A2A S.p.A. (A2A) Earnings Call Transcript & Summary

Good afternoon welcome to A2A Q1 2024 results call. My name is Zach, and I will be your operator for today's event. [Operator Instructions] I will now pass the floor to host Marco Porro, Head of Investors Relations.

Good afternoon. Thank for attending the call to present Q1 2024 results with solid results. Renato Mazzoncini, our CEO, and Luca Moroni, our CFO, will comment the results. Renato Mazzoncini?

Good afternoon. Thanks for taking part in our conference call where we will comment on the results of Q1 2024. Allow me to highlight something I have already mentioned in other meetings. That's something that I'd like to restate. The results we have attained also in this quarter stem from a strict planning which started 13 quarters ago, leading to constant growth in line with the business plan we had developed. Following the trajectory of our business plan, we are profiting from positive wins, as already discussed during March 11 about the energy scenarios, which have only partially contributed to robust industrial growth stemming from a CapEx-driven strategy, which also this quarter has allowed us to maintain significant level of investments and developments. We are very glad of these results. If we want to take a look at the slides, we will see the highlights, needless to say that hydro production is back to normal levels. We can make a comparison with the first quarter 2023, where we had the tail of the drought effect end of 2022. So it's worth highlighting here that A2A hydro production, which in the 10 years before 2022 was averaging 4.3, 4.4 terawatt hour, in 2024 will expectedly go back to the previous performance. So it will outperform conservative data we had assumed when preparing the budget in 2023, when we had carried forward 2023 value and a value of 3.7 terawatt hour for 2024. We are now confident to announce value of 4.4 terawatt hour, since the catchment basins are full, and there is still plenty of snow in our mountains following the dynamics we had had in the previous years. Another important element that you have certainly seen is the extraordinary performance of the market -- business unit of the market margin. We're expecting it also this year, we are still absorbing a very significant retention costs, which will only end in 2025. They are essentially due to customers repositioning after fixed price contracts and their end in 2022, with 100,000s of customers at fixed prices. They need to be reassigned and if they contact us, they can be repositioned and this generates a cost for us, but this retail margin is very important to us and it stems from a customer base, which has increased by 500,000 customers compared to the same quarter in 2023, and they are free market customers with prevalence for electricity customers. Also regulated businesses have already produced more revenues of WACC adjustment and the very good performances we have made in our investments supporting the RAB of electricity, water and gas and the remuneration base to grow further. And all of this has been partly offset with different EBITDA impact by thermoelectric production, which is decreasing due to higher hydroelectric production and to the import from France and from the MSD which is now back to a normal level, which means about 50% of what we had in 2023, and this is in line with our expectations. Very interesting element for the very first time in our history, renewable energy source production has exceeded the thermoelectric production. We have 1.3 terawatt hours of renewable energy sources in total. And 1.2 terawatt hours of electricity production. So this effect has caused the decrease you see here by 43% of CO2 emissions produced kilowatt hour, which is a very important achievement. The growth of RES is essentially linked to the start of operations of some wind and solar farms, mainly wind farms, the most of all in Sicily Matarocco plant. The other very important element is the distribution capacity of our electricity. As you see, it has been growing significantly by 6% to 7% driven from the investments we have performed. Last year, we have invested more than EUR 270 million in the electricity grid with an increase thereof about EUR 170 million. And this measure has been adopted to tackle the peak in the demand of distributed energy, which is estimated at 30%. And in Milan, Brescia, it can reach 50%, which requires important investments in line with the logic of taking over the [indiscernible] from ENEL, we are now working on the closing. There is some administrative measures to be taken. And then we also need to define all of the criteria for measuring the energy which is distributed by A2A or ENEL through the substations from Milan to the outskirts of Milan. Always with reference to renewable energy sources, it's worth drawing your attention to the fact that in early May, we have acquired 70% of the solar farm in Milan too. We have a building site for a 60-megawatt solar farm, the largest 1 in Northern Italy, with this new plant, adding 112-megawatt peak production, we will have, in total, almost 170-megawatt capacity; by far, the largest photovoltaic plant in Northern Italy. We have continued to invest to counteract the water losses. The distribution network of water is well remunerated by the energy authority. I would say that it's the part of network where we get the best WACCs. The per head investment is EUR 130, the national average is about 50% of that. So we have about EUR 100 million of investments for the water network, which is very rewarding from a technical point of view. And in this slide, you also see the other 2 elements, namely the final opening of the flu gas cleaning in Brescia, improving the performance of the WTE plant so that 12,500 equivalent households can get heating through this WTE plant. And then we have been awarded the order for public lighting [indiscernible] which confirms our geographical expansion. We are now present in 8 regions and 45 municipalities. If we look at the next slide, it's self-explanatory. I would say it requires no comment. Luca Moroni will comment on the net financial position.

