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

Good afternoon. This is the Chorus Call operator. Welcome to the presentation on the 30 September 2024 results of the ACEA Group. [Operator Instructions] Now I would like to hand you over to Mr. Dario Michi, Head of Investor Relations at ACEA. Please go ahead, sir.

Thank you, and good afternoon. Welcome to the presentation of the ACEA Group at the 30th of September '24. Fabrizio Palermo, CEO and General Manager; and Mr. [ Ragni ], CFO and Deputy General Manager at ACEA will be reporting on the key financials of the first 9 months of '24. After the presentation, a Q&A session will follow. I now hand you over to Mr. Palermo.

Good afternoon. Good afternoon, everyone. Thank you very much, Dario. The group's results were achieved within a regulatory framework that were characterized, first of all, by the positive consultations that have been carried on to approve new tariffs. To date, ARERA has been -- submitted all the proposals about tariffs by the group. And to date, the only tariff already approved of by ARERA is ATO2 tariff that was approved on the 24th of September '24. As for Grids, I'd like to remind you that the resolution of the temporary tariff for '24 was published in May '24 already. and is based on the ROSS tariff rules, that is the total spending mechanism for the sixth regulatory period with a WACC increased to 6%. As for commodity prices, commodity prices were lower than in 2023. And finally, as for interest rates, the average interest rates at the 30th of September, actually short-term interest rates were 3.7% versus 3.6% in the same period of '23. So in other words, in line with last year, while the long-term interests are dropping vis-a-vis the same period of '23 and stand at 2.7% versus 3% of the first 9 months of '23. Short-term interest rates have been cut only in June for the first time by the ECB and then again in September. So the group has operated in a regulatory framework that has been characterized by some new factors and by trends that were already there and that show an improvement of tariffs, all of which has driven up our revenues. Revenues amounted to EUR 3.1 billion, EUR 1.9 billion of which related to regulated business up by approximately 7% compared to September '23, so growing EUR 124 million. And this is mainly due to the investments carried out in the previous years and also as a result of the tariffs approved. So hybrid is improving. As for waste and environment, the trend is slightly downward. EBITDA net is growing 12% on 2023, which accounts for a growth of EUR 123 million, EUR 107 million related to regulated businesses. The growth has been driven by -- driven mainly by the Water business, by Grids and especially by the growth of tariffs. And net profit, not including one-offs, grew by 31%, EUR 165 million on the previous year. And the growth is actually mainly thanks to a good financial management that has enhanced investments on regulated business. CapEx, net of public grants is growing 13% on 2023, and this is mainly thanks to investments in regulated businesses. So all CapEx in the first 9 months of the year amounted to EUR 952 million, exceeding by EUR 169 million, the investments made in the first 9 months of '23. The operating cash flow amounted to minus EUR 16 million, so negative figure, mainly because of the capital absorption due to investments. The group managed to improve the NFP/EBITDA ratio ending at 3.39x, down compared to 3.49x in the -- of 2023. Moving on to the results. As I said, revenues growing amounted to EUR 3.1 billion, EUR 1.9 billion referred to Water, Public Lighting, Environment, growing 7% vis-a-vis 2023. As for EBITDA, EBITDA is growing by EUR 123 million, thanks to the growth of revenues of Public Lighting, Grids, Water and Environment. As for CapEx, we can say that net CapEx were up by EUR 96 million approximately on '23, so a growth of 13%. But including the CapEx of the first 9 months of the year, the total CapEx amounted to EUR 952 million, including the grant funded exceeding by EUR 169 million, the investments made in the first 9 months of '23. Net profit, one-off growing substantially grew EUR 65 million on 2023, thanks to the EBITDA growth and efficient financial management that offsets higher depreciations and amortizations. So we considered appropriate to review our guidance. As this slide shows, we expect an EBITDA guidance ranging between 3% and 5% -- I mean, 3%, 5% higher than '23. So our idea is that of increasing this guidance to plus 7%, plus 9% on '23. And we would like to provide new guidance and improved guidance for our NFP/EBITDA ratio dropping from 3.5x to 3.4x. As for CapEx, we confirm our guidance of EUR 1.5 billion gross CapEx and EUR 1.1 billion net of subsidies. The main drivers leading to this reviewed guidance are mainly the increase of profitability and the higher tariffs for water and the substantial operating efficiency plan that we have been implementing and that is generating the first good results. And now I would like to hand you over to Mr. Pier Francesco Ragni, our CFO, who will be reporting on the main highlights -- financial highlights.

