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

Good afternoon. This is the Chorus Call operator. Welcome to the presentation of results as of September 30, 2021, of the ACEA Group. [Operator Instructions] Now I would like to hand the floor to Ms. Elvira Angrisani, the Head of Investor Relations at ACEA.

Good afternoon. Thank you for connecting to the presentation of the ACEA Group results as of September 30, 2021. Mr. Giuseppe Gola, the CEO; and Mr. Fabio Paris, the CFO, will now illustrate the presentation, and then we'll have a Q&A session where Giuseppe Gola and Fabio Paris will be present, together with Stefano Songini, the Director of Investor Relations and sustainability and myself. Giuseppe, the floor is for you.

Good afternoon, Elvira. Good afternoon, everyone. The results as of September 30, 2021, is still very good. We are in a good trend continuing on to the results of the first half of the year. Page 2 of the presentation shows the main financials. EBITDA stands at EUR 930 million for the first 9 months, plus 8% plus vis-a-vis the previous year. We also have a net profit of EUR 249 million, which is plus 13% over the previous year. CapEx stands at EUR 684 million, plus 9% over the previous year. And net debt stands at EUR 3.998 billion with the ratio of net debt over EBITDA at -- that stands at 3.26x. So this results allow us to confirm the guidance, which you may remember. So we confirm the guidance of 2021 with the EBITDA, which is expected to grow in excess of 80% over 2020. CapEx is also confirmed in guidance. It was stand at about EUR 900 million. We also confirm our guidance on the net financial position which is expected to stand in the range between EUR 385 billion and EUR 395 billion. Following page shows the leading events, the main happenings, the main projects we have been involved in, in the results of 2021. So we'll review them briefly together. In January 2021, we were very successful in placing the first green bond for a granters of EUR 900 million, of which EUR 300 million was a trench issued with the negative yield of fitch ratings confirmed long-term issuer default rating at BBB+ with a stable outlook. In between April and June 2021, we've been very active on the commercial front. We have launched the electric power vehicles offer with ACEA e-mobility. And we also launched a Luce 100% Green and Gas 0% CO2 offer. So all of our commercial offers were presented with 0 impact, 0 CO2 emission flavor. In May 2021, Gaia rating gave us a score of 78 or 100 in the overall rating of ESG performance. Our rating improved for the third year in a row. June 2021 Standard Ethics improved our corporate rating from EE- to EE. July 2021, we announced the acquisition of 2 companies, operating in plastic recycling. In particular, I'm referring to the purchase of 70% of Serplast and 60% of Meg. In September 2021, we went through with another acquisition, a bigger one this time. We acquired 65% of the Deco company, which is a company that operates in the disposal and recovery of waste in the region of Abruzzo with an installation that treats about 300,000 tonnes per year. Throughout 2020 and 2021, we have worked a lot on photovoltaic. We've worked out many new plants for a total installed capacity of 69 megawatts today, and we are working on future or ongoing plans for another 51 megawatts. In the meantime, we also worked on selection, a financial partner, and this project is actually going on as scheduled. In October 2021, we have announced an agreement -- relevant agreement for the Consorzio Interuniversitario per la Scienza e la Tecnologia dei Materiali to develop circular economy initiatives. Now let's look at the economic and financial performance in more detail. For the first 9 months of 2021, consolidated revenue stands at EUR 2.765 billion, up nearly 12% over the previous year. EBITDA is EUR 930 million, plus 8.3%. EBIT stands at EUR 459.7 million, plus 7.9% over 2020. And the group net profit is EUR 248 million, up 13.6% over the previous year. CapEx stands at EUR 684 million, which means plus 9.4% over the previous year. Net financial position is EUR 3.998 million, which means plus 13% compared to December 2020 end September 30, 2020. Let's switch to Page 5. This shows the performance by business area. In particular, as far as EBITDA is concerned, so EBITDA is EUR 930 million, and the contribution to growth is EUR 31 million from water, which reaches a grant total of EUR 489 million. EUR 3.8 million of EBITDA comes from energy infrastructure and distribution, which is EUR 275 million, plus EUR 3.8 million. Generation also gives an important contribution to growth, and it stands at EUR 53.7 million, plus EUR 18.5 million. Commercial and trading stands at EUR 56.2 million, up EUR 6.2 million. Environment is EUR 49 million, plus EUR 9.5 million. And other businesses and the hold company grew by EUR 2.5 million. Here, we also show the changes in the scope of consolidation, which we incurred in the last 12 months, which gave a contribution to growth, in particular, plus EUR 10 million was the contribution of the consolidation of SII Terni. You may remember that in November last year, we have closed this deal. Then the acquisition of Adistribuzionegas, which has now been merged with Pescara Distribuzione Gas and we named Adistribuzionegas, had an impact of plus EUR 2.7 million. The acquisition of Ferrocart/Cavallari, the waste treatment plant gave a contribution of EUR 2.3 million. The acquisition of SIMAM, which we concluded in May last year, gave plus EUR 1.8 million. All the photovoltaic developments were plus EUR 2.2 million and the Consorcio ACEA e Lime Norte contributed EUR 4.8 million. So net of that new scope consolidation. So the organic growth of EBITDA was plus 6%. So now let me hand the floor to Fabio Paris, who's going to present details of individual business areas and other quantitative data.

