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

Good evening. This is the Chorus Call operator, welcome to the presentation of the first year half '26 of ACEA. [Operator Instructions] I now would like to leave the floor to Mr. Dario Michi, Head of Investor Relations at ACEA.

Good afternoon, welcome to the first year half '26 results presentation of the ACEA Group. Fabrizio Palermo, CEO and General Manager; Pier Francesco Ragni, Co-General Manager; and Valentina Bracaglia, CFO, will illustrate in detail the financial highlights of the first year half. I now leave the floor to the CEO and General Manager, Fabrizio Palermo.

Good afternoon. Let's begin today's presentation with an overview of the regulatory and market environment. As for the regulatory front, we have witnessed overall positive developments, particularly in the Water segment. The MTI-4 tariff approval process by local authorities has been completed, while ARERA is nearly completing the approval process across all group operations. As for the electricity networks, in June 2026, the provisional regulatory tariff was published following the publication of the final 2024 tariff in April, both fully in line with our expectations. In the Environment business, similar to the Water business, tariff updates for the 2026 and 2029 period are currently underway. Turning to the commodity market. In the first half of 2026, electricity and gas prices posted increases of 6% and 2% respectively compared to the same period in 2025. Consumer prices reported an average increase of 2.2% year-on-year. Finally, as per interest rates, as you can see on the slide deck, in H1 2026, the six-month Euribor and the eight-year mid-swap stood at 2.4% and 2.9%, respectively, both reflecting a year-on-year increase. Moving to the next slide. So here you see the business performance improving, driven by strategic investments and by operational improvement. As for Water, we further strengthened our market leadership through projects wins both in Italy and internationally. In the Electricity business, the sale of ACEA Energia was successfully completed in line with the group's strategic objectives. We have also accelerated our growth trajectory through the acquisition of Aquanexa, a leading service provider in the water sector. We have strengthened our presence in the Water segment with additional ancillary services that are going to be strategic going forward. As for people, ACEA entered the top 20 ranking employers 2026 in Italy, underscoring our commitment to human capital ever since the beginning of the business plan. Our balance sheet was further bolstered by the successful execution of Italy's first public Blue Bond issuance. Fitch confirmed the BBB+ rating with a stable outlook and raised our FFO net debt ratio from 5.2 to 5.5x, recognizing the group's enhanced financial flexibility and credit profile resilience. Then we set up the ACEA Foundation, that was then recognized as an historical brand of national interest, further enhancing the group's identity and heritage. Overall, these achievements underscore ACEA's ability to grow in a sustainable way while delivering long-term value for our community, stakeholders, and shareholders. As for the next slide, here you see the H1 2026 financial highlights. Pro forma organic EBITDA grew by 4% compared to the first year half 2025, driven almost entirely by regulated businesses, which account for approximately 95% of total EBITDA. Please remember that the EBITDA organic figure of H1 2025 was restated to exclude the technical and contractual quality bonuses in the water sector and to account for business scope changes related to the high voltage and PV assets sales as well as the deconsolidation of Publiacqua. We will come back to this point later on in the presentation. Net profit stood at EUR 454 million, up significantly year-on-year, benefiting from the capital gain generated by the disposal of ACEA Energia. Organic net profit, excluding non-recurring items, rose by 16% to EUR 176 million, reflecting the strong operational momentum. CapEx, net of public grants, reached EUR 500 million in line with the H1 '25 and over 90% of them are allocated to regulated activities to support the infrastructure modernization and sustainable growth. Operating free cash flow is negative EUR 58 million. Our robust operational performance allows us to maintain a sound balance sheet structure with a pro forma net debt to EBITDA ratio of approximately 3.64x, fully consistent with our full-year 2026 guidance. Moving on to Slide 6. Here, you see more details about the first year half performance. As already mentioned, pro forma organic EBITDA reached EUR 719 million, up 4%, well in line with our clear targets and driven by regulated operations. Reported net profit reached EUR 464 million. Taking out the one-offs and scope changes, organic growth was 16% and it mirrors the strong operational performance. Capital expenditures remained flat year-on-year. The share dedicated to regulated activities account for 91% of the total. Net financial positions stood at approximately EUR 5.2 billion, up by EUR 217 million compared to end of 2025, primarily driven by seasonal working capital dynamics. Net debt to EBITDA ratio, as I already pointed out, stood at 3.64x, fully aligned with expectations and within our full-year guidance range. In the light of these results, we confirm our full-year 2026 guidance, namely EBITDA growth range between 3% and 5%, gross CapEx EUR 1.5 billion roughly, and net debt to EBITDA ratio range between 3.5 and 3.6x. And I will now hand you over to our CFO, who will walk you through the detailed financial results. Valentina, the floor is to you.

