thomson reuters streetevents edited transcript · 10/19/2012 · thomson reuters streetevents...

THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPTFUM1V.HE - Q3 2012 Fortum Oyj Earnings Conference Call

EVENT DATE/TIME: OCTOBER 19, 2012 / 1:00PM GMT

THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us

©2012 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited withoutthe prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliatedcompanies.

http://www.streetevents.com

http://www010.streetevents.com/contact.asp

C O R P O R A T E P A R T I C I P A N T S

Tapio Kuula Fortum - President & CEO

Markus Rauramo Fortum - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Benjamin Leyre Exane - Analyst

Martin Young Nomura - Analyst

Haakon Levy DNB Markets - Analyst

James Brand Deutsche Bank - Analyst

Robert Schramm Macquarie - Analyst

Deborah Wilkens Goldman Sachs - Analyst

Michael Ridley Mizuho Bank - Analyst

Per Lekander UBS - Analyst

Peter Bisztyga Barclays - Analyst

Inglo Becker Kepler Capital - Analyst

Emmanuel Turpin Morgan Stanley - Analyst

P R E S E N T A T I O N

Tapio Kuula - Fortum - President & CEO

Yes, good afternoon, ladies and gentlemen. Together here in Helsinki, I have our new CFO Markus Rauramo and our previous CFO Juha Laaksonen.And we have the same procedures as before so that Markus and myself we will give short presentations and after that we are ready to answer yourquestions.

I hope that you have all material available because I am referring to that material and those pages in material. And starting from page 3 a verydemanding market environment that was really demanding the power consumption as about that the same level as previous year in the Nordiccountries industrial consumption was down. For example, in Finland it was down during the last 12 months about 4%.

But what was really significant difference is the Nordic system spot prices. Now during the third quarter they were 42% lower than at previous yearand you might remember that during the second quarter the difference was 46%.

In Russia the situation was better. It was about the same level consumption was about on the same level slightly marginally more, but spot priceswere better than last year. Then if we go to the summary of the third quarter results -- page 4 -- really it was as we expected and as I think as weguided after the second quarter results were weak as expected but obviously this is an acceptable situation.

Comparable operating profit was down from last year 300 million down to 220 million also cash flow significantly lower. Our achieved power price10% lower. We had all-time high Hydro generation, but we had so much water that we had to release [part of the] water without producing electricityand, of course, that also reduces and then possibilities for [optimizations].

Also we had lower nuclear volumes especially because (inaudible). These among other things among the external world especially are good reasonswhy we are launching this efficiency improvement program.

2



OCTOBER 19, 2012 / 1:00PM, FUM1V.HE - Q3 2012 Fortum Oyj Earnings Conference Call



So why -- if we turn to page 5 -- we have in this efficiency improvement program? The main drivers are of course the current economical situationand especially uncertainty about duration it's very difficult to predict when and if and how strongly the economical situation will recover.

Then we have special reasons especially in power sector. I think that the power sector is also difficult to really have good predictability. One reasonbeing those political issues especially taxes and then also the market itself with a growing amount of subsidized production. That has its ownimplications.

So, what is our main objective? The main objective is that during 2013, 2014 even starting during this year we will increase at least by EUR1 billionour cash flow. Markus will explain this more in detail, but we have three main instruments to achieve that.

One is CapEx, so we will be reducing our investment program. We will be also rescheduling some parts of that, and we will divest about EUR500million with our non-core assets. And then we will cut our fixed costs so that we will get much more competitive cost base after this efficiencyimprovement program.

Then a couple of more detailed information on page 6. You have noticed that there has been quite significant area price differences betweenHelsinki and System price and also between Stockholm and System price.

When we have hit our power as we have mainly part those (inaudible) include also area price (inaudible) so that we wouldn't get the benefit ofthose area price differences as some of you might thought that we would get. This is obviously very difficult for you to estimate.

Then if we turn to page 7, as you can see as there is in the headline that really Nordic water reservoirs are at record high levels. What is reallyexceptional that that has been the situation in practice throughout the whole year. That is very, very exceptional.

Then probably really the picture -- the critical part of the external world for us is seen on page 8 where you can see the price development and theNordic area as said really from the third quarter compared to last year the price is down by 42%. It's also down from the second quarter of this year.As I already said also, Fortum's power price went down compared to last year's third-quarter 10% but also down compared to the second quarterthis year.

As I said Russia -- the development is a more positive if we look at the spot price which indicates or illustrates and the energy component that theprice is up by 19%. Capacity price for all capacity is slightly down and what is the achieved power price for Fortum its 10% up.

Then page 9 summary results. Of course, quarter two and quarter three for seasonal reasons are normally always weak quarters, but as we haverealized especially this year they are especially weak. And as I said the comparable operating profit down from 300 down to 220 and, of course,also significant decrease in earnings per share and also in cash flow during the third quarter.

If we take the whole 9 months we are relatively much closer to last year because the first quarter was I would say reasonable and the comparableoperating profit is about 140 million lower than last year's comparable operating profit for 9-month. And then if we compare earnings-per-sharethat is reported earnings per share is much lower, but then we have to take into account those special one-time items with [affect] comparabilitybetween these two years. Also cash flow is lower than last year being a bit lower than EUR1 billion.

Page 10 of which tells about third-quarter and this is as you can see mainly question about Nordic power market which I already explained alreadybefore. Also other segment if I called that segment is much worse or clearly worse than last year. Markus will explain that afterwards.

