Enel SpA (ENEL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Enel Full Year 2023 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Monica Girardi. Please go ahead.

Thank you. Good evening to all the people connected. Welcome to the Full Year 2023 Results Presentation, which will be hosted by Enel CEO, Flavio Cattaneo; and the CFO, Stefano De Angelis. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send questions only via email at [email protected]. Before we start, let me remind you that media is listening to both the presentation and the Q&A. Thank you. And now let me hand over to the CEO.

Sorry, I started, but the phone -- thank you. Thank you, sorry for this delay. Thank you, Monica. And welcome to everybody. Group delivery in 2023 was strong. All the targets revised upwards in November '23 were met. Financial are up double digit year-on-year, and we recorded an outstanding improvement of cash generation with FFO up more than 60%. The positive evolution of regulatory frameworks that I will delay later confirms the potential value creation of our capital allocation and provide support to the '24-'26 plan delivery. On the M&A side, as promised, we are close to completing the disposal plan announced with around 90% of the target already addressed. Lastly, in light of the strong results achieved, we'll propose to the next AGM a dividend per share of EUR 0.43. Let's now have a look at '23 delivery on the next slide. Last year, the group recorded an outstanding financial performance across all businesses. EBITDA reached EUR 22 billion on the back of less volatile environment that restored the full growth potential. Net income came in at EUR 6.5 billion, increasing by a remarkable 20% versus 2022. FFO grew almost EUR 6 billion versus last year. Due to the EBITDA growth, the recovery in working capital and the managerial actions already implemented. Let's now have a look at the progresses of each key pillar of our strategy, starting with the capital allocation on the next slide. Our capital allocation was selective and maximize the returns while minimize risk as promised. Europe took the lion's share, absorbing 60% of our total CapEx, 20% more than last year. The shift into our capital allocation strategy was already visible in 2023. I want to highlight that more than 50% of our investment has been in assets with long-term stable and visible returns. Looking at the business KPIs, we delivered a sound growth in RAB, in renewable capacity, and repositioning into the B2C segment. Our advocacy will support investment in regulated activities in future. As you know, we concentrate investment into stable, visible and remunerative regulatory frameworks and geographies. Over the past couple of months, we recorded notable improvement. Italy, the implementation of the ROSS mechanism is progressing as planned and includes a specific remuneration for special project in resiliency. LATAM, we welcome constructive discussion around the regulatory frameworks and clear rules for target adjustment will, on one side, restore business profitability. And on the other, allow for a recovery in asset value. In Spain, we'll continue to work to ensure the regulatory framework will be supported from investment into energy transition. In generation, we kicked off our partnership business model with a successful transaction. At the Capital Market Day, we announced 3 different business models: ownership, partnership; and stewardship. In the partnership business model, investments are shared with third parties to foster capacity growth and to accelerate paybacks and returns. The recently announced disposal of 49% stake in BESS and the generation capacity project in Italy at around EUR 1.1 billion is an example of our partnership created value for the growth. We inherited the project from the past M&A plan, but we revised the structures of the deal to maintain the control of the asset. Additionally, we closed it at much better financial and contractual conditions. And more will come as we expect to create further value, leveraging our portfolio rotation. Now we'll move to the second pillar of our action. Last year, we focused on CapEx generation benefit. FFO reached almost EUR 15 billions on EBITDA conversion, close to 70%. This result was possible due to a more effective and cost disciplined organization leading the ratio above 80% in the second half of 2023. The effort on cost reduction is visible across the board, and it's progressing better than expected. In just 6 months, we were able to save around EUR 500 million compared to the 2023 budget and EUR 200 million year-on-year, a pace of reduction in addressable cash cost, in line with our target shown in November. The disposal plan is progressing at sound multiple. As you can see in this slide -- it's eighth slide. As you can see, we have now closed our -- announced around 90% of the planned M&A deals aimed at deleveraging the group. The reengineered disposal plan has been executed at strong multiples. And in some cases, even better than comparable transactions. The latest example of our over delivery is the sale of a 90% stake in grids located in peripheral areas of Milan and Brescia executed at rich multiples as Stefano will detail later. For now on, we focus the M&A would be on portfolio optimization to unlock resources that can be deployed at higher returns. Moving on to the third pillar of our strategy. Credit metrics improved strongly, even not considering in full the cash proceeds from the M&A activities. FFO net debt increased 10 percentage points, landing at 25%. And net debt on EBITDA was well below 3x, not yet included the cash in from announced disposal. The group not only achieved the target metrics, but is well on track on its leverage. On environmental sustainability, absolute emissions continue to decrease versus the base year 2017, in line with our 2030 goal. Finally, shareholder remuneration on Slide 10. The resiliency of our business model, the operating performance and all the managerial actions we put in place allowed us to deliver sound results. We will, therefore, propose to the AGM a dividend per share of EUR 0.43, up by more than 7% versus previous year and implying a 7% dividend yield at the current share price. Now I leave the floor to Stefano, who will dive into the detail on the financial performance. Please, Stefano.