Thank you, Giuseppe. We are at Page 6 in the presentation now. So we can see some results for water to begin with. As the CEO just announced, all businesses are actually up and growing. And this is also true for the water business. The EBITDA grew by 6.8% in this business. And this was actually seen in all the companies in the water business with the only exception of ATO5. But you may remember, we have discussed this before. This is due to tariff reviews, which were implemented during 2021. Growth is mainly due to ATO2, which in relative terms is the biggest company in the water business. And this is due to an effect which is closely connected to the operational efficiency, which we are able to obtain during this period of time. The results of the water business for the first 9 months of 2021 was also helped by the consolidation of the attorney, which happened in November 2020. And the new scope extension for distribuzione gas, which is actually the outcome of the merger between Alto Sangro and Pescara Distribuzione Gas. So this new scope was actually making a reference to what used to be Alto Sangro. Let's move to Page 7. This shows the performance of the energy infrastructure business. Energy infrastructure also helped increase EBITDA. The performance was plus 1.4% here. And this performance can be broken down to show that the improvement for electrical distribution, and in particular, the areti company stands at 2.2% before effects coming from activities performed in connection with the resilience plan. This is also due to the commercial partnership with open fiber. Now this performance may actually mitigate the reduction, which has been posted in the public lighting business. Here, we reduced the business by EUR 1.2 million and this is mainly due to the lack of authorization for new assets in the public lighting business, which implied a decrease of EUR 2.1 million. Let me remind you that as of 30th of September 2021, which is when we finally completed the installation of second-generation meters. So during this first 9 months, the group has installed 290,000 new 2G meters, which is fully in line with the expected rollout plan. Should we move to Page 8? This shows the performance in the generation business. Here again, we can actually post a significant growth in terms of both EBITDA and CapEx. The main economic effect is driven by the increase in the price of energy and by the volumes of hydro electric energy produced over the whole year. Let me remind you that in the same period last year, we had posted a lower rainfall data. And so we ended up having lower volumes of hydro-electric production. This period's results were also due to the developments of this new business area, which is photovoltaic, which posted plus EUR 3.4 million, of which EUR 2.2 million were due to the change in scope of consolidation. The new photovoltaic plans, we have now reached the total installed capacity of 69 megawatts, res plants under construction, most of which are pretty advanced in construction. As of September 30, 2020, they account for another 51 megawatts. Let's move to Slide 9, which shows the performance in the commercial and trading business. Here again, all performance indicators are going up for this business area as well. EBITDA is up 12.4%, and CapEx is also increasing quite substantially. The increase in margins is mainly due to the margins on the free market, both thanks to the increase in the volume of energy sold, which is up by 33.2%. And this is also due to the price effect, which has been actually characterizing this storm on the market. EBITDA also grew, thanks to the improved margin on gas sales. This accounted for plus EUR 9.9 million. And the reduced margin on the in-house protection market, which meant minus EUR 2.1 million. Let's move to Page 10 this shows the environment business area. Here again, there is a significant growth of EBITDA, plus 24%. And EBITDA in the first 9 months of 2021 was up to EUR 49 million. Growth was mainly due to the effect of margins on waste-to-energy installations. Energy was sold at higher prices. And we also posted an increase in the volume we have processed. Let me also remind you that there was a scope change in this area, too, because we went through with some M&A deals, and we'll give you a snapshot of the ongoing deals, too. As our CEO pointed out earlier, in April 2020, we acquired Ferrocart, which actually contributed to this period's results for EUR 2.3 million. Also, we performed another acquisition a couple of years ago for a revamping activity of a sorting plant, which is Demap. We actually may remind you that the Demap is a company which is active in the revamping and sorting for plastic packaging. Another update I'd like to share with you, as the CEO said, is that we have signed an agreement to acquire Serplast than Meg that together handle about 70,000 tonnes per year of waste. And we also have an agreement to acquire 65% of Deco that has a production capacity of 270,000 tonnes per year. Let's move to Slide 11. This shows EBIT and net profit. The growth performance is also confirmed in the lower part of P&L. EBIT is up 7.9% from EUR 426 million in the same period last year to EUR 459.7 million in the first 9 months of '21. And net profit grew from