Naturgy Energy Group, S.A. (NTGY) Earnings Call Transcript & Summary

So good morning, everyone. This is Abel Arbat speaking from the Capital Markets Team at Naturgy. We hope you're well, and we thank you for joining our 2020 full year results call. Together with me, we have our Executive Chairman, Francisco Reynés; together with our Head of Financial Markets, Steven Fernández; our Head of Controlling, Jon Ganuza; and our Secretary of the Board, Manuel García Cobaleda. So we're going to go ahead with some company remarks addressed by our Chairman, and then we will open the floor to Q&A. So with that, I'm handing it over to our Chairman. Please, Francisco.

Good morning to everyone, and thank you, Abel, for your introduction. As always, it's a pleasure to address me today to all of you that are connected to this conference call of the results 2020. As you have already got the presentation this morning, we have thought that maybe probably more efficient to allow us to go faster and quicker into the Q&A part and just to take a couple of minutes of attention on the key remarks of these special results presentation for this year. First thing, of course, and chapter 1 in our presentation is about the recent events, recent events which are around the tender offer that has been sent or presented by IFM, the Australian fund. I just wanted to, on behalf of the company, be clear on some key parts of this tender offer that are affecting the company. First and most important is that it has been an unsolicited offer. You know it is addressed to maximum of 22.689%, which means it's partial and is at EUR 23 per share at the time of the presentation and with all the deductions on dividends that could be paid after that. On this part, just to again remark that Naturgy was only informed shortly before the public announcement. Then any questions you may have around that, we'll have probably very, very limited answers because our knowledge was extremely, extremely weak. Second, the bidder has not been in touch with the company. Therefore, the bidder has not received or requested any information from the company in their process to analyze this tender offer. And the main information on this tender offer, Naturgy was aware of the terms just at public announcement. I think that all these 3 points are very important for us to be understood by the market. What is the company doing in the meantime? Well, very clear that we are continuing to operate the business on a business-as-usual basis. Of course, for the interest of all shareholders, all shareholders are today and should today be clear that the company continues its operation on a running business. We are developing our efforts, as we have stated many times before, which is readdressing the strategic direction of the company towards the energy transition opportunities. And within these opportunities, we are continuing our rotation strategy. Portfolio rotation strategy was formed in part of the strategy, as we have explained many times before. On the Board, as you know, the Board will have a legal obligation to give an opinion to the shareholders on what the Board thinks that should be the position of the company and the shareholders in front of the tender offer but it's not the time at all. It will come, and when the time will arrive, the Board will comment on the offer, not now. Because of that, our Capital Markets Day is postponed, subject to further development. But the main reason is that although the company is working hard and because of this tender offer arriving at the time that we were preparing the presentation, we are considering how the company should work and trying to or avoiding any condition or anticipating any position of the Board. And this is what the company and its advisers are now analyzing. And of course, Capital Markets Day will come therefore in due course. I can't comment more on the tender offer but I think that was important for me to take this opportunity to be clear with everyone. Probably, some of you will have some questions around the tender offer that may arise at the end of the presentation. And with all my sorries, but I might say that probably most of your questions will not be able to be answered for the time being. On the presentation for the 2020 results, I would like to highlight, on 1 side, the scenario. As you have seen in our presentation, the scenario was clearly addressing headwinds during the whole year, including the effects on the pandemic, including the effects on the ForEx in Latin America and the rest of the effects, in particular, on the gas market in the LNG in inspection. Our results, I need to apologize to all the analysts. Since we have changed our management structure, we are readdressing our reporting structure to be consistent with the responsibilities within the company. It has positives and negatives. I know, and again, I apologize for the negatives, which in particular, are for you, the ones that are following the company and its results. And the capital markets department is, as always but even more now, available for you to help you in this readdressing of your models in order to understand better how we have restructured our reporting. But I think that it makes a lot of sense to highlight a very important part of our new strategy, which is renewables. That will be reported as a whole unit, and you will then be able to follow how we are increasing our assets in operation and how it develops the CapEx and our pipeline. Most of you were not aware that our renewables capacity today already in operations is around 4,600 megawatts of power, 4.6 gigawatts in operations already. And I think that this was part of what we want you to be aware