Thanks, Flavio. Good evening, everybody. In this slide, you see all the action we put in place since May last year. What we did in the second half '23 and what we will do in the near future fully supports our plan ambitions. But I'd like to add some other supportive pieces on this. As the CEO mentioned, our advocacy will result into constructing frameworks for Grids. On the integrated margin, additional renewable capacity and medium long-term hedges on production will couple with commercial policies and bundle offering, improving customers' loyalties and securing margins. We will also benefit from the elimination of different extraordinary energy taxes in Europe introduced during the energy crisis. Lastly, we are working to implement additional and structural changes to further reduce areas of potential volatility, lowering our exposure to commodities and turning around unprofitable assets. From the next slide, I deep dive into financials evolution. I'm on Page 13. In order to allow a clean comparison of the main drivers of growth, we have highlighted in 2022 EBITDA, the contribution of disposals. On a clean basis, EBITDA is up by 15% compared to last year. This operating growth resulted from a good performance of Grids due to regulatory updates that more than offset the negative effect of the CPI on costs. And a strong increase in the integrated business whose positive performances came also on the back of a normalizing environment that drove the rebounding of the negative dynamics affecting last year as I will also detail later. From a geographical perspective, European countries were almost 70% of the total EBITDA for the period. In the next slide, you can see the reconciliation between the ordinary EBITDA of 2023 and its baseline into 2024. Disposal announced so far that in part will be finalized in 2024 will led to a rebase of our ordinary performance whose impacts were anticipated at the Capital Market Day in November. On a full year basis, disposal will carry a EUR 1.3 billion like-for-like adjustment on 2023 EBITDA baseline and around EUR 0.5 billion on net income, mainly as a consequence of the deconsolidation of Peru and Romania. Want to remind that in 2023, we account for the nonrecurring impact from the gas arbitration that will not repeat itself this year. Both EBITDA and net income base lines came in, in line with what originally projected and presented last year. I will now move to the results analysis by business, starting from the Grids. This performance, once excluding the impact of assets disposed in 2022, grew flattish year-on-year with organic performance offsetting the stewardship contribution regarded in 2022. On top of the resilient performance of the business, it is worth mentioning that the 5% growth in RAB, the positive expected outcome of our continuous advocacy activity and our investment plan gives high visibility to our ambition to expand the EBITDA contribution of this business line. Let's now continue with the evolution of integrated business on Slide 16. The integrated business is strongly up year-on-year. Italy represents the bulk of this growth, driven by the rebound in the retail segment, the recovery of the hydro production and power prices normalization. In Spain, the positive evolution of the retail business was offset by the negative performance of the gas business, including the one-off impact of the Qatar arbitration. The operating growth in rest of the world was negative as the growth from renewable development and the hydro recovery in Chile were more than compensated by the one-off gain recorded last year from the one-off sale of gas contract in Chile in the fourth quarter '22 and the negative comparison on tax partnership impacts in the U.S. Finally, stewardship contributed positively for around EUR 200 million year-on-year. Focusing on future, I want to stress that the integrated business model will support margins across the plan in line with expectation. Looking at the different geographies -- in Europe, 100% of the renewable production is backed by sales to the B2C and small and medium enterprises. And on top of this, pre-hedges protect generation margins from backward trends. In countries outside Europe, renewables are fully covered by long-term PPAs, eliminating in full any risk associated with falling power prices. Additionally, in countries like Columbia and Chile, we may lever on our flexible capacity to reduce short-term volatility in the energy markets. I will now dive into the earnings evolution. Page 17. Ordinary group net income came in at EUR 6.5 billion, increasing by more than 20% versus last year, driven by the EBITDA performance already commented. D&A slightly increased versus 2022 reflecting the organic expansion of our asset base, while the net financial charges were impacted by an unfavorable interest rate environment, which affected the 20% unhedged portion of our debt. Income taxes increased on better economic results. And finally, the improved earning mix shift towards Europe contributed to the significant expansion of the post minorities net results. Cash flow is on the next slide. FFO increased almost EUR 6 billion, thanks to a strong improvement in cash generation in the second half of the year. Working capital and provisions impact [indiscernible] recovered in Q3, the negative impact of 2022, continue to improve also in Q4, totaling a positive contribution of EUR 1.3 billion in the full year cash flow. Looking at the other moving parts in the second half, cash out for taxes was in line with the scheduled tax due installments. It's worth to remind that as commented during first half results, the first 6 months of 2022 included a lump sum payment of the solidarity contribution in Italy for around EUR 0.6 billion. Finally, financial charges were affected by the increase in interest rates as already commented. Let's now move to net debt evolution on Slide 19. Net debt came in just above EUR 60 billion with FFO generated in the period that has not been covered in investment needs. Active portfolio management landed at EUR 3.5 billion on the back of the disposal of Romania and for the voltaic assets in Chile as well as the sale of the 50% stake in grids. I want to stress that on top of what already cashed in during 2023. At the beginning of January, we announced the closing of the U.S. solar and geothermal deal for approximately EUR 300 million. And we have already signed this more than EUR 6 billion that are still to be cashed in, in 2024. Taking into account the contribution of these deals, the pro forma net debt stood at around EUR 53.5 billion, reaching already the target announced for the full year. And now I hand over to the CEO for his final remarks.

