Iren SpA (IRE) Earnings Call Transcript & Summary

Good afternoon, and welcome to Iren H1 2024 results. My name is Zack. I will be your operator for today's event. [Operator Instructions] I will now hand over to Giulio Domma, Head of Investor Relations for starting today's call.

Good afternoon, and thanks for joining the conference call to present Iren's Group H1 2024 results. I am here with Luca Dal Fabbro, Executive Chairman; and Giovanni Gazza, CFO, who will present the data. After which, there will be the usual Q&A session. Without any further ado, I hand over to Luca.

Good afternoon. The Board of Directors has just approved the results also for H1 2024, which show an EBITDA growth by 5%, mainly due to the adjustment of regulatory parameters in the distribution and network business and the full recovery of the valued customer portfolio, thanks to the affected commercial strategy. The net financial debt EUR 4 billion was kept under control and was up by 2% compared to the figure at the end of 2023. During this period, we have recorded investments for almost EUR 370 million payment of dividends, and this investment of tax credits related to the Superbonus. Among the main achievements in Q2, we can include the signing of 2 green loans totaling EUR 280 million to support investments to increase the resilience of electricity and water networks. The acquisition of authorizations for the construction of Italy's first large-scale advanced agrivoltaic project in Rovigo, 49 megawatts. Activities aimed at closing the acquisition of a minority stake in EGEA to be completed and finally, although these events occurred after June 30. On the industrial side, I would like to highlight the commissioning of the 38.5 megawatt photovoltaic plant in Tuscania. Supported by the results achieved in the first half of the year, we have decided to confirm the 2024 guidance. Moving on to Page 3 of the presentation, we review the main ESG indicators, reflecting the sustainable growth path defining the business plan, thanks to approximately 71% of the investments we made with the sustainability profile. With reference to the green transition, at the end of the first half of 2024, we record a 4% reduction in carbon intensity. As a result of the increase in hydroelectric production, plus 49% and the decrease in thermoelectric production, minus 37%. And from waste to energy, minus 13%. It is also important to underline the achievement of 72% separate waste collection in the historical territories and increased by almost 19% compared to the same period in 2023. Of the material recovered in our waste treatment plants, thanks to the investments made in new plans. Iren's strengthening process in the territories continues to increase of the municipalities served in waste collection with the addition of municipalities in the [indiscernible] area and extension of the district heating network. Also with reference to service quality, the results just approved show important progress with an increasing satisfaction of customers visiting our stores. The achievement of 71% of district-sized water network and the decrease by 3% of water withdrawn from the environment, thanks to the reduction of water leakages as per business plan. Moving on to Slide 4. We can see the main economic and financial indicators for the period. The EBITDA in the first half was equal to EUR 636 million, up 5% year-on-year and in line with the results reported in Q1. The main variance factors for the period are very similar to those presented during the last conference call. Among the positive factors fostering growth we can mention. The updating of regulatory parameters in the networks, which has had a very strong positive impact on the rate of return on invested capital [indiscernible] and the recovery of inflation on operating costs and regulated revenues. The continuous improvement of market margins are thanks to our commercial strategy. The organic growth in networks due to continued investments in inorganic growth, thanks to the consolidation also AcquaEnna and Sienambiente. On the other hand, the headwinds in the period were the reduction in the achieved energy prices of renewables and our waste-to-energy production compared to same period last year and the persistent domestic weakness of the MSD market, the lower contribution from energy efficiency activities for the completion of energy upgrading works supported by Superbonus, 110% tax incentive. The temporary and availability of waste treatment plans for planned maintenance activities and the figure of a WTE plant. Added to this is reduced efficiency of the new plants caused by startup costs. It's worth noting that net of the lower contribution of energy efficiency activities are EUR 31 million in the BU Energy. The profitability of the integrated energy chain is positive. As the lower profitability of cogeneration plants was offset by the growth in margins of energy customers, confirming the strong resilience of Iren's overall portfolio with respect to the energy scenario. Finally, the EBIT increased year-on-year following the EBITDA trend. While net profit increased by EUR 2 million despite the fact that the 2023 figure was affected by reduced tax rate due to the presence of tax credits. I now hand over to Giovanni for in-depth presentation of business dynamics.

