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

[Foreign Language] And now I'd like to hand you over to Mr. Michi, Investor Relations Head at ACEA.

Thank you very much, and good afternoon, and welcome to the presentation on the ACEA Group results at December '24. Fabrizio Palermo, CEO and General Manager of the ACEA Group; and Pier Francesco Ragni, Executive General Manager and CFO of the group; will illustrate the results achieved there. And now I'd like to hand you over to Fabrizio for initial remarks.

Good evening, and welcome to you all. I would like to make reference with the regulatory and market environment that you see on Slide #2. The tariff approval by ARERA are on going after the local policies have completed the approval of process. The Water Services tariff met for have been approved and the additional tariffs authorizations have to be -- will approve the WACC -- Water WACC is 6.1% versus 4.8% in 2023. As for Electricity, I'd like to point out that the provision of '24 tariff was published in May. It was based on the ROSS tariff rules that need to see the total spending mechanism for the sixth regulatory period of the period -- of '24, '27. The Electricity WACC amounts -- amounted to 6% in '24 versus 5.2% in '23. The energy prices in '24 reported a dramatic fall vis-a-vis '23, respectively, minus 15% and minus 14% as far as energy and gas are concerned. At the first of this December, the mid short-term interest rate amounted to 3.5%, slightly lower than the previous year when based to a 3.7% while the mid long-term interest rate dropped vis-a-vis '23, standing at 2.6% versus 3% in 2023. Moving on to the next page. '24 marked a strong acceleration of the long-term project growth of the group. This applies both to the industrial and the communication plan in March, the '24-'28 industrial plan was illustrated where we defined our strategy and our objectives. That were implemented already in '24 partially, of course. So I refer in particular to the major construction sites that accounted for a real gear change. I'm referring to the Marcio Aqueduct, the Ottavia Trionfale line. So all the major water projects and not only greater projects, also the environmental project. Then the implementation of the our international strategy that we laid the foundation for all by participating in the [indiscernible] plan confirming our role in South America, particularly in Peru, where we actually manage actively our stakes in that country. Then we have launched an electrical flexibility service. We have acquired the WTE project in Rome. We have been awarded 2 major tenders in 2 regions where we are not present. It has been for years that ACEA hasn't extended its geographical footprint. So we managed to enter Liguria and Sicily. Then we set up a water subholding company to increase our efficiency and have an increasing role in the water industry and that we have a bid for 2 major tenders in Lombardy, so outside the regions where we have been traditionally operating. Please remember that in March, Fitch improved ACEA rating from negative to stable. And then we also acquired high-voltage electricity grid that we are going to dispose off and then starting the 1st of October '24, and this is an important point. We consolidated the Aqueduct with using the net equity method. In October '24, the public partners of the Fiora Aqueduct declared there will not be renewal, the shareholders' agreement. And even though the announcement was not made within the shareholders act, the need to redefine the corporate governance emerged to redefine the control of ACEA. Hence, we changed the way we consolidated the Fiora Aqueduct, we are currently negotiating the new shareholder act agreement, and we're modestly optimistic about it. Coming to the results. I believe the results speak by themselves. '24 ended with all-time high results, both in terms of EBITDA and net profit, so an unprecedented result. The EBITDA reported reached EUR 1.557 million, up 12% versus the previous year. In a way, we have achieved our business plan targets in year -- 1 year, I had the plan that we announced early '24. EBITDA grew on average more than 5%. That that was factored in plan. So EBITDA grew [ 7-9% ], well above the guidance of '23. And this I would like to point out that our guidance has already been seen -- reviewed upward at the beginning of the year. As for the net debt-to-EBITDA ratio, '24 ended with a 3.2% ratio. And again, a substantial improvement versus the -- our guidance that had been reviewed versus the initial guidance of 3.5%. EUR 1.4 billion overall CapEx in '24, of which EUR 1.2 million net of subsidies, subsidies, of course, that we have received. Moving on to Slide 7, '24 highlights. As already pointed out, the reported EBITDA increased from EUR 1.339 million at the 31st of December '23 to EUR 1.557 billion at the 31st of December '24, after 12%, as already pointed out. Net of extra all in items, EBITDA grew 12% on '23, up EUR 152 million, of which [ EUR 142 million ] was in the regulated business. Growth has been driven mainly by Water and Grids, thanks to the increase of tariffs there, and the commercial business as well. The net -- reported net profit amounts to EUR 332 million, up 13% versus '23. Organic net profit is EUR 330 million, up EUR 51 million compared to '23, thanks to the growth in EBITDA more than offset the rise in depreciation linked to the investments in regulated business. Net and gross CapEx grew respectively by 26% and 19% versus the previous year, mainly driven by the growth of investment in regulated businesses. All in all, the net investments in '24 amounted to EUR 1.459 billion, exceeding by EUR 296 million investments made in the previous year. The operating cash flow amounted to EUR 373 million after compared to '23 million by EUR 225 million. The net debt-to-EBITDA ratio is 3.18x, significantly better than the previous year. And now I would like to leave the floor to Pier Francisco Ragni, the CFO of the group and Deputy Manager of the group, who will be providing more details about the financial highlights.

