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 9 Months 2024 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, everyone, and thank you for joining us. Today, we will walk you through Italgas 9 months results. I'm here with our CEO, Mr. Paolo Gallo; and our CFO, Mr. Gianfranco Amoroso. I leave now the floor to our CEO, Mr. Paolo Gallo.

Good morning for the people that are listening from U.S., and good afternoon for the others. We're going to present today the third quarter results, and I'm starting from Page #2, when you can see that the momentum that was already clear on the first 6 months is here an increase. EBITDA, EBIT and net income show a double-digit growth, as well we see just a slight reduction in the overall revenues and that it is clearly the reason is driven by the disappearance of the Superbonus. In fact, on the revenue side, we recorded an increase of 11.5% year after year regarding gas distribution that I would like to remind you that has been supported by the update of the Italian regulation. That has recognized higher WACC, deflator and the inflation on the OpEx that I would like to remind you that is the -- because of the delay in terms of recognition, we saw it only in 2024, but inflation and higher interest rate already started back in 2022. On top of that, we have also an increase of revenues coming from the CapEx and investment we made last year that resulted in an increase of our RAB. The new revenues are coming from Acqua Campania that, as you know, has been consolidated in the last 8 months, that has partially offset the decline in the ESCo business. Let me say that the -- thanks to the increase of EBITDA and thanks to the fact that the increase has been significant and even higher than the increase regarding depreciation and interest cost, that's the reason why you see an increase in EBIT and net income that in terms of percentage is higher than the EBITDA. Let's move to the other picture that is on Page 3, operating cash flow. Operating cash flow, you see we nearly doubled last year operating cash flow. That is the other element of the decrease of revenues, the disappearance of the Superbonus. You remember very well that last year, we had a significant cash absorption driven by the Superbonus. This year, we don't have that. And on top of that, we also use the tax credit coming from the Superbonus itself. The CapEx is slightly lower than last year. I will explain you in a moment why. But if I look at the core of the CapEx expenditure, that is exactly in line of last year. The third quarter as the seasonality of our revenues is always probably, let me say, the worst in terms of cash generation from the revenues point of view because of the seasonality. And that's the reason that you can see and you can notice that the net debt has increased in respect, not only of last year, but also in respect of the first 6 months, but that is absolutely in line with what we expected. Let's take a look at the CapEx. So we are on Page 4. We invested around EUR 550 million. That is 6.7% lower than last year. The reason are main -- the reason is mainly one. We have lower spending in the digitization, considering that by the end of the year, we will have completely 90% of our program to fully digitize the network. So we are at the end of this program. But if you look at the absolute number, absolute number is still significant. It represents slightly below 30% of our overall investment. The other reason why we spend less and that's, let me say, a good signal is that we spend less in the lower centralized CapEx. As you know very well, this number is not impacting the RAB because the centralized RAB is recognized on a standard basis is based on the number of delivery points that we manage. So that's a good indication that we are saving some money also in the centralized, so-called centralized CapEx. Regarding the core activity, that is development and repurposing of the network that is exactly in line with last year. In this period, we laid down more than 500 kilometers of pipes, of which nearly 300 kilometers were completed in Greece. So also on this side, the investment in Greece is continuing, is on track, 300-kilometer is a significant number but that is exactly in line with our expectations. Let's take a look for a moment about the environmental performance. We always show this. These numbers are again significant both in terms of net energy consumption and in terms of Scope 1 and 2 emissions. We registered in the energy consumption minus 11% in respect of last year, and Scope 1 and 2 emission minus 10%. If we look at the