Thank you very much. Let's now look with at Slide 5 with the Networks, which closed H1 with an EBITDA increase by 26%, mainly due to the increase in regulated revenues, plus EUR 40 million result of investments made over the years and the tariff review at the beginning of the year. These revenues are partially offset by an increase in operating costs, especially in integrated water service. It should be reminded that EUR 9 million were recorded in the first quarter related to the extraordinary inflation recovery on operating costs in 2023. The consolidation of Acquaenna in June 2023 gave a positive contribution of EUR 5 million in this H1. Focusing on the bar chart on the right, we note that investments are up 12% compared to H1 2023, especially in water and electricity networks. In addition, the increase in RAB by almost EUR 300 million, plus 11% versus year of 2023 is achieved thanks to the equal contribution of investments made in past years and to the regulatory evaluation linked to the application of the deflator approximately 5.5% weighted average rate. In the second half of the year, we expect that the EBITDA will be in line with the first half of the year, net of EUR 9 million, an extraordinary item accounted for in Q1. Moving on to Waste business unit, Slide 6. We show a first half year decrease compared to the same period of last year, minus 5% with opposite dynamics for collection and disposal. The growth in collection activities, thanks to the recovery in tariffs on the higher inflation related costs and efficiencies for EUR 14 million in total is more than offset by EUR 21 million reduction in treatment and disposal activities. The contraction of the plant margin is due, one, to lower plant availability compared to last year at turbine WTE because of planned maintenance of the main turbine and the power generation alternator. And in Q2, there was a plant shutdown caused by a breakdown that temporarily suspended waste treatment that were then sent to other disposal hubs. This has caused also reduction in power generation. The combined effect of these 2 phenomena was negative for EUR 9 million. Two, the prolonged start-up phases of the new waste treatment plans, which resulted in continuing startup cost. Three, the depletion of the available capacity of some landfills which led to a reduction in the volumes of no municipal waste managed by approximately 14% that you see on the right-hand side in the lower part. For the worsening energy scenario with the negative effect on electricity and biomethane transfer prices. These negative factors were partially mitigated by the consolidation of Sienambiente as of January 1, which contributed with EUR 6 million. In the second half of the year, we expect waste collection activities grows in line with the second -- with that recorded in the first half year, EUR 40,000, EUR 50,000 while in treatment this was activity and performance similar to that of the first quarter, anticipating a full recovery of operation of the WTE. In Slide 7, we analyze the dynamics that led to a 30% reduction in EBITDA of the BU Energy. First, renewable generation benefited from 40% higher hydroelectric production volumes, thanks to the abundant rainfall and [indiscernible] production volumes, thanks to the contribution of new plants, managing to overcompensate the decrease in electricity prices, most especially the average price of EUR 108-megawatt per hours was achieved 30% lower than last year due to both lower hedging costs and the lower price captured on the MGP. Secondly, district heating business reported a drop in margins of EUR 9 million caused by reduction in sales tariffs, as there are still indexed to use the price of gas despite an increase in the volume of heat sold 5% due to the higher volumes the group achieved these results in this business. So CCGT cogeneration and thermoelectric plants reported an EBITDA decrease of EUR 28 million due to both the sharp contraction of clean spark spreads and lower opportunities on the MSD market, EUR 12 million versus EUR 60 million last year. In the second quarter, we managed the flexibility of our plants opportunistically in order to capture positive spark spreads in the day ahead market, even at the cost of reducing operating hours due to base prices that was predominantly negative at the period. Also impacting the reduction in volumes was the failure of a turbine with scheduled maintenance in a CCGT plant unit. All these resulted in a reduction in production volumes of about 10%. As you can see in the lower right-hand side chart. And finally, Iren's smart solution with the efficiency, energy activities reported increase of EUR 31 million due to the completion of the renovation work related to the end of the 110% Superbonus incentive. The second