Thank you very much, Fabrizio, and good afternoon to you all. As we heard, the reported EBITDA, 90% up, which means plus EUR 152 million, which is thanks to the business reported in the Water, Lighting and Electricity Distribution, which made up or offset the unfavorable scenario. Regulated businesses account for 87% of valuable EBITDA. And the -- we have plus 19% overall. Now if we consider the finance of our -- with CapEx, overall EUR 1.939 billion, which is plus EUR 90 million of investments in 2023. Net profit is growing strongly, plus 18% organically, thanks to the EBITDA growth, which compensated the depreciation. Now the EBITDA is growing by around -- sorry, net debt is growing around EUR 100 million. And as we said, the net debt-to-EBITDA ratio has improved significantly versus the end of 2023 compared to the guidance we gave to the market. Now the EBITDA now. The EBITDA is growing because of the organic growth of regulatory businesses. Organic growth, excluding generation, is equal to EUR 181 million. Now we also have the effect of the tariffs and also we have the growth of investments. We have an improvement of commercial margin, and this is due to the growth of the unit margins of the customer base. Now these features allowed us to offset the negative effect, which is due through the energy scenario, but also a lower electric volumes produced because of the weather events. Now organic growth is strong and that offset more than the negative energy scenario. You see on the right the one-offs recorded in '23, in 2024 with an overall amount of EUR 28 million in 2023 and EUR 40 million in 2024. Let's now move on to the net profit. Now organic net profit, which is 18% versus the previous year, thanks to the growth of the EBITDA, which offset the depreciation. As to the financial management, here, we see that it is related to the interest rate trends. Now on the right, you see the one-offs, which are related to the net profit reported in 2023 and 2024 with an amount, which is EUR 15 million. Now as to the dividend, the Board directors result a dividend equal to EUR 0.85 per share, the highest dividend ever paid by ACEA, growing by 8% of the dividend paid, the results of 2023. Let me remind you, the policy didn't yield and reduce an organic growth by 4% during the 5 years period. That's a dividend policy. As for the guidance in the group invested EUR 1.4 billion versus 2023. There is a plus 26%. Now 92% of investments related to regulated businesses. Now the CapEx, EUR 260 million were financed, thanks to public subsidies and such subsidies have grown by EUR 200 million versus 2023 thanks to the CapEx in the regulated business. You see here the detail of the activities carried out in 2024. Also the widening of water Pipes and the line -- fourth line of San Vittore. Let me move to the cash flow. The [ absolutely caution ] in 2024 is equal to EUR 100-odd million. Now we certainly point out that the good management of the working capital. But we need to underline also the performance of the EBITDA and also the strong growth that we have recorded in Q4 of 2024, which had an impact on commercial debt. Now we had tenders at the end of the year, so the results will be reflected next year. And then we also have the tax related to the [ incentive ] bonus. Then we've had an increase, the limited of long-term regulatory receivables, which led to an increase in regulatory WACC, and we've had a positive impact, which do not translate in cash now, but will be reflected in next year's cash. Now so in future years, we envisage the reduction of outstanding regulated receivables. Now as for the financial structure, the cost of debt is 2.16%, and this is related to the