Iren SpA (IRE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Iren's 9M 2020 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 10th of November 2020. I would now like to hand the conference over to our first speaker today, speaker Massimiliano Bianco, CEO of Iren. Thank you. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for attending Iren's conference call on 2020 9 months results that despite a very difficult scenario in which we had a strong volatility of energy prices, we're quite stable and reflect the resilience and the strength of our company. Moving to the result of the period, the reduction in commodities prices, the lower power volumes sold and the COVID effect led to a decrease in revenue equal to 18%, which is not reflected in marginality because we reported an EBITDA of EUR 653 million, down by 3% compared to last year. Excluding the nonrecurring items affecting '19 and 2020, operating margins grew by 1%. To deepen at the main factors that influenced the EBITDA in 2020, 9 months, it's important to underline. The organic growth contributed for EUR 25 million affected all the business units, but in a different way. The positive contribution in net growth due to the increase in allotted revenues for roughly EUR 13 million, was partially reduced by the new regulation, which recognize lower OpEx it ties in gas and water sector and which led to a decrease of the result for EUR 8 million. In waste, we reported a positive contribution for around EUR 5 million, thanks to a combination of higher margins on collections activities and higher waste volumes disposed in our waste-to-energy plants. The organic growth is completely absorbed by the negative impact of the energy scenario. The increase in customer base now at 1,873,000 as clients and the better performance of our value-added services line of business driven the increase of market for EUR 5 million. Synergies were EUR 9 million, affected mainly the Networks business because of the capitalization of costs and a reduction of operating expenses. The consolidation of the I.Blu company from August allowed it to increase the result of waste sector for almost EUR 2 million during the first quarter -- this quarter. As far as the energy scenario is concerned, we reported an overall negative impact of EUR 6 million. On one hand, the drop of PUN prices affected the electricity production of our hydroelectric plants and waste-to-energy for EUR 15 million. In addition, we still reported a reduction in heat spark spread compared to last year. On the other hand, the combination of lower thermoelectric and cogenerative production, along with an higher MSD and partially covering clean spark spread led to quite stable margin in gas fuel plants generation. The energy scenario positively impacted also the market business because of the strong decrease in -- of commodity prices led to an extraordinary margin of over EUR 10 million. In addition to the effect of the energy scenario, thanks to our commercial policy composed by repricing based on our fixed components and an active hedging activity, we can exploit the entire contribution of our customer portfolio for around EUR 30 million. Despite the downtrend energy scenario, the energy value chain reported a positive result underlying the effectiveness of our integrated business model. The climatic effects had a negative impact for approximately EUR 10 million in heat volumes distributed in our strategic networks and lower gas volumes sold to end client because of the mild temperature recorded during the year. The reduction caused by the negative climate effect was only partially offset by the increase in hydroelectric volumes. Finally, due to the emergency scenario related to COVID-19, we reported higher corporate cost to maintain the safety of our workers and employees, lower electricity and gas volumes sold to clients and a reduction in volumes of waste managed and consequently lower plants activities for an overall negative contribution of EUR 12 million. If we're stripping out also the COVID impact, the EBITDA growth was -- would have been of 3%, in line with our expectations. Below the EBITDA, the EBIT and the net profit reported a negative outcome, minus EUR 16 million and minus EUR 20 million, respectively. Due to higher depreciation for capital-intensive investment and provisions to bad debt, of which EUR 25 million were related to COVID impact, partially counterbalanced by a release of fund. The net debt increased, now over EUR 2.9 billion, but our CFO will explain better, later on these topics. Finally, a few words on investments. Now at EUR 414 million, which recorded a significant increase of 28%, explained by the construction of new combined cycle into Turbigo plant. By the expansion of our district heating networks and by the projects relating to the construction and ramping of waste treatment plants, in line with the latest business trend assumptions. Let's start with the business unit section, as usual, with the