Italgas S.p.A. (IG) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Italgas First Half 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Anna Maria Scaglia, Head of IR of Italgas. Please go ahead, madam.

Good afternoon, ladies and gentlemen, and thank you for joining us. Today, we will walk you through Italgas first half 2023 results. I'm here with Mr. Paolo Gallo, our CEO; and Mr. Gianfranco Amoroso, our CFO. We will address any questions you might have at the end of the presentation. I leave now the floor to our CEO, Mr. Gallo.

Good afternoon to everybody. Paolo Gallo speaking. Let's start looking at the summary of results presented in Page #2. In continuation of the result that we presented 3 months ago on the first quarter, we achieved an impressive growth in the last 6 months with double-digit increase in all the key operating drivers, income drivers. Revenue were up nearly to 32%, led by the strong growth of our ESCo and the consolidation of the Greek operations, proving, in fact, the benefits of the diversification that 2023 represent for Italgas. In the Italian distribution business, the main drivers were two: RAB growth and the positive impact of the deflator that were unfortunately partially offset by the [ dilution ] from the disposal of the item of Napoli. While total OpEx were up year-over-year, this is not surprising, considering the development of the ESCo and the consolidation of the Greek operation. If we look, and we will look in details in a moment, just the distribution business, costs remain fully under control with understanding the inflation impact. Overall, considering our cost of debt, our adjusted net income grew by nearly 15% in respect of last year. Let's move to the following page, Page #3, with an overview of the CapEx. We spent nearly EUR 400 million in the first 6 months with an acceleration, if you remember, in respect of the first quarter, but the mix was significantly different if we look at this year and last year. I will explain in a moment. The first 6 months, the working capital was negatively impacted by -- the working capital negatively impacted the operating cash flow and explain the change and the reduction of the operating cash flow with respect of last year. Two main drivers have created such impact, is the super bonus activity, we have already talked about that in the first quarter; and the lower contribution from billing seasonality. That has been positive but less positive than the previous year, due mainly to the milder weather and to the lower consumption created by all the action put in place by our government to reduce the gas consumption or the energy consumption in general. As a result, the cash flow evolution and the payment of the dividend, net debt increased by about EUR 300 million, just above EUR 6.2 billion. Let's take a look at the CapEx that is on Page 4. We invested, as I said, around EUR 400 million, 6.4 higher than last year. Out of this, EUR 50 million referred to Greece and the remaining, EUR 350 million, to Italy. Where there is still an increase in the digitization, remain very strong. We spent around EUR 125 million, with an increase of 12% in respect of previous year, mainly concentrating on the digitization of the asset because the contribution of the smart meter has been negligible. Development and repurposing of the network attracted the majority of the CapEx, nearly EUR 190 million. That includes also EUR 24 million regarding Sardinia. As I said, we spent nearly EUR 40 million in CapEx in Greece, we'll give you in a moment more details about that, that represent 311 kilometers of new network, new pipes in Greece only. If you look at the overall group, we added 478 kilometers in new pipes. As I said, we would like to give you a more detailed analysis of the CapEx expenditure in Greece. And I think that the result achieved in the first 6 months of this year are here to demonstrate the change in the path, the change in the speed that the new shareholder, Italgas, has given to the 3 DSO. In fact, you can see that the value, if we compare what the 3 DSO have invested last year in the same period, has increased by 41%. And if you look about the kilometers, the increase, it's even higher, is 48%. If you look on the right part of the page, you can see that these new kilometers are well spread across most regions in Greece, 7 out of the 10 in the Mainland Greece. We are also working very hard on the DSOs integration. Following the strategic plan presentation we made in June in London, our teams share this project with the Greek regulator. Let's take a look where we are about the project integration that is on Page 6. We've been -- we have achieved in this initial 6 months significant progress. First of all, we have moved all the companies that are basing in Athens in one single building. And it may look a little bit awkward to say that, but it's not so awkward because that is the first and the major step to integrate the 3 DSO. The second step that we have done always on the Athen-based operation is that we have moved all their IT infrastructure to cloud. And we have redesigned the infrastructure to upgrade network and end-user services. Regarding the old Greek operation, a significant effort was deployed on the IT system modification and transformation, leveraging our own capability, the capability that today are concentrated in our company called Bludigit. A few examples. We have stepped up the cybersecurity that in these days is extremely important to reduce the risk of cyber attacks. We've established a joint governance between our IT company, Bludigit and DEPA. We have started to set up the new EMMG platform for smart meter to collect data from the smart meter and the WOS platform that is used to remote control field activities. So we are bringing to Greece all the technology that we have been using in the last few years in Italy. Let's go back now and take a look at the ESG results. As usual, we are looking that to underline the progress that we are making toward our targets that we set for 2028 and 2030. The first page, Page 7, shows the net energy consumption. Net energy consumption was down, if we look only at the Italy perimeter, by nearly 19% in respect of the previous year. If we include Greece, that was not consolidated, of course, in the first 6 months of 2022, the drop is reduced to slightly below 15%, but is the remarkable drop. The main contribution came from industrial gas consumption, which was more than 22 terajoule lower, thanks mainly to the action that we put in place to improve the performance of our [ operating ] system. The remaining 1/3 reduction, 11 terajoule, is coming from civil gas consumption, thanks to the efficiency that we have achieved in optimizing the consumption of our building and the constant