Enel SpA (ENEL) Earnings Call Transcript & Summary

Good evening to all the people connected. Welcome to the full year 2024 result presentation, which will be hosted by Enel's 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 session. Thank you. And now let me hand over to the CEO.

Thank you, Omar. Welcome to everybody. We're starting with our focus on rebuilding and constructive dialogue with institution that is already showing a positive and visible outcome. The resulting improvement of regulatory framework will support our industrial plan delivery and confirm the value creation of our capital allocation. Group delivery in '24 was visible based on a solid performance and allowed us to meet all the targets. The result was achieved due to the higher contribution of Iberia, U.S. and LatAm at integrated margin level. Stefan will detail later on in the presentation. The leverage has been successfully executed, and its completion improves our balance sheet flexibility for a more profitable growth. Lastly, in light of the results achieved, we'll propose to the next AGM a dividend per share equal to EUR 0.47 for '24 implying around 70% payout and a 7% dividend yield at the current price. Worth to remind the floor, it is confirmed at EUR 0.46 per share over the plan period. As additional shareholder remuneration, the Board of Directors has approved the renewable of the share buyback program for a maximum 500 million shares and amount up to EUR 3.5 billion. The program will be proposed to the next AGM, and the shares acquired will be consequently canceled. Now we'll have a look at 2024 deliveries. The next slide, you see, last year, the group recorded an outstanding financial performance and growth across all businesses. EBITDA reached EUR 22.8 billion, landing at the top of the guidance range on the back of a less volatile environment restoring the full growth potential. Net income came in at EUR 7.1 billion, increasing by 10% versus the previous year. EBITDA and net income are the outcome of our managerial actions implemented in the no domestic market, where the new capital allocation approach is increasing asset-based profitability. Net debt-to-EBITDA ratio lowered to 2.4 versus 2.7x of last year, on the back of an improved performance and the deleverage completion. Now we move and we see the progresses of our advocacy action in the next slide. Supportive regulatory frameworks are the main driver to attract investment for the energy transition. Therefore, we reinforced our advocacy action. And over the past months, we started to record notable achievements. In Italy, for example, the first and most relevant outcome was the renewable of the distribution concession. Also on the renewable side, the new supportive measures have been introduced in FER X decree in Spain, where we're working to ensure the regulatory framework will be supportive of investment into energy transition. On LatAm, discussions have been positive so far, and the renewable of the concession in Brazil is expected by the end of this year. Now I will dive into capital allocation on the next slide. Our capital allocation has been designed to maximize our term profile, while reducing risk and consequently, improve the performance of the group. Investments were deployed in line with our strategy with networks accounting for more than 50%, 5-0, 14%, 1-4 higher -- percent, higher than previous year. As a consequence, operating KPIs improved RAB reached more than EUR 45 billion. Renewable production on total increased by 8% year-on-year, while the share of emission-free stood at 83%. Therefore, our customer side, renewable coverage on fixed sales reached 82% from 65% in '23. Now we'll see the progress in M&A activities. As announced during Capital Market Day, we'll leverage on different models in order to create value and reach the level of desired returns. In the recent months, we got to brownfield opportunities. The first one is, it has been 600-megawatt of hydro assets in Spain. And the second one, over 1 giga of renewable assets in Australia to our joint ventures in the region and exploiting the stewardship of our business model in this case. These 2 deals prove we are moving to less risky technologies and countries delivering on what announced. Now it's time to the second pillar of our strategy. Let's talk about our efficiency program in the next slide. So far, we reached around EUR 800 million savings compared to 2022, and we're more than halfway through the improved plan target of EUR 1.5 billion. And I remember you, we updated in -- updated last November. Actually, this achievement is a clear evidence of our persistent focus on optimization of processes and activities without compromising our operation, which continued to deliver a strong performance. Now it's time of financial and environmental sustainability. In 2024, our financial performance continued to be solid, and the net debt on EBITDA reached 2.4x, well below the peers average. This level of leverage gave us over EUR 10 billion additional financial flexibility on top of the EUR 43 billion investment announced in CMD, including the buyback, which will comment -- I will comment in detail later on to capture all of this, the future and profitable growth opportunities and to maximize the value for our shareholders. On environmental sustainability, absolute emission continued to decrease in line with the '30 goals. Finally, shareholder remuneration on Slide 9. The resiliency of our business model and the efforts of our advocacy actions as well as the positive operating performance allowed us to achieve a solid economic and financial results. As I mentioned before, we propose to the next AGM a dividend per share of EUR 0.47 for 2024, implying a payout of around 70%, and the new share buyback program aimed at improving shareholder remuneration, a further option on top of the organic and inorganic opportunities and part of the EUR 10 billion additional flexibility mentioned before. This option could be evaluated also at subsidiaries level. I leave the floor to Stefano now for the financial performance details.

