Enel SpA (ENEL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Enel Américas Second Quarter and First Half 2026 [Audio Gap].

Good evening to all the people connected. Welcome to the first half '26 results presentation. Enel CEO, Flavio Cattaneo, will open with the key highlights; and our CFO, Stefano De Angelis, will present the economic and financial results of the period. We ask those connected to the webcast to send questions only via email at investor.relations@enel.com. Before we start, let me remind you that media is listening both to the presentation and the Q&A session. Thank you. And now let me hand over to the CEO.

Thank you, Omar. Welcome, everybody. Over the past months, we have continued to deliver [indiscernible] the execution. Indeed, in the first half, EBITDA and net income increased by 3% year-on-year reaching respectively $11.8 billion and $3.9 billion, in line with our expectations. In fact, due to the contribution of our activities in Spain and Latin America, we have been able to offset the impact of the Italian energy decree as Stefano will detail later on. The strategic turnaround has improved the quality and the visibility of our earnings, reducing our exposure to market volatility. Growth continues to come from stronger underlying business performance. And at the same time, we are moving forward with both brownfield and greenfield investment while maintaining strict financial discipline. The focus on execution drove a 5% increase in earnings per share so far at EUR 0.40. This result allow us to expect full year EPS at the top end of our guidance range. Let me now turn to our execution and the progress of our asset turnaround. Our asset portfolio is well balanced. 78% of EBITDA comes from Tier 1 countries, and more than 90% from regulated secured business with a low risk profile. Let me now show our progress in capital allocation across both greenfield and brownfield investments. Greenfield investment increased by 14%, especially in Tier 1 countries. Networks remain our main focus and the strong expansion of RAB up by EUR 4.4 billion year-on-year, further improves visibility on future growth. In renewables, capital allocation remained disciplined. We continue to select in projects with secure earnings supported by PPAs or solid customer base. New capacity is progressing in line with the expectation with 3 giga currently in execution. Regarding brownfield opportunities, since the beginning of the year, we have signed agreements to expand our asset base. This transaction will add 1.5 giga of renewable capacity and 350,000 customers. In addition, we are evaluating a 15 gig of [ forte ] opportunities, out of which 15%, 20% in advanced stage of negotiation. Now let's move to value creation. In this month, we are addressing the new phase of our strategic plan with a clear focus on growth. Our investment plan is well on track. We've continued to increase shareholder moderation with EUR 6.6 billion returned through dividends and share buybacks. At the same time, we maintained a comfortable net debt-to-EBITDA ratio at 2.6x. Due to this, the 6% EPS growth for 2026 is already secured without considering any contribution of further shares buyback or acquisition. I now hand over to Stefano, who will give you more details on our first half results.