Thank you very much. Let's now dive deeper into the EBITDA performance on Slide 7. In H1 2026, we generated a reported EBITDA of EUR 721 million, with regulated businesses accounting for approximately 95% of the total EBITDA. Specifically, Water accounts for 59%, Network and Public Lighting 30%, and Environment 6%. On the right hand of the slide, you can see the main one-offs and scope changes that in H1 2025 amounted to EUR 46 million. These were mainly related to the technical and contractual quality bonuses in Water for '22-'23 and the contributions from sold high voltage and PV assets as well as the deconsolidation of Publiacqua that occurred end 2025. As for H1 '26, the one-off items and scope changes totaled approximately EUR 2 million, reflecting the temporary plant downtime for revamping in the environmental business and the Aquanexa positive contribution following its closing in April. Slide 8, net profit. In H1 2026, net profit reached EUR 454 million, boosted by the EUR 269 million capital gain realized after the disposal of ACEA Energia. Excluding non-recurring items and business scope variations, the recurring net profit grew double digits, namely 16%, reaching EUR 176 million, mirroring the underlying operating performance previously mentioned. Similar to the EBITDA, also in this slide, you see on the right the detailed one-off components and scope variations. On top of what I've already stated, we have the capital gain deriving from the disposal of ACEA Energia, earnings from discontinued operations, and the impact of the IRAP surcharge introduced by the so-called Decree Bollette. Let's now move on to capital expenditures on Slide #9. In the first year half, gross CapEx, before public grants, totaled EUR 663 million, flat compared to last year. This highlights our focus on regulated assets, on infrastructure reliability and long-term resilience. Particularly, Water accounts for the main destination of our capital deployed, with EUR 379 million accounting for 57% of the total, primarily targeted at network developments and wastewater treatment facilities. Investments on Network and Public Lighting follow, amounted to EUR 209 million, focusing on grid modernization and IT and commercial systems. Then we go on investing in the Environment business with the construction of Line 4 at the San Vittore plant and the development of new PV projects, photovoltaic projects. Let's now move on to cash flow. It confirms the strength of our balance sheet. We generated -- EBITDA amounted to EUR 721 million, leading to EUR 512 million in operating cash flow before CapEx versus the EUR 570 million in net CapEx. Operating free cash flow stood at minus EUR 58 million, marking an improvement compared to both Q1 '26 and to the first year half of '25. As a reminder, Q2 cash outflows included annual tax and dividend payments, while absorbing the net proceeds from the sale of ACEA Energia and the acquisition of Aquanexa. Moving on to the financial structure on Slide 11. The first year half results confirm the sustainability of the group's long-term growth profile as well as a sound capital structure. As of June 30th, 2016, net financial debt stood at EUR 5.2 billion, up by EUR 217 million versus year-end at 2025. The pro forma net debt to EBITDA ratio was at 3.64x, fully consistent with our target guidance range of 3.5 to 3.6. Our debt structure remains a core strength of our group. Roughly 80% of our debt is fixed rate, average cost of debt at 2.16% and the average maturity of 3.8 years. This structure effectively shields us from interest rate volatility and offers strong cash flow visibility. Rating agencies continue to confirm our strong investment-grade profile with a stable outlook, BBB+ from Fitch Ratings and Baa1 from Moody's. During the first year half, we further strengthened our liquidity and financing flexibility with the June credit facilities. In June, we successfully placed a EUR 500 million Blue Bond. And this accounts for the first Italian public issuance of a blue bond and the success is testified by the fact that the demand -- that it was oversubscribed by more than 3x, reaching an order book of EUR 2.6 billion. Slide 12, we have a look at the Water business. Water remains the group's primary driver of growth with sound results with organic EBITDA posting a strong 8% year-on-year growth, largely driven by tariff indexation. At the same time, CapEx remained at a high EUR 379 million, broadly in line with H1 2025. On Slide 13, we see that Networks and Public Lighting confirmed a solid growth path, backed by ongoing RAB expansion from capital deployed over recent years and efficiency gains. In H1 '26, EBITDA reached EUR 217 million with 2% organic growth year-on-year, while CapEx accelerated further, reaching EUR 209 million. As for the Environment business, we recorded stable operational results, really impacted by scheduled plant maintenance. Operating EBITDA was EUR 42 million, minus EUR 1 million year-over-year. We go on investing on this business. CapEx rose by 14% versus H1 '25, supporting facility upgrades, revamping and capacity expansion of our plants. As for generation on slide 15, we reported particularly strong performance. Organic EBITDA is up 22%, driven by higher volumes, mainly from renewable energy sources, and leading to a 90% hydroelectric power generation increase. CapEx increased by 33%, and in H1 2026, CapEx reached EUR 15 million. This is it as far as the presentation is concerned. We can now start the Q&A session.

