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

Good evening, this is the Chorus Call operator. Welcome to the first year half 2024 results of the ACEA group. [Operator Instructions] And now I would like to hand you over to Ms. Dario Michi, Head of Investor Relations at ACEA.

Thank you very much, and good afternoon. Welcome to the ACEA Group's First Year Half '24. [Indiscernible], Fabrizio Palermo, General Manager and CEO of ACEA; and Sabrina Di Bartolomeo, CFO will be illustrating the main financial highlights. At the end of the presentation, a Q&A session will follow. Fabrizio, please.

Good evening, everyone. Thank you very much for attending the conference call today. We will report on the first year half 2024 results that are characterized by an evolving regulatory end market environment. As for regulation, as you can see on Page 2, the Water Service Tariff Method 4 has been introduced leading to an increase in the WACC from 4.8% to 6.1% and higher target caps by around 2%. Negotiations with the local authorities for tariff increases are currently underway in the second part of the year. As for Grids, the provisional at '24 tariffs approved with the resolution of the 206/2024 and the new ROSS-based approach has been introduced based on the total spending mechanism for the 6th regulatory period, which has driven the WACC high from 5.2% to 6%. As for commodity prices and inflation, the '24 energy price fall down to EUR 93 megawatt hour, approximately a reduction of EUR 43 per megawatt hour versus the same period of last year. Also, the gas price is dropping down to EUR 31 megawatt hour, down EUR 16 versus the same period of 2023. In June, inflation grew 0.1% on a monthly basis and 0.8% year-on-year. All these are a number of key factors as far as commodity prices and inflation. As for interest rates versus the first quarter of '23, short-term interest rates have slightly grown, while the long-term rates have rapidly dropped. And on Page 2, you see Euribor at 6 months that increased, whereas the MidSwap 8 year dropped to 2.7% versus 3% in the same period of the previous year. Marketing interest rates reflect the first ECB interest cut of 25 bps. Within this framework, the results of the group are all positive. Revenues are growing actually when it comes to regulated businesses. Revenues amounted to EUR 2 billion. Regulated business accounts for EUR 1.2 billion, going 2% EBITDA, current EBITDA amounted to EUR 720 million, up to EUR 50 million compared to 2023, driven mainly by the growth of regulated business. Water Italy grew 5%, Grids and Public Lighting 16% and the Commercial sector also contributed favorably the whole offset the adverse energy scenario reported on prices. The recurring net profit amounted to EUR 168 million, up 18% compared to 2023, not including one-off and the scope of claim [indiscernible]. So as I said, the recurring net profit amounted to EUR 168 million, up 18% compared to '23 EBITDA improvement and the improvement of the financial management more than offset the rise in depreciation linked to the regulated businesses. Gross CapEx amounted to EUR 558 million, increasing 4% compared to '23, net of the investments financed by grants. So the aggregate shows a decrease of 5% compared to the previous year. Net investments in regulated businesses accounted for roughly 90% of the group total. As to the free cash flow, the operating free cash flow grew by EUR 25 million positive free cash flow in line with the first year half of 2023. This enabled the group to maintain a sound financial structure with an NFP/EBITDA ratio of 3.54x in line with the guidance we provided early this year. Moving on to the next page, you find all the details about the highlights I have just provided. So EBITDA is growing, as you can see, from EUR 670 million in first year half '23 to EUR 729 million. Net profit increased from EUR 142 million to EUR 172 million. The NFP/EBITDA ratio is in line with guidance. And the net debt has increased from EUR 4.847 billion to 5.130 billion. CapEx increased of the previous year from EUR 548 million to EUR 568 million. In the first year half '24, we confirm our focus on regulated businesses, which account for 86% of the group's EBITDA and 89% of the CapEx. As already pointed out, NFP/EBITDA ratio stands at 3.5x, in line with the full year guidance, notwithstanding the increase in net debt of approximately EUR 283 million in the first year half, mainly driven by the payment of dividends. So therefore, the 2024 guidance is confirmed. EBITDA expected to grow by 35% of 2023, investments amounted EUR 1.5 billion, EUR 1.1 billion net of grants, and the NFP/EBITDA ratio is confirmed at 3.5x. Drilling down to the items is the Page 6 is the ability to do the evolution of EBITDA and the contribution of the various units into EBITDA. And here you can see the role played by the board of business that have Grids and Public Lighting that together with the environment account for 86% of the group's EBITDA. If we move on to the next page, net profit. Again, here, you see the exceeding evolution of the net profit. We also favorably impacted by the financial management. So despite the increase in financial charges, the final result is positive. So net profit in the group, net profit increased from EUR 142 million to EUR 172 million in the first year half '24. On the following page, you see the evolution of CapEx, showing the larger share accounted for by the Water business, the EUR 343 million invested in the first year half. Such amount was invested mainly on the expansion of water and sewage pipes and the maintenance of plants and networks as well as on-treatment plants for a key activity for the group. As for Grids and Public Lighting, we have invested on the upgrading of the grid. We have restarted the work on the Grids in Rome and in the metropolitan area of Rome. So both on primary and secondary substations and we started installation of 2G meters. As for the environment business, we've started the work on the San Vittore plant. We are working on the fourth line of San Vittore plant and then we have revamped the fumes line at the Terni plant. All the other businesses contributed marginally to the extent of the group. On the following page, you see the evolution of the cash flow in the first half of '24. And this shows the contribution of the various entities into cash generation. And we see that in this year half we have the impact of the dividend paid out. Final point to the financial structure. So today, we concern our rates with a stable outlook at both Fitch and Moody's that we confirm our NFP/EBITDA ratio in line with the margins. On this page, you see the structure and the updated activities. I would like now to leave the floor to Sabrina Di Bartolomeo, who will be dwelling on the results of the various business units.