Thank you, Flavio, and welcome to everybody. The pragmatic back to basic and financially disciplined approach we adopted in the last 2 years, drove to a consistent positive delivery in the core KPIs and financial performance across all businesses. Emission-free generation is growing with financial results boosted by a remote energy management already fully enforced in Italy. In our domestic market, the supply business normalized after the [indiscernible] in 2023, thanks to a mandatory broad review of our retail customers of the portfolio. Last but not least, a pragmatic and fact advocacy supported a constructive regulatory framework that allows to increase investments and in parallel with value generated in the network business. As a result, 2024 ordinary EBITDA reached EUR 22.8 billion, increasing more than EUR 2 billion versus previous year on a like-for-like basis. This like-for-like comparison is not to give a different and positive perspective to the 2024 reported EBITDA, that was higher compared to the ordinary result, reaching EUR 24.1 billion on the positive returns of the executed disposal plan, generating significant cash capital gains. But recurring long-term growth leverages on the organic performance of the core business. From a geographical perspective, this portfolio rationalization is visible with EBITDA coming from Europe and U.S., accounting for almost 80% of the total. Finally, in 2024, net debt on EBITDA landed at 2.4x, a sector benchmark, providing ample balance sheet flexibility moving forward. After this broad overview of the 2024 results, I will speak up focusing just on the main topics of the business, starting from the networks. As we commented in the presentation, this EBITDA reached almost EUR 8 billion, up by 8% year-on-year on a like-for-like basis, confirming the positive growth headway observed along 2024. On top of the positive and consistent trend in Europe, it is worth mentioning that the LatAm EBITDA stabilization was achieved in a tough macroeconomic and political environment, where the positive contribution from investments, tariff indexation and energy volumes distributed to our customers has been offset by the local currencies devaluation observe in the period, and this accounts for EUR 0.2 billion. Now we move to the evolution of our integrated business, and I am on Slide 13. Integrated business EBITDA increased by EUR 1.9 billion year-on-year net of perimeter driven by the normalization of relevant business dynamics that restore a segment performance that is current with our asset portfolio mix in terms of value generation also looking forward. As a consequence, renewables recorded a strong performance across all regions, recovering around EUR 2.7 billion versus last year. Flexible generation, I would say are moving to normal. As a fact, minus 21 terawatt hour reduction in coal and gas was mostly driven by the end of mandatory requirements. Finally, retail EBITDA reflected the mentioned downward price campaign in Italy. Starting from 2025, we expect a more linear evolution of the performance with price dynamics fully embedded in group's plan assumptions. I will now provide an update on our energy management and hedging strategy in the domestic market, meaning Italy. Slide 14 describes how the new integrated sourcing sales management model supports ample visibility, resiliency on future evolution of the earnings. Compared to the past, we moved from an approach focused on the forefront financial hedging of the industrial open position on generation and gas contracts to an end-to-end integrated and flexible approach, focused on the value potential of our large resilient residential and small medium business customer base. Thanks to this new approach, renewable generation is set to be naturally matched with the day sales and more resilient customer base with financial pre-hedge as a lever to have implemented value to optionality. This allows us to maintain a predictable fair profitability with guarantee to our customers a sustainable price despite a persistent volatility on power price scenario. As you can see from the chart, 2025 is almost fully hedged. And for 2026, we already covered 85% of the expected generation. The contracted price of these volumes are reliant or above the Capital Market Day scenario. More details 2025, we forecasted EUR 114 megawatt hour, and we hedged at EUR 117 for 2026. The average prices of today of the hedged volumes is EUR 140 compared with the scenario at EUR 111. And now I will move on Slide 15, talking about the earnings evolution. Ordinary group net income came in at EUR 7.1 billion, above the guidance provided on the back of the positive results of our operations and additional contribution also from the assets disposed in 2024, most excluded from the guidance provided to the market. Financial expenses reduced by EUR 100 million at profit and loss level, but it is worth to highlight that cash financial expenses declined by around EUR 400 million, EUR 500 million has no cash FX impact and other non-monetary items generated relevant and volatile impact, both from P&L and net debt on an accounting measure. While the reduction in charges on debt is mainly driven by the EUR 4 million reduction in gross debt, I would like to highlight also a higher contribution from associates, mainly due to the positive performance of [indiscernible] elektrárne, whose stakes will be deconsolidated by 2025 after the exercise of the call option by [indiscernible] at the end of 2024. Finally, reported net income stood at EUR 7 billion, almost in line with the ordinary net income and doubling versus the average results achieved in 2021, 2023. Let's now move to the slide related to the FFO. In 2024, we confirmed the strong results achieved in 2023 in terms of cash EBITDA with an FFO once normalized for cash out, not organically related to the 2024 operational performance standing at EUR 14.6 billion, exceeding 25% of the group's net debt, reflecting a solid modernization of 2/3 of our EBITDA. Highlights I want to mention, first of all, the Qatar arbitration that was mostly related to 2021, 2022 operation was moved in 2023, but financially impacted 2024 working capital change that would have been neutral, excluding just these items. Another important highlight is the provision, where we include EUR 300 million noncash item related to the 2021, 2024 additional regional hydro fees in Italy, which, as you could remind from the Capital Market Day, we have already potentially included in the assumption. On this matter, we maintain our solid position that these amounts are not due before concession expiry, meaning after 2029. Final remarkable points are the following. The tax payment was impacted by the 2023 tax balance paid in Q3 2024 due to the significantly difference, we are Italy in this topic, between 2022 taxable income versus 2023. Financial expenses, as I said before, benefited from the reduction as cash do not follow the accounting principle. Let's now move to the debt evolution on Slide 17. Cash flow generated by the operation was dedicated to fund EUR 11 billion of CapEx, including EUR 1.1 billion of brands already cashed in. Additionally, our partnership model contributed for EUR 2 billion with cash inflows from the BESS project in Italy and solar projects in Spain. Finally, dividends paid stood at EUR 5.4 billion. Thanks to the strong focus on cash generation and the completion of the 2022 disposal plan, we have been able to reduce net debt by more than EUR 4 billion versus last year, reaching a remarkable balance sheet solid with net debt on EBITDA ratio at around 2.4x. Now having already started the new fiscal year before our CEO closing remarks, I share the year-on-year perimeter reconciliation and this is the last time having completed, as I already said, the disposal plan set in 2022 on Page 18. In order to compare organically full year results with the 2025 guidance show at the November Capital Market Day, we provide the rebased EBITDA net income for 2024. Like-for-like EBITDA 2024 is EUR 22.4 billion, adjusted for Peru and Lombardy asset disposal. This year, as you may see, the difference are not the same as that in the past, let's say, that are minimum. Net income baseline is EUR 6.6 billion, where on top of the Peru and Lombardy assets, we adjusted 2024 net income for the contribution of Slovenské Elektrárne that amounts EUR 0.3 billion positive. On these last items, [indiscernible], it's worth to remind that on that side, we recorded the repayment of more than EUR 1 billion intercompany loan at the end of January. This will have a positive impact on rating agencies adjusted net debt. As a result of the normalization I mentioned, in 2025, we set a 3% growth versus the 9% EBITDA security investment plan scenario presented in the last November in the Capital Market Day. On top of this, I want to highlight that there is a clear potential upside to be considered on the back of the balance sheet flexibility we have achieved. But on this topic, I hand over to the CEO for his closing remarks.

