Endesa, S.A. ($ELE)

Hello. Good evening, everyone. Today's first quarter 2026 results presentation will be led by our newly appointed CEO, Gianni Armani, whom we warmly welcome today together with the CFO, Marco Palermo. [Operator Instructions] Thank you. And now let me hand over to Mr. Armani.

Thank you very much, Mar, for your kind welcome. I have only recently taken up the role of CEO, and I would like to ask you the indulgence for a brief settling-in period. For this reason, during the Q&A session, we'll take a slightly a secondary role, giving the floor to our CEO, that a CFO that will answer to all your questions professionally. Thank you very much for the understanding. The quarter delivered solid financial results with EBITDA growing 14% and net income rising 24%. The performance was primarily driven by the distribution business, which continues to demonstrate its strength supported by effective and disciplined management and of our grid in the environment of the new regulatory framework. Once again, the period highlights the resilience of Endesa liberalized business model despite the environment shaped by the geopolitical uncertainty, the ongoing volatility of the energy markets, our strategy has enabled us to deliver consistent and robust results. Finally, the quarter highlights the strategic importance of a well-diversified energy mix where renewables and nuclear generation. along with demand electrification remain a key to strengthening the energy independence and ensuring price stability. These pillars are essential, not only for the energy transition, but also for increasing the resilience and the reliability of the systems. And I would add to contribute to the growth of Spain as a country. The strong operational and financial execution provides the necessary visibility and the confidence to confirm the full year guidance. With that, I will turn to the operational and financial developments of the period. On Slide 4, let me briefly comment on the operational evolution during the quarter. Starting with generation, the total output increased by 8% year-on-year, reaching the more than 14 terawatt hours. The performance was primarily driven by higher renewable production, which rose 18% compared to first quarter last year. hydro output increased 13%, benefiting from a very favorable rainfall conditions during the period, while our reservoirs stands at record levels. At the same time, wind and solar output grew 24%, supported both by both higher installed capacity and solid resources conditions. Nuclear output was slightly lower, reflecting the scheduled reflowing outages. Overall, the generation for -- from not meeting technologies, including nuclear, accounted for approximately 87% of total lump and insular production. At the same time, CCCT generation was materially higher, benefiting from the increased demand for backup services for the TSO. Meanwhile, the sales slightly decreased by 5% to 18 terawatt hours, mainly driven by lower index volumes on Iberia mostly B2B customers, more exposed to market uncertainties and fixed price sales remain stable instead. Finally, the number of free power customers grew by 3% year-on-year to EUR 6.4 million. including the contribution of Energia Collective, which are just about 300,000 customers on power portfolio. From the market perspective. I'm now on Slide 5, the current geopolitical tensions around the street of our moods have once again placed the energy market on the forefront of the debate. While the distribution of commodity supply routes is certainly affected affecting the global markets as far as gas is concerned. Strong U.S. LNG flows into Europe have limited the impact, if you see it on a quarterly pricing levels. compared to last year. TTF spot price averaged around EUR 40 per megawatt hour in first quarter of this year. Representing a 15% decline year-on-year. At the same time, the CO2 prices reached EUR 76 per ton up 4%. This evolution is particularly linked to -- is not particularly linked to the energy crisis, but more into structural factors linked to the progressive tightening of new ATS mechanism and the introduction of the carbon border adjustment mechanism, the CBA. As a result, the average [ Varian ] pool price in the first quarter stood at EUR 44 per megawatt hour, down 48% year-on-year. this, notwithstanding the conditions. The crisis conditions on the commodities. This comparatively low price levels has helped to contain the power bills absorbing the impact of exceptionally high ancillary services costs driven by the TSO reinforced operation in dispatching since April 2025 blackout. From a cross-country perspective, Spain, average price remains very competitive. When compared to main European economies, underscoring the reduced exposure to volatile prices, thanks to the higher share of renewables energy sources and the reliable nuclear fleet that contributes to reduce exposure. On Slide 6, we review the demand evolution trends, electricity demand at the start of the year keeps showing a growth trend consistent with the previous quarters. On adjusted basis, mainland demand grew around 1% year-on-year which compares to 1.7% demand increase in these areas, mainly leveraged on a steady contribution from services business and residential consumption. The weak performance of industrial sector appears linked mainly to the uncertainty on the geopolitical scenario. In this context, the high level of network congestions across all major distribution nodes remain the critical concern for the future. As of April last available figures, Spanish power grids saturation reached 90%, which largely hinders the connections of all these new demand vectors. It is clear that to unlock the potential that contains the total cost of energy, grid bottlenecks, and inefficient system operations should be solved. Therefore, efforts must be focused on providing comprehensive framework to foster required investments in distribution for network security and voltage management. I will now hand over to Marco for the financial results. Thank you.

