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

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Q1 2022 Results of the ACEA Group. [Operator Instructions] And now I would like to leave you the floor to the IR of ACEA.

This is Ira Angrisani. Good afternoon, and welcome to the Q1 2022 Results Conference Call of the ACEA Group. We are here with the CEO and the CFO of the company, who will be reporting on the results of the first quarter and then will be available together with the Head of Investor Relations and Sustainability and myself for the Q&A session. Giuseppe?

Good evening. Thank you very much, Ira, and welcome to our call on the Q1 2022 results. I would say that the first quarter was in line and slightly better than our expectations. Our EBITDA -- our group EBITDA amounted to EUR 380 million, up 2% compared with the previous year. Net profit, EUR 99 million, 20% up on the previous year. And the capital gain that we realized with the completion of the Equitix transaction for the disposal of deferrable [indiscernible] asset that contributed roughly EUR 21 million, which again testifies that the evaluation that the Equitix fund had made of our assets was correct. CapEx, EUR 222 million, minus 3%, in line with our guidance -- according to our guidance in line with the previous year. Net debt EUR 3.890 million, minus 3% on the previous year, and this is because of disposal of 60%, 6-0, of our photovoltaic stake, which enabled us to reduce the net debt by roughly EUR 150 million. Our leverage is currently net debt-to-EBITDA LTM is 3.08. So I think it's fair to say that we can confirm our guidance for 2022. EBITDA growing between 2% and 4% versus 2021, CapEx in line -- substantially in line with 2021 and net debt between EUR 4.2 billion and EUR 4.3 billion. Good news that we received just after the closing of the first quarter, and therefore, the impact has not been factored in as yet is the Arera resolution disclosed on the 26 of April. So the Resolution #183, whereby the technical quality analysis carried out by the regulator in 2018 and '19 was published. So we're talking about an incentive mechanism for technical quality of the main indicator of the integrated water service. The ACEA Group has received EUR 26 million or in excess of EUR 26 million for the fully consolidated water companies. This is good news, not just because of the economic implications, but because, again, this testifies that the ACEA Group companies are well-managed because most of them have contributed to this result. And again, this proves that the industrialization process implemented in the past years of the water service has proved to be successful underwriting to do. On Page 3, you see the Q1 results. So consolidated revenues of EUR 1.192 billion, up 28% on the previous year, and this also because of the price increase of energy. EBITDA, EUR 318 million, up 2.1% on the previous year. EBIT EUR 153.8 million, minus 1.1% and net profit EUR 99.4 million, up 19.6% on the previous year, as I've already pointed out, also as a result of the Equitix deal. CapEx down by 2.8%, standing at EUR 222 million. Net debt EUR 3.89 billion versus EUR 3.98 billion, and again, we see a difference of 2.5%, but growing 3.5% versus 31st of March, 2021. On Page 4, you see the evolution of the EBITDA broken down by business areas. So EBITDA grew from EUR 311 million to EUR 318 million. And that was mainly driven by environment and generation that account for EUR 10 million and EUR 7 million increase, partially offset by the negative contribution of energy infrastructure that suffered from the reduction of the regulatory WACC and of commercial and trading that as we're going to see in a minute reports a result that is compared with last year first quarter that was particularly good. You see that all the other areas of the group contributed with a negative number of 2.1. And these results are also affected by the changes in the scope of consolidation because of the recent acquisitions made over the past 12 months. Particularly, the acquisition of MEG that contributes EUR 0.5 million; Serplast, that is waste treatment and plastic treatment, in particular, contributed to EUR 0.1 million; Deco, EUR 1.18 million; Ecologica Sangro that contributes EUR 1.1 million; the photovoltaic business contributes EUR 1.2 million and the Consorcio ACEA Lima Sur contribute EUR 1 million. And now I would like to leave you to Fabio Paris for more details about the financial highlights.