Thank you, Stefano. The economic and financial results are clear evidence of our delivery abilities. The increased focus on advocacy actions across all countries provide full visibility on the implementation of our capital allocation strategy. The continued effort of improving group's profitability allow us to confirm 2025 full year guidance. Through our actions, we have been able to restore growth financial solidity to capture future and more profitable growth opportunity and guarantee an attractive shareholder remuneration via current dividend policy and the new share buyback program. I take the opportunity to announce we model -- our CMD to the beginning of 2026. It would be more efficient and aligned with standard market practice. Finally, we'll continue to focus on group's profitability to lock in marginality and guarantees a safe harbor to our shareholders. Thank you for your attention. And let's now move to the Q&A.

Thanks to our CEO. Let's now open the Q&A session. We received a lot of questions for the call. We have summarized them by topics. Let's start with the more strategic questions that will be answered by our CEO. The first one, distribution concession renewal. How will concession fee be calculated? Any indication on the potential amount?

Well, all the technicalities are still under discussion and the amount of the fee is subject to the final decision of the government and authorities. In terms of amount, it will not be negligible in my opinion and will be included offshore, and I won't point out this element in our RAB.

Thank you. Is there any means on the renewal of the hydro concession in Italy?

First of all, let me say, our concession are set to expire in 2029. So we expect the process will take a longer time to start and it will involve both regional and national authorities. In any case, this is a one-off of our priorities. And our intention is to implement the buckets in this sense. But we aren't in a hurry, and it is not the right time to speed up the process. And let me say, trust in us.

Final question on concession. When do you expect the situation in South America will be sort?

