Hera S.p.A. (HER) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call operator. Welcome to the presentation of the H1 2020 financial results of Hera Group. [Operator Instructions] And now I'd like to give the floor to Mr. Tomaso Tommasi di Vignano, Hera Group's Executive Chairman. You have the floor.

Good afternoon and welcome to our H1 2020 presentation. We will be talking about the complexity of the first half of the year. Although I'm sure you are all aware of it, it was very challenging due to a number of reasons. And I think it's safe to say that without bragging too much about our results, I think we were capable of reaching the targets we had given ourselves. We were in line with our business plan ever since the beginning of the year when these external events still hadn't played out. As we had mentioned during our Q1 presentation, let me reiterate the fact that all of our services continue to work. And this is something, of course, which says a lot about our company and all the people who work for us, both within the company and outside of it. Now as you can see on the first page of the presentation, there were some events, which marked the first half of the year. We'll be seeing the events, which happened during the first half of the different events between Q1 and Q2. Obviously, because the impact of -- the COVID crisis had a different impact, both in terms of the length of time and its impact in Q1 and in Q2. As I mentioned, all our services continued working with a few extra efforts in some of our services, efforts which, of course, were due to the fact that in some sectors, specifically some companies and some clients had stopped their business following the health emergency. Now what happened in Q1? Well, in Q1, we had our shareholders meeting, which confirmed the dividend, as we had mentioned, it would be during the presentation of our business plan. We then continued to implement a number of projects linked to organic growth, which are a normal part of our growth process and which had already been mentioned in the business plan's forecast. Third element I'd like to focus on is that during the quarter, we further consolidated in a positive way the agreement we had signed at the end of last year as far as our appointment relationship with Ascopiave is concerned. In other words, we had some opportunities immediately operate at the beginning of the year with the creation of EstEnergy, which is now the most important player in the energy sector in terms of the number of clients in the Veneto region. That was the first thing we did. And then we also further strengthened our relationship with Ascopiave. And in 2 steps, we made the acquisition of Ascopiave shares. And therefore, we also became shareholders in the company. As I was mentioning, Q1 was different compared to Q2, also in terms of the impact of the warm weather. The winter was extremely mild. This is unforeseeable compared to the previous years. And therefore, in some of our businesses we suffered due to, again, the mild weather. And of course, keep in mind that in Q1, the biggest issue, the most worrisome issue was the beginning of the health emergency, although that only had an impact of 1 month in Q1. So these are the main items, which marked the first 3 months of the year, which, of course, we had already discussed together. And then we entered Q2, which, of course, we continue working towards achieving continuity. We didn't allow ourselves to become depressed by the scenario we had to deal with. And of course, we didn't give up on achieving the targets we had given ourselves, which we had already summarized in terms of the impact it would have had in the conversation we had with you. In Q2, we confirmed and began the execution of the dividend, which we had illustrated in the business plan. That dividend was fully paid. We also had our shareholders meeting, which reconfirmed our Board with some major continuity as far as the top management are concerned, both myself and the CEO were confirmed for a further 3 years. And we also had some new entries in the Board. We have a significant number of new Board members. I already mentioned that as far as Ascopiave is concerned, we completed the acquisition of a stake in that company. And then over time, we realized that the impact of the health crisis, which we had already started feeling in Q1, was even greater in Q2 because out of the 3 months of the quarter, 2 months were characterized by major difficulties of the market, which, of course, didn't allow us to fully work on our activities. It was a very challenging part of the year with the health emergency. And then by June, we were able to really pick things up compared to Q1. The winter was almost over, although this affects some of our businesses -- effect we certainly felt. So these 2 factors had an impact on the first half of the year's results, although they weren't able to entirely damage our results through its effect, and we'll be hearing about this from our CEO. So these events didn't erode all of the growth that we had achieved through our typical levers, such as M&A, which in the first half of the year accounted for over EUR 27 million in growth, mainly coming from the EstEnergy deal but also from a major transaction and the waste treatment sector. And I'm referring to industrial waste, specifically. And therefore, having been able to achieve and defend these results were important for the targets that we'll be describing. And in fact, the main results as for each one are concerned, the ones you saw in the press release, are quite consistent if you look at the general scenario in the first half of the year. First of all, our turnover was stable at EUR 3.6 billion, with EBITDA, which is at EUR 560 million, with a growth equal to EUR 14 million compared to year-end last year. And despite the negative impact we suffered in both Q1 and Q2 and despite the impact of the mild winter, we were still able to defend our growth. We were able to preserve most of the growth despite the conditions I described. As far as EBIT is concerned, we're up to EUR 296 million with a 2.4% growth and an increase worth EUR 7 million compared to year-end last year. Net profit post minorities is at EUR 166 million, which is the same level we had achieved in H1 2019, which means we were able to fully offset all of the negative impact stemming from the 2 general factors I mentioned earlier. And we also included, of course, some of the impacts of the EstEnergy deal, the deal we struck with Ascopiave. We did receive some help from the tax rate in the recent period, which is at 27% compared to 28% that we had in 2019 in the same part of the year. We had a very positive creation of cash, which allowed us to fully cover our investments equal to EUR 248 million. This is something about to underline because it is a strength, which underscores our will and our ability to meet the targets we have given ourselves in the business plan. This kind of investment -- these levels of investment goes to show that we wanted to continue working towards achieving the content of the business plan. The net debt-to-EBITDA ratio stand at 2.81, which is good results, which improved things. Also all included figurative debt besides all the things which are required by the investment plan. All of the drivers contributed to these results as usual, and I think that this really underscores our ability to withstand the elements. Our company has again, even despite the unique conditions we are living, the same conditions, our competitors also face, and you can draw your own conclusions. EBITDA growth drivers are the typical ones, which allowed us to achieve [ 560 ]. And M&A was worth an organic growth worth some [ EUR 51 million ]. M&A accounts for EUR 32 million, and that refers to the EstEnergy transaction. And to that, we also have to add an acquisition in Tuscany, which I mentioned earlier. So that in H1 2020, we were able to achieve some EUR 5 million, which was consolidated as of July 1, 2019. Organic growth was a lever that we used with the specific commitment with a contribution worth almost EUR 19 million. And this is the result of the client expansion program, which is very good during the first half, with a further 35,000 energy customers. It is also the result of our actions towards cost cutting, especially in terms of staff, which allowed us to continue to work on efficiencies. And we don't have to recruit to external support as many others had to. Cost cutting was important, of course, but we also have to keep into account some innovations, such as the use of smart working initiatives, which was very intense from the beginning of the period. Although, of course, as soon as the conditions were there, we reduced smart working initiatives, although they're still pretty relevant. Substantially, our growth was able to fully offset the negative impacts we faced stemming from the external elements I mentioned. Again, the mild weather during the winter, which accounted for minus EUR 7.5 million, and the effects of the COVID emergency, which, over the first half of the year, had an impact worth EUR 29.8 million. This goes to show that we were able to deal with these events without swerving from what we were expecting to do when we first described what our expectations were for the period. We were able to achieve our EBITDA target, and it is fully consistent with the growth projections in our target. Hopefully, we won't have to face a similar external problems in the second half of the year. And therefore, we will -- we continue to work with the awareness that by focusing on continuity, we will certainly be able to achieve a number of other excellent things. And let me give the floor to Stefano now who will be giving you some further insight in terms of how we were able to achieve our results.

