Iren SpA (IREN) Earnings Call Transcript & Summary

Good morning, and welcome to the Iren Group conference. My name is Zach, and I'm going to be your operator for today's event. [Operator Instructions] I now leave the floor to Giulio Domma, Head of Investor. Thanks for listening. Enjoy your session.

Good afternoon, everyone, and thank you for joining the conference call to see the group results of Iren for the H1. I'm together with the Executive Chairman, Luca Bufo Alfabro; and our CFO, Giovanni Gazza. I now leave the floor to Luca to start the presentation, after which we will have the usual Q&A session.

Thank you, Giulio. Good afternoon, everyone, and thank you for joining us today. We'll try to be as brief as we can to leave time for the questions and answers and give you the opportunity to follow the conference calls of the other companies scheduled for this afternoon. Today, the Board of Directors approved an H1 report showing double-digit growth in all financial results. In particular, EBITDA grew by 14% over EUR 90 million. Which has been supported by positive results from all BUs and the consolidation since January 2025 of EGEA, which contributed EUR 24 million, representing over 60% of the EBITDA target for 2025. Net financial debt following capital expenditure of almost EUR 400 million and the payment of dividends of around EUR 180 million. That is an increase of 4% compared to the end of 2024, which equals EUR 4.2 billion. As far as significant events are concerned, events which occurred during the period in the H1 didn't have an impact on this H1, we have these events. The decision by the authority, ARP to expand the waste energy plant by building a fourth line with an additional capacity of around 260,000 tons the [indiscernible] the granting of the authorization to expand the [ Moncalieri ] landfill by a total of 150,000 tons, the starting of the construction of an air cooling system at the Moncalieri plant, which will enable us to improve the efficiency of the plant and ensure the operation of the electric power plant in drought conditions. The renewal of the EMTN, Europe medium-term notes program with an increase to EUR 5 billion and the listing on the Italian Stock Exchange electronic bond market last week. Despite the sustained growth in the first half of the year, we confirm the guidance provided in the last quarterly report because as you will see shortly, some of the positive factors recorded in this half of the year are not replicable in the H2. Let's now move on to Page 3 in our presentation to see the main economic and financial indicators for the period. EBITDA reached EUR 726 million, plus 14%, mainly due to the positive effects of such things. The aforementioned consolidation of EGEA for EUR 34 million, higher hydroelectric and thermoelectric volumes also linked to the improvement in clean spark spreads on electricity production. The organic growth in regulated businesses also supported by certain nonrecurring items in the division in addition to the achievement of synergies in line with planned expectations. When it comes to negative factors for the period, we have no extra-marginal gas sales realized in the same period as last year as it was already announced in the previous conference call. EBIT stood at EUR 326 million, plus 17% due to growth in EBITDA, which more than offset higher depreciation, amortization and provisions for bad debt. Group net profit, on the other hand, amounted to EUR 184 million, plus 24%. The growth reflects the positive reduction in minority interest linked to the acquisition of the minority stake in Iren Acqua, which is one of the extraordinary operations of the last 2 months, which had this objective. It means having the kind of yield which we were paying to third parties. Total investments for H1 amounted to EUR 915 million, of which EUR 393 million in technical investments, up 14%, which have been mainly allocated to the development of the water and electricity networks latter up 31% and the completion of the waste treatment plants as well as the extension of the district heating network and EUR 522 million in financial investments related to the EGEA and Iren Acqua transactions and operations, the issue of the EUR 500 million hybrid bond offset the impact of the M&A operations on the net financial debt, which stood at EUR 428 million, up compared to December 2024, plus 4%, mainly due to the payment of dividends. I will now hand over to Giovanni for a more detailed look at the business dynamics.