of. On the rest, again, I apologize for this change. What happened during the year 2020 is that, number one, we have met our guidance. If you compare at the constant perimeter, and again, I would like to again ask the analysts that have not yet changed the perimeter that are -- for some of you, still including Chile in your figures -- Chile electricity in your figures. As you know, in the figures we are presenting today, Chile electricity is no longer formally in part of the EBITDA base. And that's the reason why we are saying that we have met the guidance of EUR 4 billion in EBITDA because at the time that we established the guidance, Chile electricity was formally in part of the reporting, and since we reached an agreement with China's State Grid for the sale of Chile in November, Chile electricity is already out of the reporting. In terms of ordinary net income, our ordinary net income has been of EUR 872 million, clearly below the year 2019 because of all the effects, as I mentioned before, in the scenario. But the company continues performing its cash flow from operations, generating cash. And in this year, the cash flow from operations have generated over EUR 3,400 million. It's important to remember that as a partial offset of these headwinds that we suffered during the year 2020, the company has been working hard in the efficiency program, and we have been able to reach over the target of EUR 500 million of OpEx reduction by 2020, we reached the level of EUR 545 million of CapEx -- of OpEx efficiencies by 2020. Then 2 years in advance, we have overpassed our target in OpEx efficiencies. 2020 has also been a year for asset valuation reviews. And in this sense, the most important thing is that we have conducted a EUR 1.3 billion asset valuation through an impairment on mainly, our operations in thermal generation in Spain and Argentina. Two important remarks on this accounting exercise. Number one is, it is not impacting at all the cash in the year 2020. Then it is noncash impact in 2020. And second is that after then, then from 2021 onwards, it will incorporate a positive effect on the P&L due to lower amortizations. More or less, the positive effect through the P&L of years '21 onwards will be around EUR 75 million per year. On Chile electricity, as you know, the binding offer has been accepted and the contract has been signed in November 2019. We are expecting to close the transaction before the end of first half 2021 and it's just pending on some local permits. Things are going on track, and we are not seeing any clouds in the sky to advise on any potential delay on this timing. Regarding net debt in our balance sheet, we have included a proxy on how would have been the net debt in the company, in the case that the proceeds from Chile would have been already incorporated in the cash balance of the company. This is the reason why in Page 17, you may compare between net debt in fiscal year '20 and pro forma net debt in fiscal year '20 as well. And the difference of this -- around EUR 2.6 billion is because of the proceeds that we are expecting to receive from Chile, which are duly signed and, of course, just pending on these approvals to be closed. You have a quite detailed reporting on how every business unit has been developed. And with me, we have Jon Ganuza if there is any question -- special question for him to answer, we can go ahead into the Q&A part. But as a summary of the 2020, I would like to highlight what is written in Page 26 is that results, starting at the line of incomes, have been clearly affected by energy demand, prices and Lat Am currencies, all together boosted by the pandemic. We are, as point number two, to highlight, working hard in structural changes as a demonstration of how the OpEx base of the company is moving towards the targets, even over-passing the targets in advance, and also working on gas renegotiations with all the main gas suppliers, as you have already known, through Sonatrach or other major suppliers. It's important to again highlight the efficiencies acceleration and the noncash effect on the asset valuation and the sale of Chile Electricidad on a disposal agreement fully binding. How are we seeing the year 2021? Number one, of course, we did not expect this new situation that we are now living with the tender offer. And of course, one of the clear key events of the '21 is how the tender offer will finish, how and when. But in the meantime, the company will continue working on the main strengths that we have established here for our networks, the energy management, renewables and assets. What I would like to highlight is that networks in Lat Am, there's consolidation of Chile Electricidad, a very important issue to be considered. In energy management, the expiration of the concession of EMPL, which is finishing at the end of October '21. On renewables, and thanks to the last acquisitions in the U.S. and other investments close to the public auction that has been already discovered last week in Spain, the company is clearly committed during '21 to continue this rerouting towards renewable energies, and we are foreseeing a minimum investment of around EUR 1 billion during the year. And in terms of assets, on top of executing the 2 binding agreements with Chile Electricidad and Union Fenosa Gas, our longer disputes with Egypt which should finish in the next coming months, we will continue rotating the portfolio, as we have already established as part of our strategy and part of the advantages of the company for the next years to come. I think that probably you would be more interested in a Q&A part, and I will hand over to Steven and Abel to address this part of the presentation.

