Centrica Plc · LSE:CNA
Centrica — FY2018 Earnings Presentation
70 slides from Centrica's earnings presentation, Feb 21, 2019
Slide 1: Preliminary Results for the year ended 31 December 2018
centrica Centrica plc Preliminary Results for the year ended 31 December 2018
Slide 2: Disclaimer
centrica Disclaimer This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares or other securities. This presentation contains certain forward-looking statements with respect to the financial condition, results, operations
Slide 3: Iain Conn, Group Chief Executive
centrica lain Conn Group Chief Executive
Slide 4: Charles Berry, Non-executive Chairman
centrica Charles Berry Non-executive Chairman
Slide 5: Iain Conn, Group Chief Executive
centrica lain Conn Group Chief Executive
Slide 6: Centrica team
Centrica team aw Richard Hookway Chief Executive, Centrica Business Justine Campbell Group General Counsel & Company Secretary (from 1 April 2019) IN Non-executive Mark Hodges Chief Executive, Centrica Consumer Jill Shedden Group Human Resources Director lain Conn Group Chief Executive dt d air Sarw
Slide 7: Key financial messages
centrica Key financial messages * 2018 financial performance mixed, with adjusted operating profit up 12%, but disappointing volumes in Spirit Energy and Nuclear and slower than expected recovery in North America Business * 2019 AOCF impacted by UK default tariff price cap, continued weaker E&P and
Slide 8: Portfolio resilience, but impacted in 2019
centrica Portfolio resilience, but impacted in 2019 Revenue, gross margin, AOCF, operating profit (fbn) 35.0 20.0 SS 25.0 P—4 5.0 2.5 — Group revenue — Adjusted gross margin — Adjusted operating cash flow 0.0 Adjusted operating profit 2014 2015 2016 2017 2018 2019e 2016 adjusted operating cash flow
Slide 9: 2018-20 focus — performance delivery and financial discipline
centrica 2018-20 focus — performance delivery and financial discipline * Demonstrating customer-led gross margin growth * Driving cost efficiency towards being ‘most efficient price-setter’ * Improving organisational effectiveness * Securing the capabilities we need for 2020 and beyond * Maintain ca
Slide 10: Strategic development
centrica Strategic development * Strategic direction aligned to external trends, including response to Climate Change * Energy supply challenges - regulatory landscape and lower energy demand per GDP * Shift of propositions towards what customers need and want, not limited to energy supply * Centric
Slide 11: Specific topics we will address today
Specific topics we will address today * 2018 financial performance and 2019 outlook * External context and Centrica’s strategy * UK Home Energy Supply performance and the impact of the UK default tariff cap * UK Home Services performance, with material improvement expected in 2019 * Continued growth
Slide 12: Chris O'Shea, Group Chief Financial Officer
centrica Chris O’Shea Group Chief Financial Officer
Slide 13: Commodity prices
Commodity prices Average Brent oil prices ($/bbl) ° $71/boe $65/boe 60 =e 40 20 0 Jan17 Jan18 Jan19 = Historic month ahead prices Forward month ahead prices Average UK NBP gas prices (p/th) 80 59pthy ~ 60 P *, 50p/th,” 40 A6p/th : 20 0) Jan17 Jan18 Jan19 Brent oil, UK NBP gas and UK baseload power p
Slide 14: Financial headlines
Financial headlines Year ended 31 December (£m) 2017 2018 A Revenue (£m) 28,035 29,686 6% Adjusted gross margin (£m) 4,037 4,253 5% Adjusted operating profit (£m) 1,247 1,392 12% Adjusted effective tax rate 22% 41% 19ppt Adjusted earnings (£m) 693 631 (9%) Adjusted basic earnings per share (p) 12.5
Slide 15: Centrica Consumer
Centrica Consumer ADJUSTED OPERATING PROFIT / (LOSS) Year ended 31 December (£m) 2017 2018 A UK Home 819 668 (18%) Energy 572 466 (19%) Services 247 202 (18%) Ireland 47 44 (6%) North America Home 114 123 8% Energy 146 135 (8%) Services (32) (12) 63% Connected Home (95) (85) 11% Centrica Consumer 88
Slide 16: Consumer: adjusted operating profit drivers
Consumer: adjusted operating profit drivers External / Efficiency Accounts/ portfolio Investment programme mix £885m —(£201m) £196m —- (£110m) i... (£20m) 2017 centrica The above adjusted figures are before exceptional items and certain re measurements. Adjusted operating profit includes share of jo
Slide 17: Centrica Business