Thank you very much, Giuseppe. And let's start with the financial highlights of the water business first. As we already announced, we reported a positive performance that applies to all the water companies of the group, with the exception of Gori. I would like to recall again the closing of the agreement between the Consortium established by Ascopiave and Iren for the acquisition of certain gas distribution concessions. And the concessions of interest to ACEA are 5 ATEMs, 2 in Abruzzo, 2 in Molise and 1 in Campana, all in the center of Italy. The agreement was signed in April 2022. The main drivers of the growth are ATO2 that contributes 1.3% to the growth of the EBITDA. And this is mainly due to higher CapEx and higher operation efficiency. As we already pointed out, Gori reported an increase in maintenance costs and was impacted on -- by regulatory effects. And I also would like to point out the increased contribution from equity-accounted companies. Giuseppe already mentioned the technical quality reward for 2018-'19 amounted to EUR 26 million, exclusively for the water companies fully consolidated in ACEA Group and EUR 24 million of this EUR 26 million referred to ATO2. Let's now move on to Page 6, where we can see the details of the energy infrastructure performance. As already pointed out there is a reduction compared with Q1 2021. And the drop in EBITDA by 3.6% is mainly due to the electricity distribution of ARETI with a negative impact of 70 bps in WACC from 5.9% to 5.2%, partially offset by improved operational efficiency. So the net effect is a reduction of EUR 3.5 million. At the 31st of March 2022, the second generation electricity smart meters installed amounted to 450,000 and we are still installing the charging points connected to the grid at the 31st of March were 653. In terms of total electricity distributed numbers of post, you can see that both have been growing and are higher than the Q1 2021. On Page 7, we can see the financial operational highlight of generation business. And as already pointed out by Giuseppe, we reported the closing of the agreement with Equitix for the sale of a majority stake in the holding company to which ACEA photovoltaic assets have been transferred. The disposal included 105 megawatts of which 46 eligible for feed-in tariffs and 59 newly built. The closing took place in March 2022. So the scope of consolidation in Q1 '22 contributed to the group's results because already consolidated. And the price and volume effects have driven the growth of this business that grew by EUR 8.4 million. However, this growth was partially offset by the reduction in volume of hydroelectricity produced, a reduction of 35% mainly due to lower rainfall. The change in scope of consolidation of the photovoltaic business has contributed EUR 1.2 million. And as for the photovoltaic plants pipeline we have, all in all, 640 megawatts in the pipeline, 190 of which approved and therefore under construction already to build and 450 megawatts are waiting for authorization. Page 8, you can find the highlights of the Commercial & Trading business. And here, we reported an EBITDA reduction of 29%. The reduction in the EBITDA as the CEO already pointed out is compared to the results, particularly brilliant results achieved in Q1 2021. So the reduction of the EBITDA reflects an exceptional circumstances marked by high levels of energy price volatility and a drop in electricity consumption due to the higher proportion of consumers and the customer mix. And this is also mirrored in the KPI that are reported in the table. So you see a drop of the total energy sold from 2.1 giga to 1.9 roughly. And the number of electricity customers remains stable. Total gas sold remains stable as well as and the same applies to the number of gas customers. The free market EBITDA because of the factors that I've already mentioned, dropped by EUR 1.3 million. The enhanced protection market EBITDA dropped by EUR 1.1 million, and the gas sales EBITDA dropped by EUR 2.7 million. We can now move on to Page 9, where we can find the highlights of the environment business. And again, I would like to highlight the acquisitions that have already been mentioned, the acquisition of 70% of Serplast and 60% of MEG. These are 2 companies that operate in the plastic recycling sector. They handle volumes of roughly 70,000 tonnes per year, I mean, jointly. The closing for MEG took place in October 21 and the closing of Serplast in February 2022. Moreover, the acquisition of 65% of Deco that is a company that designs, builds and operates plants involved in treatment and deals with solid urban waste for 270,000 tonnes per year. So the closing took place in November 2021. As you can see, we report an increased EBITDA for waste-to-energy plants, thanks to higher prices received for electricity produced. And then a change in the scope of consolidation, plus EUR 3.5 million. And as I said, another main driver of EBITDA is the higher prices received for electricity produced that contributed EUR 6 million. Again, a change in scope of consolidation contributed EUR 3.5 million. And then I would like to point out the reduced EBITDA at Demap and this is because of lower volumes handled, and this accounts for roughly EUR 1.7 million. And this because it's partially due to the plant stoppage that occurred in December '21 and the plant restarted in February 2022. Moving on to Slide #10. Here, you see EBIT and net profit. EBIT remains flat with slight increase compared with the previous year. Pre-tax profit increased by roughly 15%. And this, as already pointed out, because of the capital gains realized on sale of photovoltaic assets, net of this capital debt gain, the performance would remain flat. And then net profit increased by 19.6% and tax rate stable, so in line with Q1 2021. As for depreciation, depreciation grew compared with Q1 2021, mainly actually, I should say, exclusively because of higher CapEx and changes in the scope of consolidation that I've already commented on impairments and provisions remain, let's say, stable. And there is a slight reduction compared with Q1 2021. But in absolute terms, these are negligible changes in Page 11, the evolution of CapEx. So investments or CapEx is slightly decreasing compared with the previous year, so EUR 229 million in Q1 2021 and EUR 222 million in Q1 2022. As you can see in the evolution, the reduction is mainly due to commercial and trading and generation. Commercial and trading, as we said, is compared in with a year where there have been investments made that cannot be replicated in 2022. And generation is simply a postponement of part of the development activity of the photovoltaic plants. As you can see, investments are mainly focused on regulated business that account for 85%. And now moving on to Page 12. We can see in more details the items of the cash flow. I would like to point out free cash flow of EUR 15 million, which is mainly driven by an improved working capital management that was impacted mainly by 2 factors, steady improvement of the cash-in and a better -- a more effective management of receivables. So EUR 98 million, the total cash flow, benefiting from the impact of the disposal of the photovoltaic assets. As you can see, CapEx takes up EUR 222 million of this cash flow. And then you can see financial costs accounted EUR 22 million; change in provisions, EUR 29 million; and then M&A, EUR 145 million generated, mainly the disposal of photovoltaic assets that account EUR 150 million. On Page 13, we can see the details of our debt structure. As we already pointed out, net debt at the 31st of March 2022 amounted to EUR 3.89 billion slightly lower than the 31st of December 2021. So with a debt of EUR 236 million, but slightly higher than the 31st of March 2021. 86% is fixed rate, average cost of 1.40% average maturity, 4.8 years. You see that net debt EBITDA LTM dropped slightly compared with the 31st of December 2021 figure when it was 3.17, and it is now 3.08. As for the ratings, you can see that rating, I mean, Fitch and Moody's remain stable. So Fitch's ratings at BBB+; Moody's Baa2, again, a stable outlook. As for the sustainability ratings, I would like to confirm the CDP A- leadership confirmed; Standard Ethics upgraded to EE positive outlook; Bloomberg GEI improved to 80.67 and Gaia ratings improved to 82/100. Thank you very much. We can now start the Q&A session.

