Iren SpA (IRE) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Iren's H1 2021 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Mr. Gianni Vittorio Armani. Please go ahead, sir.

Thank you, Nicole, for the introduction. Thank you all for attending the conference. We are presenting today a very positive result for first half 2021. We are reporting 9% growth on the EBITDA. That is mainly driven by several elements. First of all, the consolidation in the first half of I.Blu and Unieco results that were not considered in the first half of 2020. Secondly, in the energy scenario reported very positive results in terms of PUN growth particularly on the hydro and WTE production. Even though the general increase in demand reported a lower value for energy markets compared to last year. And the reduction of distributed heating margin, even though growth in volume of heat sold during the winter, partially offset this reduction of heat margin, which I'll clarify later on in the presentation. Organic growth investments on the network and improvement in synergies are also reported and contributed to the EBITDA growth. On the negative side, we have further cost of COVID reported at EUR 6 million, more or less. And emerging structural costs, mainly on Market and Networks driven by digitalization and service improvement. Below EBITDA, we have some extraordinary elements that impacted the performance particularly the provisions, EUR 10 million of provisions for COVID credit and the debt lower than last year that was reported EUR 25 million. The optimization of Unieco debt for EUR 13 million. And the contribution specific system measure that reported an improvement in net profit of EUR 32 million. That is due to realignment of tax and statutory asset values on the books, which released provisions for deferred taxes that were in our books. We reported also during the semester, an increase in investments of 10%, mainly concentrated in maintenance, but 1/3 on development CapEx. We -- our main investments that we report is, of course, the new combined cycle in Turbigo, that is under the capacity market mechanism that will be online next year. And the new installation for battery system of 6 megawatts in the CCGT plant in Turin and we enter into operations of Cairo Montenotte organic fraction treatment plant that produced the first cubic meters of maintaining last week. And we also started the new plastic recycling plant of I.Blu and for the production of Blupolymer that is used for steel production decarbonization. And we also started operations of Rapallo municipality water purifying plants that is serving 90,000 inhabitants for almost EUR 40 million of investment. 60% of our CapEx was focused on ESG projects. And going to the next page, Page 3, we are reporting a significant improvement on main drivers that for ESG measurement. Particularly, we increased 4% our purified water volumes, thanks to new plants that were introduced this year, and the reduction -- improved reduction of duration in the energy interruptions by 4%, electricity energy. And also on the waste sector, we reported an improvement in sorted waste share, a 90 basis point improvement in this field and significant growth in recovered material volumes from waste more than 400,000 tonnes. On the Energy side, the carbon intensity index that is measured with the science-based target mechanism also improved 6%, thanks to the optimized production of heat and electricity in our district heating plants. And on the Market side, we report the effective success of our campaigns for -- in order to promote the use of renewable energy that extended this service to additional 250 gigawatt hour. And the increase, significantly increase in digital construction in our customer care services, thanks to improved digital platforms and the self-care operations that were made available to our clients. Now we go deeper into each single business unit, going to Networks. We report positive growth of 6%, reaching EUR 190 million. This is mainly driven by the growth of allowed revenues from organic growth of RAB that reported a 5% increase from EUR 2.2 billion to EUR 2.4 billion. Mainly in the water sector, where we are intensifying our districtization of our network, reaching 57% of network districtivized, thus being able to reduce losses in our network. And in order to measure this, we report a reduction in consumption by our inhabitants of 9 liters per day per inhabitant. It's an indirect measure of losses, but it's a very significant one. On the negative. On the Network, we have increased structural cost partially on digitalization and remote control of our networks in order to improve our measurement and control, the networks plus COVID impact extra cost for service and operations. We have a positive EUR 6 million effect mainly due to insurance reimbursement on the water sector and the cash-in of previous year certificates in the gas and electricity. The outlook at the end of the year will be, however, in line with last year. We offset for the one-off elements. Going on the Waste business, Page 5. We reported a very interesting 24% increase in EBITDA, leading to a result of EUR 99 million of EBITDA. The rise, as mentioned, is mainly driven by I.Blu and Unieco consolidation that contributed EUR 18 million on the final results and allowed us to increase volumes managed by 32% over the year. The positive contribution of treatment activities mostly on plastic and paper sectors is due to the increased higher prices of commodities. It is, of course, across the board on all commodities. Plus, as we have an additional, as mentioned before, contribution from increased PUN price, thanks to the sale of electricity from WTE production. In addition, our WTE particularly TRM, the Turin plant was connected to district heating increasing the 54% heat distributed on the network. On the negative side, we report higher cost of collection, mainly driven by increased service level that allowed us to improve our share of sorted waste, plus a reduction of availability of REI landfill structure, which is expected to be -- to obtain authorization for expansion next year. Overall, the outlook for 2021 EBITDA is the confirmation of the consolidation effect of I.Blu and Unieco, which I remember is not -- does not have an impact on the second half, which were already consolidated plus the extension of the energy scenario after the end of the year. We will have also the negative impact on collection and availability of the plants that will be confirmed over the year, leading to a stable