Centrica Business ADJUSTED OPERATING PROFIT / (LOSS) Year ended 31 December (£m) 2017 2018 A UK Business 4 40 900% North America Business 71 81 14% Underlying performance 133 81 (39%) 2017 accounting adjustment (62) - nm Distributed Energy & Power (DE&P) (53) (81) (53%) Energy Marketing & Trading (E
Slide 18: Business: adjusted operating profit drivers
centrica Business: adjusted operating profit drivers NAB 2017 EM&T EM&T / External / accounting legacygas Efficiency UKB Nuclear NAB portfolio Investment adjustment contracts programme performance performance performance (£56m) £7 (£27m) £161m = a £39m (£39m) L fed £121m 2017 \d taxation, Reconcilia
Slide 19: North America Business gross margin
centrica North America Business gross margin North America Business North America Business Forward net margin under 2018 gross margin ($m) gross margin ($m) contract ($m) 500 600 500 400 il 400: ; 300 PF 300 200 200 0 0) Gas Power 2017 2018 2018 2019 Gas Power I Gross margin range 2014-18 Optimisati
Slide 20: North America Business outlook
centrica North America Business outlook * Disappointing performance in 2017 and 2018 NAB return on average capital employed" * Focus on driving profit and ROACE improvement - Enhanced products and propositions to meet customer 2018 | needs and drive improvement in gross margin Incremental trading an
Slide 21: Exploration & Production
Exploration & Production E&P Year ended 31 December (£m) 2017 2018 A Gas and liquids realisations 1,555 1,988 28% Adjusted operating profit 201 521 159% Adjusted operating cash flow 509 963 89% Free cash flow 396 483 22% Average gas Average liquids sales price sales price Europe (p/therm) Europe (f/
Slide 22: E&P: adjusted operating profit drivers
E&P: adjusted operating profit drivers Spirit Portfolio Commodity Efficiency Spirit exploration change / FX programme CSL performance costs £13m £154m (£180) re £151m com centrica £521m The above adjusted figures are before exceptional items and certain re-measurements. Adjusted operating profit inc
Slide 23: 2017-18 efficiency programme delivery
centrica 2017-18 efficiency programme delivery £4,516m Dy — £4,450m (£26m) £109m || 2017 controllable costs (£248m) £99m Efficiency FX Inflation programme — Other! like-for-like @ @ Costs of goods sold controllable costs @ @ Operating costs 1. Other includes revenue investment, service investment, p
Slide 24: £1.75bn of cost efficiencies by 2021
centrica £1.75bn of cost efficiencies by 2021 Exceptional restructuring costs 2016-18 £486m Exceptional restructuring costs 2019-21 ~£750m £312m (£940m) £262m (i £5.0bn Inflation = (£125) £350m (£250m) m. mem £4.5n (£60) (500m) Efficiency 2019 programme Other/one 2019-21 officiencies aig off/portfol
Slide 25: Cash flow
Cash flow Year ended 31 December (£m) 2017 2018 EBITDA 2,137 2,447 Tax (102) (61) Dividends received 58 22 Working capital & other (24) (163) Adjusted operating cash flow 2,069 2,245 Net investment (46) (968) Interest (including debt purchase) (296) (429) Dividends (463) (551) Exceptional payments (
Slide 26: Divestments
centrica Divestments * Nuclear divestment targeted by 2020 - First round of sales process commenced in H2 2018 * Further £500m of non-core divestments in 2019 * Disposal of Clockwork Home Services operations in North America for £230m - Channel and brand rationalisation - Focus on efficiency, effect
Slide 27: Debt maturity profile
• • • • - - 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045
Slide 28: Sources and uses of cash
centrica Sources and uses of cash @ Other @ Pension deficit payments @ Exceptional payments @ Dividends Equity Placing ® Material acquisitions @ Disposals @ Capital expenditure @ AOCF @ Interest 2015 2016 2017 2018 2019e AOCF £2.3bn £2.3bn! £2.1bn £2.2bn £1.8bn-£2.0bn Net Debt 2018 basis £4.7bn £3.5
Slide 29: Group financial framework
centrica Group financial framework Targets Metric Adjusted operating cash flow * 3-5% underlying growth p.a. on average Dividend * Progressive in line with adjusted operating cash flow Controllable costs * Operating cost growth < inflation * Investment <70% of adjusted operating cash flow Capital re
Slide 30: 2019 Group financial targets
centrica 2019 Group financial targets * Targeting AOCF in the range £1.8bn-£2.0bn, including impact of UK price cap, continuing lower Spirit Energy and nuclear volumes, higher cash taxes * Further £250m of efficiency savings * Headcount reduction of 1,500-2,000 * Capital reinvestment expected to be
