Endesa, S.A. (ELE) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us today for our First Half 2026 Results Presentation. With me today are our CEO, Gianni Armani; and our new CFO, Daniele Caprini. Before we start, let me remind you that after the presentation, we will move to the Q&A session. And starting from today, we will only take questions submitted in advance by e-mail or through our website. In addition, given the busy earnings calendar with a large number of companies releasing results today, we aim to limit the duration of the call to 1 hour. Thank you once again, and now I would like to hand over to Mr. Armani.

Thank you very much, Mar. The first half of the year delivered solid financial results with EBITDA increasing by 20% and net income growing by 41%. This performance reflects growth across all businesses, supported by higher contribution from regulated activities, including both distribution and non-mainland generation. These results highlight the resilience of all our businesses and the disciplined execution of our strategy. Growth has been supported by continued efficiency efforts, allowing us to improve profitability and maintaining solid financial ratios. At the same time, we continued to accelerate the execution of our investment plan with network remaining the main focus. Overall, the robust operational and financial performance delivered with more than 60% of full year EPS target already achieved, together with a strong visibility that we have for the remainder of the year leaves us well positioned to raise our full year EPS guidance. On Slide 4, in the first half of 2026, EBITDA increased to EUR 3.2 billion. More importantly, the contribution of our regulated businesses increased from around 40% to approximately 50% of total EBITDA. This reflects the weight of networks and other regulated activity within our portfolio, further strengthening the quality and resilience of our earnings. The stronger earnings profile translated efficiently into solid bottom line results. Net income reached EUR 1.5 billion implying 45% EBITDA to net income conversion, while EPS increased 46% to EUR 1.44 per share. Lastly, cash generation remained strong with EBITDA to FFO standing at 70%, and FFO to net financial debt, reaching 38%, supporting a strong financial position. Turning to market conditions on Slide 5. Power prices fell almost 20% despite the energy market being clouded by uncertainty and volatility stemming from the ongoing geopolitical tensions. This decline was partially offset by the significant increase in ancillary services cost since 1 year after the blackout event. The TSO reinforced operation continues to drive up overall system operating costs. In fact, according to external sources, this cost could exceed EUR 5.6 billion in 2026, probably equivalent to the distribution network costs. Against this backdrop, electricity demand showed a modest growth with largest increase on residential segment, mainly due to temperature effects, followed by services and industrial demand, still affected by the uncertainty of geopolitical scenario. This reinforced our view that further investments in the grids will play a critical role in enabling economic growth supporting electrification and unlocking future demand. In this sense, the Royal Decree approved yesterday and of which we don't have yet the final text, significantly rise distribution investment kept providing additional headroom to accelerate CapEx deployment in the coming years. As we can see in Slide 6, we continue to accelerate our investment plan with gross CapEx increasing by 14% year-on-year to EUR 1.1 billion. Networks remained our main investment area, representing more than half of total CapEx. This increased investment effort has already delivered operational improvements with lower network losses and TAP remaining at -- or even improving when exceptional weather-related events are excluded. In renewables, the output reached 11 terawatt hours with 86% of main lead output coming from emission-free technologies. In supply businesses, the total customer base stood at 11.3 million, while free power customers increased to 6.3 million. The Spanish retail market remains highly competitive, although we expect a more rational environment going forward as regulation tightens and market conditions evolve. Against this backdrop, our retail strategy remain focused on value creation, customer quality and profitability, supported by a more pull-oriented channel mix and the enhanced customer experience. The customer proximity remains the key differentiator. With a network of more than 370 stores across Spain, we continue to reinforce our physical presence through the expansion of our directly managed commercial footprint, enhancing customer relations and strengthening control over customer experience. At the same time, we continue to drive customer growth in loyalty through our digital initiatives, while leveraging on MasOrange partnership, exploring new opportunities for customer acquisitions and enforcing loyalty and enhancing commercial offering. Let me now hand over to Daniele for the financial results. Thank you, Daniele.

