Iren SpA (IRE) Earnings Call Transcript & Summary

Hello, and welcome to the Iren H1 2023 Results Presentation Conference Call. [Operator Instructions] I will now hand you over to your host, Mr. Giulio Domma, Head of Investor Relations, to begin today's conference. Thank you.

Yes. Welcome, and good afternoon, everybody, and thanks for joining Year-end Conference Call on First Half '23 results. We will start with the presentation, which will be given by our Chairman, Mr. Dal Fabbro; and our CFO, Ms. Anna Tanganelli. The question-and-answer section will then follow. Now I leave the floor to Mr. Dal Fabbro. Luca, go ahead, please.

Thank you, Giulio. Good afternoon, everyone. Well, we start from Page #2. You can see in the 5 clusters of the slide, the key highlights of the first half. So first, the EBITDA was 8% up, thanks to a full recovery of customers' portfolio value along with stronger hydroelectric volumes. Two, the organic growth supported by the robust investment in regulated businesses was partially offset by cost inflation. Three, the full integration of SEI Toscana, a waste collection company has been allowing us to extract synergy. Four, NWC peaked by the end of June, in line with our expectations due to transitional elements already accounted in Q1 that will reduce their impact in H2. Five, as far as the fifth cluster is concerned, we confirm the strategic plan approved by the Board of Directors in March 2023 and providing for investments mainly in green transition, service quality and business expansion in our legacy areas. The higher investments made in the period, up 5%, allowed us to increase the new waste treatment capacity, revamp waste water treatment plants, and finally, to improve the resilience of our electricity network. So now if you allow me to move to Page #3, I'll give you the time to switch it over, to flip it over. While we can see that the earnings continuing to be on track on all sustainable key indicators. In particular, let me point it out the positive achievements on material recovery, up 35%; and production of biomethane, up 67%. The slight increase in carbon intensity that stands at 327 grams per CO2 per kilowatt is a temporary effect of higher thermal volumes related to a phase in -- of the new Turbigo line and lower heat volumes produced. By the end of the year, anyhow, carbon intensity is expected to reverse in line with -- in line with last year and meeting our business plan expectations and assumptions. We have continued to reinforce sorted waste collection to up 71% in the legacy area. And at the same time, we widen our local presence in waste collection and water businesses. Finally, it's worth mentioning that the distribution activities on water cycle continued, reaching 68%, enabling decrease of water withdrawals minus 6%. Sustainable investment accounted for 80% of the total during this period. Now let's move to Slide #4, shows the key economic and financial numbers of the period. In the first half, EBITDA reached EUR 606 million, reporting a growth of up 7.8%, and the result includes some positive and negative factors. One of the positive side we reported, so a recovery in market profitability from 2022, particularly in electricity supply worth over than EUR 60 million. A favorable energy scenario for renewable assets for EUR 35 million, led by supportive price and higher volumes in hydroeletric production and at least full contribution of SEI Toscana, as I mentioned before, which accounted for EUR 30 million in waste business units. Nevertheless, we have also a negative side of it. So if we flip over on the negative side, we find a lower District Heating contribution for over EUR 40 million, as already expected in Q1 as a combination of lower rate volumes and a margin reduction. [indiscernible] of the MSD was up to EUR 60 million from EUR 35 million in 2022 and a persistent inflation scenario affecting our operational costs mainly in regulated business, which was not possible to recover in the tariff. The EBIT was 12% down because of the recognition of provisions related to Italian government's clawback on renewable prices for EUR 35 million. Tripping out this, the EBIT was in line with last year. Well, then we have technical investments, grew by 5%, up to EUR 356 million. Most of the investments concerned the network while the largest increase was recorded in waste business unit for the construction of a new treatment plant for material recovery. Finally, net financial position at the end of March was equal to EUR 3.9 billion, increasing versus December year-to-end due to a temporary net working capital expansion. The growth compared to the net financial position recorded in Q1 can mainly be explained by a payment of the dividend, which took place in Q2. Now I hand over to Anna to go through each business unit's H1 results. Please, Anna?

