Iren SpA (IRE) Earnings Call Transcript & Summary

Good day, and welcome to today's Iren conference call. This meeting is being recorded. At this time, I would like to hand the call over to Giulio Domma, Head of Investor Relations. Please go ahead, sir.

Good afternoon, everybody, and thanks for joining our conference call on 9 months results. I'm here with the CEO -- with the Chairman, Mr. Dal Fabbro; and the CFO, Ms. Anna Tanganelli. We will start with the presentation, then the Q&A section will follow. Luca, go ahead, please.

Thank you, Giulio, and good afternoon, everybody. Let me remark that our outstanding 9 months results are one-off step forward along our strategy path. Indeed, on Page 2, let's go on Page 2, you can see the key highlights. First, the EBITDA was 13% up thanks to the full recovery of customers' portfolio, value and stronger hydro generation. In particular, very strong hydro generation. Second, the positive performance is also boosted by an external growth contribution, yielding by the full integration of SEI Toscana, a waste collection company and from the consolidation of Acquaenna, which is a Sicilian water company. Then a third point, the organic growth underpinned by technical investments at about EUR 550 million that was almost completely offset by higher cost due to persistent inflation ratio scenario. And then fourth, considering such a strong delivery also supported by a well-diversified portfolio of activities, we keep on pushing on the investments underlined by our 10 years business plan, which has been proven once again quite effectiveness. Now let's move on Page 3. It is a quite complex slide. But nevertheless, we can see that our sustainable growth continued throughout the quarter, with all sustainable key indicators ahead or on track with the business plan path. In particular, positive results already shown in the first half of the year are confirmed in this quarter, with a material recovery and biomethane production of 30% and 32%, respectively, compared to the last year. On top, of the carbon intensity, which, of course, was in the first half was very higher than previous year, is now at the same level, achieving our business plan assumptions also on this slide. We have continued to reinforce sorted waste collection, reaching 71% of the legacy areas, and at the same time, we widen our local presence in district heating and water business. Finally, it's worth mentioning that the distribution activities on water cycle continued ahead of our business plan assumption, reaching 30% enabling of a decrease of water withdrawals by minus 5%. Now sustainable investment accounted for 80% of total during this period. Let's move on page -- Slide 4, which shows the key economic and financial numbers of the period. In the 9 months, EBITDA reached EUR 857 million, reporting an important growth of 12.9%, supported by energy value chain. The ordinary result was 14.9%, up year-to-year, included several tailwinds and headwinds. On the tailwind side, we reported a recovery in market profitability from 2022. In particular, in electricity supply worth over than EUR 110 million, a recovery in hydroelectric price, 90% up and volumes 50% up compared to the previous year. And then a full contribution of SEI Toscana, which accounted for EUR 14 million plus in Waste business unit and the consolidation of Acquaenna. Again, as I said, is a water company in Sicily, with a positive result of plus 4%. On the headwinds side, we boosted -- we booked a strong reduction of MSD to EUR 25 million from EUR 70 million in 2022, due to a lower demand of [indiscernible] margin. This, of course, is a general result of all the operators. So it's not specific to Iren, but is generically spreaded all over the operators working in MSD. And then this repeating contribution of over minus EUR 25 million due to the consumption reduction. And then inflection scenario affecting our operational costs of EUR 50 million, mainly on regulated businesses, which partially offset our organic growth in regulated business accounted for EUR 20 million. Now as far as the EBIT was only 1% after because of what? Because of recognition of provisions related to Italian government clawback, our renewables price for EUR 41 million, and then stripping out this and EBITDA was up 14%. Then as far as technical investments are concerned, these were EUR 548 million, in line with the previous year. Most of the investments concern the networks, while the largest increase was recorded in the Waste business unit. Finally, net financial position at the end of September was in line with the end of June and equal to EUR 3.9 billion, increasing versus December year-to-end due to the net working capital expansion and the high level of super bonus 100% credit. Now I hand over to Anna to go through each business unit's 9 months results. Please, Anna?