And then page 11 -- in addition to power division and Nordic power market you can see that it is you for 9-month results is mainly distributionbusiness and there are in practice really two reasons for that; one reason being as we have mentioned before that this EUR57 million provisionswhich we did at the end of last year didn't cover all of those costs related to the Christmas storms. And also, we have accelerated investments toimprove the security of supply and costs for that has also increased during this 9 months compared to last year.

So that -- now I will hand over to Markus, and Markus will cover finances and more detailed information about different businesses.

3






Markus Rauramo - Fortum - CFO

Thank you very much, Tapio. You are welcome also on my behalf to the call. First, I will just make a short reflection here. I have now worked atFortum for 2.5 months. I have been around for many of our power plants and offices in Sweden, Finland, Poland, Russia, and Estonia and I havehad the great chance to personally meet hundreds of Fortum employees and sit down and talk with them. I have had an excellent and very warmwelcome and I'm very happy that I joined Fortum and I feel it's a great company.

Then I move to some of the key issues and the results on page 13. Of the comparable Q3 operating profits went down EUR77 million comparablefor the first three quarters down [EUR114 million]. Favorable changes in our sales gain impacted our reporting operating profit and the comparabilityitems were high last year, and this has a big impact on the difference between the first 3 quarters 2011 compared to 2012.

I will go through in more detail at the divisional results, but at this point I will comment the other areas as Tapio said. We have a somewhat highercosts in the other area due to growth projects, and some of the costs tend to move between quarters and years.

And compared to the earlier guidance and commentary we have had on the other area the run rate cost will be somewhat higher at about EUR70million to EUR80 million per year. But as I said the costs move between quarters so they haven't been and they will not be always alike.

Then I move over to power. In power division on page 14 sales are down in Q3 and also in the first 3 quarters. Profits are on very low levels, highHydro generation, high water reservoirs and Swedish krona fuel costs, longer outages impacted in the costs (inaudible) had a EUR30 million negativeimpact on our results.

Operating profit is down from EUR268 million to EUR201 million on year on year basis in Q3 and at the same time investments continued higherevent last year.

Then over to heat on page 15, heat sales are down a bit. The strongest Swedish krona is offsetting some of our volume decline. Heat has beenmaintaining and has been able to maintain its profit levels despite divestments, and also there investments have been on high levels in the last 12months and also the first 3 quarters.

In Russia, sales have increased -- on page 16. Production capacity has increased due to our investment programs and electricity prices are higher.Operating profit slightly better than last year. But fuel costs being higher are offsetting some of the increased capacity and higher prices. Our newcapacity is improving profitability and to the old one is decreasing it somewhat on the quarter.

(inaudible) is delayed as we told before but it doesn't have an impact on the overall schedule of our investment program. Investments in Russiaare at the level of 500 million in the last 12 months and 300 million in the first 3 quarters.

On distribution on page 17 sales are up. We have been accelerating our work to improve that the network reliability and that has led to alsoinvestments and assets increasing to a level of 3.8 billion. Operating profit, at the same time, down from 62 million to 57 million. Repair costs andcompensation to customers has been higher than last year. We have, as said, we are investing to the reliability so investments at the same levelsas operating profits or higher.

Then to electricity sales page 18 -- divisional sales are down. We have been restructuring the business and there is less business sales than we hadlast year. At the same time operating profits is up from EUR4 million to EUR9 million. And we've done a lot of work on the electricity sales side andyes the work is paying off and we have been successful in broadening our customer base here.

And then to page 19 and the income statement. So for the group sales are flat, costs up EUR70 million and operating profit down 77 to 220.Comparability items almost cost nothing in this quarter and that gets us to operating profits of EUR223 million. At the same time it's worthwhileto note that last year the comparability items were high due to (inaudible) electricity hedge fair value moves.

4






Then on the quarter we go down to associated income mainly (inaudible) up to EUR7 million and we have financial expenses EUR82 millionsomewhat up on a year on year basis. We have more debt and the cost for Swedish krona debt for us has increased.

That gets us to profit before tax which is at the level of 148 million down and 92 on a year on year basis. Income tax expense in P&L, 30 million getsus to the net profit of 118 and EPS $0.14 compared to $0.23 comparable period last year.

Then the cash flow statement on page 20 -- operating profits before depreciation and down a 70 million and of course a bigger difference for thefirst 3 quarters and this big move includes again the sales gains like (inaudible) fair valuation changes, 600 million last year, 150 million this yearfor the first 3 quarters.

In Q3 financial items and FX gains/losses were 162 million and cash flow. This includes the cash flow impact when we translate the externallyborrowed euro debt to Swedish krona and the cash flow impact can move up or down depending on the Swedish krona rate. Paid tax was 85million in this period.

We get to funds from operations -- practically no working capital movement and net cash from operating activities. CapEx paid was 342 millionand that basically gets us to the cash flow before financing of minus 234 million and for the first three quarters of the number was 345 million inlast year fairly higher 793 million.

Some key ratios on page 21 comparable EBITDA down from a level of 2.4 billion to 2.3 billion at the same time when net debt has increased from6.8 to 7.7. And that gives us an net debt EBITDA of 3.4 from the level of 2.8 to grossly down to 10.4 ROE, 13.1. So we are not meeting our financialtargets, as Tapio mentioned, and we take action.