new tax on debts. Now let me remind you that on the 15th of July, we reimbursed a bond of EUR 600 million at a fixed rate on the 2.65%. Now we don't have to move our funding through SACE's Archimede of EUR 300 million and this increases the financing at SACE's Archimede to EUR 100 million. Now these funds will be used in 2025, but thanks also to the maturities of bonds. In February, we reimbursed EUR 160 million, in September EUR 200 million. Now as to the fixed rate debt 91% and the duration is around 4 years. Now move to the recurrent business unit. First, the Water, recurrent EBITDA is going by 13%, thanks to the increase in tariffs, which is compensated by the results of the company's consolidated equity. Now you see EUR 12 million are related to the consolidation of Fiora, which accounts for EUR 20 million, and the recognition of previous targets in the Water business of around EUR 35 million. Now 2023, minus EUR 28 million are related to the premium for the quality of service, which leads to an increase of around EUR 200 million versus previous year. And net of public subsidies, EUR 100 million, 17% RAB in the Water business at the end of the 2024 amounts to EUR 4.8 billion, up 4% in 2023. Coming now to the Grids and Public Lighting. The recurring EBITDA grew roughly EUR 50 million versus 2023 as it's driven by the growth of regulated tariffs. WACC increased from 5.3% to 6%, and also thanks to the growth of RAB, CapEx and net of subsidies increased by 8% versus the previous year, RAB of Grids increased from EUR 2.8 billion in 2023 to EUR 3.1 billion in 2024, growing 11%. As for the environment, the recurring EBITDA dropped by EUR 8 million because of higher margins on the waste-to-energy plant. CapEx increased substantially, reaching EUR 100 million, mainly because of the works on the fourth line of San Vittore and the fume line at Terna. Moving on to generation, the recurring EBITDA dropped by 32% to be exact, following the lower prices on the energy markets and lower hydroelectric volumes especially in the Central Italy. CapEx reached EUR 26 million, dropping versus the previous year. Total energy output grew 8%, increasing from -- sorry, dropped by 8% from 754 gigawatt hour in '23 to 693 in '24 following the 28% drop. As for Commercial business, recurring EBITDA increased by 38% mainly driven by higher margins in the free market and thanks to energy management, this positive component has been partially offset by the loss of the nonrecurring events. CapEx increased by EUR 17 million versus '23, mainly because of higher costs in acquiring new clients and new customers. And finally, the '25 guidance, we expect EBITDA growing by 2%, 3% versus '24 versus the restated EBITDA '24. The '24 restated EBITDA has been calculated by adjusting the reported EBITDA of EUR 1.57 billion, and that has been adjusted following the scope of changes as already described. We have -- I'm sorry, the speaker says, we have not considered the Fiora Aqueduct for 18 months, and we have been not included high voltage line that was -- is the subject of a binding agreement with Terna signed end '24. As for 2025 EBITDA, our guidance didn't factor in the contribution of a high-voltage line for the -- not before the disposal and the Fiora Aqueduct has been consolidated at net equity for 12 months. As for net debt EBITDA ratio, we expect 3.5x. In our estimates, we factored in the sale of the high-voltage network, considering early the proceeds from Terna of EUR 224 million, whereas the incentives from ARERA amounting to EUR 23 million is expected to take place in '26. Thank you very much. So this is the end of the presentation, and we can start the question-and-answer session.