Thank you and good afternoon. As usual, let me give you a quick update on the 3 business areas. I think we can skip Page 4 because the Chairman already mentioned those things. We can move to Page 5, which gives you an illustration on our regulated businesses. We can see a contraction worth some EUR 7 million. EUR 226.9 million as the H1 results. Some elements, of course, are due to the things the Chairman mentioned earlier, such as the health emergency, which had an impact worth EUR 3.8 million. And that is due to the slowdown in demand and customer requests, new meters and so on. We had an impact on the entire perimeter linked to the tariff review, which came about at the end of 2019. That is worth some EUR 6 million, the tariff implemented by the national authority at Hera. To that, we opposed EUR 11.6 million in terms of organic growth in terms of cost efficiency, including staff, the internalization or the in-house activities we were able to add and a recovery in terms of profits. And this would have given us a positive impact. But then we had an impact stemming from the sales we made in the Ascopiave transaction, especially the gas business in Padua, which compared to last year accounts for a minus EUR 8.7 million throughout the perimeter, which brings us to a grand total of EUR 226.9 million, which is the H1 result. And again, just to give you a business by business breakdown. This is, of course, an answer to one of your typical questions. The gas distribution business, which accounted for EUR 80 million EBITDA in 2019, is at EUR 74.8 million in H1 2020. The water business is pretty much in line with last year, standing at EUR 122.8 million. The electricity networks are in line with last year with EUR 21 million, whereas district heating, especially due to the effects of the mild weather in Q1 this year, had a contraction in profitability from EUR 9.5 million down to EUR 8 million. So this is the breakdown of the various businesses within the general network sector. So this is an overview of the regulated businesses, which suffered a limited impact from the COVID emergency. That only happened in the one single commercial business. Moving on to the waste business, Page 6. In this case, we had a contraction worth slightly less than EUR 4 million, which, of course, suffer the impact of the health emergency. Just to give you some figures. You know that the reduction in the volumes of urban waste was at around 9%. The reduction of special waste in general terms was between 10% and 12%. And we had a decrease on the price of electricity and the gas commodity in general, especially in the months of April and June, which, of course, had an impact on our revenues from sale of energy or biomethane. And therefore, with a total impact worth EUR 9.4 million, which is due to the health emergency. This was partly offset by cost cutting and bringing certain activities in-house. And of course, we also have the benefits of the acquisition we made in July last year of the landfill in Pistoia, Tuscany. The net contribution of which was EUR 5 million in H1. All in all, therefore, we stand at EUR 122.4 million, of which the waste treatment and recovery part is worth EUR 86 million, which is EUR 2 million compared to H1 2019, which was worth EUR 88 million. Moving on to Page 7, the energy sector supply specifically, electricity, gas and value-added services. In this case, we have a growth worth EUR 23 million up to EUR 193.5 million despite EUR 17 million, which is the impact of the COVID emergency. The EUR 17 million stem from the lower volume delta and the price delta. Lower volumes refer to the lower procurement contraction -- the year-to-date contraction and sold volumes in Northern Italy, a figure which is in line with the figure we have whenever we manage the network, such as Modena, Imola and Trieste is worth 11%, but it's also a delta on price because the lower commodity prices, especially where we had already completed the procurement of energy for its end supply, obviously forced us to sell the volumes we hadn't supplied at market prices. And therefore, the impact of that was significant. Deferred gas plus electricity equals EUR 17.2 million -- minus EUR 17.2 million, to which we also have to add the minus EUR 6.4 million due to the mild winter. We have seen those figures during the Q1 presentation. This was especially true on February, and that accounts for minus EUR 6.4 million in terms of lower volumes sold that we were able to achieve a plus EUR 10 million cost efficiency, service recovery and so on, including the fact that during the period, we also had less push commercial activities. And therefore, we had lower costs. And to that, of course, we also have to add the contribution brought about by Ascopiave, which is worth EUR 36 million. Having said all this, our growth is equal to EUR 23 million. And within this figure, this goes back to a question you asked us during the Q1 presentation. This growth figure includes benefits stemming from the ancillary services, MSD, which compared last year was some EUR 10 million more. At this point, I'd like to move on to our cash generation graph, and I'll let Mr. Moroni describe the events referring to our net cash flow in the first 6 months of the year.

