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

Good afternoon. This is the Chorus Call operator. Welcome to the presentation of the results as of March 31, 2024 of the ACEA Group. [Operator Instructions] Let's now here the floor to Mr. Dario Michi, Head of Investor Relations, over to you please?

Good afternoon, everyone, and welcome to the presentation of our results of the ACEA Group as of March 31. Fabrizio Palermo, CEO; Sabrina Di Bartolomeo, CFO of ACEA are going to illustrate this presentation. And at the end, we'll have a Q&A session. Please Fabrizio.

Good afternoon, everyone. First of all, thank you for your time and for your attendance of the conference call. The performance of the group in the first quarter of the year was good. First of all, I would like to spend a couple of words on the regulatory and market environment that has been typical of the beginning of this year. Partially, we have talked about this environment when we presented the business plan a few months ago. And I would anyway like to dwell up on it for a second. As far as regulation is concerned, for water, we have applied the water service tariffs method for called MTI-4, which is the regulatory period from 2024 until 2029 with an increase in WACC from 4.8% to 6.1% and higher tariff caps by around 2%. As far as grids are concerned, it is another very important business for us. The new ROSS tariff rules are being implemented, which is regulating the distribution of electricity, and it's based on the recognition of total spending for the sixth regulatory period from 2024 to 2027, and WACC will increase from 5.2% to 6%. Commodity prices and inflation, the energy price, S&P had decrease in 2024 -- to EUR 92 per megawatt hour as an average, which is about EUR 65 per megawatt hour less than the first quarter of 2023. On the other hand, the gas price, well, also decreased by EUR 29 or better down to EUR 29 per megawatt hour. So it's down EUR 28 per megawatt hour versus 2023 same quarter. So prices are actually going down. On the other hand, the inflation in March was 0.1% on a monthly basis and plus 1.3% on a trend basis. I'm not going to talk about interest rates, even though it is in this presentation even because I actually think everybody is really familiar with this scenario. Now let's switch to Page 4 and see our results, which we believe are important and positive along the lines that the business plan had been drafting. So results in the first quarter see an increase in terms of both revenues and EBITDA and net profit for the period. CapEx is in line with our expectations and operating free cash flow means an improvement of the NFP-EBITDA ratio to 3.48x. So this is actually, the overall result for the group is about EUR 1 billion, of which 60%, so EUR 600 million is from regulated business, which is also growing by 1% versus 2023. As far as EBITDA is concerned, reported EBITDA amounted to EUR 357 million, plus EUR 21 million versus the year before, the same period of the year before. Also driven by the growth in the regulated businesses, plus 6% towards Italy and plus 13% and Grids and Public lighting and by the commercial sector, which also increased. And all those increases have more than offset the adverse energy scenario that has been typical at the beginning of this year. And as we saw earlier, there was a sharp turnaround in the overall trends there. Reported net profit is EUR 83 million, plus 14%, 14% compared to the same period in 2023. The growth in EBITDA and the containment of financial costs has more than offset the rise in depreciation due to the investments in regulated businesses. To confirm the grind and continues attention that the group reserves to identify all possible growth areas for margins and all possible measures to contain financial costs. CapEx is pretty much in line with the year before. Net investments in regulated businesses, confirm our trend, which sees a major positioning of the group and regulated businesses, which now account for 90% of the group total. Operating cash flow is negative, minus EUR 32 million, but this makes it possible to maintain a sound financial structure. As I said earlier, the ratio has improved. And I think this is really relevant because it confirms the trend. We actually started late last year because we're actually reversing and improving the group's net financial position. Should we move to Page 5 in the presentation. This is a detailed overview of all the numbers. I have summarized in the previous page. So you can actually see the EBITDA is improving. CapEx is pretty much in line. profit is improving, and we actually see the MFP performance, too. I think this bears witness to what we indicated at the business plan level. So there's a very carefully managed growth. We started in the group, and we aim and obtain in our results during the planned period, and we are actually right on track based on our expectations at the beginning of the year. The following pages Page 6 shows the EBITDA bridge. What you see on one side is a big weight of regulated businesses that overall accounts for 85% of EBITDA, plus Water, Italy, grids and public lines NIM and environment. So this shows that EBITDA improved mainly thanks to organic growth. In view of an energy scenario, which was, of course, a big headwind against just like for all the other players, too, at the beginning of this year. Net profit because of the operating management and unchanged financial management has allowed us to improve by 17%, which is what Page 7 shares. Then CapEx, you see breakdown here in different businesses, we should actually point out that we do continue on investment. Of course, water is the key business for us. We're investing significantly there on reclamation and extension of water and sewer pipes. Let me remind you that some of the investments from the PNR national resilience and recovery plan is actually used in these investments, we co-fund them. It's not just NRR funds. The grid has actually been upgraded, in particular, the Rome grid. So we are actually promoting energy transition in the capital city. And also, we're making big investments on the environment. So today, we are working on the fourth line of San Vittore and on the Terni plant. As to environmental investments, of course, these numbers not including the waste-to-energy facility neither did the business plan, by the way. So we are engaged in a tender, and the final bids should be filed within the next few days. So the group is busy working on this, and we do believe it's a really important project for the Environment business unit of the company. Finally, and then I'll hand the floor to Sabrina Di Bartolomeo, CFO. I would also like to point out that as far as cash flow is concerned, a lot of relevant work has been done by the company, and we're still busy working on it to optimize our financial management. And of course, this is also reflected in the 2 stable outlooks that the company has been receiving from [indiscernible]. For the sake of completeness and tenets will also show the breakdown of net financial position, and we can actually notice that leverage is improving throughout for the deadlines they pretty much in line with our expectations and pretty well balanced for the future, too. Let me now hear the floor to Sabrina Di Bartolomeo, She's going to report on the individual performance in 2024, please?

