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

Good morning ladies and gentlemen. Welcome to the first half 2023 results presentation, which will be hosted by our CEO, Jose Bogas; and the CFO, Marco Palermo. Following the presentation, we will have the usual Q&A session open to those connected on the call and on the web. Thank you and now, let me hand over to Jose Bogas.

Thank you, Mar, and good morning, everybody. Let's start with the highlight of the period. During the second quarter, we have seen a gradual softening of the macro scenario in Europe with inflation showing some kind of moderation despite which some rate hikes are still not throughout out. Energy market had been characterized by falling gas prices that have resulted in a big relief in power prices, easing the need of further regulatory measures. In this context, we have recorded a strong operating and financial performance that give us good visibility to meet 2023 target. EBITDA like-for-like increased 27% reaching EUR 2.5 billion, while net ordinary income is up by 20%. FFO is robust and accounts for EUR 1.6 billion with a remarkable improvement, thanks to the normalization of the negative market context that impacted working capital evolution last year. On Slide #4, you can see the evolution of the main operational parameters across all businesses. Mainland renewables capacity amounted to around a 9.3 gigawatt, an increase of 0.8 gigawatt over the last 12 months with an emission-free output of 81% that allows us to cover around 76% of our fixed price contract, reducing our sourcing costs, re-exposure and improving profitability. Customer in the liberalized market increased, reaching a total of 6.9 million, consolidating our leadership back by an appealing commercial offering in a scenario of still high and volatile prices. As proof of our commitment to boost electrification as one of our main strategic pillars, we continue to accelerate charging point deployments reaching 16,600, an increase of 50% in the last 12 months. In grids, we continue to improve quality indexes, time of interruption improved to 25 minutes, while RAB remained stable at around EUR 11.4 billion. Deep diving into investment deployment on Slide #5. Overall, gross CapEx amounted to more than EUR 1 billion, 12% higher than previous year. Around 80% of total investment have been channeled towards the strategic pillar outlined in our business plan. On the one hand, to develop new renewable capacity and on the other to optimize network operation through the improvement in efficiency, the adaptation of the network to new customers needs and enhancing, at the same time, service quality and resilience. On Slide #6, we summarized the evolution of the market dynamic throughout the period. During the second quarter, European gas references continued with a downward trend already seen in the past quarters. Behind this performance lies the combined effect of milder temperatures, weak industrial activity and the ongoing gas saving measures endorsed by the European Union. TTF and PVB spot reference price were on average 55% down year-on-year. Cumulative mainland demand fell by 4.8%, heavily affected by the combined effect of the reduction of the interconnection balance, the increase in self-consumption that boomed in 2022, and last but not least, the economic downturn affecting industry and SMEs. Endesa's mainland demand performed better and decreased by 3.8% with services and residential segment trimming its demand by 5.3% and 4% respectively due to the aforementioned effects. The rapid normalization of commodity prices, the destruction of demand and the record levels of renewable output have resulted in 57% fall in average spot power prices in Iberia. On Slide #7, sales to liberalized customer with our free power market amounted to 36 terawatt hour, with index sales decreasing by 2%. Fixed price sales were almost 80% backed by our CO2-free generation, ensuring the competitiveness of our customer energy costs and further reinforcing the commercial appeal of our integrated business strategy. Solid development of free power margin which reached EUR 58 per megawatt hour, almost doubled the previous year level, mainly resulted from the outstanding thermal margin, still benefiting from the favorable market environment, the higher price driven output margin due to the -- to better achievement prices, supply normalization now returning to levels around EUR 12 per megawatt hour. And finally, the positive result of staying in the management or in the management of our short position. Regarding forward sales, we continue steadily progress in hedging energy sales to fixed price customer for the coming years. A brief focus on the gas business. We are on Slide #8. Total gas sales decreased by 5% mainly due to lower CCGT's activity and a slight decrease in gas sales compared to the previous year. This trend is in line with the demand contraction at country level, normalizing from the extraordinary levels reached in 2022. Total gas unitary margin slightly decreased year-on-year reaching EUR 0.8 per megawatt hour, showing that the favorable market scenario seen in first quarter is normalizing. Volume hedged of our sourcing contract come to 90% and 65% for 2023 and 2024 respectively. And now, I will hand over to Marco who will detail the financial results.

