ACEA S.p.A. (ACE) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the presentation on the results as at the first 9 months of 2020 of ACEA Group. [Operator Instructions] At this time, I would like to hand you over to Ms. Ira Angrisani, Investor Relations Manager of ACEA.

Ladies and gentlemen, good afternoon to you all. My name is Ira Angrisani. I am the HR Manager of ACEA Group. Thank you for connecting to this presentation, during which we shall present the 2020 results for the first 9 months. I'm here with the CEO, Mr. Gola; the CFO, Mr. Paris; Mr. Stefano Songini and myself. Mr. Gola will now start the presentation, and then you will have the possibility to ask questions.

Thank you very much, Ira, and welcome to you all to the presentation of the results of the first 9 months of 2020. Now the results are very good, and they are in line if not above our expectations. We have continued to grow despite the overall social and economic context with the persistence of the health crisis and going towards an even more complex situation. Despite this, over the past few months, ACEA has continued to show a very high level of resilience, and we shall continue to work in this direction. It has proven to be able to manage its own businesses and its unregulated businesses in a very good manner versus -- or considering the overall context -- with brilliant performance. Let's see some of the main indicators, the key data. EBITDA growing by 12% versus same period of 2019, EUR 859 million. EBIT EUR 426 million, plus 6% versus the same period last year. A net profit in line with the same period of last year, but we will see, during the presentation, we need to take into account a number of positive items that we had in 2019 and that we did not have this year. The CapEx plan is being carried out even faster than we expected before the COVID emergency. EUR 629 million (sic) [ EUR 625 million ] of investments, up 18% versus the first 9 months of 2019. Let me give you a few ideas of what we have been doing this year. You know these things, but let me summarize them. We continued the acquisitions in the field of waste treatment with the acquisition of Ferrocart and Cavallari, storage, treatment and sorting plants for a total of 145,000 tonnes a year. We completed the acquisition of Simam, a leader in the design, construction and operation of liquid waste treatment plants. This is fundamental for our engineering sector to moving towards the building of plants. We completed the acquisition of 51% of Alto Sangro Distribuzione Gas, thus increasing our presence in the field of gas distribution. We continued with the acquisition of photovoltaic plants. So now we have 52 megawatts of power installed. And we have, in pipeline, over 40 megawatts to be installed out of the total pipeline of 400 megawatts. And then in January, we placed a bond issue, EUR 500 million, with a term of 9 years and with the lowest rate in our history, 0.50%. Fitch confirmed the BBB rating with a stable outlook in May. And then Standard Ethics increased our outlook from stable to positive, and our rating is now EE. Last but not least, as you probably know, we approved, at the end of October, the plan -- the business plan covering 2020-2024. It's a plan which continues our strategy with a considerable value creation. Let me summarize the main items of the plan. EBITDA CAGR of 7% in 2024, EUR 1.4 billion. A very important CapEx plan amounting to EUR 4.7 billion in the period. And then net debt-EBITDA ratio of around 3x in 2024, the net debt-EBITDA ratio target is 3x. And dividends totaling and growing. So we are committed to a minimum dividend to be paid in 2021 on the results of 2020 of EUR 0.8 per share. Let's now move on to Page 3 of the presentation and you see what I have already anticipated. ACEA is showing a strong -- very strong operational and financial resilience and a strong financial strength. Now the EBITDA, should be noted, is strongly growing and has grown in the first 9 months. 