As for our EBITDA growth in Q3 '24, as pointed out by the CEO, was mainly driven by the organic development of our regulated businesses. Then on the slide, you see that the regulated business, Water, Grids, Environment account for the larger share of the group's EBITDA, 86%. Then if you look at the evolution of EBITDA in the first 9 months EUR 1.006 billion to reach EUR 1.161 billion at the end of September '24. You see that the evolution was mainly driven by organic growth, EUR 136 million deriving from the increase of tariffs by EUR 122 million. Water grew EUR 74 million, of which EUR 50 million as a result of MTI4, that is the new tariff scheme. As for Grids, we grew EUR 48 million, of which EUR 25 million related to the tariffs update. Then the energy scenario had a negative impact of roughly EUR 13 million. As for the one-off impact reported in Q3 '24, EUR 31 million, the key element is accounted for by EUR 24 million due to the recovery of inflation for 2022 and '23. As for our net profit evolution in the first 9 months of '24, again, you see from EUR 209 million, we have reached EUR 285 million and the evolution accounts to EUR 65 million organic. And this EUR 65 million are EUR 63 million related to operational management and so the growth of EBITDA, in other words, and EUR 2 million to the improvement of financial charges, net financial charges. We have seen opposite signs for financial charges. We've seen financial charges increasing slightly and other financial charges that have dropped because of a reimbursement of a bond that has been replaced with funding at a higher rate. As for one-off impacts, we can refer to the one-off items, EUR 24 million and net of the tax impact, plus EUR 15 million. Then of course, there are some provisions, risk provisions. As for CapEx, as in the first 9 months of '24, the group invested EUR 952 million mainly in regulated businesses, EUR 870 million of which were invested in Water, Grids and Environment. Out of this EUR 952 million CapEx, EUR 123 million were funded with public subsidies mainly going to Water that accounted for almost all the subsidies received. Then you see that regulated business are mainly water investments to expand the water network and to increase the efficiency of the network. As for Grids and Public Lighting, we are focusing our investments on low and mid tension networks. As you might know, we have achieved an agreement with [ Terna ] for the high voltage network and the other investments that we have to make in Grids refer to primary and secondary substations. As for investment in Environment, as you might know, we are investing on the fourth line of the San Vittore waste-to-energy plant and the ramping of the fumes line at the Terni plant. As for the cash flow in the first 9 months of '24, as you can see, our cash flow dropped by EUR 16 million, 1-6, mainly driven by 2 factors: one, capital absorption or cash absorption of working capital. In this regard, we have completed our activities as far as the building super bonus concerned. So the difference of EUR 133 million in working capital, this is mainly referred to receivables that are actually related to our exit from this type of regulatory activity. And then you see cash absorbed by, again, other regulatory receivables. Compared with September '23, our cash flow dropped by EUR 40 million. But as you can see, it is due to higher investments amounting to roughly EUR 96 million. The cash flow -- the total cash flow is down EUR 386 million, which accounts for the increase of our net debt versus the 31st of December '23. As for our financial structure, as you can see, the breakdown of our net financial position slightly changed between long term, short term and cash and cash equivalents, as already pointed out on the 15th of July '24, we reimbursed a EUR 600 million bond using cash that was available to optimize our financial management. And we used the short-term debt. And last month, we signed for a new long midterm funding for the regulated business amounting to roughly EUR 320 million. So the transaction that was done in July, namely reimburse the bond and then another funding that was agreed upon offset and balance the situation. The