Thank you, Gianni. Before we begin, let me say that I am very pleased to be joining this call in my new role of CFO of Endesa. Turning to Slide 8. Let me briefly highlight once more the outstanding economic and financial performance delivered in the first half of 2026. EBITDA increased by 20% year-on-year to EUR 3.2 billion, while net income rose by an even stronger 41% to EUR 1.5 billion. Net financial debt increased by EUR 0.2 billion to EUR 10.3 billion with the net financial debt-to-EBITDA ratio remaining at 1.6x. Moving to Slide 10. Looking at the main drivers behind the strong financial performance. First, network EBITDA increased by 24%, mainly supported by the new regulatory framework in force since the 1st of January of this year and the effect of positive previous year resettlement, resulting from the update of certain remuneration parameters booked in first Q. Generation & Supply EBITDA increased by 16%, driven by: first, higher customer EBITDA with the resilience, both in gas and power margins despite ancillary services cost increase, together with an improvement in fixed cost; second, stable renewable EBITDA as the negative price effect from lower references was offset by better volumes and lower fixed cost. Then in conventional generation, EBITDA also rose by 18%, supported by both margin expansion and the cost containment. Margin increase was driven by EUR 0.2 billion improvement in non-mainland generation margin supported by the favorable regulatory framework, which enable future greenfield investments in this business as well as by prior year resettlements. This was partially offset by the normalization of the gas management margin. Operating costs decreased by EUR 45 million, further contributing to EBITDA growth. Turning now to our Network business, and I'm now on Slide 11. As mentioned before, the new regulatory framework drove an improvement in earnings with the networks EBITDA rising 24% to EUR 1.2 billion, representing 36% of total EBITDA, Networks continues to increase its contribution to earnings further enhancing the visibility, resilience and the quality of our results. At the same time, we significantly accelerated investment with the network CapEx rising to 38% year-on-year to EUR 0.6 billion. This reflects the increasing needs for grid reinforcement and expansion to support the energy transition and growing electrification trends. This investment for -- is translating into continued growth of our regulated asset base, which reached EUR 11.4 billion, providing additional visibility on future regulated remuneration and reinforcing the long-term growth profile of the business. Focusing on the retail business on Slide 12. Our retail action plan continues to deliver visible benefits, improving both the efficiency of our commercial model and the quality of our customer portfolio. We are seeing the benefits of a higher share of pool-driven acquisition and the lower cost to serve, reflecting a more efficient and disciplined customer acquisition approach. These improvements are also supporting stronger customer quality indicators. In particular, early churn decreased by 5%, while bad debt levels also continued to improve. Together, these strengths are enhancing the quality, profitability and the sustainability of our retail earnings. Now I'm on Slide 13 and turning to our integrated power and the gas unitary price margin. The free power margin remained broadly flat in absolute terms, assorting the impact of higher ancillary services cost. Combined with lower liberalized sales volume, this drove the unitary margin up by 6% year-on-year to EUR 56 per megawatt hour. We also reshaped our hedging approach to achieve a more flexible alignment between generation and supply profiles. This enhanced matching capability to optimize the management of our energy position, strengthening the value of our integrated business model. Looking ahead, we expect the free power margin to remain in line with our full year 2026 guidance. Meanwhile, the gas margin remained broadly flat. Lower sales volumes dropped the unitary margin to EUR 11 per megawatt hour, up 7% year-on-year. Our high hedging levels in both power and gas continue to provide strong visibility with limited exposure to market volatility. Moving to Slide 14. Efficiencies continue to translate into tangible savings with fixed costs decreasing by 8% year-on-year. Efficiency gains more than offset inflationary pressures and the costs associated with business growth, supporting continued reduction in the cost base. This performance reflects the ongoing execution of our transformation program with more than 500 initiatives focused on simplifying the way we work, streamlining processes, optimizing assets and accelerating digitalization. Across areas, such as workforce optimization, operational simplification, IT and software license optimization, asset management, procurement and commercial activities, these initiatives are already delivering tangible productivity gains. We expect them to progressively materialize throughout the year. Moving now to Slide 15. Net ordinary income reached EUR 1.5 billion, up 42% compared to the first half of 2025, reflecting the strength of underlying operating performance and positive nonrecurrent effects. This resulted in an improvement in the net ordinary income to EBITDA conversion ratio to 46% from 38% a year ago. D&A and provision remained broadly stable at EUR 1.1 billion as lower bad debt partially offset the increased amortization linked to higher investment. Financial results improved by EUR 0.1 billion year-on-year. mainly driven by less payment interest income recognized following several favorable administrative and decelerating ruling. Finally, the effective tax rate stood at around 24%. Turning to next slide. Cash generation continued to be robust with the FFO reaching EUR 2.3 billion, implying a remarkable 70% cash conversion in spite of a transceiver negative effect in working capital. Net financial debt remains quite stable as the strong cash flow generation was almost enough to fund investment needs as well as EUR 1.2 billion of shareholder remuneration, including both the interim dividend paid in January and the share buyback program, which represented the cash flow outflow of approximately EUR 550 million. It's worth highlighting the remarkable FFO net debt ratio at 38% over the last 2 months as well as the solid leverage ratio, which will allow us to accelerate and capitalize on investment opportunities. And now I hand over to Gianni for the closing remarks.

