Iren SpA (IRE) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Iren 9 Months 2022 Results and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand over to your first speaker, Mr. Giulio Domma, Head of Investor Relations. Please go ahead, sir.

Welcome. Welcome, everybody, and thanks for attending our 9 months conference call. As usual, first, the presentation will be given by the CEO, Mr. Armani; and the CFO, Ms. Anna Tanganelli. Then, the Q&A session will follow. Gianni, the floor is yours.

Thank you very much, Giulio, and good afternoon, everybody. Starting on Page 2, we would like to show the main highlights of the last 9 months results. EBITDA increased by 4% year-on-year, thanks mainly to the development of renewable business and the contribution of waste treatment business. Almost EUR 1.1 billion of gross investments, 1.8x higher than last year as foreseen in the business plan. In a year in which we experienced some strong headwinds, such as the extreme volatility in the energy scenario and the severe drought, nevertheless, the group managed to grow, thanks to the development of the asset base and mitigating actions undertaken by the management. Despite the almost doubled revenues and the possibility of paying bills in installments for customers, the trade net working capital recorded an increase of only EUR 80 million compared to full-year 2021. That was possible, thanks to the continuous, as explained later, to the continuous monitoring of working capital flows across all businesses and the timely intervention with corrective actions. Taking into account all these elements, we continue to confirm the guidance for the end of the year despite the very challenging remaining quarter. Moving to Page 3 and our ESG results. We can see from the slide, our sustainable growth path continued with all major KPIs on track or ahead of the plan. And we can use ESG KPIs as a good representation of our industrial performance. We reported a slight increase in the carbon intensities that stands at 338 grams of CO2 per kilowatt hour. This is because of the severe drought occurred in the period that strongly impacted our hydroelectric production and reduced the efficiency of our CCGT facilities. Taking into account these 2 elements that are non-recurring, the reported result would have been 322 grams per CO2, so 2% less than the figures presented in 2021. On the other hand, the last 9 months, we increased our material recovery and biomethane production, thanks to the new plant phase-in during the period. We strengthened our local presence, increasing the waste collection inhabitants served through the consolidation of Sei Toscana and the EPC value of rebuilding projects rise 2.7x compared to last year, resulting also in a very good performance on EBITDA. Furthermore, we were able to maintain a flat sorted waste collection at 69%. Even if the amount of waste, on average decreased 3% during the period due to the slowdown of the economy that occurred during this period, of course. Finally, it's worth mentioning that the continuous decrease in the water withdrawal, minus 4%, is representation of the reduced water losses. We also reported a positive service quality perfection from the clients, particularly in physical stores and the increase of digital contacts with our clients. Sustainable investments overall amounted for 72% of the total during the period. Moving to Page 4. We show the key financial figures of the period. As said before, 9 months of 2022, EBITDA reached EUR 759 million, reporting a 4% growth, except at the beginning and mainly reported -- related to the following factors. The capacity market, which contributed for EUR 51 million, combined with the renewable asset performance of EUR 44 million additional EBITDA, which was counterbalanced by the negative impact of the drought and the energy scenario, equal to EUR 70 million negative on the EBITDA. The impact of the drought affected sales also in the first half of the year, both the energy business unit with a lack of hydro volumes compared to the previous years, but also market view due to lower natural hedging volumes that had to be compensated with purchasing of energy in the market. Organic growth of EUR 25 million was mainly driven by rebuilding activities carried out by Iren Smart Solutions, and the new waste treatment plants that entered into operations. It's important to mention that the network business are up. Growth was partially offset by the WACC review that we experienced last year. Over the period, we experienced also higher operational costs primarily related to fuel and internal uses of energy, of which I recall is a pass-through only for the water business. That will be recovered in the tariff in the coming years for the part of the cost that refers to regulated activities. The decline in net profit is largely due to extraordinary change in the elements reported in 2021 versus 2022, accounting to 72% -- EUR 72 million. Excluding these extraordinary elements, the negative performance is mainly due to higher depreciation of new industrial investments that entered into operation without registering the increase -- or a deferred increase in EBITDA. And increase of bad debt provisions as a result of the doubling of revenues in the period. Finally, net financial position at the end of September was equal to EUR 3.86 billion, increasing versus December last year due to a strong investments and acquisition, mainly in the period and the large impact of gas storage cost that is reported in this 9 months results. I now hand over to Anna to go through each business unit results.