Thank you, Luca, and good afternoon to everyone on my behalf. Let's see the analysis of the company's performance starting with the networks business unit on Page 4. H1, the business unit reported EBITDA growth of plus 14%, which is around EUR 23 million, mainly due to, first, organic growth of EUR 11 million; second, the consolidation of EGEA plus EUR 7 million; three, the net balance of nonrecurring items with a positive impact of EUR 11 million for the H1. Let's analyze the performance of each business line. In the integrated water services, organic growth and the consolidation of EGEA contributed a total of EUR 8 million. The positive result for the period was also supported by 2 extraordinary nonrecurring items that is EUR 8 million relating to the ARERA bonus for technical quality and EUR 3 million for a tariff adjustment. These positive items offset the absence of the extraordinary inflation recovery of EUR 9 million recorded in Q1 of 2024. Electricity distribution reported an increase of plus EUR 7 million as a result of the higher revenue constraints, supported by a significant increase in the RAB plus 7%. Finally, the gas network benefited from the consolidation of EGEA for EUR 3 million and the extraordinary reinstatement of operating costs recognized for the period 2025 in accordance with the ARERA resolution 570 amounting to more or less EUR 10 million. Investments made during the period were up compared to the first half of 2024, plus 12%, mainly due to an increase in investments in electricity distribution, plus 31%, which is extremely important, and this wants to upgrade the network and the service quality. Now I'm going to business -- environment business unit, shown on Page 5. EBITDA grew by 6% with a value of EUR 132 million. This collection continued to grow with an EBITDA increasing by EUR 5 million due to the tariff updates and the consolidation of EGEA, which contributes around EUR 2 million. The expansion of separate waste collection is going on as it was planned in the business plan, both in our historical areas as well as in those recently acquired, which is around 70%. Treatment and disposal activities also grew by EUR 2 million compared to the first half of 2024, thanks to the positive contribution of waste to energy plants, mainly driven by higher energy revenues. Thanks to the full availability of electricity generation turbines, which if you remember, in the first half of 2024, it had a breakdown, which compromised its operation. During H1, we launched a recovery plan for the waste treatment plants to improve economic results by optimizing both the management of incoming flows and plant operations. This operational plan limited the negative effect of the availability throughout the H1 of the plastic sorting plant in [indiscernible] Bosco due to the fire that affected the entire plant last August. Again, this is August 2024. Very positive of the results from the development of environmental remediation activities, while landfills recorded a slight decline due to the plant saturation. In this regard, it should be noted in the second half of the year that we have the authorization to expand the [indiscernible] landfill by a total of 150,000 tonnes, of which 20,000 tons are already planned by the end of the year. Overall, the volumes of waste managed during the H1 increased by 3%, supported by the increase in both municipal and special waste, mainly due to the integration of EGEA. Finally, investments grew by 6% and mainly relate to the completion of the waste treatment plans provided for in the business plan. Greater rebuilding activities on the energy qualification activities. We conclude our analysis of the business unit on Page 7, which also reported growth of EUR 10 million, plus 7%, reflecting the increase in electricity sales. The trends are essentially similar across the various business lines, which overall benefited from 2 factors. The first, the EGEA's contribution of EUR 60 million, of which EUR 7 million from electricity sales and EUR 9 million from gas sales, growth, which is also reflected in volumes sold to end customers, plus 28% of electricity and 10% for gas. Second factor, the lower operating costs resulting from commercial process optimization activities, which made it possible to reduce the cost-to-serve ratio while maintaining the high quality of the service provided. These positive factors offset the lower margins resulting in particular from the absence of the extra marginality recorded last year in gas sales. Competition is increasing in the churn rate is increasing, sorry, the churn rate, making it more expensive to retain the customer base, which is down slightly compared to the first quarter, mainly due to the strategic decision to focus investments on loyalty or worthiness as well as retention of higher-value customers, reducing investments in digital acquisition channels where customers with higher rates are concentrated. Finally, we confirm the positive industry trend also for sales of high value-added products and services. The economic result is slightly down due to a different mix of products sold as already seen in the first quarter of the year. Moving on to the next slide, #8. We described the factors that enabled us to move from plus 14% EBITDA to plus 24% group net profit. In particular, amortization and depreciation increased by EUR 29 million with a value of [ EUR 450 million ] in first half of the year. The investments and the consolidation of EGEA. EUR 700 million which are expected [indiscernible] receivables arising from changes in the scope of consolation to citizens for waste collection services, which in the past were municipal debt. Because of that [indiscernible] compared to last year, mainly due to the interest rate differential between new bond issues and those which have been redeemed. The average cost for the period is stable at [ 2.25% ] [indiscernible] and other financial assets include costs of EUR 7 million relating to extraordinary changes for the refinancing of [indiscernible] and higher discounting charges. The group's net profit for the period amounted to EUR 184 million, up plus 24% compared to last year, supported by the growth in the EBITDA and the lower impact of net profit attributable to noncontrolling interests. Now let's focus on the net financial debt slide. We can see an increase in debt of EUR 145 million, plus 4% compared to the end of 2024. The increase is mainly linked to the payment of dividends of EUR 177 million in June. The cash outflow from M&A operations in Acqua and EGEA has been offset by the issue of hybrid bonds, while operating cash flow of EUR 435 million more than offset capital expenditure in the same period. Tax credits coming from rebuilding activities of EUR 38 million will be realized by the end of the year as we have already seen in the past. Net working capital increased by EUR 214 million due to 4 different effects: a seasonal effect of around EUR 130 million, in line with last year's trend when the increase in the first half of the year was of approximately EUR 150 million. The consolidation of adjusted net working capital of EUR 40 million, 3 tariff receivables in regulated business and relating to so-called extra caps receivables amounting to EUR 26 million. Finally, 4, EUR 20 million in receivables for the contributions related to the projects financed by the national resiliency plan. I will now hand over to Luca for the conclusion of the presentation.