Thank you very much, Daniele -- thank you, Daniele. Let me now turn on to a shareholder remuneration and provide an update on our share buyback program, a key pillar of our capital allocation strategy aimed at maximizing long-term value. By the end of June, we had already completed more than 50% of our 2 billion share buyback program. keeping the execution firmly on track. Indeed, on July 15, we started the execution of the sixth tranche amounting to 500 million, further reinforcing our commitment to enhance shareholder returns. Beyond the attractive effect of the buyback, our commitment to shareholder value is also reflecting the confidence in the earnings outlook for 2026, as shown in Slide 19. As highlighted earlier, following the strong performance delivered in the first half of the year, including the positive contribution of certain nonrecurring items. And given our confidence in the outlook for the remainder of the year, we are upgrading our 2026 earnings guidance. We now expect new -- net ordinary income to exceed EUR 2.4 billion, comfortably above the upper end of the original guidance range, translating into a higher earnings per share and supporting enhanced shareholder returns. Before we conclude, let me leave you with some key messages. First, electrification remains the greatest opportunity for Spain. Unlocking a significant demand waiting for connection will require accelerating grid investments, not only to support economic growth and energy transition, but also to improve system efficiency and reduce overall cost -- system costs, particularly ancillary services costs that are needed to provide security for the network. At the same time, in a volatile commodity environment, and this integrated business model remains a key competitive advantage providing resilience, mitigating market exposure and supporting sustainable long-term value creation. Thank you for the attention, and we will now open to Q&A session.

[Operator Instructions] We receive a lot of questions for the call that we have tried to summarize by topics. In particular, we received questions from Alberto Gandolfi, Goldman Sachs, Fernando Garcia, RBC, Jorge Alonso, Bernstein, Arturo Murua, Jefferies, Rob Pulleyn, Morgan Stanley, Peter Bisztyga, Bank of America, Jenny Ping, Citi, Meike Becker, HSBC, Pablo Cuadrado, JB Capital, Pedro Alves Mageza, Davide Candela, Intesa and Javier Suares, Mediobanca. Thank you to all of you for participating. The first one is, could you quantify the impact of nonrecurring items booked on the first half results? I think Daniele, that is for you.

Thank you, Mar. Approximately EUR 0.2 billion of the EUR 3.2 billion EBITDA reported in the first half of '26 was driven by positive nonrecurring items. This included around EUR 0.1 billion in distribution related to the prior year remuneration resettlements and further EUR 0.1 billion in non-mainland generation, primarily reflecting the favorable Supreme Court ruling on historical fuel remuneration. Beyond the EBITDA impact, these items also contributed approximately to EUR 0.1 billion of late payment interest income positively affecting financial results.

The next question is also on the first half results. Can you explain the evolution of the non-mainland generation EBITDA?

