Iren SpA (IRE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Iren's First Quarter 2023 Results Conference Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Giulio Domma, Head of Investor Relations, to begin the conference. Giulio, over to you.

Thanks, and hello, everybody, and thanks for attending our conference call on the first quarter results. I'm here with our CEO, Mr. Gianni Armani; and our CFO, Ms. Anna Tanganelli. And as usual, they will give us first the presentation, and then we'll have the room for the Q&A section. Gianni, please go ahead.

Thank you, Giulio. Good afternoon to everybody. Starting on Page 2, I would like to highlight what has happened in the first 3 months of 2023. First of all, EBITDA growth is in line with our guidance and with our budget. The recovery in Market BU profitability was partially offset by the reduction in energy volumes registered during the winter. Organic growth was supported by significant investments carried out in the last period and was partially offset by higher operational costs due to inflation mainly, still not captured by the tariffs. Sei Toscana consolidation contributed to EBITDA increase and this highlights once again the capabilities of the company to quickly integrate and improve new companies as they enter the group. The recent upgrade in rating positively judges our sound financial discipline and our strong commitment on cash flow optimization, focused on regulated businesses and our business plan as a whole. Taking into account these elements, we confirm the guidance at the end of the year. Moving to Page 3. Also, this quarter continued our sustainable growth path in all key indicators and they are all on track with our plans. First of all, the reduction in carbon intensity that stands at 301 gram of CO2 per kilowatt hour is the combined effect of lower thermal production, higher renewable and improved efficiency in the emissions on WTE, in part contributed by the reduction in humidity content in the waste treated in the plant. Positive achievements likewise on the material recovery in our plants and the production of biomethane, which will benefit even further this year with the phase-in of 2 additional plants that are going to enter into operations in the Q2. We continue to reinforce our sorted waste collection performance to 70% and extend heating volumes reaching 102 million cubic meters distributed and also in completing our -- the development of rebuilding projects that was started 2 years ago. Finally, it's worth mentioning that districtization activities on the water cycle continued, reaching 65%, enabling to decrease water withdrawal by 5% is significant performance in the reduction of leakages. Sustainable investments account for 80% during the period. So we continue as we stated in our plan. On Slide 4, it shows the key financial figures in the period. In the first quarter of the year, EBITDA was EUR 368 million, reporting 2% growth as anticipated in Slide 2, mainly related to the following factors. First of all, the Market BU recorded recovery in profitability from 2022, particularly in the energy supply. This is contributing by EUR 37 million. At the same time, energy volumes negatively hit EBITDA... [Technical Difficulty]

Please standby. We're just going to place you on music hold with the technical difficulty. We'll now resume the conference call.

We -- excuse us for the convenience. I don't know what has happened. Technology's way too complicated to understand at this point. So we'll restart from Slide 4, if you don't mind. I was mentioning the performance of Market BU that recovered profitability compared to last year by EUR 37 million. Energy volumes impacted negatively EBITDA by EUR 34 million. This is the contribution of 2 elements. First of all, lower volumes due to mild temperatures, energy efficiency initiatives, but particularly demand elasticity given the high prices in 2022. And this accounted for EUR 30 million out of EUR 34 million. And the reduction in electricity volumes mainly due to the not yet available thermoelectric turbine that had an outage in 2022 and restarted operation in Q2. Sei Toscana, the waste collection company, operating in Siena is fully consolidated since July 2022 and reported EUR 7 million during this quarter. I reminded last year, from July, reported EUR 7 million in Q2 and Q4 -- in Q3 and Q4 last year. Organic growth is contributing by EUR 6 million, mainly driven by network tariffs in waste treatment plants. At the same time, during the period -- this period, we experienced emerging costs mostly related to inflation, which is to be recovered in the next years in the tariff, particularly on regulated activities. Net profit was up 14% due to the absence of extraordinary tax on energy bills, the so-called Contributo di solidarietà. And going on CapEx -- technical CapEx, the contribution in growth of 34%, while total CapEx were down 30% because of last year numbers were affected by the cash out of the acquisition of photovoltaic asset. Finally, net financial position at the end of March was equal to EUR 3.7 billion, increasing versus December last year due to temporary net debt... [Technical Difficulty]

Please hold on. We'll place you on a short music hold.

Do we now continue the call?

Yes, okay.

Thank you very much. Excuse us again for the technical default. I was talking about net debt. The increase is mainly due by net working capital expansion that we expect to be reabsorbed by the end of the year. And we will explain later. Anna, particularly, will explain later in the presentation. Now I'll hand over to Anna to go through each business unit and the financial evolution.