Thank you, Luca, 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. Excluding nonrecurring items, we have positively impacted H1 of last year as a result of tariff adjustments related to 2021. Ordinary EBITDA reported a slight increase year-over-year as the positive contribution from higher regulatory tariffs of plus EUR 12 million in the period was almost fully offset by the impact of the severe inflation scenario on operational costs, which accounted for approximately EUR 10 million. The majority of which though will be recovered through tariffs over the coming years. Gross CapEx increased by 12% in the period, mainly to further optimize the resilience of our electricity network and as for water distribution, in 2023, we successfully progressed in our strategy to consolidate companies in which we hold minority stakes. In particular, at the end of March, we acquired 51% of AMTER, a water management company based in Liguria with about 35,000 of inhabitants served. And at the end of May, we acquired the majority stake in acquiring a Sicilian water concessionaire in the province of Enna with almost 180,000 inhabitants served. Turning to Slide 6. The Waste business unit posted a plus 5% EBITDA increase year-over-year to EUR 132 million. Such growth was substantially driven by collection, also thanks to the effective integration of our operations in Toscana. As for our treatment business, over the period, we experienced a contraction in prices for recyclable waste and in brokerage margins. In addition, the positive contribution from the phase-in of the new organic fraction treatment plant with biomethane production in Emilia was more than offset by an overall more adverse energy scenario compared to last year. At the same time, we continue to execute on our investment growth path with plus 55% of CapEx year-over-year to support the development of several new treatment facilities, one of which is already in full operation, which is the wood treatment plant for pallet production in Vercelli and 2 others will be phased in by year-end, which are the plastic and paper treatment plant in Borgaro Torinese and expansion of organic fraction treatment planned with new methane production in Santhia. Moving to Slide 7. The Energy business unit ordinary EBITDA decreased by EUR 11 million over the period to EUR 190 million, mainly due to a contraction in heat volumes compared to prior year, combined with the normalization of the related margins. But let's analyze each business line one by one. So Renewables, which includes solar and hydro, posted a strong positive margin performance of plus EUR 35 million over the period, primarily thanks to higher prices and higher volume on hydro. In particular, hydro production was up plus 100 gigawatt hours compared to prior year, while prices increased mainly as a result of a more effective hedging strategy. These margins contracted by EUR 49 million year-over-year as milder winter temperatures combined with customers' energy savings actions resulted in lower distributed volumes of minus 340 thermal gigawatt hours compared to prior year, while margins overall normalized versus 2022 exceptional levels. CCGT & Thermo performance was impacted by housing in MSD contribution to minus 50% almost compared to prior year, with MSD at only EUR 16 million in H1 2023, in line with the nationwide trend and by lower production volumes down minus 12% versus H1 2022, albeit, recovering from Q1, thanks to the full availability of all our plans in the second part of the semester. These effects were partially offset by a positive clean spark spread in the period, higher than last year and notwithstanding an overall market average negative clean spark spread, again, thanks to our effective hedging strategy. Finally, the positive performance of our Energy Efficiency business continued also in H1 2023 with EBITDA increasing by EUR 11 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 H1 2023, especially for what concerns electricity. This was achieved by: one, effectively managing contracts at expiration, starting from the beginning of this year; two, focusing mainly on variable price contracts, which reached 70% of our portfolio and on fixed components to reduce margin volatility; three, successfully leveraging selected unhedged positions on the supply side to optimize margins which led to a plus EUR 25 million extra marginality, which will not be replicable in the next quarters. And by the way, we remind you that the group has a profit at risk threshold equal to 15% of the entire Energy supply chain. Such remarkable performance was achieved despite a decrease in overall volumes sold due to the strategic decision to continue to increasingly focus on retail rather than business customers. Also, Gas posted a positive result despite the reduction in volumes linked to a mild winter season, combined with energy savings actions put in place by retail and business customers. Finally, Iren Plus reported a weak result year-over-year linked to a contraction of energy efficiency projects. Okay. Now let's briefly comment the key P&L items below EBITDA, only very few quick remarks. So depreciation was up EUR 34 million versus prior year as a result of the integrations made and the increase in CapEx carried out during the period. Regarding other provisions, this is the only actually important point. Here, we booked a EUR 34 million provision related to the Italian government's clawback decree on renewable prices introduced last year and further extended up to June of this year, which is undergoing, as you probably very well know, a status of administrative appeal. The 2023 extension in particular, which accounts for EUR 20 million out of the EUR 34 million seems to be in clear conflict with another clawback mechanism introduced by the European Union end of last year and which sets the price cap at EUR 180 per megawatt hour instead of Italy's [ EUR 58 ]. So we expect a favorable resolution on this last piece of the EUR 54 million, on the EUR 20 million. As for financial charges, H1 2023 saw a moderate increase in cost of debt. Now it's 1.8% compared to 1.6% of last year; and tax rate at 26.2%, benefited from the newly introduced tax credit for 2023 for high energy consuming companies. As a result of all the above, net profit for the period was EUR 143 million, up approximately 4% year-over-year. Let's now comment on the net financial position evolution over the period on Page 10. Net debt increased by EUR 573 million versus year-end, mainly as a result of EUR 356 million of net CapEx carried out in the semester, a temporary increase in net working capital which I'm going to explain in a minute, and EUR 183 million of dividends paid in Q2. So focusing on net working capital. The key factors here, all of whom are temporary in nature and will be almost fully reabsorbed by year-end and in line with what we've already seen at March end and include not normalized, i.e., more unfavorable gas payment terms compared to historical conditions towards major energy suppliers across 2022, 2023 winter season. And on this, we already secured 100% of new supply contracts for the new thermal year 2023, 2024, as payment terms in line with historical trends. So we should see a payable normalization mainly in Q4. Then EUR 155 million of increase in tax credit over the period related to super bonus of 110%. Also here, we already have agreements in place with several financial institutions to accelerate the related factoring process within year-end. Finally, we report a structural timing shift on the cash in of waste collection credits following the change from taxes to tariffs in selected geographical areas, starting from the beginning of this year. So overall, we expect approximately EUR 100 million in total to be reabsorbed within end of the year. I will now turn the call back to Luca for our closing remarks.

