Enel SpA (ENEL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Enel First Half 2024 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, and good evening, everybody. Welcome to the First Half '24 Results Presentation hosted by Enel's CEO of Flavio Cattaneo; and the CFO, Stefano De Angelis. Following the presentation, we will have the usual Q&A session. We ask people connected to the webcast to send questions only via e-mail at investor.relations@enel.com. Before we start, let me remind you that media is listening to both the presentation and the Q&A session. Thank you. And now let me hand over to the CEO.

Thank you, Monica, and good evening to everybody. Let's start with the highlights of the period. The strong performance of the beginning of the year extended also in the second quarter. We had visible progresses on financial results, deleveraging and efficiencies. To date, we have cashed in more than EUR 5 billion from disposal and we have taken a step further with the partnership deal in Spain as has just announced. All this confirms our confidence on 024 delivery. We see the result -- results to move towards the top of the range with a positive impact also in our dividend. Indeed, I remind you that our dividend policy allows us to pay up to 70% of our ordinary earnings if cash neutrality is reached. Let's now dive into the details of our performance. Financial results improved visibly. Ordinary EBITDA came in at EUR 11.7 billion, up by 9% versus previous year. Stefano will elaborate on the main drivers later on in the presentation. Ordinary net income is up double digit, confirming the trend observed in the first quarter. Cash generation remained strong with FFO reaching EUR 5.5 billion and providing some coverage of the net CapEx. This results are supported by managerial action put in place so far. We record further improvement in the regulatory frameworks across our operation due to our ongoing advocacy activities. In Italy, we welcome a set of [ decrease ] that can be a game changer for the renewable development. Still in Italy on July 1, we welcomed in our customer base, the client leaving the regulated segment. In Lat Am, we enjoy the stability of the regulatory frameworks and they appreciate the ongoing constructive discussion with the various regulators. Value creation is mainly achieved through a carefully planned capital allocation. In line with our strategic pillars, CapEx in networks account for more than 50%. More than 65% of total investment were deployed in Europe. As a consequence, industrial parameters improve across the board. RAB/customers stood at around EUR 650. Renewables production on total increased by 10 percentage points, while the share of emission-free production reached almost 85%. This industrial performance benefited also our customer segment where the fixed sales covered by renewable production for almost 90%. In the period, we recorded a significant progress also in the partnership business model. In the first 6 months of the year, we have already completed 2 deal worth around EUR 2 billion out of EUR 6 billion to be cashed in by 2026. In particular, following the successful completion of the partnership with Sosteneo in Italy. Today, we announced a partnership with Masdar on solar assets in Spain. This -- a clear example of how we can enhance the value associated with our project. In the partnership business model, investments are shared with the third parties to foster capacity growth and to accelerate paybacks and return and more will come. I will now move to the second pillar of our action. Over the second quarter, we continued to progress on efficiencies. In just 12 months, we reached around EUR 500 million savings versus 022. And now we are half way through the 1 million target set in November 023. More than 70% of this reduction is associated with the project and growth business and geographies. While the rest has been recorded at holding level due to the rationalization of operating expenses and overhead reduction. Let's now focus on the third pillar of our strategy, financial and environmental sustainability. In 2 years, the quality of our results improved, thanks to the managerial action implemented in the last fourth month -- 14 months, sorry. Not to withstand the perimeter effect, EBITDA is up by more than 40%, and it is clean of any capital gain. Operating cash flow produced organically increased by almost 8x. Net debt on EBITDA improved strongly, not yet included around EUR 2 billion cash in from announced disposal. Enel is now positioned as one of the less levered company in the sector. On environmental sustainability, emission intensity recorded a remarkable 41% decrease over the past 12-months. And now I leave the floor to Stefano, who will deep dive into the financial performance of the period.