This business delivered a margin increase of approximately EUR 200 million, primarily supported by the enhanced regulatory framework for '26, 2031, which provides for higher return, improve the recognized operating and economic standards. In addition, as I have just commented, this result benefit from the positive sentence recognizing a higher full remuneration for 2020, 2022 as well as from the lower O&M costs registered in the period. It's important to emphasize that the new remuneration framework for this business is considerably more investment-friendly, enhancing the attractiveness of future investments.

We have received some questions asking for more detail on how the supply EBITDA in the second quarter has increased despite high customer losses and energy costs.

The improvement in retail EBITDA in first half '26 reflects, to a large extent, the benefits of the commercial and pricing action implemented over the past 2 months in our electricity retail business to address an exceptionally challenging market environment characterized by unusually high ancillary services cost. These measures progressively gained traction during the period and were further supported by lower energy sourcing costs, particularly in the second quarter. In addition, the gas retail business delivered a strong performance, especially in the B2C segment, providing a further contribution to earnings growth. Finally, continued efficiency initiative led to a meaningful reduction in fixed operating costs across the retail business, further acing profitability.

Okay. Next, we have received a couple of questions about the efficiency plan evolution. The first one is how is the efficiency plan progressing? And on the same topic, how artificial intelligence is contributing to the efficiency plan?

Fixed costs in the first half '26 evolved in line with efficiency plan presented in February. As shown on Slide 14, efficiency gains more than offset inflationary pressures and the costs associated with business growth resulting in a continued reduction of our cost base. In addition, we continue to implement further efficiency initiatives that are expected to progressively materialize throughout the year, supporting the achievement of our cost discipline targets. About the AI initiatives, the efficiency plan is increasing driven by AI initiatives that, at the moment, cover approximately 50% of business projects so far. The adoption is focused on high-value use case across customer operations, network management, asset maintenance, software engineering and cybersecurity workforce productivity and the service quality, operation, operational resins and so on. But some of our most advanced application are already delivering tangible benefits in generation and in distribution, particularly in private maintenance, network monitoring and fraud detection.

The next question is about the hydro. How sustainable is the strong hydro performance in the first half?

Well, hydro performance in first half '26 was slightly ahead of our initial expectation with the output reaching 5.4 terawatt hour, particularly not the contribution from pumped storage facilities up 29% versus first half '25. The strong hydro contribution provided additional support to generation earnings and overall integrated margin during the period. Looking ahead, our outlook remains constructive, but fully consistent with the business plan assumption of favorable either hydro year in 2026. Reservoir levels remains healthy and comfortably above the 10-year average, providing good visibility for the remainder of the year.

Okay. We move now to the hot topic of the call, that is the update on guidance. The first question is what gives you confidence in upgrading net ordinary income target?

We are upgrading our net ordinary income guidance on the back of a strong first half performance, combined with the good visibility on the expected evolution of the business for the remainder of the year. The first half of the year delivered solid results supported by positive operational performance in all business lines. In addition, we benefit from nonrecurring positive effect both at the margin financial results left, which were not embedded in the guidance range presented at the Capital Markets Day. Taking all these factors into account and based on our core current expectation for the second half, we now expect net ordinary income to comfortably exceed the upper end of our guidance range. We are very comfortable, and we see during the second half, what will happen, but we are very, very comfortable.

Indeed, the following question was precisely about the main operational drivers for the second half.

Well, the drivers are more or less the same. We don't expect any change on these drivers. But operationally, we expect the second half to follow a trajectory broadly similar. In distribution, non-mainland generation, we will continue to benefit from the positive impact of the updated regulatory framework applied to a growing asset base. In the liberalized business, we expect to maintain free power margin broadly in line with the first half '26 level, landing at approximately at 44 -- EUR 54, EUR 55 per megawatt hour by year-end, almost notarizing higher-than-expected and similar service costs, which we estimate will have a net impact lower than EUR 100 million in full year '26. Regarding the gas margin, after the good results recorded in the first half, we expect certain moderation in the coming quarters, according to the seasonality of the business.