We have taken at the same time good care of our liquidity. We issued a bond -- 1 billion, 10 year bond with 2.25 coupon in August. We have 1.1billion of cash and 2.7 billion of undrawn credit facilities.

When we combine this weekend profitability to the weekend cash flow and the overall economic environment and increased cost, our conclusionis that we have to strengthen our balance sheet. We have to correct our cost structure so that we can be faster and more flexible and can reactfaster to the changes in the environment.

On page 22, I will describe a little bit closer what our efficiency program is planned to be. We are planning to take our CapEx down by 250 millionto 350 million. That is starting basically from today so we have some impact in 2012 as Tapio was describing, and then on and a cumulative basisin '13, '14 that gets us to the number indicated here in our plan.

We are also planning to divest businesses worth of 500 million compared to the total balance sheet around 20 billion. This is, of course, not changingus in a material way. And then we are planning to reduce our fixed costs so that in the end of the year 2014 our run rate costs will be 150 millionthe lower compared to 2012.

This is taking into account inflation. This taking into account our growth projects. So we're talking about the nominal number in this point in ourplan. So together we plan to strengthen our cash flow by more than EUR1 billion in the years 2013 to 2014.

Then I turn to -- [come] back to Tapio.


Okay, thank you, Markus. The outlook on page 24 -- key drivers and risks. These are pretty much the same as we have indicated before, of course,demand and supply hydrological situation and these are especially Nordic area related issues and parameters for us. CO2 emissions allowanceprices, that is the European level thing and fuel prices of course that is the global fuel market.

5






Power plant availabilities is a big thing for us, and as we know especially volatility and uncertainty among Swedish nuclear power plants has beenthe issue in the past. We have been working with that and that will be high on our agenda also in the future.

Nordic market, as I explained really the industrial -- especially energy intensive industry and their consumption has been down. The retail sectorand the service sector has increased their consumption. And the fact that electricity will have a bigger role in the whole energy consumptionportfolio makes us confident that in the long-run trend wise electricity demand will also be increasing in Nordic area.

And as Markus said in Russia we have the same objectives and we believe that after we have completed the investment program at the end of2014 soon after that Russia division will bring EUR500 million in EBIT [to the program].

Then a bit more information about our CapEx. As Markus already said, from today or from yesterday we can say that we are also acting with thisyear's CapEx program and instead of previously giving guidance that the CapEx will be between 1.6 and 1.8 we believe today that it will be aroundEUR1.5 billion.

So some of the investments in practice will be rescheduled for next year and that is the reason why we keep the guidance for next year the sameas it has been previously between EUR1.1 billion and EUR1.4 billion. But then we are able to reduce CapEx during 2014 down to 0.9 to 1.1 -- soaround EUR1.1 billion.

Hedging -- we have been able to increase hedging for the rest of this year to the level of 70%. The price is EUR1 per megawatt hour [down] so thatthe average price is now what we expected from that part at EUR48 per megawatt hour.

For 2013 we have been able to keep the price at EUR45 per megawatt hour even if we have increased the volume from 55% to 60%. This is the firsttime when we published the hedging figures for 2014 and the volumes are 30% and average hedging price EUR43 per megawatt hour. I think thatis a reasonably good achievement in this market condition.

And of course the fairly new thing is the efficiency improvement program and that is really what we have heard the reasons and the main targetis to strengthen the strategic flexibility and especially the competitiveness of Fortum. And when we do this in the right way and when we publishsomething like this I think that all of you know that we are serious. And we believe that after this efficiency improvement programs Fortum relativelyeven more competitive among other companies in power and heat sector.

So this was briefly our presentation. And now together with Markus and Juha is available as well we are ready to answer your questions. Please goahead.

Q U E S T I O N S A N D A N S W E R S

Operator

Thank you. Ladies and gentlemen the question and answer session will be conducted electronically.

(Operator Instructions)

We will now take our first question from Benjamin Leyre of Exane. Please go ahead. Your line is now open.

Benjamin Leyre - Exane - Analyst

Thank you very much and good afternoon. I have two questions please. First one is on Sweden. I wonder if you can update us on the discussionsaround the Hydro real estate tax in Sweden and would that be the Swedish energy Association mentions that the tax could be raised to SEK90 perkilowatt hour. What are the chances according to you for significant increase?

6






The second question on Russia, please you indicated in your report that the commission has been set to discuss about the heat business in Russia.What could come out of it please, and what is the timing for the commission as far as you understand to daily customers, some results? And canyou provide an idea of how much of a squeeze you suffer at the moment from the fact that you have not been able to pass through the rising gascosts into your [heating ties]? Thank you.


Okay, thank you. Markus might continue with the Hydro tax issue, but that is of course discussions ongoing in Sweden and when they are planningand preparing their party and I don't think that we have that detail information about that.

But then the part -- the Russia -- heat business in Russia, as we have said before currently today heat sector and heat is not really business in Russia,but we have also indicated publicly and certainly indicated in Russia that we believe that at some point in time there is clear need to make heat tobe business and to have also financial incentives to get investments to heat sector, whether to question about heat production or heat network.

And in that sense we feel very positive about the fact that they have established that kind of committee and, of course, we are eager and active toparticipate that discussion. This will not suddenly and quickly change the situation, but I believe that this is the right direction and, hopefully, thiswill give also results in the future. I believe that this is clearly positive scene.