Thank you, Flavio, and good evening, everybody. I'd like to highlight that notwithstanding the energy scenario continue to be impacted globally by declining price trend. The resilience of our operating results leverages on the integrated end-to-end model we have implemented that is based on a market-driven energy management tailored on different generation assets and country-specific regulation. On the other hand, we benefit of the new capital allocation focused on visible and risk balanced financial returns and efficiences already achieved in this semester. As concrete evidence, we closed the first half with an ordinary EBITDA up 16% on a like-for-like base, supported by the progression of grids performance on the back of constructive regulatory updates and the positive renewable generation contribution to the integrated business performance. From a geographical perspective, European countries EBITDA accounted for 73% of the total and [ increasing ] 13% versus previous year. As you may remember, this was something that we have guided in our Capital Market Day. I will now move to the business segment results. I am on Page 11. As I commented in the previous slide, net of the 2023 disposal, Grids' EBITDA increased 4%. In Italy, while the increased CapEx efforts will sustain a growing path moving forward, we record a positive regulatory updates both on inflation and [ work ]. Spain approved at almost flat year-on-year and some issue is starting to be addressed and key regulatory topics will be crucial for future growth. In Latin America, the operating performance benefited of the new routes for tariff indexation with a relevant and positive contribution from Argentina, only partially offset by the impact of inflation on cost. Let's now move with the evolution of the integrated business. Again, net of perimeter, the integrated business increased by some EUR 1.5 billion. Renewables are confirming its growth driving role already observed in the second half of 2023. The EUR 3.7 billion EBITDA booked in the first half of this year was supported by different positive items that I'm going to comment. First of all, we, at higher resource availability, mainly driven by better hydrology across all countries. This account for approximately EUR 800 million. We have the contribution of the investments we were performing last year and in this first half of 2024, that accounts for approximately EUR 300 million. We do not have, when we look at the comparison year-on-year, the EUR 200 million clawback measure in Italy. And as also a result of the different energy management model were implemented last year, we had a EUR 600 million negative impact of the either short position that also affected the 2022 results. Don't forget that a potential headwind represented by the [ coal ] price drop in Italy and Spain was more than offset by the increased portion of hedging in the integrated margin, energy management. When we move to the thermal generation, the decline trend is linked to the 12 terawatt lower output on the back of better hydrology and the end of the mandatory requirements on coal production that we have commented many times in the last year. Finally, retail EBITDA decreased EUR 100 million as the expected normalization of margins in Italy is now compared on a year-on-year basis with the impact of the repricing of the entire residential customers' program in late 2022 and first quarter 2023. Remind that in Italy, at that time, the [indiscernible] [ coal ] price was higher than EUR 200. This short-term positive impact on margin of debt repricing is now normalizing, and we are working hardly to recover on the negative customer base impacts, leveraging on our bundle strategy and reshaped our portfolio. Moving into the earning evolution on Slide 13. We see that the magnitude of the net income expansion compared with last year has been supported by the greater EBITDA conversion rate that stood at 34%, [ up ] by 4 percentage points year-on-year. More details, the D&A that includes the bad debt provision increased following the business investment trend, partially offset by the perimeter reduction for the asset disposed. In terms of conversion, we saw a positive contribution 1 percentage point. The contribution was also positive with the flat financial expenses that we start to benefit from net debt reduction, tax to the cash-in of the M&A deals realized at the end of to second -- of the second quarter of 2024. After the deduction of taxes, net income benefited also from a higher contribution from countries with greater equity interest as a consequence of the geographical [ position ] of the business in Europe. Worth to mention finally that the first half reported set of results is higher than the ordinary figures we are reporting. Let's now move on the Slide 14 related to the cash generation. The FFO stood at EUR 5.5 billion, slightly higher versus the first half of last year. Focusing on the moving parts. Let me start with the delta working capital that were minus EUR 2.8 billion. As you know, the economic and financial impact of the operation has frequently a time lapse that may affect significantly the cash flow in the working capital short-term dynamics. In the first half of 2024, we cashed out the gas arbitration, and we settled the CO2 2023 provision affected by the extraordinary core generation spike we have commented many times. On top of this, working capital was impacted by the recurring seasonality of cash cost and especially CapEx. Considering the nonrecurring items that will not affect the second half cash generation and adding to this, the reversal of the seasonality effect, we have full visibility on the second half cash flow being able to support our ambition in terms of net financial position and the cash neutrality target commented many times. Cash out for taxes was EUR 1 billion lower versus previous year as in the first half 2023, we paid the solidarity contribution in Italy and a portion of tax payments in Italy shifted to July. Finally, financial charges are in line with previous year. Don't forget that we were approximately 1 year into the region of EUR 60 billion and we had also EUR 2 billion of [indiscernible] sale that now is, let me say, less than EUR 100 million that was generated financial cost. So the benefit of the reduction of the reported net debt plus the [indiscernible] sale debt will start to contribute positively to the net income from the third quarter 2024. With this, I move to the net debt that came in at EUR 57.4 billion, including a EUR 700 million of negative impact from currencies movement, which have no cash impact. In the period, FFO more than covered the investment needs with FFO minus net CapEx being positive for EUR 1.6 billion. Net CapEx amounted to around EUR 3.9 billion as we received EUR 500 million of grants, and we cashed EUR 1.1 billion, thanks to the closing of the partnership with Sosteneo in Italy. Active portfolio management was positive for EUR 4 billion on the back of the closing of the U.S. solar and geothermal deal that we performed at the beginning of the year and Peru disposal in the second quarter. I want to remind that we have already signed deals with more than EUR 2 billion pending to be closed. Taking into account the contribution of those deals, the net debt-to-EBITDA ratio is already landing a target, 2.4x, one of the lowest figures among the peers in the industry. Let me now quickly remind all the M&A deals executed. The solid financial structure, we have been able to reach, allow me to state we have basically completed M&A plan aiming at deleveraging the group. The range year disposal plan has been executed at strong multiples and, in some cases, significantly better than comparable transactions. This latest evidence of our overdelivery is the compression of the sale of the assets in Peru resulted in around EUR 4 billion cash sheet recorded at the end of the semester. And net debt consolidation of around EUR 900 million accounted as [indiscernible] sale. The execution of the deals allow us to strengthen the group financial profile had financial flexibility and unlock resources to support the industrial plan execution. Moving on to the guidance for the full year with the update with the same structure in the first quarter, so I will update you to the second half '24 performance at EBITDA level. We had a strong semester, as you know, but it's important to highlight that results included around EUR 300 million associated with the contribution of the Peruvian assets we disposed in May and June that were not included in our CMD guidance. So excluding this part of the result, in the next month, we expect it to confirm a linear positive evolution around the quarter, supported by the existing regulatory frameworks and solid investment plan. The integrated business, we contribute for around EUR 7.5 billion, as Renewables will continue to improve, thanks to the enhanced integrated energy management more than offsetting the reduction in thermal generation. And the retail segment that will progress in the normalization in Italy where we are completing our repositioning progress. The results achieved so far and the expected trends aligned with our CMD assumptions provide us visibility and growing confidence on full year 2024 EBITDA, which is expected to move towards the higher end of the guided range. And now I hand over to the CEO for some closing remarks.