EUR 218.7 million of 2020 to EUR 248.6 million in 2021, i.e., a 13.6% growth. Tax rate, which characterizes the current year is 29.8% versus 30.5% last year. Let's now focus on the most relevant items and the EBITDA. So there was a variation on depreciations. Depreciations increased, in particular, because of the growth of CapEx in the previous years in all business areas. As to impairments, these are in line with the growth of revenue. So the increase is mainly due to seasonal factors and to correlation with the increase of business volumes. Now let's move to Slide 12, where we can see a key focus on our CapEx and investment activities. All business areas are involved in the growth of our CapEx. The little exception being energy infrastructures. So CapEx will increase from a total of EUR 625 million in 2020 to EUR 684 million for the first 9 months of 2021. And in particular, most of the growth is due to the water business area, which is also the biggest relative contributor. And it has CapEx of EUR 373 million. This is mainly connected to the management of the water integrated service, i.e., the repair and expansion of auto in pipes, extraordinary maintenance of plants and networks, development and treatment plants, and once again, the consolidation of SII Terni, which was a scope change. The CapEx for the energy infrastructure business area gave a contribution of EUR 197 million. This is mainly due to the upgrade and expansion of the grid, then the resilience plan, which is one of the drivers that really have an impact on the economic situation of this period, and the installation of the 2G meters, which is actually reaching full rollout during this year. So we are completing this installation plan. The other business areas also contributed to growth, including generation, plus EUR 30.5 million in terms of contribution through the extra maintenance of plants such as Tor di Valle, which is production plan and the construction of some photovoltaic plants. The other businesses are commercial and trading, which is characterized by the costs due to customer acquisition and IT systems. And within commercial and trading, we also included the e-mobility projects that characterize most CapEx invested in this period. The -- this business area saw a contribution of investments of about EUR 23 million for the environment business, in particular, with the work we did on the Orvieto landfill. We changed in scope of consolidation of Ferrocart/Cavallari, and we also constructed a new concentrator at Berg. So CapEx overall keeps being characterized by a concentration of, well, 83% on regulated businesses, and the remainder is invested in nonregulated business. Now let's shift to cash flow, Page 13. Here, we can notice that higher absorption of working capital during this period was about EUR 64 million more than last year. This is mainly due to the activities we implemented during this period of time in which we have seen a sharp increase of energy prices. And the government stepped in with some measures to try and give some protection to end users. So all the government decisions and systems costs were actually having an impact on our accounts. So the temporary effect was a missed timing of working capital, which was due to the miss timing between the moment when we cash in our prices and the effect of the new prices kicking in. Another effect is the dynamics of the energy prices in this period again, which meant there was an increase in the volumes of goods sold, mainly due to higher prices. Now if we look at the cash flow statement, we can see that CapEx accounts for about EUR 670 million. I would look at the tax estate, which is actually much higher than last year. This is a direct consequence of the improved performance that the group has posted throughout this month. And I would also look at dividends paid in this period, which was paid out in June. Should we move to Page 14? This shows our financial structure. The group's net debt increased compared to the same date last year -- sorry, compared to December 31 last year. It increased by EUR 470 million. And the debt structure is still absolutely stable. Fixed rate stands at 85%, whereas thanks to the issuing we did at the beginning of the year. In particular, I'm referring to the green bond, which was placed for EUR 900 million in 2 tranches of EUR 300 million and EUR 600 million. So the direct consequence of this first green bond was a decrease of the average cost, which now stands at 1.42%. The average duration of the debt is 5.3 years. And as we reported already in the past, there's actually -- there's no significant component of debt, which is expected to be falling due before 2022. The rating for the group for both Fitch and Moody's is stable. As far as the outlook is concerned, Fitch rates as BBB+, whereas Moody's rates as BAA2. As to sustainability ratings, CDP rates as A- with a leadership position. Standard Ethics gave us a rating of EE. And let me remind you that Standard Ethics upgraded its rating in June 2021 and gave us a positive outlook. The rating that Gaia gave to the group was 78 out of a total of 100 and an improvement of the rating for the third year running for the group. So this is all from me, and I will yield the floor back to Elvira.