Now we conclude our presentation with the guidance slide, which we confirm as in line with that provided during the last conference call. EBITDA at the end of 2025 is expected to be between EUR 1,340 million and EUR 1,360 million compared to last year, the half year just ended the second half of the year will see less market growth due to the absence of nonrecurring items following trends. [indiscernible] the increase of nonrecurring items and this has been important for the results of the 30th of June. In the environment segment, the growth trend recorded in the first half of the year will consolidate, thanks to the tariff increases for waste collection and the higher contribution of treatment plants of approximately EUR 10 million compared to last year, partially offset by the negative effects of some scheduled maintenance on WTE plants already planned for the third and fourth quarters. In the energy BU, the second half of the year is expected to be lower than the second half of 2024, mainly due to expectations of lower hydroelectric production also in light of the low water inflows in last month. In addition, forward curves continue to show negative clean spark spreads for the second half of the year associated with low electricity demand. In the market BU, we expect results at the end of 2025 to be in line with the previous year. Contribution will offset the lack of extra margins in gas sales in 2024. For 2025, [indiscernible] will exceed EUR 900 million in addition to more than EUR 500 million in financial investments already finalized as you saw in the previous slide on the net financial debt. The net debt EBITDA ratio will remain constant and is expected to be 3.2x considering the hybrid bond issue and expected net working capital at the end of the year, up by approximately EUR 100 million compared to 2024. If you all agree, we can now move on to the Q&A session. Thank you.

[Operator Instructions] Now the first question is from Francesco Sala from Banca Akro.

Congratulations for your results. I have 3 questions, if I may. The first one is on the business supply. So my question is, what are you expecting in terms of margins from Q3 onwards because, of course, there's components having to do with the different scopes. So we saw in Q1 and Q2 results going up. So my question is what will you expect from Q3? You told us about a high level of competitiveness. So can you share with us, I mean, some key numbers on this trend? Question number two. So what are the numbers that you expect in H2, so for the second part of the year? Because you told us that you expect a decrease versus last year. So do you have a number for this? Do you have a figure? And do you think something has changed, I mean, in the recent months because of critical. So question number three, on the guidance. Do you expect a weaker performance versus H1? So once again, I'm going back to the guidance because the guidance would lead to a decrease in EBITDA in H2 versus last year's H2 EBITDA. So once again, any change in terms of supply generation, especially the SF and thermoelectric production or generation.