Thank you, Pepe. Good morning -- and good morning, everybody. Sorry. The soundness of our business model is clearly reflected in the strength of our financial performance as detailed on Slide 10. EBITDA stood at EUR 2.5 billion, marking a solid 27% growth year-on-year in comparable terms, while net ordinary income came in around EUR 900 million, 20% higher. Both figures show a normalization compared to the extraordinary results of the first quarter. FFO strongly improved by EUR 1.8 billion mainly due to the normalization of working capital strongly impacted by the market context in 2022, as we will see later on. Moving now to the main drivers of the EBITDA growth. I am on Chart #11. The integrated business management that you can see in the spotted box in gray color represents the bulk of this growth with EUR 867 million increase, an notable 95% versus previous year. All of this was driven by a positive performance in supply, normalizing the margin from negative levels of the first half of 2022, as well as in conventional generation and renewable businesses. Distribution EBITDA slightly increased by 3% to EUR 902 million. And lastly, the 1.2% extraordinary levy impact in Q1, as well as the positive effect of the Social Bonus sentence that we booked in the first half of 2022, are posted in the structure line of the P&L in gray color on the chart. Moving into a deeper analysis, we are now on Slide 12 on generation and supply business. EBITDA reached around EUR 1.8 billion, doubling result of previous year, with an increase of the free power margin by EUR 937 million, as Pepe has just commented. And additionally, a slight deterioration in the gas business. If you look at the other margin, it remains almost flat with lower contribution of the non-mainland business mainly affected by previous year resettlements and the recognition of higher fuel reference last year, mainly offset by the positive net impact of gas mark-to-market. And finally, fixed cost slightly increased mainly explained by the inflationary context and higher activity. If we move to Slide 13. Distribution EBITDA increased by 3%, as we said, to EUR 902 million, explained by the positive delta of gross margin due to the negative previous year's resettlements that we booked in the first half of 2022. And a slight fixed, cost increase as a result of some positive non-recurrent booked last year and some CPI impact. Let's now continue with the analysis of the results below EBITDA. I'm on Chart #14. Net ordinary income amounted to EUR 879 million, up 20% compared to previous year, on the back of the positive dynamics commented at a EBITDA level. D&A increased by EUR 83 million year-on-year mainly due to the higher investment in renewable, distribution and retail and a slight increase in bad debt. Financial results increased by around EUR 220 million mainly explained by higher financial expenses as a result of the increase in average gross debt, coupled with a worsening interest rate scenario affecting the cost of debt and the negative delta from the financial provisions' update. Rise in income taxes by EUR 51 million -- sorry. Mostly driven by the nondeductible revenue, levy. And lastly, minorities decreased by EUR 26 million. Moving to the cash flow on Slide 15. FFO recorded a sound improvement versus last year, reaching EUR 1.6 billion in absolute terms. Deep diving into the main dynamics that positively affected the working capital, there was a significant improvement of EUR 0.5 billion in the regulatory working capital in the second quarter, mostly thanks to settlements cashed in related to the non-mainland system. Positive impact as well of the net trade payables and receivables as a consequence of variation in energy and commodity prices recovering from the abnormal market context in 2022, and this was something that somehow we have highlighted in the previous quarter. All of the above was partially offset by higher income taxes paid mainly from the increased result in 2022 and the payment of higher net financial expenses due to the increase in interest rates. Further improvement of FFO is expected over the rest of the year. If we now move on the debt evolution on Chart 16. Net debt stood at EUR 10.6 billion, decreasing by 3% versus the full-year 2022. It should be underlined that the positive FFO already mentioned was more than enough to cover this period's investments. Gross debt decreased by 22% due to a sharp collateral requirements reduction of 53%. Moreover, as a consequence of the recent rising progression in interest rates, the cost of our debt reached 3%. Finally, our financial management reveals a strong credit metrics in the period. Leverage measured as net debt on EBITDA ratio, slightly decreased to 1.8x, well below the industry average. And FFO to net debt ratio stood at 33%, increasing by 18 percentage point versus last year. Let me now hand over to Pepe for the final conclusions.