Thank you, Gianni, and good afternoon, everyone. Let's now move to our business unit results. Let's start with the business unit Networks on Slide 5. On the EBITDA, the 7% RAB increased, mainly driven by water and electricity networks, was entirely offset by, one, the regulatory revision of the WACC, which accounted for EUR 10 million in total; and 2, by higher operational costs, the majority of which will be recovered through tariff over the coming years. In the period, we also reported EUR 9 million of positive one-off, mainly related to tariff adjustments for previous years. As for investments, gross CapEx increased by 20% over the period. And consistently with previous quarters, such increase was mainly linked to the revamping of wastewater treatment plants and to the increase of our networks' resilience. As a result districtization activities, which I remind, are crucial to improve monitoring and time intervention continued, reaching more than 63% of the grid by the end of September 2022, up from 58% of last year. Turning to Slide 6. The Waste business unit posted a plus 20% EBITDA increase year-over-year, reaching EUR 197 million, mainly driven also in this quarter by the strong performance of waste treatment facilities. Such growth was the result of 3 main factors. One, a supportive pricing scenario on the energy stored by WTEs, combined with higher volume as shown in the chart on the bottom right. Here, you can see that heat volumes were up plus 23% year-over-year, while electricity volumes were up plus 4%. 2, higher prices and volumes of recovered material and waste intermediation. And 3, the phase-in of the 2 new organic waste plants with biomethane production launched in the second half semester of 2021, which brought our overall unit in production to 4.3 million cubic meters by September [ 10th ] and contributed for EUR 600 of EBITDA in the period. As for our collection business, the slight margin reduction versus prior year is mainly due to higher operational costs, primarily fuel and inflation, which will be recovered for tariffs over the coming years. This negative impact was partially offset by the consolidation of Sei Toscana, the waste collection company operating in the southern part of Tuscany, which has been fully consolidated since July 1st of this year. Investment of the business unit totaled EUR 118 million, plus 14% versus prior year. And the growth here, as we already commented in our previous calls, was mainly linked to the development of several new treatment plans over the period. You might remember the new organic traction treatment plant, biomethane production in Reggio Emilia, the wood treatment plant for pilot production in Vercelli and the plastic and paper treatment plant in Borgaro Torinese. Now looking at the remaining part of the year, we expect the waste business unit to continue also in Q4 the same positive EBITDA performance reported in the previous quarter, thanks to the contribution of the newly consolidated Sei Toscana [ we said ], and the support coming from the increased biomethane production, as well as the continued strong performance of WTE plus in the next few months. Moving to our Energy business unit on Slide 7. Here, EBITDA increased by EUR 90 million over the period from EUR 170 million to EUR 260 million, thanks to the positive margin contribution of the solar assets acquired beginning of the year and of the capacity market, which countered on a severe hydro reduction resulting from the drought. In particular, solar assets contributed for EUR 44 million of EBITDA, thanks to over 170 gigawatt hours produced. This result was partially offset by the impact of the government decrease of [indiscernible], which accounted for EUR 4 million in the period. As we revised downwards as a result of the lower hydro production, our previous estimate of the impact of this measure, you might recall, we have announced EUR 11 million in H1 2022. And we now revise this number down to EUR 4 million. In fact, hydro volumes reduced by almost 400 gigawatt hours versus September 2021, affecting also revenues from green certificates. On the flip side, though, the MSD market contribution from hydro accounted for EUR 10 million in the period. CCGT and Thermo facilities continue to benefit from the contribution of the capacity market, which accounted for overall EUR 51 million. At the same time, the business reported a minus EUR 10 million decrease in MSD margin compared to previous year. In addition, production volumes contracted as a result of the temporary cooling difficulties, as well as a turbine failure occurred at the end of June, but will be fully recovered in Q1 2023. Overall, the MSD of the group was flat versus prior year and equaled to EUR 70 million in total. Heat showed a positive performance also in this quarter, despite a slight margin weakening linked to seasonality and the [ expiration of TEs ] accounted for minus EUR 23 million over the period. The good trend of the energy efficiency business, our Iren Smart Solutions, continued also in Q3 with its EBITDA increasing by EUR 16 million year-over-year. As far as the outlook for Q4 is concerned, we expect hydro margins to normalize over