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 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Anna Maria Scaglia, Head of Investment Relations of Italgas. Please go ahead.

Good afternoon, everyone. Thank you for joining us. Today, we'll walk you to Italgas First Half 2024 Results. I'm here with Mr. Paolo Gallo, our CEO; and Mr. Gianfranco Amoroso, our CFO. I leave now the floor to our CEO, Mr. Paolo Gallo.

Good afternoon, everybody, and welcome to the -- this conference. We are going through the results that we achieved in the first semester of 2024. So I will start from Page #2, where you have the summary of the results. As you can see, we managed to deliver double-digit growth in adjusted EBITDA, EBIT and net profit in the first half of the 2024 while the revenues were down by 6.4% and that was fully expected due to the reduction of revenues and activity in our energy efficiency company because of the end of the super bonus. On the other hand, we see a significant increase of the overall adjusted gas distribution revenues by 12% year-over-year. Gas distribution, as you know, was supported by a review and update of the Italian regulation that has incorporated higher inflation and rates in the allowed return with the delay -- with the normal delay of the regulation. But even more important, we have seen a significantly rapid growth that is driving our revenues. In our revenues, there is also the positive contribution of Acqua Campania, the company that we acquired from [indiscernible] and Veolia , consolidated for the first 5 months of the year. If you couple these result in revenues with our ability to reduce and control the cost, that's the reason why we are having EBITDA, EBIT and net income grow at double digits. In particular, net income grew by 13.3% in respect of last year. If we move to the following page, Page #3, another significant result is in the operating cash flow that has not only materially improved versus the first semester of 2023, but the number has really significantly grew 66% more. And that is mainly driven by an effect that there is no more the super bonus cash absorption that we have registered last year. Gianfranco -- when Gianfranco talk about the working capital, he will explain in more details -- all the detailed generation of cash flow. And the cash flow today is in line, I would say, probably even better than in line of the historical trends that we registered for the cash flow generation. CapEx is slightly below last year. I will explain in detail why that is not driven by our normal operation, but it's driven by investment that we do in what we call centralized RAB and investment in digitalization. What is extremely significant is that thanks to the cash flow generation, the cash flow -- the operating cash flow was able to cover the CapEx, to cover an M&A and to cover a portion of the dividends that we paid in May. So at the end of the day, the debt at the end of the period increased by EUR 176 million if we exclude IFRS 16. Let's go and take a look at the CapEx that is on Page 4. We invested EUR 354 million, that is down 11% with respect of last year. Let's see what are the driver. The driver of these are mainly 2. Lower spending in digitization as we are completely in the digital transformation of the network, still -- EUR 100 million is still a significant number in the first 6 months. The other element that was significantly reduced was the lower -- what we call lower centralized CapEx. This number has no impact at all on RAB because what we call centralized RAB is adapted annually only to account for the deflator impact and is normally remunerated on the basis of the number of redelivery points. So even if we invested less, that is only positive because we are saving money. Development and repurposing of the network are in line with what invested last year considering Greece and Italy. And what is extremely important is that in this period, we were able to lay down more than 300 kilometers of new pipes out of which 200 in Greece. After that, I will move -- I will skip to the ESG results of the first semester of 2024. We are at Page 5. The page shows the net energy consumption that is down 12.5% (sic) [ 12.4% ] in respect of last year. For the time being, we have excluded for a matter of comparison, the consumption of Acqua Campania that is -- that was not present last year. So on a like-for-like basis, the reduction is anywhere significant. We saved 22.7 terajoule in respect of last year. The main contribution came from gas consumption, thanks to all the activities and actions we put in place in order to reduce the consumption of gas in our preheating system. And in fact, we were able to achieve a significant reduction in our specific consumption ratio and now is close to 1. Last year was 1.15. As well, we recorded a better performance on our buildings, leading to lower civil consumption. Also, electricity consumption was down due to the higher use of auto produce electricity and also to the optimization activity that will run on the water facility in [indiscernible]. Finally, the other component is a lower consumption of gasoline and diesel and natural gas. And the result is mainly driven by less kilometers that we travel and thanks to the use of digital staff has done and work on site. A different -- it looks like a different perspective is the Scope 1 and 2 emissions that are increasing over the first semester of 2023. Let me explain why. First of all, there has been a revision of the ratio, the global warming potential that has been introduced, and that is accounting for 8.2 kilotons. So that is, let me say, driven by an external and different method of calculation. But there is also an increase due to the fact that we have discovered more leaks. And the more leaks are driven by the significant increase of kilometer that we recorded in the first half of 2024. So we nearly covered all our network, 73,000 kilometers with an increase of 36% in respect of last year. So we expect that in the second half of 2024, we are going to -- let me say, to inspect the areas that according to us are, let me say, the most critical ones, and we expect to find less leaks than in the first run. I have already underlined the effect of the global warming potential. Regarding the other elements, of course, less kilometer traveled by vehicles has produced less CO2 emission, less gas consumption has produced as well less CO2 emission. Let's go back to the economic results. Let's take a look at the revenues on Page 7. Adjusted revenues decreased by 6.4% and that is the result, as I explained before, mainly driven by the drop fully expected of Geoside, our energy efficiency company revenues. In the same time, this drop was partially compensated by the increase of the revenues coming from our gas distribution, Italy and Greece together, and by the consolidation of Acqua Campania that is bringing, as you can see, nearly EUR 32 million in addition in terms of revenues. I think that is the comments that I have relevant to the revenues. Let's move to the next page, that is regarding operating expenses. Operating expenses can -- we are showing that the control of our cost is significant. On a like-for-like basis, we were able to reduce by 1% our operating cost, including Greece in respect of 2023. The major drop in the operating cost is driven by the energy efficiency. We have seen that we have less EUR 175 million in terms of revenue. We have also EUR 140 million in terms of operating cost. Similarly, Acqua Campania, who brought a positive contribution in revenues, contribute also an increase of cost by EUR 17 million. Overall, our cost in the first half were at EUR 201 million. As a result of the combination of revenues and cost, our EBITDA increased by more than 10% in respect of the first half of 2023. As you can see, the 2 contribution are positively the distribution activity in Italy and Greece by nearly EUR 88 million and a decrease relevant to Geoside that is EUR 24 million in terms of difference in terms of EBITDA. Of course, the core business, the gas distribution in Italy contributed for a significant amount, nearly EUR 600 million out of the EUR 671 million of EBITDA. You see also a contribution of Greece and a limited contribution by Geoside and the Water. I leave now the floor to Gianfranco for the remaining part of the presentation. I will go back at the end of the presentation to collect any questions you may have on those numbers.

