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

Good morning, everyone. This is Abel Arbat speaking from the Capital Markets team at Naturgy. We hope you are well, and thank you for joining our results call for the first half of the year. You should all have received our results presentation or else you will find it available on our website. Next to me is our Head of Financial Markets, Steven Fernandez, our Head of Financial Planning and Control; Jon Ganuza; and the Secretary of the Board, Manuel García Cobaleda. Mindful of the results season and how busy is everyone, we are going to briefly go over the presentation and open it up to live Q&A. Also, as a reminder, we would like you to note that the company will be presenting the Strategic Plan '21-'25 today at noon, and we hope you can join us there, too. So thank you very much. And with that, I'm handing it over to Steven to start with the presentation.

Thank you, Abel, and good morning, everyone. As Abel mentioned, mindful of your time and the fact that we've already published the results this morning, available both on the website and on the [indiscernible], we're going to go very briefly over a couple of key highlights, and then leave plenty of room for any questions you may have. Bearing in mind that today we're not going to be answering -- at least in this call, any questions related to the strategic plan. As Abel mentioned, those will be addressed afternoon. So basically, let's begin up with a little bit of the scenario, which you see on your Slide 4. What we're seeing here is demand is showing some signs of recovery in the regions where we operate. And this is particularly interesting in taking into account the COVID-19 outbreak began to materially affect operations in March of last year. As you can see, electricity and gas in Spain, compare an average 5% or 10% above, respectively, the same period of last year, while in LatAm in the regions where we operate, we have experienced increases that range from 2% to 56%, with some exceptions that we will see later on, okay? If we think about energy markets, and that would be on Page 5, what you will see is that we'll see -- we've seen since the beginning of the year a gradual improvement in economic sentiment that has driven an increase in commodity prices. And in particular, it's worth highlighting the evolution of the Brent seen up 63% on average versus H1 of 2020. But we also see similar trends with strong increases in gases like Henry and NBP. Wholesale electricity prices in Spain, as you all know, have also risen significantly on the back of higher commodity prices, of course, and CO2 emission rates. If we think about FX, what we see is lately FX is stabilizing. But since the beginning of the year, the overall impact on our accounts is negative, and we have seen in the results that, that has shed around EUR 64 million from EBITDA and around EUR 22 million from unconsolidated net income. And this is mostly as a result of significant devaluations in Brazil and Argentina, which you can see in the slide, have decreased by 17% and 31%, respectively. Also, we're highlighting that the swings in exchange rates that we have seen so far have not yet been recognized for the most part on existing tariffs, where applicable. If we move over to the consolidated results, you can see that EBITDA for the H1 reached almost EUR 2 billion. That's up 3% versus the previous year on an ordinary basis. And again, this is driven by demand and the improving energy scenario. However, it compares negatively against H1 '19 on a reported figure because of COVID. If we think about it in terms of ordinary net income, we've reached EUR 557 million for H1. That's up 17% versus 2020. But again, if we compare it against pre-COVID, still 20% below, so there's still room for recovery at those levels. If we think about it in terms of EBITDA nonordinary impact amounted approximately EUR 280 million, and this is mostly as a result of the restructuring costs that the company incurred during the second quarter of the year as part of the employee voluntary departure plan completed by the company in Spain and something that you are most likely familiar with. It's worth highlighting that this plan has had its highest adherence in the Spanish network and the supply businesses. And obviously, moving forward, this allows us to streamline the company's personnel costs to an ordinary OpEx base. On a reported basis, net income reached almost to EUR 500 million, at EUR 484 million. And obviously, the restructuring costs incurred in the quarter were partly compensated by the completion of the UFG agreement, which had a positive nonordinary impact of EUR 100 million in earnings. Cash flow from operations remained strong at almost EUR 1.3 billion, while net debt amounted to around EUR 13.6 billion, in line with the previous quarter. And obviously, it's worth highlighting that this amount does not yet reflect the pretax proceeds -- the proceeds from CGE Chile. As you may remember, we signed this, and we closed this transaction in -- on Monday. And the cash proceeds for the company after taxes are around EUR 2.4 billion. Well, moving on to Page 9. I'm going to -- I'm not going to spend a lot of time there. You can see simply an explanation of the performance across the different businesses and obviously the impact from FX. That is clearly highlighted. And likewise, in case of net income on Page 10, up 17%. But again, take that with a grain of caution. Favorable basis of comparison of this number is up quite significantly. We should be comparing this against pre-COVID figures. Finally, in terms of cash flow, as I mentioned before, stable cash -- stable net debt position with a slight decrease in the average cost of debt. The idea here again is that this figure should be revised downwards once you take into account the EUR 2.4 billion of cash proceeds from Chile. And with that, I'll hand over to Jon with a quick overview of the different businesses.