83% of this is accounted for by regulated businesses. This has been the main driver, not to be affected too much by the COVID emergency. Now we confirm our guidance for 2020 that we had already increased. Now in particular, our EBITDA above 8% versus 2019, we confirm this, that is that our EBITDA is going to be above 8% considering the EBITDA this 9 months has grown by 12%. So we expect the target of EBITDA by the end of the year will be greater than 8%. We only need to take into account that in Q4 of last year we started the reconsolidation of Acquedotto del Fiora. And so the change is due to the change of the perimeter in the first 9 months. In the last 3 months, this change in perimeter will not be there because this Acquedotto del Fiora was already consolidated in 2019. And then CapEx broadly in line with 2019. Considering the first 9 months results, we confirm the CapEx guidance, although it is likely that it goes a bit higher. Net debt, considering the emergency -- the COVID emergency and we thought that this was going to be under pressure. Well, as of today, we are with a net debt of EUR 3.45 billion, and therefore, we can confirm our guidance. In our previous calls, we said that we were going to be in the upper part of the range, between EUR 3.45 billion and EUR 3.55 billion. So we're going to be in the higher range. But net of what is going to happen with this new shutdown or lockdown, as you may call it, we believe, however, that we will be within the range that we previously announced. Let's now see the financial highlights for the first 9 months of 2020. Consolidated revenues at EUR 2.472 billion, up 5%. EBITDA, EUR 895 million (sic) [ EUR 859 million ], up 12%. EBIT EUR 426 million, up 6%. And the group net profit in line with what it was in the previous year, same period. Now as we said before, a high resilience in the management of regulated businesses. And as the results show, it is important to note the consolidation of the Acquedotto del Fiora, the impact of M&A activities performed this year or in the second part of last year, they are contributing fully this year. And then we need to take into account the fact that the first 9 months of 2019, we had a nonrecurring income of EUR 16.2 million following the cancellation of the antitrust fine by the regional administrative court. So -- and then net debt, EUR 3.535 billion, growing versus EUR 3.63 billion (sic) [ EUR 3.063 billion ] at the end of 2019, but in line with our expectations. Now before moving on to the details of the different businesses, let me move to Page 5, where you can see what we have been doing to manage the COVID-19 emergency. I have to say the company has reacted constructively and positively to this emergency starting from the beginning of the lockdown or shutdown, and we managed to operate without any interruption. So we have been working seamlessly, and we moved from working from the company to working from home quite rapidly. And all of our white collars are equipped, allowing them to work from home, but they already had such equipments before. We have, on the contrary, been able to work on the field without any discontinuity, so operation -- operating activities continued. And this is also due to the digitalization of the workforce, and therefore, thanks to the actions in terms of workforce management, but this is something that we have been doing for years. Sometimes, we do not need to have workers interact with people in the office. Over the past few months, we have worked hard also to do a bit more of training. We now have remote training tools now. And we are working and we are rapidly moving towards the implementation of all of the work spaces that are going to be more appropriate to the new organizational dynamics. In all of the areas, we are adopting agile working techniques, and in order to manage all of our employees, we now have no longer time-driven performance measurement tools, but result-driven performance measurement tools with also an eye to the quality of life of our employees. Of course, in this moment, we are trying to improve the quality of their life and to strike a work and private life balance. And then the company is now reducing its company's carbon footprint because of people not coming to the office anymore. So here, Page 6, you can see the EBITDA of the first 9 months. 