Network sector, Page 3, which during the first 9 months of 2020 reported an EBITDA growth of 3%. A particular decline reported in this period was related firstly to the water sector that contributed for EUR 5 million. On the positive side, the organic growth of EUR 10 million is based on the increase in RAB, plus 4% compared to full year '19, supported by the important investment made in previous years that allowed the company to increase its regulated revenues. The continuing implementation of the performance improvement initiatives allowed us to achieve synergies, which have been counterbalanced by negative impact of the regulation for EUR 4 million. On top of that, we underlined the absence of an insurance reimbursement of 2019 for -- of EUR 4 million, which we expect to receive also this year in the fourth quarter. Secondly, to the electricity sector that reported a positive outcome due to EUR 1 million of synergies achieved in the first quarter. Finally, to gas sector that reported an increased result of EUR 2 million compared to last year because of the increase in allotted revenues for EUR 3 million and the synergies achieved, which were partially offset by the lower cost recognized [ entirely ] by the regulator for EUR 4 million. The investments are in line with our business plan assumption and a slight reduction compared to the previous year. The largely investment allocated to improve resilience of the energy infrastructure, to reduce leakage and increase the efficiency of the water system. During the lockdown period supported by less vehicle traffic and a decreasing request for emergency response, we were -- we're able to accelerate reaching the 2020 full year target. The activities of division of networks into small and equal areas called districts, which allow a more precise monitoring of networks and increased management efficiency. As we told in the past months, during the COVID-19 emergency, we have been guaranteeing the essential services, keeping our technician to operate safely and also running the activity in a different way, which is why we recorded a lower efficiency and some emerging costs, mainly in the water sector for EUR 2 million. As far as the outlook is concerned, the 2020 full year results will be slightly higher compared to last year. The increase is in allotted revenues and incentives for technical quality will be counterbalanced by the absence of '19 water balances for EUR 14 million. The effect of the new regulation measures negative for around EUR 10 million, mainly in water and gas sectors. Moving on the waste sector, Page 4. The decrease of EBITDA of EUR 6 million was generated by treatment and disposal activity affected by lower volumes managing of special waste and lower prices on waste-to-energy electricity production. Going deeper in each activities, the increase in collection activities of EUR 3 million were mainly related to higher margins compared to the same period of '19, supported by an increase in the quality of services and to higher efficiencies, mainly thanks to San Germano consolidation. In the first 9 months 2020, we reported a slightly increase in urban waste management plus 1%, thanks to the consolidation of I.Blu from August 2020. In these months, the activities to increase the sorted waste have been continued. Thanks to them, the percentage reached 69.1%, up of 1.8% compared to full year '19. The decrease of treatment and disposal activities of EUR 9 million depends on the negative energy scenario and on the reduction of waste volumes. The decrease in PUN price achieved affected the waste-to-energy electricity produced for EUR 7 million. On top of this, the decline in special waste volume generated by COVID conduct that to reorganize the special waste flows between landfill and waste-to-energy plant. In order to saturate waste-to-energy capacity and maintain the availability of a landfill for 2021, when the pricing of special waste will be higher. Because of this strategic choice, we reported a decrease of EUR 5 million in the first 9 months of 2020, coming from the lower use of the waste landfill and other minor solid facilities. On the other hand, we reported a positive contribution from the consolidation of I.Blu for about EUR 2 million. Despite the investment plan suffered and a slighter delay caused by COVID lockdown, the investment made were 70% higher compared to the same period '19. The CapEx are devoted to improve collection activities and planned construction and revamping. As regards the outlook, we expect a slight increase in the EBITDA compared with last year because on one hand, we confirm the positive contribution of collection activities. On the other hand, the negative trend experienced catch the eye by lower volumes of waste and lower PUN will be partially countered by the consolidation of I.Blu from August 2020 and Unieco from November 2020. From an overall contribution of EUR 6 million this year, in 2021, we expect a full contribution from this to M&A transaction