[Operator Instructions] The first question is from the Italian conference call, Javier Suarez, Mediobanca.

I've got 3 questions. The first about the supply business where you reported a weaker performance in Q1 2022. But my question is the following. Can you explain or can you elaborate a bit more on the reasons why there's been a drop in the EBITDA of trading? And what do you expect in the next quarters if the current situation persist? So we would like to -- I would like to hear more about this. And then as for the working capital absorption, I was surprised that there's been a reduction of the working capital versus Q1 of last year, which I didn't expect, honestly. Can you please explain why there's been this relative improvement of working capital? And what kind of -- what figure do you expect for working capital full year considering that the macroeconomic situation is definitely not particularly favorable? And then I was also surprised by the reduction of impairments and provisions reported on Page 10. I expected exactly the opposite dynamic. So what do you expect in terms of impairments and provisions for this year in a difficult again, a scenario as the one we are experiencing? And then I would like to ask the management of the company about the possibility to build a waste-to-energy plant in Rome, which stage are negotiations with the municipality of Rome?

I'm going to answer on your first questions and then -- and on the waste-to-energy plant, and then Fabio will be answering the questions about working capital and provisions. Well, as for trading, commercial and trading, there is a seasonal effect that was a bit more negative this year and was particularly positive last year. Last year, Q1 reported an EBITDA of EUR 25 million. And the full year EBITDA was EUR 81 million. So the performance of Q1 2021 was definitely better than the rest of the year. And this is because of lower commercial costs and some one-off items. This year, we have nothing. We have a negative component that is the restructuring of the coverage on 100% of the energy that we sell in the year. We hope we'll be able to recover in the rest of the year, particularly in Q2. So this is not a problem, honestly, it wouldn't have no impact on our P&L if nothing changes. Of course, consider the current energy prices, we are getting ready to face the next few months and the next few years. Clearly, there is a problem of coverage currently. And we have to get equipped to improve our coverage. So all the new clients are being acquired at variable prices, which means that we are trying and protect ourselves against the energy price fluctuations. And we are also acting on our customer base to have a strong coverage. Then our commercial engine is still working very well. The reduction of clients in the enhanced protection market is higher than we expected, but this is because of the substantial increase of the energy prices. This had a greater impact on the announced protection market and then on the free market. And so the announced protection market customers are now paying higher prices, higher energy prices and therefore, are moving to the free market. The acquisition of new clients in the free market is still being very successful, and I believe it's one of the best in the industry. So let's say that we expect this year to be, again, a year marked by growth even when compared to 2021. As for the working capital and the management of receivables, as we already pointed out, there are 2 factors that impacted on the working capital. We have roughly EUR 40 million that impacted and as for the loss provision, we haven't reported any problems with our receivables, quite the reverse we are only now seeing towards the end of the quarter some issues. However, let's say that the deterioration of the performance is confined to water and then water is not affected by the energy pricing increases. So clearly, the impairments is something that we have been scrutinizing attentively and monitoring attentively. But so far, there are no signs that may lead us to think that there might be a deterioration of provisions.