[Operator Instructions] First question by Roberto Letizia, Equita.

I have a few questions and maybe I'll come back to you after [indiscernible]. So I'm trying to focus on 2025, trying to analyze the possible change in the perimeter of [indiscernible] now you talked about the opportunities -- and the opportunities on the retail business. How much is the retail business as part of ACEA [ business strategy ]? Now explain quite well. I hope you know whether are you potentially -- how we're expecting about the working capital in Q4. I would like to -- how much the improvement that you mentioned there is strong growth or whether it will be absorbed in first part of 2025? Now if possible, can you give me a summary of moving parts of 2025 and main drivers? And what kind of contingency have you factored in the growth of EBITDA by 2%, 3%? Now you said that of course, is a contingency like the activation of the high-voltage [ network ]. So Any possible change to the guidance that you provided?

Now as to the first question, there is the retail business. We have repeat what we have always said, there is -- this is a business as part of our program. And as all of our businesses that we are certainly open to any solution and opportunity you might have on the market. Nothing more, nothing else. This what we have always said and what we confirmed with business plan. As to the debt dynamics, how much the improvement is restructuring in nature, now let me tell you what I said during the presentation. There is -- in 2024, we had a positive effect in Q4, which is mainly related to the concentration of a meaningful CapEx in Q4. Certainly, in 2025, we will have to pay the CapEx made in Q4. And this, within the guidance, will realign the ratio of the net financial position EBITDA. Now as to the other question you asked, 2025 in terms of networking afar dynamics will be a neutral. As mentioned from the target on our business plan as in parts 2025, the year will be net working capital dynamics will be neutral as mentioned among the targets of our business plan. As to the moving parts, 2025, the year will be characterized by a number of different phenomenon. For instance, the organic growth related to the new 2024 regulatory plan and with the growth of the Energy business. Now the Water business, despite the regulatory WACC is decreasing by 3.4%, this is offset by tariff growth and the accelerated growth of RAB. Now EBITDA, as I always said, and as we always remember that we expect the growth of the competitive pressure. As for other businesses, we expect a outgrowth in terms of the environmental business and also generation business should there be improvement of weather conditions versus what we had the last year. Now as for the guidance for the net debt-to-EBITDA. We had this contribution for 6 months of the Terna grid. Sorry, the sound is not very clear. I'd like to know whether in EBITDA guidance, the ratio of net debt-to-EBITDA, does not include the 6 months of Terna. Now the EBITDA for 2025 in the guidance was calculated as if we had no high-voltage business starting from 1st of January 2025. So this all applies to the net debt to EBITDA ratio.

Next question Javier Suarez at Mediobanca.

My first question refers you to the dividend policy of the group. We have seen the dividend in '23 growing more than the guidance and ahead of the business plan target. So the dividend that they're going to pay on '24. can it be considered as a basis of which to apply the 4% dividend ratio that you factored in, in the previous business plan? So can we consider '24 as the starting point, let's say, of this 4% growth of dividends up to '28? The second question reflects from the guidance again. Can you please provide us with the guidance also as far as net income is concerned, for '25, I believe the consensus is around EUR 300 million to EUR 340 million, probably slightly lower. Can you feel confident with that figure? And then third question and the fourth question refer more to your strategy. I'd like to know if the group is interested in acquiring assets in gas and distribution? The ITAGAS is going to discuss over, is this something that might be interesting for ACEA Group. And then I would like to know whether the measures adopted to mitigate the impact of high energy prices that may have an impact on the working capital of the company. And then I would like to know if you can provide us with more info about the upfront payment for ACEA should the agreement to extend the useful life of the asset by 20 years, what could be the upfront payment that ACEA will have to bear?

I can answer your last question. Our RAB for energy distribution is at EUR 3 billion. So the upfront payment to extend the useful life will depend on the request of the regulator. So in other words, it is a math calculation that you have to make between our RAB and the percentage that the government will apply. As for our dividend policy, what I said during the presentation is what I'm going to repeat now. Our guidance remains the same that was in our business plan. So our guidance is exactly the same. The payout of this year is the result of -- again, results higher than expected. As for the guidance on net income, we do not provide such guidance in line with our past, let's say. As for the gas network, recently assets that are going to be disposed of by ITAGAS were published recently. As already pointed out, we take very seriously any opportunity that might arise. We own the part of the network in some regions of the country. We will be certainly following the future evolutions. I can't tell you now what our final decision will be. As for the impact on our net working capital of the higher price -- energy prices, we know that the government has -- is going to adopt the measures that will lead to our reduction of EUR 1 billion of tariffs with a negative impact on our working capital. So if the 1.6 billion that is going to be provided as a subsidy to households, the impact would be EUR 0.8 billion in our case that is amounted to roughly 6% of the charges, the country charges. I don't know If I can tell you more than this, this is our best guess.

Next question, Emanuele Oggioni of Kepler Cheuvreux.

I have a few questions, which are related to the approval of the tariffs for 2025, some tariffs were approved, other were not. Can you give us an update here. And then to what extent this is included in your guidance for the growth of EBITDA? And to what extent this is an upside versus the guidance? Second question, I'd like to have a clarification on RAB. You usually give us the gross [ EBITDA ] of the grants. Can you give us the net value of these grants and the breakdown of the grants? And then a third question on the net working capital, the regulatory net working capital. There is those related to the mismatch between ARERA and the tariff increase of the different [indiscernible]. Well, at the end of 9 months, the value was EUR 600 million in terms of the data at the end '24? And then what are your expectations related to the reduction of that amount in 2025 including the business plan period? Now you said that the starting point was EUR 400 million at the end of 2023, and you thought you could this amount within the business plan. And then a question on waste. Recently a -- is the news was published about the stop of work certain of the waste-to-energy San Vittore line because of the controls on the part of the authority. Do you see any delay that might contribute negatively to the EBITDA of this business unit?