Thank you, Gianni. So turning to Slide 8. You can see the solid financial performance delivered in the first quarter of 2026. EBITDA reached EUR 1.6 billion, representing a 14% year-on-year increase like Jan was mentioning, while net income amounted to EUR 0.7 billion, up a strong 24% compared to last year. Net debt increased by EUR 0.5 billion to EUR 10.6 billion with the net financial debt-to-EBITDA ratio remaining stable at 1.8x. Moving now to Slide 9. If we now focus on the main drivers behind the strong financial performance, EBITDA reached EUR 1.6 billion, up 14% year-on-year, supported by, first, the Networks EBITDA increase by 45% and representing approximately EUR 200 million, mainly supported by the new regulatory framework and the effect of positive previous year resettlements from the update of some remuneration parameters. Generation and Supply EBITDA remained almost flat, driven by, on one side, stable renewables EBITDA that reflecting better volumes in the quarter, offset by the negative price effect from lower references. On the other side, flat customer EBITDA with the resilience in gas business and power margin stability, although impacted by higher-than-expected ancillary services costs as we commented before. And lastly, in conventional generation, EBITDA was almost flat with the normalization of gas management margin offset by progress on the efficiency plan. Now on Slide 10. These dynamics are reflected in the performance of our integrated power and gas unitary margins. The pre-power margin amounted to EUR 54 [indiscernible] remaining flat year-on-year despite higher ancillary services costs. Meanwhile, the gas unitary margin stood at EUR 10-megawatt hour, broadly in line with expectation as it began to normalize from the exceptionally strong levels recorded last year. Moving now to Slide 11 for the below EBITDA. Net ordinary income came in at EUR 0.7 billion, up versus the first quarter of 2025, reflecting strong operational performance and improving the net ordinary income to EBITDA conversion ratio to 44%. And D&A remained flat at EUR 0.6 billion as the lower, but that offsets the increased amortization linked to higher investments. Financial results almost flat year-on-year lower cost of debt on one side that offsets the increase in average gross debt. And finally, the effective tax rate stood at around 20.5%. Turning to the next slide. I'm on Page 12 now. Cash generation remains strong with funds from operations standing at EUR 1 billion and a cash conversion ratio of 65% FFO to EBITDA. Over the period, net financial debt increased by EUR 0.5 billion, up to EUR 10.6 billion. This reflects dividend payments of EUR 0.5 billion, together with the execution of the share buyback program, which generated a cash outflow of around EUR 300 million. Gross financial debt rose by EUR 1.2 billion, while the average cost of debt improved to 3.1%. And now I hand over to Gianni for the closing remarks.