As for the first question, in 2025, I mean, we will maintain. So we will keep the same margins. Yes, there's competition, but competition is on customer acquisition. There's an increase of churn rate and the acquisition cost is not going down and only partially on the margins. The contract deadline is in the second part of 2026. So we are working on this. We need to revise 20% of 2026 contracts. There's a thing to a reduction of the margin in terms of commodity, while the fixed component is steady, just by definition. The commercial strategy is not just following or objectives or hitting targets. We would like to retain high-value customers so that we can sell other products and services with other projects. We're now focusing so much on the physical points. We have a little bit less than 1,200, a little bit less on digital systems. In this case, churn is higher. Giovanni, please go ahead.

So question 2 and 3. Now the second question is very important because this confirms the guidance based on the first half of the year results. So basically, we foresee a production in H2 by around 550 gigawatts hour in terms of hydroelectricity. So we need to amend the forecast we released in May. So it was 135, we will go to [indiscernible] so we reduced this amount by 50 gigawatts hour because there's a couple of factors that we have to take into account. It hasn't rained a lot at the end of June and at the very beginning of July. And at the same time, so we also have to consider the fact that snow is melting on the top of the [indiscernible]. So once again, we are revising and reducing the expectations in terms of hydroelectricity. Now there are other determining factors in order to confirm the guidance, which is basically the visibility of the electric spread. And so basically, we see that there are curves showing us a negative spread evolution or situation. Now this situation has already started at the end of last year. The situation is unchanged. And basically, these spreads turn positive only when we are close to delivery. So basically, in terms of projections, well, forecast today project slightly negative values, very slightly negative values. So of course, they do not, if you will, justify the production. So these are the 2 main determining factors. And as we have said in the speaking notes, there's another key factor, which is maintenance. Once again, maintenance has to be done on the waste to energy or WTEs. This is our preplanned maintenance, as you know. So once again, this factor is also very important, and this means that we want to, I mean, reconfirm the contents of the guidance. As for the operating performances, I have to say they are quite good. So again, they will be replicated in the other businesses, and we will see them in H2. So in terms of the evolution of the supply, well, as we said in 2024, well, last year, we had an extraordinary margin because of gas sale around EUR 20 million. So a part of this extra margin has been, let's say, used in H1. So we still have a small part, which may be around EUR 10 million.

The next question comes from the Javier Suarez, Mediobanca.

Now the first one is a follow-up on the guidance. Considering that if I'm not mistaken, the net income H1 accounts for 60% of the full year target. So do you feel comfortable, I mean, with the high part of the range for 2025, just to better understand what you are telling us in terms of the guidance. So this is the upper, if you will, area of the range where I guess you feel most comfortable. The second question is on the operations. What about the integration process of EGEA and [indiscernible] what about the synergies that you are working on and finding with the group? So do you think this will be a source of growth? So this is going to be interesting, I guess, for the group? And if at all possible, I'd like to know what your strategy will be considering, I mean, the freshest data you have for 2026. Any idea in terms of prices and volumes through 2026? So the observation period will end in 2 months, I know. But can you tell us what you expect in terms of adjustments that, as you know, will take place starting January 1, 2026.

Now as for question number one on the guidance, well, the answer is yes. I mean, we are working now on the UR, which is the upper range. I have to say that the outlook is flat, but optimistic at the same time, once again, within the art of the range that we have set. It's not a question of caution. But once again, the information and the evidence we have is confirming this trend. As for the price of energy, and this is your second question, the process is kind of positive and very well advanced, and it will be closed at the end of next year, so the end of 2026. The data we are extracting belongs to, if you will, 3 different areas. On the one side, we have the so-called economy of savings in terms of putting together many activities, for example, administration and IT will be merged. We are also generating cooperation and partnership synergies between different geographies and different teams. So I do confirm that in 2026, we will complete the integration process. And at the end of 2026, we expect the generation of an additional value versus or as compared with the value we have today. Giovanni, back to you for answer to question number 3.