Thank you, Paolo. We are now on Slide 10, where we have adjusted EBIT marked an increase of 12%, reaching more than EUR 400 million. This growth is supported by an increased EBITDA of almost EUR 50 million, resulting from the variance of revenues and OpEx that we have already explained. For the first time, EBIT contribution of Acqua Campania of around EUR 3 million. On the other side, higher D&A for around EUR 10 million, mainly related to the carryover impact of the CapEx executed last year. Moving now to Slide 11. Net profit adjusted after minorities reached EUR 241 million with an increase of around 13%. Net financial charges marked a level of [ EUR 55 million ] or EUR 11 million higher than last year's same period, mainly due to the impact of new bonds that we issued in June last year and last February. Income from associates increased by EUR 6 million, mainly due to the contribution of water affiliates, Siciliacque and Acqualatina, both equity consolidated. Finally, we accounted for EUR 97 million of adjusted income taxes, marking an increase of approximately EUR 11 million and due to a higher taxable income. Tax rate was 27.5%, slightly above last year at 27.1%. Moving now on Slide 12. We have just a recap of the P&L elements that we have discussed in the previous slides. So I will skip it and I will drive you directly o the following one, Slide 13, where we show the impact of adjustment and reconciliation with the reported P&L figures. As you can see, we reported approximately EUR 10 million of adjustment revenues, EBITDA, EBIT and the EBT lines with a tax effect of EUR 2.8 million related to this. This item is mainly related to the impact of Resolution 207 of this year. Resolution of ARERA, concerning the negative adjustment related to revenues already allowed by ARERA for the period 2011 and 2016. These positive components was due to cover cost of telemetering. Let me add that Italgas disagrees with such resolution and took action against this. Now on Page 14, there is a focus on the Water business in line with what we have presented for the first quarter with the aim to provide you with a better visibility on the performances of the Water business. As you know, we are not consolidating line by line Siciliacque, despite a 75% ownership since we have no clear visibility on timing of such accounting change. So in the second column, we made a representation of both Sicilia and Acqualatina on a per quarter basis leading to an aggregated EBITDA overall of EUR 27 million. Now looking at the evolution of the cash flow on Slide 15. First, you can see that cash flow from operation was around EUR 530 million, expressing a significant increase around EUR 200 million if compared to the first 6 months of 2023. To explain this, you will remember that last year -- sorry, you will remember that last year was deeply impacted by some specific phenomena on net working capital like the booming super bonus tax receivables and the impact of bonus gas. At the opposite, this semester, we came back to a positive networking contribution for around EUR 33 million. As a result, free cash flow covered a net CapEx of around EUR 390 million. Financial investments completed in the period, and almost 1/3 of dividend payment of EUR 285 million in the second quarter, resulting in a net debt increase of only approximately EUR 195 million. Finally, the following page, we make the usual update of the financial structure at the end of June. Let me recap the transaction that we have already flagged in the first quarter presentation. A new bond of EUR 650 million fixed rate issued in February and the repayment of the bond of EUR 380 million expired in March in addition to the new EUR 600 million sustainability-linked revolving credit facility. All this, coupled with the cash resolution described in the previous slide, resulted in a level of liquidity slightly above EUR 300 million at the end of June. Notwithstanding the refinancings that occurred in the period, the average cost of debt is almost in line with last year, 1.5%. Current composition of our debt remains substantially unchanged with 92% fixed and the remaining floating.