the next quarter, combined with the higher spark spread on gas plants, which is expected to more than offset the lower volumes linked to the turbine failure. Going to Slide 8. Well, you can immediately see from the chart that the Market business unit margin performance shrunk in Q3 as a result of the lower hydro production commented in the previous slide, combined with exceptional volatility of the energy scenario. The strong reduction in electricity margin was mainly driven by the impact of extraordinary high prices on our unhedged volumes. On top of that, exposure to market prices was greater than expected due to, one, a lower naturally hedged volume as a result of the severely reduced hydro production and 2; higher supply volumes given the unexpected lower churn rate of the period and higher summer consumption. This explains also the plus 27% volume increase to retail and SME clients, as shown in the chart on the top right. If you remained for a second on this volume chart, you can see that the lower electricity sold to business clients was a strategic choice made by the group to optimize the working capital, focusing on businesses with sound credit ratios, while the growth in wholesale volumes was related to opportunistic transactions carried out in H1 2022. Moving to gas margins. We already commented the performance during our last call on H1 results. Here, the decrease was linked to a spike in unhedged volumes associated with colder temperatures, in particular during March and April of this year, bringing us the purchase volumes on the top market at exceptionally high prices. Last but not least, our customer base reached over 2.2 million customers by September end, of which electricity grew by plus 13% and gas by plus 8% versus year-end 2021. Now looking at the next 3 months, we expect the negative EBITDA trend experienced by this business unit to finally terminate and profitability to return, to be in line with last year's quarter results, also thanks to an increase in hedged volumes in Q4. Okay. Let's now briefly comment the key P&L items below EBITDA on Slide 9. Depreciation was up EUR 45 million versus prior year as a result of the acquisitions made during this period, as well as the increase in CapEx. Bad debt provisions increased by EUR 7 million year-over-year, taking into account the exceptional growth in revenues occurred over the last 12 months. But please note that to date, we have not yet experienced any significant deterioration in our credit portfolio, nor in our past due receivables, although we remain very cautious for the remaining part of the year. We also released legal provisions for EUR 12 million in H1, following the positive settlement of certain claims with suppliers and other institutions. One comment on the cost of debt. Our average cost of debt fell by 10 basis points versus prior year to 1.6%. This is a remarkable result considering that the overall market, as you very well know, is actually moving in the opposite direction and was enabled by our high share of fixed rate debt and by a prudent management of our financial resources, which brought us to secure during the year bilateral funding at favorable terms with several institutions. No particular remarks on taxes as the impact here is entirely linked to the Contributo di solidarieta decree, which amounted to EUR 31 million, as we had already announced and booked in H1. Finally, minorities increased by EUR 8 million versus prior year due to the good performance of all the not fully owned subsidiaries such as CRM, which is the WTE of Turin As a result, net profit for this period was EUR 138 million, down approximately EUR 100 million versus prior year, which, as you might recall, had been positively impacted by more than EUR 40 million for positive one-offs. Okay. Last but not least, let's now comment on the net financial position evolution over the period on Page 10. Net debt increased by EUR 951 million year-over-year, mainly as a result of the net investments and acquisitions carried out during the period, which accounted for almost EUR 900 million, in line with our 10-year strategic plan. The net working capital performance, on the other hand, highlights once again also this exceptionally adverse and complex environment, our ability to effectively manage and continuously optimize our trade working capital. Gas storage increased by EUR 290 million versus prior year as a result of higher volumes, plus 14% year-over-year and higher prices compared to September last year, in line with the security of supply commitments requested by the government. This effect is expected to be fully absorbed between Q4 2022 and Q1 2023. At the same time, the temporary elimination of system charges foreseen by the Italian government, entailed an increase in receivables for around EUR 60 million. As a result, trade net working capital grew by only EUR 80 million over this year, despite the doubling in revenue and the bills installment payment measure introduced by the government. Okay. I will now turn the call back to Gianni for a run-through of the action list we put in place over this year to counter the numerous headwinds faced and for our closing remarks.