Thank you, Marco. As we look at 2026 as a year, we do so with confidence in the strength and resilience of our business model. Reflecting a solid visibility on earnings across all activities. We confirm our targets for the year. in an EBITDA in the range of EUR 5.8 billion, EUR 6.1 billion and net ordinary income between EUR 2.3 billion and EUR 2.4 billion and supported by the following business drivers. First of all, generation and supply performance is sustained by a resilient model. that relies on efficient hedging strategy, significantly mitigating the exposure on market volatility and enhancing earnings abilities. In network, results are driven by the new regulatory framework that gives certainties and by a successful management of the grid with continued focus on quality and reliability. At the same time, we remain fully committed on efficiency that is a key driver to generate value. Progressing steadily and in delivering an efficient and effective plan. To conclude, the presentation, we would like to highlight the priorities that need to be addressed in order to meet the upcoming energy challenges. The current global context reinforces a clear message, accelerating electrification and renewable development, efficient renewable development within the carbonized mix is the most effective way to protect the consumers and economies from geopolitical shocks, particularly in Europe. Electrification is not only central for the energy transition and for the environment, but also to long-term affordability, resilience and security of supply. In parallel, investments in electricity networks and need to be accelerated to accommodate structural demand growth and to ensure system reliability. Grids and the bottleneck are the bottlenecks of the transition. Enabling renewable integration and strengthening overall system security. To make this possible, regulatory support is essential in particular, approval to increase investment cap is critical to unlock CapEx requiring distribution network and stability of regulation is even more important. Thank you for the attention. I will now hand over to Marco for the Q&A session.

[Operator Instructions] Starting with the first question coming from Pedro Alves from CaixaBank.

Three, if I may. The first one on the Spanish royal decree on the grid investment cap. Can you tell us the current status of the royal decree, the approval process? Has there been any formal engagement from you with the ministry since the CMD. Basically, I want to ask if you see a risk of the decrease being eventually delayed and if so, how would that affect your regulated asset base expansion trajectory towards your 2020 targets? And second question on ancillary services. we are not seeing any sign of normalization in technical restrictions. Actually, had electric data show quite the opposite. I think there was actually another important increase in the previous months. . So are these costs evolving according to your expectations in the plan and in your guidance? And how is this impacting your retail margins basically and also as these extra costs are being progressively recovered in terms of customer pricing. And last one, very quickly, just a clarification on the distribution, can you please quantify the effects of the settlement corresponding to previous years?

Okay. So thank you very much, Pedro. And let me take the chance just to stay -- to thank you all the people connected now. It's very late. It has been a long day for you guys. I know a lot of events and you still together with us. So thank you very much. Pedro, so on the Spanish Royal Decree, we do expect to have news on that I would say, if not before the summer after the summer. So in any case during this 2026. I guess that what we are seeing after the publication of the congestion the different nodes in the -- around the cities, but in the different [indiscernible] autonomous clearly reflects the need for a development of CapEx on the distribution side and on the transmission side. So we guess that this should Sao Paolo trigger this decree that has been announced by the government last year. So I mean, we do expect this either before the summer or right after the summer. Question number two, regarding the ancillary services. So yes, you're right. There are no normalization signs actually all the opposite. Now we should remember 2 things that in the first quarter of last -- of next of last year, we had no blackout so of course, in generally, those tends to be months of deep impact because prices tend to be a bit lower. So generally, the cost of ancillaries tend to be higher. Having said that, this level of cost it's somehow higher than the one that we were foreseeing. So I would say that on one side, this is slightly higher but then on the other side, I guess that if you look at the results of the first quarter, the operative performance of the group, it's really, really strong. So despite this, this probably is the only thing that is going not as expected. I mean, all the rest is really compensating the rest. And regarding distribution, I mean, just to give you an idea, the level of extraordinary there, it's around EUR 100 million. So if you have to net debt also in the -- on the number that you have this quarter, lands at 1.5% in terms of EBITDA. So I mean also that I guess that it's a good indication of the good performance of the company.

Next question comes from are from Javier Suarez from [indiscernible]

Congratulations to the new CEO. Three questions. The first one is on the demand evolution. On Slide #6, an interesting to see the underlying trend that you see on the market. That justify the continuous increase in electricity demand that we have seen in 2025 also in 2026. In this context, if the company can update us on any ongoing discussion with upscaler for the development of new data centers. And then a second question is on the details on network saturation. You can give us your latest detail of that level of network separation in the distribution network that can justify the increase on the existing regulatory cap and the second final question is on the guidance that has been a firm today after a very strong first quarter of this year. So the net income is representing more than 30% of the full year target. So just listing in myself, the reason why the company is maintaining that this existing guidance, that's for the sake of feeling conservative at the beginning of the year, if there is any element that we should consider that should be making using a little bit more conservative in the next few quarters.