I can just comment on Sweden and the tax. There are a few things that that we referred to in our report - other one is the budgetary issue. Theother one is a little bit more of a regular issue being the real estate tax and, as Tapio said, this is a regular update but we don't know the outcomeyet. We expected to be finalized by the end of the year.

The other one is that part of the Swedish project proposal is that the corporate tax will be decreased but that, of course, we will also see when thebudget is then handled in Sweden.


Thank you.

Operator

We will now take our next question from Martin Young of Nomura. Please go ahead.

Martin Young - Nomura - Analyst

Good afternoon to everybody. I will stick with the two questions. The first relates to your cost reduction plan, EUR150 million. I would be verygrateful if you could give a little bit more granularity as to where that might appear on a divisional basis and also concerned that you expect all ofthat 150 to impact the P&L in a positive way.

And then the second question relates around your dividend paying ability and your balance sheet. Getting somewhat concerned that quarter inquarter out we are seeing the net debt to EBITDA ratio creep up. It's now above the level of the 3 times that a number of your competitors at targetand your dividend payout ratio is also increasing relatively alarmingly and is likely not to be too far short of 80% to 90% over the next few years,which is quite a high payout.

7






I just wondered the way you stood on the dividend, whether you can categorically state that you are committed to maintaining at least EUR1 europer share dividend.


I can start with the cost reduction and where it would take place. We have, of course, done some internal work to be able to evaluate what is a levelthat we can communicate and commit to today. The work had now really starts internally and to the evaluation and planning and execution willhappen on unit by unit level.

What we are aiming for is a structure that is faster, more flexible, more transparent, more suitable for the changing environment that we are livingin. So I would expect that there will be changes in every area but especially in the ways we are working.

Whether the 150 would be totally positive impact, that is the next run rate that we are communicating for the end of 2014. There could be of courseassociated one-time costs but we are not in a position to evaluate it right now and if there are items that should be communicated then we willget to that once the time is right for that. But now really the hard work starts in the unit.

And then I will pass over to Tapio for the dividend question.


Okay, thank you Markus and as we have said before when we decide and our Board decides the proposal to the shareholders meeting aboutdividend, obviously they take into account of the dividend policy what has been achieved as earnings-per-share, but this is not the only questionabout one or two quarters not just one year.

They look at also the huge prospects obviously in that respect also the strength of the balance sheet. And, of course, one reason is that we establishthe efficiency improvement program is the fact that we know that there are a lot of our shareholders for which really dividend is the reason toinvest to Fortum. So, this is certainly in our mind.


Okay.

Operator

We will now take our next question from Haakon Levy of DNB Markets. Please go ahead. Your line is now open.

Haakon Levy - DNB Markets - Analyst

Good afternoon, and thank you for taking my questions. I'm going back to the announced CapEx reductions as part of the efficiency program.

How should we interpret these reductions? Are these kinds of projects postponements or project cancellations? And you also mentions somepotential improvement in working capital as part of the efficiency program. Can you help us understand how you will go about this?

8






Unidentified Company Representative

Haakon I think the latter part of your question was a little bit difficult to hear, but if I got it right, how to interpret our CapEx costs. It will be bothbut to start with this year's CapEx will be somewhat lower than we have communicated and next year it will be on the same level.

Then going forward, let's say if the maintenance CapEx is on a level of 500 million to 600 million even the number we have communicated for '14has room for growth projects. So it will be a more capital evaluation of the whole project portfolio.

But I'm happy about this and that there is a good prospect for growth in our business and we have good CapEx proposals. So having more proposalsthan what we will spend money on should lead to that they will be better aligned with our strategy and more profitable what we do. But I thinkthat is the color that we can give at this point in time.

Did I miss the latter part of your question?


Yes, just to restate you mentioned also from improvements in working capital as part of the efficiency program. Are there any areas in the workingcapital that you see as excessive at the moment [do see] any potential for reductions yet?


That's an area where, as you can see from the material we didn't put the specific number on it, but I think that the early indications are that thatcould have potential as well. But I think we want to be conservative and not put a number on it before we are in a position to do it comfortably.


Okay, thank you.

Operator

We will now take our next question from James Brand of Deutsche Bank. Please go ahead.

James Brand - Deutsche Bank - Analyst

Hello, James Brand here. Two questions. The first is on cost-cutting and 150 million target. I just want to be if you could be very specific in termsof likely what you mean by that 150 million. I think it was 150 million including growth projects.

Do you mean that you will be cutting 150 million from the cost base after the normal type of inflationary growth and also taking into accountadditional cost if they were to face or additional (inaudible) pressure on cost from any CapEx that you are undertaking? That may be the wronginterpretation but if you could just be very specific on exactly what you mean by that 150 million.

And then also you said that you had done some internal work already. It might be that it's too early days to comment on any specific, but is therea rough mix you have in mind between the different cost segments such as staff costs and material costs and other factors?

And the second question is on disposals. I'm just wondering how you -- you are obviously very committed it to you achieving your target of 3 timesand net debt to EBITDA and accordingly keeping an A-minus rating, but how do you judge -- obviously borrowing costs for the moment for you

9






and your recent (inaudible) bond that you issued 2.5% coupon borrowing costs are incredibly low and as you said you are being more selectiveon CapEx projects and which projects you pursue.