half of the year will replicate what was already achieved in the first period. The expected high directive production in the next 6 months, guaranteed the levels of hydroelectric reservoirs is expected to be about 0.7 TWH. Furthermore, also from the point of view of margins, expectations are substantively in line in the first half year. We can notice in Slide 8, that 48% growth is related to the full recovery of the portfolio value, thanks to commercial actions implemented. The growth reported in H1 2024 is a result of the alignment to market conditions of our commercial policy on the entire customer base, which despite the very competitive market remained stable compared to the end of 2023. A portfolio that at the end of June included almost 2.2 million customers with the performance of our customers whom we confirm the continuing growth trend. Looking at the volumes, so we can see an overall increase by 8% due to both more sales opportunities to wholesalers already recorded in the first quarter and an increase in volumes for business and retail customers. Conversely, gas customers are decreasing due to commercial phase with fewer acquisitions of this type of customers. Moving along the Iren Plus business line, there is a continuing growth in the sales to customers, products and services, partnered with commodities, such as insurance and connectivity services, the latter also through multiyear contracts. In the second half of the year, we expect EBITDA to be lower than in the first period due to seasonality of margins. Therefore, the EBITDA target for the market BU at the end of 2024 is approximately EUR 230 million, EUR 240 million. So we also point out that as of July 1, approximately 200,000 customers were acquired to market liberalization auctions net of customers transferred that entered our portfolio. Moving to Page 9. We'll look at the elements led from EBITDA to group net profit. Depreciation and amortization increased by EUR 33 million as a result of investments made last year, and this includes EUR 8 million of depreciation of non-recent integrated companies. For the full year 2024, growth will be approximately EUR 40 million. That's the expectation. The decrease in provisions is due to the extraordinary provision made in 2023 and release to Sostegni ter Decree amount of about EUR 34 million. The average cost of debt was 2.1% versus 1.8% in H1 2023, and it's stable compared to Q1. Finally, the group net profit for the period amounted to EUR 145 million, up 2% year-on-year. The reduction in the increase in net profit is mainly generated by higher tax rate, which now stands at 30.5% compared to 26.1% last year due to the nontaxability of extraordinary contributions to compensate for higher energy price, but also higher profit linked to minority stakes up by EUR 7 million. Moving on to the net financial position for the period, Page 10. We note that, that is slightly up EUR 80 million compared to the value as of the end of 2023. The operating cash flow equal to EUR 465 million benefited not only from EBITDA, but also from the divestment of tax credit from 100% -- 110% Superbonus, which reached EUR 250 million in the period, which is expected for financial year 2024. The net working capital is increasing by about EUR 300 million, of which EUR 150 million are structure and will be maintained at year-end. As anticipated in the first quarter, about EUR 100 million is due to the effect of the declining energy scenario but as a financial benefit from stock exchange sales. We benefited also from higher credit that are not immediately chargeable in regulated business due to regulatory increases for the portion exceeding the tariff cap. The increases we had in 2024 resulted in the next tariff cap that will be -- will not be invoiced at the end of 2024. In addition, in the second quarter, there was about EUR 50 million of investment grants related to the NRP for which reimbursement procedure by the states are longer than expected. Another EUR 150 million, I expect it to be temporary and are expected to be reabsorbed by year-end, of which approximately EUR 70 million is related to water and waste for building the tariff increases related to H1, around EUR 40 million for continuing billing delays on energy efficiency and a further improvement of payment terms of gas supplies contracted for the new 2024, '25 heating season with a contribution of approximately EUR 40 million. Operating cash flow generation for the period fully covered capital expenditure of EUR 345 million and also M&A transactions related to the consolidation of Sienambiente and acquisition authorization. Finally, dividends of about EUR 180 million were reported with EUR 26 million were paid to minority shareholders. I hand over to Luca for the closing remarks.