average cost of debt slightly higher than 2.08% at December '23. And this because the new funding have higher margins -- sorry, higher interest than the ones that were repaid. As for our rating, our rating is a BBB+ with a stable outlook by Fitch and Baa2 with stable outlook by Moody's. As the CEO pointed out, our net debt-EBITDA ratio has improved from 3.49 to 3.39 and better than the first half of '24 when it was [indiscernible]. Moving on to the business. As for Water Italy, revenues reached EUR 1.161 billion, growing EUR 67 million on 2023, net of nonrecurring events and changes in the scope. And this is mainly thanks to tariff growth related to investments made and the approval of new tariffs. As for EBITDA, [Technical Difficulty] organically by 13% on the first 9 months of '23 amounted to EUR 69 million, mainly thanks to the tariff growth, as already pointed out. And EUR 74 million are accounted for by the growth of EBITDA in the Water business, then EUR 50 million related to the adoption of the new tariffs and EUR 20 million, thanks to the investments made in past years that generate [Technical Difficulty]. Then EUR 24 million refer to the recovery of inflation in '22, '23 is a one-off item. CapEx reported an overall growth of EUR 26 million on the previous year and an increase net of public subsidies of EUR 26 million [Technical Difficulty]. As for Grids and Public Lighting, revenues amounted to EUR 522 million, up by EUR 53 million on 2023. And again, this result is mainly driven by the increase of regulated tariffs. WACC has increased from 5.2% to 6%, and thanks also to the increase of the RAB. As for the EBITDA of this business, it grew 15% organic growth, growing EUR 43 million. This is mainly the result of the growth of tariffs. As already pointed out, the increase of tariffs generated EUR 48 million of which EUR 25 million refer to the -- or related to the increase of the regulatory WACC and the rest to the investments made in the past years. Then the one-offs that are positive unlike Water business, so positive EUR 5 million that is the release of funds. As for CapEx, net of public subsidies, CapEx increased by EUR 24 million on '23. Let's now move on to the Environment. Revenues, net revenues amounted to EUR 228 million down compared to 2023 by EUR 11 million. This is the combined effect of lower revenues coming from the treatment of liquids, roughly EUR 8 million and the balance EUR 3 million. EBITDA is down 8%, mainly due to the energy scenario, namely reduction over the national [Technical Difficulty] price and then this energy scenario has been offset by better margins on WTE by EUR 4 million, but the waste to energy is negatively impacted by EUR 3 million because of the down of the fume line at the Terni plant that impacted by EUR 5 million. CapEx are increasing as compared to '23 by EUR 49 million investments on the fourth line at San Vittore plant and the fume line at the Terni plant. The production [Technical Difficulty] revenues down by EUR 31 million, mainly because of the energy scenario, minus 18% and lower production, minus EUR 9 million. Compared with our peers, our hydroelectric plants are all located in the center of Italy. And this year, in Abruzzo, a substantial reduction of rainfall was recorded and production was down 60% on the previous year same 9 months. And then, of course, the drop is also related to the lower single national price. As for one-off nonrecurring items, EUR 2 million related to the revamping of the photovoltaic plants. Lower CapEx than '23, down EUR 15 million, less investments on photovoltaic plants. As for Commercial, revenues have reached EUR 1,350 million, down by EUR 463 million compared to '23 as a consequence of price reduction and also lower volumes. As for EBITDA, EBITDA grew by EUR 42 million versus the first 9 months of '23, and this is mainly the result of a higher margin of the free market and thanks to the energy management activity. CapEx amount to EUR 48 million, up by EUR 14 million on 2023, and this is mainly due to the higher costs to acquire new customers. This is it as far as the presentation is concerned, and we can therefore start the Q&A session. Thank you very much.