Thank you, Fabrizio. Welcome, everyone. So should we move over to water Italy business. So here, again, we see an EBITDA growth of 6%. This is organic growth, driven mainly by the investments we've done so far. Revenues are pretty much in line with last year. for a reason. So on one side, we have tariff growth, which is connected to investments and more than offset by smaller changes in revenues because of a smaller change in scope. And as far as EBITDA is concerned, EBITDA is also improving. Here, again, thanks to organic growth and tariff growth. So despite a slight reduction of the results of the companies accounted for net value. And basically, this includes all depreciations due to the improved and increased investments in the past years. CapEx, once again, CapEx is pretty much in line. As far as net CapEx is concerned, whereas CapEx gross of funding is slightly lower than the original forecast of the business plan. But this is mainly due to how the recovery plan fronts are being paid out. We confirm RAB at EUR 4.6 billion. Of course, we will review that as we go, but we confirm it so far. Grids and public light in. Well, in this particular case, once again, revenues do increase, mainly thanks to the growth of regulated tariffs. So actually gas increased from 5.2% to 6%. EBITDA also improved, also thanks to the positive impact of the increase in tariffs by about EUR 12 million. And CapEx, here again, we see a slight decrease reported, but is actually due to supply chain disruptions. And so we believe we are going to recover that during the rest of the year -- the CapEx is expected to go back to the foreseen levels. We did actually have some supply problems at the beginning of the year. So once again, the gross RAB is confirmed and it's EUR 2.8 billion environment. Here, we see a slight decrease in revenues, which is mainly due to 2 reasons. On one side, we have downtime at the Terni plant, which was totally planned for Italy. It's in line with the budget. It's actually even better than the budget, but this planned downtime, maintenance-related downtime is actually causing a slight decrease. On the other side, compared to last year, we also have a lower price of energy. So let me remind you that we already started about 80% of the energy throughout the Europe, positive prices. And so we do not expect unless there are some catastrophic events happening. So we do not send downtime. I was reporting about earlier. So EBITDA sees a reduction -- a decrease, which is due to the energy scenario of WTE of San Vittore and some delays on the volumes sold and some slower performance than expected. CapEx is increasing versus last year. I'm sure you remember that we are engaged in revamping the WT Terni. And we are also engaged in building the fourth line of San Vittore. So there is a slight decrease of disposal -- there has been an improvement versus 2023 of the dumping side and treatment. But as far as electricity sold is concerned, once again, this is actually impacted by the Terni WT downtime. Generation, this is also affected by the energy scenario, of course. Of course, the reduction of EUR 75 per megawatt hours is actually quite relevant and significant for us. So once again, we have a good hedging level versus budget. So we do know that as far as prices go, we are pretty much in line with our original expectations. Unfortunately, generation is lower, energy generation is lower, unlike what happens in many companies in Northern Italy, in Central Italy, rainfall was very scanty and snowfall was even more scarce. So there were unfortunately for us, some adverse climate scenarios. So we didn't have much rain. We didn't have much snow. And so the catchment basin actually hold 73% less than the years before. And to some extent, this is a very significant decrease for us. As far as CapEx is concerned, -- it's actually in line with 2023, we have different time into. But during the rest of the year, we expect to invest a bit more on photovoltaic. This year, this quarter 2, we have reached 103 megawatts of photovoltaic installed power with the latest plant that has been installed recently. Now commercial. Of course, revenues are decreasing here because I'm sure you'll remember that after the energy shock what our company did was adopt a very cautious prudential approach. So we don't sell consumer [indiscernible] to index markets. So because of this, there is a reduction of revenues, of course. So whenever there is a reduction in the price of energy, we do see a reduction in revenues too. However, this doesn't have an impact on EBITDA. For us, actually, it's the opposite. EBITDA is increasing. And this is due on one side, thanks to the commercial development because we increased our customer base or better, we increased the EBITDA due to customer base margins and customer base management. And also, we are recording energy management activities increased, mainly connected to the Superbonus -- so-called Superbonus law. And as far as CapEx is concerned, we see an increase in CapEx, which is partly due to some industrial investments. And partly, this is due to higher commissioning costs for all activation strategies with clients. So as you see, we serve a higher number of electricity clients, 1.24 million customers. And we posted an even bigger growth of gas customers because we are actually increase -- were actually implementing a dual strategy, and we are actually serving customers that have a dual agreement with us as we provide them with both electricity and gas. Now having said that, let me thank you for your time. And I want to tell all of you is that thanks to the results we've seen in the first quarter, we can simply confirm the guidance that we stated. So EBITDA between 3% to 5% versus 2023 -- investments net of funding EUR 1.1 billion to EUR 1.5 billion gross and net financial position versus EBITDA is 3.5%. So I did the floor back to Dario for his final wrap-up.