Thank you, Stefano. Well, the strong results achieved are a clear evidence of our focus on improvements and delivery, ongoing progresses on disposal are said to, first, simplify the group's asset base; second, improve efficiency and accountability. Third, reduce risk and lastly, support our goals of returns maximization. All these will be a net positive also for our shareholders. We reiterate our commitment on the target set during the Capital Market Day, confirming our effort on the execution of the plan. The continued focus on cash generation and strict financial discipline point to potential upside in shareholder remuneration starting from 2024. Thank you for your attention, and let's now move to Q&A session.

Thank you. Thank you to all of the analysts that send their questions over. Let me start with a few questions, which might be answered by our CEO. Set of questions around the disposal activities. So the first one is about Peru. Currently, you have not disclosed any update on the closing of the Peruvian asset. What is missing to get the final approval?

All the most relevant authorization has been obtained. I think you will shortly have an update on this -- is not long, the awaiting for defining and closing the deal.

The second question is about a recent deal. At the beginning of March, you've announced the sale of a distribution asset in North of Italy. What is the strategic rationale behind this transaction? Will you account the gain for the sale in the ordinary figure? And if that's the case, are you envisaging the payment of an extraordinary dividend?

Let me say, regarding the strategic rationale, in Capital Market Day, we have defined our attention in some cases also in Italy. For -- in this case, we have discussed about the swap, but the swap is in terms of sell the grid where it's quite impossible to obtain the new remuneration with the new incentive like in the north of Italy, where the grid is updated many times, and invest in the south of Italy where we can obtain an extraordinary premium for resiliency. And this is -- this asset, this deal, it has been part of this strategy. Regarding the special dividend, I don't think now is time to discuss about it. But what I can say is that the value of this transaction support, let me say, the total shareholder return. By the end of the year, as I said in the presentation, we think we have the create -- the environment for the evolution of our dividend in line as promised in the Capital Market Day, starting from -- even starting from 2024.