Before going to the Q&A, let me just make some comments about the numbers that we have shown to you. The performance are extremely strong and are confirming what we have done in the last 7 years. So there is nothing new. The fact that we are continuing -- yes, our growth is continuing is significantly important. This year, we can see that the gas distribution in Italy fundamentals is very strong, not only thanks to the increase of the WACC, the allowed return and the inflation, but also because even though in such a scenario, we are able to keep under control our cost and to reduce even if it's only by 1% to continue to reduce this cost in respect of last year. And we were able, in that way, to compensate -- more than compensate what we were expecting in terms of energy efficiency results. We start to show some positive contribution from the water sector, where we have been working very hard in these first 6 months to contribute to significantly increase not only in terms of economic results, but also in terms of operational results. Greece is on track. So we are happy about that. And I think the best result that we can show in the first half is a very extremely solid operating cash flow generation. Back in light, I would say, probably better than what was the historical trend. Now moving to and anticipating some of your questions about 2i Rete Gas, I would like to say that I cannot tell you anything because we are during -- in the due diligence process. The journey that we started more than 2 months ago is on -- is proceeding as expected. So we are in a good step in our due diligence, but we cannot provide to you additional information. You should be patient. You should be sure that as soon as we have significant development, we will announce it on -- immediately to the market as soon as we will be in a position to do so. So please do not ask a question about 2i Rete Gas because that is the best information that I can provide to you. I will leave now the floor to questions you may have.

Operator, please let's start the Q&A.

[Operator Instructions] The first question is from John Campbell from Bank of America.

I've got 3 relatively quick ones, if I can. So looking at the working capital, performance was improved year-on-year. How should we think about it for the rest of 2024, particularly relating to these receivables you have for the super bonus? So that's question one. Second is sort of how do you see progress so far in integrating the recently consolidated water assets? Do you reckon you can apply sort of your know-how in natural gas distribution to achieve some quick wins there, I would argue. And the third one, I appreciate any comments you can give, there is a press article in [indiscernible] on the 20th of June and the article hypothesizes, I stress the word hypothesizes, that a bridge loan refinancing could require EUR 1 billion of equity issuance or hybrids. What is your response to this article? Do you agree with that hypothesized figure? And can you give any details.

Yes. I will take the first question about the working capital resolution impact on over the year of the super bonus receivable. As you know, we have a bulk of around EUR 130 million for this year to be compensated. Part of it has been already compensated in the first semester without an impact on cash because the taxpaying was due for the 1st of July. [indiscernible] in the month of November for the remaining portion to be paid in terms of taxes. Broadly speaking about working capital end of the year, we can have a position of that to be neutral to positive at the end of the year.