Slide 31: Iain Conn, Group Chief Executive
centrica lain Conn Group Chief Executive
Slide 32: Agenda
centrica Agenda * External context — opportunity and challenge * Indicators of stabilisation and growth potential in customer divisions * Centrica Consumer — capability transformation, UK energy supply market, Services and Connected Home growth * Centrica Business — capability transformation, DE&P g
Slide 33: External context — opportunity and challenge
centrica External context — opportunity and challenge * Fundamental trends in energy and services - Decentralisation and decarbonisation of the energy system - Increased choice and power shifting to the customer - Advancements in digitalisation and technology * Centrica’s strategy and Climate Change
Slide 34: Centrica and Climate Change — progress to date
centrica Centrica and Climate Change — progress to date * Centrica’s strategy built around the customer and decarbonisation, decentralisation, digitisation of energy * Reduced exposure to E&P and gas-fired CCGT. Development of new efficient and lower-carbon solutions * Propositions in both Consumer
Slide 35: Centrica's climate change ambition and targets
centrica Centrica’s climate change ambition and targets abling all our customers to use energy more sustainably’ Help our customers reduce Enable a decarbonised Reduce our own emissions in line with Paris emissions in line with Paris goals 2022 Help our customers reduce their emissions by 15%, by di
Slide 36: 2018-20 focus — performance delivery and financial discipline
centrica 2018-20 focus — performance delivery and financial discipline * Demonstrating customer-led gross margin growth * Driving cost efficiency towards being ‘most efficient price-setter’ * Improving organisational effectiveness * Securing the capabilities we need for 2020 and beyond * Maintain ca
Slide 37: Customer divisions — focus for gross margin stabilisation and growth
centrica Customer divisions — focus for gross margin stabilisation and growth * Cross-sell/up-sell across 5 pillars in each division * Shift to digital customer journeys, and proprietary platform development enabling digital sales * Increasing personalisation of propositions * Exposure to new gross
Slide 38: Customer divisions — indicators of stabilisation and growth potential
centrica Customer divisions — indicators of stabilisation and growth potential * Consumer account reduction slowed to 249k in 2018 and to 23k in the second half * Two years of stable UK Home services accounts and gross margin. Competitive cost focus in 2019 * Growth in protection plans and home warr
Slide 39: Customer-led gross margin
Customer-led gross margin Consumer £15bn 25% 20% £1 Obn 15% 5 £5bn 10% 5% £0bn 0% 2015 2016 2017 2018 Closing 27.4m 26.7m = 25.3m 25.1m accounts Gross margin £104 £109 £110 £104 /account centrica Business’ £15bn 25% 20% £10bn 15% £5bn 10% 5% £0bn 0% 2015 2016 2017 2018 Closing 1.4m 1.4m 1.3m 1.2m ac
Slide 40: Consumer strategic framework
centrica Consumer strategic framework Energy In-home Peace Home energy Home supply servicing of mind management automation Ls a a) > TS im! a a) — | bs > _| Ls = aaa Energy supply Services @ Primary entry point o— Pillar linkage 40 Preliminary Results 2018
Slide 41: Improving our customers' digital experience
centrica mproving our customers digital experience * 60% of customers signed up to digital channels Ore : * 50% of UK customer transactions now online | — * Continued enhancement of functionality =| * Customers experience improved through digital Booking | : - UKH NPS +5 points higher digital vs. of
Slide 42: Personalisation for our customers
centrica Personalisation for our customers * Driving growth through tailored offers * Rewards programmes launched in UK and Ireland - >2m Rewards members and >150 offers across UK and Ireland - UK churn halved for Rewards customers * Sophisticated pricing in UK Home Services resulting in gross margi
Slide 43: More choice for our customers
centrica More choice for our customers * Increased speed of product development and testing * Broadened product features * Modularising & bundling our products * Expanding our offering to more customer segments * More trades and markets for on-demand services of FREE POWER That's the #powerof100 43