Thank you. We can open the Q&A session now. Thank you.

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

I have a couple of questions. The first is about your accounts and regulation on water. I think that in your accounting for water, you're still using the regulation parameters or regulation formula that was applied before. So is this connected with the final settlement with local authorities? So the question is, when do you think this final settlement with local authorities is going to happen? So when will you start accounting for retroactively also accounting for the improvements in the tariff system from January 2024 onwards. So do you think a reasonable agreement should be an increase of revenues should bring about an increase of revenues of about 200 basis points versus the previous data. Do you still consider that to be a reasonable expectation? My second question is about the new waste to energy installation to serve the city of Rome. So if I'm not mistaken, the bid should be filed between -- before May 18. Do you confirm you want to be involved in that tender? What is the reason why you consider that an interesting business for the company? My third question is about -- well, it's corrected to the earlier question actually. It's about the supply business, which is performing pretty well during the first quarter of 2024. And do you consider this business as noncore for ACEA. So is there a possibly subject to disposal to fund different growth opportunities?

I'll take your question on the accounting and regulation accounting, and then Fabrizio will take the other questions. Now as far as regulation accounting is concerned, we are currently implementing the tariff increases that have been already approved as you correctly imagined. And we expect the final settlement with the authorities to happen towards the end of 2023 or the -- sorry, the end of Q3 or the beginning of Q4. So by then, we are going to account for this increase. And we still believe that what we indicated as an average budget increase is still reasonable. So we are sticking to the numbers we indicated in our previous presentations. Fabrizio will answer on Wte.

Yes. So as far as the Rome waste-to-energy plant -- the tender said that bids should be handed in by mid-May. We're actually working to prepare our bid and to file it. As you know, we confirm we're interested. This project is strategic. It's a project which, as you know, has seen as amongst the promoters or better it's a project which has been tendered by the extraordinary commissioner, but it's actually the project that the consortium originally filed, which was headed by a chair and which includes Hitachi [indiscernible]. So because of the way this is structured, since it's a private public partnership project, the procedures that we have a right to action if other bids are also filed. So we have a kind of a preemptive right, which is typical in this kind of bidding. So it's a very important project for us, not just because of the very nature of the project itself, which is certain interesting, but also -- in Rome, as we speak, we already have a pretty active environmental management business in place, thanks to the Waste to Energy Systems of San Vittore Frosinone which is actually why we're revamping it and building a fourth line. So it's absolutely functional to manage and develop our business locally. And for us, this is likely to mark the beginning of future perspective too because this would actually be the first project that would promote directly because the other projects that the company have access to were purchased by ACEA not developed from scratch. So they had been originally developed by other players, and then ACEA acquired them as we are working on the actual creation of this project. That the group is always very carefully in maximizing value and optimally managing all of its assets. So it's quite obvious that any business we have will try to maximize in terms of business management. In my view this doesn't limit any kind of strategic or brand-related project. So we may want to review the business allocation of the company in the future. So any assessment about future business opportunities are still true and holds true. And I would like to remind you that, as we said in our business plan, our focus is that ACEA's core business is focusing on the regulated business. Now of course, this other business we are discussing has totally different features.

The next question will be asked by Stefano Gamberini of Equita SIM.