Thank you, Anna. Moving to Slide 11. I would like to add some color to the actions that the group has taken to limit and eliminate the impact of negative external factors, in particular in Q3 that, as you know, is the quarter in which the performance of the company is normally less effective. Concerning the energy management, we secured 80% of gas annual needs from autumn 2022 to summer 2023, which we estimate around 2.4 billion cubic meters, taking into account the expected savings in consumption. Rescheduling of payments and in both collection terms, coupled with an active [ pool ] of clients exploiting artificial intelligence tools, allowed us to effectively manage trade net working capital, containing its increase. Strictly connected to the energy management is the topic of margin calls on energy derivatives. At the beginning of the year, the group has made a strategic decision to stabilize all open positions in the European Energy Exchange, which is the market that is requiring daily margin calls. And to stop any further activities on EEX thereafter, hedge infrastructure has been transferred to the OTC market where Iren managed to secure contracts, which don't require cash collaterals. As far as capital structure is concerned, at the end of September 2022, the group had almost EUR 1 billion of liquidity against debt maturities of EUR 384 million in Q4, and only EUR 52 million during all 2023 full-year maturities. On top of that, Iren had additional commitment and hot money lines available from banks to support the daily activities on the energy market and further strengthened the liquidity and credit ratio vis-a-vis our rating agencies. Finally, the double-digit inflation, we're already experiencing a negative outcome on our operational costs. However, in the regulated business, it is possible to recover this higher operational cost in the tariffs during the next years. And in addition, RAB itself will be reevaluated using a larger deflator. On the non-regulated activities, the inflation cost will be recovered, thanks to the significant ongoing performance improvement projects outlined in the business plan. Moving to the closing remarks on Page 12. Despite the tough environment, Iren reinforced over this 9 months, its investments towards the energy transition, thereby achieving several sustainable targets ahead of the 10-year plan that we approved last November, mainly thanks to the renewable and large [ geographical perimeter ] on waste collection. Doing so, we also maintain our strong focus on financial discipline, effectively managing our working capital through several actions that we already described in the previous slides. Finally, it's worth mentioning that we expect a challenging last quarter ahead of us, where the stop of repricing activities will be combined with a severe scenario and volatility. Nevertheless, the negative impact on market view, profitability is expected to be compensated in 2022, thanks to a stronger estimated margin contribution from energy and waste use. We, therefore, can confirm full-year 2022 guidance, in particular, EBITDA growth up 6% versus last year. Gross investments at EUR 1.4 billion in line with the 10-year plan, favoring projects, of course, that ensure shorter time to EBITDA performance. And in particular, net financial position over EBITDA at 3.4x. Let me underline that this is our key target in the short term. And these uncertainties in terms of scenario is important to keep under control net financial position versus profitability. And we're strongly committed to keeping these financial ratios under control. Any potential shortfall in EBITDA will therefore be offset by corrective action to contain leverage. Thank you for the attention. And we can now move to Q&A session.