Thanks, Anna. So very rich presentation. But at the end of the day, we need to move to the guidance 2023. So let's focus on that. And if you flip over to Page #11, so guidance for 2023. Then we see that we need to highlight the main factors which allow us to increase the EBITDA guidance versus the previous call. We expect to over the H2 to have a solid contribution for the supply activity, thanks to our commercial strategy and an effective hedging activity. Higher hydroelectric volumes, now estimated in 1 terawatt hour and the full availability of the Turbigo thermoelectrical plant. These positive factors will be counterbalanced mainly by lower contribution from the MSD market. Taking into account all of these, let's say, factors, we can summarize and say that the EBITDA is expected to grow up 10% versus 2022 full year; total gross investment at EUR 1.3 billion, so EUR 100 million more than the latest guidance and focused on regulated businesses; the NFP/EBITDA ratio at around 3.3, thanks to the reduction of temporary effect on net working capital and the cash in from the minority stake sale of the gas distribution company. Having said so, thank you for the attention. And let's now move to the Q&A session. Thank you very much.

[Operator Instructions] The first question comes from the line of Javier Suarez calling from Mediobanca.

Many thanks for the presentation. Several questions. The first one is trying to understand the reasons behind the increase on your EBITDA guidance to plus 10%. So the -- my understanding is that this is basically due to the better-than-expected performance in supply, particularly on the electricity business. So the question for you is if we are assuming now an EBITDA growing by 10% by the year-end, which is the impact that this may have at the bottom line. When I see the consensus, the latest available consensus, I think that the expectation is more for a mid-single-digit EBITDA growth, and that is corresponding to a net income consensus along the lines of EUR 250 million. Because of the fact that we are increasing the EBITDA guidance, should we assume that, that EUR 250 million of net income is too low or there are any other compensation factors that we should be taking into account? That is the first question. The second question is on the net debt-to-EBITDA guidance at 3.3x. I think that you mentioned that, that is included in the proceeds from the disposal of a minority stake on the gas distribution network. So can you give the number of net debt-to-EBITDA, we have considered any extraordinary disposal? That would be helpful. And the third question is on the dynamics -- business dynamics, on the Waste business. It's called my attention the argument that you are making on the treatment business of lower prices. So if you can elaborate that, what do you see in the treatment and disposal activities in terms of volumes and then prices?

Okay. So Javier, on the reasons behind the plus 10% guidance, yes, you're right, there are 2 main factors. One, as you correctly said, to recover a better performance than expected. So a full recovery of our Market business to net profitability, that's absolutely right; plus though also a better-than-expected performance on hydro. As you might remember, we said several times that we had assumed in our guidance volumes -- hydro volumes, which were only slightly up versus last year. In fact, now we see almost for the full year, 200 gigawatt hours more than in the previous estimate -- so in the previous guidance. Then there is also some minus which counterbalance like still decrease in performance of heat, but let's say, on the flat side, the market business and the performance and hydro are the 2 main factors. As for the impact on the bottom line, what I can say is that this last 10% year-over-year will translate into a similar growth also at net income level. Yes, so I would say that. As for the sale of gas, EUR 100 million, sorry, I don't want to necessarily don't answer your questions on the sort of the 3.3x. The point is we will stick to the 3.3x no matter what. So right now, we are obviously factored in because that's -- the process is ongoing, is on track. As Luca was saying earlier and then he can elaborate further, we have binding offers received over the last few days. So we still expect closing well before year-end; so in any case, within the December 31. But if we were to see signs, but this might not occur, obviously, we will put in place other actions to still maintain our 3.3x net debt-on-EBITDA ratio guidance. So that's for sure.