Now let me answer your question about the approval of tariffs. Now in our water world, tariffs have all been approved by the authorities. ARERA has not approved -- has approved to it, sorry. The others are expected will be approved shortly. Now the tariffs that have been approved are in line with our business plan and are factored in our 2025 guidance. Now let me go through the last question that you asked, then we'll answer all of your questions. Last question about the temporary stop of the works of the fourth line of San Vittore. At the moment, we are establishing the dialogue with the relevant authority, and we are trying to solve the situations as soon as possible. At the moment, I can only tell you that we are focusing and paying attention to the this [ iceberg ]. That's all I can tell you. Now as for the absorption of the regulator activity for 2029, said all rebalancing have to be, in a way, discharge, so to speak, on the energy bills.

Next question of Francesco Sala with Banca Akros.

I've got a couple of questions, too. First of all, what is your visibility and out of the tenders in the Water business that you have bid for? And are you planning to bid for other tenders as well? And then in the light of the '24 results, are you considering reviewing your -- updating your business plan, if yes, when? And my final question, just a few words about the WTE. What is the timing there? And when do you think the WTE can be included in your turnover in the next years.

Now as for visibility on the hydroelectric tenders, out of the tenders that we have bid for, we are waiting for the final decision, and therefore, I cannot tell you when this is going to happen. As for the update of our industrial plan, our business plan, well, definitely, we're going to update it, will be probably in the second part of the year, also because we are following the evolution of the extension of the concessions for distribution of low and medium bottom that accounted for a substantial share of our EBITDA. As for WTE, waste to energy plan, well, there's been a temporary award to the consortium that includes also ACEA. Currently, the final evaluations have been made, and we expect that the tender to be awarded shortly. Project financing is being -- that is being negotiated with the banks will not be consolidated because it's a nonrecourse project finances -- financing project.

Next question, Davide Candela, Intesa Sanpaolo.

I had a question about the '25 guidance. It's more of a clarification, I would say. Now some part of tariffs were approved somewhat late. I wonder whether the 2025 guidance includes also the tariff increase obtained in 2024, or only the new approval of new tariffs in 2025? There's another question that perhaps you didn't answer the question of the colleague, the net grants for Water and Electricity?

Now as to the net RAB, we do not provide the data for the net RAB. As to the net working capital, so as to the equalizations in 2024, well, because of new regulations, they [ improved ] in 2025, but they will have to be invoiced in 2025. As to the question about and late approvals, well, everything was provided for in net provisions in 2024. So there's no impact on our concessions in 2025.

Next question is a follow-up question by Emanuele Oggioni with Kepler Cheuvreux.

Yes. I actually wanted to ask the same question about RAB. So I'm going to ask a different question on waste. In '25, considering the results achieved in '24, negative result following the reduction of volumes as well as the drop in prices of electricity generated with waste-to-energy and considered the drop in volumes of treatment business, could you provide us with a more detailed outlook for '25 as far as waste is concerned?

Well, in '24 waste business reported an EBITDA drop of roughly 9% because of the overall energy landscape that had a major impact. So we expect to recover in 2025 part of what we lost in '24.

[Operator Instructions] The next question is a follow-up question by Javier Suarez with Mediobanca.

Now I have a question, which I still have is about the supply business. You talk about the different moving pieces. You mentioned the normalization will occur in the next few years. Now could you perhaps give us more specific guidance of the business supply guidance in 2025?

No, Now we do not give a specific guidance on the individual business unit. Now the reported EBITDA already includes a number of one-offs amounting to EUR 170 million. In 2023, they amounted to EUR 130 million. So basically, that is the overall range that we can expect.

[Operator Instructions] Ladies and gentlemen, there appear to be no other questions from the conference call.

Well, thank you very much for taking part in today's conference call. Let me remind you that the Investor Relations team is available should have any question or [indiscernible] clarification.

This is the Chorus Call conference operator. The conference call has now been concluded. You can disconnect your telephones. Thank you.