Slide 44: Consumer accounts
Consumer accounts Customer accounts (‘000) 25,316 (127) om : (535) Collective tariff/white Prepayment label 66 — Competitive Services pressures growth 2017 centrica 444, Connected Home growth 25,067 Choices made: @ Underlying holdings movement: @ UK&| @ NA 44 Preliminary Results 2018
Slide 45: UK energy supply market price differentials
centrica UK energy supply market price differentials Average market dual fuel prepayment price (£) Average market dual fuel SVT price (£) 1,350 1,350 1,300 1,300 = 1,250 1,250 . 1,200 ° 1,200 | 1,150 H 1,150 i ’ 1,100 H 1,100 3 ° H 1,050 1,050 ' | : ‘ 1,000 8 1,000 ’ 950 950 ° e 900 900 Pre-cap Post
Slide 46: UK energy supply market dynamics
centrica UK energy supply market dynamics Annualised prepayment account churn * Reduced pricing differentials 20% 15% * Annualised prepayment churn declined by 5ppt 10% since price cap implementation 5% | * Ofgem announced cap increases in April 2019 % pre Cap —_—Post Cap - £117 in default tariff ca
Slide 47: Driving sustainable change in the UK energy market
centrica Driving sustainable change in the UK energy market point plan to improve UK energy supply market Centrica unilateral actions implemented Engaging with BEIS & Ofgem on market reform @ Drive further improvements in customer service and our r ) Level the playing field on government environment
Slide 48: UK Home Services
centrica UK Home Services UK Home services account growth * 2018 performance = - Negative impact from ‘Beast from the East’ of ~£20m Investments delivering account growth 2014 2015 2016 2017 ay - Underlying improvement in gross margin 2018 - 150k Connected Home products sold through field force 2018
Slide 49: Connected Home growth
Connected Home growth Cumulative products, customers, subscriptions ('000) 2,824 214214 9% 9% 160 160 — H1 FY H1 FY H1 FY H1 FY H1 FY 14 14 15 15 16 16 17 17 18 18 @ Cumulative products @ Cumulative customers @ Cumulative subscriptions centrica * Full year growth vs 2017 - Product sales up 37% to 1.
Slide 50: Connected Home competitive position
centrica Connected Home competitive position Estimated cumulative smart thermostat sales! (m customers / hubs) 6.1 Estimated eco-system deployment 2 (m customers / hubs) 5.8 5.7 8.5 05 05 O05 93 Nest Hive Tado Schneider Alarm.com Hive eQ-3 Wink DT Ecobee Honeywell Netamo Eneco Nest ADT _ Vivint Comc
Slide 51: Business strategic framework
centrica Business strategic framework ——— Energy Wholesale Energy Energy Energy Supply Energy Insight Optimisation Solutions LS a) Ls [> >| aan > _| ae Ls =] Energy supply & wholesale Services @® Primary entry point o— Pillar linkage 51. Preliminary Results 2018
Slide 52: Integrated Solutions Platform
centrica Integrated Solutions Platform Single User Interface Demand Operational Management Efficiency & Optimisation Demand Response / DSR Common Market Interface Subsystem (Forecast, Prices, Dispatch, etc) © Panoramic g& REstore weas /{/ Direct exeec) Direct Load Control Generator ‘teri / Site Sche
Slide 53: Distributed Energy & Power growth
centrica Distributed Energy & Power growth DE&P order intake and order book Secured order book realisation fm fm 254 122 "6 1 "7 7 ‘3 "8 2018 Revenue Secured order book realisation @ Secured order book @ 2019 @ Order intake @ 2020 @ 2021 onwards 53 Preliminary Results 2018
Slide 54: B2B propositions and scale
B2B propositions and scale Panoramic energy insight customer sites Optimisation capacity’ (number) (MW) 3,000 3,000 2,000 2,000 0 0 H22016 H12017 H22017 H12018 H22018 H22016 H12017 H22017 H12018 H2 2018 Energy solutions capacity under management Route-to-market capacity under management (MW) (MW) 80
Slide 55: Route-to-market services in Europe
centrica Route-to-market services in Europe Route-to-market contracted capacity by geography (GW) 7 X Moray offshore windfarm trading & balancing PPA ed Spot Market MORAY EAST OFFSHORE WINDFARM Cash Flow Intermittent Power Physical Power centrica 55 Preliminary Results 2018
Slide 56: Demand response in North America
centrica Demand response in North America Centrica offers software, hardware and expertise in exchange for a share of customer savings Event forecasting Event monitoring Value reporting one * REstore forecasting algorithm * Utilisation of Panoramic Power * Customer's performance scorecard integrated