monitoring of the performances of the building themselves. If we look at the electricity consumption, was also lower, mainly driven by the lower use by Italgas Acqua, thanks to the digital -- use of the data in the digital in Italgas Acqua, reducing in the case the consumption of electricity, that is extremely important in the water sector. And also thanks to self-consumption of electricity produced in the citygates that are equipped with turboexpanders, combined with cogeneration plants. Those equipment is used to treat the gas, but at the same time, they produce also electricity. Finally, if you look at the vehicles consumption, we again achieved a reduction in the net energy consumption, thanks to the fact that the kilometers that we traveled in the first 6 months were significantly lower than the last year due to the digitization of the business processes that has brought us to reduce the number of travels. If we move to Page 8, we have the similar picture about the greenhouse gases emissions. In the period, we have seen an increase of 8.4%, driven by two factors. The major factor is that we included Greece that was not present in 2022. And the other is because we have -- during the first 6 months, we have concentrated ourselves in inspecting, first of all, more kilometers than in 2022. We exceeded 51,000 kilometers of our network in Italy, and we have focused ourselves in the areas that, where we have mentioned, were higher in 2022 with the objective to prioritize action where necessary. While this resulted in higher overall emission, the positive out of the choice is evident in the ratio, the KPI that we measure of gas leak per kilometer survey. Not only did it not increase, but was slightly lower than last year. Reduction in the emissions by the vehicles is driven by the less kilometers that we traveled during the first 6 months. Now let's look at the economic results. On Page 9, you have the profit and loss account. In 2023, we don't have any adjustment. And therefore, we compare the 2023 with the 2022 adjusted. Total revenues increased, as we have already shown before, by EUR 224 million, led by ESCo and by the Greek -- Greece consolidation. Expenses increased by EUR 131 million, driven by the same drivers. Depreciation and amortization was also up, due for two effects: higher CapEx in the scope of -- and the consolidation of DEPA infrastructure; tax rate, Gianfranco will tell you later. The result is that we were able to increase the net profit by 15% in respect of last year, passing the EUR 213 million. Let's take a look in more details about the revenues and the difference between revenues achieved last year with the revenues we achieved this year. First step is the RAB growth. RAB growth and the effect of the deflator accounted for EUR 25 million in revenues. Then we have the combination of the inflation that is recognized at revenues level to cover our OpEx, that has been nearly completely offset by the negative X-factor. The inflation recognized was about slightly less of 4%, while the X-factor was [ 3.53% ], as you know. The result is that only EUR 1.7 million is the effect of an increasing recognition for the inflation cost, very, very, very small contribution. Other regulated items were negative for nearly EUR 5 million. I will explain in a moment. And then we have all the disposal, Naples, [ Napoli ATEM ] and Gaxa disposal, net of Janagas positive contribution resulted in EUR 35 million lower revenues. And then we have the two big parts: DEPA contributed for EUR 87 million, and the majority increase comes from ESCo, EUR 152 million in the first 6 months. Let's go and take a look from a different perspective on the revenues that is on Page 11. That is line by line. If you look at the Italian distribution regulated revenue, regulated revenue distribution, what is called regulated distribution revenue gas in Italy, reported a slightly increase in 2022, [ of ] understanding the disposal of the [ Napoli ATEM ]. And then, other distribution revenues were down, as I said before, due to lower revenue for customer services and lower incentive for leak detection. I should say that this reduction is attributable to positive adjustment that we recorded in 2022, so were like [ una tantum ]. Otherwise, the level of leak detection incentive is absolutely in line with 2022 results. Now let's take a look at the cost. We are on Page 12. As I said before, our operating expenses increased by EUR 131 million due to a combination of factors, let's go one by one. You remember that every quarter, we show what is the like-for-like cost difference. And I'm very happy to say that in the second quarter, we were able to make this like-for-like cost equal to zero, offsetting completely the inflation impact. It's even more than that because if we exclude the pass-through costs, so costs that are also -- that is a -- have a similar recognition in the revenues, the overall costs were down more than EUR 3 million in respect of last year. Then we have the fact that Gaxa and the [ Etano ] Napoli are not anymore in our perimeter, and that represents about a minor cost of EUR 12 million. And then we have what is adding the DEPA cost, nearly EUR 26 million. And the ESCo, we have seen the increase in the revenues. Of course, we see also an increase in the cost of EUR 117 million. The next page, Page 13, just show this cost in different -- let me say, on a different perspective. If we take a look at the results in terms of the EBITDA, EBITDA grew in respect of last year by more than 18%, so it's a significant, very strong growth. Let's look where it comes from. First of all, if we look at the Italian contribution, the Italian contribution, even though there has been a Naples disposal, it is still positive. So we need to thank the RAB growth and the impact of the deflator. DEPA Infrastructure accounted for EUR 61 million, and the ESCo accounted for nearly EUR 30 million. What is on the right side of the chart is also very interesting because it shows you how the business of Italgas has been evolving over the last 12 months, with the Italian distribution moving from 98% of the total EBITDA to 84%. And you can see the contribution of the Greek operation and the contribution of ESCo. You also need to consider that in the Italian gas distribution, there is the Naples -- the Napoli disposal that has reduced the contribution of the gas network. You should remember also that the comparison has a different perimeter because in the first 6 months, we did not have Greece. While, of course, during Greece, we started to consolidate the Greek -- Greece operation in September 1, 2022. So you can see the full impact in the first 6 months of the Greek contribution. I leave now the floor to Gianfranco for the remaining part of the presentation.

