Iberdrola, S.A. (IBE) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us today. I'm Isabel Sanchez, Deputy Head of Investor Relations. The purpose of this call is to provide further details on Iberdrola's announced acquisition of the electricity distribution company in Finland, Caruna, and to walk you through the strategic rationale, key financial considerations and expected contribution of the transaction. We are joined today by Mr. David Mesonero, Deputy CFO and Global Head of Corporate Development, who will take you through the presentation shared with you in advance. If you have not yet accessed it, the presentation is also available on our -- on the link you have received through the [indiscernible]. We appreciate that this is a busy period in the reporting season, so we have designed today's session to be focused and [indiscernible] with a total duration of approximately 30 to 40 minutes. After the presentation, we will open the line for a live Q&A session. [Operator Instructions] As always, if you have further questions after the call, please feel free to contact the Investor Relations team at investor.relations@iberdrola.es. And now without further ado, I will hand over to David Mesonero. David, over to you.

Thank you, Isabel. Good afternoon, everyone, and thank you for joining us today. It is a pleasure to be with you today to present what we believe is another important milestone in Iberdrola's long-term strategy. Before we begin, I would also like to thank many of you for the message and congratulations we have received following its signing, victory and funding. Although we are a multinational company, it was certainly a very special moment for our country considering our culture. Back to the presentation at Iberdrola, we don't wait for the future to happen. We anticipate and we build it. Our history has shown that we have demonstrated a consistent ability to anticipate the cultural changes, remain ahead of global trends and all the challenges facing the energy sector into tangible [indiscernible] sustainability goals. Today we are taking another [indiscernible] step by entering a new geography and establishing a leading position in electric distribution in Finland. This decision is not opportunity. It is an actual result of our [indiscernible] capital allocation framework. Over many years, Iberdrola has followed a very clear investment approach. We invest in [indiscernible] network in countries with strong credit quality, predictable [indiscernible] regulation [indiscernible] growth and sustainable value creation potential for our stakeholders. Following [indiscernible] of our thermal generation business in Mexico, we are now recycling [indiscernible] into one of Europe's highest quality regulated [indiscernible] platform. We are [indiscernible] deploying capital from [indiscernible] noncore business into a growing euro-denominated and [indiscernible] asset in a [indiscernible] A+-rated country, 3 notches above Spain, 1 notch above the U.K. and on par with the United States. This is precisely the type of capital allocation Iberdrola has consistently delivered, improving the quality through stability and resilience of our earnings while preserving our financial strength. With that, [indiscernible] lead you through the presentation. Please turn to Slide 2. The main message on today's presentation is [indiscernible] Caruna is an excellent strategic fit for Iberdrola that will further strengthen our position as one of the world's leading [indiscernible] operators and increasing our exposure to stable, predictable and long-duration [indiscernible]. Network already represents the largest contributor to Iberdrola's value, and we continue to [indiscernible] that they offer one of the most attractive combinations of earnings visibility, investment opportunity and [indiscernible] growth with [indiscernible]. Caruna is the largest and [indiscernible] companies in Finland, with more than 20% of [indiscernible]. The company also benefits from [indiscernible] providing additional long-term visibility and [indiscernible] a fully regulated business and [indiscernible] regulatory framework with visibility until 2031. Based on the current regulation [indiscernible] and our business plan, Caruna is expected to generate [indiscernible] result on equity of approximately 8% with additional incentives. This is an attractive [indiscernible] regulated business in a AA+ rated country, supported by stable cash flow and a significant long-term investment program. Finland is also an important of the investment case. This is one of Europe's more stable, innovative and highly digitized economies. With a strong execution on our framework, clean and competitive [indiscernible] generation and a significant potential for further electrification. Electricity demand is expected to grow materially. [indiscernible] integration, data centers [indiscernible] value chain and other energy-intensive activities. Electricity demand from [indiscernible] Finland is expected to grow by around 4x by 2030, increasing by 1.6 terawatt-hours in 2024 to approximately 5 to 6 terawatt-hours by 2030. This creates a clear requirement for continued investment in [indiscernible] network. Caruna is well positioned at the center of Finland's digital economy investment and energy development. We expect Caruna's net income to grow [indiscernible] by approximately 7% CAGR [indiscernible] by increasing capital [indiscernible] program between 200 and 300 [indiscernible] annually. From a financial perspective, this transaction is also very attractive. We are acquiring an 80% stake in Caruna for an equity consideration of approximately EUR 2 billion. Around EUR 1 billion or approximately half of the consideration will be disbursed by 30 months following the close. [indiscernible] payment materially is reviewed [indiscernible] improve the [indiscernible] economics of the transaction and [indiscernible]. The transaction value is 100% of Caruna at [indiscernible] value of approximately EUR 5 billion, including EUR 2.47 billion of net debt as of December '25. The implied [indiscernible] multiple is approximately [ 16x ] expected 2027 [indiscernible]. We underscore acquiring a high-quality [indiscernible] platform with [indiscernible] having growth and attractive P/E multiple below Iberdrola [indiscernible]. The transaction is expected to be EPS-accretive on the [ first ] year, around 1%, without considering possible synergy [indiscernible]. The value proposition is fully supported by the quality [indiscernible] and growth of the standalone business. Any additional benefit from Iberdrola experience, scale, operating or financial capabilities would therefore represent potential upside rather than a [indiscernible] of value creation. Coming now to Slide 3. Caruna is the largest distribution company in Finland, serving a population of around 1.5 million, 25% of the country [indiscernible] in a market that remains highly fragmented, with 77 distribution network operators. That position of strength [indiscernible] in network through the addition of 100% regulated business generating a single cash flow in euros in a AA+ rated country. This also provides Iberdrola with a new platform in a market undergoing a