Slide 57: Building a global LNG portfolio
centrica Building a global LNG portfolio * Structured offtake contracts to buy LNG (Cheniere, Qatar Gas, Mozambique LNG) * Sale of cargoes to lock value from locational gas price spreads * Value from optionality to send divertible cargoes to other markets * Over 200 cargoes transacted across more th
Slide 58: E&P portfolio and performance
E&P portfolio and performance * Role - cash flow diversity and balance sheet strength * Spirit Energy successfully established - Self-financing European E&P business - Disappointing 2018 production; focus on improving performance and strengthening - Progressing development projects and exploration -
Slide 59: Spirit Energy fields map
• Schiehallion Field • Foinaven Field Whirlwind Halifax Lancaster • Warwick Lincoln Solan Field Strathmore • • •
Slide 60: Current outlook and response
centrica Current outlook and response * Delivered group financial targets in 2018, but weak performance in E&P, Nuclear and NAB * Facing unusual combination of factors in 2019 - £300m operating profit impact from price cap - Continued lower volumes in E&P and nuclear - Recent commodity price correct
Slide 61: 2019 Group financial targets
centrica 2019 Group financial targets * Targeting AOCF in the range £1.8bn-£2.0bn, including impact of UK price cap, continuing lower Spirit Energy and nuclear volumes, higher cash taxes * Further £250m of efficiency savings * Headcount reduction of 1,500-2,000 * Capital reinvestment expected to be
Slide 62: Summary
centrica Summary * 2018 financial performance mixed, with adjusted operating profit up 12%, but disappointing volumes in Spirit Energy and Nuclear and slower than expected recovery in North America Business * Targeting 2019 AOCF in the range £1.8bn-£2.0bn. £2.1bn-2.3bn average AOCF target range for
Slide 63: Q&A
centrica Q&A 63 Preliminary Results 2018
Slide 64: Adjusted operating profit
Adjusted operating profit Year ended 31 December (£m) 2017 2018 A UK Home 819 668 (18%) Ireland 47 44 (6%) North America Home 114 123 8% Connected Home (95) (85) 11% Total Centrica Consumer 885 750 (15%) UK Business 4 40 900% North America Business 71 81 14% Distributed Energy & Power (53) (81) (53%
Slide 65: Adjusted operating cash flow
Adjusted operating cash flow Year ended 31 December (£m) 2017 2018 A UK Home 928 805 (13%) Ireland 62 74 19% North America Home 154 187 21% Connected Home (121) (47) 61% Total Centrica Consumer 1,023 1,019 (0%) UK Business 131 62 (53%) North America Business 87 278 220% Distributed Energy & Power (3
Slide 66: Net investment
centrica Net investment Year ended 31 December (£m) 2017 2018 Centrica Consumer 166 223 Centrica Business! 239 243 Exploration & Production 480 499 Other 2 64 49 Capital expenditure (including small acquisitions) 949 1,014 Cash acquired through Spirit Energy transaction (78) - Net disposals 3 (825)
Slide 67: Net debt
Net debt Year ended 31 December (£m) 2017 2018 Opening net debt (3,473) (2,596) Adjusted net cash inflow / (outflow) (939) (60) Other movements in net debt (62) (0) Closing net debt (2,596) (2,656) Cash posted as collateral (336) (290) Closing net debt excluding cash posted as collateral (2,932) (2,
Slide 68: IFRS impact
IFRS 16 impact Pre- Post Variance IFRS 16 IFRS 16 Year ended 31 December (£m) 2019 2019 Operating lease payments 86 - -86 DD&A - 88 +88 Operating cost 86 88 +2 Operating profit -2 EBITDA 86 - +86 Interest expense - 7 +7 Pre-tax profit / (loss) (86) (95) 9 Adjusted operating cash flow * (99) - +99 Fi
Slide 69: Disclaimer: Rules of thumb
centrica Disclaimer: Rules of thumb The rules of thumb were provided in February 2019 based on the then current prevailing range of oil, gas and power prices. They are illustrative and are intended as directional only and exclude any potential impairment or impairment write-back. The actual impact o
Slide 70: Rules of thumb: E&P and Nuclear
centrica Rules of thumb: E&P and Nuclear Please refer to disclaimer on slide 69 of this presentation before using this information. The table shows Centrica’s profit after tax (PAT) and adjusted operating cash flow (AOCF) sensitivity to changes in commodity prices on a hedged basis for 2019 as at 31