And going back to the question about the waste-to-energy plant. Thank you very much for your question because this is clearly a very important project for us. We believe that the waste-to-energy plant would be the right solution to solve the problem and waste in Rome. And ACEA is the most -- the best positioned, let's say, candidate for the development and the management of the WTE plant. So we have an outstanding experience and we are very much focused on waste-to-energy. Clearly, the municipality of Rome will award the tender following the existing regulations and will be certainly bidding to the call for bid.

Next question, Stefano Gamberini, Equita.

I've got 3 questions, too. First of all, I will like to hear something about Toscana. I read an article where apparently, there is an ongoing negotiation with ACEA that is proceeding very well and that other companies in the industry could be involved. So besides the 40% that you could acquire, I don't know whether you're going to acquire it or not, you have to explain me what you plan to do. So I would like to know whether there are other equity consolidated or equity accounted companies of the group, that could be included in that transaction? And then extra profit and the impact on power generation. Can you please remind me why the EUR 66 - EUR 68 per megawatt hour does not apply to the sale of hydroelectric power? And what are the potential risk of this tax that should reach 25%? Also what is the risk for ACEA? And then the EUR 26 million of technical quality reward that referred to the year's 2018/2019. So I believe that those have been already accounted for as revenues in those years. And so there should be no impact on Q1 2022. Or do this EUR 26 million contributed to your EBITDA of Q1 2022?

Well, as far as Toscana is concerned, I can tell you that negotiations started or I should say, a dialogue started, but we have come to no final decisions yet. We're simply trying and understand whether the conditions are there to see whether our stake in Publiacqua can become part of the multi-utility. Anyway, we are currently dialoguing to have a more exhaustive picture currently. We are not considering disposing of our stake. So as I said, and as we have repeatedly said, we are interested in the project. We are definitely open, but we are ready to be part of it as industrial partners. So we are interested, but the -- what we get in exchange must be being able to play the role of the industrial partner, and we are not interested in a financial stake in other words, and consider that we have a long-standing experience with multi-utilities in the center of Italy, this is what we expect. So we expect it to be, again, an industrial partner. Then I would like to answer the question on the technical quality reward. If you remember -- well, first of all, this is good news. I cannot say it came unexpectedly because if you do your job well, then you can expect to achieve this result by considering that the technical quality is comparison of the performance of a number of indicators among Italian players. And only the 3 best performers get the reward. And the 3 worst performers are actually sanctioned. So it was impossible to understand how this system of rewards and sanctions could be applied. So this result confirms that we have adequately manage our water business as an industrial player. Clearly, the size of the companies do make a difference. But this result was not factored-in, in our in 2018 was not factored-in, in 2019 and was not factored-in, in Q1 2022 because as I said, it came unexpectedly, the news were made available on the 26th of April. So it's not factored in, in Q1 results. As for the extra profits you have to consider that the plants that have been impacted on by the decree are the photovoltaic plant that were involved in the deconsolidation process. And it was also our water plant in San Angelo is impacted on all the other photovoltaic plants became operative in a time frame that is not covered by the decree. And our water plants, all the other water plants are also not covered by the decree. So the decree actually excludes the type of plant that -- the water plants that I'm referring to. And so this is the area of application of the decree that has been estimated at around EUR 5 million currently.

Just a very quick follow-up. So if I understood correctly, we have a EUR 25 million more due to the technical quality role, but your guidance is confirmed. So I believe we will be reporting a 2.8% growth rate. And then are you going to update your business plan in June? Or will it be postponed after summer?

Thank you very much, Stefano. Well, again, we didn't mention the guidance today because, again, we haven't factored in this result as well as yet. So the half year results will be taken into consideration this technical quality reward and as well as other scenarios, and we will be considering whether to update the guidance or not. Considering this upside, well, I would say that we would be more towards the 2.4% rather than 2.2%. But anyway, as for the strategic plan update, we are working on it. And again considering that the industry is actually very dynamic and consider the new projects that we would like to factor in our business plan, like the development of the TWE plant in Rome, then we will probably be postponing it after the summer.