Thank you, Paolo. We are now on Slide 15, and we see that in the first 6 months 2023, EBIT reached almost EUR 360 million, marking an increase of 21%. In the period, we saw an increased EBITDA of our Italian perimeter of more than EUR 30 million -- EUR 32 million as a result of the variance of revenues and OpEx, already explained before by Paolo. Second, higher D&A for Italian assets of almost EUR 14 million, mainly related to the CapEx executed in the last 6 months and the carryover of the CapEx executed last year, considering a neutral impact from Naples discontinued SG&A as of 1st of January 2022. Third, the first-time EBIT contribution of DEPA of almost EUR 44 million after D&A of EUR 17 million that, in addition to the EUR 13 million of the Italian perimeter, gives the total increase of EUR 30 million, already commented by Paolo. Moving now to Slide 16, where we have adjusted net profit after minorities that reached EUR 213 million, up almost to 15%. We commented the net financial expenses were EUR 44.6 million or EUR 18 million higher than last year's same period, mainly due to the impact of the rising of short-term interest rates on our floating rate debt. In relation to the fixed rate portion, we have accounted the full impact of the [ AV ] loan executed in December of 2022 for EUR 2.4 million and the new bond issued in June for EUR 1 million. We also accounted for the cost linked to the factoring of the VAT receivable of the first quarter of around EUR 5 million. Contribution from associates decreased by EUR 0.8 million. Finally, we accounted for EUR 85 million of income taxes, marking an increase of EUR 10 million due to higher taxable income, while the tax rate was 27.1%. We now look at the evolution of the cash flow on Slide 17. First, you can see that cash flow from operations was around EUR 320 million. This is a consequence of a negative evolution, as expected, of net working capital that brought a negative contribution of almost EUR 130 million. I would flag two items in particular. First, [ geoside ], or the activity in the energy efficiency area, booked EUR 168 million of higher receivables for super bonus and EUR 30 million of higher payables to our suppliers. Second, a lower cash contribution from the billing seasonality, only EUR 85 million, if compared to last year's same semester, due to mild weather and to saving implemented by the [ final ] users to contrast high commodity costs. On the right side, net CapEx generated a cash outflow of almost EUR 400 million. All this, coupled with dividends and other payments for EUR 235 million, resulted in a net debt increase of approximately EUR 315 million. Let me now make a quick update on our debt structure at the end of June. We are on Slide 18. The new element is that in June, we issued a EUR 500 million new bond with a 10 or 9 years to ensure an adequate liquidity in anticipation of next year funding mix. Our debt composition, after that new issuance, remains broadly unchanged, 8.5% floating, the remaining fixed. In light of the new bond and the new bank facilities carried out in the last 12 months, mainly since December, our average cost of debt increased to approximately 1.4%, reflecting the rise in the short-term market rates. Moving on to the balance sheet on Slide 19, just to comment that the net capital invested amounts to almost EUR 8.7 billion, with an increase of more than EUR 270 million compared to same period last year, mainly related to incremental CapEx and working capital. On the liability side, consolidated net debt was EUR 6.3 billion, include the IFRS 16 impact of approximately EUR 84 million. I leave now back the floor to Paolo.