Good afternoon, everybody. I'll begin my part of the presentation by saying that our cash flows went very well, especially our cash in. We had already commented together on the sensitivity we had at the beginning of the health emergency. We tried to imagine a worst-case scenario had we had to suffer from a cash shortfall for any possible difficulties our clients could have had, especially in the business segment. But I have to say that compared to our worst-case scenario, we were quite resilient. And it also goes to show the soundness of our customer base and the resiliency of our customer base. And besides some requests for payments-related installments in the business sector, which is worth some EUR 10 million to EUR 20 million. There really was nothing else for the time being. And therefore, the cash flows were very positive, which also allowed us to close with some equally positive financial indicators. You'll see that the operating cash flow, especially from the operational level, were above EUR 400 million. To that, we also have to add some EUR 90 million from the net working capital, which went well and which is a typical characteristic of this part of the year in terms of its seasonality. We did well. Things are definitely positive. Then we have some EUR 27 million in provisions, which we consume over the 6-month period and over the full year period. We spent CapEx worth some EUR 250 million. And here, you can see that we have a fairly solid number, which is worth some EUR 220 million on operating cash flows. Then we had a small part of the dividend we paid in June for the EstEnergy Group that refers to Ascopiave or the part Ascopiave owns, then we have a small portion of impact on M&A and buyback of shares. The net effect, as far as the cash flow is concerned, is worth EUR 190 million. And also taking into account the dividend we paid in July 8, which is worth EUR 160 million, net-net, as far as cash is concerned, we have a plus EUR 30 million compared to the end of last year. This allows us to come up with a net debt-to-EBITDA ratio worth, despite the put with Ascopiave, which is up at 2.8x, the net figure would be 2.35x. So these are especially sound figures, a very solid, and they show excellent financial soundness. And I'll give the floor to the Chairman for his conclusions now.

Well, there really isn't all that much to add as far as I'm concerned. What I want to reiterate is that, hopefully, we can leave this phase behind us. Although from January 1 to the present, we worked well. All of our results are positive, the fact that we were able to continue to work on our strategy. Our results are on track. We were able to achieve results, and we were able to achieve all of our commitments, including dividends, which, as you know, continue to grow, and that is something that we had no intention of reverting from. And then we are still continuing to invest. And that wasn't easy, of course. We were able to be in line with the business plan, and they are above the investments we've made last year. I think that these are -- the 2 latter figures go to show that the company is solid, and we are extremely committed to delivering when it comes to our targets. And at this point, I'll open the floor to any questions you may have.