52% of this is accounted for by the water business, 35% energy infrastructure, 6% commercial and trading, environment 4%, and then 3% other areas. Now on the table or in the table on Page 6, you see all of the changes in perimeter, consolidation of Acquedotto del Fiora or Consorcio Agua Azul Lima, our company -- concerned company in Peru. In -- as of January, we have been consolidating it fully, the acquisition in the field of the gas distribution in the environment business and in the engineering business and the development and growth of photovoltaic. In the first 9 months of 2020, we had EBITDA growing by around EUR 65 million, thanks to this change of perimeter. Now considering this and considering that in 2019 we had EUR 16 million fine and some -- so a few million related to the CIP6 feed-in tariffs, considering all of this and net of all of this, our organic growth is by 8% bigger than -- or higher than what you could see in our business and strategic plan. Page 7, you can see the results of water. And then we should see the results of the other businesses. Water is fundamental for our growth, both because of the consolidation of Acquedotto del Fiora, which contributed EUR 41 million as a difference. And then also the acquisition of companies in the gas distribution business, but also because of the growth of investments and the application of the new tariff regime, all of this, and despite the fact that in the new tariff regime, we no longer have, for us, the effect of the commercial bonus that was EUR 55 million. However, this bonus was offset by the recognition of new cost components, including those related to the sludge disposal. Thanks to this and thanks to the growth of investments, we could grow our margins in the water business. Now as you can see, the EBITDA of the water business now is at EUR 458.6 million, growing almost 24%. CapEx growing by 33.5% versus the previous period. These results are the result of the changes of the perimeter. Next page, Page 8, energy infrastructure. So when it comes to the change in perimeter here, we have the development of new photovoltaic plant. Now we have total capacity of 52-megawatt. And then the growth of the EBITDA is driven also by regulatory distribution effects by EUR 15.7 million. Generation, the negative item here due to the COVID-19 emergency. There is the strong reduction of the prices. Unfortunately, in this period, we also had less rain and less water in the hydroelectric basins. The combination of 2 items led to a negative impact year-on-year of almost EUR 8 million, which was offset by the generation of the voltaic plant by EUR 7.6 million. The overall EBITDA of this business, it's growing by 5.3%. There is EUR 305.9 million. CapEx, EUR 223 million, up 13.4% versus the previous year. Now let's see commercial and trading. Here, the EBITDA is EUR 50 million, growing by 6% versus the previous year. But this result is particularly positive considering that in this business we had a combination of negative effects of the COVID-19 emergency -- that is a reduction of price of energy, but also a reduction in margin -- in the enhanced production margin, especially related to the revised mechanism to compensate delinquent accounts. Now we have quite a good number of customers in this market, around 800,000 customers, while the impact here was around EUR 6 million. The growth of customers in the free market and the growth of margins in the free market of around EUR 10 million of EBITDA managed to offset the loss of margin in the enhanced production market because of the revised mechanism to compensate delinquent accounts. On the free markets, in September, we had for 423 customers -- 423,000 in energy and a number of -- and 206,000 customers. So net of the regulatory changes and the COVID emergency impact, which had an impact on the price of energy. Now considering that the price of energy has decreased, especially during the lockdown, and considering that we tended to purchase energy at a price which is set 12, 18 months before, because of the lower consumptions, we were forced to sell on the market the energy that we could not sell to our customers and that had a negative effect. Net of this effect, this business would have grown a bit more. Now then you -- Page 10, the environment, and these are positive results, especially if you consider that in 2019 we had quite a consistent amount of CIP6 up until August 2019. So we are losing some EUR 19 million because of this. And then a reduction, again here in the price of energy. Our waste treatment plants were penalized with an impact on margins of minus EUR 5 million. But we had a number of positive items, which managed to make-up for the negative ones. We had, for instance, an increase in feed-in tariffs, and we completed the acquisition of Demap and Berg and the acquisition of Ferrocart, Cavallari and Multigreen. As to the volume of disposal, and treated 1,180,000 tonnes in the first 9 months of 2020, up considerably versus the same period last year, and growth in the energy sold. Now at this point, I hand you over to Mr. Fabio Paris, who will lead you through the economic and financial items.

