chile. Here, the electric system was affected by a series of negative events leading to an increase in spot sourcing prices due to lower production, thereby reducing our PPA margins.

Our European merchant plants benefited from higher ancillaries and captured spreads. Overall, their contribution was broadly stable in comparison to a very good H1 2020.

Supply EBIT was significantly up, due to the Covid recovery and to colder temperature.

And now let's look at Nuclear and Others.

Nuclear posted an improved EBIT contribution mainly reflecting better achieved prices and a very high availability of 92% for Belgian units. D&A was lower, mainly following the 2020 impairment.

EBIT for Others decreased. GEM's contribution normalized following a particularly strong performance in H1 2020, which had benefited from positive one-offs and better market conditions, with high volatility. These year- on-year negative evolutions were partly offset by the Covid recovery.

French B2B Supply activities from Entreprises et Collectivités had a higher contribution, mainly driven by Covid recovery and colder temperature.

GTT's contribution normalized and, following the partial sale at the end of May 2021, GTT is accounted for under the equity method starting June.

Moving to cash flow generation, CFFO was 4.3 billion in H1 2021, up 1.3 billion year on year, mainly driven by the following effects.

First, operating cash flow was 700 million higher, reflecting the EBITDA increase.

Second, the overall change in Working Capital Requirements had a positive effect of 700 million, driven by a positive change from energy management activities. This was largely due to margin calls resulting from a commodity price increase. On the other hand, this was partly compensated by a rise in gas prices, weighing on inventory and client invoicing.

Please note that the change in Working Capital Requirement for Other activities was flat, which represents a good performance for a period showing growth.

And, finally, the outlook for 2021.

We are now expecting Net Recurring Income Group share to be in the 2.5 to 2.7 billion range, which is an upgrade of 200 million versus the initial guidance, based on an EBIT indication in the 5.5 to 5.9 billion range, an upgrade of 300 million.

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