[Operator Instructions] The first question is from the [indiscernible] conference call, Javier Suarez, Mediobanca.

I have 3 questions for you. The first refers to the cash flow generation, which was very strong during the first half of the year. I was surprised because I expected Q2 -- I expected the company to suffer much like the country in Q2. So why is it that you were are so resilient in terms of cash flow generation? I would have expected an increase in provisions for bad debt, although there is no track of that in your accounting. So I was wondering why it is that you're so resilient. Why is it that you had a positive contribution on your net working capital? So that was the first question. Second question is on the generation business. Even during the lockdown period, the company was able to increase its underlying client base. That is pretty surprising to me. I would have expected the company's commercial activities to slow down, to suffer. So can you tell us what managerial actions you took? Because our customer base, especially in electricity, continues to grow. And my third question is on the net income. Page 2 of the presentation confirms the net income. Can you give us some insight as to what the net income of the company is without all of these figurative accounting, which are connected to the EstEnergy deal because I think the underlying net income would continue to exist even if you adjust these performances and these figurative accountings?

Let me answer beginning from your last question. Beginning with the impact of the Ascopiave deal on net income, you can see it on Page 2 and the note. It's worth EUR 20 million, EUR 11 million of which refer to figurative amounts and another EUR 9 million refer to the amortization of the goodwill on the client list. So that is a total of some EUR 20 million, which had an impact on the result. Moving on to our commercial activities. It is true that we increased our customer base. Now the growth you see in the presentation is when we compared to June 1, 2019. So that shows you the increase of our customer base in a 12-month period. We did have a slowdown in April and May, of course, because all of the physical channels were shut down. But I also have to say that we did continue to allow our agencies and our operators to continue working. Over the period, we got them working at the outbound acquisition of clients. Of course, the pace of things that are different from the one we usually have. But the fact that they were able to stay operational, and this means that they kept working, although partially. And that allowed us to recover very quickly once things were reopened in early June. And if we look at the results of the past 3 weeks, we can see that we are back to the pace we had prior to the lockdown. And that, I think, explains not just the variation we had over the past 12 months or compared to 12 months ago. And it also gives you a good view of how things picked up once we exited the lockdown. The only channel, which is still suffering somewhat refers to the physical shops. We're still at 70% to 75% of the flow we used to have in January or -- compared to the same period last year. That means that the people who, in Q1 and Q2, were more familiar with our digital channels continue to use those same digital channels and still physically going to our shops. So in terms of behavior, I think this is the only thing, which is still suffering from a lockdown to a certain extent. As far as the cash flow is concerned, maybe Luca wants to answer.

I underline the resiliency of our customer base. And the news here is that we had no deterioration in our cash due to 3 reasons, I think. The first is the very close attention we pay when it comes to acquiring customers with an origination system, which is very careful when it comes to the customers we pick. Secondly, we worked hard to -- on prevention to allow all of our customers to overcome the emergency in the best possible way. In other words, we were able to offer 3-month installments and then 6-months installments. And when the lockdown continued, of course, we feel that did help our customers. Especially our business clients, some of them did ask for these installments. But at the end of the day, the payment ratio didn't suffer significantly. So we are continuously working and acting as a way of supporting our customer base. The third reason refers to a slight drop in volume and prices, and that means that the working capital deflated somewhat compared to a normal situation. And then as far as the provisions for debt -- for bad debt are concerned, even here, we have been somewhat cautious in our mass, but they were in line with the new accounting principles, especially the new IFRS accounting principles, which say that you should account for your provisions with an outlook in the future. And in the figures we had for the 2019 accounts, our provisions were more than adequate. And also given the sensitivities we performed on P&L as of June 30 this year, well, we were able to assess that those provisions were very much in line with any possible bad debt we would have to face in the coming 6 months. So I think the way we were able to prepare for these events allowed us to be ready even despite the complicated situation.

And going back to what Luca was saying concerning the bad debt provisions, please keep in mind that we finished drafting our 2019 final figures in early March. And in early March, we already knew what was happening. Given that we had to apply the IFRS 9 with a view to the future for cash-ins. Even in the results of last year, we already had our view on how things have to be managed. And therefore, at the end of 2019, we already started working on certain dynamics. We started seeing on the very first week of March when we closed the figures for 2019 and then, of course, had an impact on the results of H1 consistently.