Thank you, Gianni, and good afternoon to all of you. Let's now move to our business unit results, starting with the business unit networks on Slide 5. Q1 2023 EBITDA was in line with prior year as the increase in tariffs resulting from a 7% RAB growth year-over-year, mainly driven by water and electricity networks, was entirely offset by higher operational costs. The majority of which will be recovered through tariffs over the coming years. As for investments, gross CapEx increased by 31% 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 electricity networks' resilience. Brief focus on water distribution. We are successfully progressing in our strategy to consolidate companies in which we hold minority stakes. In particular, at the end of March, Ireti acquired 51% of AMTER, a water management company based in Liguria, with about 35,000 inhabitants served. And at the beginning of April, we signed definitive agreements for the acquisition of a majority stake in Acquaenna, a water concessionaire in the province of Enna with almost 180,000 inhabitants served. Closing is expected by May end. Moving to Slide 6. The waste business unit EBITDA posted a plus 4% increase year-over-year to EUR 68 million. The higher PUN price on the electricity produced by WTEs in Q1 2023 versus fully hedged prices at pre-crisis levels in Q1 2022 has been counterbalanced by several factors. One, lower energy volumes sold, minus 3% year-over-year; two, a contraction in heat prices compared to Q1 2022, which had been positively affected by a spike in gas prices; and three, a reduction in prices of recoverable materials deriving from sorted waste collection. As for our collection business, positive contribution from synergies resulting from the consolidation of Sei Toscana. Finally, efficiencies achieved in the period were offset by higher operational costs due to inflation. In the quarter, we also doubled investments to EUR 47 million versus EUR 23 million in Q1 2022. And as you already very well know, the growth here was mainly linked to the development of several new treatment plants, 3 of which will come into operation by year-end, i.e., the wood treatment plant for pallet production in Vercelli; the plastic and paper treatment plant in Borgaro Torinese; and the new organic fraction treatment plant with biomethane production in Santiago. Turning to Slide 7. The energy business unit EBITDA decreased by EUR 31 million over the period to EUR 134 million, mainly as a result of lower volumes. The overall price effect was flat despite the generally negative price scenario, thanks to the positive impact of our hedging strategy on hydro prices and on clean spark spread. Heat was down EUR 42 million compared to prior year due to lower distributed volumes, i.e., minus 250 gigawatts year-over-year, along with lower margins versus Q1 2022, which had been strongly affected by gas price volatility. The contraction in distributed volumes as a result of milder temperatures and customers' saving actions was only partial affected by the network expansion, which reached 102 million cubic meters by quarter end, i.e., plus 3% of distributed heat. As for hydro, the positive performance was supported by higher year-over-year prices and the contained volume increase of plus 22 gigawatt hours compared to last year, notwithstanding the overall persistent drought. These positive elements were partially offset by higher concession fees versus Q1 2022. On thermal, the reduced production volumes of the Turbigo plant was due to the continuous turbine outage, which led to an overall year-over-year drop of around minus 400 gigawatt hour... [Technical Difficulty]

Please standby. Due to technical difficulties, we will just go on a short music hold.

Production volumes of the Turbigo plant were due to the continuous turbine outage, which led to an overall year-over-year drop of around more -- minus 400 gigawatt hours, while CCGT plant volumes suffered from a lower sheet and as a result, electricity output. Turbigo returns to normalized production levels beginning of May. At the same time, the higher clean spark spread of the period was offset by a lower MSD of EUR 7 million versus EUR 50 million of prior year. Finally, the positive performance of our energy efficiency business continued also in Q1 2023 with its EBITDA increasing by EUR 7 million year-over-year. Going to Slide 8. It is immediately visible from the chart that the Market business unit substantially recovered its profitability in Q1 2023. This recovery has been achieved despite an overall reduction in volume. On electricity, the reduction was the result of a change in client mix, shifting more focus from businesses to retail clients to minimize price and volume volatility. As for gas, the warm weather combined with energy savings actions put in place by retail and business customers led to an overall contraction of volumes sold. Full recovery of our customer portfolio will be completed within the next quarter. Let's now briefly comment with the key P&L items below the EBITDA on Slide 9. Depreciation was up EUR 20 million versus prior year as a result of the acquisitions made and the increase in CapEx carried out during the period. Bad debt provisions were essentially in line with Q1 2022, and no particular remarks also on taxes. Please here remember that Q1 2022 had already been negatively impacted by the Contributo di solidarietà” decree for EUR 24 million. As a result, net profit for the period was EUR 135 million, up 15% year-over-year. Let's now comment on the net financial position evolution over the period on Page 10. Net debt increased by EUR 369 million versus year-end, mainly as a result of EUR 190 million of net CapEx carried out during the quarter, in line with our 10-year strategic plan and the temporary increase in our net working capital. In particular, the EUR 345 million of temporary increase in net working capital was linked to the following factors: EUR 120 million related to an acceleration in CapEx execution in Q4 of last year. This is very much recurring in our business model. We usually accelerate CapEx in the last quarter of the year. EUR 105 million of seasonal ordinary working capital absorption... [Technical Difficulty]

Please standby. We will resume shortly.

