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

Good afternoon everybody. We're here with the usual team, our CEO, our CFO and our Investor Relations Director for the H1 financial results, which our Board recently approved. These results confirm the good results posted in Q1 and they are in line with our business plan, the one we approved earlier year. What we're seeing in terms of the revenues is the production turnover which is down by some 33% linked to the energy scenario with lower prices on the supply side, lower turnover. As you know, that is a positive element for us. And we also had some lower intermediation activities, and therefore, this is the outcome. In terms of EBITDA, after the extraordinary growth we posted last year, we're continuing to grow even in Q2, which is in line with what we had seen in Q1 this year. We are now up to EUR 733 million. This is a growth which much like in Q1 increases in terms of percentages as we move down the lines in terms of EBITDA plus 2%, EBITDA is plus 2.8%, and we'll be seeing further details on the following slide. All the way down to a major growth in terms of our net profit increased was 16%, roughly EUR 30 million more compared to Q1 last year. The growth in net profit as we'll be hearing from Mr. Vai is a growth that allows us to transfer the value we have generated. In terms of EBITDA both last year and this year, all the way down to the net profit, thanks to a decrease in the financial burdens, which are, for the most broad linked to a more relaxed energy scenario. Leading to a larger stability inflows and a possible rationalization in terms of the debt we have. Now moving on to the EBITDA. You may remember that last year, we had posted major results linked to the super eco bonus. We were capable of extracting the highest possible value from those results. And we're seeing that the structural growth was EUR 66 million more than offset the dip as far as the tax eco bonus is concerned, with a EUR 15 million net growth which has a higher value compared to what we see the EUR 14 million because we're replacing the opportunities that we took advantage of in previous years with elements linked to structural growth, which are very balanced between our activities on the market. And the activities that we are working on in regulated sectors, EUR 37 million on the market and EUR 29 million on the regulated side of things. Now, how is it that we can transfer the growth we posted on EBITDA, also be down to EBIT. Well, because linked to the growth and amortization that we're seeing, given the fact that we have increased investments, you may remember that we're investing some EUR 2 billion in development investments, which leads to greater EBITDA and greater amortization. And we are offsetting the growth in amortization with a reduction in the accruals for provisions. This is the effect of the decrease in turnover. And this allows us to recover and increase efficiencies were EUR 16 million compared to last year. Now moving on to the creation of value. Now what does this growth mean. And in terms of the stability, in terms of our financial situation, we wanted to create value. And we can see this through 3 different indicators, which point in the same direction. ROI is up by 1% roughly 10%. The same applies to ROE, up by over 1% and a growth above 10%. And therefore, the profitability and the capital of equity sees that we are posting a 10% growth. And even as far as the total shareholder return, as far as H1 is concerned, what we're seeing is that we distribute a dividend, which give us a 4% dividend yield. And if we look at the EPS for H1, this EPS is up by almost 17%. Now after this quick overview, we can go into the details of the various businesses and their specificities. As for the previous quarter, we will be giving you a brief summary of the figures to leave some time for Q&A so that we can conclude by for since you have other commitments today. As far as the Energy Supply business is concerned. In this case, we have a reduction in EBITDA compared to last year due to the fact that we no longer have the super eco bonus contribution linked to the various tax opportunities that the government would give final summary up till last year. We created a value with that, and we are now replacing that. And even in this case, with the organic growth, we've had plus EUR 28 million, which offsets more than half of that negative item stemming from the expiry of the tax eco bonus. Now the organic growth as we see -- as we also saw in Q1 is supported by 3 elements. On the one hand, we've had a growth in our customer base with 125,000 further customers. We also had a growth in margins linked to renewals of contracts. And the production in shipping costs in a moment in time in which the volatility of energy are reduced and prices are more stable those costs are now back to the precrisis levels, which allows us to increase margins. Now as far as our customers are concerned, we've had an organic growth through which at the end of June, we added -- we're now at 1 million customers with an overall growth of 125,000 customers. As you know, on July 1, we had an extra 1 million customers from the Maggior Tutela market, which we started to manage. And this is very much in line with the activities that we had expected for this first month. Now let me give the floor to the CEO for some further insight on our other businesses.