An additional question is if Endesa could capture any upside from higher wholesale power prices expected for the second half of this year?

Very limited, if any, our marginal generation is effectively fully hedged through fixed price sales to our customer base. As a result, higher price will have a little impact on full year '26 earnings.

Okay. On a different topic, and I think this is a question for our CEO. Some analysts are asking if following the recent management changes in Endesa, do you expect the current strategic plan to remain unchanged? Or could there be some adjustment in the next Capital Market Day?

Currently, our strategy drivers remain unchanged. Clearly, investors expect continuity and our focus is in delivering the most out of the strategy plan that we have presented at the beginning of the year as a group is Endesa. We clearly will communicate a new investment plan in a Capital Markets Day at the beginning of 2027 with renewed market developments and the new regulatory trends. But of course, our focus is -- continues to be in the same directions with slight adjustments even in the future.

Okay. Regarding the share buyback program, we have received 3 different questions. The first one is if we are committed to complete the current share buyback program, Second is if we continue to purchase shares considering the current price, it makes sense or not. And finally, if we plan to launch a new sale buyback program after the completion of the current one.

Very briefly. Very briefly. Very briefly, as we shown in Slide 18, we are fully committed on the plan. The plan is clearly on track. We believe that the investments still remain value accretive given the performance that we are delivering on the results for the year and for the future, and represent an attractive use of capital. The outstanding shares that we canceled enhanced earnings per share and support higher dividend share per share, providing an attractive return for shareholders. And lastly, we actually are not thinking to launch an additional plan and the no extension of the current plan is currently under consideration.

Most of the analysts are asking for our view on the royal decree recently approved. Indeed, it was approved yesterday, which increased the cap on the network investments.

Yes, the Ministry with this decrease, fully aware that electrification is enabled by extension of grids. And this allows both electrification and the change of production mix that is in progress in Spain. Large part of the network are close to saturation. And this clearly is -- is a problem to be solved in order to unlock economic growth. The new version of the royal decree even though we don't have the final text they should be published today or tomorrow, we believe, includes a significant improvement of initial additional cap that allowing up to EUR 10.2 billion of investments in distribution in the years between 2027 and 2030, versus the EUR 7.7 billion that we had in the initial draft. This is going clearly in the right direction, providing greater regulatory visibility and level and also locating network investments with a view until 2030. Of course, this is the main focus of our strategy, and we believe that this is the right direction the regulatory framework is going.

We have 2 additional questions also related to the grid. The first one is what's your opinion on the new capacity reservation regime setting the royal decree law 7. And if we expect further regulatory intervention to free up grid capacity.

Yes. Of course, in demand and supply of grid capacity is creating grid tension. So in this -- the correct availability of capacity. This regime is clearly under review from the ministry and Royal Decree 7 of the beginning of the year has intended to modify the balance of the market, imposing new additional burden for speculative connection requests. Unfortunately, the released capacity for the application of the decree has been limited to 1.2 gigawatt in distribution and 1 gigawatt more or less in transmission. And this is not very much compared to the 45 gigawatt that are the outstanding request for capacity only in distribution. We see that, of course, this situation will evolve. But the real solution for the -- in this tight market is by to expand distribution capacity and accelerate investments in this aspect. Do we expect the future and further regulatory interventions? This might be is clearly the allocation of capacity that is not effectively used is clearly an efficiency and inefficiency that the regulator has to validate and to adjust. There are several ways that can be done, and we are starting together with the Ministry ways to solve this issue.

Next, an update on data center. What is the main bottlenecks for the development? And which is the approach to this business?

Clearly, data center is going to be an infrastructure that will enhance productivity and has a potential to expand electrification together with being an intensive user of energy. Beyond the investment impact that may have on our grids and clearly being a potential customer. It's really important to facilitate the expansion of this kind of infrastructure in the system, and we expect the deployment gradually even in Spain, with a good visibility over the 5 and 10 years of the commitment of investments with a growing pipeline that we see in the sector.