Next question is [ Mr. Jon ].

I would like you to specify what you said about the pipeline for the photovoltaic plants. You mentioned 190 megawatts. Are you partially including also part of the megawatt that you have already sold? Or is this just that the 640 megawatts in the pipeline with different levels of maturity, of course, will all remain within a share, and therefore, you'd be controlling 100% the pipeline, let's say. So that was the first question. Second question, not so much about the waste-to-energy plants only, but I'm talking about the waste-to-plants in general. Will you benefit from the recent decree approved by the Italian government? And do you expect a speeding up of your CapEx and if yes, in which areas and for which projects?

Well, as for the pipeline, the pipeline that we mentioned -- well, first of all, we have disposed of assets that had already been constructed and were already operative. So these 190 megawatt are just refer to ACEA. And then these 640 megawatt, that is the total pipeline is just pertaining to ACEA. And then as for CapEx will difficult to say whether we can accelerate our CapEx with the only exception of photovoltaic plants. Of course, we do hope there would be an acceleration in the development of projects that will enable us to, again, execute the pipeline in shorter time. Currently, we do not see signs of acceleration of the authorization process. So honestly, we don't see any substantial changes so far at least. We do hope that the Italian government makes decisions to support and assist the players in this industry to speed up the authorization process. And again it's a lot of question referring to the permitting process and to the various projects. Next generation [indiscernible] projects will affect ACEA well over the next few months. So on top of the waste-to-energy plants, I think you're going to postpone the disclosure of the business plan after the summer. Well, this is not one of the drivers for this decision. The main driver of the decision of being the new projects and the volatility of the scenario, especially the energy scenario at the current times. We are certainly focusing on the recovery plant projects. And for some of them, we are already at an advanced stage. More than the recovery resilience plant, I'm referring to the reactor plant where we'll be receiving EUR 50 million for the Gori company. We are optimist for other parts of the recovery plan, particularly referring to the water infrastructure. So Aqueduct mainly, so we have already tabled our request. And we are soon going to bid for the tenders that are going to expire soon in the short term, let's say. But I'd like to point out that whenever money is allocated -- financing is allocated to regulated business, particularly regulated water business. The funds become an alternative to the CapEx made by the company, and therefore, those do not contribute to the RAB. So these monies are substantial support to speed up our investment, particularly for the smaller companies that have very little room to increase the investment and I am referring to Gori ATO5 and such money would make it able to develop infrastructures that would otherwise be impossible to develop. But again, this will not have a direct impact on our accounts, let's say. And this applies to the water business. And then, of course, we are focusing on projects that refer to waste treatment. And here, we can have access to a limited financing under the recovery plan, but these funds will be allocated to the -- directed to the development of the business, which is not a regulated business, of course.

Next question by Davide Candela from Intesa Sanpaolo.

I've got a question about your debt and maturities. Considering your duration, are you considering refinancing, especially the short-term debt I'm referring to '22, '23? And consider the current interest rate scenario, how do you expect that the cost of debt will evolve? And what you plan to do considering that the scenario of the liability management has changed?

Honestly, we do not need to issue new bonds. Honestly, we don't have a substantially part of the debt falling due in '22 and '23. So we are currently taking up and waiting to see approach. And we are following closely the financial dynamics in the market. In the mid longer-term, we of course, expect to see a different interest rate dynamic. But currently, we have, let's say, no hurry or no need to make a new issuances.

[Operator Instructions] Next question, a follow-up question by Javier Suarez, Mediobanca.

I'm sorry. I still have 2 questions. One, on the capital gain that you realized and that you accounted for in Q1. What is the tax rate on this EUR 21 million. I mean the EUR 21 million is the gross capital gain, how much taxes will you pay on it? And then second question, again, about the EUR 26 million of the reward, the technical quality reward. When do you expect that you'll be able to cash-in this EUR 26 million?

Well, as for the capital gain, you are right. Probably you couldn't hear me because the sound was poor. But anyway, as for the tax rate on capital gains, we are under a participation exemption regime and so it's 5, 5% of the taxable base. As for the EUR 26 million, when do we expect to cash this EUR 26 million in? Well, we do not have a precise date. We expect to cash it in by the end of the year.

Well, ladies and gentlemen, there is no other question in the waiting queue.

Okay. But then thank you very much. And if you have questions, please contact us. We are certainly happy to take all your questions at a later stage.

Ladies and gentlemen, thank you for joining the conference. It's now over. You may disconnect your telephones.