Thank you, Luca, and good afternoon to all of you. So let's now move to our business unit results, starting with the business unit networks on Slide 5. Excluding nonrecurring items that have positively impacted the same period of last year as a result of tariff adjustments related to 2021, ordinary EBITDA was substantially in line year-over-year. The positive contribution from higher regulated tariffs of plus EUR 18 million in the period was almost fully offset by the impact of the severe inflation scenario on operational costs, which will be recovered for tariffs over the coming years. Gross CapEx was in line with prior year, underpinning around growth of plus 8% and in particular, the past 31% increase in investments for the electricity grid, signal our commitment to continuously improving the resilience of such network. As for water distribution, as you might recall, at the end of May of this year, we acquired the majority stake in Acquaenna, as previously said by Luca, which contributed to an EBITDA growth of EUR 4 million. Turning to Slide 6. The Waste business unit EBITDA decreased by around EUR 10 million year-over-year to EUR 187 million. While waste collection grew by EUR 13 million over the period, also driven by the effective integration of SEI Toscana, which is fully consolidated since July 2022, treatment and disposal, combined with the contracted energy generation, reported a negative performance compared to last year. In particular, at the end of Q3, we experienced lower margins from recyclable waste and brokerage activities due to landfill volume reduction, together with a lower EBITDA contribution from the new plants due to start-up costs and ramp-up activities. Energy generation was, as said, negatively impacted by an adverse energy scenario. At the same time, we continue to execute our investment growth path with plus 16% CapEx year-over-year to support the development of several new treatment facilities, one of which is already in operation, which is the wood treatment plant for pellet production in Vercelli and 2 others to be phased in by year-end, which are the plastic and paper treatment plant in Borgaro Torinese and the expansion of organic fraction treatment plant with new methane production in Santhia. Moving to Slide 7. The Energy business unit ordinary EBITDA increased by EUR 6 million over the period to EUR 263 million, mainly due to a positive contribution of hydro. Renewables, which includes solar and hydro, posted a strong positive margin of plus EUR 35 million, sorry, over the period, primarily thanks to hydro, as said, with prices close to EUR 150 per megawatt hour as a result of an effective hedging strategy and higher volumes for 300 gigawatt hours. On the other hand, the total margins were down due to lower prices compared to previous year. These margins contracted by EUR 27 million year-over-year as milder winter temperatures predominantly in Q1, combined with customers' energy savings actions, resulted in lower distributed volumes. CCGT and Thermo was impacted by severe reduction in MSD compared to prior year, with MSD at only EUR 25 million over the period in line with the nationwide trend versus EUR 70 million in 2022. At the same time, volumes produced by CCGTs were slightly up year-over-year, thanks to the full availability of our Turbigo plant. The clean spark spread was EUR 4 per megawatt hour higher than 2022, thanks to an opportunistic management of our facilities and a successful hedging policy. We reported positive results also of our energy efficiency business sustained by more than EUR 230 million of investments made in the period. Going to Slide 8. The market business unit recovered in 2023, the full value of its customer portfolio predominantly in electricity, which last year has been adversely impacted by market volatility. As already seen in the previous quarter, this result was achieved by an effective management of contracted expiration, and by focusing mainly on variable price contracts and on fixed components to reduce margin volatility. This important recovery was achieved despite a decrease in overall volume sold, due to a strategic decision to continue to increasingly focus on retail rather than business customers, and due to lower consumption of retail clients as a consequence of several energy saving actions. Finally, IrenPlus reported a contraction year-over-year due to weak demand of energy efficiency projects linked to the end of incentives. Let's now briefly comment on the key P&L items below the EBITDA on Slide 9. Depreciation was up EUR 34 million versus prior year, as a result of the integrations and consolidations made and the CapEx carried out during the period. As for other provisions and write-downs, here, we booked a EUR 41 million provision related to the Italian government clawback decree on renewable prices. The figure was revised upwards compared to H1 due to the recalculation of some components. As mentioned in the last call, administrative appears on the matter are underway, and we expect a favorable resolution for the group over the coming months. Tax rate is confirmed at 26%, benefit income tax credits introduced in 2023 for high energy consuming companies. And net profit for the period was EUR 177 million, up plus 26% year-over-year. Moving to that financial position on Page 10. Net debt increased by EUR 583 million compared to year-end 2022, while it is stable compared to H1 2023. The growth in net debt was a result of EUR 548 million of net CapEx carried out in the period and the increase in net working capital, mainly resulting from, as we already commented in the previous quarter, an unfavorable case payment terms across 2022 and 2023 winter season compared to historical conditions, and a significant stock of Super bonds 110% tax credit, notwithstanding the partial reduction and factory we executed in Q3. I will now turn the call back to Luca for closing remarks.

Thanks, Anna. So moving to Page 11. We confirm our forecast 2023 guidance, defined by 10% EBITDA growth, driven mainly by the recovery of customers' portfolio value, improved performance in generation supported by [indiscernible], the full availability of Turbigo plant and the prudential estimate on heat and gas volume in Q4, 1.3 billion gross investments. And therefore, we expect an FPP/EBITDA ratio of 3.3% by the end of the year. Well, then, thank you for your attention. And let's now move to the Q&A session.