Let me tell you Acqua Campania, we own 96%, and we fully consolidated it. Acqualatina, we own 49%. We are the industrial partners, majority is in the comune ownership. Siciliacque, we have 75%, but for the reasons explained before by Gianfranco, we cannot consolidate it. Our partner is the Regione Sicilia. So we have different situations in which -- the role common to all the 3 is, of course, let me say, the role of the industrial partner. And some of them, like Acqua Campania, the consolidation and integration is more strong than the others. Let me say that what we are doing, we are focusing mainly on helping Acqualatina and Siciliacque to deliver by mid of 2026. What they have committed in terms of investment relevant to the national resilience and PNRR. The commitment is important because they have to invest nearly EUR 150 million that is devoted to the improvement of the network as well as the digitization of the network. I am particularly referring to Acqualatina. So we have built around these 2 company a team that is helping them through procurement, engineering, project management, to help them to focus on how to deliver on time this investment. That is extremely important because you know that if we don't deliver them by mid-2026, we may have a big problem. So the situation on the water is proceeding fine. We are really acting as an industrial partner. There has been already some quick win, if you want, that is the collaboration that we have established between our gas distribution and water distribution in Acqualatina, where many activities on site to repair and replace pipelines have been carried out together. So at the same time, we are intervening to repair or replace gas pipeline as well as water pipeline. And that is a significant quick win also for local community, where you have only one operator that is intervening or 2 operators together at the same time that are intervening at the same time and reduce the, let me say, the bad part of such intervention to the local community. Regarding the last question, honestly, I have not seen that press, but I can tell you, as we have already told you that the finance acquisition of 2i Rete Gas, it's already fully underwritten by JPMorgan. And then after that, we will refinance through a combination of equity or equity-like instrument and debt. And the objective is to maintain the current rating profile that Italgas has. More than that, so I don't comment on article that I haven't seen it.

The next question is from José Ruiz Fernandez from Barclays.

I only have 2. One is, well, you made a EUR 1.8 million EBITDA from energy efficiency. And I was wondering if you can help me to normalize the full year either '24 or '25 for ESCo activities. And secondly, if you can give us a guidance of net debt by the end of the year without M&A.

Okay. Regarding EBITDA of the ESCo, let me say that as anticipated, 2024 was changed into our business in a sense that the super bonus has ended and therefore, what we have seen is in terms of record numbers is what we expect, so nothing new. And we didn't expect the super bonus or similar, let me say, not super bonus, but similar bonus about residential to pick up during 2024 because you don't expect that people that until last year, we're not paying a single euro for the upgrade and refurbishment of their real asset -- real estate asset, now is willing to pay immediately 30% or even more than that. So we expect this residential activity to restart a little bit in 2025. So 2024, we are working in building new, let me say, businesses that are mainly to our business -- let me say, toward business activity, similar industry, let me say, some residential in terms of energy management and public administration. Those are the 3 areas that we are working, and we will see significant results in 2025, not in 2024. We cannot disclose now what is going to be 2025 numbers in terms of energy efficiency. As you know, we expect to present our new plan by, let me say, September/October. By the time, we will be able to disclose more about the future of energy efficiency. What I can tell you is that we are working hard to build different kind of business activities, as I told you, towards these 3 sectors. Regarding the financial position at the end of the year, I think Gianfranco can give you more information.

Sure. The net debt without IFRS 16 for year-end is 6.6%. So the number -- the figures that we gave in the guidance we communicated last month without any M&A, except the one that we have already done this semester that I commented before, the EUR 50 million.

The next question is from Javier Suarez from Mediobanca.

One question on the regulatory update on the gas tenders. I have read on the local press that the Minister of Environment and Energy security, maybe working on a proposal to simplify gas distribution tenders in Italy and press has been reporting different initiatives. So the reason for you if you would be -- you can update us on any conversation with the current administration and on any measure or proposal that could make this acceleration in the tendering process for new wealth distribution area a reality. Any update on that would be very helpful. And the second question is on the operational efficiencies. I have seen on Slide #8 that the like-for-like efficiencies has been again reduced. The question is, it is fair to say that these operational efficiencies have been extracted mainly in Greece -- or in your Greece activities and we should see that number increasing while Italgas' best practices are introduced into your group subsidiary? Is that the correct statement? That would be helpful as well, a clarification on that. And then finally, if you can repeat again that you intend to present a new business plan update by the end of September beginning of third, is that correct?

We did not understand the last question. Could you repeat that? Javier, sorry for that.

No, no, no. It's a clarification on previous answer, if you have said that you intend to present a new business plan update by the end of September, beginning of October.