[Operator Instructions] First question by Francesco Sala, Banca Akros.

Good afternoon, and thank you very much for taking my questions. I've got 3. Can you please tell us what do you expect for the Environment business in the second year half, considering that there have been some factors that impacted on the performance of H1 because of some shutdowns of plants or maintenance? So when such temporary problems are solved, what is going to happen? Second question is about the guidance. Considering the H1 result and the contributions by Aquanexa and the environment bonuses that we can expect in H2. Can we be confident with the higher end of the range rather than midpoint? Then third question, the WACC. Can you give us an update about WACC for 2027?

Well, thank you. First of all, as far as the guidance is concerned, when I answer the question about the environment based on H1 '26 results, we are confident that we'll be reaching the high end of our guidance range. Thirdly, in H2, we won't have a linear development. The Environment business will accelerate after the maintenance of the plants of the previous year half. We expect a slowdown of generation that grew substantially, remarkably in the first year half of the year, that cannot be replicated in the second year half. Moreover, in the second year half, the contribution to the results will come mainly from some operating costs that support the projects provided for in our business plan and are mainly concentrated in the second part of the year. As for the WACC market, currently, the reduction of trigger of 30 basis points is active. With the volatility of the markets following the Gulf conflict, gradually play a key role in the panel because we expect the removal of Qatar from the panel. If this is going to be the case, then the opportunity to eliminate the trigger are certainly higher, but we have to wait and see.

Next question by Javier Suarez, Mediobanca.

I got 3 questions. The first is a more general question, more strategic in nature, rating agencies say that they feel confident with this net debt-to-EBITDA ratio almost near to 5x. What are the implications for you of this type of gearing that is substantially different than what you report now? Is it a matter of accelerating CapEx? Or is it a matter of having a more proactive M&A approach or paying higher dividends? So what is the company's view in a moment when it is clear that it is possible to absorb additional gearing? And then I would like to know when the company will decide to distribute an extraordinary dividend related to the capital gain from the disposals. And the second question, adjusted EBITDA reported growth the adjusted net income grew above 10%. Can you please explain us the difference? Why is there this difference? Why the growth of the bottom line is so strong? Is it due to lower provisioning and lower taxation, lower minorities? Can you please help us understand what are the factors implied to try and understand what happens below the EBITDA that enables you to increase the net income markedly? And then third question follows up the answer you already gave. You reported a net income of EUR 170 million [ EUR 111 million ]. You are a highly regulated business, of course. And I know that generation performed very strongly. But if we multiply EUR 170 million by 2, is this a good proxy of the performance of the second half? I would like to try and understand what do you see in the second half of that may limit the growth of the bottom line in the second year versus the first year?

Thank you. First of all, as for the review will lead us to 4.5x ratio providing us more flexibility and confirm that the rating agency as the regulated business Moody's still has to revisit. So as Moody's, again, we are still pending the review by Moody's. We focus on regulated businesses, as you say. So we will be focusing on growth in the regulated businesses, namely water and networks,fueling the growth grasp that may arise on the market besides growing organically. As for dividends last year, the capital gain enabled us to pay an extra dividend. Our dividend policy provides for on top of the ordinary divides decide what to do for '26. The projects that we are definitely reducing and this is also our financial management has remained unchanged despite growing debt. And this has given us the once again [indiscernible] net profit -- net income, sorry. what we said about the EBITDA, considering that we are going towards the high end of the range financial charges. So at the high end of the guidance will slow down, and this can give you an idea of what we expect for the full year.

Next question Emanuele Oggioni,Kepler Cheuvreux.

I got a couple of questions. First, so much waited for business plan. We haven't seen official data yet. So I would like to know whether you confirm the idea of having a new business plan by the end of the year and when exactly? And second more strategic question or let's say, more general question related to the negotiations that you have with ARERA or the Italian government for a larger scale reform of the water segment so that problem in Italy, in particular in the South of Italy is addressed whose management do not have the money and the technical skill to make investments. So do you expect something may happen. So again, you are constantly dialoguing with the regulators to eventually address these issues and adopt a large-scale reform that can drive your growth even further.