Okay. Thank you, Marco. And now, some closing remarks before the Q&A. First of all in the semester, we have once again delivered a solid set of operating and financial numbers, thanks to the integrated vision of our business model. This strong performance translated into a solid improvement in FFO with cash contributed in consolidating our solid financial position. All in all, these results, in line with our expectation, and a high degree of visibility on business development from the rest of the year supports our confidence in achieving the 2023 target. This concludes our first half 2023 result presentation and I think we can now open the Q&A session.

Okay. Many thanks, Pepe, Marco. We are now open to answer all the questions you may have.

[Operator Instructions]

Okay. First question comes from Manuel Palomo from Exane BNP Paribas. Please, Manuel, go ahead.

I've got, let's say, let's stick to 3 questions. First of all, I'd like to get your views on recent PNIEC draft drafted by the Spanish government and sent to the European Union. And related to that, also whether you could well share your views on future renewable investments in Spain, whether you could rethink them given the low power prices that we're seeing specifically in hours in which the sun is shining. Secondly, I remember that back in November 2022, Enel announced the EUR 21 billion divestment plan which included gas portfolio in Spain. I wanted to have an update on it, please. And also whether the potential divestment of that gas portfolio could represent any upside on the dividend for the year 2023? And finally, I wanted to ask -- I know that Endesa is a pretty efficient company. However, I wanted to ask whether you feel like there's additional room for cost cutting in the company in order to try to help the group to achieve future years' guidance.

Okay. Thank you, Manuel. Let me start with the first question that you have posted in relation with the PNIEC update. First of all, I would like to say that this draft document will be not draft but something real in June 2024. So it is open to changes. Even more, we are sending allegations up to the 5th of September to the government. Having said that, these new draft, PNIEC increase ambitions in terms of renewables and it is even more challenging than the objectives set out in the REpowerEU. So in that sense, the first thing that I should say is that we see it as positive. Having said that, positive, we see from an initial reading of the document that the plan seem very challenging, and we noted some uncertainties or if you prefer weak points. First of all, the sector capacity to increase 85 gigawatt of wind and solar versus the year 2022. That means something around 10 gigawatt per year, until reaching 133 gigawatt in the year 2030. And why I said this sector capacity? Well, in my opinion, it's not realistic to deliver this quantity and taking into account the history -- the statistic that we have. But more deeply, I would say that technical -- there are technical difficulties on integrating all the new capacity in such a short period of time. The second thing is the scarcity of key components and specialized labor force. I would add the increasing social opposition, and finally, the financing difficulties. So at the end of the day, what I think is that the market will really fix the renewables that will be introduced in the system. The second thing is the sector capacity to increase 12 gigawatt of pumping and batteries up to 18, if I'm right, gigawatt in the year 2030. Also, the sector capacity to develop 11 gigawatts of electrolyzers. That seems a little bit difficult, in my opinion. This 11 gigawatt of electrolyzers will or would cover the total hydrogen -- grey hydrogen that we consume in Spain today. In addition, the feasibility of increasing the interconnection with France from the current 3 gigawatt to 8 gigawatt, this is pending subject during many, many time. And finally, we are a little worried about the security of supply after the phaseout of Almaraz -- the first 2 reactor of Almaraz in the years 2027 to 2028. All in all, as I have said, it's a positive thing, because its ambitious and challenging. But I think that we will have time to discuss with the government to try to adjust this plan. With regard to the gas portfolio, let me say that -- and I will ask Marco just to go deeply in this question. We continue with our idea of selling a part of our business. It is true that the context has changed a lot. When we decided to do that, we are thinking about prices around EUR 100 per megawatt hour in -- a little bit lower than that in the gas market. And now, we are looking prices in the last month of June a little bit higher than EUR 30 per megawatt hour. Nevertheless, we continue examinating the possibilities, and we think that we will have some kind of news at the end of the year. And the third question that Marco will answer also, if there is room for more cost cutting, absolutely yes. Always, there are room for cost cutting. And I think that one of our strength is that during the last years, we have been working just to reinforce our balance sheet and our -- and strength our competitiveness. And this is the real, in my opinion, a strength of this company to be prepared for the future, to be prepared for being solid in our numbers to go ahead and to be one of the leaders of this energy transition. And Marco, could you, please.