I think technology is sabotaging our call. So I'll try to speak faster. So at least you can get to the other slides, the comments on all the slides. Okay. So in particular, I'll go back to the comment on the temporary increase in net working capital. I was saying, EUR 120 million were related to the CapEx executed in Q4, and this is very much recurring. EUR 105 million were seasonal ordinary working capital absorption. EUR 60 million were linked to a change in waste collection payment method. We moved from monthly payments to different -- to half year payment terms in selected areas. And then EUR 60 million were due to gas payment terms still not normalized in Q1 2023. In addition, in the quarter, we also accounted EUR 130 million of tax credits, mainly related to Superbonus 110%, which we are going to factor so to sell in the second part of the year. So given all the above, out of the overall net debt increase, approximately EUR 350 million will be reabsorbed in the next quarters and, for sure, by year-end. I will now turn hopefully the call back to Gianni for our closing remarks.

Thank you, Anna. Moving to the closing remarks on Page 12. We would like to point out that we expect in the next quarters a solid contribution from the supply business due to our commercial strategy and the successful preemptive hedging activity. And since the beginning of May, we restored full availability of thermoelectric plants due to turbine repair. And on the industrial side, we want to highlight that we expect the phase-in of 3 plants on the waste treatment activity and new photovoltaic parks for overall capacity of 70 megawatt. In addition, we want to highlight the conclusion of the first phase of the public-private partnership proposal that was granted in public interest on the hydro concessions in Piemonte region. This will involve 300 megawatt of plants that have expired the concession. And the proposal is going to extend the concession for additional 20 years in a regulated framework fashion. Finally, we want to highlight in terms of outlook that net... [Technical Difficulty]

Please standby. We will resume shortly.

On the full year outlook, we have net financial position that is in line -- totally in line with our expectation and on track to achieve full year guidance. And we confirm full year guidance, providing EBITDA growth of 6% versus full year 2022 gross CapEx of EUR 1.2 billion. And net financial position over EBITDA ratio around 3.3 and in line with our newly upgraded rating. Thank you very much, and I will hopefully open up Q&A session that we'll explore the technology even further.

[Operator Instructions] And your first question comes from the line of Roberto Letizia from Equita.

The first one is on the potential involvement of you in AJR in tender as we have seen the interruption of the exclusive tox and maybe this is going to transform into a different one, as the group is not a small one. And that could bring significant financial consideration you to enter in such a negotiation. I was wondering if you can add a few details on how do you think this may fit the financial position of year-end with regards also to the target of the strategy plan. I would like to have a view on how the hydro is actually going in the last week. We saw a slight recover of rainfall. So wondering if this is affecting also your plants. And we may hope in recovery or a better contribution of the hydro going forward. Briefly, very -- 2 very, too small question. If the -- there are any compensation for the stop of the thermal plant of Turbigo and what is the final one, the possible improvement in net income from the acquisition of minorities that you did in the water segment.

Thank you very much. First of all, on AJR, of course, we are analyzing the reason for our competitor A2A for dropping the exclusive negotiation. We have been calling for a competition on these assets. But of course, we have not yet added an access on the data room. We will definitely look at the numbers, and we are, of course, first of all, committed in terms of guidance from what we communicated. So that is our priority. Of course, we are looking at this asset given the synergies that we can implement and also the fact that there is a possibility to turn around working capital in these small supply operators. But of course, we will look very deeply at the numbers and see if they are compatible with our net financial position. The guidance, of course, will remain unchanged in all scenarios. In terms of rainfall, we have not seen yet a significant change in our -- in order to update our BUs. We expect 800 gigawatt hour production during the year. The level of the basins is higher than we projected. However, so if it continues to rain, it's obviously a good thing. On the stop of Turbigo, it's now 2 weeks that the plant has been running and we are positive on the possibility of the plant to be stabilized and fully repaired. In terms of acquisition in the water segment, Acquaenna and the smaller initiatives overall contribute by EUR 10 million in EBITDA.

Your next question comes from the line of Javier Suarez from Mediobanca.