Iren SpA (IRE) Earnings Call Transcript & Summary

Call on the first half '22 results. I have Mr. Gianni Armani, our CEO; and Ms. Anna Tanganelli, our CFO. First, they will give you the presentation. The Q&A session will then follow. Gianni, the floor is yours.

Thank you, Giulio. Good afternoon, everybody. Starting at Page 2, I would like to outline the main highlights that characterized the first half of the year. EBITDA increased by 9% year-on-year, and gross investments were more than doubled. Sound organic growth supported by network waste and energy efficiency along with the contribution of renewables supported this growth. The resilience is confirmed. Energy value chain was overall positive, thanks also to the capacity market outcome despite several headwinds like extraordinary drought that impacted several businesses and government measures against Soren commodity prices. Gross investment carried out in the period and the payment of dividends led to a net debt increase that remained, however, under control, thanks to cash generation and the optimal management of net working capital. Thanks to all these factors, we are on track to confirm the guidance despite we are facing a scenario largely more challenging than expected. Moving to ESG. The results of the period are also very promising. As you can see from the slide, we continue to be on track and in some instances even ahead of the plan on all major ESG KPIs. The improvement on our cargo intensity now [indiscernible] particularly district heating and sorted waste collection activities that continue to perform in line with our expectation, while EPC value of rebuilding projects more than tripled compared to last year. Finally, it's worth mentioning the 2% reduction of water withdrawal, which is a proxy for water losses. It was possible, thanks to the increased districtization activities that allow for greater monitoring and timely intervention in case of net damages. Sustainable investments account for more than 70% of total investments during the period. Moving to Slide 4, which shows the key financial figures of the semester. The EBITDA, as said, at the beginning was up 9% in the first half of the year, reaching EUR 563 million, thanks to the following factors. The capacity market contribution by EUR 35 million, stabilizing generation business margin. The organic growth amounted to EUR 20 million, the majority of which worth EUR 12 million related to rebuilding activities managed by Iren Smart Solutions. The remaining amount is due to the phasing of 4 treatment plants and increase the margin on the network despite the reduction of EUR 7 million in the WACC review of the regulation. Additionally, we had EUR 16 million registered mainly from Energy and Commodity scenario. And on the negative, as I said before, we have to report about EUR 50 million of impact as a consequence of the drought, and I will highlight better these elements. The Contributo di solidarietà, Windfall tax is booked -- fully booked in the semester and the amount is EUR 31 million. The slight increase compared to Q1 estimate is due to the new guidelines issued by the fiscal authority in June 2022. Excluding all extraordinary elements affecting both 2021 and 2022, the net profit grew 8% year-on-year. The effect of Sostegni ter decree, on the other hand, has been EUR 11 million in the first half of the year. The full estimated impact is confirmed at EUR 20 million, EUR 25 million. In H1 2022, gross investments reached EUR 739 million, 2.2x the previous year figures of which roughly 70% is dedicated to development CapEx. And net financial position at the end of the year -- at the end of June, I'm sorry, was slightly below EUR 3.4 billion, increasing by short of EUR 500 million versus the end of previous year, representing less than 50% of the total cash out from investments, dividends and taxes. I now hand over to Anna to go through each business and the financial figures.