Thank you, Flavio, and good evening to all of you. I will start giving some highlights about our business results. As in the last release, we have segregated the trading and wholesale segments results because this activity that [indiscernible] relevance is now in a completely different shape when compared to the past. As you know, our focus has shifted into an energy management model where commodities contracts, trading positions and related derivatives are no longer the end game, but they are instrumental to our core business that is to build and manage power capacity, generate, distribute and sell energy and adjacent services to our final customers. 2026 is the year when this discontinuity is pivotal in the results, given the aspiration of the last 2022-2023 huge position matching commodities contracts and derivatives with our generation. This means that now we have 100% of the production potentially devoted to our final customers. And the generation supply is now 100% end-to-end integrated value chain. To be consistent, we're moving to the financial results and help our stakeholders to share this evolution. We will release some additional financial data about the composition of the global generation and trading unit, where the trading and wholesale results is accounted. This will not represent an adjustment of previous year results. And in order to favor the best potential acknowledgment, we have also eliminated any adjustment, for example, as we did in the first quarter. So the number are clear and are the same of last year. We will just segregate this trading and wholesale figures from the unit that is called global generation and trading. And we will publish all the details you may need to better understand the presentation and the business results that we are now commenting into this new landscape. Before moving ahead in the presentation, I want to underline that in the first half, the EBITDA conversion into net income reached 33%, and net income share on full year target achieved 55% of the full year results. Types of target -- when we refer to the target in this part of the presentation, we refer to the target without any potential movement from the basic figure. To give more color, more strategic overview of the business dynamics and having clarified the net of trading perimeter, I think it's better to move on Page 8. Here, we can appreciate how the first half delivered improved the quality and the visibility of our organic growth. First block is the distribution business that confirmed a double-digit EBITDA expansion, reaching EUR 4.8 billion and a 10% growth year-on-year, approximately EUR 400 million. This consistent trend boosted by continued expansion of CapEx and RAB further announced the share of our group's margin that stood in the 6 months at 41%, another step-up of 3 percentage points compared to last year. Second block, the generation supply business shows a very similar trend when excluding the trading wholesale segment -- reshaped international portfolio is the driver of the EUR 600 million EBITDA growth. A very positive performance if we consider the persistent headwinds like the ancillary services in Spain or the curtailment, especially in South America. Finally, we were to highlight the marginal exposure related to the trading and wholesale segment that accounts for just 3 percentage point of the group's EBITDA, minus 6 percentage points when compared to last year. Let's now move into the business highlights. I'll start this section with the integrated margin evolution. And with the geographical description of the results that I think is better considering also when we were referring about headwinds [indiscernible] in order to comment the group results. Starting from the top of the slide. We have LatAm where the growth has been supported by the additional mill capacity and by the improved hydro generation in Colombia. As I said before, we were to highlight that the persistent curtailment in Brazil offset improved price scenario also in the Northeast of the country, where we have a significant portion of our capacity. So it's a pretty good news. Unfortunately, the entertainment is not allowing us to take benefits in this moment of this trend in the market. In Chile, the [indiscernible] hydro production in the second quarter was compensated in the 6 months, as you already saw in the 3 months -- in the first 3 months by the long-term gas contract optionality. In Iberia, the new integrated value chain that was introduced recently, that -- coupling the [indiscernible] volumes with the renewables and new [indiscernible] production resulted into [indiscernible] more profitable sourcing model based on the best-to-best flexible matching of the generation and supply profiles. And in the commercial side, the reason we started in March with this action, exiting some well-identified and costly also in effect it push sales channels whose acquisition quality is not aligned with our ambition. On top of that, we have a supportive regulation of the island generation that paved the way also to future higher investment with a fair RAB remuneration. We are talking about real RAB, it's not RAB like somebody saying the best. Finally, in Italy, the poor hydro resources availability offset the recent spot price upside. On the other hand, the retail business stabilized its trend, thanks to the increasing adoption of fixed price offering, representing a mutually convenient hedging for -- from the spot price spike, but I will comment this trend also in the following slide. I'm on Page 10 of the presentation. As say before, the new energy model [ paradigm protect ] both side of the value chain from exogenous and unpredictable events that turn into price volatility. In this context, fixed offerings still both customers and suppliers allowing for a secure sourcing cost and for mutually affordable, sustainable and secure price for the final customer. Looking at the trend of the average fixed price in the last 4 years, you may see that after the spike observed in 2022 and 2023, customers were reposition -- enjoying a 14% average reduction, that means a 40% reduction if we start from 