You know, we have already, in the presentation, said about our expectation in South America, especially in Brazil, even because the plan for improved network resilience is well on track. Our expectation renewable is by the end of the year. Moreover, while we expect the updated regulatory frame work in Argentina, where we are in the discussion even there, we are having a positive discussion in all the country in the South America.

Thank you. The deleverage completion resulted in higher balance sheet flexibility, more appetite for M&A?

I repeat it again. On M&A, we only look at accretive deal. And when we talk about accretive and without synergy or other things at the beginning, it's important to understand this. And we intend to buy assets and especially in developed countries with a stable environment and profitable returns. I said many times, I want to point out again, we are not interested in a large M&A deals. Now we have room in our balance sheet, but we don't want to buy at any price and we look at the right opportunity. Otherwise, we prefer to buy our shares also at subsidiaries level, as I said in the presentation.

So shareholder remuneration upside increase DPS to EUR 0.47 per share. It's right to think about this is the new flow?

No. As I said before, the current dividend policy is clear and foresees EUR 0.46 as a floor, and we have already changed the floor. We can change every year with the possibility for DPS to increase up to the 70% payout. Indeed this year, it has been EUR 0.47. Obviously, the share buyback program is a further option to approach shareholder remuneration and DPS growth naturally. In this case, I think we cover all the expectation of our shareholders, including me.

Recently, there have been news around government measure to reduce the price of electricity for final consumers. What's your view?

But today, there is a strong discussion in Italy. We have a constant dialogue with authorities and all the parties is involved in this discussion. Measure like the price cap applied in the past in Spain have demonstrated to be not effective. And it has been abundant in this country, and this we have already the real proof it's not concrete way. One of the most effective instead measure has been already included by the government in the FER X decree, where there is a possibility to sell electricity for 20 years with PPAs at the fixed price. This could be a benefit both for customer and the operators. This reduced naturally the price of energy. I suggest that, let me say, also not following only the energy price evolution for define the result of our company because for integrated players, the profitability is not strictly linked to the price of electricity. And I'll give you some example. The first one is the good performance in 2024, driven by contribution of nondomestic counters like Iberia, for example, which had a lower power price, but higher integrated margins compared to Italy. The second example is Italy. In 2022, result were power prices were at the highest, but the economic performance was the worst ever recorded. This is the reality. This is not the only general discussion.

Last one for the CEO. What's the impact on your development strategy in U.S. after the executive order from Trump administration?

Now there are no impacts expected. In the U.S., we don't target to add new capacity in the short term from greenfield. This is for sure. And all the production, the existing production in the country is baked by long term to deal with the very rated company, big corporate -- American big corporate. And our potential new investment for the company will be evaluated only if the condition are supportive. Furthermore, in this area, we believe a brownfield renewable assets are more convenient and potentially more profitably than greenfield ones. Thank you.

Thanks. Let's move to CFO questions. Stefano, could you please share with us a bit of technicalities on distribution concession renewal? Any upside on CapEx versus the plan presented in November?

But as of now, it's too early to go in depth on all the moving parts as the process is at an early stage and most of the technicality will be discussed in the next months. Technically speaking, let's say, that there are 3 main items. The first is the size of the extraordinary investment plan and its definition. Second, the amount of the lump sum payment by the current consistently and recognized as RAB. And third, the incentives in terms of regulatory remuneration. For this the early plan in the premium for the additional investment, we don't expect any significant change, considering that energy distribuzione has anticipated this approach and the existing plan about resiliency, for example, represents a benchmark. So we have already a regulation for this. Worth to remind that we already increased from EUR 12 billion to EUR 16 billion the CapEx allocated to Italian grids over the plan period, and the additional investment, as I said, are already included in some projects for the networks upgrade. Moving to the one-off RAB payment, it is already established in the budget law. But it will be defined according to a wider framework, taking into account also the sustainability of the network charges in the bill on the energy system. By the way, I remind you that the Capital Market Day investment plan already includes a portion of this item that was based on our expectation, a portion of this.

Thank you, Stefano. Geothermal concession, they have been renewed on EUR 3 billion CapEx to be spent on those assets. Are investments additional compared to plan?

Yes, no. The EUR 3 billion CapEx are spread over, let's say, decades. So the next 2025, 2027 plan already included these investments because the discussion with the region was already in place. We got this plan provides also for additional cap, but this is also in the medium and long term. So don't expect like the other topic, let me say, a spike in the CapEx rate. This is more something that is in continuity compared to the rest.

Thank you. Guidance. So EBITDA and net income guidance for 2025 has been confirmed despite strong 2024 results. Could you please detail the building block for 2025 guidance for both EBITDA and net income?