[Operator Instructions] The questions come from the line of Javier Suarez from Mediobanca.

Three questions. The first one on the financial position, the second one on the supply business, and the third one on the overall strategy balancing CapEx and dividend. So on the financial position, the company confirms the target for net debt-to-EBITDA of 3.4x by the end of the year. So can you help us to understand which is the -- which are the building blocks on that argument? I'm particularly interested on your assumptions related to working capital absorption, what you are expecting by the year-end? And why do you feel -- do you feel comfortable in a scenario on which maybe working capital absorbing becomes an issue because of the macro situation? Why the company feels comfortable that through its managerial action to contain that net debt to EBITDA at just 3.4x by the year-end? The second one is on the market division. So obviously, there is a very difficult scenario that has become even worse for you due to the ongoing drought. So the question for you is, what has changed for the company in terms of commercial strategy in the supply activity or hedging strategy as well? And how the company intends to change both aspects to face the last quarter of the year and the year 2023? Because that is probably an area of concern, the capacity of the company continues dealing with what seems to be a very complicated supply market. And the third question is on the scenario. So the question is a little bit of a higher profile in the sense that you are accelerating on CapEx. CapEx has almost multiplied by 2 inter-rate scenario changing significantly. So how do you see that equilibrium between a company accelerating on CapEx cost of financing that becomes more stringent down the road. So how the company tends to modulate these 2 moving pieces? And part of the question is also related to the capacity for the company to consider asset rotation as part of the strategy. It has appeared on the trade, the possibility of setting a minor various stake on your distribution activity. If you can comment on that, that would be helpful as well.

Okay. Very clear. First of all, working capital. We -- of course, we have a seasonal effect that is very strong this year. That is the reduction in storage. That is the use of storage will reduce. Of course, the EUR 300 million that we have inflated in the storage facility. And this is a reduction, more or less of EUR 120 million, EUR 150 million in our working capital. Then in general, we have managed during this tough 3 months to rebalance our, let's say, incoming flows versus outgoing. And therefore, by having tuned the days in which we get paid versus the days in which we collect, we are confident that we can keep this balance unchanged. Third, we have been very effective in managing our collection of clients. And this is in part a general effect in the market. The fact that the aggressiveness and the commercial actions by the market, in general, has reduced the churn. This [ hasn't ] changed, reduced the number of the quantity of last invoice the clients leave when they change -- when they switch the suppliers. And this fact -- this normally is the biggest source of bad debt for this kind of business, and therefore, we expect this not to change in the coming months. Then, of course, there is, in general, an effect that we can foresee with different prices. As market prices goes up, we generally have an increase in EBITDA, but also increase of working capital. And this also works when the price goes down, so this made -- it make us very confident in the ability to manage the net financial position over EBITDA ratio. On the supply, of course, on one hand has exposed very well by Anna, and we were exposed by sudden unbalancing our hedging policy, that was up to 20% of our total volumes in part from unexpected higher consumption in the summer impacted by lower churn during the period, and finally by the reduction in natural hedging quantity. Of course, all these 3 elements have been counterbalanced by our hedging policy and therefore we don't expect additional impact going ahead. And it's worth mentioning that, of course, all these short-term impacts that we're experiencing in this phase at the market will some day change on the flip side. So it's good that the company is holding the position without having a strong impact going forward. Finally, on CapEx, first of all, there is a strategic element that we have to highlight, both for renewables and the circular economy. The value of those investments has only increased in these difficult times. So the urgency to -- and the value of these investments is increased and you can see it from the value that was generated by the acceleration in renewables this year. So we see a strong value in those investments in the implementation of biomethane infrastructures and so on. Secondly, we can state that arriving at EUR 1.4 billion of investment, this year, we're already in a steady state position in terms of investments and trend during -- and the company is -- with this cash flow is managing this amount of investments well. Thirdly, we have accelerated, as you might have seen from some articles that we're accelerating the asset rotation policy that we introduced in the business plan. We, as you know, have planned to find partners to finance the development on the gas networks that is a priority in our business plan. And we have several other initiatives that potentially can be activated in order to find partners to finance our investments opportunities.