Okay. The proposal that you are referring to that you have read on the newspaper about the reduction of number of items, we have read it also. My comments is very simple. Let's take what happened in the last 12 years since the revision of the concession. 177 items, only 9 have been completed in 12 years. So any modification of the existing legislation would be welcome in a sense that if it reduced the number of items, it will probably increase the likelihood that those tenders will happen. So from that point of view, we are positive reading what you have read in the newspaper because that will help probably the consolidation from one side, but even more important, will help the tenders to happen. But let's see what is going to happen. That is my only comment. So I really liked you read it. My comment is positive. Let's see if it's going forward. Regarding the operational efficiency that you are referring to, let me say that the main driver is still Italy, it's not Greece. Greece, we are working out to bring, if you remember last year presentation plan, to bring the level of efficiency of the Greek operation, similar to Italy, but you cannot expect that they will be immediately at our level. So the operating expenses in Greece are more or less in line of last year. And because there has been some additional cost driven by some extraordinary, let me call it, additional cost that we have encountered in order to start to review those costs. So we expect the Greece will contribute in the second half of this year or better in 2025 as the operational costs will probably decrease. But the like-for-like that you see is Italian operation. It's not Greek operation. Greek operation is in line of last year. So that is -- and it is a good news because we still are able to reduce our costs in Italy, and we are working hard in order to get the same result in Greece the same that we are getting in Italy. Regarding the new plan, we told you when we announced that the strategic plan was delayed it's because we want to present this plan as soon as we will have, let me say, a clear situation about 2i Rete Gas. So if we are successful and if our binding offer will be accepted by the counterpart, then we will present the new strategic plan. So it should happen between September or October.

The next question is from Stefano Gamberini from Equita.

First of all, could you kindly repeat why the CapEx decline in Italy in the first half and what we could expect in the coming quarters? Second, as regard this reduction of OpEx, why you are still improving the Italian situation? If you share with us, if you were able to even improve your initial targets, thanks to the digitalization. Or are there some higher capitalization year-on-year? The third topic for me is what could we expect from the regulator on 2 main topics again, the first is regarding the new WACC, could the regulator also change the EBITDA or the leverage in the update of [indiscernible] WACC for '25, '27 periods? When do you expect the first consultation document and what is your, we can say, best estimates right now? And the second, as regard the RAB deflator, do you have some talks with the regulator considering that the gap between CPI and deflator of gross fixed investments in 2023 was 600 bps? And do you have the feeling that the regulator could introduce some changes in the calculation of the deflator?

On the CapEx side, as I told you, there are, let me say the same level of investment in the distribution activity. We reduced significantly in term of percentage, not in terms of absolute number. The amount that is -- it is called centralized RAB that is up, let me say, approximately, but it will not impact the RAB, as I said before. You know that the return of what is called centralized RAB that is calculated over the number of redelivery point. So it's not affected by our reduction in CapEx. And the third element is that we -- the amount of what we invested in digitization has been decreased because we are completing the transformation, the digital transformation of the network. What we expect by year-end, we expect that in the next half, we'll probably have an increase in the digital stuff as we are completing. So we are rushing in order to get to the famous 90% of the network fully digitized and fully managed by DANA. And therefore, you will probably see some increase in the second half. The amount relevant to the network will remain stable. Some of the centralized RAB may change due to the fact that this number is affected by -- also by IFRS 16, that may change depending if we sign some long-term contract on car leasing and other stuff like that. On the second one, on the OpEx side, you should not be surprised that we are still continuing to reduce our OpEx in Italy. So as I told you, there is no specific element, but there are multiple elements that are driving our costs down. 1% is not big, but still a significant number. The digital stuff is the main contribution, the DANA application that is months after months covering the overall network is the major contribution because it reduced the number of intervention by our technical staff on the field. The number of intervention is reducing because we are able to do it remotely and -- there are many activities that are moving to digital staff are affected by cost reduction. So we don't have one single item. We have multiple items that are contributed. It's not a huge amount, but we have reduced the cost significantly in the past year. So to me, the trend is what is important. We are still keeping the control of the cost and reducing a little bit. On the future of the regulation, as you know, the WACC, we need to wait until the end of September to have a full picture. We still have a couple of months -- August and -- more than 2 months until the end. So we will probably update at the next conference call. Regarding the deflator, we have already seen the correction for 2023 because the status changed to some of the parameter and the regulators recognize such change, and therefore, they introduced the correction. We expect that it's going to happen again. When the new consultation document about the next regulatory period, I think it will happen next year. So let's see. We don't have the date, it's too far from now.