Yes, in the presentation, we showed that there will be a perimeter effect and this is unfortunately something that is happening in the last 2 years. So starting from full year 2024 baseline of EUR 22.4 billion, little building block, let's say, we see today are the following. For this, we see around EUR 800 million EBITDA increase, where Italy is expected to progress at the 10% growth run rates that we have already observed also in the 2024 results. In [indiscernible] it is mostly in line with 2024 trend that means, let me say, a very small growth expected still this year because, as you know, the final regulation is under definition. So the CapEx plan, as we have already shared, will be revised according to the content of the new regulatory framework. Lastly, LatAm is coming back to growth in our projection, thanks to a slightly better macro environment and support the regulatory updates on not only tariff in the session, but the whole, let me say, again, regulatory framework that will allow a first upward in capital standards. In the integrated margin, sorry, we said the further consolidation of the renewable generation contribution to EBITDA, that we leverage on additional capacity that is now focused on regulated market and best meaning storage. This positive trend will be mostly offset by the trading position and energy market normalization and the thermal generation that is progressively flat and is more and more dedicated to ancillary generation and regulated revenues. Finally, the EBITDA will be mostly in line with 2024 second half performance, where economics already affected the mentioned asset on customer portfolio normalization. Lastly, again, the supply market in Spain, we are [indiscernible] a slight positive room for additional profitability. Below the EBITDA, we expect a more linear evolution.

Thank you, Stefano. Hydro. 2024 has been strong in terms of hydro output. What's your expectation for 2025? What's the current level of reservoir in Italy?

In 2024, the hydro output has been strong across all region, excluding probably, as you see in the [indiscernible], a tough second half 2024 in Colombia. For 2025, what we expect in Europe, a slight but dryer year versus 2024, but in line with the historical average. While in LatAm, we are forecasting to normalize the trend. What does it mean? That is a higher production in Colombia, where the [indiscernible] normalized growth last month and a lower -- slightly lower production in Chile. In any case, all these trends at the moment are in line with plan assumption because it's something that we have already assumed as projection for the industrial plan.

Thank you. Let's move to retail. Churn was high double digits in 2024? How is it progressing after the implementation of the new commercial strategy?

But again, the situation is normalized, but I understand there is a very strong focus on this, but we have already told several times that the situation has already normalized because at the end of the day, we have completely reshape our commercial offering to the current market price curve, moving toward a more sustainable price for the final customers compared to the 2022 and first half of 2023 offerings, which are consequently naturally, let's say, reducing. But the retail market is in a new normal after the 2022, 2023 spikes, with higher competition, but on the other hand, also a wider market size after the full liberalization. So net-net, this is not negative. This is not a negative scenario because the market, the pie has increased with the liberalization. So some competition, additional competition was expected.

Thank you, Stefano. Retail margins. Looking at your number, it seems that unitary margin for Italy is much higher than Spain. What's driving the higher marginality is sustainable in the long term?

Here, we have to be very careful because there is also some political topics on this. But again, the average you had to divide the margin between wholesale and day one, average commercial margin, both Italy and Spain are similar. The main difference between the 2 countries, driven by the underlying wholesale dynamics that are different. We know exactly why this happened because of the very heavy weight of gas generation in Italy when compared to Spain, the nuclear absence in Italy were compared to Spain is something that we perfectly know. The integrated strategy, by the way, allows us to ensure margin sustainability in the long term in this way, both in Spain, in Italy, meaning where we have a very strong and solid integrated position.

Thank you. And last one from the web. Working capital was EUR 500 million negative in 2024. What's the expectation for this year, any one-off to be considered? Any impact expected from the elimination of system charges for more residential customers?

Let's avoid any hypothesis on this last point because system charges that are being eliminated are just a small portion, probably the market and the investors remember what happened some years ago, so nothing comparable. Generally, working capital dynamics are impacted by several organic and nonorganic items, including also, as you see, for example, the tax payments in Italy, the Qatar arbitration, one-off with sometimes also noncash impact. As for 2024, we normally achieve neutral organic working capital change because, as I said before, if you exclude the Qatar payment in early January 2024, the working capital was strongly negative along the quarters in September and July, don't worry because this will move to 0, let's say, to more balances of this happen. At the same time, be aware of the aforementioned dynamics, we always include an assumption above exactly to absorb potential one-off that happens. This does not mean that we have potential one-offs in the plan, but we have, let's say, the coverage in terms of working capital for some potential one-off. Thank you.

Okay. Thanks to our CEO and CFO. There are no more questions. So Q&A session is over. We cover all the main topics. If something is missed, the IR team is available for follow-up after the call. Thanks to everybody.