Thank you, Cristian, good afternoon. With regard to the Waste business. Now what we were commenting Q1, we mentioned that this business continues to grow, and we've seen further acceleration, as you can see in the lower right-hand graph, you'll see that in Q2, there has been a speeding up compared to Q1. We now have plus EUR 9 million compared to H1 2023. Now this growth was brought about by the contribution from all of the waste activities, both the regulated side of things with waste collection, which posted an overall growth equal to plus EUR 3 million compared to H1 2023. This is a growth which is supported by an increase in the regulated return, but also by further efficiencies by the integration of value-added services. And it's also due to the fact that the one-off initial cost of concessions are no longer there and we have 15 year concessions. Therefore, we have a good visibility as far as waste collection business is concerned. And that business is linked to the other business, which gives us even more satisfaction, which is the waste treatment business. This is an area of business in which we have plus EUR 9 million. If we don't consider the energy market that we'll be commenting later on and this is a business which is growing both in terms of volumes and prices, so that in the first few months, we've been able to expand our market share, as you can see on the graph on the right-hand side. The volumes of special waste have gone up by other than 70,000 tons, especially the industrial waste, which we are leaders in industry. And therefore, despite a slowdown as far as the industry is concerned we have been able to grow given the fact that we're also present in the oil and gas sector, which, as you know, is anti cyclical compared to other businesses. And therefore, this allows us to grow, both in terms of the solid waste but also more recently as far as liquid waste is concerned. We also had a growth in special waste coming from urban waste, which are imported from other regions, the other regions which are having a hard time in terms of waste treatment. Also as far as the industry is concerned let me say a few words regarding the land remediation business. You may remember that in early 2023, we had made the [indiscernible] company. That segment is continuing to grow, we're very pleased with it, with an increase in the business brought about by the more traditional customers, but also from new customers. And therefore, this business we sell, which is we have seen some stricter economy of cleaning up sites to a company, which allowed us to become market leaders even in the land remediation sector. That, too, is a very positive thing for the growth of the business. As I mentioned earlier, prices also contributed to growth. They are stable. And in some segments, we have, in fact, gone up, specifically in liquid waste. When it comes to margins, stemming from the energy store from waste energy plants. We are expecting this component to become neutral when it comes to the growth of results at year-end. Last year, this segment has given us a very good results thanks to our fixing policies. But also thanks to the lower pauses lower amount of downtime we'll be seeing in the second half of the year. That figure will turn towards 0. And now I would like to move to the networks. As you know to the update of the WACC -- the regulated WACC, we're seeing that this is the largest contributor to the group's growth. In absolute terms, we're looking at plus EUR 269 million for networks which are 37% for the overall group numbers. This is a growth even compared to Q1. As you know, we're already seeing the effects of the increase in regulated return, plus 110 basis points which have supported the growth of EBITDA. As you can see on the graph on the right-hand side, this is a double-digit growth almost up to 11%. And the growth drivers also increase the inflation of RAB, the inflation was approved by the regulator with revenues which are significant. And then inflation was also recognized on costs and OpEx. And as you can also see on the graph on the right-hand side, all of the networks contributed to growth especially in the water business because it is the largest business with its RAB, which is worth EUR 1.8 billion. The water networks posted a growth worth EUR 18 million, then we have electricity distribution, which grew significantly. The main reason for that is linked to the application of the ROS method, the regulation setting targets for cost and services and that's an average for specific players and no longer an average based on NL figures. And this is an opportunity that we are capable of taking advantage of. We'll be doing that both this year and in the following years. Also, our gas distribution business has grown. And all of these different and various positive results have more than offset the negative linked to district heating. And therefore, compared to H1 2023, which benefited from major nonrecurring growth elements. And on a few extent we also -- we're also going to be discovering the new tariffs, which will be set by ARERA for 2025 since the current ones are transitional ones. The networks EBITDA, therefore, has significantly increased the traditional results for networks. And in fact, on the left-hand graph, you'll see that despite a significant update in the WACC and despite the major inflation rates, we were able to offset those impacts with consent efficiencies and development investments. And therefore, the impact of regulated businesses on the remaining part of the portfolio will be rebalanced progressively thus further improving the group's risk profile. And I'll give the floor to Massimo Vai now for a comment on the following slides.