Thank you very much, Giuseppe. And now we're going on to Page 11, and we shall now consider the EBITDA and the net profit. In the period, the EBITDA is at EUR 426 million, up 5.8% versus the same period of last year. Now within the EBIT, the items like depreciation up 18.9% related to consolidation of AdF, EUR 20.2 million; write-downs are growing by 12.2%; consolidation of AdF, EUR 1.1 million. Provisions are stable, considering -- however -- although there is a change by 16.7%. But in value, the overall value is related to AdF mostly. Now the growth of depreciations and write-downs is in line with the growth performance of regulated businesses and -- if you consider volumes and growth of revenues. Now if you consider our investments in the previous years, which then lead to depreciations, now it's -- the net profit is basically stable versus the previous year. But as Giuseppe said before, not only in 2019 we had the cancellation of the fine by EUR 6.2 million. And this had a direct effect on the result because this tax neutral. Please remember that last year, we also had a more or less -- up until August, we had the CIP6, which had a net contribution of EUR 13 million. Now let's move to the slide on Page 12, where you can see the CapEx trend. Now as we said before, this trend is strongly focused on regulated activities. As you can see, 85% of such investments were related to regulated businesses and the remaining on other areas. If you see the CapEx trend, overall CapEx growing by 18.2%. You can say that -- you can see that water and the energy infrastructure play the lion's shares. Water accounts for EUR 84.9 million. Total EUR 334.4 million (sic) [ EUR 338.4 million ] invested here. In this area, investments were made in infrastructures typical of this industry, repair and widening of water and sewage pipes, extraordinary maintenance of plants and networks, work on treatment plants and consolidation of the Acquedotto del Fiora by EUR 23.4 million. Now the energy infrastructure area has been growing by EUR 222.8 million versus the same period of last year. And in the first months of 2019, EUR 26.3 million were invested. Investments related to the upgrade and expansion of the grid and resilience plan with work on secondary substations and particularly on secondary networks, that is medium and voltage networks. Commercial and trading, minus EUR 4.8 million compared to the previous year. The reduction here is mainly due to the fact that in 2019 we had an increase in CapEx for the development plan of IT systems. Since last year, the company has been investing for the implementation of the new CRM system. Last year, we had the greatest chunk of investments here, and our investments are slowly decreasing or are becoming lower versus the previous period of last year. Then let's consider the environment business here. Investments are declining by EUR 11.2 million, overall investments in the year EUR 18.2 million. And here, we invested money in the San Vittore plant and in the Orvieto landfill. Now in the same period last year, we invested EUR 15 million for the revamping of Orvieto that was expensed last year and does not have a recurring effect on this period. Other businesses and corporate, EUR 1.1 million, reaching a total EUR 18.9 million of investments. The details here are related to reduced investment at Aguas de San Pedro; change in consolidation perimeter in the engineering and services area for the acquisition of the Simam stake; and then an increase in corporate investments, greater investments in IT projects, which have been implemented to manage the shifts and the management of the workforce in this period. Total investments of the group in 9 months of the year, EUR 625.3 million. Now Page 13 of the presentation, you see the cash flow and how it has changed during the period, starting from the EBITDA of EUR 859 million. [ I shall dwell ] on the most important item, change in working capital, EUR 211 million. I'd like to say that the most relevant factor here is related to the impact of the COVID-19 emergency. The overall effects are around EUR 90 million. EUR 57 million of this are related to payments in arrears of Acea Energia and the water companies, EUR 27 million, and the deferred collection of regulatory items around EUR 30 million. And then we also have an increase in the regulatory impact of around EUR 33 million. Other relevant factors, which I'd like to underline: change in income tax paid, EUR 48 million; dividends, EUR 166 million; M&As, EUR 92 million; and adjustments to IFRS 16 for the change in perimeter of the year, EUR 6 million, with a total -- for a total of EUR 473 million for the overall period. Now Page 14, net debt. As we said, as at the 30th of September 2020, our net debt amounts to EUR 3.535 billion, with a change versus the 31st of December 2019, where debt was EUR 3.062 billion. Now the net debt as at the 30th of September can be broken down in a medium-, long-term debt, EUR 4.116 billion, and the short-term debt, EUR 581 million. Now the net debt-to-EBITDA is now 3.1%. Now the structure of the debt as the 30th of September 2020 is fixed rate 82%. And then maturities, and you see here the detail of the maturities on the graph at the center of the slide. As I was saying, the debt within 2021, 3%, and debt after 2021, 97%. The ratio between fixed rate and floating rate is 82% fixed rate, 18% floating rate. So this hasn't changed. The ratings of this group. So financial and sustainability ratings of this group are stable versus what was presented in the previous conference calls. The Fitch Ratings is BBB+, stable outlook; Moody's, Baa2, stable outlook; sustainability ratings, then CDP, A- with leadership; and Standard Ethics, EE minus, and positive. This is it. This is the end of the presentation. And at this point, I'll hand you over to Ira.