net energy consumption on the left side of the page, the main driver is the saving in terms of gas consumption, both in the industrial and in the real estate gas consumption. So in the building -- in our building, gas consumption. That is the major driver. As you can see, is 25 terajoules that represent the majority. And then we have, of course, some reduction also in the electricity consumption, some reduction in the fuels, thanks to the lower kilometers that we have used our vehicles and the lower kilometers are directly linked to the progressive application of our digital -- progressive use of our digital application. If we look at the Scope 1 and 2 emissions on the right side, again, here, the majority of the reduction is relevant to the gas leaks and let me say -- let me spend a few words on that because that is even a better result that in respect to -- just to the number that you can see here. Why I'm saying that? Because we recorded less emission than last year. But in the same time, we have done nearly -- we have inspected nearly 110,000 kilometers. That is about 135% of our overall network. So in 9 months, not only we have inspected once all our network, but we have inspected even more. So the fact that this amount that is nearly minus 10%, it is an extreme positive numbers because it is computed considering having done much more kilometer than last year. The increase of kilometer survey has been nearly 40% in respect of last year. The data that we were able to collect through the inspection of our network has helped us to identify intervention regarding the CapEx based on predictive maintenance. And that is going to be even more true and more often in the future, the more that we collect data about the behavior of our network. And then, of course, the remaining reduction in Scope 1 and 2 emissions are not so significant. Let me add one element that is minus 10% includes also the new global warming potential factor that has increased. Otherwise, the reduction on a like-for-like basis in respect of last year would have been minus 18%. Let me move to the -- to Page 6 and take a look at the revenues. As you can see, the -- I've already said that the adjusted revenues for gas distribution increased by 11.5% compared to last year. And the reason is the one that you see in the page is the regulatory WACC is the RAB growth, the deflator and the inflation positive impact. As I told you, WACC deflator and inflation reflects some delay in time that is based on our regulation. So it arrives late in respect to the increase to the inflation cost and to interest rate raising that we have already experienced. For the Water business, the consolidation of Acqua Campania for 8 months contributed to almost EUR 53 million in the period, and that is partially offsetting the negative impact of the ESCo. It is, as you can see, EUR 235 million less in respect of last year. Let's take a part of the -- let's take a look at the costs. So we are on Page 7. The cost significantly decreased in respect of last year because there is no more cost of the Superbonus. But if we do a comparison on a like-for-like basis, again, these 9 months, we recorded a minus 1% on a like-for-like basis. Acqua Campania contributed for the 8 months for nearly EUR 30 million for additional cost. Let's move to Slide 8. This is my last page before I move the floor to Gianfranco. We had -- we registered an increase in the EBITDA adjusted of nearly 11%, and we passed EUR 1 billion of EBITDA. That is, I mean, in 9 months is a significant performance. As you can look at the breakdown of the business, you can appreciate that the great majority, as we expected, is still related to the Italian distribution activity. Greece contributed for nearly EUR 100 million and EUR 25 million came from the combination of the other 2 business, Water and ESCo. If we look on the EBIT evolution that is on the right side of the chart, the EBIT increased by nearly 13%. That increased more than if you look at what happened in the first semester, and we are closing at EUR 605 million. Of course, it has been supported by the increase of EBITDA that we have seen before. And there is also, for the first time, an EBIT contribution coming from Acqua Campania of EUR 4.2 million. Meanwhile, we have, as expected, an increase of depreciation and amortization for nearly EUR 12 million, mainly related to the fact that last year, we invested a significant amount, and therefore, we have registered more depreciation. Now Gianfranco will continue into the presentation and will guide you through the net profit and the cash flow.