second half and maintaining the increase that we have in the first half over to the second half. Shifting to Energy. We reported interesting results from hydro production and from energy efficiency businesses. Overall, EBITDA grew 5.5%, leading to a result of EUR 134 million of EBITDA. As I said, the growth in the energy scenario and the increase of PUN price positively impacted the hydroelectric production, with an average PUN price of EUR 57 per megawatt hour, 33% higher than last year. Higher heat volumes mainly driven by climate conditions during the winter and impacted by the expansion of the network. And overall higher production of CCGT we had was partially compensated at the lower hydro production linked to lower rainfall during the winter. We experienced a positive clean spark spread for CCGT of EUR 1.4 per megawatt hour compared to last year negative measure. And an increase in energy efficiency business, thanks to Superbonus initiative and bonus facade for buildings reported a EUR 6 million increase in EBITDA. On the negative side, we have 2 main elements specially MSD contribution that was reported up to EUR 41 million during the first half, EUR 10 million less than last year. Plus a reduction on heat spark spread by 20%, driven by the fact that the tariff, the delay -- the heat tariff, the delay in adapting to growing gas commodity. And therefore, with growing gas prices over the winter, the margin was reduced compared to last year. Of course, this effect will be partially offset in the second half of the year given that we estimate a stable gas prices over next winter and fall. Going to Market view business unit, we have a higher -- significant higher margin in gas that's driven 8% EBITDA increase up to EUR 93 million. Particularly higher gas margin was driven by procurement seasonality and gas -- stored gas prices that came from last year. Total contribution of this element is EUR 19 million. We had a contribution from new retail clients acquired during this first half of the year, and our customer base arrived to 1.9 million clients, increasing -- growing 2%. And a positive contribution from IrenPlus products. The total penetration of this products on our customer base grew 49%, reaching 19.4% of total customers. On the negative side, we have a lower -- we experienced lower electricity margin given the fact that part of our customer base have not been hedged and growing PUN prices as part of unhedged customers. Structural emerging costs typically on digitalization and commercial activities also offset that part of the positive effect by EUR 8 million. And a slight decrease in electricity sold, linked mainly to COVID effects on small business activities also contributed to the small parts in the negative side. Overall, the outlook for the end of the year, excluding the EUR 8 million -- EUR 4 million of reported extraordinary one-off effect will be in line with last year. Looking at what is below the EBITDA, we are -- and moving to Slide 8. We reported a 46% growth in net profit. That is driven by a number of elements, particularly the higher depreciation due to organic CapEx plus the increased perimeter due to I.Blu and Unieco. Lower provisions for bad debt related to COVID, EUR 10 million versus EUR 25 million of last year. And the absence of EUR 16 million of provisions fund the release in 2020 for hydroelectric sector. Plus, we have an optimization of Unieco debt. They reported an improvement of EUR 13 million of financial charges and a lower cost of debt and partially offset by an increase of gross debt and that less than changed the financial charges element. Extraordinary tax reduction led to an effective tax rate of 14%. There is an extraordinary effect that contributed significantly to the net profit growth. Passing to cash flow and net financial position. We, in Page 9, reported a bridge between the end of the year, situation in the net financial position and the current first half net financial position, which shows that EUR 280 million investment plus dividend payout of EUR 150 million and cash out of EUR 27 million for Futura acquisition, where completely offset by organic operating cash flow given buying profit plus amortization. Also derivatives and change in net working capital and deposit contribution showing particularly for net working capital management, the effectiveness on how we manage our working capital. Going to the financial profile, we are reporting 97% of our gross debt that is fixed rate and an increased debt duration up to 5.7 years, thanks to renegotiation of loans. And we also can report a 50 basis point improvement in the cost of debt. 85% of Iren total debt is composed by bonds and almost 60% is green assimilated instruments. Going to the closing remarks. We are today reporting solid results that allowed us to improve the guidance for the end of the year. We uplift the EBITDA guidance to EUR 990 million with a larger growth especially in the Energy and in the Waste business. Also net profit is expected to be around EUR 290 million, plus CapEx is going to be confirmed at EUR 800 million and net financial position over EBITDA improved to 3.3x. Such positive performance drives this group to look to further improvements on our business plan that will be unveiled in November. We are already working on this document. And we confirm today that the new business plan will focus on ESG as a strategic measure of success in our businesses. Industrial growth is based on secular economy, networks and resilient cities, which are drivers and distinctive abilities of our company. And development will be focused specifically on our territory of presence of which -- from which we can derive significant success. We are also introducing some innovations in our planning. We are focusing on a 10-year horizon, with, of course, different milestones during the 10 years horizon projections, because a longer horizon allow us to focus on priorities and change. We will introduce a greater focus on decarbonization. It is today one of the elements that has no specific response in our plans. And M&A will be part of the total CapEx of the plans, simplifying the view on the company and leverage evolution. Also we will focus and report projects that aim to have PNRR contributions, specifically on mechanical and purification plans in Liguria and district heating initiatives. Plus, we will focus our alignment of capital deployment on -- in taxonomy and in general on ESG investments. This is all for this presentation, and we can pass on to you for question and answers.