Operator, we...

Yes. Go ahead, Abel.

Now operator, please, we're open for questions so please go ahead with the line of questions.

[Operator Instructions] Our first question today comes from Alberto Gandolfi from Goldman Sachs.

I appreciate it's a difficult moment in terms of like how much you can say, but considering the CMD has been postponed for now, I just wanted to start perhaps with your energy transition towards green energy. And I mean, thank you for disclosing the EUR 1 billion per year investment in renewables. I was wondering if you can give us maybe a tiny bit more details about that, maybe a very broad split by region and maybe a very broad split by technology. So how much should we expect for wind versus solar, and maybe U.S. versus Iberia, for instance? The second question is about your 2021 outlook. The -- I mean, it's very helpful, Slide 27. Your final sentence says persistent headwinds but you have new opportunities. So I was just wondering, do you think you can still grow EBITDA in 2021 versus 2020 at constant perimeter, considering the loss of the EMPL on one side, the FX that continue to remain a headwind but perhaps a bit better LNG and more renewables? So just trying to see the direction of profit. And the last question would be, can you maybe tell us briefly if you have any restriction? I think the answer is no as long as you don't frustrate the offer. You're absolutely free right now to announce hypothetically an asset disposal, right? This tender does not stop you from taking those type of strategic steps? And thank you so much for disclosing all of it.

Thank you very much, and nice to meet you at least by phone since many months to meet us in person. I would pass the word to our General Secretary in terms of confirm what you have stated. I would tell you that what he has explained to me, and he will do it now in more detail, which are the obligations and the restrictions that today, the Board has in the context of the tender offer. And I would prefer that he is more precise not only for you but for the rest of the audience because as you may imagine, this is something that the Board is considering -- taking into serious consideration because we are working for the best of all our shareholders and, of course, for the best of the value. Please, Manuel, if you can elaborate a little bit more on that?

Yes. Thank you, Mr. Chairman. So once a tender offer is announced, just from the moment of announcing, it's not yet that it is filed in the CMB. So already since last 26th, there's a duty of so-called passivity. That means that the Board is prevented from doing anything that could derail the tender offer. Nevertheless, there are relevant circumstances in the current tender offer. First of all, it's just a partial tender offer and this is relevant for the purposes of the intensity of such passivity rule. Second thing, if we consider the composition of the Board of Directors of Naturgy, where there are proprietary directors that represent more than 50% of the shareholder base, this means some sort of proxy of what the shareholders' meeting could decide, accompanying whatever proposal the Board of Directors has made. And the law provides that a general assembly can effect on whatever and can surpass any restriction. And thirdly, what a [ quick ] question, some of the decision of the Board of Directors are mainly in the part of portfolio allocation. And this is something that the Board of Directors has already started and even communicated following to the market since long ago. So this amounts for us to a business as usual way of running our business. So for other circumstances, it's a very limited application of the -- this passivity rule in the context of this specific tender offer.