Nevertheless, we expect to sale the gas participation before the end of the year. And as Anna said, we already have offers -- binding offers, and we might declare in the coming weeks, also a big news on that. So a confirmation that we are going to select one of these binding offer in order to close down by, let's say, in November, December this year, the operation. So we do not put in doubt this operation. Nevertheless, we have a Plan B and Plan C to anyhow maintain the guideline.

And on your last question then on the Treatment business. So will see the phasing of 2 new treatment plants, the biomethane plant in Santhia and as we said also plastic treatment plant in Borgaro. However, as we also highlighted in the presentation prices going down by almost 10% year-over-year, which are what's driving the negative performance in the semester. I hope we addressed your question, Javier.

The next question comes from the line of Roberto Letizia from Equita.

The first one, very easy, just a clarification on Javier's question on the net income. So the 10% growth that you mentioned on net income reflecting the trended EBITDA. Does this reflect and include also the EUR 34 million provision that you booked in the first half? Or that 10% works on a sort of adjusted level in your mind. So many -- this exclude the EUR 34 million? Can you just clarify this just to have a better perimeter of this indication? Then I would like to know a better -- a little bit better more the flexibility that you have in managing the overall level of debt. So I'm very pleased to hear that you have a Plan B and a Plan C. I am just wondering if any of the 2 additional plan may eventually occur even if you do the disposal, so at the end, taking your final debt level below the 3.3x. So maybe you can a little bit better clarify on how you intend to manage those plan B and plan C that I think -- maybe it's a question of time, but maybe you want to implement them in any case? And maybe just a little bit of describe what kind of alternative measure this consists of to give you flexibility on the debt management? I would like to have a quick comment from you, if possible, on the antitrust investigation on the pricing for the district heating. What kind of risk -- maybe none or maybe some there may be on this, even consuming that this is always under the eyes of regulator for -- eventually even possible regulatory changes, but I don't see -- I don't know if you see any risk for that? And a final one, if I may. If you can tell us on, if any, do you intend to change your hedging procurement policy and your variable to fix exposure on gas procurement mainly for the next season?

Okay. So on your first question, so the guidance, the 10% guidance -- guidance -- sorry, 10% EBITDA guidance does include the EUR 34 million, but in 2 different ways. So as we said before, the EUR 34 million was made up of EUR 14 million linked to 2022 and then EUR 20 million linked to 2023. So -- we see the 2 pieces, the 2 portions of this before having, in our view, different levels of risk. So we see the 2022 portion to be a higher risk compared to 2023 simply because, as we said, the 2023 clawback conflicts with another clawback mechanism, which was introduced at the European Union level. And so the appeal process, we understand now has been submitted to the European Court of Justice, so has a more articulated and more complex administrative process. So what we factored in the plus 10% is the first portion, the EUR 14 million, while we assume to still keep the EUR 20 million, but as a provision also because the process -- the administrative process probably -- that's our understanding, won't conclude within the end of this year. So might probably drag also in 2024. So there is a portion of the EUR 40 million is included in the guidance, while the EUR 20 million are still, let's say, now in our forecast for 2023, but below the EBITDA. So as a provision.

No. Yes, sure. But what I was asking is about the net income, not the EBITDA.

Understood. The net income at that point would include both. So on the Plan B and Plan C. So what we meant is, obviously, we gave the guidance of 3.3x, sorry, and as you well know, we tend to stick to our promises. So as I said, first of all, we don't see a risk now of the sale process not going through at all. This may not mean for maybe reasons but not only depend from us. It may be delayed and fall after our, let's say, target of the end of the year. So that's the one thing to be said. So right now, I think that the visibility of it not going through at all is high in the sense that we don't see that happening, it might simply be delayed. Having said that, if it really does end up not happening, which we hope to be the very unlikely scenario, we can activate actions as we've also demonstrated last year to be able to implement, which can go along to different access. One, we can try to accelerate even for further the factoring of tax credits. As you know, these tax credit can also not be sold, so not be factored at all. We could also carry and that's our intention, by the way, to keep a portion to offset following years' taxes, so they can be used to compensate year [ T+1 ] taxes. But in case needed, we can implement the other option, which is to factor them in a bigger amount. So that's one thing we can do. So not to keep a portion for future compensation but accelerate the further factoring. And then second, obviously, as we did have to resort to, let's say, slow walk some of the investments, which have lower priority and move them into 2024.