Okay. Thank you, Steven, and good afternoon, everyone. So moving on to Page 13. Networks Spain ordinary EBITDA has reached EUR 828 million. That's an 8% increase vis-à-vis year. The most important thing is gas distribution in Spain. We've seen both an increase in the sales and also due to the fact that in 2021 we no longer have the lockdown restrictions that we had in the first semester in 2020. We've also resumed activities like, for example, periodic inspection. In electricity distribution, the growth in results has been mainly driven by investments and efficiencies that have offset the financial remuneration adjustment that was included as part of the regulatory period 2020-2025. All in all, Networks Spain have benefited from the recovery of energy demand and operational improvements. Moving to Page 14. In Networks LatAm ordinary EBITDA amounted to EUR 395 million in the period, 10% lower than previous year, mainly the main effect has been the FX, which has not been compensated by the 5 indexations and we'll dive on that later. Regarding gas demand, as Steven has said, more or less in most of the countries, overall gas demand has increased, although the growth is mainly driven by low-margin segments, while the evolution in high-margin segments, residential and commercial, have a more mixed picture depending on the country. In Power Distribution, lower demand has been due to confinement measures in the first quarter of the year and also a much softer temperatures than 2020. Some of the expected tariff updates that we should have had this year have been delayed mainly due to the fact that we have also seen delays on the new tariff trading process. This has happened, for example, in Brazil, where we are now planning to -- for the new tariff. And for example, I mean, January, in Brazil, we should have seen a tariff increase due to the indexation of like 24%. And basically, what we think for this part of the year is only 10%. The same applies to Mexico, where we are expecting -- we are waiting for the new regulatory tariff. And until that happens, also, the inflation indexation that we should have had at the beginning of the year has been delayed. Moving to Page 15. Energy Management ordinary EBITDA has increased by 9%, basically in markets what we see is an increase due to the improvement in the cash procurement negotiations that we had last year and also a better gas scenario. LNG, we are seeing increasing results, basically due to the closed positions that were closed during last year when the market environment was much worse and the closed positions that we had last year that had been closed in prior years. In the pipeline EMPL that we're seeing is the step down on capacity, which I would like to remind that, that concession expires at the end of October 2021. Thermal generation in Spain has benefited mainly due to the higher pool prices from the CCGTs and higher sales. And thermal generation, basically, the negative effect is mostly, FX impact. So in summary, contract renegotiations and improving scenario led to higher margins versus a very challenging 2020. Moving to Page 16, Renewables in Spain. But we see that despite of the higher production that we had in 2020, that was offset by the lower price of the internal sales contract in the supply business that we had vis-à-vis 2020. In Australia, the new capacity has been offset mainly due to the mark-to-market of the strict existing contractor businesses that we have. And in LatAm, the positive contribution due to new capacity coming in the operation in [ Chile ]. So I think it's important to emphasize here that, during this quarter, Global Power Generation signed another power purchase agreement with Telstra, Australia to build a 58-megawatt wind farm, which will commence construction on the last quarter of 2021 and is expected to be fully operational in the first half of 2023. Naturgy continues to consolidate its position in Australia as a leading wind farm developer. In summary, a slightly weak result mainly affected by internal sales contract with supply businesses. And lastly, moving to supply business on Page 17. Ordinary EBITDA amounted to EUR 214 million, 21% higher than the first half in 2020, primarily driven by the improvement in gas supply, supported by the recovery of gas prices and sales, which were partially offset by ongoing margin pressure, especially in power supply, notably due to lower sales in retail and small, medium enterprise segments. Naturgy continues to make substantial progress on its new marketing strategy, having signed a number of relevant PPAs during the quarter as well as reach new third-party agreements in renewable energy supply with partners with large distribution capabilities, including financial institutions as well as the Spanish postal service company among others. I will now turn it over to Steven to summarize before going on to the Q&A.