As for the hedging, I do confirm the positioning that we have already shared back in May. So 85% of 2.2 tera of hydroelectricity production and the price will be EUR 105 per megawatt hour. Now as for the thermal electricity or thermal electrical position, I have to say that we have to reconfirm the number we said before. This has to do what we've said before. I mean, today, we don't have the condition to implement new hedging forms. So we would kind of strengthen a situation that's slightly negative. So this is why we do reconfirm the 30% of the total annual production. And again, the value is basically EUR 2 or EUR 3 per megawatt hour, which is what we have consolidated in H1. As for next year, so 2026, well, I have to say that we have to reconfirm the hedging, which is what we have shared with you in the past. And now this means that we will have around 50%. In this case, we have 2 tera because, well, today, we cannot think of a much bigger production mean bigger than 2 tera for 2026. In this case, the price will be EUR 105 to EUR 110 per megawatt hour. What is really very reduced, very small is around 10% of the hedging on the thermal electrical production. As for the RAL triggers, I have to say that, well, basically, we are waiting for the end of the observation time. So it will be closed in September, as you know. So at the very beginning of the autumn or the fall season. So it all depends on the volatility that we have seen in the market. So once again, this is what we expect. Basically, no major changes. But once again, it's a little bit too early. We don't have any idea or numbers on the quantities on possible adjustments. And of course, we will be much more accurate at the conference call where we will be commenting the 30th of September results. Thank you.

The next question comes from Roberto Letizia from Equita.

I'd like to have some insights on the parameters of the guidance. Now we talked about the negative components, I have to say, but I'd like to have some insights on the fact that we have prices on electricity, which are EUR 30 higher than the average price 1 year ago. We had EUR 90 to EUR 95. Today, we have around EUR 120. So there's a big jump forward in the first part of the year. The other consideration is the spread. And I know that the spread is negative, but also in the first half, we can see that those spreads that we have acquired do account for an improvement of EUR 3, EUR 4, maybe EUR 5 per megawatt hour versus the prices we had 1 year ago. And again, what is positive is the power prices. So those plants are negative, but they are a little bit better than those we had last year. So do we have to have some special considerations on service in general? And I also would like to have a confirmation. I mean, can we consider this guidance, which is kind of conservative? So what is the contribution from EGEA in H2? It was meant to have EUR 55 million, but I counted EUR 30 million in H1. So what about the full year number? Or what can we expect in terms of contribution from EGEA in H2? So this was the question on the guidance. Second question, could we have maybe a view or an update on the renewal of concessions for electricity distribution. So basically, your own site, let's say, update. What about the deadlines? Because I know the deadlines are sort of past due. So can we also have an update of your in terms of what the government is doing and expecting?

Well, it is not possible for us to get all of the positive effects and actions that are taking place on the market today because we decided to have a hedging level on electricity, which is very high, which is once again, 85% as I said before. So these values are very close to EUR 100. And again, this is sort of a constraint or a limit. So we cannot get extra margin opportunities. But of course, it goes without saying that we were able, I mean, to stabilize sort of to freeze the margins. And as for the spot spreads or SS, you're right. And as we said before, now this is something we see in the financial statements, but there are some, let's say, sort of gaps or ups and downs because also in summer, H1, well, you see what is happening, but recently in the last weeks and also because of the drop of demand. Well, actually, what we saw were some spreads that have been negative for some hours because once again, this also takes into account the production of renewable energies. And this kind of production is really very important today. So there was a drop in demand, and this means that the spreads get into a negative territory. And I have to say that this is one of our assumptions. I mean we want to be as transparent as possible. Now this is the same transparency we have used on the guidance we have today, considering the spread behavior in H2. As for EGEA, as you said, we have EUR 34 million in H1. So we do reconfirm a EUR 55 million on a full year basis. Once again, as for the growth of EGEA, this is due -- as we said before, this is due to the completion, if you will, of this integration process. And it depends on the seasonal behavior of the system. I mean we have EUR 34 million. I mean, a big chunk of this is due to district heating and commodities. And of course, I mean, they are not really balanced. So basically, we have 60% to 70%, which is kind of concentrated in the first half of the year. Now as for your questions on the hydroelectric concessions and electric grids. Now as for the hydroelectric concessions, as you know very well, I'm sure we got for the project. So we're now waiting for the regional authorities to approve so that we can start with the first batch of plants and we can start working. Now as far as this topic is concerned, we don't have a perfect visibility because what we expected and still expect for the end of '25 and for full year 2026, if you will, the approval. But once again, we are sort of observing. We're just sitting, waiting for what will happen, so we can now confirm. As for the electricity grids, well, you know that on a national level, well, we have some specific financial laws, but we also have a draft agreement for ARERA. And we're just once again waiting. So waiting to define and estimate the so-called remodulation charges. And so just waiting for the final decree or the formal piece of legislation.