I'm just wondering how you kind of review that trade-off between keeping a very strong credit rating potentially missing out on some growthopportunities.


I can first comment on the cost cut -- what do we mean. I think -- and I know that it wasn't maybe easy to read from this slide, but what we meanis the most conservative way of looking at it. So we take this year's cost basis and we assume that we implement the CapEx that we have guidedand we assume that we have the inflation.

We have a [nominal] basis we should be EUR150 million lower than what we have today. So we fight the inflation. We use our existing resourcesto implement the growth and even with that we have EUR150 million lower cost base.


So if I took the whole of your -- is that just your controllable cost base, or is that the entire 3.2 billion or so from memory of costs that you have?The absolute cost will be 3.05 billion in 2015 or is it part of that cost that will be 150 --?


That's another good question. We specifically say fixed costs and the point of there is that the variable cost, fuel costs and also the power prices,they are something that of course we cannot totally have (inaudible) around them. So they will move.

And we want to be very clear that the costs we can control what we work on that as hard as we can and as tough as we can, and then the businessshould produce the margins between our fuel costs and our market prices. So no, we don't think (inaudible) number or the number that you arereferring to.


Just in terms of helping us model that, would you be able to let us know what amount of cost you are thinking about when you are setting thattarget? So what you would consider your fixed costs base to be.


Yes, we are talking -- well, we have yet to publish that exactly on those lines but we are talking about a 10% reduction roughly -- roughly speaking.But I think it's best to look at that 150 million.

And then when it comes to have we done internal work on this rough mix, of course, we have had certain assumptions and also some analysis onthe line by line what could be achievable so we have some kind of proxy in our mind, but we are not at this point communicating that.

What we want to do is to make sure that we do engage our 10,500 employees into this work, so we really get all of the best input and all of thebest ideas and have a really good process how to make this company more flexible and stronger better suited for the future. But, even if we havesome thoughts, we do not have it the final set up in mind because the planning work we will start now.

10






I think Tapio might comment on the disposals, otherwise I will just say that first of all the debt coupon was 2.25 not 2.5. And I think that the pointyou are making about capital efficiency and so one, that's another story compared to that we have cost escalation and we have a bad operatingenvironment.

So, that we need to fight anyway. Then we can look at what is the optimal capital structure, but that would then mean that we would look at ourfinancial targets and we are not touching on financial targets at the moment.


Yes, question about the these disposals. What we have done in that respect that we have analyzed that there is enough and non-core assets salesor whatever which are in that sense and non-strategically so important that we would need them in the future and among those assets we aresure that we can divest during these 2 years assets with EUR500 million. So we really try to be also in this area cautious that we don't promise toomuch which we couldn't deliver.


(inaudible) for your answers.


Sorry?


Thank you both for your answers.


Okay. Thank you.


Thank you.

Operator

We will now take our next question from Robert Schramm of Macquarie. Please go ahead.

Robert Schramm - Macquarie - Analyst

Thanks very much for taking my questions. I want to know on the disposals, have you identified in terms of businesses or geographically that areashave you considered and non-core and available for sale? And have you -- would you be prepared to guide for potential figure of EBITDA dilutiveimpact of these divestments or cash flow dilute of impacts of these divestments?

11






And my second question is on (inaudible). It just seems that it has slipped a bit further commissioning from turn of the year to first quarter 2013. Ijust wanted to get your explanation on how it has slipped further and how can we be sure that this is the last delay of the project. Thank you.


Okay. If I start with disposals, as I said before, really the criteria is that they are non-core concerning our strategy but we haven't really put othercriteria is certainly not in a way that we could publish at this moment that neither with geographies or between different businesses.

The (inaudible) situation is pretty much the same as it was after the second quarter. Now we feel that the turn or the rear is too early but that webelieve that the first quarter is doable and that progress itself is going on pretty much as we expected or so after the second quarter.

Robert Schramm - Macquarie - Analyst

Okay, thank you.

Operator

We will now take our next question from Emmanuel Turpin of Morgan Stanley. Please go ahead.

Emmanuel Turpin - Morgan Stanley - Analyst

Good afternoon, everybody. My first question new will come back on cost-cutting. I think the answers have been quite clear so far, but just to makesure getting the right understanding. If we look at starting base of fixed costs of around 1.5 billion we should then inflate that for '13, '14. That givesus if we use 2% around 1.560 billion and then we take a 150 million of that and therefore we go towards just above 1.4. I just want you to knowthat in the logic of this calculation I'm correct.

Number two, on cost-cutting just to make sure that you do not take into account the reduction in OpEx coming from the disposal program.

Second question on disposal please (inaudible) disposals. Out of the 500 million of that non-current assets, how much of that amount have youalready identified, and out of this 500 million, how much of EBITDA generating units would there be as opposed to units may be associatesnoncontributing to the EBITDA? That is interesting when we look at the impact on the net debt to EBITDA that it may have. Thank you.


Okay, if Marcos starts with the cost-cutting.


Yes, good question and it's really good that you asked so that we get this, so that you understand what we are trying to say. If we use the hypotheticalnumber that you presented, 1.5 billion, what we assume yesterday will be inflation and we have the announced growth projects that we are alreadyimplementing so there would be cost increase.

The point we are making is that we would have 150 million lower cost than the 1.5 after two years. So we will fight back the inflation. We will fightback the organic growth and then even from that level we take cost 150 million down. So the comparable number would be 135 -- from 15 to 135.