rapid electrification process. Finland benefits from an abundant clean energy electricity, a [indiscernible] power prices, making an attractive location for anything [indiscernible] investment. [indiscernible] operator expects electricity demand to increase by between 22% and 45% by 2030. [indiscernible] demand growth will require substantial [indiscernible] and substantial electricity [indiscernible] with distribution companies playing a central role in connecting new demand, integrating [indiscernible] generation and maintaining [indiscernible] availability of supply. Caruna is [indiscernible] well positioned to capture these opportunities [indiscernible] footprint and technical capability. The regulatory framework is stable, predictable and [indiscernible] until 2031 [indiscernible] recovery of [indiscernible] investment and provides the necessary framework to respond to growing electricity demand [indiscernible] where investment capability has been constrained by regulatory [indiscernible] framework enables [indiscernible] investment to be incorporated into the regulated [indiscernible]. This alignment between regulation, demand growth and investment [indiscernible] for the transaction. In simple terms, Finland provides us a combination of stability, a strong credit quality and electricity demand growth. Turning now to Slide 4. Caruna is much more than Finland's largest electricity [indiscernible]. This is a fantastic company and one of Europe's highest quality regulated network platform. The company serves approximately 740,000 [indiscernible] around 1.5 million population, and operates close to 89,000 kilometers of electricity line. Around 67% of this network has already been underground. Underground means increased network resilience with these weather related interruptions, improved [indiscernible] of supply and lower operating and maintenance requirements over the life of the asset. This is particularly relevant in Finland. Caruna has therefore already completed a significant investment program to reinforce the resilience and quality of its network. At the same time, the [indiscernible] of growth is now emerging. These investments are supported by distribution licenses granted [indiscernible]. By 2027, Caruna is expected to have a regulatory [indiscernible] above EUR 2.5 billion, EBITDA of around EUR 369 million, a net income of approximately EUR 148 million. 2027 will be the first year in which Caruna is fully consolidated in our financial statements. We expect net income to grow in the next decade by around 7% CAGR, supported by the increase in [indiscernible] expenditure program and by the continued growth of Finland's [indiscernible] and the United States, Iberdrola has consistently demonstrated its ability to invest in [indiscernible] and improve operational performance and customer service. We think Finland represents another excellent opportunity to [indiscernible] those capital. It is also important to emphasize that Caruna is already a highly efficient organization [indiscernible] operating model and only 247 employees. Our approach will therefore be to preserve the strength of the business and support its next phase of investment and growth. Now turning to Slide 5. Following the completion, Iberdrola will own 80% of Caruna. The remaining [indiscernible] will continue to be held by 2 highly respected long-term [indiscernible] institutional investors: AMF and [ Ehlo ]. AMF if one of Sweden's largest [indiscernible] business, while [ Ehlo ] is one of Finland's leading investment [indiscernible] company. We are delighted to partner with those shareholders whose investment [indiscernible] is closely aligned with ours [indiscernible] and focus on [indiscernible] investment also demonstrates a confidence in Caruna's long-term prospects [indiscernible] is therefore not only our acquiring [indiscernible]. It is also about establishing a long-term presence in Finland and [indiscernible] to a leading [indiscernible] investor. Our integration philosophy will be equally important. Caruna is already a highly efficient [indiscernible] business with a [indiscernible] identity and a capable management team. Our objective is to preserve those strengths while [indiscernible] Iberdrola's expertise in such areas as digital asset management, predictive maintenance, engineering, procurement, [indiscernible] along the network line. Finally, turning to Slide 6. [indiscernible] the relevant regulatory application by [indiscernible]. The approval process is expected to be completed by December, with closing anticipated within the first quarter of 2027, subject to the receipt of the required regulatory clearance, one in Finland and in the European Union. We have already begun [indiscernible]. Given Iberdrola's [indiscernible] experience in [indiscernible] across multiple jurisdictions, we are confident that the transition will be smooth. Our priorities will be clear: continuity and quality of service. [indiscernible] of the local management [indiscernible] engagement with employees, regulators, customers and all other stakeholders, and preservation of Caruna's [indiscernible] identity. This will remain a locally managed [indiscernible] business supported by Iberdrola's global network capabilities, investment experience and financial strength. Let me now conclude with 3 key messages. First, Caruna is [indiscernible] asset Iberdrola looks for. If combined, [indiscernible] AA+-rated [indiscernible] and highly visible long-term investment requirements. This is expected to deliver during the next decade a regulated return on equity of around 8%, a net income growth of around 7% CAGR, supported by an increasing capital expenditure program of between EUR 200 million and EUR 300 million annually. These are attractive returns and work process for a fully regulated business with a framework of very stable cash flow. Second, this acquisition demonstrates once again Iberdrola's disciplined approach to capital allocation. We are expecting the profit from divestiture of our thermal generation [indiscernible] in Mexico into a high-end quality regulated [indiscernible]. We are moving from a mature and noncore business into [indiscernible] network, which remains at the center of our strategy and of the global electrification program. The transaction is expected to be EPS accretive on the third year. And third, this transaction [indiscernible] the overall quality of Iberdrola. It increases the contribution of regulated network to our portfolio, which now represents more than 50% of our EBITDA. It improves earnings and cash flow [indiscernible]. It strengthens the resilience and geographical diversification of our business model. And it provides Iberdrola with a leading platform in a country where electricity demand and [indiscernible] investments are expected to grow significantly over the coming years. Caruna is not simply a high-quality asset. It is a long-term growth platform in one of the [indiscernible] strongest and most stable economies. We believe this transaction represents another important step in our strategy. At Iberdrola, we don't wait for decisions to happen. We invest in, we [indiscernible] and we create value from it. Thank you very much for your attention.