of about EUR 20 million. Analyzing the energy business unit at Page 5, it's worth to highlight the factors leading to a negative result for roughly EUR 50 million, mainly due to the reduction of PUN price, the lower contribution of heat business and the absence of positive nonrecurrent elements related to '19. As already experienced in the first half, despite the negative downturn scenario with a double-digit price drop due to the lower electricity demand, our performances achieved were better than the market. In particular, in terms of overall generation volumes and hydroelectric production selling price. The good management of our fleet allowed us to sell the opportunities on the day-ahead market to the hydroelectric plants and on the ancillary services market to the co-generation thermoelectric facilities, which are highly efficient and flexible. Most of our generation profitability coming from the MSD market, where in the first 9 months, we obtained EUR 60 million plus EUR 10 million compared to '19, despite a decline in the third quarter. Excluding nonrecurrent elements, the main management factor reported in each sector are the following: in the hydroelectric and renewable generation, the reduction of EUR 7 million were due to the decrease in PUN, with an effect of EUR 13 million, which was partially counterbalanced by the higher contribution of green certificates for EUR 5 million and the increase in hydroelectric volume plus 6%. Despite the PUN downtrend, we achieved a 15% higher selling price than the market price, thanks to the effectiveness in production planning. The business was also affected by the expiration of green certificate for EUR 2 million. The electricity production by gas fuel, so cogeneration and thermoelectric plants, reported a negative result of EUR 1 million based on the good performance on the MSD market that we carry from previous quarters in combination with lower volumes and margins in the day-ahead market. The MSD in the third quarter was weak when compared to previous quarters due to higher spark spread in the day-ahead market and consequently, higher volumes of production, which allowed us to partially recover the lower volume in the first half. The clean spark spread achieved in the day-ahead market as an average of thermoelectric and cogenerative technologies was above EUR 1 per megawatt hour compared to more than 1 unit of megawatt hour last year. Furthermore, the result of this sector was negative due to the absence of the contribution of capacity payment reported in the third quarter '19, but we expect to receive by the end of the year. The heat sector reported a negative result of EUR 18 million caused by the mild climate in the first quarter and in September, which led to a 10% decrease in volumes distributed along with a lower heat spark spread compared to last year when it was exceptionally high. However, we continue to expand our networks and now equal to 95 million cubic meters and acquire new customers. The energy efficiency sector called Iren Smart Solutions has contracted more than 300 energy efficiency projects for condominiums and public buildings. Thanks also to the Ecobonus. We expect a further positive contribution starting from the fourth quarter, but better results will be visible from 2021. The '19 the nonrecurring elements of EUR 25 million was related to capacity payment, green certificate, energy certificates and other many small balances referring to previous years, while 2020 one-offs were the recognition of green certificates related to previous year. Concerning the outlook, stripping out the negative impact from last year nonrecurring elements, we revised downwards our forecast compared to the first half because of lower expectation on MSD contribution due to lower third quarter and unexpected turbine failure, which we last for 2 months with a negative effect close to EUR 8 million. Despite the negative elements, we confirm the other assumptions explained in the last conference call. For the hydroelectric sector, PUN forward price achieved is expected to increase compared to the first 9 months. Concerning the electricity production by cogeneration thermoelectric plants, we foresee a positive result. We expect a better day-ahead market, which led to a higher clean spark spread than last year, and MSD at EUR 70 million, partially offset by the reduction in volumes produced also for the shutdown of a turbine for extraordinary maintenance. Regarding heat business, we confirm our expectation of a spark spread slightly higher when compared to last year and lower volume distributed leading to an overall negative margin. The last business unit to analyze is market, Page 6, which reported a considerable growth of 24%, favored by our commercial policy and customer base increase, partially offset by the extra cost related to COVID and the emerging costs due to digital transformation and marketing activities. Excluding the absence of a positive accrual reported last year for