Thank you, Javier, for the clear questions. I will try to be as clear as well. So on Slide #6, regarding the -- what we are seeing on demand, I guess that just to give you a bit more of color -- what we are seeing, and it's there is that the problems on the straight of our moves and the war is somehow impacting a strongly industry. . So on the industry side, there has been a clear signal of reduction of demand. While on the other side, you know that the trends below the residential and services are still very strong and do not depend on that. On the data centers and [indiscernible] I guess that here, the news is that the new decree that somehow is trying to take away from the current demand. The capacity demand that has been allocated, the projects that do not have a real execution phase or there are not so much decided yet. We think that all this should somehow allow for the good project somehow allowing some space in the grid and therefore, giving potentially faster more space to a project like the serious one on -- coming from the hyperscalers. So I mean that should -- we should see this probably in a few months. But despite this, we still believe that clearly in the congestion, I go to the question number two, the congestion level all around Spain, particularly around the big cities, but now it's in the entire community, the company that is autonomous is so high, passing the 90% that basically the need for new investment is there and should be done. So we see positively the new Royal decree because somehow is trying to tackle the problem short term. But I mean this somehow we have to take the chance just to do CapEx and resolving also the problem medium and long term. And regarding question number three, on the net income, well taken. I mean, the short answer is we are conservative. This is the first quarter. So I mean, it's -- I guess that it's early just to discuss about whether reviewing the 2026 targets. Clearly, I mean, the quarter has been very solid, and therefore, I mean, it's -- but still, it's only the first quarter, so let's wait.

We move now to the next question coming from are Javier Garrido from JPMorgan.

I will have 2 questions. The first is on the impact of the higher cost of ancillary services. There is a trade-off in between higher generation revenues and lower supply margins, but I would assume that you will continue as you did last year, to increase prices to pass through the high ancillary services costs -- is that a fair assumption? And if yes, when do you expect to neutralize the impact of this higher ancillary services costs on the integrated margin and the second question is if you could quantify what would be the impact for Endesa from the suspension of the generation tax in Spain.

Okay. Thank you, Javier. For the 2 questions, actually, almost 3. So on the higher cost of ancillaries, yes, you're right. I mean, as we said, it's a bit higher of what we were thinking. As you know, we basically are somehow marginally exposed because on the other side, on the generation side, we do not recover all of this. We are around almost 30% of the market when it comes to as a supplier. So we bear the cost, 30% of the cost of the system while when we move to the ancillary services, it's probably half of that. So there is always a kind of an exposure. And I would say that probably this is just to quantify, I mean, still for the -- on the quarter, it's a low number. It's a few tens of millions of million euros. But I mean that's the difference. And despite this, the result of the quarter has been very good. When it comes to how long does it take just to neutralize this, all of this, I guess that unfortunately, it takes time. So I mean, we started to do that but we are exposed. And as we said when we presented the business plan, we were seeing this somehow recovered at the end of the plan. So it takes us -- it's not a matter of months. it's not a matter of years. So it will probably take a couple of years adjust to do that. And when it comes to the last one being on the -- on the generation tax, yes. So on the generation tax, basically, all the changes that has been done kind of neutral to us. The generation tax estimation is also there, I would say, when it comes to compensate this effect that I was mentioning on the higher ancillary costs. So also there are a few tens of millions. Thank you very much, Javier.

And now we have Rob Pulleyn from Morgan Stanley.

Welcome to Gianni. The first question, can you just clarify something. You mentioned a circa EUR 100 million, I suppose, one-off network resettlement. Was that anticipated in guidance to be recovered this year. So just to understand whether that sort of contributes to the guide to the full year cover or not. And to be honest, actually, I think that you have questions have already been asked, so I'll leave it there.