Thank you very much, Jon. So basically, what you've seen in today's results is that the scenario is improving compared to last year. And the operating performance also improved and continues to improve as COVID-19 effects continue to subside. This has obviously been noticeable in all our businesses, although LatAm continues to be affected by the ongoing FX depreciation, pending some of the tariff updates. Notwithstanding the above and taking into account all the effects, we believe that the current trading scenario are supportive of a 2021 ordinary EBITDA of somewhere between EUR 3.9 billion to EUR 4 billion. And with that, we'll open up the line for questions. Again, we have Jon and myself. We have the Secretary of the Board as well. And if there's any questions related to the upcoming tender offer, and we'll open the floor to you guys.

[Operator Instructions] Our first question comes from Harry Wyburd of Bank of America.

I'll just give it to -- I guess, it'll be a lot more specific questions later on today. So first one is on the restructuring costs, obviously, much higher in the second quarter. And I just wanted to understand to what extent was that actually planned or expected. Or was there something opportunistic about that? And maybe where are we now in terms of the total restructuring costs compared to what you've been. I know the old business plan is sort of out of date. But would I be fair to kind of assume that the restructuring costs you've incurred over the last few years are now a lot higher cumulatively than you were initially planning? And then the second one is on finance costs. You mentioned on the net debt, obviously, we can get big reduction. I think we're also going to get deconsolidation of a lot of the Chilean debt, I guess, perhaps it's even more relevant given what finance costs are doing in LatAm at the moment. Can you just give us some kind of guide to what the impact on your finance costs will be from the deconsolidation of the debt and the other net debt on the Chile disposal?

Harry, so I'll start off with the last question. What you need to bear in mind is the debt from the Chile transaction has already been deconsolidated. So reclassify. So the current cost of debt of 2.4% is a good proxy to think about moving forward, okay?

Yes. Going to the first point, restructuring costs, I think that there are several points that we have to bear in mind. First of all, as Steven has said, has been voluntary and it has been negotiated with the unions. The agreement was reached on the 8th of May, and that's why we didn't start earlier or the capture cost that we had in the first quarter were much lower than the ones that we've seen in the second quarter. That's the first thing that I would like to stress. Secondly, I would like to point out that the capital costs that we're seeing in the closing of June do not reflect the full cost that we will see by the end of the year. And this has to do due to the fact that in order to account or recognize the capture cost, it takes several steps and some of them, we're taking, this plan has began on the 8th of May. We are talking about something around 800 employees leaving the company. And to process all that and to account that, we have only accounted a part of the program. And I think that the end figure that we will see by the end of the year will be slightly over EUR 400 million and not the EUR 300 million that we're seeing in June. And yes, I think that, as you said, if we compare it with the initial restructuring costs that we pointed out in July 2019, it's true that, as we've been analyzing in more depth, the potential that there was for the restructuring and changing the processes, that has also changed the initial outlook that we had regarding of how big the transformation could be. So I think that's basically what we've done is we've brought forward some of the changes that we thought that they were going to be done after 2022. We've been able to move them forward and accelerating the transformation as far as efficiencies is concerned. And in this sense, I would like to point out that already by the closing of 2020, we had exceeded the efficiency targets that we had set ourselves for 2022. So this capture cost that we are seeing in 2021 are on top of already seen more efficiencies than in 2021. So I think it would not be really fair just to compare the capture cost of 2018, but we should also see the efficiencies that we're capturing associated to those ones.

Our next question comes from Lillian Starke of Morgan Stanley.