Okay. We move to another question about a recent transaction. What is the strategic driver of the sale of the battery storage system in Italy?

But this is an example where -- at the beginning, this transaction was into the list for the disposal and consider as stewardship. Indeed, the first idea was to sell 80% of that. And the first offer for 80% were EUR 1 billion. That we have transformed this deal. In this case, we have changed the deal into partnership. In this case, we consolidated the deal even because it's very visible and regulated business, at least in the major part, and we have obtained more than the amount linked to the 80%. Indeed, we have obtained EUR 1.1 billion for 49%, while we were close to sign for 80% of up to EUR 1 billion.

Last one on the M&A side. Are you happy with the current portfolio? Or is there more asset rotation to be expected? What regions or activities would you consider for an asset rotation strategy?

We intend anyway to maximize returns on investment capital. We are happy. However, we remain mindful of market opportunities. Let me say, we keep an eye on what can be able -- value accretive for the group without jeopardizing our business profile. What we have done so far demonstrated that we can create value with asset rotation and asset rotation is accretive only if investments are profitable. For this reason, in light of what we said in the Capital Market Day, we fixed a minimum 300 basis point return over WACC calculated in each geographies and by technology.

We move to -- we'll stay with the CEO for a question around the retail business. So tenders in Italy, what's the strategy behind the participation into the auctions? How much are you going to get in terms of marginality in light of the discount we had to pay to bid for those clients? And was the impact from tenders included in the plan or no? And will you be able to replace customers before the expiry of the transitionary contract?

Let me say, first of all, we have selected the areas based on the opportunity to increase our market share. Indeed, we have to see the area where we are not incumbent, not only in power, but also in gas, and then I explain why. Potential value of the customers, because we have selected areas also where there is a lower churn and higher income per capita. And as I said, for the first one, where we are -- the areas where we -- Enel is not the incumbent in power, but is neither the second player in gas, there is many possibility for the cross-selling. And this is -- the return of this cross-selling mitigate totally what we have spent for acquiring this client. We have improved our competitive positioning because we are acquiring a portfolio of customers with no acquisition cost and at the price lower than similar transaction in the market have done in the past, the other player. The discount will pay monthly, and it's not due if the customer move to the liberalized segment while instead, if we buy from the other company, we pay upfront, even though the client choose other player -- and I don't think this -- I think that allows us to address our action in a good way. The impact is not relevant for this year -- for our balance sheet for this year. And I -- my expectation is a positive at the end of the story.

Okay. I think we ended with the questions that had to be answered by our CEO. Thank you, Mr. Cattaneo. We moved to the -- a set of questions on financials. So moving into the CFO area. The first one is on the EBITDA '23 that came in line with the midpoint of the guidance range. Is this a consequence of the lost arbitration on LNG in Spain? Or was there any different upside, downside versus expectations we set in November?

Yes. Let's say that -- it's correct to say that the main impact was the Qatar arbitration, then you had the volatility of this business, but a lot of moving pieces. But to summarize, the impact is 100% related to the Qatar arbitration. So as we adjusted the 2023 baseline, and you can see we have re-summed up the Qatar impact in order to reach our expected starting point for the CMD industrial plan EBITDA guidance.

Second popular question is about the guidance for '24. So midpoint of the guidance is EUR 22.4 billion. Can you walk us through the moving parts to get there from full year 2023?