Thank you. Thank you, Fabio. So we can actually start the Q&A session.

This is the Chorus Call operator speaking. [Operator Instructions] First question is Javier Suarez of Mediobanca.

I actually have 3 or 4 questions. My first is about working capital. So of course, there's worsening of about EUR 60 million due to the measures that the government decided to try and contain the impact of the higher electricity and energy prices. So could you please provide us with some information about what this delta work in capital might be for the end of the year? And what's the underlying performance? This is also very important to try and understand how to contain the impact of this work and in our working capital. So what's the underlying performance that you're aiming at? So that's my first question. The second question is about the commercial and supply business. We know there was a pretty strong expansion in this business, in the amounts of clients, too. And so could you please provide us with some information about the individual brands actually in the electrical energy sector? Could you please give us some indications about the margins in this part of the business? That will be very interesting. Then another question is, did you see any impact from the increase of raw material prices? And finally, do you do -- already have any preliminary contracts with the new administration of the city of Rome, did you see any change happening there? Can you share some information with us?

Okay. I'll try and answer your questions. So the impact on working capital, this is mainly due to the effect of the increase in energy prices because the increase in prices means an increase in volumes sold. So this is the rolling effect, and I expect a part of that may actually go back to normal before the end of the year. Whereas other parts will actually go back to normal in the following year. Then we also have a point on the consistent charges, which I don't expect to go back to normal before the end of the year. And we'll need to try and understand whether this will become a permanent feature or whether it's just a temporary feature that the government will only keep going for a limited amount of time. So we now stand at EUR 60 million working capital more than last year today. And I -- well, by and large, I should say that maybe 50% of that should go back to normal before the end of the year and the remaining 50% next year. So this is connected to this effect due to the increase of prices. Also, the increase of working capital is fully in line with what we saw last year. So there's no particular structural phenomenon due to misperformance in credit management of payments or receivables or whatever. It's mostly -- it's due to external factors. Then your second question was about the commercial and trading business. Well, we are working on margins for individual clients. Today, the margins for clients on the free market is improving slightly this year. I should say it's stable or slightly improving and increasing. Gross margins are stable on the protected markets -- enhanced protection market. So should we look at an energy client in the free market today, the margin on a yearly basis is about EUR 120 with energy clients for the enhanced protection market have a margin, which stands at about EUR 45. So of course, the impact on the total economics of the commercial and trading business, as clients increase in the free market and gas business where we have bigger margins. This is certainly the plus side and this will balance out the loss of margins from the enhanced protection market. Also, as far as commercial and trading is concerned, starting from July 1, we had to give up 18,000 SMEs in the enhanced protection market because an auction was organized for the protected markets. And we didn't turn out to win it. So eventually, the EBITDA margin of those clients overall is nearly EUR 5 million per year. So that's to give you an overall picture. As to the raw materials prices and their impact, well, the overall impact on the group -- but personally, I'm really satisfied to see, especially as far as the price of energy and gas are concerned. I mean I'm quite satisfied to see how the group was able to wrap through this. We didn't suffer any negative impact, just this temporary impact on working capital, but we did have good impacts, which are not maybe huge but quite relevant as far as generation is concerned. Because both for hydro-electro generation and waste-to-energy generation, we have installations that work in a very profitable way. And so they took advantage from the increase of energy prices. So this is the main impact we have posted. As far as the economic management of the commercial area is concerned, we didn't feel the impact of the energy increases. Energy prices increases. But because we've been really conservative, so we always hedge whatever energy need we need to purchase with 12 to 18 months of advance. So we didn't really have to buy energy at the higher price that it trades at today. As to your question in terms of our contact with the new administration of the city of Rome, I should say that we expect no big changes, no big news there. The city of Rome is 51% shareholder. And well, as I seek, I have no comment on that, but I don't really expect anything particular, anything special to happen with new -- of the new city of administration.