I just have a couple of questions. The first one is around the dividend. It seems like for the first time you've paid a flat dividend compared to last year was EUR 0.31. And I was just wondering, given the guidance is calling for a higher full year dividend, should we read more into this? Or is rather that we should expect a higher proportion of the dividend to be paid later in the year or announced later in the year? And then the second question I have is around the tariff adjustments in Latin America. Given the pace at which this has been progressing, are you still expecting the adjustment to take place this year or rather we're looking at that adjustment to be pushed into 2022?

Steven here. On the dividend, I'm not sure I followed. I mean, as you know, we've been paying 3 dividends per year. The EUR 0.30 that we announced today is line with what we paid last year at this time. And you cannot extrapolate anything from this dividend payment for the full year amount. So we'll discuss, among other things, dividend policy later on today at 12. But again, you cannot extrapolate that EUR 0.30 based on anything really.

Moving to your second question, tariff adjustments. I think it's not easy right now to have a view on how that's going to happen. If we look at Brazil, regulatory tariffs should have started in 2018. So actually, it's 2021, and we are still talking about the 2018-2022 tariffs. And as you know, the regulator there has already published a draft, and we are contesting that draft. So I don't think, I don't really know, exactly how long that's going to drag. And in Mexico, we are also with a delay, although it's not that big compared with the one that we're seeing in Brazil. But I think that right now in Mexico, in the energy sector, the President has another -- other priorities. And I don't know whether that's going to impact on the level of urgency and the level of effort that they're going to put there in order to speed up the process. So I don't know. Honestly, I think it's -- right now, it will be -- we don't have enough information in order to have a clear view when that's going to be settled.

Our next question comes from Jorge Guimarães from JB Capital.

I have 3 questions, if I may. The first, is it possible to elaborate on your hedging strategy for LNG for 2022? I mean, are you also hedging the cargoes like you did this year? And if so, at what type -- at what range of spreads? This would be the first one. The second one, is it possible to provide a split of [indiscernible] electricity? And the third one is just the clarification. Use of cash in -- of Chile, is the Chile electricity sale is EUR 2.4 billion after tax. Is it value -- I may be -- is this value in line with the initial estimate? I believe it was slightly above. But can you please clarify that?

So okay, I will try to answer the first question. I didn't really quite catch the second one, about regarding the split, but I can already advance you that if it's not an information that we already supply, we are not going to supply so -- but moving to the first question, the hedging strategy. we do have in the information that we're providing in the Excel that is available in the worksheet, what's the hedging strategy that we have in the LNG business regarding the sales. I would like to point out, although we do it every now and then, that's the level of disclosure, but I think that we are in the company, the only affiliated company that will give that level of disclosure. We do not give a disclosure about what's the trading strategy or the hedging strategy that we have regarding the cargoes. And I know that right now is quite a hot issue taking into account the current high pool prices and the current gas prices and also the current times [indiscernible] prices. I would like to say only that we do have a substantial of fleet that has been missed on a long-term basis. Those -- that fleet is sized for a certain level of operations. And sometimes, we do have to make some spot rentals of fleet. But no, yes, we don't disclose any information regarding the hedging strategy that we made in the fleet.

On the Chile disposal, yes, the amount is in line with what we announced. You may remember back -- When we announced the transaction, we did a presentation on it, and we mentioned that there were pretax cash proceeds of EUR 2.6 billion. The EUR 2.4 billion is after taxes. So it's 100% in line with what we announced.

[Operator Instructions] Our next question comes from Javier Suarez of Mediobanca.

Three questions, maybe 2 are follow-ups. The first one is on the international LNG business. In Slide number, I think, it's 15 -- you're mentioning that the price recovery is not translated yet into margin due to a significant weight of contracted sales. Can you give us some guidance or light on when do you expect that higher price environment translated into higher margins for Naturgy, a kind of indication on when you are expecting that happening in the next few quarters or so would be very helpful. Then the second question is on, if you can give -- help us to understand the dynamics of the energy supply business in Spain during the second quarter. I think that some light on that would be very helpful as well. And the third one is on the restructuring cost that has been very sizable during the second quarter, if you can give us a guidance on what that number of EUR 300 million during the first half would be by the year end.