We have decreasing ratio between PFN and EBITDA, which is 2.2, which is a significant financial performance. The significant growth of the net profit supported by EBITDA growth supported by industrial elements has allowed us to have an additional benefit, i.e. reduction in the cost of debt besides tax efficiency leading us to ordinary net income of EUR 294 million, [ a monster ] of year. Look, I don't know whether you want to add some details on the next slide. Good afternoon also on my side. I'd like to thank you very much indeed for taking part in this call. Slide 5 shows how EBITDA growth a 40% increase to reach EUR 202 million year-on-year, as you see here, EUR 703 million versus EUR 501 million in Q1 2023, stems from energy generation EUR 120 million and market effect EUR 87 million. We will then see what are the drivers of these positive changes. Also smart infrastructures are performing well. We have an increase of EUR 11 million. And we have a stable performance of waste as we will see in the next few minutes. It has given a very positive contribution in terms of industrial performance, which is partly offset by some scenario effect, which has been normalized. Let's now comment on the various business units, Slide 6, you see generation, which is increasing by EUR 119 million, EUR 120 million versus quarter 1 2023 year. We have provided a breakdown linked to the technologies we manage as mentioned by Renato at the beginning of the presentation. So we have produced more using renewable energy sources than conventional ones, through thermal electrical sources. And you see the significant contribution more than EUR 200 million, thanks to RES. The most important part comes from our hydro plants, which have benefited from very positive water levels, thanks to the heavy snow and rain falls, so that we are on the safe side also for the next quarter. So there is a slight downturn, EUR 70 million less in the so-called flexibility part related to more conventional plants also called fueled plants, which have not generated any energy. While in Q1 2023, there was still some residual production and less production at San Filippo wind farm. And as Renato has already mentioned, we have CCGT plants, which have produced fewer terawatts but we have leveraged the flexibility of these plants to reach attractive margins. The trading portfolio is now stable. In previous years, there had been very positive results, also thanks to market volatility, which is now thus making this kind of business more stable. On the right-hand side of the bar chart, you see the generation from renewable energy sources, which increases by 83%, reaching a level of 1.3 terawatt while the thermal production decreases by 64%, and it reaches 1.2 terawatts. Next slide, Slide 7, market, as already described during previous meetings, the market is now stabilizing and normalizing its margins. Most of all, if we compare it with the last quarters of 2023. The difference is here measured with reference to Q1 2023, where there was still the tail of fixed price contracts over 2 years where we had been suffering and we have also we had also larger volumes acquired on the spot market at increasing prices. This phenomenon had been commented in detail for last quarter of 2022 and in Q1 2023. And then gradually, the situation has stabilized, also expressing the potential positive margin that we had already commented, thanks to the overall market repositioning at more attractive levels after the energy crisis also because some operators have left the market. So market margins are, therefore, positive. They give us a good visibility also when it comes at the next quarters. Also considering the fact that we can absorb investments we had resolved to perform in 2023. We are now reproposing it in 2024. We are going to invest in the customer base about EUR 60 million or EUR 70 million for retention actions if customers are proposed different market prices due to the change from a fixed price energy contracts renewed in 2022. The customer base is increasing, and reaches 3.5 million customers. That's not new. We have already commented the figure. You can see the difference. The main. Increase has been recorded starting from Q2 2023. And this growth has continued. There will then be a stabilization, and we will then look at the full effect of the acquisitions in the pipeline