Sabrina, I have a first question on working capital. So in first Q, we have EUR 100 million of working capital. Would you please help me understand why and what can we expect on a full year basis in terms of impact? If I'm not mistaken, in the business plan, we're supposed to be neutral in 2024. What kind of impact can we expect -- and so in the first quarter, there has already been an increase in payments because of the water situation, I think. And secondly, I have a question on tariffs. Tariffs for water, in particular, what kind of WACC do you -- is it 3.16% or 3.8%? And as a consequence, what is the average increase that you applied for with local authorities for 2024. So I know that the average for the period is 5.5%. If I understand that right, they're answering in Q4. So what's going to change in maybe just the management of net working capital because if I understand you well, as far as net financial position is concerned, there shouldn't be any major change. Then I have a question on waste. There's a slowdown, but the plan includes a big growth of results there. So what should we expect from the waste business in the rest of the year? So EBITDA is 3.5% there is the contribution of waste in this? And are we likely to see a big growth in as early as 2025 -- or should we wait until the end of the period of the plan? And then if I may, I have another question on [indiscernible]. So I do understand you can certainly manage possible disposals. But my feeling is that you want to be more active in your management there. So my question is, can we expect anything to happen within this year, maybe discussions on dealing some in energy sales and majority on waste, I think are being studied by you. So what are you going to do with your stake in [indiscernible] the assets you have developed in solar. I think this is just a point of your company today. So you can actually dispose of them and sell them to the JV with [indiscernible]. So what can we expect in terms of asset rotation?

Your first question eras the drivers for the growth of the working capital. The working capital compared to what we budgeted originally is absolutely in line with our expectations -- essentially a [ tiny ] little bit better, but actually, it's pretty much in line with our expectations for Q1. As you rightly said, of course, there's an impact on from receivables, which means that we are still applying the old tariff method. Also there is a reduction of investments we've made compared to the year before. Also to improve the impact on financial charges. And I'm sure you appreciated that we actually fall in line with the previous year. And we achieved that result even though there is a 5% decrease of similar dealing for the first quarter -- as we said at the plan business plan presentation conference call. This year, the objective we have in mind is staying at 3.5x on the NFP-to-EBITDA ratio. We're slightly below that level today, [ 348 ]. So actually, there is a slight improvement compared to [ 349 ], which was the performance at the end of the year, but basically, it's the same number all in all. So all of this makes us believe and notice that the trend is absolutely right on track, and our targets are achievable. That doesn't mean we will have no working capital absorption at all throughout the year. We will have some. As we said at the beginning, we'll have to keep the net financial position to EBITDA ratio firmly under control. And then we will improve versus the last few years, also thanks to new tariffs. So that was the first question. As to the second question, the WACC we used is 4.8% -- so as we said earlier, tariff increases so far just in line with the ones that have been approved. But for the last quarter, we hope that agreements will be reached. So we are pretty much in line with the budget today. versus our average tariffs. We are pretty much in line with budget and expectations. Then you were asking about -- the waste and the performance of the environment business. So in the first part of the year, of course, we suffer from the fact that we have downtime at the Terni lines. Terni is supposed to go back to being operational at the end of June. But actually, we had already budgeted for this. So right now, we see no particular challenge in reaching our objectives in complying with our targets because as far as the energy price is concerned, over that 70% has already been accounted for values that are quite hopeful. I mean, we are very positive. We may be able to recover any possible further decrease that may happen in the rest of the year -- and then for what the overall business plan, let me remind you all that we'll have big growth because in the last 18 months of the plan, the fourth line of San Vittore will become operational. So we started to build it now. And so there's about EUR 200 million investments that will be deployed between this year, next year and the beginning of 2026. Then of course, having 4 production lines is certainly going to be very helpful and will help us get to our target. Well, I'll take your other questions. So as far as the asset rotation issue is concerned, as I said during the business plan presentation, this is, of course, an issue. And it's something which is not actually part of the business plan objectives. So it doesn't have -- any particular impact or influence on the objectives we've set ourselves. We are actually looking at some opportunities if the right conditions come up. And if the right candidates come up on the market, there is a number of assets that may be interesting. Here, we have mentioned one earlier, which is the commercial business. We are actually looking at some opportunities for growth in other businesses too ore we are looking at the possible optimization in the management of these assets. So it's premature to discuss that now. We are working on some of these things. And as soon as we'll have a clearer understanding of them, we will be happy to share this information with you. However, I would say that the key message, which I also pointed out when we presented our plan is that the planned objectives do not factor in any possible disposal of assets. There are some upside potential there, and we will assess them as we go if the right conditions appear. So if the right conditions come up from the market, we will look at those possibilities.

Yes, the [ size of ] financial charges are concerned, well, congratulations. It's just EUR 1 million worsening in this kind of scenario, which is very, very good results. May I ask you if you have any kind of guidance on the bottom line too?

Well, as far as the bottom line is concerned, it's too early to say, I think we're doing well. And as we already said and promise, we will keep improving and do everything in our power to improve. However, the budget sees an increase in our profit. However, it's far there just at the beginning of the year today.