Thank you very much, Fabrizio, and good afternoon. As far as water utility business is concerned, here we report a very growth-driven mainly by investments made over the past few years. Tariffs true, mainly in 2023 and so we still feel the impact of the crisis. In fact, in the impact of '24, this will be done only when the tariffs will be set. The net equity cost-related companies report a slight decrease of EBITDA that is mainly due to CapEx starting in the past few years, implying a meaningful rate of depreciation and we have a lower contribution from borrowing. All in all, the business grew 5% and that's fully organic growth. As for the CapEx, we have started implementing some of the investments related to the National Recovery Plan, so that's why you see an increase of investments. And you see that the RAB will be recalculated at the end of the year. Moving on to Grids and Public Lighting. So focusing on our core businesses, here we see growth of revenues. Here we have already had in the increase of tariffs. A different regulation applies here. EBITDA is growing and overall growth is 60% thanks to the organic growth and the increase in electricity distribution tariffs, driving WACC from 5.2% to 6%. CapEx increasing with an increase of [indiscernible] which stands witness to our ability to make business financial investments. For the key areas, the number of PODs is slightly increasing. Electric power distribution is stable and we are installing the 2G power meters [indiscernible] activity that we have [indiscernible] . Environment, as you might remember, we had a down of the Terni waste treatment plant, which impacted our revenues as well as our EBITDA. This fact has, of course, an impact, the Terni plant is not working, had an impact on our results. CapEx are increasing. Remember that we're developing the fourth line at San Vittore that we already started, plus the upgrade of the Terni plant, which contributed to an increase of EBITDA by EUR 3 million. As for the main KPIs, we have, again, the impact of the Terni plant stop that became operative again end of May. So we received a positive impact in the second year half. As for production, unfortunately, here we have greatly suffered from a lower hydroelectric production sector and on the sub-Italy were stricken by drought both in the winter and now as a consequence we have suffered a lot. Like the north of Italy, where the rainfall was abundant, so we have experienced a reduction in volumes as well as prices as far as electric energy is concerned. And this had a negative impact on the performance of the group. As for electricity generated and sold, we may have noticed that we bought a substantial drop mainly driven by the reduction of the hydroelectric power production. As for commercial, very good performance, drop in revenues driven by the reduction of electricity generated and sold, but we experienced an improvement of the margins and an extension of the customer base. Customer base is supplying both electricity and gas increasingly, CapEx is increasing, reflecting the position of the customers. So I would like to give the floor back to Dario now to start the Q&A session.