Thank you very much for the detailed overview, David. We will now move to the Q&A section. Operator, please, may we take the first question?

[Operator Instructions] The first question comes from Jenny Ping from Citigroup.

I've got 3, please. Firstly, can you just tell us actually, given you've got the visibility until 2031, what is the RAB growth in country -- or what is the RAB growth or what is the RAB in the country, firstly, one? That would be my first question. Secondly, looking at the net debt to RAB of this asset, we're talking close to 100% leverage. Is there any plan to inject equity into the business to reduce leverage at some stage? And then the third question I had was really around the EUR 1 billion deferred payment. Is that contingent on performance or on something else in 30 months' time? Or is it payable regardless?

First, regarding the visibility of the RAB for 2031 and why we are confident. So it is based on Finnish regulator. The Finnish regulator has approved the framework for the next 3 years until 2031. So there is no any question about the regulation. So we have full visibility until that year. What we expect is by 2031, the RAB will be around EUR 3 billion, okay? So it is including the CapEx that we are going to deploy in the next few years minus the amortization of the [indiscernible] of the CapEx that we need to do. Regarding the second question, if it is necessary to finance the growth of this company, if we need to put more equities. In our assumptions, we are not assuming any other equity injection. Please do consider that this is a very stable regulatory framework that obviously we -- the company has a very efficient financing strategy. But on top of that, as we have done, for example, we've seen value Iberdrola can provide additional [indiscernible] if it is necessary. And third, regarding the deferred payment of EUR 1 billion, there is not any contingency. So it is not -- there is not any kind of earn-out or things like that. It just a deferred payment of 50% of the equity value for the 80% of the acquisition. Obviously, between the acquisition process, we find any legal topic that we can -- that we are not happy with that. This will be a potential discussion with the sellers. But we don't anticipate any major issue as we have done a very, very detailed due diligence. And of course, there is [indiscernible] that is somehow [indiscernible] the business.

Let's move on to the next question, please.

Our next question comes from Gonzalo Sanchez-Bordona from UBS.