Thank you, Paolo. On Slide 9, you see net profit adjusted after minorities that has reached an amount of EUR 361.7 million with a remarkable increase of 14.2%. This has been driven by a solid operating performance with the EBIT that is up of almost EUR 70 million -- EUR 69 million. The other component, net financial expenses marked a level of EUR 85.8 million or EUR 13.8 million higher than last year same period, mainly due to the full 9 months impact of the bond that we issued last June in 2023 and the new bonds that we have issued this year last February. For the income from equity investment, there is an increase by EUR 8 million, mainly due to the contribution of Water affiliates, Siciliacque and Acqualatina, both of them equity consolidated. Finally, we accounted for EUR 145 million of adjusted income taxes, marking an increase of approximately EUR 20 million due to a higher taxable income. So the tax rate has been EUR 27.5%, slightly above last year, it was 26.9% or 27%. Moving to the following page, just to say that you see a recap of all the details of the profit and loss was elements we have been -- we have discussed in the previous slides, and also the growth rate compared to the same period of last year. So I will skip it and we'll go directly to the following, where we show the impact of adjustments and the reconciliation of the P&L adjusted with the reported P&L figures. The adjustments are the same already reported in our first half report. And as you can see, there are approximately EUR 10 million of adjustment at the level of revenues, EBITDA, EBIT and EBT lines, carrying EUR 2.8 million of tax effect related to them. The reason of this adjustment is an item mainly related to the negative impact of an ARERA resolution of the number -- resolution number 207 of this year. Concerning revenues already allowed by ARERA in relation to the previous period, the period 2011 and 2016 to cover cost of telemetering activity. So Italgas disagreed with such resolution and took action to preserve its rights. Now moving to the following page. We are on Page 12, that is focused on Water business where in line with the first quarter, the first half presentation, we aim to provide you with a better visibility of the performance of the Water business, we have isolated the performance of the Water business itself. As you know, we have 49% interest in Acqualatina, and we are not consolidating line by line Siciliacque, in which we have a 75% ownership. So in the second column, we made a comparison with representation of both Siciliacque and Acqualatina on a per quarter basis, leading to an EBITDA overall of almost EUR 41 million. Now looking at the evolution of the cash flow on the following page, we are on Page 13. First point, you can see that cash flow from operation was around EUR 713 million, expressing a significant increase, more than EUR 300 million if compared to the first 9 months of last year. To explain this, you will remember that last year was deeply impacted by some of specific elements of net working capital like the Superbonus tax receivables. The opposite this year, we've seen a progressive normalization of the net working capital, which reflects the typical seasonality of the business after the summer season that is characterized by lower level of consumption. As a result, the cash flow from operations covered net CapEx of around EUR 590 million. And part of the dividend payment of EUR 285 million to Italgas shareholders that occurred in the second quarter and other variation in the period. All in all, this resulted in an increase of net debt of EUR 270 million. If we look at the financial structure at the end of September, first, let me underline the important fact that both Moody's and Fitch affirmed Italgas ratings following the announcement of the deal of the 2i Rete Gas acquisition, while also Standard & Poor put 2i Rete Gas under positive credit watch for the same reason in light of the potential acquisition. This is a clear recognition of the strong strategic and financial rationale of the deal in our view at least. Focusing on our debt maturities, let me recap that transaction that we have completed so far. A new bond of EUR 650 million fixed rate issued in February with a coupon of 3.125% and the top issuance of the same bond in September for additional EUR 350 million, the same condition, of course, reaching a rounded amount of EUR 1 billion. We also concluded this year the repayment of the bond of EUR 380 million expired in March. In addition, we have completed a new EUR 600 million sustainability-linked revolving credit facility. Of this transaction, coupled with the cash flow evolution described in the previous slide, resulted in a level of liquidity just above EUR 600 million at the end of September. Another important point is that notwithstanding the refinancing activity that occurred in this year, we managed to keep the average cost of debt just above the level of last year at 1.5%. As far as the current composition of our debt is concerned, it remains substantially unchanged, 93% is fixed and the remaining 7% is floating. I now leave the floor back to Paolo for his final remarks.