Thank you. As to the guidance for 2024, the results of the first 6 months allow us to be more transfer with regard to 2024. We have more confidence. As anticipated by Giovanni in the next half year, we expect a confirmation of the growth in regulated businesses and a partial recovery of profitability in waste disposal activities due to the absence of planned plant shutdowns offset by lower contribution from the energy sector, mainly due to seasonality faith. Given these indications, we confirm the guidance given during the presentation of the business plan update. EBITDA, EUR 1.240 billion, plus 4% compared to financial year 2023. Group net profit in range in the region of EUR 260 million or EUR 270 million, plus 4% compared to last year. Last year, investments of about EUR 1 billion, including the purchase of minority stake of EGEA for EUR 85 million and net debt-to-EBITDA ratio of 3 -- plus 3 -- sorry, 3.3 due to the operating cash flow, which will fully cover the investments for the year. We can now move on to the Q&A session.

[Operator Instructions] Next question from Javier Suarez, Mediobanca.

I have 2 or 3 questions. First question, can you give us an update on [indiscernible]. I would like to know where you are from a governance point of view and how is the governance-related discussion within the company. Can you provide us an update on possible appointment of a new CEO and possible timing for the appointment? Second question is about the net working capital absorption in the first half of the year, EUR 106 million. You have mentioned a significant contraction in H2 about EUR 200 million. Can you help us understand what are the reasons for this change in net working capital absorption that we have observed in H1? And next question. Can you provide an update on expected growth in renewable energies? In the past, you have mentioned it could be possible to find a minority financial partner for them. Can you provide an update on your strategy and what we should expect?

As to your first question, I will answer the first and third question. Giovanni will answer the second one. Update on government and appointment of a possible CEO. As already said, governance is now managed by the Executive Chairman and Deputy Chairman. The shareholders, majority shareholders have got the right to appoint a CEO if they deem it appropriate. The syndicated arrangements are now object of reflections of analysis. If the decision is made, a CEO can be appointed with an internal process in line with the arrangements. We will receive communication of that and the Board of Directors and general shareholders meeting will then acknowledge this appointment. So far, there has been no decision made on that. So the governance is still the same. And this is what I can tell you by way of answer. As to your question 3, strategy and renewable energy sources, we confirm that we are exploring the possibility of conferring all of our renewable solar assets, photovoltaic in a new company and to put on the market, 49% of the ownership of this new comp so as to finance additional renewable developments. The idea is with the money we acquired with 99% would allow to foster to implement new projects. We have a rich pipeline which needs funding. To avoid increasing the level of debt, this is the option we have outlined. Giovanni?

We envisaged reduction of about EUR 150 million out of EUR 300 million until year-end is along the 3 main drivers. The first driver, billing of tariff increases for CCGT and waste. They have been important measures at the beginning of the year, but as you know, these measures require complete process involving different ages, the -- in some areas of the process is almost completed. And this will look billing starting from the next few months of these amounts with collection by end of December 2024. There is also another item relating invoices to be issued for energy efficiency. End of June, we have invoices to be issued. The process had -- administrative process hasn't been completed yet. Now they are going to be issued -- some are being issued. They are going to be issued to the Italian Public Administration and we expect a collection by end of December 2024. Last, there is another action, i.e., renegotiating contracts of gas supplies. We have already undersigned all agreements with our suppliers for the 2024-2025 campaign. In this context, we have also managed to update a share of shipping deliveries. So gas delivery to the virtual trading point, at more favorable payment terms, which will allow us to have a contribution of about EUR 40 million end of December 2024. These are the 3 main drivers leading us to an estimate of reducing the increase by EUR 300 million to EUR 150 million that we are going to measure end of the year. About EUR 50 million of these million related to -- to P&R contributions, which have still got to be collected. To apply for reimbursement from the public state, you have to pay your own suppliers, but you -- the complete process and payment is longer than expected. So we should, in our forecast end of December, this will have to be envisaged.

Next question Stefano Gamberini, Equita.