Thank you very much, Sabrina. The presentation is over, we can therefore start the Q&A session.

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

I've got 3 questions. The first about Page 9, namely the cash flow statement. And the delta in the working capital in the first year half. We're talking about EUR 130 million roughly are due to regulatory amounts are lower, amounts of receivables. So this is the kind of argument that was provided. Can you please break out these 2 elements, the variable items and the lower amount of receivables sold? And what do you expect in the second year half? And where do you expect to end up starting from this EUR 130 million, where should we get by the end of the year? That was my first question. Second question, the waste-to-energy plan in Rome. In your press release, you say that you are waiting for the award of the tender. Can you please update us about the deadline that you make -- that you expect to start up the development of the waste-to-energy plant and what kind of investment will ACEA to -- will have ACEA to bear? So can you please update us on this? And the third question refers to the recently announced partnership with the Apulia Aqueduct. To what extent are such partnerships relevant to the ACEA Group to contribute to the development and the upgrade of the water system in Italy, the water network in Italy, which is an emergency?

I can answer your first question about the working capital. You're right, Javier. Working capital is a negative in the first year half. This is mainly due to regulatory changes. So most of it is the result of regulatory changes and tariffs increases in particular and then the residual impact of previous activities. We pay the utmost attention to the P&L and as far as the full year is concerned, we expect an improvement, definitely. So we know that tariffs will have an impact in the second year half and this will enable us to recover partially the working capital. All in all, we're currently performing better than we had planned or that we expected internally.

So good afternoon, Javier. As for your second question about the waste-to-energy plan, we are waiting in a few days the final confirmation by the municipality of Rome about the tender that has been awarded. So this is what we are waiting for to start the work site. We expect the work site to start at the end of this year, early next year. It's impossible to say the exact date now, but more or less this is what we expect. I'm confident, however, that it will be sooner than later. We are getting ready within the consortium, but we still have to wait for the time that is generally required to award the tender. As for the partnership with the Apulia Aqueduct, well, it is a partnership that will enable us to bid for a tender that will award 30% of the aqueducts to private companies. And this is an important step for us in this partnership because in future we will be able to become part of the shareholding of aqueducts [indiscernible] that is, if you will, a strategic move to start and operate in the center of the south of Italy. We are fully aware of the importance of water. And we have seen the Italian government recently allocating investments to the water network to upgrade it and additional resources will be allocated to start the important project at Sestriere. We have been allocated additional resources to fully cover the funding of the Peschiera project. So we expect the project to be starting shortly in the next few months. Next question.

Next question is Stefano Gamberini at Equita SIM.

First question about water, the water business. So you didn't factor in the water increase of roughly 130 basis points. So this means that for the full year we will be short of 50 million, 60 million of grants when such a tariff increase takes place. So considering this trend together with all the other positive trends, if you could give a full year guidance of the EBITDA of 5% or 6%. I would say it is not conservative and considering that the Terni plant will start operating again in the second year after. Considering that the tariffs increases will have to be approved by the local authorities, what happens if they don't? So what kind of risk do you expect? The authorities set a maximum increase of 8.4, so you will be short of 200 [ bps ]. Referring back to the question about net working capital. Net working capital deteriorates by 100 [indiscernible] versus H1 '23. So in H1 '23 it was only EUR 13 million. Why did the net working capital deteriorate? And what are the managerial actions that you plan to take place regardless of the tariffs increases and adjustments? I mean, in the plan you plan the improvement of the net working capital by EUR 160 million thanks to such actions, whereas for the full year you report a slight improvement, whereas I would expect a substantial improvement. So I would like to understand whether I'm not making the right calculations. And the last question, actually the last two questions refer to OpEx, EUR 200 million before inflation was the target for a reduction of OpEx, where do you stand here? And then the asset rotation. So what about the asset rotation if you increase investments on the regulated business? So I will just say this, a disposal of minorities in the waste business, is there any novelty? Can you update us about this? Are you still focusing on this? Or is this a kind of activity that will be postponed later on in the plan frame, time frame?