EUR 9 million that affected in the same way the 2 main sectors, the goal would have been of 40%. The commercial strategy made of a combination of our pricing policy and back-to-back hedging activities aimed at reducing the margins volatility led to a recovering margins of around EUR 30 million, which we believe to be structured. In addition to this, the extraordinary dumping of commodity prices allowed to achieve an extra marginality for over EUR 10 million. The continuous growth of our customer base allowed us to reach 1,873,000 clients plus 57,000 of clients compared to '19 year-end. 35% of the new clients have been acquired, thanks to web channels. As outlined in the latest business plan, the national commercial strategy is ongoing and for the significant investment in marketing, especially in digital channels. At 3 September, we have a national customer base of over 16,000 clients, 85% of which acquired thanks to web sales. We reported emerging costs for roughly EUR 10 million, linked to digital transformation based on a new CRM system that integrates management of the group to entire customer base and higher cost due to the marketing and commercial activities. Investment in informatics system will guarantee a better experience for customers, further increasing percentage of digital and self-care operations now equal to 40% and 20%, respectively. Now I would like to better explaining the sector trends reported in the first 9 months. In the electricity sector, the reduction in volumes of electricity sold, minus 22%, was due to the closure of small business and small business clients activities during the first half and to the reduction of public administration volume lost in [indiscernible]. The reduction of volumes was partially offset by the increase in wholesale segment. The gas sector -- concerning the profitability -- sorry, in addition to the normalization of margins for roughly EUR 18 million, we reported an extraordinary positive result due to the drop of commodities price and the consequent increase of customer marginality, both in retail and business segment. The gas sector was affected by the lower volumes sold to end client due to the mild temperatures for EUR 3 million by lower gas used in the generation activities and the effect of lockdown. The margins normalization is worth EUR 15 million, on top of which we have had an extra profitability on commodity price. IrenPlus reported a further increase compared to previous year, mainly thanks to sale of household services and green line products with a penetration rate on our customer base of 14%. Along with the Iren Smart Solutions, we are ready to exploit all the opportunities offered by the government incentives for the retail clients. The emergency related to COVID led to a reduction in volumes sold for around EUR 4 million, affected mainly the electricity business. Concerning the outlook of the business unit, we foresee a very's good result due to the further expansion of customer based portfolio, sustained by our commercial activities, which will lead to an EBITDA of over EUR 135 million, a value that includes roughly EUR 10 million of extra terms coming from opportunistic hedging activities. Now I hand over to Massimo Levrino, Iren's CFO, to explain the elements below the EBITDA line.

Thank you, Massimiliano. I am going to Page 7. The chart shows the results from EBITDA to net profit. Looking at EBIT that stands at EUR 290.2 million. You can see a decrease of EUR 53.8 million, higher than the decrease of EBITDA because of the growth of provision of the bad debt that increased from EUR 23.7 to EUR 51.3 million. They had a growth of 27 -- [indiscernible] due to the adjustment of the provision to the expected losses related to COVID emergency, whose impact of EUR 25 million was already accounted in the first half. We confirm the assessment regarding the impact of COVID due to the bad debt provision have been fully accounted for the full year 2020, the forecast of the provision for the full year are about EUR 60 million, including also the usual provision estimating about EUR 35 million. Going to depreciation and the other items that increased at around EUR 3 million, but separating the depreciation from the other components, we recorded an increase -- the increase of depreciation of EUR 25 million, while the other provision recorded a reduction of EUR 22 million due, in particular to the extraordinary release of hydroelectric provision for an amount of EUR 16 million. The increase of depreciation is linked to the growth of fixed assets due to the increase in CapEx in 2020, but also in the last 3 years, and to the extension in the area of consolidation. EBIT stands at EUR 246.1 million the decrease was EUR 56.7 million. In the 9 month, the financial charges for loans and bonds that stands at EUR 51.3 million and a growth of EUR 4.1 million because of the increase of the financial debt, partially offset by the lower average cost of the debt that decreased from 2.5% to 