I have 3 questions. First question. Can you help us understand better the water distribution performance, EUR 39 million increase in EBITDA in H1, minus EUR 9 million one-off and then EUR 30 million the rest of the year. So EUR 0 million, correct me if I'm wrong, so EUR 30 million plus EUR 30 million, EUR 60 million, while gas distribution, electricity distribution will slightly increase. Can you help me understand this EUR 60 million, can you break them down? And is this trend going to continue also next year and why? And linked to this, if I have understood you tariff increases this year could not absorb the whole increase you are entitled to get. So how much has been postponed to next year? And what is the increase we can expect in 2025? Then a question about waste. It's surprising to see EUR 10 million impact linked to one-off maintenance costs and then we have about EUR 15 million that are linked probably, if I got you right, to plants that are still in the startup phase. So here, we have the risk. Are there any technical problems? Are you going to overcome them? When are we going to see the full impact of these plants on the EBITDA, in H2 or in 2025? Third question about your financial flexibility. If I remember correctly, I have read an interview of the Chairman saying that there could be an interest on your side. If there are assets in the gas distribution to be sold in Italgas 2i Rete Gas transactions. Is this true? And why are you focusing on gas distribution and not on other businesses. I'm thinking of water distribution, of electricity, of renewable energy sources with probably more significant green aspect.

Okay. Reconstruction of the water is correct. We have EUR 39 million minus EUR 9 million. It's an effect in 2023 that cannot be replicated in H2. The increases have -- these tariff increases exceed the cap and will generate credits, which will be recovered for EUR 40 million, EUR 50 million, which will be reclaimed in the next financial year. For waste business unit, there has been a reduction linked to maintenance and also to a figure, which has had an impact on WTE generation. And in this half year and also in H2, partly, we have criticalities affecting the new -- some new plants, some difficulties in fine-tuning in setting up the organic waste plant and the pilot plant in Vercelli, which haven't reached yet their full operations. As already commented during the quarterly call, we will see solution of these technical problems only in 2025. Another deviation factor for these results is linked to the depletion of land fill capacity. So we have depleted capacity. This has a significant effect. And in this area, we have a process to get new authorizations. Their contribution will not be in 2025, starting from the beginning of 2026. We have advanced authorization activities. So we expect to have another 1 million tonne total capacity available at the beginning of 2026. From a point of view of a recovery in 2025, we will try to recover what we have lost the EUR 10 million lost to the stop of the WTE and another EUR 15 million from plants that are not performing at maximum levels, plans that are causing extra start-up costs. With regard to gas networks, as I said, during the previous meetings, we are interested in looking at some gas network. So this is what we are observing. It's not #1 priority for the company. We have other options, especially renewables, which are more interesting to us. We wanted to try and find synergies on neighboring areas or swaps without a specific target included in the plan. It's more an opportunistic consideration.

Just a quick follow-up. The cap is 8%, 8.5%. Now the EUR 60 million, with this increase in tariffs of 8% -- is it inclusive of 8%? Or are we above this level? Just to understand whether next year, we can expect similar increases or if we have already recorded double-digit increases reflected in 2024.

The caps are lower 4%, 4.5%. So the invoice tariff was to customers can be increased by 4%, 5%. I mean the resolution was made, but the tariffs are capped to 4%, 5% year-on-year. So I was referring to the whole thing. Also environment has the same mechanism, EUR 40 million, EUR 50 million and EUR 10 million to be referred to waste.

Next question will be asked Emanuele Oggioni.

I have a question concerning the retail business. Market. Profitability is always quite good, above expectations. And I would like to understand the level of sustainability, just for H2 but also for 2025. How sustainable are they considering with the volumes of sold electricity since the customer base is flat at EUR 2.2 million. I'd like to understand where this continues increase in margin, unit margins and customer-related margins, and also wholesales have grown by 27% in H1? And probably this is due to your long position on electricity generation and maybe of hydroelectric power generation, which led to increased sales that may be temporary in nature because they may be linked to rainfall, to the level of filling of the basins. And so they are not necessarily sustainable for the future. I'd like to understand the level of sustainability.