Good afternoon, everybody. And the slide on Page 7, you have an update of our cash flow. And on the right-hand side, you have the development of the net debt-to-EBITDA ratio. The operating cash flow for H1 is up to EUR 536 million with a further EUR 230 million that can be added to the results posted in Q1, which you may recall was equal to EUR 236 million. And as you know, in Q2, we no longer have the component stemming from the thermal season, especially as gas is concerned. Therefore, this continues to be a major figure. And if we compare this figure with the one we posted last June, we have a growth equal to EUR 76 million which is equal to 17%. Moving towards the right, you'll see that the working capital is -- absorption is reduced compared to what we had seen in Q1. Therefore, the effects of the commercial development at the end of the thermal season, diminished the absorption of the working capital, which is in line with our expectations. You may remember that at the end of Q1, we had to pay the debts we had to suppliers that we still had at the end of the year. Referring to all of the 110 super bonus that we completed last year. Moving on to CapEx. The investments we made in H1 this year, EUR 328 million, they are up by EUR 22 million compared to last year. And they are very much in line with our development plans as envisaged by the business plan, which we approved in late January of this year. We then also have a ecom, which we didn't have in March, the one linked to the distribution of dividends, the dividends which we paid in June worth EUR 252 million, which is up, as you know, compared to last year because with the results we obtained last year, the company decided to increase the dividend per share, which was then distributed. All in all, therefore, all of these elements combined led to an increase in our debt equal to EUR 236 million. But if you compare it to the growth in EBITDA, allows us to have a stable net debt-to-EBITDA ratio, which is well below the threshold which we feel is essential for our financial settlements, which, as you know, is 3x. Therefore, the results are very positive in terms of cash generation. And moving on to the next slide, and beginning with the graph on the left-hand side, we also have a very relevant element, which is the reduction of the average cost of debt down to 2.7%. And if we compare H1 this year with H1 last year, you may recall that last year in H1 we had begun a review of our debt towards banks that we had activated in H2 2022. You may recall a link to the last instance market and the gas storage. Those costs were reabsorbed last year, and that was replaced by the working capital that we needed to take advantage of the super bonus. Therefore, we paid back the bank debt that we had over the 12-month period that led to a reduction in the cost of debt, and now we are back to a value which is very much similar to what we had in H1 2022. As far as our interest rate is concerned, as you can see, 97% of our debt is at fixed rate. And therefore, we are very marginally exposed to the varying cost of debt. We also paid back a green bond, which expired. We paid that in July. And then next week, we will be repaying another bond, which was launched 15 years ago, and we'll be paying back that bond without having to -- as for further financing. This was all done, thanks to the cash that the company generated in recent months. As far as the ratings are concerned, on the right-hand side of the slide, this is just a way of confirming what we already know, there is nothing new. Our adjusted parameters are well in line with the thresholds. And therefore, there will be no variation in ratings. So things are looking very good which confirms what we had expected to do. We're in line with expectations, if not somewhat better. And that gives us a good outlook even for the second half of 2024. And I'd like to give the floor back to the Chairman for the conclusion.