A couple of those final remarks before we open the Q&A section. Let me say that I'm extremely pleased about the performance that we registered in the first 9 months, notwithstanding the effort that we put on the other deal to close the other deal on 2i Rete Gas and we just -- a couple of weeks ago, we presented a full integrated and combined plan with 2i Rete Gas. If we look more on the 9 months result, let me say that the gas distribution fundamental remains extremely strong, not only for the fact that we have received, even with a delay an increase in work in WACC deflator in inflation, but also because we were able to keep our cost under control, not only we were able even to reduce our cost in respect of last year. As well, we recorded positive contribution from Greece in the water in line with our plan. We are working hard on the energy efficiency activity to rebuild the business on a more solid basis and not thinking about the Superbonus anymore, but trying to provide effective offers to industrials, to big residential and eventually to public administration in order to really improve the efficiency results also in our customer as we were able to show in Italgas. Remember that the numbers that we show in terms of reduction of energy consumption is driven by the effort of our energy efficiency company into the overall group. So this is what ARERA is able to provide to us and it would be able to provide to any other customer. I will leave the floor back to the audience, and I'm opening the Q&A session.

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

I've got 3 quick ones, if I can. First thing I wanted to ask you about given the sort of now reported 9 months results, basically, do you see upside to your ad hoc full year guidance, EBITDA, EBIT level, et cetera, based on what you've seen for the 9 months? Second question is maybe can you provide some sort of details about the full year CapEx guidance as well? I think it was EUR 900 million that you announced for the full year, and you've done 500-ish so far. That seems to require quite a nontrivial acceleration in the fourth quarter. So is that on track? Third one is basically, can you give -- when can you provide us with all visibility on potential antitrust disposals? How long will that take?

Let me say that the first 2 questions are relevant to the guidance. Well, we are -- I mean we have shown a significant result in the first 9 months. We, of course, cannot do anything different than confirming the guidance we gave the guidance 2 weeks ago. We may even -- let's see what is going to end the year and see how it looks like. But for the time being, guidance is confirmed. In particular, on the CapEx side, we may be slightly below EUR 900 million. So I'm not confirming something that we said around EUR 900 million. So with that number in the first 9 months, we will probably be slightly below EUR 900 million. But still I'm looking for the technical CapEx in a sense that I'm looking for about the number of digital equipment that we connected to the grid, to our network that we bring the digital equipment to DANA, the number of kilometers that we have as an objective to lay down and we are perfectly in line. So at the end of the day, if we spend less, that's fine for me as long as we meet our target in terms of physical target, and that is absolutely in line with what we have decided internally to reach as a physical target. Regarding the antitrust, we just recently filed the antitrust documentation. It will take a little bit of time in order that we will have some feedback from them. So we are not -- we don't have any kind of information we can deliver to the market right now. But we can confirm you that we have filed the antitrust documentation.

The next question is from Aleksandra Arsova with Equita.

A couple on my end. The first one is on some rumors on newspapers that again, the government is thinking of changing the rules for natural gas tenders. So maybe if you can confirm that actually something is happening or it's just the usual rumors? And again, that maybe these new rules will imply some new considerations on the technological development of the operators bidding for the tenders. So this should help you actually. So just if you could confirm or not this new approach. And then the second one is maybe just some color on the nonregulated energy efficiency projects. You mentioned that now you're, of course, not considering more the Superbonus, but you're building on some news activities. Maybe if you can give us an idea of where you see the figures of the nonregulated business apart from Water in 2025?