Thank you, Manuel. If there is any more clarification needed, as you know, we have already said that Manuel is today joining this conference call, although I think that it has been clear enough to say that the company will not stop to continue pursuing value creation opportunities because of the tender offer, because this is in the interest for existing shareholders, for the future shareholders and for the leaving shareholders then. This is the most important obligation that we have in our mind. On the split, I told you that it was around EUR 1 billion, and we will need to differentiate between regions or countries. More or less, 30% will be in Australia. As you know, we have already won some projects that we disclosed. But of course, these projects are attached to obligations of investment. And more or less, 30% of the figure will be invested in Australia, 30% in Spain. As you have seen, we have already won part of the public auction the government made public last week, and this is also attached to some investments. And 30% in the U.S., which are linked to projects that were in the portfolio of the acquisition that the company made at the beginning of the year in the U.S. The remaining 10% is in Chile, projects that were already started and are continuing and finishing and will be in operations during the year '21. On growing EBITDA for the future, it is true that EMPL is finishing. As we have already stated, EMPL will finish by end of October '21. But it's also true that the company has demonstrated that it will do the best it can to offset, through our internal world, mainly through efficiencies in OpEx reduction, how we can be done to compensate lack of businesses somewhere. We think that the scenario is not going to give us easy moment. It will not be as easy as some years ago it was. But the reality is that the answer is yes, we will grow in '21 versus '20.

Our next question comes from Javier Suarez at Mediobanca.

I will try to make some questions on the unsolicited bid. I understand that it's difficult to answer some of them, but hopefully on some, you can give some more light. It's on the definition of an unsolicited offer. Obviously, you referred to the company -- the company was informed about the bid just minutes before the presentation. But it seems that some of your -- of the investors that are seated on the Board have been informed on the offer. So the question is if you can give us an answer -- with us your conversation with your existing shareholders on this unsolicited bid and if you can give us and share with us this conversation on what the tender could add to the company, its strategy, what they intend to do, et cetera, et cetera. So the question is on the existing shareholder that has been publicly [ failing ] to be informed about the offer before it was launched. Second question is on other shareholders that are not -- has not been given an opinion. If you can share with us any conversation with criteria on their position on the offer or with the government. The third question is on the timing for the Board to give an opinion. If you can share with us your best guess on when the Board of the company could give an opinion on the unsolicited bid that has been presented. And the fourth and final question is, you mentioned before that you -- the company believes that the bid should not interrupt the asset rotation policy that is at the core of your strategy. So if you can share with us not the business plan but the certain priorities of the company in light of this unsolicited bid, if it is changing anything or the company just continue -- believe that it can continue its own way as before.

Thank you very much for your questions. I think that, again, I will also ask Mr. Cobaleda to help me on your third question, which is about the timing, although I am aware and I have been told by him that it is too early for the Board to say a single word, but I would like him to explain to everyone how it is going to be the process for this opinion to be disclosed to the market. But before -- and I'm sorry for that but as you can imagine, I mean, I am Naturgy and I can talk on behalf of Naturgy, its Boards and its management committee but not on behalf of all shareholders. And I apologize but I cannot talk on behalf of them. They have their own words. And if you have any question to -- for them, please address these questions to everyone in particular. And on the rotation, before Mr. Cobaleda explain us a little bit more about the timing, on the rotation, it is clear that portfolio rotation forms part of the strategy of the company since years, not now. It's not new. Therefore, because the rotation strategy forms part of our strategy, the first demonstration has been that we have closed a deal in November with China's State Grid to sell our assets in Chile Electricidad. And we already said, at the time of the presentation to the market, that it was not going to be the first and the last opportunity of asset rotation, and we were working on other projects that we were not going, at the time, neither now, to disclose but which are fully aligned with our strategy, which is going to reduce volatility, increase visibility and incorporate a portfolio with much more hard currencies. In this sense, the company continues working and is not forming part of a new strategy neither a different strategy under the tender offer. It already established its strategy since years. And it is on -- this tender offer is not going at all to stop this strategy because we think that is for the benefit of all shareholders. I would like Manuel to comment on the process that I have already introduced. Manuel, please.

The law provides that the Board of Directors has to issue an opinion on the tender offer once the tender offer acceptance period has [ started ] -- in fact, has to do it within the 10 first days. But as you know, the tender offer, the prospectus to be filed by the CMB as far as we know since we read it in the announcement, the offer is expecting to file it within the next couple of weeks. So with the process that it will take in the CMB and maybe the permits but also the public announcement mentioned, we may be a couple of months already away from that moment. So it's not an issue to be dealt with in the short term but more in the horizon of a couple of months.

Our next question comes from Fernando Garcia.