2.1%. The net profit of the company consolidated using the equity method shows the not significant growth of EUR 1.8 million, due to better results of some small subsidiaries. And the other financial item had a marginal amount of EUR 0.7 million, roughly stable compared to the previous year. Going to group net profit that stands at EUR 153.3 million, it has a decrease of EUR 37.7 million, about 20%. But excluding the nonrecurring items already mentioned, I'm talking about EBITDA, the net profit would have decreased by 6.2%. The tax rate was 29.5%, a slight reduction. It is the same tax rate foreseen for the full year 2020. Minorities were EUR 20.2 million. They had a slight decrease of EUR 1 million. Now we can move to Page 8. You can see that the net financial debt at the end of September 2020 showed a growth of EUR 209 million. Going to analyze the reason for the increase, we start from the cash flow calculated as sum of net profit, depreciation and provision. It was EUR 489 million, and it had a slight decrease of EUR 14 million compared with the first month of '19. The growth of net working capital was EUR 67 million, posted by delay in collecting receivables, in particular, EUR 50 million due to the impact of COVID. And in the first half, we have to point out that in the first half, the growth of net working capital was higher. In fact, it was EUR 118 million. We expect -- about COVID, we expect that impact on COVID will be roughly EUR 80 million by the end of this year, and we foresee a decrease of the fee growth until a complete recovery by the end of 2021. Therefore, we are confirming the estimate already announced. The CapEx were EUR 114 million, EUR 90 million higher than in '18, a strong growth of 28%. About consolidation, the impact was EUR 76 million, in detail the effect on it and i suppose we shall related to the acquisition of the company branch SEI Energia for EUR 25 million. The acquisition of the control of the company, I.Blu, EUR 43 million and deposits or to other states in small companies NOS and AEC for EUR 80 million in total. The dividends were EUR 149 million, in line with 2019, despite of the increase of the dividend for Iren shareholders, but -- by 10%. Because in last year, we have the payment of an extraordinary dividend to the minority shareholders in the consolidated company year and after. About buyback, the impact in the 9 months was EUR 17 million, but we have to say that on the 28th of October, the second tranche of the share buyback ended. If we consider also the first tranche, the total share purchase were 15.5 million shares equal to 1.19% of the total share and -- we bought this year at an average price of EUR 1.19 per share. Now we can go to the next slide. At Page 9, you see the interest rate and the debt structure. Starting from the interest, you can see that only 3% of interest is at variable rate, 83% at fixed rate and 14% is hedged with the swap. The cost of debt was 2.1% compared with 2.5% in the first 9 months '19. The reduction of 16% was achieved, thanks to the new funds at a very low-cost and to the liability management carry out in '19 that have full effect in 2020. The average ratio of the long-term debt is 5.7 years, higher than in '18 when it was 5.3 years. The second pie chart on the right -- on the center, I'm sorry, center, represent the breakdown of the debt structure. This chart show that even total gross debt is divided in bonds for 83% and other financial sources of 17%, of which 15% from the AB funds and only 2% from other banks. The higher percentage of bonds is due to the new issue, the bond issue on July 1 for an amount of EUR 500 million, tenor 10 years. With reference to sustainable finance, 54% year-end total debt is composed by green or a simulated instrument, of which 39% are green bonds and 15% are EIB loans. Moving to maturities. You can see in the bar chart on the right that the next 3 years, the maturity will be EUR 190 million at the end of 2020, EUR 229 million at the end for 2021, and EUR 420 million at the end of 2022. The liquidity that we have at the end of September, we had, at the end of September, was about EUR 700 million, thanks not only to the aforementioned bond issue, but also through the collection of an EIB loan of EUR 75 million and by the cashing in February of EUR 330 million for the OLT sale. Moreover, is year-end has as a total amount of EUR 300 million of undrawn committed long-term [indiscernible], EUR 100 million more, thanks to the latest loan whose contract was signed with EIB on the 23rd of October. Now also the total availability from EIB is EUR 220 million. In addition, we have also EUR 80 million available from the Council of Europe Development Bank. All these loan have a maturity of 15 years, [indiscernible] a very good condition. In addition, even have the availability of 2 sustainable link of a volume facility for a total amount of EUR 150 million that, in case of need, can be drawn. Now I hand it over to Mr. Massimiliano.