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

Three questions. The first one is, I guess, on the new strategy of the company. There is a new CEO and I wanted, if you can -- I was wondering if you can share with us kind of your priorities on what you think the new strategy is going to be different from the previous one in things such as, for example, M&A versus organic growth, dividends versus CapEx or approach versus renewable synergies. So any light on the direction for the new strategy, that would be very helpful. Then the second question is on the consultation document by ARERA on the regulatory WACC and also on the waste collection and treatment businesses, if you can share with us the latest thought of Iren on those documents. And the third question is on the dynamics for the supply business. We have seen higher gas margin offset by the contracts under the electricity supply business, if you can share with us the dynamics that you are seeing on the energy supply business overall.

Regarding the business plan, of course, more information will be available as we are going to present in November. A few elements are, of course, clear and we try to highlight them. Also we will have, in general, a stronger decarbonization focus specifically on our Energy business, but also on our district heating business. That is currently included differently from our competitors in the energy sector instead of the network. So this will be -- we lead to, of course, investment in these areas that will be -- I would -- I don't know how to define them. Of course, the more you integrate early on, on the value chain, the more value you can create. Of course, we have 0 pipeline in terms of new developments in renewables. And therefore, we need to acquire something, which means that some M&A will be needed. This M&A though, we'll try to concentrate it on the development phase, which allow us to have better returns overall. Of course, we are not aiming to be a market leader in the renewable sector. But we are able to give a contribution to the energy transition of the market. We are very strong in developing authorizations for very complex plans and very effective in our engineering and construction business. And therefore, we are best suited to be very effective in development of renewables. We also have an important and very stable customer base that can edge with PPAs, the evolution and development of new renewable plants. I tend to exclude to be the primary acquisition partner of any -- already built plans. But we could partner with investors to support them in managing these facilities and hedging the industrial risk. In waste sector, of course, we are a leader in a few areas that are very important like plastic recycling business, and we have a significant position in all waste treatment activities. We are also very effective in entering into new areas with our collection business. That is normally a poor activity, but that we are able to transform into a positive contribution activity. And therefore, of course, we will look for growth in the overall value chain of waste sector. But on this, of course, it's a very fragmented activity and very fragmented market. So a combination of organic growth tenders and acquisitions will be aligned and more clarified -- better clarified in the business plan. In terms of energy market supply, of course, we are experiencing an increased competition in this market. We are also -- I mean, managing a very strong and very stable customer base in our specific territories. But we understand that being a leader in customer service is the strongest retention tool that we can develop. And we are also very strong in penetrating our customer base with more services, which allows us to retain and to reduce churn over time. On ARERA instead we registered, in general, a positive return on the ARERA regulation. ARERA is generated and is one of the most important contributor of stability in our sectors and is deriving from -- coming from the energy experience is expanding stable regulation also to waste and water business. On the Waste business, of course, we see favorably the fact that the regulation is being extended especially for new investments. Of course, there are some elements that need to be clarified for instance, and specifically the existing contracts, particularly project contracts that need to be aligned to the increased -- I mean, the regulation need to consider the fact that there were previous agreement underlined. And if we pass into the WACC evaluation, of course, in general, we see a huge value in the fact that the regulator has a consistent approach in evaluating recurrence from our business. And of course, we are today in a phase in which we should expect a reduction in recurrence which, on the other hand, is an improvement on the eyes of the consumers. But we know that the authority is well aware of the need for investments even by energy transition and in general, the development of our network businesses. And therefore, we know that all concerns will be addressed by the new regulation. Of course, in the numbers specifically, we see this alignment with our estimates, particularly on the cost of debt, but I'm sure that these details will be adjusted in the final documents.

And just as a follow-up, it would be fair. I'm referring to your statement on the M&A activity that as part of your new strategy, the focus on M&A is going to be on renewable energies, trying to help with the construction phase and therefore, buying pipeline and to a lesser extent on the Waste Management business. Is that a fair summary?