2022, and we land on 2026. So -- and the relevant portion of this reduction was sustained through the sourcing efficiencies with the matching that I'm trying to make clear that is a real concrete structural and fundamental change in the story of the energy management of this group. Thanks to our generation, we can now maintain the price of the customers and change the -- in the [indiscernible] from the present, for example, short-term spike that is happening in Italy in these last 3 months. Why we can maintain this price because the sourcing is made through our generation. So for me, it's important to stabilize the pricing -- having a fair model benefit in terms of pricing, but especially in terms of ability to offset any potential change in the market condition. Our competitor, for example, if you look at the pricing of the recent of -- also from the more aggressive, they were around EUR 150, just for the energy component. This is not to say that this is exactly the price that they have to pay in order to source the energy that they will sell to the fixed customers they want to acquire. I say this because what is the positive and visible return for the company, not a spike in the margin, but a spike in the average lifetime of the contracts of the customers that increased 2 years from 3 to 5 years, and this was the result of a dramatic reduction in the churn that moved from more than 30% in 2024 to below 20% in 2026, and these months, it's also continuing to improve. But again, this is a specific situation that we have today when we have an additional benefit to when compared to our -- to the other players in the market. Let's now move to the grids. The EBITDA here reached EUR 4.8 billion, as I said before, increasing 10% versus the same period of last year and accounting for 41% on the total of the group. If we look at the evolution for the geographies, in Italy, it's a clear example of what we consider consistent and resilient. We continue to increase the CapEx. Now we have single-digit change. But what is really important in Italy that we are improving strongly the RAB expansion because as you may remember, I commented before, when you make a mix where you eliminate, for example, the grants that clearly are positive because we have the reimbursement. We have a marginal, let's say, single-digit margin up to 10% but 0 of that amount moving to the RAB. When I move from grants into normal, let me say, CapEx -- this make a completely different change in terms of RAB, also because I already closed the gap between the [indiscernible]. And talking about [indiscernible] this is exactly what we expect to happen in Spain, where we have, let me say, a [ vegetative ] RAB in the last years. You may see 11.4%, 11.5%, 11.3%. Now a new cycle has already started. So in this quarter, we do not see the benefit, let me say, that we expect moving forward. And in this quarter, we are starting this new [indiscernible] investment, but we have also [indiscernible] you can see the debt, what sometimes we consider one-off. It's not just a one-off because if you look inside the one-off, you see that this one-off is related to a positive change into the regulation. So you have the recovery of some previous year results that is, let me say, a one-off. But you have also to look inside that you see that you have a benefit when compared to the vessel for structural improvement as, for example, the [indiscernible] recent change. In LatAm, where we see Colombia, we, let me say, are very happy to see how this country can be resilient also in terms of the grids. Brazil has been very positive because of the tariff adjustment related to inflation, we increase the investment by 30% when compared to last year, and this also have a positive benefit to the RAB. Now what is important in Brazil is that these are, let me say, book value that are right for us, this compose [indiscernible] financial assets at the end of the concession. So it's real value. But we have to transform this variance to cash in the next quarters. There, as you may see, reached approximately EUR 50 billion. That, as we know, this increased strongly the resilience and visibility of the EBITDA moving forward. And we are talking about, let me say, as you see, more than 40% of our present EBITDA. Moving into the next slide. We see that the CapEx that are one of the booster of the RAB at -- of the EBITDA growth have reached EUR 3.5 billion now. EUR 0.6 billion in Brazil, 30% growth. EUR 2.2 billion in Italy, where the story of the investment for the resilience, the quality and the development of the [indiscernible] a full year story. And as you may see in the right side part of the slide, you see how we reach with a consistent growth in the [indiscernible], the EUR 4.5 billion that we expect for this year. And what is important that in the 6 months with EUR 2.2 billion of CapEx into the Italian network we have already realized what was the average investment in the 5 years from 2018 to 2022. Now I'll quickly show you the earnings per share evolution before diving into the cash flow dynamics. The earnings per share growth is supported by a sound industrial operational business with the strong delivering and also partial execution of the share buyback, both Enel and SpA and at subsidiary level. These remarkable results in the first half represent 54% of the target for the full year and allow us to expect an earnings per share for 2026 landing at EUR 0.74 corresponding to the high end of the guidance range. Looking at that evolution for 2026, it's important to underline that this result will be based from now to the end of the year, purely on organic growth driven by the consistent delivery of our investment plan and the strategy set to enhance the value of our existing asset base. To summarize in numbers, the 2026 full year net income expectation, we also exceed the 5% growth year-on-year set at the Capital Market Day, positioning us in the high end of the range. With the already executed share buyback for enhancing the earnings per share accretion by 200 basis points. This is something that you also see today. This will -- this is a translation of the