Thank you, Massimo. The 9 months 2020 result came out below last year as the comparison is strongly impacted by several -- by the absence of several one-offs reported in '19. When it comes to the operational performances, we are reporting numbers in line with our expectations, and we are confident to achieve our target even in the current tough environment. As told, we are facing a worsening scenario led by the second coronavirus wave. In light of the 9 months result, we confirm the previous 2020 full year guidance, taking to consideration the following elements: We are confident on the correct estimate of the COVID impact on the full year, minus EUR 15 million on EBITDA, EUR 25 million credit losses and EUR 80 million worsening of net working capital; we don't see a worsening of the previous assumption even in a situation when the current -- where the current measures to contain the pandemic are being maintained. In terms of net working capital, we believe the further increase of EUR 30 million is sufficient to cover the worsening of payment time, considering that the lockdown does not involve production activities. Coming to the fourth quarter expectation in a volatile environment, we are confident to report growing result. As far as the energy and supply activities are concerned, we have hedged about 80% of the generation production, and we were already covered on the supply volume side over 90%. For the other activities, we expect a positive contribution from both organic growth and M&A transaction to support the full year 2020 EBITDA at about EUR 910 million. Net profit is expected at roughly EUR 210 million. While the net financial position net to EBITDA ratio is expected at around 3.5x, including 0.2x impact from M&A transaction. CapEx are expected at EUR 630 million, reflecting the slight slowdown caused by COVID emergency, mainly in development of the waste treatment plants. Regarding the 2021 outlook, we are confident to reach the business plan targets despite the second coronavirus wave, which is expected to last over the first half, at least, with a negative scenario impact. As far as the energy value chain is concerned, we have already covered 50% of the hydroelectric production at about EUR 50 per megawatt hour, which is our most relevant scenario exposure. Referring to the thermo profitability, it depends more on the MSD performance than on the day-ahead market and a specified value. So as it happened this year, we expect an overall contribution in line with our business plan assumption. We don't expect further material energy scenario impact, even in a worsening scenario. As on the power and gas supply, we expect to keep stable profitability to the combined effect of forward selling price and back-to-back hedging. For the other activities, we don't see major negative impact as we have already put in place all the measures to carry on our operations facing the emergency situation. We should have a negative impact of some millions euro from running our industry activity in a less efficient way, that's all. So now we can start with the Q&A session, please.

[Operator Instructions] And our first question comes from the line of Javier Suarez from Mediobanca.

Three questions. The first 1 is on the market division. And the good performance so far this year. So the thing that I am interested if you can give us more details on the expansion in the customer base so far this year on what activities that is focusing. And if you can give us a sense of the level of profitability, I don't know, the level of a first marking for an electricity client versus a gas client in the protected market versus the liberalized market on the electricity side? I think that, that is -- that would be very helpful to understand the reason behind this very good performance that is helping to, I guess, through a successful dual fuel strategy to expand profitability here and what we should expect into 2021. Then on the -- the second question is on the generation business. And that obviously has been suffering from the gas scenario that is difficult. I'm interested in this comment that you are expected lower contribution from the MSD market during the fourth quarter. Is that just purely related to the failure in that turbine that you are mentioning, or there are different things? If you can please elaborate on that lowering in expectation for the MSD market during the fourth quarter? And the third question is on the synergies. I think that on your business plan, you were mentioning EUR 55 million of synergies to 2025. If you can help us to understand the level of [ network ] of synergies so far this year. I think that on the presentation that is focusing on the network activity, you can help us to understand, again, that level of synergies from where they're coming from and the level expected for 2020.

So about -- starting for your first question about market. As you probably remember that the good performance we are seeing this year was, let's say, expected because we work in the last years in order to, let's say, normalize and stabilize on a -- an upper level and profitability of supply. So what is important to know that the larger part of the profitability of supply business in 2020, we can consider as a structural, better profitability of this business unit. And only EUR 10 million, as we said, are related to an extra profitability we can say that arise from a very active hedging policy that allow us to benefit in a scenario with a very low commodity prices. About the expansion of customer base, as you know, we had a target to grow each year an area of 50,000, 60,000 of clients, and we are doing. And we expect to increase this target per year to 60,000 to 80,000 per year because of the completion of our digital transformation of the business. The scale-up of the capability in this business unit in -- on a national perspective. And so because of this, we think that we can push on organic growth because these figures are related to organic growth in client -- in customer base growth. About the second question in generation. As we said, we expect -- we did in the first 9 months, EUR 60 million of MSD, and we expect EUR 10 million more in the second quarter. This is also related to this expectation for, let's say, a weaker MSD in the last quarter is also related with an expectation of higher volumes. And so a better spark spread in the forthcoming weeks. For sure, this will be negatively affected in our case until the first half of December because of the turbine failure had in 1 of the 2 turbine in Moncalieri. So this will have an impact of EUR 7 million, EUR 8 million this year. About synergies this year, we'll have a roughly a EUR 12 million of synergy in the full year, of which 60% are related to networks.

[Operator Instructions] And the next question comes from the line of Enrico Bartoli from Stifel.