I wanted to know that on the gas contract renegotiation cost, if you have reported already all the costs or there is more pending for 2021. And then I would like you to explain all the concepts of these costs. And finally, can you provide some detail about what could be the impact of this -- going forward, of this gas contract renegotiation?

I will pass the word to Jon Ganuza, who will answer that in more detail. Please, Jon.

Yes, Fernando. With this close during this year, I would say that the bulk of the contracts that could be renegotiated have been renegotiated within this year. There are some contracts that still are going to be renegotiated on 2021. And as you are aware, most of the contracts that are subject to renegotiation do have ordinary [ price ] clauses that do apply on a 3-year basis. So some will start in 2021, 2022, but I would say that the bulk of the renegotiation, we've seen it this year. Regarding the impact, as you can understand, this is a sensitive information. And as the same as in during this year, we have not disclosed the impact that each of the renegotiations have had. We've just commented the fact that they were [ closed ]. We have not disclosed not even the estimate about what the impact we expect to see from those renegotiations.

Our next question comes from the line of Javier Garrido at JPMorgan.

I apologize because I have a few. I will try to be as short as possible. The first one would be if you can elaborate on your approach to the balance sheet. You have mentioned in previous calls that you believe that Naturgy has significant investment capacity. I mean I can understand that you cannot talk about numbers but at least if you can give us your views of what are the ratios, what are the metrics that you would be looking at, and what is, in your view, a sustainable profile for the capital structure of Naturgy, that would be very useful. Second question would be on a sentence including your 2021 guidance for the supply business. You mentioned there's certain improvement, mainly supported by mild recovery and structural changes. I was wondering if you could elaborate on what these structural changes are and in which direction they will work. And third question is on Mexico. The Mexican government has made the proposal, legislative proposal to change the dispatching order as well as the conditions of the contracts with private operators servicing the CFE. And if you could elaborate on what could be the impact of that proposal for your Mexican business. And last question will be on your remarks about the expectation of high EBITDA in '21 versus 2020, just to be 100% clear. Do you mean reported or ordinary EBITDA or hopefully both?

All right. So Javier, this is Steven. On the balance sheet approach, we've mentioned before that our target is to protect the BBB rating right now. That means that we're going to be looking at ratios such as FFO to net debt, which has to be at a minimum of 18%. Clearly, when you look at the balance sheet, I think you need to take into account the cash coming in from disposals. And specifically, as you can think in terms of FFO to net debt with the 2021 horizon, you can imagine that, that ratio is going to improve significantly. And then there are other elements that will allow us to also protect that BBB, for example, being more proactive in the market like some of our peers are going up for hybrid instruments as [ investment ]. So we think it's doable, and at the same time, continue investing at the rate that we think we can. So that's going to be the focus on the company. In terms of the growth that the Chairman mentioned, we're referring to ordinary EBITDA growth for 2021.

So Javier, regarding your second question, which were the main changes that we foresee in the supply business for 2021. I think that under structural changes, what we have to see is the change in the commercial strategy. That is the result of the new management that we have, this change in the commercial strategy. We take that -- we're certain that is going to change the trend that we've seen in these past few months where we were losing clients. So what we are already starting to see is that we have a net growth in clients due to a new acquisition strategy and also an improved retainment strategy. Regarding the third point, Mexico, it's true that the government has announced that they have the intention of changing the merit order and also reviewing the PPA, the current PPA that [ cities ] has signed. But I think that there are 2 things that -- at least 1 thing that we also have to keep in mind is that one of the measures that the government has set regarding the energy sector has already been contested by the Supreme Court in Mexico. So I think that we have to wait and see whether these measures in the end can be applied or cannot be applied. But when they come in force, then we will see what impact do they have in the businesses that we have there. But actually, let's always remember that the main part of the business that we have there is PPA-related. And therefore, it would mean changing the profitability of PPAs that were signed a long time ago. And therefore, we were talking about [ retractivity ] on our contracts are already existing. So it's not something that can be done. So [ hard to believe ] from behalf of the government. I understand that the government says that they want to do it but another thing's being able to.