12







After growth, but outside of disposals?


Correct.


Yes.


Very clear.


And then the part of disposals, as we indicated that we have analyzed the potential for disposals and we feel that this EUR500 million is doable.We have, of course, a list of potential divested or potential assets to be divested of more than EUR500 million but to be able to also deliver we speakabout EUR500 million.

Then we are not planning to disclose what would be the EBITDA consequences but obviously we try to find out the divestment of [techniques] inthe way that will not have significant EBITDA consequences.


Thank you.

Operator

We will now take our next question from Deborah Wilkens of Goldman Sachs. Please go ahead.

Deborah Wilkens - Goldman Sachs - Analyst

Yes, good afternoon. I will also keep it to two questions. Kicking off, you've mentioned growth projects both in terms of CapEx and this other costitem. Could you just remind us what the bulk of the growth projects are and how we are going to see them in the earnings?

And in the separate question is when we look at the last 12 months what you give us in your release in terms of comparable EBITDA and EPS, couldyou just help us again understand what the impact is from the storm costs? So not just the fourth quarter but then also in the first, second, andthird?


Okay, if I first refer what we mean by growth projects; as we have -- and I think that we have those growth projects on our site as well so that if Iremember correctly we have projects worth 800 megawatt electricity production and about 230 megawatt heat production in Europe between

13






2012 and 2015 roughly. And then, as you all know, the growth project in Russia is 2400 megawatt, and EUR2.5 billion. Those are the most significantgrowth projects.

Then what other consequences, storm -- Christmas storm as you mentioned and as we know the provisions which we made last year during thefourth quarter were EUR57 million, but that was not enough to cover all of the costs but we haven't disclosed the exact figure.

But if you think about that there -- the distribution business were behind last year about EUR30 million during the 9 months. You can estimate that[quarter] that EUR30 million comes from those additional storm costs and the other part comes really because of the accelerated investmentprogram for network reliability.

I think that that hopefully gives at least some guidance.


Thank you.

Operator

We will now take our next question from Michael Ridley of Mizuho Bank. Please go ahead.

Michael Ridley - Mizuho Bank - Analyst

Hi and him. I want to ask about your leverage target which is now you have hit 3.4 times. Am I right in hearing that you do want to get back to 3times and that you have a timetable for that?

Secondly, you were put on negative by S&P after your 2Q results, are you moving now to cut costs in response to that or is that sort of collectivedecision of for other purposes? Thank you very much.


I can take part of this question so the 3.4 as such is not, it would not be worrying if the environment was better and things were proceeding asplanned originally, but the environment has been changing quickly. When we have though weaker cash generation combined with the growingcosts. We don't think that we should let our leverage grow.

In normal times, if we have growth projects then, as we have communicated before, we have room to move around the target in the medium term.We should get back to the 3.0. One of the key things with improving the cash flow is to make sure that we continue to have a solid balance sheet,but we have not set an exact timing the when we should or would be at 3.0.

That when it comes to the negative S&P outlook, no, this is not the response to that. We have been mentioning that the drivers -- why we want toimprove our cash flow, we want to maintain the flexibility. We want to maintain a strong balance sheet and strategic options in our own hands.

And I think from our point of view the key thing the with the rating agencies is that we maintain a very open and transparent dialogue so that theyhave correct information of our performance and of also our long-term directions so that they can then make the correct evaluation and we don'tas such take a view on what the rating could or should be.

14






Michael Ridley - Mizuho Bank - Analyst

Thank you very much. Very helpful.

Operator

We will now take our next question from Per Lekander of UBS. Please go ahead.

Per Lekander - UBS - Analyst

Yes, good afternoon. I'm coming back to the dividend process and historically you always said is that in the range of 50%, 60% payout, 3 times netdebt to EBITDA and the decision gets taken together -- well the proposal gets taken together with the full-year results. Is that still kind of the processwhich I think of, or are those components still there and we will not hear anything until you report next quarter? Is that correct?

Second, on the issue with the credit rating. Do you have a target for credit rating, or is it just what it becomes? Thanks.


Okay, I will start with the dividend and Markus will then take the rating question. I think that I actually covered really is those a main criteria is whenour Board will decide the proposal for shareholders meeting. I don't expect that we will give guidance before that.

And then at that time we also know that the results from the fourth quarter and that there are several criteria you can also see if you look at thehistory that these dividend policy -- dividend to be between 50% and 60%. That is just one criteria. There has been exceptions from that in thepast, whether there will be exceptions from that in the future we will see.


Okay, then I can take the credit rating question. Like I just said before, we don't have an explicit target for a credit rating. We have communicatedthough our financial targets on average and on ROCE and on ROE and then our performance leads to the credit rating what it is. And as said, whatwe do focus on quite a lot is the quality of the communication with the credit rating agencies so that the information is accurate and timely.

What is then, of course, is of most important to us is the access to credit as such and what we have done now is issued 1 billion bond. Coming backright away to that point also I don't think that 2.25 is a representative of what one would think that the credit market would actually provide in thelong-term.

So I think that these credit markets over all are very exceptional and that's why we pay attention to our liquidities our available -- credit lines,because if things -- let's say that the markets are so sensitive at the moment that we want to be very well prepared for whatever circumstancesmight come that are outside of our control as well and then do everything that we can that is in our own powers to meet our financial target.


Thank you.