Thank you, Gianfranco. I would like just to make a few remarks before opening the Q&A session. Let me say that the second quarter has confirmed the trends of the first quarter, so strong growth in respect of last year. Gas distribution fundamentals remain strong in Italy, led by the RAB growth and cost control, despite the negative impact of disposal and the negligible impact of the inflation recognition by the regulator. Diversification with Greece and the ESCo is a material growth driver. I should remind you that the regulator in Greece has recently approved the 2023 allowed return for the 3 DSOs, and it was set at 8.57%. And finally, we are still working, and we -- with Veolia to close the deal on the water asset. Our guidance for 2023 is confirmed, so I'm anticipating probably some of the question that is coming. Now please, the floor is yours, and we are available to respond to your questions. Thank you.

[Operator Instructions] The first question is from Sarah Lester from Morgan Stanley.

I just have a high-level strategic question, please. I'm interested to hear management's view of the longer-term makeup of Italgas. So in 5, 10 years' time, is it very much by then a multi-utility? Or does the Italian gas networks remain very much the dominant core business? Obviously, just interested, given the rates in backdrop with water in Greece last year.

This is the only question?

Yes.

Just one.

Very good. It's a new habit. Normally, it's three questions. Now -- I mean, very interesting one. Thank you for your question. My answer is we are not going to be a multi-utility, full stop. That's very clear. Our gas distribution will remain core in the years to come because we feel, and there is clear evidence in the last couple of years, that the gas distribution infrastructure will play a central role in the energy transition, and we are here to play such a role. If you look at the water sector or if you are talking about the energy efficiency, those are, let me say, industry-related sectors, strictly connected to our sector itself. So what we are doing is that we are trying to take advantage of sectors that are very close to us, let me say, for operation, water distribution for -- related to energy transition, energy efficiency. And therefore, we have decided to invest because those businesses are very close to us for the two reasons that I mentioned to you before. That does not mean that we are going to be a multi-utility. We are not going to be a multi-utility. And we are trying to leverage the knowledge and the competence to enter in industries like the one that I mentioned or eventually to diversify ourselves always in the core business on a geography base. Greece is a clear demonstration that we can be a significant player also outside Italy, again, leveraging our competence and our knowledge in the gas distribution. But 5 or 10 years from now, we will still be a significant -- our core business will be gas distribution, maybe with [ sum ] of the other 2 businesses, very interesting in terms of results.

The next question is from Javier Suarez from Mediobanca.