for 2024. Electricity sales are performing well. There is an increase by 9% from 5.7 to 6.2 terawatts. Gas sales are pretty stable. Slide 8. You see here the waste business unit. Industrial management of this business has led to very positive results, also thanks to the start of operations of Parona WTE plant, giving its full contribution and thus allowing us to have larger volumes to produce actually more gigawatts of energy as we see on the right-hand side of the slide. This contribution from the [ desal ] plant, which is worth about EUR 18 million has been offset by about EUR 20 million linked to the repositioned energy scenario after the peak that we had recorded, the peaks of positive performances last year. Slide 9. Smart infrastructures. As we were saying all businesses increased, all distribution businesses increased positively with the only exception of electricity distribution where we had a positive increase as a result of both positive forecast of the WACC and IRR. But then there was -- there were lower volumes of new connections also due to the normalization of the various contributions resulting from this are called Ecobonus and Superbonus, which had an impact on the volumes of new utilities which is something that we noticed in the heat management business. The return for gas and water cycle were very positive, thanks to the increase in RABs, which enables us to obtain an excellent return on our invested capital. On Slide 10, you see the trend of the income statement, as we were saying in the beginning. EBITDA increases by 40%. And therefore, we have an increase of up to 70% in net income, basically as a result of good financial management, that is to say management of financial expenses. So there's -- with the tax rate, which is 29% as against 33% in the previous year, there is some risks, and there is some EUR 30 million depreciation on the investments made. I had already mentioned CapEx, and so I can confirm that we are mainly on the same levels as last year, that is to say, EUR 220 million. And we need to stress that we have EUR 125 million investment for development investments. So basically, they form the bulk of our investments. On the right-hand side, you see that investments in smart infrastructure take the lion's share. And especially within smart infrastructures, the major part is taken by the electrical energy. But you can see that our CapEx are spread across all business units. And we have over EUR 1.4 billion CapEx over the year. And at the bottom, you see the typical breakdown you're accustomed to seeing. That is to say, both by SDGs where we have approximately 80% and by EU taxonomy, which is even stricter and we have 64% of eligible CapEx. And the last pie chart basically shows a breakdown by our 2 pillars, that is to say, secular economy and energy transition, where energy transition also in line with the new plan where we have EUR 22 billion CapEx over the plan period for energy transition fixed for circular economy. And here, you can see we have a 70% to 30% ratio between the two. On Slide 12, you see cash flows. There's excellent operational leverage, so EUR 700 million, which enables us to reposition the net working capital delta. As you may remember during 2022, we had managed, and we had shifted some of commodities purchases from stock exchange platforms to bilateral contracts. And thanks to this excellent cash flow management, we are now able to fully normalize our situation. So we have the typical seasonality effect in quarter 1, in Q1. That is to say something that is related to the winter part of our business. So we are absolutely in control of the trend of cash flows from working capital management. And so we can obtain a rate which can repay our CapEx and so we still have enough variation which increases by EUR 70 million but the most important figure is that we keep sound PFN/EBITDA ratio at 2.2. Okay. Let's close with the good news of the change in the guidance. You have all seen that we have revised the annual [indiscernible] of the guidance by EUR 100 million in terms of EBITDA and the net ordinary income has been increased to EUR 650 million to EUR 670 million. So let's say that these results make us very confident and also very happy, I would say. I will now leave some room for questions. I would skip the takeaways, and I would go straight to the Q&A session.