Operator

We will now take our next question from Peter Bisztyga of Barclays. Please go ahead.

15






Peter Bisztyga - Barclays - Analyst

Hi, good afternoon. It's Peter Bisztyga from Barclays. Two questions, if I may. Firstly, foreign exchange losses on the way you sort of hedge yourSwedish subsidiaries, but those have been an ongoing drag on sort of debt and cash flow for pretty much as long as I can remember. Are you goingto change your hedging strategies (inaudible) and prevent any further deterioration in your gearing ratios rising from that?

And then my second question relates to your plans to grow in India. Is it safe to assume that your CapEx cuts mean that those plans and are nowabandoned?


Okay I will start with the Swedish krona net impact on our cash flow and balance sheet. It indeed -- it is an ongoing item that will if the Swedishkrona/euro rate changes it will continue to change. Very simply we change our euro dominated debt to Swedish krona debt that we use to fundour group companies. And when we do that [we forward] -- when the forward rolls over depending on where the currency rates are we will havecash flow impact positive or negative.

And depending on how you want to finance your assets you will have volatility somewhere if you operate in foreign currencies, or you have it inP&L or you have it in cash flow balance sheet's.

We think that this is a good way to do this and this is really business driven. So this meets our economic -- economic and FX exposures very wellbut, of course, the cost of that is that then we have to endure the cash flow volatility. We do take that into account when we think about the balancesheet strength and access to funding. So we need to keep that in mind, of course.


Okay. And then if we go to India, it's good to remind you that we haven't made any investment decisions concerning India. And we have establishedsmall office to study business opportunities and analyze the India market. I think that it's an interesting market.

I think that there is demand for our competency in Indiana, but especially in these circumstances we will be even more careful concerning that theinvestment -- the timing of the investment, et cetera, so that we certainly take the current situation -- the efficacy improvement program, et cetera,also into account when preparing and especially when deciding those potential investments.

Peter Bisztyga - Barclays - Analyst

Okay, thank you.

Operator

We will now take our next question from Inglo Becker of Kepler. Please go ahead.

Inglo Becker - Kepler Capital - Analyst

Thank you, good afternoon. I have just one question left on the recent suggestion by the EC over the commission in Europe that also facilities inEurope is what I think they said need to step up safety investment estimating the total cost across the region of 10 billion to 25 billion. I understandyour plans are included in there.

16






Is that the case? Do you have any number for us what that might cost? I know that is not yet a final decisions are just a suggestion, nothing final,but any directional idea here? Thank you.


As we have said before, based on the report which we have got from Finland and from Swedish safety authorities, we don't expect any significantneeds for investments concerning safety with those a nuclear power plants. We are either operating and owning 100% which is (inaudible) andwith other co-owned nuclear power plants either. Obviously, this is a bit pre-information but this is our firm belief today.

Inglo Becker - Kepler Capital - Analyst

Right. Okay, thank you.

Operator

We will now take our next question from (inaudible) of Allianz. Please go ahead.

Unidentified Participant

Good afternoon. Thanks for taking my question. My question is actually about Fortum Russia, your subsidiary. As of today you have accumulatedmore than 95% state in Fortum Russia and requested (inaudible) shares from the Moscow stock exchange and that is to be done by the end ofDecember.

So what should we expect as your further steps in this area? Can we expect to squeeze out of minorities, and when and at which price can this bedone? Thank you.


Yes, obviously our aim is to manage that company without additional bureaucracy and whether there will be then squeeze out or not, that hasn'tbeen made yet decided. It seems to be also that probably part of those shares are lost at least because we haven't been able to pay dividend tosome share owners. So that we will analyze and then the situation what is the most sensible way to act. Obviously this is not a big thing now forFortum as a Fortum group level.


What are the timelines for your decision?


Unfortunately, I can't really say the timetable for that.


Okay, thank you.

17






Operator

We will now take a follow-up question from Martin Young of Nomura. Please go ahead.


Hi, once again. It's follow-up to Emmanuel's question on the cost reduction. I think you have been perfectly clear with the example that startedwith the 1.5 billion saying that you could get down to 1.35 which would be 150 plus the inflation re-impact around about EUR60 million.

But if you consider that you got a reasonable amount of growth coming through in Russia which is already well and truly in the pipeline I wouldimagine that the cost base in Russia is actually going to move in an upward direction and possibly reasonably significantly.

So if you were to actually look at the total cost reduction that you are attempting to achieve here, it's probably going to be in the ballpark of aboutEUR300 million when we include inflation and the impact of mitigating growth within it. Is that the correct type of number that we should belooking at here and actually you are underselling yourself in the way that you have communicated the cost reduction plan? Thanks.


Okay, probably Markus will comment a number but just to explain the Russian situation, with our investment program of course in (inaudible) thatwill be integrated into existing power plants, so that with existing resources et cetera I think that we can pretty much take care of those new powerplants as well.

And if we think about the (inaudible) power plants that is very effective new power plants so that, for example, the number of people runningthose power plants. We haven't disclosed a number but it will be very limited number. So that in that respect it's exactly as Markus said that thosecosts coming from those growth projects will be covered.


I can comment on the number. Like Tapio said, largely we have big operations in most of the growth sites already and (inaudible) the cost increasewill not be as dramatic as you were saying, so no we are not totally underselling ourselves. But we have taken into account that there will be somecost increase if we would (inaudible). Your logic is correct the number wouldn't be that big though.