Yes. If you allow me before we move to the Q&A session, as today marks my last analyst call as CFO of Iren. As you know, on December 1, I will start a new adventure in a different company, in a different industry. I really want to take the opportunity to thank you all for the support and the constant, let's say, constructive dialogue we had over the past 2 years. It's been really an honor and a privilege to work with you over this time and obviously to work as CFO of Iren. I hope we'll have an opportunity to work together again in the future. Thank you.

Best wishes, Anna.

Thank you, Luca.

And thank you for the service you provide to the company. It was appreciated. Okay. Let's move to the Q&A. So please shoot your questions. Thanks.

[Operator Instructions] And our first question comes from Javier Suarez from Mediobanca.

Hi, everyone, and thank you for the presentation, and many thanks to CFO for the job done. The first question is exactly related to recent changes in the management team. The question for the new Executive Chairman is when do you intend to update the market on the new business plan? And which are the moving pieces that you are maybe waiting for to present that new business plan? Is that related to some acquisition? Is that related to regulatory outcome? Is that related to taking time to better understand the way you want to direct the company? So can you help us and elaborate to understand your way of thinking about the existing business plan and the update of that business plan with a new business plan that is mirroring the way a new management team is looking at things. That would be the first question. The second question is on the -- on corporate activity and things that can change the profile of the company. I'm referring to the acquisition of some of the assets of Egea. You can update us on the timing for this operation and more importantly, what do you think is the upside for an investor or Iren stemming from the integration of this asset? And also where you are on the disposal of a minority stake on the gas distribution network? And the third question has to do with the general outlook for the -- for 2024. So entering into 2024, how do you see the different business evolving? How do you see also the discussion with the regulator when it comes to the new regulatory framework for water distribution, and your latest expectations from the regulatory outcome affecting electricity and gas distribution from 2024.

Okay. Thank you very much for the questions. So first question being, let's say, the governance and the -- when we are going to update the market. So we are going to update the market by June 2024. So -- and in this occasion, we will update, let's say, the year plan. So far, so good. So no big changes are required for the time being. So -- but by June 2024, we are going to maintain the plan and we are going to issue the new ideas on the plants eventually. Corporate activities, in particular, the update of Egea timing, right? Well, as you might know, we have been selected as exclusive bidder now. And we are, at the moment, busy with the Egea management to finalize the agreement with the banks that are the ones that own the debt. So we are going to negotiate with them and with the state as far as tax are concerned that Egea didn't pay in the last years. When we are going to finalize the agreement with the credit owners, and the state, then we are going to add the first signing, and the closing is foreseen at the moment by March 2024. So to cut the story short, by the end of the year, we should have the signing. By the end of March 2024, we should have the closing of the operation. And then if all will go successfully, we are going to own the company by April 2024. This is the best estimate I can share with you. Okay. Now as far as minority stakes, we are under discussion with an operator. Let's not base before, let's say, [ elegance ] to the NIM. We are discussing. There are some ups and downs in the discussion, but we are moving to -- on the discussion. What is the last question?

Outcome for 2024.

Well, I think, Anna, I think you can help me on that.

I can maybe give some hints then if you want to, Luca, please interrupt me. Obviously, for now, we are seeing a growth for 2024 broadly in line with the plan. We announced this year, obviously, there will be obviously some changes. Above all, as we had mentioned when we released and announced the plan and the update of -- from a regulatory standpoint of the work, and as you might remember, was not reflected in the plan but what we currently have. So that's going to be definitely an upside, as well as we expect the recognition in the tariffs of the impact on the cost side we had this year for inflation. Other than that, for organic growth, I would say, no big news. So we will have the full operation of our waste treatment plans and also the generation assets, including Turbigo, which as you know, this year was not fully available across the year. On the financials, the net financial position side, we will have the impact if the process comes to a successful conclusion of Egea, which we estimate to be in the ballpark of EUR 100 million, which we are able to fully absorb as we communicated also in the past. And we expect, therefore, to maintain our net debt and EBITDA ratio in line with the plan and in any case, below the 3.4x we always indicated. And I would say on the dividend policy, same strategy as in the plan. Sorry, Javier, maybe one last thing, it's important on the regulatory side, I forgot to mention. We are in favor of the [ RAS ] system, just to maybe anticipate a question that may come later on, as we foresee a quality premium on projects and activities which mainly in the areas in which we are focused, and we have a lot of investments same in progress in place to improve the resilience of our network.

And could you please share your expectations on the uplift on regulatory formulas for electricity and maybe water from 2024?