The first question by Roberto Letizia at Equita.

My first question refers to the tariff approval in ATO2. I'd like to move on to the -- from the P&L to the balance sheet. So I would like to know how you're going to collect the tariffs in the next few months? And to what extent do you expect the new tariffs will have an impact on your working capital in the next few months? So if you can elaborate on this. And then can we also now focus on '25 for a moment, only from a qualitative point of view to know what the moving parts are in your opinion next year? Focusing particularly on when do you expect the approval of new tariffs in the other areas? And then a question on balance sheet flexibility and all the transaction you are implemented. You recently actually completed the deal on electric production assets. So I would like to know whether you are in the position to grasp extraordinary opportunities and what kind of asset rotation can we expect going forward?

I'll be answering your question about tariffs. Our business plan that was released in March of this year provided for a tariff increase. And what we have assumed in our plan is perfectly in line with the tariffs increase that has taken place. ARERA so far has approved of ATO2 only, but we know that local authorities have already approved new tariffs. Our companies have already adjusted their P&L considering the new tariffs starting the 1st of January '24, which implies a growth of revenues on regulatory businesses are mirrored in the working capital, which has been factored in, in our business plan. But once the tariff increase becomes fully operative starting '25, we expect such volumes to drop. The so-called settlements have to be repaid by or within the regulatory period, and ARERA was absolutely clear about this. As for the disposal of assets or -- and high voltage, so how much resources will be released by this deal? Well, the binding agreement we signed with Terna and the closing is expected for the first stage of '25 will generate EUR 247 million of available resources. As for the use of such resources will be released, well, you know that we are focused on investing in the regulated businesses. We are doing high voltage because high voltage is a business that we do not manage directly because transmission is managed by Terna also because of the regulator's requests. So we'll be using these resources to strengthen our investments in our regulated businesses and in low and mid-voltage. Today, high voltage has generated EUR 23 million EBITDA. So we do not expect any major impact on the earnings per share also because these released resources will enable us to invest on regulated businesses and so that will replace the missing part, let's say, of high voltage. Then as for the moving parts for '25, well, that was mainly the settlements. So settlements account for the main moving part for '25, and I've already answered the question about this.

So I imagine that your question was mainly about the reduction of WACC.

No, no, no. I was referring to the moving parts of your P&L, and you already answered my question. But in the light of the evolution of experience this year in terms of tariffs and in terms of commercial activity, what do you expect the moving parts in '25 will be from [indiscernible].

Well, as I already pointed out, considering that the tariff scenario is now clear -- and considering that the tariff scenario that has materialized is in line with the assumptions of our business plan, we believe we will be sticking to the trajectory we have been following. So I do not expect anything that may lead us to change our trajectory in terms of growth and growth of our EBITDA. As for nonregulated businesses, well, production is impacted upon by climate, so water, rainfall and the electric market. As for the Commercial business, the growth of the first 9 months of the year, considering that we see competitive pressure, we expect to go back to normal in '25. And by normal, I mean the results of the past few years.

Next question by Francesco Sala at Banca Akros.

My first question is about the supply business. Do you expect asset rotation in this business, if not in the short and the midterm? And then can you update about the [Technical Difficulty] industry? And will you be bidding for [indiscernible] bids in the midterm? And then as for the waste business, can we expect a recovery in the next -- over the next quarters considering the one-off items that you factored in, in Q3?

I can start with the waste question. About waste, we had the Terni plant that was not operative and will go back to being operative in '25. Then we have the San Vittore plant where we are developing a fourth line. As for Environment, our Environment business, we are currently managing volumes at best. So we plan to strengthen our business in other areas as well to increase the current volumes. So we expect that we'll be able to recover margins in '25 on waste. As for Water, well, we bidded in the Syracuse tender. We have been temporarily awarded the Syracuse tender. We bidded also at the Imperia tender, and we are temporarily awarded the Imperia tender as well. Also, we'll be bidding for all water bids that will be held next year. This is our core business, I mean. As for asset rotation, I've repeatedly commented on this in the past. So we definitely take into consideration if the conditions are there and if asset rotation contributes to our strategy, fits with our strategy, that is to say, growing the most in the regulated businesses.

Next question, Emanuele Oggioni, Kepler Cheuvreux.

I got a couple of questions. Actually, I would like you to specify some points that were raised by other participants. For instance, the net working capital in '25 and the so-called settlements [indiscernible]. I understood that in the first half of '24, you didn't factor in MTI4, which means that you may still have a positive impact in '25 year-on-year by MTI4. And in the first part of '25, we'll see a slight deterioration of working capital, but the second part of '25 with flat tariffs year-on-year, we should see a recovery of the net working capital. This is my reasoning. I would like to know from you whether this is correct. And then second question about the disposal of the high-voltage grid in Terna. Can you give us an idea about the capital gain that will be realized in '25? And then all my other questions have already been answered.

Well, in '25, we do expect improvement of our net working capital. In the first half, we will have a cash in deriving from the tariff upgrade of the first 9 months of '24. In other words, the impact will be felt in '25. About the high voltage grid, I'm not willing to disclose any -- sorry, to disclose any number because the calculations we have made were based on provision of RAB that still has to be confirmed by ARERA. And then there is the ARERA premium that will depend on the closing of the transaction. We do our best with Terna, of course, and we expect closing to take place within H1 '25. At that point, we'll be receiving a 4% premium based on the ARERA regulation, such a premium would drop to 3% if the deal is closed in '26, which is, however, not our case because we expect it to be closed by H1 '25. And the other adjustments that have to be taken into consideration investments that will be made between the 1st of January '25 to the closing date [Technical Difficulty]. Once we have everything in order and the signed SPA, I will be disclosing the related capital gain that we expect.