Okay, thank you.

Operator

We will now take a follow-up question from Benjamin Leyre of Exane. Please go ahead.


Yes, thank you. I would like to follow-up on Russia and another topic. I wonder if you could communicate with the absolute deadline is that youhave to meet on the timing of the commissioning of your 2 plants in (inaudible) in order to keep being able to have a provision (inaudible) on these2 plants?

18






And also can you please update us on the progress that you may have made to obtain some compensations from your contractor that you tookthe delay in the commission regarding these 2 plants? Thank you.


Yes, the compensation discussions are ongoing. So in that respect I can't really comment the timetable. We believe it that all (inaudible) powerplants will be commissioned next year as we have indicated in our reports.

Now I don't remember -- I think that is public information when are those due dates exactly. Actually, for the third unit that is quite far away so thatthere is no even hurry to meet even for the second one I think that there is a good buffer. And now the first unit is the most critical but I don't seein that respect a critical due date to be critical item.


And I can comment that we -- of course, we made the provision on the concerning this and then once the units are commissioned and then theprovisions would be released if applicable.


Thank you.

Operator

We will now take a follow-up question from Emmanuel Turpin of Morgan Stanley. Please go ahead.


Thank you. I appreciate that today's announcement on the efficiency program is kind of the headline announcement for the objective. You havebeen quite clear that you are still working internally on implementation. What sort of timeline do you have in mind to come back to us with moregranularity in terms of divisional split in terms of implementation costs?

Is it fair to assume that we shouldn't hope for too much at the capital market day which is only a short while away? When do you expect to be readyto come back to us?


I think we will, of course -- we will elaborate more in the capital market day of course on the issues, but like I said that the work will really be donequite deep down in the organization on unit levels.

And that's why I don't think it's even reasonable to expect that there would be a big one-off announcements that would make a lot of headlines.And my expectation is that you will see more in the run rate cost levels of the different divisions going forward and in area other.

But I think what we will happily do when we communicate our quarterly results and when we are on the road we can tell what has been happening,what are the real things that are changing because this is not about a big headlines and big changes. This is about changing ways of working,changing processes, making things simpler, reducing number of projects and so on and reducing the internal complexity that has accumulatedover time. So, it's a lot of very simple day to day work in reality.

19







Thank you.

Operator

We will now take a follow-up question from Deborah Wilkens of Goldman Sachs. Please go ahead.


Thank you. In the second quarter release the you had written that you expected the income stream to be the -- backend weighted for the year. Ijust wondered if you could comment on that as things stand now. And also just remind us for the (inaudible) plants what the size is of the potentialprovision reversal for next year.


I think that our statement that the results will be year end weighted as we said last year as well is relevant or so for this year.


And when it comes to the provision, of course, we look at the provisioning every quarter. So we would release anything that would be appropriate,if we had knowledge we could release things right now. So we will see as (inaudible) is implemented what if any can be released, or whether theyyou will have to be used. So at the moment, nothing more to release and we cannot speculate about how much could be released either.


Thank you.

Operator

We will now take our final question from Per Lekander of UBS. Please go ahead.


Yes, hello. To questions more. So on the new capacity in Russia, is there any chance that you could give us some kind of indications of the yearlyEBITDA upside for '13, '14, and '15 or just some rough numbers on how much you think the new capacity will add for these 3 years?

And then second, and may I excuse myself if I misunderstood what you said. So, there has been a very large area price difference in the marketsand I interpreted you said that you are not fully benefiting from this. Is this correct? So, let's say, (inaudible) price is 35 and the finished price is 40,isn't that an upside to you? Thanks.


Yes, if I start with the last question. If we wouldn't have hit the area price differences then we could have gotten a higher area price, but becausethat has to a big degree also been hit, then we couldn't get the price difference in our advantage.

20






What is the Russian investment program? As I said, all (inaudible) units, the 3 times 480 megawatts, will be -- we believe will be commissioned nextyear. And if you take their propulsion from the total investment program which is EUR2.5 billion, and these are more than half the total capacity,you can estimate or so that is significant part of the total investment program and the capacity -- currently the capacity fee for that is between 12%and 14%.

And additionally, of course, the energy component market margin and you can estimate what is the financial contribution. And then the last unit220 megawatt, or roughly 220 megawatt, they will be commissioned in (inaudible) during 2014.


May I do a follow-up on the first one. So if you are hedging, you are selling a hedge on the system price as a understand, but can't you also sell a[fee of fee] hedge on the finished area price and that's really your hedging is related to sum of these two?


Yes, and we are using although (inaudible) and as I said that at least this time that we had also mainly get that area price differences.


Okay. Thank you.

Operator

We have no further questions in the queue.


Okay, thanks for your attention and thanks for your interest and all of the questions -- very, very good questions. And I hope that we will continueour discussions during our Capital Markets Day in Stockholm 6th of November, and obviously we would like to have you at our dinner alreadyduring the evening on 5th November. Many thanks from Helsinki.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

D I S C L A I M E R

Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes.

In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based uponcurrent expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are morespecifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of theassumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION,THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUMEANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLECOMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

©2012, Thomson Reuters. All Rights Reserved. 4922456-2012-10-20T05:22:32.273

21






thomson reuters streetevents edited transcript · 10/19/2012 · thomson reuters streetevents...

Documents