Several questions. The first one is on the Slide #17 on the working capital dynamics that has to do with the growth on the ESCo activity. Can you remind us the assumption by the year-end, should we assume that, that number, that absorption in working capital, it's going to be at zero by the year-end? And which are the managerial actions that you can take to zerosee that number again by the year-end? Then another question is on the -- moving to the Slide 20, on the regulatory settlement in Greece for 2023. If you can share with us how this settlement compared with the assumption in the recently presented business plan? And you can share with us your assumption for -- in the business plan for that allowed return on RAB increase beyond 2023? Then during the presentation, you have made a lot of emphasis on the management effort to bring data to the Italgas standard to a digital transformation. So in your industrial experience, which is the timing that a company like Italgas needs for the completion of that project and to bring the Greek operation to the Italgas standard? The very last question is around -- on the water distribution activity, maybe a follow-up on previous question. So after the closure of the deal with Veolia, how do you see the capacity of the company to become a relevant factor in water distribution through selected M&A and the real options that you see in that market as we speak?

You have recorded some of the questions that were not [ bound ] by your colleague in Morgan Stanley because you did four questions. So on the net working capital by year-end, maybe Gianfranco may give you also the -- well, there is a confirmation of guidance in the net debt that what we have announced in June. Maybe you can elaborate a little bit more on the net working capital.

Yes. For sure, the assumption was based on the working capital neutral. And the guidance for the [ debt ] was EUR 6.4 billion, including IFRS 16. This means that following to your question about the impact of the super bonus receivables and the activity of the ESCo, the neutrality will be also, let's say, positively affected by the reopening of the banking system in order to be able to buy this receivable. Otherwise, you will remember -- you have to remember that the normal evolution, this kind of receivable linked to the normal, let's say, activity of the ESCo, established a period of 4 years in order to be recovered. So normally, there's a possibility to recover, in installments, in 4 installments, the receivables that you have in 1 single year. And this was also the case this year when we have, say, utilized the first installment of the receivable 2022 against the tax paid in June.

On the second question about, if I well understood, the number approved by the regulator in Greece about the WACC, the 8.57%, was [ then ] in line with our expectation and with the assumption that we made in the new strategic plan when we presented the strategic planning back in London. Why it was in line? Because the -- let me say, we presented to the regulator different studies that 3 DSOs have elaborated their own studies by a third party, and we -- and those studies were presented to the regulator with slightly different outcome, one from the other, but very close one from the other. And therefore, we took numbers. We put the numbers inside our plan. Honestly, it was 8.5, so it was very close to the result that we got from the regulator. So the result has been in line. The reason is because our studies were extremely strong on that, very solid, very realistic. And we find, on the other side, a regulator that has recognized the good of these studies, and they have translated into a number that was very close to our expectation. Then, I did note that you mentioned something about the RAB, for which I did not get it. Let me see. Okay. The value of the RAB for Greece was in -- at the end of 2022, EUR 720 million, and it is expected to be EUR 800 million by 2023. These numbers are important. And I mean now I understand your question because the revenues recognized, so the WACC in Greece is multiplied by the RAB of the same year. So it's slightly different from the Italian one, where the revenues are calculated based on the RAB at the end of the previous year. So the revenue is coming, just to make it sure, the revenue is coming. The revenues that should come for 2023 are the RAB of 2023, end of 2023, multiplied by the WACC, plus all the other components. You mentioned about when and what is the time frame, which will bring DEPA with the same profitability as the Italian one. You need to go back to the -- there was a clear page in our business plan presentation in London, where we indicated what was the assumption taken in the plan and the ambition that we had. The ambition was to bring the same level of the Italian or maybe slightly below because you don't have the economy of scale that we have in Italy, in a 5 years' time. We are on that trajectory, so we should be there in, hopefully, maybe in less than 5 years' time. But take a look at the chart. It was on Chart 23 in our strategic plan presentation. There is the ambition line, we are on that line. And hopefully, by year-end, we should -- we can tell you that we are even better than that line. On the water side, your question is, can we become a relevant player in the water distribution? Honestly, now we are focusing on closing the Veolia deal. And we have also our strategy out to tackle the big leakages that there are in the water distribution. And as we explained in London during our strategic presentation, we said we feel that the digital technologies that we have developed in the gas distribution apply to the water distribution with limited investment, should be able to significantly reduce, we talk about 15% to 20%, current leakages. So moving like, let's say, from 50% to 30%. And then, based on the data collected, we should be able to prioritize investments and therefore, to further reduce the leakages. But we want to -- after we will take over the Veolia asset, we want to demonstrate this theory that has been already demonstrated in the gas distribution, honestly. So it should be relatively easy to demonstrate. And then I think, after that, we may become a relevant player in the water sector.