Thank you, Gianni, and good afternoon to all of you. Moving to the single business unit results, starting with the business unit Networks on Slide 5. As you can see from the chart, the rough increase of water and electricity more than offset the regulatory revision of the related WACC, resulting in an overall positive EBITDA performance year-over-year. As for gas, as previously communicated, our long-term strategy is to maintain a stable RAB over time, which resulted in a slight margin contraction versus prior year linked to the corresponding WAC reduction. Overall, the impact of the regulatory revision accounted for EUR 7 million in H1. In the semester, we also reported EUR 11 million of one-off, mainly related to tariff adjustments from previous years. Overall investments increased by 14% in the period and were mainly concentrated in water and electricity, primarily to revamp the wastewater treatment plant and to increase the resilience of our electricity networks. Finally, as already mentioned by Gianni, districtization activities, functional to water loss reduction continued also throughout the second quarter of this year, reaching more than 62% of the grid by the end of June. Turning to Slide 6. The Waste business unit posted a plus 29% EBITDA increase year-over-year, reaching EUR 126 million, mainly driven by Treatment & Disposal activities. Thus drop was the result of one; plus 19% rise in heat volumes sold compared to last year, as shown in the chart on the bottom right, combined with favorable prices in the semester for both heat and electricity. Two; higher prices and intermediation of third-party waste despite lower volume; and three, the margin contribution of the new plant phased-in during the period, i.e., we have 2 biomethane plants, which in H1 produced combined 2.9 million cubic meters of biomethane. We have a paper and plastic treatment plant in Parma and the new I.Blu plasmix treatment plants to produce Bluair in few weeks. As for collection, the slight margin reductions here versus prior year is mainly due to higher operational costs, primarily, [ if you will ], and inflation, which will be recovered for tariffs over the coming years. Finally, the view posted overall investment sharply upwards in the semester, plus 41% compared to H1 2021 and equal to EUR 67 million mainly linked to the new organic fraction treatment plan with biomethane production in Reggio Emilia, the wood treatment plant for pilot production in Vercelli and the plastic and paper treatment plant in Borgoforte [indiscernible]. Moving to the next slide, Slide 7. The Energy business unit increased by plus 54% versus prior year to EUR 207 million despite the severe drought, which affected the hydro production in the semester. Thanks to an overall effective energy management, supported by a positive scenario and the contribution of the newly acquired renewables capacity. Heat continued to show a sound margin performance also in Q2, as you can see in the slide, as a result of the normalization of the related profitability following the contraction experience over the last couple of years, which accounted for approximately EUR 25 million. This positive effect was partially offset by the impact of the district heating bonus, which will be recognized by the group to [ finalize in] financial distress until end of August of this year. CCGT & Thermo continue to benefit from the contribution of the capacity market, which accounted for EUR 34 million in H1. At the same time, the business reported a minus EUR 7 million decrease in MSD compared to prior year and a slight production volume contraction linked to temporary coding difficulties and maintenance activity. The solar assets we acquired in full year beginning of 2022 contributed for EUR 70 million of EBITDA in H1, thanks to over 100 gigawatt hours produced. And the good trend of the energy efficiency business, i.e., in Smart Solution continued also in Q2, continuing to benefit from public incentives and from an increase in the overall construction activity. Last but not least, Hydro, which was severely affected in the quarter and overall in the semester by exceptionally lower volumes, down 50% versus last year, reducing also revenues from Green Certificates. In total drought affected our overall energy value chain by minus EUR 50 million including both the above-mentioned impact on the [indiscernible] or the energy business unit as well as the effects on our natural hedging strategy as we will see in the next slide. Finally, the government measure DL Sostegni ter accounted for minus EUR 11 million in H1 2022. Moving to Slide 8. The market business unit EBITDA performance in the first half of this year and in particular of its electricity margin was a result of 2 main factors. One, exceptionally high prices impacting unhedged volumes, combined with a mismatch between actual and forecasted consumption profile; and two, the reduced hydro production triggering [ of ] transactions, mainly in Q2. As for volumes, the strong increase in electricity sold to retail and small medium enterprises plus 42% versus prior year was mainly linked to client loss acquired in Salvaguardia public auction awarded last year. While the growth in wholesale volumes was related to opportunistic transactions carried out in Q2 2022. As for gas margins, the decrease was linked to a spike in an unhedged volume, associated with colder temperatures in particular during March and April of this year, bringing us to purchase some volumes on the spot market at exceptionally high prices. During the second half of the year, with selected old contracts reaching expiration, we will carry out a repricing campaign to bring those contracts in line with current market conditions. Finally, strong increase in retail client acquisitions with our overall customer base now at EUR 2.17 million, i.e. plus EUR 170,000 versus end of last year, of which electricity clients were plus 10% and gas clients plus 7%, also thanks to the acquisition of the retail company, Alegas, completed in April 2022. Let's now move to Slide 9. We will briefly comment some of the key elements below EBITDA. So bad debt provisions were stable year-over-year. As you can see, to take into account the doubling in revenues occurred during the period. notwithstanding a relaxation of the pandemic crisis, which has impacted bad debt in 2021 and also 2020. We also released legal provisions in the semester for around EUR 12 million following the positive settlement of few claims with suppliers and other institutions. I would now like to draw your attention to financial charges. Here, our performance was very strong. We remained stable over the period despite extremely challenging market conditions, characterized by increasing interest rate, as you very well know. [indiscernible], on the other hand, was able to crystallize the reduction in average cost of debt, which now plans at 1.6% to down 10 basis points versus 1.7% of H1 2021. It's a remarkable result. As for taxes, as already mentioned by Gianni, in H1, we booked the full impact of the Contributo di solidarietà, i.e., the Windfall Tax for EUR 31 million. Without this impact, H1 net profit would have been EUR 164 million. And stripping out also all extraordinary elements reported last year, it would have been up 8% versus 2021. Finally, on Page 10, you can see our net financial position evolution in the semester, so from December 31 to June 30, 2022. As shown on this slide, our continuously disciplined and optimized net working capital management was able to contain, once again also in Q2, the headwinds linked the overall market and energy scenario volatility, a significant increase in turnover year-over-year and the impact of seasonality. Net debt in this semester was further affected by the payment of EUR 165 million of dividends, as you can see on the chart, and EUR 130 million of taxes with operating cash flow, absorbing the strong investments made. For your information, the impact of the bill instalment payment manager measure introduced by the government beginning of this year was approximately EUR 80 million, while the higher prices affected gas storages for another EUR 80 million. This last effect is expected to further increase in Q3 due to higher volumes of gas stores, but will then be fully reabsorbed between Q4 2022 and Q1 2023. One final important remark from my side before I hand the call back to Gianni, standing for the year has already been fully secured with this year's means entirely covered through quite competitive financial instruments, price well before the last spike in interest rates and spreads. I will now turn the call back to Gianni for a status update on our gas procurement strategy.