Regarding the first one, the rumors that you mentioned, I have not seen in the last several weeks about this changing in the number of items. So I don't know, but let's -- I just mentioned that because I was not aware of. Let me say that from what we understood, the effort from a legislative point of view is to make the tenders happen. That, unfortunately, is not what we can record it in the last 12 years. During our strategic plan presentation, we underlined the fact that in 12 years, we had only 9 item that has been awarded up to now and there is maybe 1 plan that is going to happen a few as in terms of awarding. We know already the results. So I think the effort that has been done in the past year with very little effect, if no close to 0, was to improve the tender's process. So any -- let me say, any modification in that will help the tenders to happen. I think it is more than welcome. So we are, let me say, supporting any modification in the tender rules that will help the tenders to happen. So we'll evaluate any proposal that will come. But if those proposals are in the direction to make this up -- to make the tenders to happen are more than welcome. Regarding the energy efficiency, as I told you, we have exited like -- we knew already the Superbonus period. We are focusing on -- especially on the industrial or small- and medium-sized industries to provide offer about energy efficiency, also based on the experience that the energy efficiency company has gained inside the group and the numbers are clearly evident. I mean that's what we have shown and the track record that we have shown on the -- on our ability -- on the ability of the energy efficiency company to provide a solution to reduce the energy consumption, both in terms of gas and electricity. For 2025, let me say that we will see better results in terms of higher results, higher revenues, higher EBITDA on the energy efficiency, but honestly, I don't have any idea how -- any idea or a number that I can tell you right now because it's too early. We are -- they are working very hard to provide -- to create a situation where we can make a significant offer and contribution to third party how to reduce the energy consumption in line with what we were able to do already in Italgas.

The next question is from Emanuele Oggioni with Kepler.

I have 2. The first one is on the net working capital guidance for the full year. And also if you remind your policy about the -- how to use the fiscal tax assets related to the Superbonus. If I remember well, the amount could be roughly EUR 190 million a year in order to cut the -- to benefit the cash flow of the company. And the second question is still on ESCo business. So you mentioned a recovery in '25 in line with the planned sanction. But you are good in right this wave in the last few years. But I ask if you still consider as a core business, this kind of not regulated activity, also in light of the transformational deal with 2i Rete Gas and so in the future could be disposed or could be considered no more as a core?

So Emanuele, we'll take your first question about the evolution of net working capital. You've seen that at the end of September, the net working capital absorbed cash for EUR 43 million -- EUR 44 million approximately. As I commented, this is quite usual for the period of the year because of the low level of -- lower level of consumption during the summer period, summer month. As far as the projection for the year-end, as you mentioned also, there will be a positive impact of the Superbonus, the tax receivable in this case. The number you mentioned is wrong. We are talking of around EUR 130 million per year. Part of this has been already, of course, utilized this summer for the payment of the first installment of the taxes. The remaining will be utilized by the end of October for the payment of the remaining of the tax. And overall, I will expect a positive sign of the net working capital, so a change in the sign from negative to positive by year-end.

I'm taking the question regarding the energy efficiency. Let me go back to the strategy because otherwise, if we don't go back to the -- our vision about the future, you may eventually understand that why you are doing the energy efficiency business. Energy efficiency, if you remember, that there are at least 2 strong connection with our gas distribution activity. The first one is that we by law are obliged to buy energy certificates year after year based on the volume that we distributed on the gas. So there is an intimate connection with energy efficiency because we are obliged to buy energy efficiency to support the energy efficiency certificate production of the energy efficiency project. That's the reason why, if you remember, back in 2018, we decided to enter into this business because we say why we don't -- because we are obliged, we want also to take some business advantage being signed, not just buying and selling, buying and selling energy efficiency certificate. And that was the reason that we had in 2018 about entering to that and still continue to be true. The second, even more important, is that in our vision of the energy efficiency -- of the energy transition, energy efficiency is playing a significant role to reach the objective of the net zero by 2050 as well as distributing green gases such as biomethane, hydrogen gas, synthetic gas and so forth. So it's part of our strategy, the energy efficiency as one of the tools that we have in order to support the energy transition. For the reason, energy efficiency is part of our core business, even if it's a small one. Third one, but is probably it's -- let me say, it is a side that is as well as important is thanks to the knowledge and the competence and the expertise of the people, we were able -- that are in the energy efficiency company, we were able to achieve the reduction in the energy consumption and the reduction in CO2 emission that we are showing to you every quarter. So they are using us, as Italgas Group as, let me say, the first company to deliver all the new ideas about reducing energy consumption and reducing CO2 emission. But in that way, you can see that the energy efficiency is fully integrated in our business and strategy.

Next question is from Javier Suarez with Mediobanca.