The next question is from Mark Freshney from Credit Suisse.

Firstly, I mean I can't get away from this point on the EBITDA. I mean it seems you've had a very strong start to the year. Presumably, we should be seeing the EUR 1.18 billion now as a floor. Secondly, just on the returns in Italy, I was just interested to see what your latest expectations are for those returns next year.

On the first one, let me say that I said before, we confirm the guidance. On the EBITDA guidance, we -- well, we'll probably be at a very high point of the guidance. So I share your view that we have been able to report strongly result in the first semester. On the ESCo side, let me say that we will see a declining -- a little bit of declining of the revenues over the next 6 months only because the super bonus will end by year-end. So there is normal that there is a peak at July -- June, and then we will see some decline. But still, I feel that we will report very -- on the higher part of our guidance of the EBITDA. Regarding the WACC, we are very close to the end of the period in which we [Audio Gap] those observation period. And based on -- they're still missing August and September, so 2 months out of 12. We confirm that the WACC for the next year should be 6.4, so 80 basis points higher than today WACC. That is our expectation. That is a very strong expectation.

The next question is from Stefano Gamberini from Equita.

I have two questions. The first is regarding, again, the WACC in Greece. Just if you can give us the breakdown of the main components of this WACC, which was set for 2023, if I'm not wrong. What could happen for 2024 onwards when we could expect a new decision from the regulator? The second, regarding your concession in Rome. If I'm not wrong, this will expire in 2024. The Rome municipality was the first to decide about the tender. Or even if there was even an agreement between you and the municipality of Rome for the extension of -- for the renewal of concession. And so if you already have some contacts with the municipality because probably, they will -- on track on the contrary of all the other [ Atos ]. Considering also the topic regarding the value of the assets, the RAB and the value of the asset that could be recognized as a redemption value to you, could you also remind about this topic? What is your best estimate right now regarding the RAB in this concession in 2024 at the end of concession and the potential redemption value?

Okay. We can provide to you the detailed number, but let me go through one by one. Regarding the WACC in Greece, risk-free return market is set at 2.36%; [ risk ] premium [ for 5.5%]; systematic risk factor, 32%; [ counter ] risk premium, 0.8%; after-tax rate, 1.3%; cost of equity pretax, 8.06; capital before tax, 22%. It's quite longer list. So at the end of the day, the result has been 8.57%. It's more probably for many analysts. We can provide to you all the data, but that is -- those are the major data that are inside the evaluation of the WACC. For the years to come, that is something that will be discussed at the end of this year, beginning of 2024. Honestly, the result will mainly depend about the evolution of the factor that I have already told you. On the Rome side, I will pass the data to Gianfranco. Let me only say one thing that it's true that the concession is going to expire next year. As you remember, in our plan, we have put as a date for the end of the tender process in 2027, so in 3 years. That should be quite a significant record, if you look at all the other tenders time. So that after 3 years, the concession will be awarded to a new operator. But for the data, Gianfranco will give you the numbers.

Yes, Stefano. So as far as the RAB is concerned in 2024, the total figure of RAB is EUR 1.7 billion, of which the RAB already owned by the municipality is around EUR 700 million. The RAB subject to, let's say, the evolution for free at 50% is around EUR 350 million, and the remaining is the RAB that will be returned against cash.

The 0-3 issue. 0-3 is divided 50% is owned -- will be owned by the comune.

50%.

50% will be owned by us. So the comune will own about EUR 0.85 billion.

Yes. And in the concession agreement, there is a fixed amount for the redemption value, which has been fixed at EUR 300 million, the so-called [ una tantum ], to be paid to the existing transaction, in case it will not be awarded a tender.

So just to summarize, the RAB, in fact, EUR 1.7 billion, is splitted 50-50, more or less, between the owner shipped by the community Roma and the ownership by us. And then there is the EUR 300 million as a [ una tantum ] to be paid at the end of the concession.

If I...

Please.

EUR 1.7 billion, so this means that you have more or less 850 million use of owned RAB out of this EUR 1.7 billion and a redemption value of EUR 300 million. Am I wrong?

Correct.

You're correct.