Rob, so thank you very much for the question. So I would say that we were not expecting this level when we set the guidelines for the 2026 just to be clear on that. Let me add what is the source of this, let's say, anticipated or non anticipated coming. We worked a lot on transparency of our regulatory certifications. . And this has effectively an impact on the years that have been certified, and we have, let's say, a recovery of the certification of the previous years that is coming with a slight detail delay, and that is the last one was what year. The last one was 2022, and we have now a proposal of final settlement of of 2023. And so we have been working a lot on our documentation that we sent to CMS and this is starting to work out. And the other element is linked to the change in the incentive scheme based on quality and losses, which, of course, is a pie that has been shared between all the different players in the market. And so part of this is -- depends on our performance, but also on the performance of the others. By the way, by the way, guys. So I mean that -- I guess that truly shows how is on the ball, our new CEO. I mean, so fully absolutely full in is my previous activity exactly. And on the other side, that also shows how beautiful needs to go live on this stuff, so just to really get a feeling on things.

I guess that is the last question from the call is Alberto Gandolfi from Goldman Sachs.

And welcome Gianni as well. Two questions. One is on the churn rate. Can you tell us what are you seeing lately on the churn rate? Is there an acceleration before the phone for a lack of better word poaching is about to end or quite the opposite has like the volatility in commodities, which has not really impacted electricity prices in Spain, but has that had an impact on the churn rate. So if you can tell us what's going on and what you think is going to happen in the next few months. And the last one, just to be really, really, really clear, networks last year, in the full year, you had about EUR 100 million, let's call it kind of not recurring. Another EUR 200 million. So I'm trying to understand what is really the earnings power of this business before one-off regulatory compensation from previous years. Should we think this year underlying a EUR 2 billion to EUR 2.1 billion EBITDA, and we use this as a basis for forecasting future years. So it's quite important. We managed to clean this up if you shouldn't mind. Thank you so much.

Thanks, Alberto. And so on churn, yes, we have seen in the market a super high level of churn, and we were anticipating that given the new royal decree that somehow will try to prevent the level -- the high level of fraud that wasn't there. And given that it gets into operation in a few months, I mean, the level has been very high. Now very, very recently, we are seeing this changing a bit. So it has been spiking and now just reducing I don't know whether they're preparing for what it is about to come. And then on networks, yes, you're right. When we presented the plan, we basically carefully said as a new reference approximately EUR 2 billion for networks because there was -- there were EUR 100 million of extraordinary there, just to set the new number. I would say that probably now you can assume the 2.1 you were somehow mentioning.

Okay. Thank you. At this point, we have tackled all the questions. I have received some through the web but most of them have been addressed. Yes, one follow-up question coming from Pedro Carado, JB Capital okay. He's asking about the evolution of the ancillary services. In particular, the cost of the ancillary service during the first quarter. How do we expect the evolution during the year. And if we have in mind, if it should be passed as a regulated cost?

Okay. So thank you for the question. I mean here on ancillaries, I mean we were mentioning before. the first year. The first month of the year generally are the ones with the higher impact. So particularly where with the cost of electricity is kind of lower, you can clearly see at Page 5 in February, for example, but also somehow in March. So it tends then to get lower along the year. So we do expect that the evolution will be probably very similar also to the other with the same seasonality that we have been seeing also last year. And in terms of whether this could be regulated. I mean, yes, we think it should be. I mean, there has been, I guess, on this at least 80 suppliers that have been somehow making this proposal. It is like this in the rest of Europe, apart from Portugal and Spain. And particularly now, I guess that it's pretty much evident that this is a cost of the system, not really a cost of the suppliers or somehow to be borne by the suppliers. So thank you.

Okay. With this, we finished the presentation. Just to thank you for your participation. And as always, the IR team will be available in case you have any further questions. Thank you very much.