Now, before talking about the future and guidance, let's turn to Page 11 to look at our gas procurement strategy and situation. As everybody knows, we are currently in the first pre-alert level out of 3 of system contingency plan, expect to tackle the strong reduction of Russian gas import. In such a difficult scenario, where gas wholesale market is stagnating in general. The group has been adjusting the procurement activities in order to meet our obligation, supporting all our final clients. We are already -- we have already secured almost 60% of total annual needs of which 100% of the volumes of final clients, gas and heat. And the remaining share of gas supply will be secured in the coming weeks by taking into account the needs of thermoelectric plants, which are intrinsically more flexible and which consumption profile spread over the year. Moving to closing remarks. Page 12. It is helpful to summarize the main topic of the first half. Once again, positive results confirm the low risk profile and our well-diversified portfolio of activities. Renewable execution plan is on track with 220 megawatts in operation or under construction in line with the new full year target of 250 megawatts. And the financial discipline sustained by a sound cash flow generation and the efficient working client capital management allowed us to support the CapEx plan. We therefore confirm full year 2022 guidance with EBITDA expected to grow 6% versus full year 2021, gross investment to be EUR 1.5 billion in total and net financial position over EBITDA at EUR 3.4 million as previously said. Thanks for your attention, and let's move on to Q&A session. Thank you.

[Operator Instructions] The first question is from Javier Suarez from Mediobanca.

Several questions. The first one is on the evolution of the supply activity during the first half of the year. The question is, what do you -- what managerial actions do you intend to implement to -- maybe to change the hedging strategy in the supply business? Or what other kind of actions you may take to stabilize the supply activity, the contribution of the supply activity maybe also through, I think that you mentioned that more, the start of a new repricing campaign, if you can give us details on when that should impact the EBITDA of the supply business.? That is the first question. The second question is on the net working capital absorption. In the Slide #10, you are showing EUR 150 million of working capital absorption. And I think that you are mentioning that part of that is related to the gas storage activity. So taking into consideration that you are going to continue buying gas during the third quarter of the year and the reabsorption is not going to happen before or in full by the year-end. Why the company is maintained in the net debt to EBITDA target? What other levers are you considered to maintain that level of 3.4x? And then the final question is on the contribution from the capacity market and the ancillary service market. So, still there is a positive contribution from CapEx -- capacity market minus ancillary service market. So what do you expect for the rest of the year or by the next year? Do you think that these lines should converge and therefore, the capacity market at the MSD market, they contribute -- the total contribution should be equal or even lower? Do you think that there's still this difference between capacity market and ancillary service market should continue to give a positive difference?