Thank you. As you could appreciate, the management team is focused on the implementation of the business plan pillars to deliver organic, clear and predictable growth. Our action restarted the some production of operating cash flow and will bring leverage from the one of the highest to one of the lowest in the sector. The concrete approach we are implementing together with the strategic focus on profitability of our investment, efficiency and advocacy will result in a different company, more profitable, resilient and able to deliver value. All of this will couple with a dividend payment that will satisfy our shareholders. Thank you for your attention, and let's now move to the Q&A session.

[Operator Instructions]. The first one is on guidance. Numbers continue to be strong and you confirm the guidance, what factors could drive a revision upwards?

Let me say everything's going well. And as I said before, we see the all '24 numbers to move to the upper part of the range. But it's not the right moment now to talk about a potential revision of the guidance that remain the existing ones.

Second question is on shareholder remuneration. When will you officially disclose the level of DPS for '24. In case it will be above, as we said, above EUR 0.43 per share. How does this translates to '25 and '26?

But let me say, this is a mathematical approach because our dividend policy is extremely clear. If we reach cash flow neutrality, this is the case so far, we'll pay up to 70% of the net ordinary income. As I said before, we see this condition. For years to come, our Capital Market Day is in November, and you will have the answer to your question. Having said that, everyone is able to calculate in your mind, the result.

Addressable cost baseline reduction, do you see an acceleration of your program and potentially an upgrade?

Let me say, first step has reached the first target, and we are focused on delivering this target announced in the Capital Market Day. Again, this will be something we will discuss in the next Capital Day. We have shown to the market our ability to reach in advance because EUR 1 billion was the target for 3 years. We have reached the 50% of the total target in only 1 year.

I go back to the guidance out of '26. [ Do we ] still feel comfortable about the guidance in the year?

Yes, we are.

Next question is on the evolution of the retail clients in Italy. We recorded a negative evolution on retail clients in Italy, what are the main drivers of this evolution? And what do you project for the future?

As discussed in the first quarter, the evolution of the client base, the customer base is a consequence of price strategy executed before our appointment. We are now adjusting prices moving back to market condition and for a fair marginality. I want to stress here that our churn rate is below the market average. And in July, we have already clear sign of recovery. All this, it's in line with what forecasted and at time, at the moment, we don't see reason to be concerned.

Next question is about the regulation in Spain. Any news on the grids regulation? How can you define your capital allocation in absence of visibility on the regulatory framework?

We have met the Spanish government clearly explaining that it's difficult to increase our allocation of resources in the grid without a supportive regulatory framework. This is not just our position, but we share this view also with the industry. We think the government understood and a fair agreement will be reached.

When do you expect to secure the extension of concessions in Brazil like it happened to other companies operating in the country?

But the law is, it has been already approved and allow an extension of 30, 3-0, years to all distribution company, if, of course, the quality metrics are met and CapEx is spent to maintain them to the future. Our [indiscernible] meet the requirement. So we will apply for it in line with the time line defined by the authority. I think in the next 6, 8 months, we can reach the final step to sign a new contract. But the law, it has been already approved.