Thank you very much for the presentation and the opportunity for the questions. Three, if I may as well. First one is related with sources of potential [indiscernible] you mentioned in the presentation. I was wondering whether in the RAB growth [indiscernible] you've just outlined, whether you are [indiscernible]? I think you mentioned incentives, you mentioned demand growth. Is that something that can materialize into additional RAB growth or some additional incentive growth during the current [indiscernible] through 2031, and apologies because I know nothing about the Finland regulation. So that's question number one. Question number two is related with how you calculate the 17x P/E -- sorry, 16x P/E for 2027. If you could provide some details on that because I had different numbers. I don't know if I'm missing something there. And then the other question is related to how the [indiscernible] work in terms of returns on top of the 8% [indiscernible]. Is it possible to achieve higher returns [indiscernible] period or if you are referring to this potential of [indiscernible]?

Gonzalo, if you don't mind, I will make question number one and question number three because I think they are correlated. So regarding if we are considering any upside, the answer is no. We are trying to be very, very conservative in our assumptions. So there is not any kind of upside that we are seeing today [indiscernible]. The performance of this company has been huge. We have seen years with an our outperformance of 180, 190, but we are not considering that outperformance. In here, we are considering a small outperformance because obviously it's the largest distribution company in Finland, and it's a very, very -- it's a very big market in terms of the number of the distribution companies [indiscernible] 77. So when you do the benchmark, obviously the largest usually get the best KPIs. Additionally, we are not considering any efficiency from Iberdrola. As you can imagine, only procurement or all-in corporate efficiency we could achieve [indiscernible]. This is not a deal based on corporate efficiency, obviously, we will apply any operational efficiency that we can, especially procurement is a clear example. And then let me explain how it's working. So regarding the CapEx efficiencies, 85% of the CapEx efficiency is captured by the company. Only 15% needs to be referred to the regulator. As regarding OpEx, 100% of the efficiency is captured by the company up to 20% over a [indiscernible], okay? So it's quite good regulation compared with others where we have presence that usually we need to [indiscernible]. Regarding [indiscernible] question, it's very simple. We are assuming, as I was saying, close to 100 [indiscernible] so we get 16x P/E. We have seen EUR 150 million already in 2027, and this is just to divide by the equity value that we are seeing for the 100%, okay? So it's vast. So we can, of course, provide you the details, but it is very, very, very [indiscernible].

Our next question comes from Rob Pulleyn from Morgan Stanley.

Three questions, if I may. Firstly, just to revisit an earlier question. So the implied gearing given the net debt and the RAB numbers provided, is like 97%. I mean is the other activities of that net debt? And is the [indiscernible] network sort of [indiscernible] nominal gearing of 40-60? That's question one. Question two, I think you've given an interesting overview of how attractive Finland is and the electrification growth and everything else. May I ask why Iberdrola looking at this -- looking at it now? Is there an intent of our seller or other reasons that we should be aware of? And thirdly, again, notwithstanding the respective merit this particular deal, historically, Iberdrola was very focused on it is 4 core geographies. And of course, we've seen deals within those geographies over the last few years. Should we understand that this foray into the Nordic, A, is a potential future core market? Is this opportunistic in the sense that this is [indiscernible] asset in your eyes? And/or does this imply that there is no [indiscernible] inorganic that you couldn't do in the existing core geographies? I'm sorry, long question that one, but [indiscernible].

Rob, so regarding the first question, I think that you probably [indiscernible] because of a low time that we gave you. But the implied gearing is 50%, okay? So the net debt is around EUR 2.40-something billion. So just make your math [indiscernible] we can give you all the details. But it's 50%, it's quite similar [indiscernible] where we are active. Regarding the second question, it was a long one, but I tend to think that your question about why Finland and it is why we are now looking for a new dealership. I think that, obviously, at Ibedrola, we were very clear in our last Capital Markets Day, what we are looking for is great [indiscernible] country with network and especially a very attractive [indiscernible] clear framework. And I think Finland ticks all the boxes. It's a AA+ rating, so it's 3 notches over Spain, it's 1 notch over the U.K. and it's on par with the U.S. Second is fully, fully regulated. So there is no any additional business than this business, that is including rural and urban cities in Finland. And I think it's a very, very attractive regulation for a company like ours with an 8% ROE, with a 10-year bond deal, much more competitive than all the geographies where we are active. And finally, regarding additional [indiscernible], I think is the third question. Obviously, if we do these deals, usually what we want is to become delivered. With this acquisition, we are acquiring [indiscernible] we're covering 1.5 million population of inland. It's a very fragmented business with 77 DSOs. So I assume that in the next few years, we will see a potential consolidation in the country. Regarding the other countries, what we have seen is that the Nordics are going to be one of the major benefits of the data center development. Electrification is at the core of their strategy [indiscernible] is at the core of their strategy. And of course, please bear in mind that they need resilience and energy independence. So I think the networks are going to be an important role or are going to play an important role within the strategy of these countries, especially Finland.