We now have a question from Enrico Bartoli of Stifel.

So I have a few questions. I'd like to start with solar in photovoltaic. We read in the papers that your region, the finance stage in selecting the financial partner. Can you please give us some details about the possible timing of this deal? And also, could you please give some indication of the EBITDA of solar plants and how much they contributed for this 9-month period? Would you please share with us some details on the type of revenues that these installations allows? How many of these are energy installations, how many were involved in auctions? And what do you expect in the evolution of installed capacity this year and in 2022? Then I'd like to go back to the supply issue. So if I calculated that right, in the third quarter, the supply EBITDA is lower than it was last year, where in the first 2 quarters of the year, the comparison was quite significant. And there was an increase in free market customers. So in the third quarter, did you have any particular impact? And what should we expect for the last quarter of the year? Then I have another question, which is, again, on the new administration of the city of Rome. So there were changes in the top management of AMA. So do you think ACEA is expected to be involved in the plans of the new major of Rome to improve the efficiency in waste management in the Rome area?

So your first question was on photovoltaic. I'm not in a position to give you many more details now. What I can tell you is that the project is going on as expected. We are fully in line with our original scheduling as far as timing goes. So I'm reasonably confident we will be able to close on time before the end of the year, and so closing may actually happen, yes, before the end of this year, at least partially or very early next year. So it's just a question of technical time in the whole process is actually going on as scheduled and as expected. Now as far as the installed capacity is concerned, the deal we are working on right now is a deal for 110 megawatts. And of those 110 megawatts a significant part will become available in the next 2 or 3 months. So we actually completed our plans. We just need to hook them up to the network. Overall EBITDA generated by these plants on a yearly basis will be about EUR 20 million. If we look at the overall EBITDA of photovoltaic in the 9 months, that was about EUR 14 million. Now commercial and trading, well, I have anticipated a few notes on this already. So in absolute terms, third quarter was -- well, had the same profitability as the second quarter. Whereas in comparison with last year, last year, we had quite a few nonrecurrent positive costs and items. So compared to last year, the third quarter is decreasing slightly. So as to the ground rate, I can tell you that for the fourth quarter, we expect it to go up to EUR 20 million. And so without considering those nonrecurring items, we expect the fourth quarter to be stable compared to last year. So the overall EBITDA for the end of the year should be about EUR 80 million. As to your question on the new administration of the city of Rome, well, once again, right now, I'm sure that the new administration is really busy taking office. So far, we had no particular interaction with the new administration. And you mentioned AMA, this is something that concerns AMA and not ACEA. However, I don't really expect any substantial changes in the organization of ACEA or our action in the city of Rome. So of course, this is what I can tell you from the ACEA side. Of course, I'm not offering any comments from the city administration side.

Next question is from Stefano Gamberini of Equita SIM.