Yes. Thank you, Pepe, and thank you, Manuel. And thank you, Manuel, for being here together with us. And thank you to all the others that are following us. We know that for you that to follow the sector, this is a horrible day, 15 results presentation. So thank you very much for staying with us. Manuel, so on renewable investments, I mean, actually, the renewable investments are some of the keys that somehow guarantees us increasing positive results, because, of course, we lower the cost of our production. So that's something good for us given that we are -- we have this short position and we have this fixed sale to our customers. So this is something positive. Having said that, I mean, we will -- we are now evaluating the new business plan that we will present in November and there -- it's probably the right place just to discuss all of this and to discuss the volatility that we are experiencing right now. And I'm sure that there will be some impact in the new business plan of what we are seeing right now. Coming to the gas portfolio sale, I mean, we are open to discuss. As you know very well that we've been having open dialogue with some interested parties on this. And, I guess, that here, the perimeter of those discussion are basically limited only to a part of our portfolio, as you perfectly know. And this is probably around -- the discussions are around the 2 bcm of our 6 bcm. So in particular, 2 bcm is coming from U.S. So I mean, it all depends, I guess, from -- as Pepe was commenting, from the scenario that we'll see. Now, it's not particularly exciting, but we see potentially the market changing maybe in the last quarter of the year. So I mean, let's say, the channel remains open. So let's see. And on cost cutting, I mean, the CEO told you. So there is probably not so much to add apart from the fact that, of course, we've been reducing costs along the years. So now the cost cutting is more related to simplification that we have to commit. So it's a bit more difficult than the easy one of the cutting at the beginning. So we are now actually trying to simplify things and change things and working on cost cutting, particularly maybe not so much related to 2023, but particularly looking at 2024. So this is something that we will then detail more in the next presentation, and we will have the chance to discuss. Thank you.

Many thanks, Manuel. Next question comes from Alberto Gandolfi from Goldman Sachs.

I have 2. The first one is a little bit maybe more elaborated, but it's on earnings. So I see that it's late July, you're reiterating the full-year guidance. So, you have delivered more than 60% of the midpoint of net income you are supposed to do for the year. And considering that Q3 usually is very similar to Q2, we might be able to pencil in maybe another close to EUR 300 million net income. So that means that Q4 is going to be probably very important. I was wondering if you can tell us what a normalized Q4 on hydro, spreads, trading might look like for you. And if you don't [ reply ] to the question, I was wondering why not revisiting guidance already? Is there anything that worries you in the second half that we are not thinking about? Because it looks like if just conventional generation and trading stays like in Q2 and you just look at the rest of the business, it would be pretty difficult not to be where consensus is at the very least, which is EUR 1.6 billion. So, anything maybe in the development of the unregulated profits we should be -- or margins, we should be thinking about? The second question is, can you tell us, please, what's your expectation in terms of renewable additions in Spain over the next, say, 2.5 years. So if we put ourselves in December 2025, how much capacity do you actually think is going to come? What is that going to do in your opinion to spot prices? And it's probably going to change a bit the seasonality of hourly pricing. Do you think that you're going to be able to make money given your long position and given some of your merchants' portfolio combination?