Thank you very much, Javier. On the supply activities, of course, we have -- as mentioned also in the call, we are foreseeing the need for a repricing campaign in the Q3 and Q4. This, of course, activities have been already initiated given the fact that there is a 3-month strategies on the results, and we are expecting results mainly in Q4, but even in Q3. This is, of course, driven by the fact that we have been granting our clients much more convenient prices on average, 30% lower than the regulated suppliers, and these contracts are expiring, so we need to reprice those contracts. Of course, the repricing, we don't expect particular churn since our repricing strategy is going to be in line with the market competition. We are also studying BPAs to support and to sort in an outside our production facilities. On working capital, we have had, of course, a seasonal impact of the storage accumulation that is, of course, amplified -- it's always been there, but it's been amplified by the increase in cost of gas. This, of course, is totally being offset by the regulation, given the fact that we have a 2-way contract that allow us to cover the risk of differential prices between seasons. But on the other hand, there is a transitory increase in the working capital that we included actually in the forecast given the fact that in our guidance, we included EUR 200 million of increased working capital right for this reason. Currently, we are experiencing EUR 150 million, EUR 80 million are from storage -- actually, EUR 80 million are for -- from clients that pay in installments. This is in line with what is the -- regulation is implemented and 70 -- sort of between EUR 70 million and EUR 80 million is the storage. We are expecting an additional EUR 70 million in the last part of the storage season that will be reabsorbed in Q4, what else. Ancillary services, we are currently -- we have in our guidance, we estimate the contribution from capacity market basically to stabilize MSD revenues. So we've not giving an additional contribution overall, but securitizing the MSD, we are currently experiencing a positive contribution from MSD, even though we have the capacity market in place, this, of course, needs to be monitored over time. We also know that Terna is taking active action to reduce the cost of service market. And therefore, the market is becoming more competitive in this area.

And as a follow-up, in case of a full disruption of Russian gas supply is something that is not impossible. And how would you quantify the risk for Iren, taking into consideration that probably most of the EBITDA on the gas supply activities is done with retail customers. So how do you quantify the possible negative impact from industrial rationing when it comes to gas supply.

I'm not able to envisage a situation in which the market is sustained because in that case, probably the obligation of everybody will be rediscussed and redistributed. So I have to -- we have to look at any situation in which we are not in Stage 3 in the crisis situation, but we are in stage 2. So a significant reduction in Russian supply, but with the market not at food risk. In that case, we have been very cautious in sourcing our gas in order to meet the obligations that we have with our clients, reaching 100% of coverage of this without any exposure, direct exposure on Russian gas. This, of course, is not a guarantee for everything because there is always an intermediary that might be exposed with other clients on Russian gas. But in terms of -- we -- of course, we selected our suppliers based on the credibility and the stability -- financial stability. So they are all top players in the gas market, we are expecting that if the market is not suspended, and they will continue to support our contracts given the fact that they are not exposed significantly to that market. In addition to this, just to explain better, we are considering totally flexible the -- apart from the MSD needs that are marginal, ,the thermoelectric production. And therefore, we'll be sourcing thermoelectric gas based on the availability of gas.

The next question from Roberto Letizia from Equita.

I would like to go back for a while to the repricing campaign to final customers. So you're all doing that. So I was wondering if you can give us some color on how much are you able to reprice in the sense that I guess, elasticity here on the ability to move the whole increase to customer goes down, regardless of the fact that you're all repricing to the final customer. So not mentioning the churn rate, but overall, the whole market would probably have difficulty in putting through the whole cost increase. So I was wondering how much do you think you can recover in terms of margins in the retail? And how much you think you're going to give up for at least 1 year until full normalization in the [ corn ] repricing. So what's the sense of the feeling on passing on to customer, the increase? Can you please give some more detail on the gas procurement? I was looking for some qualitative comments on the market. So when you talk to the shippers today, what are they saying in -- what are they changing in the contracts? Are they avoiding to sign 1-year contracts? Are they only shipping in the very short term? Will they -- are they asking higher and more large flexibility closes? So how is it difficult today procuring gas in the market? Have you been denied by some player? Or are you able to find gas with no issues currently at the current prices? So can you give us the feeling on how if, it's becoming more difficult, the procurement on the gas side? What do you expect in terms of additional regulatory risk here? And I'm mentioning, if you can take a brief look on '23 in the sense that provided government that doesn't make any severe intervention. How this environment is reflecting on performance in 23? How much is better for you, the current environment for next year? Of course, as I said, provided regulatory risk. It's not that heavy and what kind of risk do you see from that perspective? And final question is on a read-through that one of your companies that did yesterday on adjusting results for some of the losses on the stocks due to the gas procurement. We don't see anything similar here. I was wondering if there is any loss that you registered in your number from the procurement at current gas levels versus the average valorization of the stocks on the gas.?