We're now going to proceed with the next question, is from the line of Roberto Letizia from Equita.

My first one actually goes on the repricing activities in -- on your clients. So I guess repricing is having a stop or a slow down also due to the government intervention. I was wondering when do you actually expect your price to go back to market level? When on average do you see the average expiry of your existing contracts which will allow you to get the final margin to clients improving? I have a question on the gas storage. Just a clarification to be sure on the margin evolution going forward. So you had a lot of fill up of gas storage as many other operator in the market. I was wondering if this gas is already covered by selling contracts in a sense that the gas you filled in today has been filled at very high prices while the price for the regulated customer is going down with the new way the government is -- the regulatory is looking precisely. So I want to be sure that the gas you fill in a very high prices, it's not having any margin issue in the coming months because it has been already attached to selling contracts? I was wondering if you can touch please the upcoming potential regulatory risk. So the new Prime Minister is already anticipating some action lines for the coming months which touches again the issue of the extra profit taxation, if you had any chat with them, any thoughts on what can be done on this field and what kind of risk may exist for a company like you? And a final one, you confirmed the EBITDA guidance. I was wondering if you can give us a net income indication. In case you cannot provide it, you can at least give us what do you expect in terms of D&A and provisioning. So basically difference between EBIT and EBITDA including provision consequently for the full year just to give us a better chance to assess the net income for the full year?

So you are asking for the absolute value or then...

The breakdown.

No, both of them. So I'm curious also about the amount of overall provisioning that you were going to do this year, certainly, yes.

Okay. First of all, repricing as we mentioned on the first half, we were projecting EUR 50 million of extra margin on repricing. This has, of course, been forbidden by the, as you see this, intervention and we offset all of it already in the forecast with compensating actions on the energy business unit and waste, of course for this year. Then we have, of course, a discussion open on as you might have raised on the deadline at which this you see will be applicable. We together with the authority for energy consider the end of the contract as the end of the application of [ UPB ], whereas the antitrust has a different opinion. You know, of course, confronted with this opinion, taking into account that the regulation that was approved also by the European Commission implies that if you enter into a private contract, you have to give -- to compensate for eventual losses that should be put in place in order to compensate for this. So for this year, this discussion does not have any impact on the current forecast for EBITDA. We still have to program and to see what is the impact for next year, but of course we have so many things that are open for the next year that we can -- we will give you the difference, I mean the value as we close the 2022 results. On storage, we have -- of course the storage implementation was done during a very high price period. Of course, current prices are very low, but this is because the demand is extremely low. And this, of course, is not a representative of what our all the sites will experience during the winter, the real winter. Of the total amount of storage, we have 50% that is hedged with the 2 way contractor system that was implemented by the tariff. And 30% is hedged with a fixed price. We have the remaining 20% that is exposed to the value of our client contract. On extra profits, of course, we have no ability to forecast what the authorities have in mind. What we can see that the decrease in net gains from the company profit -- the company is a representation of the fact that our company at least is paying extra profit, but is not making extra profits. So I think this should be evident also to the government. Therefore, probably new resources will need to be found in order to offset the part of the extra cost that clients are bearing that I think they should -- they cannot be taken from the energy companies. Otherwise [Technical Difficulty] state an impact on investments and there are, I mean, more profound crisis. On net income, we can say a few things. We can say that we project net income in line that we split, that that we registered before 2021. This is -- so is that more or less EUR 70 million which is the extra provision, so that are registered this year and are not registered -- positive fiscal one off. And so this is our expectation. G&A is around EUR 500 million, EUR 520 million more or less.

So we are talking about a net income in the region EUR 240 million. Is that correct? You mentioned...

More or less.