difference of the growth between net income and earnings per share that is -- will be replaced in this year 200 basis points at June, 200 basis points at December because we are now considered a scenario where the share buyback at [indiscernible] is what we have already realized. We are not imagined to change any of the EUR 1.5 billion remaining. But in this moment, we are planning the remaining part of the year with the existing and executed EUR 2.0 billion of the share buyback. This means that brownfield contribution and this additional share buyback, not only at Enel SpA because also in this I have a residual, as you can see in the annex program [indiscernible] buyback that this part, as we stated, clearly, of the Capital Market Day [indiscernible] of both [indiscernible] and Enel, that can further expand the growth potential ahead of 2026. And now as promised before, I will move into the cash flow and net debt dynamics. The cash generation continued to be strong with the recurring free cash flow standing at EUR 6.1 billion, implying a cash conversion higher than 50%, that is solid if we consider the seasonal dynamics on CapEx that we observe all the year in the sector and in Enel at the group level. The recurring cash flow generated by the business net of taxes and financial costs, cover the CapEx of the period for EUR 1.1 billion exceeding that serving part of the shareholder remuneration that is compiled by EUR 1.5 billion executed share buyback and EUR 2.9 billion dividends. What is important in this result is that we have a significant FX impact of EUR 1.2 billion. This is important to remind that we are not adjusting this value as it happens sometimes in other parts of the Europe. And we have to see that this as technically speaking, it's called [indiscernible]. This EUR 1.2 billion, that also includes the leasing, will not exist so means that there are impact -- temporary impacts of especially coverage in terms of FX and variable fixed interest rate that is in our history also when we repay our debt at the maturity, this will completely disappear. So our debt -- our net debt is EUR 60 billion. This is part of the accounting routes of the IFRS. So we have informed the market that including this component, our debt is EUR 61 million. In this cash flow, we have the impact -- the first impact, let's say, the financial one of the energy degree, and we are prepared in the last page of the presentation, 15, an update because we know that is considered a really important item. So we have put into this slide of the Capital Market Day that we [indiscernible] all the night preparing for the market. And the update regarding the part of the degree that is already clear and active. So if we start from the ATS offset, as underlined in the energy decrease, this measure is provided for 2027. So the impact on 2026 would have been 0 in any case. As you probably know, currently, there are analysis ongoing at EU and national level to define the measure that will not consist in the -- that the ATS offset but we'll maintain the final goal that is to smooth the energy price in Italy, also for the ATS component. What is important to keep in mind that in our plan assumption, we have already embedded a severe potential impact of the energy degree. If you remember, it was in the EPS only related to these items. It was the first block of the bridge. The measure related to the early payment of system charges was expected, as you can see in the comparison between the Capital Market Day presentation, the [indiscernible] at EUR 800 million. The effective imbalance, as you may see, is higher at EUR 1.2 billion. This is not because we made a mistake in the cash flow. But because in the transformation, the degree in [indiscernible], there was added the component of the [indiscernible], the so-called [indiscernible] that is the system charges collected to support renewables. Finally, the RAB as projected and expected impact for EUR 0.1 billion approximately, bottom that and on the reported net income. For next year regarding these items that I referred more to the financial side of the measures, we expect to have a total impact on net debt ranging from EUR 1.6 billion, EUR 1.8 billion because the system charge do not depend just by the number of customers and [indiscernible] depend also by the movement that we have in the component of the price that is not defined by us, but by the regulatory [indiscernible]. So this will be compound by the EUR 800 million that we already projected, the EUR 400 million that are 2 years 2026 and 2027 of the additional 2 percentage points on the RAB, the regional taxes -- the regional tax. And the green block is what we may expect that at the moment is EUR 400 million, we have made, let me say, a range coming from a potential change of the other system charges that are now in June, representing the EUR 1.2 billion impact that I already commented. What is important is to clarify 2 points. These impacts are on the stock of the debt and our, let me say, a one-off because they are not regarding cash flow impact. This means that our free cash flow in 2027 will not be affected by [ 1.2 ] impact of the system charges advance payment because this happened just one time in the first year of adoption. Next year, we will have a higher debt of EUR 1.2 billion, but the cash flow will be not affected by this movement because we will anticipate the payment in 2026 or 2027. So in 2027, we will have the benefit of not having to pay 2x the charges coming to the final [indiscernible] of the impact. Second, this impact of EUR 1.6 million do not include any about the 2027 measures that are the regarding one [indiscernible] in the intention of the measure will impact the market prices. So we become, let me say, [indiscernible] we will not consider this one-off or not ordinary, et cetera. But at the moment, we talking about -- referring about the 2026 impact that are just financial. With this long discussion about a very relevant topic, I hope to have -- any doubt in your comprehension of the energy [indiscernible] impact at this moment, so I can now hand over to the CEO for some closing remarks.