I have some questions. So the first is about the year-end guidance for CapEx, EUR 900 million of CapEx. Do you -- you confirm this, even the working capital is worsening. So as far as M&As are concerned, we're speaking of EUR 20 million invested during these 9 months. But there's another acquisition of Iseco that you had disclosed back in September. So do you expect this deal to go through before the end of this year? Or is it going to happen next year? And also, if I remember correctly, you were looking at more acquisitions, there were a couple of you were thinking about. So could you please give us your view about this, too? So I'd like to try and understand whether your guidance on CapEx, even the working capital is worsening, also includes this EUR 100 million of M&A or whether it's EUR 20 million for M&A. And if I get you right, working capital will worsen by about EUR 30 million. My second question is a clarification on working capital. I was looking at the 9 months of 2020. The trend is actually similar to the first 9 months of '21. Actually, '21 is higher. And then at the end of the year last year, we had an impact of 40 million so it's a big reapportion during Q4. Can we expect the same trend to strike in this year or 2? And can you please try and explain why there is this big impact in the last quarter? And also, there's an extra EUR 20 million, which is actually higher than the normal provision. So can you please explain that and help me understand it a bit more? Then finally, I'd like to understand what contribution you have from overseas and engineering and services. If I remember well in the 6 months, overseas was a business area that gave a major contribution. So could you please update us on the performance of overseas and engineering and services, too?

Okay. As far as the question on guidance is concerned, I confirm the guidance, in particular, we can confirm guidance for CapEx. It may actually be a bit higher than EUR 900 million, but it won't change too significantly. And based on that, we can actually confirm our guidance on net debt, too. As far as the guidance and net debt is concerned, the fourth quarter is very seasonal every year. I mean it's not just exceptional for last year. There's always a decrease of the absorption of working capital in the fourth quarter. This is a typical seasonal essent, which we expect to record this year, too, quite possibly this year because of the effects we have commented upon earlier, this recovery is likely not to be as high as it was last year. I said it earlier, we expect EUR 30 million to EUR 40 million more working capital by the end of the year. So because of this, the guidance and debt is confirmed in the range between EUR 3.85 billion and EUR 3.95 billion, it's likely to end up in the higher part of this possible range. However, of course, everything is compatible with the fact that for M&A, we are going to close the Deco deal, whereas we don't expect to close any other M&A deals before the end of this year. Without considering the possible impact of consolidation of some photovoltaic transactions, which may actually substantially reduce the net fees position. So you were talking about delta funds earlier. Well, this is only due to some upgrading items. So we have delta funds on some credits, which accounts for about EUR 8 million. And another relevant component is the variation of severance and termination funds for about EUR 10 million. I think there's still a pending question.

Yes. First, do you have any other acquisitions going on? Or you -- can you give us some color on any other acquisition deals? And the other question was about the performance of the overseas and engineering and service business areas.

Okay. So let me answer you about the EBITDA of the other business areas, and then the CEO will answer the first part of your question. As far as the overseas business area is concerned, EBITDA for the first 9 months is about EUR 20 million. And for the engineering and -- sorry, EUR 21 million. And as far as engineering and services is concerned, it's about EUR 12 million. And the EBITDA of the holding company is minus EUR 25 million. As to other M&A deals, I said it earlier, we don't expect anything else to happen during this year, which doesn't mean we're not working on it. We still work with great care. Sorry, I cut off. So as far as M&A is concerned, as I told you earlier, we don't expect to close any other deal, but Deco before the end of this year, which does not mean we are not working on other deals. We're still keeping some channels open, especially in the waste treatment area, but we don't expect them to go through before the end of the year. So overall, I think we may close the Deco deal before the end of the year. And so the increase in net debt should be anywhere between EUR 70 million and EUR 80 million for M&A.

[Operator Instructions] We have a question from Emanuele Oggioni of Kepler Cheuvreux.

Just a follow-up question on the renewables deals. I think that the deal also includes projects in the pipeline. In the past, you had given us some details about this, too. Also, we understand that in recent transactions, this is becoming an increasingly important element to assess the whole business. So we're not just looking at the existing operating under construction part, but also we're looking at the pipeline of ongoing deals, depending on the state they are in. So can you please update us on this part?

Well, we are developing a very important pipeline there. The actually -- the target is about 750 megawatts installed by the end of 2024. So far, we can confirm that target. The deals we are working on is the search for a long-term financial partner to go through with these deals, but also to work in the future on any possible further development. As we seek, I cannot give you any new detail about this, we are still in the selection phase. Thank you.

[Operator Instructions] There are no further questions at this stage.

Okay. Then thank you. Thank you for connecting in the investor relators office is always available for any further questions or information. So thank you all very much.

Thank you, and see you soon again, when we'll present the full year results. Thank you.

This is the Chorus Call operator. The conference is now ended. You can disconnect. Thank you.