Next question is from Emanuele Oggioni from Kepler Cheuvreux.

Once again, congratulations on your results. So my question -- my first question concerns some insights on the hydroelectric production. So have you updated, I mean, this number? Because in the past, you said that in 2025, we should have reached 1,350 gigawatt hours or 1.35. So once again, we have already considered a major important drop versus 2024. Now we can see that H1 did better than your forecast in terms of prices. So let's say that it was a little bit better in terms of EBITDA contribution. Now this means there was a worsening, if you will, of the situation for H2 forecast. So are you confirming the guidance instead of improving the guidance concerning, I mean, this division or this business? My second question is on DH district heating. As you know, there's a consultation document from ARERA, ARERA in order to approve a new tariff period after the transition period in 2026. So we will start from 2026 for 4 years. Can you tell me what your view is because I'm sure that this is a very important business for you. So what are your expectations? And versus the current situation or even previous situation in the previous years, so let's say, the unregulated or partly regulated business opportunity. So is this going to turn into a net increase of profitability starting from 2026 upon the entry into force of the new regulations?

Thank you so much. As for hydroelectric production, there was an amendment from 135, which is what we shared and communicated in May. As I said before, we now have changed and the figure is 1.3 tera or 1,300 giga. Now this is due to 2 factors. Now this was -- well, due to the weather in the month of June, very dry situation in terms of weather for the month of July. So this is something that was unexpected. So as of today versus last year, the difference or the gap is 50 gigawatts. We also have to say that the hydroelectric production moves in a nonsymmetric way between H1. H1 heavily depends on snowfalls, while H2 is highly dependent on rainfall, not snow falls. Because, of course, it very much depends, if you will, on the rain, okay? So H2 depends on the rain, H1 depends on the snow. If you consider our 10-year long average, well, our range was 1,200 or 1,250. So I have to say that this target, which is now 1,300 gigawatt hour, it's anyway higher, bigger than the historical average. And today, if you consider, I mean, today's rainfall and how filled our reservoirs are, well, this is the reason why we have 1,300. As for the tariff methods, we do confirm that this kind of transient system also in case of an extension won't have any impact on the proceeds constraint. I mean our tariffs won't go over the constraint, so the capped cost. So once again, this kind of transition is not having any negative impact on the business, which is what we have shared with you already. But anyway, we do think -- we do hope we will have a final formal tariff method so as to disclose the full visibility also to the future flows, which is, I mean, the possible future margin levels of this business. You know that well, the positioning in this case is excellent.

Just a follow-up, if at all possible, on the total quantity of production from renewable sources. If I'm not mistaken, in the past, we had 2.2 tera then the wind energy production went down. So the new number is basically 2 tera, if I'm not mistaken, is it?

Yes. This is one of the estimates that we made in the past. So we should have 2.2 because once again, 1.35 hydroelectric production and then 350 megawatts, which is wind and photovoltaic and then the rest was WTE, waste to energy. So it was 2.2. It's now down to 2.15, okay? So we have removed the 50 figures that we talked about before. So once again, the other businesses are not changing.

Okay. It looks like we have no more questions. Thank you so much for attending today's conference. You can now close the call. Thank you.

Thank you so much for tuning in. [Statements in English on this transcript were spoken by an interpreter present on the live call.]