Okay. Thank you. Thank you very much. [Operator Instructions] The next question comes from Javier Suarez from Mediobanca.

Thank you for this presentation. My first question is about the increase in the guidance. Can you please help us understand what part of this increase in the guidance in EBITDA and income is related to water effects, [indiscernible] effects and which part is associated with better performance. Thus definitely the contribution by both, and I would be interested in understanding how this EUR 100 million of EBITDA can be broken down? And the second question is with respect to what you said about the business plan that you've recently presented. If my memory serves well from 2025, 2026, you have an assumption of hydro production of around 3.9 to 4 terawatts per hour. Can you confirm that? And looking at the historical average of the last 10 to 12 years, I think he mentioned that you consider this to be -- whether you consider this to be a realistic or conservative assumption. And then I would like to have an update on the selling strategy for the previous -- well, in the previous quarter, you mentioned you wanted to achieve a 70% level for 2024. And then EUR 160 for 2024, and EUR 250 for 2026. Can you tell us about the forward selling? And can you tell us the price time you plan to achieve in 2026? And then I have one last question about the supply performance. which is better than you're expected. So can you give us some more granularity about what we can expect from this strategy?

Well, I'll answer some of your questions, and then I'll hand over to Luca to supplement my information. Let me start from your second question. Yes, in our plan, well, we have criterion, which is always the same, and we didn't think we should change it. That is to say we take the historical average for the previous 10 years to use a statistical criterion and to estimate hydroelectric production. And considering that 2022, as you know, was 2.7% and 2023 was 3.7%. These 2 years reduced the historical average, which went down from 4.5% to 3.94%, as you mentioned. You should consider that the full potential of our plants can reach 5 terawatts. And in some years, it even achieved that level. So of course, we would need to have a crystal ball, but what I can confirm is that at present, in our business plan, we have the value that you mentioned, this is approximately 3.9%. With some growth, you may remember the slide which showed growth to 4% to 4.1%, which is mainly related to investments because our business plan forecasts a EUR 1 billion of CapEx for hydro license generation over the planned period to improve performance and also the generation performance of our plants. Then, as we said, we think that for this year, 4.4% would be a more reliable figure. And for 2025, well, of course, I don't know what I should tell you because otherwise, I would do a different job. I'm not a fortune teller, but with regards to the strategy -- as a strategy, we had a hedging level of 70%. And if we increase fixed price production, this has gone down slightly to 63%. We are hedged at EUR 165. So you remember the price correctly. As for 2025, we still have an estimated 20%, which we had used when drafting the plan. And as for prices, we keep reiterating the concept that we had already set forth in our business plan. That is to say that there is an increasing difference between some achieved figures and full base and PUN base and the type of our plants allows us to have an achieved price, which shows a systematic premium over the base national single plan. In my opinion, in the business plan, we used the average figure for the last 5 years where the achieved price was 10% higher than the base P1, but at least the first 2 years of those 10 years, 2019 and 2020, were basically flat. The levels were very low, and there was no volatility, which is what makes a difference. So today, we see price, which is stably over EUR 100. Over our plan period, we basically assumed a 10% increase in this figure. So honestly, we feel very confident and comfortable in this respect because we don't see any concrete possibility that in the next 10 years, there may be anything different from gas price, which can set the price for energy in a marginal price -- from a marginal price perspective. In terms of surprise, well, I think that you are more surprised than we are. We have always told you that margins were performing very well because we signed the contracts, and we know them very well. And let me underline that as part of this performance in this quarter alone, we have EUR 28 million retention costs only for this quarter, which are the tail of the EUR 80 million that we already spent in 2023 to reposition our customers, as I mentioned earlier. And throughout 2024, despite the revised guidance, we have similar investments of approximately EUR 80 million, EUR 90 million for repositioning, which would no longer be there in 2025. So we expect that net of some competition, the performance for 2025 would be better than in 2024 because of the obvious reasons. With regard to the guidance, I'll hand over to Luca who can give you some more details.