Thank you very much. On the repricing campaign, of course, we are expecting an important impact around EUR 50 million between Q3 and Q4, and that is due to the fact that we have, on average guaranteed to our clients a 30% discount on the energy prices, this, on average, on 2 years contract. What we are not intervening on 100% of our customer base, we are intervening only on the contracts that are on the edge or are expiring. And therefore, there is a higher differential between current market prices and the prices that were experienced before the crisis. So the individual adjustment is going to be, of course, significant, but eventually in line with what is the current market price. This, of course, will be done and give us -- provide a significant effort on our customer care activities, but we are -- we have been preparing this activity for quite some time, and we are positive on the results that we will obtain. Currently, even market prices are still -- some in our offers in the market are still the most competitive. In terms of supply, as a matter of fact, as I mentioned in the call, gas market is really stagnating, even players that are leader in this market avoid to be -- to actively seek for contracts. And looking at the difference in coverage that we have reached, more or less 60% of our total needs versus last year where we were well above 80%. This is an indicator of how tax is to close contracts. We have experienced changes in clauses. This is, of course, something that we have to take into consideration, especially the exceptional circumstances under which suppliers may be not liable for not meeting the supply are enlarged. We don't expect this to happen in a situation -- in a normal situation, of course. And there has been more concern about supply from suppliers to provide contracts to subjects that have direct clients linked to the contracts so that higher regulatory obligations may arise from, let's say, not the unavailability of gas to their responsibility. So this is the current situation. For that, we adapted our strategy, as I said before, in differentiating the obligations for our clients and for the company. We already had an approach -- an opportunistic approach in terms of production -- on the thermoelectric production that was based on the [indiscernible] spread margin. And therefore, we are extending this opportunistic approach also to the availability of gas, of course. This is not a big deal, but it changes a lot in terms of needs -- current needs in terms of gas procurement. We are still acting in -- actively looking for other opportunities, and in general, there has been added an extra margin for importers for this -- I mean, all the different clauses and difficulties, the loss of liquidity in the market.

Moving to regulatory risk?

No?

I thought you forgot.

I know it's going to be an exercise, but just give us your thoughts.

I think, I mean, you all can see that companies and people are under stress on commodity costs. This is definitely a concern, and it will be a concern for regulatory and for the politicians. But we have to take into consideration that this is not a situation that is there to pass away and it's not a spike in prices that has to be absorbed. This is a situation that will be continued in the next years. Therefore, I am expecting that the intervention from the regulator and from the politicians, if we're going to have a normal government -- are going to be focused on trying to solve the situation long term more than in providing a quick win tax discount or whatever it is on extra profits that are not there that discourage investments because what the real solution for this crisis is additional investments in changing the mix -- energy mix change, changing the energy sources. Therefore, additional let's say, taxes on energy providers is going to discourage investments in the area, which is exactly what you shouldn't do. And in terms of losses on stock of gas procurement, we don't have to register nothing because we have registered gas prices at the correct cost -- the correct sourcing costs, and we have a 2-way contracted coverage using the regulation, and we're not inventing anything that is covering us from the risk of having sourced a summer gas at higher prices than winter gases.

We are going now to take our next question from Emanuele Oggioni from Kepler.