Yes. I start from EUR 20 billion, EUR 21 billion or EUR 21.2 billion. So this means that I'm not considering into the bridge the Qatar because it's already adjusted [indiscernible]. So taking the 2 different pieces of our business, we have the grids that have -- as I underlined in my presentation, that have a very positive growth looking forward. It's in the range of EUR 400 million, EUR 500 million net of FX that we have included in our projection and especially CPI. This is -- gives us a high visibility because, as I stated before, the 5% grow in RAB, they already in place tariff adjustment and the new ROSS regulation are 100% in line with our industrial plan projection. So we have a very strong visibility on this piece of the expected growth. When moving into generation, we have 1.5% approximately expected growth in terms of EBITDA. This comes from basically Italy where we have higher production, because don't forget that in 2023, we have a first part of the year that was strongly -- still strongly affected by the hydro availability. So we have a normalization of the existing capacity that generate -- that transformed into production. We have the code of the BESS that start to have a growth contribution in terms of the EBITDA. And we have a normalization of the pricing because in 2023, the renewable energy in Italy that was still based on previous year contracts and also affected by the [indiscernible] for the first 6 months were in the range of EUR 60 per megawatt. Now as we said before, we have already 100% pre-hedge this energy and the related revenue to more than EUR 100. In Americas, we will take benefit from an organic growth of capacity that is driven by the investment that we already booked in 2023 that we are finalizing along 2024. We have a positive contribution from the U.S. that we take into account to the results of the turnaround plan that we have put in place there and a better comparison also in order -- in terms of the tax partnership year-on-year impact on comparing 2024 to 2023. Finally, and I think this is important, especially in this market because in the retail segment, in Italy, we were already projecting, let me say, a normalization in 2024. So we have a declining impact at group level of approximately EUR 0.5 billion because we were 100% aware that the level of margins that were generated along 2022 was not possible to be projected in the structural long term. So we have already included in our projection, let me say, a normalization after the dramatic 2022 result, the extraordinary 2023, we have now projected a normalized EBITDA contribution from the retail activity, especially in Italy, while in Spain, we see, let me say, a normalized trend already in place in 2023 retail. Last but not least, also including in the starting point, the Qatar arbitration in Spain, we expect the gas business to have a progressive improvement already in 2024 that will become stronger and stronger in 2025 and 2026. Lastly, we were, let me say, prudent also in terms of trading that was quite neutral in terms of changing direction in the plan. And for what regards also the stewardship contribution to the EBITDA. So all this one could be positive upside in the next quarters of 2024. Sorry to be very long. Then Monica for sure, we'll have food.

Thank you, we're clear, detailed and clear. Okay, we move to the next one. FFO improvement extended in Q4. Full year conversion really high. Can this be taken as a benchmark for the year or for the next 3 years?

2023 was an extraordinary year, but have also a very -- a normal comparison in 2022, so in the fourth quarter, we start to see a normalized -- if you see the evolution of the net working capital and provision, the cash flow, you see that also in the fourth quarter, we have a positive contribution of EUR 0.5 billion summing up to the components. So we expect to move back to NI, let me say, normal standard range of 60%, 65% in 2024.

Next question is on the net debt guidance for 2024, which is based on a range between EUR 53 billion and EUR 54 billion. If you can detail the moving parts starting from the EUR 60.1 billion of 2023.

That exercise could be quite simple if we consider that we will enter into the 3 years' industrial plan with our guidelines that is not to generate additional debt to finance the dividend payments. So if we took the impact that we are expecting to cash in from the M&A that is more than EUR 6 billion, as I already stated, that we have also another EUR 1 billion that is in the, let me say, very short list to be finalized, and this will represent, let me say, the last piece of the puzzle that compound the EUR 11.5 billion of M&A disposal plan that we described in the Capital Markets Day. So if we consider the M&A activities -- if we consider that the FFO generated by the EBITDA minus CapEx minus the tax and financial charges, will cover the capital expenditures. And if you sum the EUR 6.5 billion expected from M&As, you may see that we are in a neutral situation. That means that we are already there with EUR 53.5 billion debt, means the 2.4x ratio in terms of net debt on EBITDA.

I think the explanation of the bridge is actually covering the next one, which was about the projected FFO level. Considering the CapEx and dividend commitment, do you envisage '24 to be already free cash flow neutral, you just said basically?

Also reminded that you have to consider the M&A cash in of the deal already signed along 2023 and the beginning of 2024.

The next one is about retail. Retail EBITDA in Italy reached an unprecedented level of EUR 4 billion in 2023. Do you expect to achieve the same result also in 2024? Is this level of EBITDA sustainable in the long run?