Let me just say there's already been explained exhaustively and is possible to draw the conclusions from this reasoning. It's clear that the 2 businesses of generation and market are performing very well, most notably generation, thanks to the effect of hydro production whereby we assume to reach 4.4 terawatt throughout the year, which allows us to have good visibility also on margins considering the fact that we continue to proactively manage hedging. Therefore, in the EUR 90 million approximately, 2/3 in generation and 1/3 market, and then there are minor differences for the other businesses, but these are the 2 main drivers.

Next question Davide Candela, from Banca Intesa Sanpaolo.

I have 2 questions. First question, referring to generation, it's a conceptual question about Hydro as in 2022 with a drought that has had tails in 2023, could an apparently positive year like 2024 have positive reverberations on 2025 in terms of water level? So is it possible to store terawatts for the following year? Or is it convenient to generate more energy also for a price revision in 2024? Second question is about the network, if we look at electricity and gas RABs, I have seen significant growth, not only year-on-year, but also growth with reference to end of 2023, plus 18% for electricity. So end of 2023, did you still have a temporary RAB not considering some aspects like resistance, the deflator and inflation effect? Or do you have a new impacting projects in 2024, which have produced these benefits?

As for hydro production, it's very likely if 2024 continues normally during year-end with big drop in water reservoirs. We don't have any specific interest in depleting all of them in 2024. We have had to update the guidance in Q1, we have, therefore, the opposite interest. We don't have the water reservoirs with a huge capacity. So this is definitely an element which is fraught with some limitations, but -- in 2023, we had 3.7 gigawatts, and this was also partly due to the fact that the year had started with empty reservoirs. So why we think that 2025 will start with water reservoirs filter to their maximum capacity level. And this is important to consider. We have reduced the hedging from 70% to 63%. And there is no classical assumption in 2025. So also on the buy side, we don't have any interest in anticipating the production in 2024 over 2025. As to the electricity RAB, it's a topic you are very familiar with. We don't have an increase due to acquisitions. We had an increase due to the fact that we have performed EUR 234 million new investments in 2023. There are about EUR 70 million on depreciation and EUR 170 million more of electricity RAB, which stems from the huge investments we are making in the electricity grades so as to tackle the growth in the peak demand in the city of Milan, where the distribution level is about 7 terawatt per hour and energy density, which is 5x higher than in Rome and the network increasingly demanding for energy peak capacity of 1.7 gigawatt, but we are suffering when we reach 1.5 gigawatts. So the investments we are making will help us reach 2040 with 2.6 gigawatts of capacity, which requires this level of investments. This is a very important element to consider [indiscernible] has a more limited increase mainly due to the service contract with the municipality of Milan. Also for gas, we have incremental investments in our business plan and for water, you see a higher figure than we had originally assumed because in some way as explanatory, we were supposed to transfer 12 small concessions to the in-house operators in the province of Brescia called [indiscernible] and they didn't have the economics to step in and as a matter of fact, they have surrendered, they have given up, the assets are still controlled by, and the same goes for the RAB. We are still investing water, and we believe there can be great opportunities there in our future.

Just a question for clarification on electricity RAB and investment plan and the trend underway are both clear. I just wanted you to contextualize the figures. If I look at your figures end of '23, you had about EUR 950 million, which is more or less the same value that you have in Q1 2024. We can explore that after the call, if you wish.

I remember, in Q1 2023, the RAB was approximately EUR 870 million, EUR 900 million, and we have now reached EUR 1.1 billion or more. I remember an increase between the 2 quarters of about EUR 170 million between Q4 '23 and Q1 2024 with an annual depreciation, which was about EUR 70 million and investments of about EUR 230 million. After the call, you can get more details from our coworkers. We will be glad to provide further details after the call. Net of ENEL acquisition, we estimate we will reach EUR 3.4 billion RAB in 2035 and this happens following the curve that we have provided in our business plan. So please make reference to the business plan. Which is the most reliable planning tool we do have.

The next question from Emanuele Oggioni from Kepler Cheuvreux.