I have, first of all, a clarification on the gas procurement. I think, I suppose your guidance refers of the thermal year, so including also Q1 2023 and not only Q4 2022. And secondly, still on gas and in this case, retail energy supply business. I wonder if you have and how much is on the total customer base, on the total contract portfolio. What is the path based on fixed fee? So basically, not sensitive to volumes. So the volumes are a pure pass-through. And so in this case, you could avoid at least for this part of contract to have a loss in the case of curtailment of gas supply. Secondly, another question on generation business. I wonder curtailment of gas supply. Secondly, another question on generation business. I wonder what is included in your guidance as regards the drought in Italy. So we see -- we saw minus 50% year-on-year in H1, what we should expect? I think the route in Italy is worsening. So we should expect also minus 60% or more than minus 50%. So what is embedded in your guidance? And still on generation, could you provide an ag update on pricing or price in 2023? And if you remember, as the how much the hydro capacity will -- could be affected also in 2023 by an extension on the price gap on hydro generation business? And finally, I have a question on the your projects on LNG fully authorized. You have a 50% stake. Could you update on this in terms of there is some news on these?

Let's see. The first question on gas procurement, the guidance is for full thermal year. Of course, we -- the 60% coverage that we are talking about is out of EUR 2.6 billion of cubic meters that are our full year consumption, including thermoelectric, of course. And therefore, we have a coverage of 50% of that demand, 100% coverage of the part that is mentioned intended to cover the needs -- the right needs of clients and indirect needs through heat distribution in district heating. We don't have the coverage of the electricity production of our cogeneration plants and our thermal [indiscernible]. This is still to be defined. We are working on it. The energy business supplied space. What is variable? We have 75% of variable prices in gas on our clients, 25% are fixed. Of course, the repricing campaign is acting mainly on the -- actually fully on the fixed one. And the drought. What we have included, we have included a projection of taking into account the level of our basins not to have, I mean, to have an average autumn and winter in terms of waterfalls. Overall, we are expecting to have 720 gigawatt hour versus 1.2 terawatt hour last year. And in terms of cap price on hydro, this is definitely something that, I mean, we need to -- I mean, the government might take into consideration even though actually, the provision that they put in place last year was not that effective in terms of contribution is impacting on us on 50% of our capacity. There might be any positive impact from hedging that drives on the fact that the hedging volumes have been remained unvaried, whereas the agro production has been reduced, and therefore, this should be included, but the authority is still working on it. There might be an intervention next year, we don't know. But I mean, it's not -- the size of the intervention is not one that should be impacting particularly our numbers. In terms of [indiscernible], as we mentioned, the project is fully authorized is already being granted our Garanzia, which is basically the tariff or 64%. We are not currently available to build a plant with only that factor of guarantees. And that is the element that should be considered. But I think there's no rational investor could bet on the fact that Europe doesn't return to peace with Russia. So that is definitely an essential infrastructure that should be decided based on the general policy, I would say, not only of Italy but of EU sourcing because, of course, every country and probably Italy is the one that could eventually reach independence from Russian import more easily. But if you account for the overall import in the continent, definitely, you need to have LNG capacity across all the costs even to diversify risk in the network to supply Central Europe. And therefore, a strong infrastructure, stable infrastructure in Italy should be part of the Italian plants, probably next government, this was to transitory, the government is so not able to develop a strategy long term. next government will need to tackle this issue. In the meantime, we are working together with Sorgenia to develop the -- and to update the project in order to be able to award as soon as the regulatory regime is clarified to award the [ delayed ] construction contract.

We are now taking on next question. The next question is from Roberto Letizia from Equita.

Yes, very briefly, can you give us a net income guidance for the full year, if possible?

I cannot give you the guidance, of course, because I don't have the ability to see in the future on what the government will implement. What they can...

Provided flat attitude from the government, what kind of net income would translate from your EBITDA guidance at constant, of course?

I can invent a guidance on this quarter. We have not...

We never gave an income guidance.

My CFO is against, so I will not do things against my CFO. No, but...

I take the blame, okay.

I'm not kidding, but we are confirming the dividend guidance of 10% CAGR growth rate versus last year.

There are no further questions at the moment. [Operator Instructions]. There are no further questions. I will hand back the conference to Mr. Gianni for closing remarks.

Well, thank you very much for following our call. We will try to keep on track in the next future calls. Thank you very much. Bye-bye.

That concludes the conference for today. Thank you for participating. You may all disconnect.