I think that I've already partially answered to this question. If we consider the starting point of 2023, no, because the EBITDA in the retail segment was also leveraging on an extraordinary high price scenario. That's why we have prudently decreased the contribution of the retail business along 2024. In the medium and long term, we are building up a commercial strategy in bundle offering loyalty actions and activities that we will allow to restart from the normalized 2024 EBITDA contribution and considering this not a reducing part of our EBITDA also from 2025 and 2026.

A question on working capital, which I believe you answered during the presentation. But just maybe to remind the main building blocks, can you please comment on the key drivers of the positive working capital evolution in the second half of the year?

Yes. As I said, in the third quarter, we have completed, let me say, the normalization in the 9 months. If you remember, in the 9 months, we finally reached, let me say, a positive net working capital plus provision contribution. And in the fourth quarter, so we moved back to have the historical and traditional seasonality. So one of the main drivers, for example, was the CapEx, let me say, level accounted in the fourth quarter that is paid partially in the quarter and more than half is paid in the first quarter of the year. But this is a structural trend that now is visible along the 2022 and 2023 while dramatically offset by the regulatory measures that generate, if I'm not wrong, EUR 5 billion of negative impacts in Enel working capital change.

Next question, it's a popular one, declining power prices. Basically, the market is assuming that for 2024, there are no major concerns, but is asking if we can share a sensitivity of our financials to declining power prices for 2025 and '26, looking at the open position?

So starting from the presentation. As I said before, the consumer and the small and medium enterprises is something that back up our production. What does it mean? That we are not considering this an hedge anticipating, but we are prehedging the prices of the business plan, let me say, and this depends strongly on our expectation based on the forward curve. What does it mean? In 2024, we've still not matched 100% of our renewable production in Italy with our consumer customers, but we have already pre-hedged, let's say, more than 100% of our revenues, as I said before, with prices that were higher than the present one. If we look to 2025, this represents more or less 80% of our average production that, if you remember, our business plan was approximately 25 terawatt from renewable generation in Italy. In Iberia, this is approximately 70%. Moving forward, this trend is continuing to improve in terms of coverage day by day. So it's not something that we will update in the next 6 months. If you will meet us in 1 month, probably the 70% has become 80% or this may be stopped because of the trend in pricing. What is important that the backup represented by the consumer segment is very levered because we have to keep in mind that we are applying an integrated strategy and then the backup represented by the consumer and the small and medium segment give us the best price condition into the market in terms of integrated margin. In the past, part -- significant portion also, I would say, of the matching and the hedging was due with top clients that do not grant the best price condition today and looking forward.

Okay. Talking about retail. And I think if I'm not mistaken, it's the last question for tonight. Analysts are asking about competitive dynamics in the retail business in Italy. And if you can just share a bit of color around clients -- the clients and the churn of the clients?

Yes, in Italy, it's clear that in the last 18, 24 months, there was a shock in the market in terms of pricing. What is important, looking at our performance along 2023, is that the evolution of the free customer base in Italy is the result of 3 different dynamics. One is the churn rate that in 2023 was influenced by the second quarter '23 price increase that transformed into invoices starting from the second half of '23 and this generated a wave of churn that is still in place. We have responded, starting from the second half, with the acquisition that is the second wave. This is progressively ramping up, powered by the new offer portfolio and still in progress sales standard reorganization. The last one is the migration from the regulated customers where Enel was taking a significant portion of the share of the incumbent operator that is Enel. This migration impact has progressively reduced for, let me say, a volume of this customer base and especially due to the energy price dynamics that happened in the second half. As I said, the commercial actions are in the ramping up stages, both the retention that in acquisition areas, so a consistent recovery is expected along 2024.

Okay. I think we have answered all of the questions that came through. So thank you, Mr. Cattaneo. Thank you, Mr. De Angelis. Thank you to all of the people that were connected and we'll see in a month at the first quarter results.

Okay. Bye.

Bye-bye, everybody. See you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.