Thank you very much, Fabio. At this point, we can take your questions.

[Operator Instructions] The first question by Javier Suarez with Mediobanca.

I have 3 questions. One, the guidance for 2020. Well, we heard that the financial debt is around mid of the range versus the previous up the range. So why are you changing your guidance on the net debt, although it's a little changed, but why? Investments have grown a bit more than you had before. So you have an effect related to higher investments. So can you explain me this a little bit more? Second question, the cash flow statement, the second column, minus EUR 211 million of working capital. Where do you think this will be at the end of the year? Then third question, trading activities. Now you have reached a very good result considering the current circumstances. You also said consumptions by customers have declined because of the COVID-19 emergency. Could you quantify the impact of the COVID-19 emergency to understand the underlying trend? And then I'd like to know something a bit more about the growth of your customers in the free market and also in the gas market. What is the profitability in these areas?

Now let me take your question about the guidance. Now in this moment, we have a clearer view of where we are heading to both in terms of working capital and M&A effects. So 2 months before the end of the year, we have greater clarity here. My forecast, in the absence of a new lockdown, which could slow down cash-ins versus the trend that we are recording in this moment. So should there be no lockdown moving on, my expectation is that the working capital difference should be around EUR 100 million, EUR 110 million negative. And we do not have major M&A activities in Q4. So M&As should remain below EUR 100 million. Now the combination of these 2, I said, EUR 3.5 billion. But when it comes to the financial -- net financial position, I'm going to be precise, 100%. So say, we are moving towards the high range, mid-range versus the guidance we gave you before, so an improvement of around EUR 30 million. In the absence of a new lockdown, stopping people from leaving home and, therefore, people could not go to the bank or post office to make payments. But then we will -- should this happen, we will recover this money next year. And we hope that if a new lockdown occurs that it lasts a little time. A comment on the commercial and trading results, quite encouraging, I have to say, yes, because margins are growing, especially because of the growth of customers in the free market. Nowadays, the gross margin of the free market is around EUR 100 per year, whereas it is EUR 50 per year in the regulated business or in the regulated market. So growing customers in the free market. And unfortunately, a decrease in the regulated markets. Well, 2 effects lead to an increase in margins. Now going back to the COVID impact. Overall -- just a second, I'm checking. Overall, the negative effect, i.e., the worsening of energy price, is around EUR 10 million for the whole year. And the comment on the profitability of gas clients. Well, when it comes to gas clients, I don't have a precise data. Perhaps, we'll come back to you later on. We'll let you know.

Yes. I'd like to know the margin similar to what you announced for the electricity market.

Okay. We'll let you know.

The next question by Enrico Bartoli.

Now first question about distribution. Growth is quite strong, around 6%. I wonder whether this is mainly due to tariff increase related to the evolution of rating or whether there are other factors which have contributed possibly? And then can you tell me something about the impact of cost efficiency in this division? I'd like to have some details about the components of the EBITDA, the contribution of foreign companies, engineering and corporate. And then when it comes to [ IDV ], EUR 6 million is that the overall value of the EBITDA for that in the first 9 months? Have you seen recently, after the approval of the new measures by the government, have you seen or have you noticed any impact? The area in which you operate are not in a lockdown in this moment, but perhaps can you tell me something about the evolution of the past few days?

Okay. I'll take the question about distribution. This is Fabio answering. And let me talk about the effects on distribution. Well, this is not merely related to the application of WACC on RAB, but there is an increase of the tariff component, which is related to a number of actions which are more profitable -- for instance, actions performed to improve our resilience or actions aimed at trying to decrease fines and penalties or actions to have reimbursements. Now in the infrastructure area, where we carried out a number of cost efficiency actions, which applies to all the group anyway, however, we launched an action to increase the efficiency of our personnel and turnover plans in order to kind of be more efficient here. So for instance, trying to exit people who are on the verge of retirement and the hiring of younger people, which generates this kind of efficiency or cost efficiency. Now moving on to the other questions. Now overseas, engineering and corporate: overseas EUR 20 million, engineering EUR 10 million, corporate minus EUR 25 million. Now the effect of -- the net effect of EUR 7.6 million in the EBITDA, yes, that's on the first 9 months. Now as to your last question about impacts of the new measures against COVID-19. Well, in this moment, we're not measuring or we're not seeing any change. In September, we haven't measured anything or haven't seen anything. In October, well, we witnessed a very normal month basically. So we haven't witnessed any change. Well, perhaps we shall witness some change from now on, especially if we were to go towards a new lockdown. At the moment, in the areas in which we operate, we haven't seen any change in the normal daily lives. So we are not witnessing anything in particular. Well, with the difference that -- from the point of view of work, in October, we were back, say, 25% of our employees who are back to the offices, whereas now we are back to remote working. And to safeguard the health of everyone and so we are now resorting or we have resorted to working from home massively.