Wonderful. And so far, we went over the economic and financial results. And now I'd like to focus on sustainability. As you may remember, our business plan was focused on value creation, sustainability and resilience as the main drivers. Let's focus on being sustainable for a moment. Well, that's because in Q2 and especially over the past 1.5 months, we have been working very hard to reach out to 3 very important stakeholders as far as growth and development are concerned, But also as a way of achieving our business plan results and targets which go beyond the length of the business plan. We decided to reach out to our workers, our suppliers and the environment more in general. The external environment as we're achieving carbon neutrality. What we did was we concluded are defined as the strategic development plan for our employees. Our employees, of course, are essential in terms of achieving the results that our company has always strived to achieve. And therefore, we decided a strategy, allowing us to deal with the challenges in the field of labor, including security, including training, professional growth, increase in productivity and the remuneration of our employees, of course. We also decided to focus on a number of topics, which are very sensitive, especially for the younger generations. Namely welfare and the integration between our jobs that are personal sphere. Therefore, we decided to launch a 70-page document which we signed with all main trade unions, which includes plenty of innovation as highlighted by many entities in Italian government bodies. So we want to allow our employees to grow but we also want to focus on our suppliers. We have constantly worked to support our suppliers to become more competitive. They themselves are professional. They support the growth of our group. And therefore, we have this virtuous cycle through which they help us, and we help them to grow. We have set up a specific plan for suppliers with a focus on safety, which is increasingly important but we also want to focus on growing sustainably. And therefore, we want to focus on professional training and services for suppliers. We have set up the payer approval. The goal of which is that is supporting the development of our business plan with a specific focus on suppliers. So again, we focus on both our employees and our suppliers. You may also recall that in 2021 and 2022, we set a target for the reduction of CO2 emissions, especially for scopes 1, 2 and 3 within our company. What this target set was that our goal to 2030 was to reduce CO2 emissions by 37%. Currently, we are halfway to that goal, which means that at the end of the business spend, we'll give to 29%. Now over the past 6 months, we focused on understanding what our ambition can be and what our possibilities can be. Always supported by tangible steps when it comes to reaching carbon neutrality. And today, the Board of Directors approved our strategic plan, allowing us to become carbon neutral by 2050. And if you consider that less than 10% of our emissions are linked to direct activities, whereas more than 90% of our emissions are linked to the emissions of the our clients, those who buy energy from us. And therefore, we want to act both directly and indirectly through a number of very concrete initiatives that we will be carrying out over the next 25 years. So that we can achieve a target of being net 0 by 2050. And we intend to achieve that by 90%. There were 90% reduction in emissions and with 10% emission capturing system by 2050, all of which is consistent with keeping the increase in global temperature below 2 degrees. So again, in H1 this year, we did very well in terms of our figures. In terms of our economic and financial performance, but we also work from the operational standpoint so that we can involve the company's stakeholders in this virtuous cycle. In which the growth of all stakeholders together can help us amplify our good results. Moving on to our conclusions which are a way of underscoring the things that we've already seen over the past 30 minutes. EBITDA continues to grow. After the EUR 200 million growth last year, we continue to grow in absolute terms. But the really relevant thing to note is that EBITDA grew by EUR 15 million, but the growth we're seeing in terms of structural growth. If we don't consider the super eco bonus, that growth is equal to EUR 66 million. And therefore, the potential for growth we have continues to be very strong even in the first half of this year. From a financial standpoint, our leverage stands at 2.7x roughly, which means that we continue to have a good cash generation, allowing us to support our investment plan along with the dividend policy we have. You may remember that in our business plan, we said that our debt level would remain stable and that all of the cash we generated would be used to drive growth. Both in terms of investments, in terms of M&A and in terms of the dividends, we expect to distribute to our shareholders. So we're well on track. And this result maybe a bit of an outlier. And I'm referring to the net profit, which grew by 30 million in H1 with a growth equal to 16.4% on the growth we posted last year, which was equal to 16% on it. So continuing to grow at double-digit rates even as far as the bottom line is concerned, and that's something that we're very pleased with in terms of value creation. I'll leave it at that. And I'll open the floor for any questions you may have. So we can have some 30 minutes for any comments or questions you may have.

The first question is by Javier Suarez, Mediobanca.

Good afternoon, everybody, and thank you for your presentation. I have three questions for you. The first is on the supply business. We saw a EUR 30 million growth -- organic growth in the business. Besides a moderation in commodity price which helps. What are your commercial policies that can justify the growth in the supply business. My second question is on the waste business. I noticed the growth in volume, but EBITDA is up more than volumes. Therefore, there is an underlying dynamic linked to special waste, which is very positive as far as prices are concerned. Can you explain the dynamics you're seeing as far as prices. And how you expect the volumes and the prices to evolve in the second half of the year. The third question is on the company's financial structure. The net working capital absorption was equal to EUR 170 million. Where is it that you expect this net working capital absorption that happened by year-end. And is the EUR 4.1 billion debt you have. Can that be a good guidance for the end of the year? And just one final question as far as the bottom line is concerned. Can you give us a guidance for net income for 2024?