Thank you for the question. I will try just to answer the second one and then Marco will answer the first one. With regard to the capacity able to be into operation in the next years, well, let me say that, as I have said, there are -- we are facing some problems. When I see we are, I'm talking about the sector. The technical difficulties of integrating this new capacity are related to the scarcity of key components and specialized labor force. There are an increasing social opposition, and we are doing our best trying to convince the local citizens about this new generation and the benefit that we will obtain -- all of us, we will obtain in this and many other things. In that sense, let me say that during the last year, the record has been something between 5 and 7 gigawatts per year. If we take into account that, we are thinking about 10 to 15, let's say, that gigawatt in the next 2 years only. And I think that is going to be very, very difficult just to really put in operation more than this total amount that I have said. So one thing is what we want or what we wish to do. And we agree that the target should be challenging, but on the other hand, we should be realistic. Having said that, the second thing is how prices in the European Union and also in Spain are going to be in the future with this increase in renewables. I would like to say that the important thing for me is not the reduction of the prices in -- wholesale prices. It's the volatility that these new renewables, especially the solar are going to introduce in the system with an exact production, let me say, in the central hours of the day. While I think in the rest of the hours, it will remain being expensive as marginal prices are set by gas. And not only by gas, but on top of that, the manageable hydro and also the interconnection with France. Considering this volatility, our long-term models point to prices in 2030 at level of EUR 75 to EUR 80 per megawatt hour, assuming gas price at EUR 25, EUR 30 -- that means -- per megawatt hour. That means lower than the ones that we have in the future for the next year, 2024, something around EUR 40, EUR 45. And taking into account CO2 at something around EUR 100 per tonne, which is higher than the EUR 80 to EUR 90 that we have today. But this is something that we think it will increase in the future because it's the policy of the European Union. And we see a reduction in the price of the gas, but we don't see this reduction. Even more, we see an increase in this CO2. If we take into account the total amount of renewables that we have in the PNIEC plan, this price that I have said between EUR 75 and EUR 80 would be something around EUR 60 per megawatt. And so in my opinion, at least up to the year 2030, we are not going to face, in the context and with the assumption that we have, we are not going to face a low price -- electricity price. But we will see a huge volatility during this period. In that sense, let me say that the renewable producer which doesn't have a PPA or doesn't have a customer to sell this electricity, in what sense not hedged through these kind of elements will face problems. But that is not the situation that we see for integrated -- vertical integrated companies. And now, Marco.

Thank you, Pepe, and good morning, Alberto. So, coming to the first question. Basically, you know the house very well. You know that historically, we give guidelines and we stick to that. Sometimes we deliver more than that. Yes, that's true. But nonetheless, we do not uplift guidelines, because we know that there are volatility out there, and so we tend to wait for things to happen. Going to the numbers, I mean, you're right. It's -- and if you look at the earnings, we are more than 60% of the results. If you look at the EBITDA -- just to make it simple. If you look at the EBITDA, we did EUR 2.5 billion in the first half. So how did we build the second half? In the second half, what we did is forgetting the second half of 2022, because it was a special year, we went back to the other years, 2020, 2021. And if you look historically, we tend to have a contribution of EBITDA in the second semester that is around EUR 2.1 billion, EUR 2.2 billion. So if you add this to the EUR 2.5 billion that we have done till now, you come to the EUR 4.6 billion, EUR 4.7 billion that is basically the upper end of our guidelines. So is it there something that scares us in the future? Not particularly, apart from the fact that recognizing that there is volatility, and we are still only at half of the year. So I mean, we want to follow and continue to work there and then see what will happen in the next quarter -- in the next quarters.

Next question comes from José Ruiz from Barclays.

I just have 2. The first one is, if you can update on discussions about the non-mainland, so the islands' receivables. And this EUR 200 million reduction in receivables, if it's attributed to settlement of payments. Second question, I was surprised a little bit by the low production of combined cycles in the second quarter of the year. The production went down by 21%. Considering the thermal gap that was big, I was wondering why you reduced production of combined cycles.

I will try to, José, to answer the second one and then. You have said that considering the thermal gap, why we have reduced the production of the combined cycles. Well, first of all, you should take into account the decrease in demand, the increase in renewables, et cetera. At the end of the day, the thermal gap has been reduced, if I'm right, something around 8 terawatt hour this first half versus the first half of the previous year. So in that sense, it is normal this reduction in the combined cycle production. We really -- let me add to this that the extraordinary situation that we have during the previous year, and especially in the second half of the previous year, is not replicable in this year 2023 in our opinion. We have had a very good performance during the first quarter but due to the inertia of the context that we've seen in the last quarter, in the second half of the previous year, we don't expect this situation in the rest of the year.

Thank you, José, and thank you also for seeing somehow some sparkle on the working capital. Thank you for seeing that. Actually, for us on the regulatory working capital, we are finally seeing some light at the end of the tunnel. As you remember, we started the year with EUR 2.3 billion actually of credit vis-a-vis the institution to be recovered. And unfortunately, the situation got even worse at the end of the first quarter, and this number went to up EUR 300 million to EUR 2.6 billion. Now finally, we are seeing some light and we have been capable of inverting this trend. So now we are down to EUR 2.1 billion. We know that this is still a huge number. We recognize that. But at least we had a churning of the trend. And we are working hard till the end of the year just to significantly reduce this number. Thank you.