On the WACC side, you're saying, we -- our view is around [ 80 ] business in [indiscernible] -- sorry. But as I said, we never included that in the plan, but this is probably speaking, our forecast, our expectations, sorry, and this would translate into an EBITDA overall impact including the WACC increase, let's say, the recovery of inflation, which I mentioned before, around EUR 45 million to EUR 50 million in EBITDA.

Our next question comes from Roberto Letizia from Equita.

And many thanks to Anna for the good job done in the last 2 years. I'm sure you will have many other good opportunity in the future. And for what regards to my questions, the first one relates to Javier's question, specifically on the recovery of the cost impact for inflation. Can you quantify your view, what is this kind of recovery that may impact EBITDA next year, just related to the cost impacts from inflation? Then one question on the guidance for the EBITDA. You maintained a plus 10% increase in EBITDA for the full year, but the third quarter would suggest a higher number for the full year than the 10%, the performance you just registered. So wondering what are you including in the fourth quarter as a negative element to remain on the 10%, which, at least to me, seems a bit conservative. And eventually, what was in the fourth quarter last year that won't be repeated in 2023? I wonder if there is any clarity on the provision you are still maintaining for the extra profit taxation. When do you think we are going to have clarity on this and what kind of impact and then you may eventually benefit? And the last one on the Waste business, you mentioned some start-up costs affecting the performance of the Waste. How much are fees? And what do you expect for the Waste division to be the outlook for the next year, just for the Waste division.

Okay. If I may go and then please jump in. So on the recovery cost of inflation, so out of the EUR 45 million, EUR 50 million I was mentioning earlier, we around EUR 25 million to be linked to the recovery of inflation. But please note, we also expect that for 2024, higher OpEx. And so the net result would be more in the range of, let's say, EUR 50 million. So on Q4, yes, we were expecting these questions -- good questions from you guys. So we have conservative also on the -- or we would like to be prudent to put it away on the evolution of the energy scenario for the last quarter and on the prices. So we prefer to maintain, let's say, the guidance on the plus 10%. Please also remember that last year, in the last part of Q4, we also had some one-off, mainly positive one-offs mainly in the water networks, which also obviously this year are no longer there an impact Q4 of 2023. But let's say, we remain prudent a little bit, given the volatility we are seeing on the energy scenario in these days and also the milestones we are experiencing in this month and in these weeks. As for the provision, so right now, we don't have any visibility. As I said, whether, let's say, the whole administrative process which is underway, will conclude in a positive way, we are, let's say, hopeful, and that's why we decided to post the provision anyhow because, as you know, especially for the portion links to 2022. So there's 2 portions in, the one in 2022 and the one in 2023 have different processes underway. So we need a little bit to differentiate between the 2 elements. We are, above all, very hopeful on the portion linked to 2023 as this, in our view, conflicts with let's say, a new decree, which set up EUR 180 per megawatt hour. On the one linked to 2022, we are still a bit prudent early December, there might be some coming out. But as I said, we still don't have greater visibility than what we just said on the outcome of this process. On the way startup costs, they are around EUR 4 million to EUR 5 million. Let me confirm, EUR 4 million to EUR 5 million. Okay.

We will now move on to our next question from Davide Candela from Intesa Sanpaolo.

Thank you for the presentation, and thanks also from my side, Anna, for these 2 years. I have a few questions. The first one is also on corporate activities. And just regards some press articles mentioning the potential disposal of your -- about 9%, 10% of Iren Acqua if this [indiscernible] is on your intention to dispose this stake? The second one question is about debt looking at the final year figures. In your Slide #10, you mentioned some working capital reduction by year-end relating to the super bonus and [ a normalization ] realization in gas payments. I was wondering if you can quantify the amount that you expect to go by year-end? And that's almost is 2 questions.

On Iren Acqua, we do not intend to dispose, but is that we that is planning to eventually dispose 40% of its participation. We own 60% of it, and F2i 40%. So F2i is planning to investigate the possibility to dispose the 40%, and we have some preemption rights that we are discussing with F2i with. But we do not plan to dispose at the moment our 60% back.

And on that, Davide, it was a little bit difficult to hear you, but I hope I can answer your question. If not [indiscernible] jump in. So the reduction -- so from now to year-end, the reduction in terms of working capital is going to come predominantly through the continuous reduction of the super bonus of 10%. As you know, in the second half of the year, we always said we were going to start factoring selling this credit to financial institutions, and we started to do that. And that's why you see a stock now reduced compared to end of June, and we will continue to do so also towards the end of the year. As you know, we will maintain a stock of tax credits by year-end because we hope, we plan to balance to offset within the tax payments for 2024. But if the conditions are there and I would say we want to do that. We could also accelerate that factoring before year-end. And then the second element is starting from the winter season of 2023, 2024, so passing basically now, we start seeing finally payment terms to energy suppliers going back to the terms that we were experiencing and seeing before the crisis. So that's a good news. I hope I addressed your question.