Thank you, Stefano. Let's move to the closing remarks. As I said before, our results are solid and supported by strong underlying business performance and high-quality earnings mix, financial flexibility continues to support growth and allow us to capture additional value accretive brownfield opportunities. The quality and visibility of our result allow us to expect a full year '26 CPS at the top end of our guidance range. Thank you for your attention, and let's now open the Q&A session.

We thank you our CEO. Let's now open the Q&A session. We received a lot of questions. We summarized by topic. Let's start with the more strategic questions that will be answered by our CEO. The first one, let's start with concession. What's the latest news on the concession renewal of hydro and distribution networks?

Well, in Italy, the distribution concession process is clearly defined by the law. The process is moving forward, and we have not gone particularly concerned. Regarding hydro, we simply need to wait for the appropriate time. I'd like to remind you, despite of our hydro concession will be in 2029. And to give you an example, the currently action for the other operators are ongoing on micro concession despite 10 years ago.

Let's move to Brazil. Could you please provide us color on the process for Sao Paulo concession and your view on Brazil in general?

Okay. Well, over the past year, we have significantly improved our service quality indicators, defined by the local authority passing from 31st in December 2023 to 7th ranking in May 6 06 -- or '26, sorry. We've delivered on every commitment defined by the Brazilian government. We have proposed 2 solutions to solve the blackout problem, underground the cables or allow more extensive trimming. In Sao Paulo cables run through the trees and the local rules don't allow us to trim more than 25% of [indiscernible], and that is not enough. At the same time, the issue is political. Brazil has been in a continuous election cycle. Local election last year, presidential election this year and this situation affects the process, of course. We remain in close dialogue with the Brazilian government. Take in mind the local authority is involved only as adviser of Minister. Moreover, the process refers only to the concession and not to the Sao Paulo company. It's important to underline the 2 concepts. First, our RAB is fully protected. Second, you have to consider the value of the company not included in the RAB. And we are talking about assets such as software, equipment, the backup generators, inventories, spare parts in a big, big numbers. At the same time, we continue discussion with the local authority. Moreover, as recently highlighted by the government that there is also an issue on Brazilian credibility for international investment. We remain confident, our balanced solution is achievable. Our objective remains the same, a fair outcome for all parties, simple.

Thank you. Let's move now to brownfield opportunities. Can you give us some color on the timeline and the size of the deal you're evaluating?

As I said before, about the 15 giga brownfield assets are currently on the market, we can secure around 15% to 20% of this pipeline. Brownfield in every meeting, also in our Capital Market Day, we said is an important driver for growth. Over the past year, we have delivered on every commitment we made. We intend to do exactly the same on M&A, remaining disciplined.

Thank you. Share buyback. Enel share buyback has been approved for EUR 1.5 billion. Any detail on the timing?

The buyback is well on track. We have already completed part of the program, not all. Remaining portion will be and this portion will be executed based on market condition as previously communicated.

Thank you. Going back to Italy. Given the recent evolution of the discussion on energy price in Italy and the energy decree, could you please share your view?

Well, the public debate often creates a misunderstanding between the wholesale and the retail price. The 2 aren't the same. The final monthly bill for residential customers is broadly in line with the European level as reported by Eurostat for 2025. We are an integrated operator. We generate -- generate electricity and supply directly to our customers. Most of our residential customers are on fixed price contract. They aren't affected by short-term movement in wholesale electricity prices. The fixed offers are [indiscernible] for market volatility and international price shocks while maintaining stable our marginality. This is the deal.

Thank you. Let's now move to question for the CFO, Stefano. Working capital deterioration for -- from first quarter, what's the expected level for year-end?

As always, the change of the working capital in the first 9 months, let's say, the first and second and the third quarter, reflects the typical seasonal trends that we [indiscernible] every year in this part of the release, mainly associated with the dynamics on [ CapEx ] spending and inventories. To make a long story short, we also answered this question. And each of the previous 3 year working capital normalized in Q4 as promised by the company. So not to say that somebody have to trust in [indiscernible] or in the finance department. But this is a usual regarding [indiscernible] has already been observed in the last -- as a minimum 4 years, 3 years. This is the fourth.