Next question by Javier Suarez, Mediobanca.

I've got a couple of questions. As for the guidance, you have updated your guidance with EBITDA at EUR 1.5 billion. Do you think this is consistent with the net income between EUR 340 million, EUR 350 million. Is that correct? And if yes, do you consider this net income eligible for dividend policy? I'm telling you because the net income is increasing markedly more than the market expected and your dividend payout based on the current dividend policy would be below 50%, which looks a bit low. And then a follow-up on Roberto's question about '25. So EUR 1.5 billion EBITDA and EUR 340 million, EUR 350 million of net income. Do you expect any growth in '25? Because the EUR 24 million that you mentioned, that is to say, the payment of the tariffs increased over the past months. So what impact do you expect in '25? And then the waste to energy plant in Rome, can you please update us about it? When do you think works will start? When do you expect the works to be completed? And when do you think your stake in this project will become [ a remunerative ]?

I can't remember your first question, sorry. Can you please remind me of the first question? Right. Net income, we do not provide a guidance on net income. So for the time being, I cannot answer this question. As for the next question, namely the 2025 growth will be definitely be impacted upon by a lower WACC. So we expect a reduction of WACC on electricity distribution from 6% to 5%. We expect a drop in EBITDA because of the disposal of the high-voltage grid should this be completed in H1 '25 as I said, high-voltage generate a full year EBITDA of EUR 23 million. So if we dispose of it in the first half of '25, we will be losing, let's say, EUR 12 million in terms of EBITDA. And then again, we -- as for the tariff increase of the past months, well, this was factored in, in our business plan. Then we expect a growing competition going forward and therefore, growing pressure. We do not provide any specific guidance for '25, but we are perfectly on track with the business plan that we announced March of this year.

As for the WTE plant in Rome, well, I think the numbers are well known, investment of roughly EUR 1 billion, works should start in spring '25. According to the time schedule, the works would take 36 months. We are still waiting for the concessionaire to complete all its activities. And then, of course, we wait for the project to be formally awarded to us. So only at that point, we'll be able to be [Technical Difficulty] the final economics of the project and the share [Technical Difficulty] and the impact that this will have on our financials. I can tell you, however, right now that this is a project financing project and therefore, will be nonrecourse for our shareholders. Are there any other questions?

Next question by Davide Candela at Intesa Sanpaolo.

I've got 3, in fact. First 2 refer to the water tariffs. First is more a request of clarification. What is included in the new EBITDA guidance for '24? So I wonder whether this new guidance includes the approval of all the concessions you have or whether it considers only ATO2 and therefore, this means that in '25, we may expect an impact of the still pending tariff renewal. And then about your regulatory receivables, consider that in your plan, you announced that most of the regulatory receivables will be recovered, whether the growing tariffs by 0.1%, as was the case with ATO2 is what will enable you to, again, recover the regulatory receivables. I would like to know whether my reasoning is correct or not or if I'm missing something. Then a final question about the water concessions. I'd like to know, if possible, what is the rationale that led you to bid in the small tenders in Lombardy for 2 very small plants. So what was the rationale that you followed and how this rationale fits with your strategy?

I'll answer the first question. Probably I wasn't clear enough during the presentation. Currently, we are factoring in tariffs increase by MTI4 for all our concessions. So the various bodies have already approved of them. We're still pending ARERA's. But we have already factored in all the tariffs increase. As for the regulatory receivables, we expect them to be halved what they are now by 2028, also because ARERA wants all the regulatory receivables to be settled by '29. As for our bidding for tenders on hydroelectric plants, we currently have hydroelectric plants, which are important for our sustainability goals. So whenever the opportunity exists, we can grasp it because strengthening our hydroelectric production is definitely important for us together with the photovoltaic energy that is the other area of renewables that we are currently focusing in and investing on.

[Operator Instructions] Ladies and gentlemen, there are no more questions.

And thank you very much for attending our conference call. I'd like to remind you that the Investor Relations team is available for any further questions. Thank you very much.

This is the Chorus Call operator. The conference call is over. You can disconnect now. Thank you very much.