Thank you for your questions. And as far as your first question is concerned of the supply business. Currently, we are supporting growth because we are increasing our customer base. We've had an extra 125,000 customers who contribute very well to the EUR 28 million growth we've seen. That contribution for the most part is linked to the reduction in shaping costs. So that has an impact on our customers, and we've also increased our overall margins by a few euros. Also as we've of taking into account certain elements of risks that we saw in recent years. But that isn't a major growth in terms of margins. Just a few thousand euros per customer, so minor figures. But what we can appreciate is a good performance in our commercial activities. And despite the end of the Tutela market, in the gas market first. And then in the electricity market in June. Typically, that leads to a certain degree of movements on the market, but we're still seeing a positive growth level. And so we're continuing to leverage on good acquisitions and low churn rates. Something I didn't mention earlier is the topic of the extra EUR 1 million -- 1 million customers that we changed from Maggior Tutela market. We've been managing them as of July 1. And in a few days' time, we had uploaded all of their information in our systems, and we have already gotten in touch with our customers. And we have already concluded our initial contact with all customers in July. And the customers level is currently very good. And its line, if not slightly above our expectations we're doing what we had envisaged in the business plan. So we are off to a good start. We have prepared ourselves for 6 months for this situation, and we are in line with that. Orazio do you want to answer the question on waste?

Yes. Thank you, Javier. Good afternoon, everybody. As I was saying earlier, prices are stable. As I was mentioning earlier, in some cases, they have gone up, and I'm referring to liquid waste, specifically and the ways we treat in the oil and gas sector. We have now become a major player, a benchmark of sorts for that sector. So both in terms of the liquid waste that treat in our various treatment facilities. Liquid solid waste, hazardous or nonhazardous waste, and we've seen a slight increase in some of those materials, especially for liquid waste. And in some cases, even in terms of the special waste stemming from urban waste. The second point I wanted to raise is linked to the synergies that we were able to extract through the acquisitions we made in 2023. The most obvious example, of course, is the ACR company. And in H1 2024, that acquisition led to some major results and with their site remediation activities, we are doing very well. Not always to regenerate waste in the business, although we certainly do generate EBITDA and value, and we generate value. Let me give you an example. We are accompanying larger players more and more. For instance, when it comes to NL, we were the one who's chosen for the purification of the Suviana Basin and I'm sure you've read about a future partnership with Fincantieri so that their shipyards can become more sustainable. Allowing them to reduce their industrial waste and to extract values from them. That is a very interesting opportunity. And just yesterday, we signed a closing deal TRS, a company which focuses on the pretreatment of waste in the Piacenza area. And that allows us to expand our geographical presence commercially moving towards the northwest of the country as a way of tackling the Lombardy region, which, as you know, is a very wealthy and a very important region as far as the entire industrial oil sector is concerned.

And as far as your questions from the financial structure are concerned, let me begin with debt. Currently, our vision for year-end stands roughly in line with the value we saw for this half or EUR 0.5 billion, give or take a few million. Then of course, we have elements linked to the seasonality of things. As you know that we -- as you know, we are developing commercially. And of course, to that, we have to add the extra 1 million new customers. And I don't expect to see any major impacts compared to the visibility we now have. And of course, we also have to manage the working capital, which is no longer linked to 3.8 million customers, but about 4.8 million, if not 5 million new customers. So that should have an extra impact. Of course, given the price scenario that may either grow or decrease a little bit. But the level is at around EUR 4.1 billion or EUR 4.15 billion based on the information we have that's about it. I think that's a very clear answer to your questions. Moving on to the more complex question. It's a question regarding the net results. As you can see, over the past 6 months, we grew by some EUR 30 million. The company is performing well. So we don't see any negative elements from here to year-end compared to how we're currently doing. So as I said 3 months ago, while answering the same question, the consensus started with the business plan. We're working on the business plan, which means that those are the references we have and that we expect to continue focusing on. So for the time being, everything is going well, or maybe ahead of schedule compared to what we expected. That doesn't mean that there will be post the results expected for 2027 this year as we did last year, but we've been slightly better than compared to what we had expected to do for the first 6 months of the year. That's about it.

The next question is by Emanuele Oggioni, Kepler Cheuvreux.