Sorry. No, we are -- of course, we will need to focus on acquiring M&A pipeline for renewable business, but we are looking also at growing into the Waste Management business. Then, of course, I cannot highlight the specific targets or specific sectors in this that we are -- we see a value in consolidations of the waste management activity, and therefore, we can be an actor in this consolidation process.

And your next question comes from the line of Enrico Bartoli at Stifel.

The first one is regarding on the impact of the new scenario for the PUN prices in Italy on your numbers. If you can share with us the hedge volumes and maybe the prices for the second half of the year and at what level you are also on 2022. And actually, it would be very interesting if you may share with us your view on the sustainability of the current level of high prices that we see for this year and also in the forward for 2022. The second question is related to the -- again, to the strategy. If I understood well, actually, you were planning to rely on the capabilities of the company in terms of development of renewables starting from the pipeline. If you can elaborate at what stage the company is at this moment considering that the exposure to wind, solar on the year-end at the moment is 0. And also I was wondering if discussions are still going on regarding the possible transaction with the CBA and if CBA would still fit your mind within the business portfolio of the company. The last one is on the supply margins. We saw this reduction of electricity margins in the second quarter. If we can expect this to continue in the second half. Or do you think that you can have also some adjustments on the final prices to customers and have a recovery of margins in the second part of the year?

Thank you. I will lead the things on the hedging strategy to Massimo Levrino. First of all, I will address sustainability of prices. There are 2 factors that are driving increased prices commodities particularly on energy. One is the growth of gas prices, and the second one is CO2 increased emission trading cost that is increased. First of all, the second element is something that, of course, it's not clear that there is a stable market for the stand of commodity, given the fact that it has no realization. So it's synthetic, let's say, product. But we see, in general, an increased need for reduction for CO2. So in general, we see that compared to last year, I would expect in the long term, an increase in cost in order to allow and facilitate the growth of new initiatives that reduce emission in this sense. Then, of course, this is not -- I'm not able to set a price on this given the fact that it has no real utilization value. But if I see the strength at which institutions are pushing towards the capitalization, I would expect higher prices more aligned to today's prices than those that we experienced in the past years. On the other hand, gas prices, we have seen and experienced divergent dynamic from prices in the Far East with which our European prices are linked, and those that characterize U.S.A. prices. In general, I would see that the marginal facility for gas production is more aligned to that of the U.S. So shale gas is the marginal price facility or price source for gas. Of course, you can increase shale gas production only with long-term price setting or price signal. And therefore, in the short term, you will see more oscillation, more volatility on the European and Asian market. Of course, the Asian market is the one that is creating volatility. Therefore, debt price, I see less sustainable in the long term, and I would expect a reduction in future times. But I can also -- of course, I would be very rich if I had known when. Then you were mentioning the renewable growth strategy. Yes, we definitely have a 0 pipeline currently and this is, of course, a challenge which we need to work out. And of course, it's 2 months that I'm in charge. So I need a slightly longer time to create an impact on this element. I've already experienced in my professional past, a similar situation in Terna with the possibility to create pipeline with plants built and sold in 1.5 years. So I see the possibility to a create significant pipeline and a stable source of investment opportunity, of course, looking at 10 years horizon and not in the very, very short term. So this will be part of our development plan. And of course, we will be, therefore, a contribution to the energy transition in Italy. Regarding CBA, of course, I mean, it's a long -- very long story but we are addressing, it's not easy to spot the possibility to finalize any kind of agreement. Of course, the 2 companies have been closed -- very close to discuss some possibility for an agreement in the past. And as a matter of fact, it makes a lot of sense also industrially, but not always what makes a lot of sense is effectively implemented. So we will see. Of course, there are different ways to cooperate with one another. I believe that this is something to explore. But of course, I would not bet any of my personal money on the finalization of it. Going to the hedging scenario, okay, Massimo?

Enrico, about the hedging policy in 2021, about the hydro production, we have hedged 60% of our total production at EUR 50, megawatt hour. And the thermo production, as you see, that we have cover advantage of 45% at the spark spread of course at roughly EUR 7, megawatt hour. For the '22 forecast, so far, we have around 30% of hydro production hedged at EUR 64, megawatt hour. And regarding the CCGT and the thermo production, it is very low. Taking into consideration the low spark spread and low liquidity that we experienced in the market.

Just a comment on the evolution of the supply margins in electricity, if it's possible.

I'm sorry, yes, I forgot. Of course, we are very active in repricing our clients. And of course, on the retail market, it is a usual practice. This is less true on the SME and business customer base, that's an annual contract projection. So we now, of course, try to offset during the year in order to reduce the negative effect that we had in the previous half.