Sorry, just a follow-up. Can you more or less quantify which amount you expect more or less? And sorry, also for my bad line before.

No, no, no, not at all. In terms of net working capital reduction or overall, I guess, you mean the overall reduction of working capital or the tax credit canal.

Yes, net working capital reduction in the fourth quarter.

So it's going to reduce by around EUR 100 million versus the figure we see today. As for reduction of around EUR 100 million.

And our next question comes from Emanuele Oggioni from Kepler Cheuvreux.

First of all, I would like to thank you, Anna, for our job. We will miss you for sure. It was very pleasure to work together. My first question is on the hedging policy on 2024. If it's possible to disclose the so far hedged volumes and power price levels for the generation business in next year? And the second question is a presentation, more details on the Egea deal structure because I intended previously that your offer set up in order to reduce the cash out, in particular, the net debt consolidation of the target company. So in order to not consolidate the company until the restructuring process will be completed in, I think, I don't know, at least 2 years. Maybe if you can add more details on this?

Yes. Okay. Well, on the hedging policy, at the moment, no data are available. We are working on implementing the hedging activities at the moment. To be honest, the market, in particular, the gas market is very volatile. So let's be a little bit careful. We are going to work on that. We are leaving the analysis, and we are going to anyhow take into account that we have a power of 15%. So -- but at the moment, no data are available. As far as Egea is concerned, Well, as you mentioned, as soon as we will finalize the closing, which is, as I said, forecasted for March 2024, we are going to implement our restructuring plan, which foresees a series of activities going from commercial synergy generation, organization optimization and the plant, let's say, synergies. So in other words, there would be a massive plan to make sure that the operations in Egea in particular, will yield the summers out. To be very honest, you might recall that a couple of years ago, we were prepared to buy Egea for 110 million. I don't know if this was disclosed, but now you know. Now we are buying for much less and we are buying without any risks, because all the risks are offset by the tribunal activities. So as I said to my Board when they authorized me to make the offer, if the sellers will accept our offer, it will be a good bargain for Iren. And I confirm this view. In other words, with all the synergies that we are going to generate are not accounted in the offer. So we have less than 50 million synergy to be generated that is in our pockets. Now this 50 million should be confirmed by and when we are going to jump in Egea and work at. But we might generate synergies between 0 and 50 million, subject to confirmation as soon as we will work on Egea, internally, of course. I don't know if I make self-clear. Okay. Good. Thanks.

We have a follow-up question from Roberto Letizia from Equita.

Follow-up for the Executive Chairman. You released some interview in the press in the past days, some of which were already talking about additional M&A from the group, which is the most active so far after the closure of it. I know this is going to take some time and also a restructuring process, but maybe you can share a few thoughts on the opportunities you might have in 2024 on the M&A side.

Yes I recall the interview. We are -- we would like to strengthen our positioning in our territories where we are already present. So as you might have heard, we have closed a deal in Tuscany to consolidate a portion of, let's say, the EBITDA of our participants company. We have, of course, acquired the subject to the confirmation of the credit owners Egea, and we are looking at small activities, but strategic activities in our territories. So for us, territories means Emilia, Tuscany, Piedmont and Liguria and also some activities in the South. So in this context, we are looking at a couple of targets, but I cannot comment further because our confidential.

No, yes, I do not to add any name or numbers. Just wondering if you see a high probability to see additional deals, whatever they are going to be during 2024?

There will be a good probability -- are going to be small deals, not, let's say, massive deals like Egea, so are going to be tactical or strategic deals, but a very small entity in terms of enterprise value.

Francesco Sala, Banca Akros.

I just wonder whether you can share with us the weight of fixed price contract in the gas business. as we enter the winter season. And secondly, I wonder whether you are starting to see increasing competition in the supply business, especially as regards prices, the recovery margin has been quite impressive in the last few quarters, but I wonder whether you're seeing something new or something changing in the competitive space, especially as regards pricing?

So the weight of the fixed price contract is 30%, confirm, yes, as checking yes, it's 30%. As for the competition on prices on the supply business, definitely, yes, we are seeing an increased competition also from operators. We've seen this over the past months, so obviously, this will reflect also on the churn rate, but we are experiencing. So yes, the short answer is definitely, yes.

[Operator Instructions] And it seems there are no further questions at this time. Please, I'd like to hand the call back over to our host for any additional or closing remarks.

Well, thank you very much for your questions. And then looking forward for the next session. For the time being, have a great day. Thanks.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.