I mean I think that's -- so I will try to answer the first and the third question. I think that the second question was a bit too open. So if you maybe afterwards, you would like to somehow close it a bit more. I think then it would be easy for me to answer. the restructuring costs, mainly they are focused in the business that we have in Spain. So I would say that -- it's all across the board. So in some businesses, it's a bit more than others. But I would say that all of the businesses that we have in Spain, because it's a company-wide program that has been negotiated with the unions. And therefore, the level of -- the quantity of people that have joined that program is all across the board, the businesses that we have in Spain. So I think that -- that's -- and the figures are more like the ones that I said, which we know already the figure that we published, the one that is close of January -- of June, that is EUR 300 million. And I would say that at the end of the year, that figure is going to be a bit over EUR 400 million, not on top of the EUR 300 million. I mean so we will see additional something like EUR 100 million plus. So just to make that clear. I wouldn't like no one to think that we're going to make EUR 700 million in capture costs. The first one, the international recovery of LNG, I think that we've been clear about, in these past 2 years, that the LNG strategy that we have, it was trying to reduce as much as possible the volatility and to integrate with certainty possible and that meant closing the positions that we had as much as we could. And what we're seeing right now is basically the result of that is, that right now, what we had in the first quarter of 2021, were positions that were closed during -- mainly during 2020 and the end of 2019 when the scenario was a bit more depressed than the positions that we had in the first semester of 2022 -- 2020. When are we going to see an improvement? Well I think that in the second quarter we'll already be seeing a certain improvement in the results, compared with the first quarter. So I would say that LNG second quarter is going to be better than the first quarter. And moving forward, well, I think it still remains to be seen. And we will have to see that is also in things are going to be in play. On the one part is the part of the volumes that we have already closed and that we disclosed in the Excel that is available for everyone and how the open position is closed now and the next few years. So -- and I think that -- regarding that, we have nothing more to add. The second question, I don't know if you want to be a bit more specific about what you meant about the energy supply business dynamics in Spain, maybe I will be please to answer you.

Yes. I was referring the -- I wanted to have your view on the evolution of the energy supply business in Spain. And what do you see in terms of margin evolution on both electric supply and gas supply.

Well, I think that on the gas margins, I think that we should be -- at least in the second quarter of 2021, we shouldn't be seeing substantial changes from what we've seen in the first half, basically in the second quarter. And regarding electricity margins, I think that we have to bear in mind 2 different things. Number one, things what we've seen in the news. I mean that's something that this was -- really worries that all the politicians that this pool prices that we see. And on the other hand is the -- what we see in the accounts, the different energy companies in Spain that is more related to the contracts, fixed price electricity contracts that we've been signing for the past 12 months. And that do not fully reflect that increase in the pool prices. So I think it's going to be a mixture of those things. So suppliers that have more low position in the supply business, while the margins are going to suffer at least in the supply business. The ones that are more hedged, I think that they will see a more or less stable evolution. And the ones who are long in generation, then we'll continue to see in generation and, I mean, income marginal generation. I think that those are the ones, we will see an improvement. So I don't think that -- that's something that we've seen already with the results presentation of other companies and also with ours that it's not just a matter of looking at the pool price. It's also bearing in mind the position that you have and the fact that an important part of the interest is beside sales that are made on the [indiscernible] segment are done on the 12-month forward basis, that wasn't in order to see and to look how the margins are, how behave this past semester and how they're going to behave in the next semester.

[Operator Instructions] Our next question comes from José Ruiz of Barclays.

I just have 2 questions. The first one is if you can remind us what is the exact date by which the government has to approve the IFM approval or not the IFM bid? I understand it's the second week of August. The second question is regarding EMPL. So basically, you're saying that the concession expires in October this year. So what -- can you describe us what happens on the following quarter, let's say, the fourth quarter? Does the EBITDA go to 0? Will we see a negative EBITDA, kind of get a feeling how the end of the concession is going to be accounted.

Regarding the first one. IFM has not informed about the date when they filed the request for the authorization. As a whole, we have done all our authorizations. So we are not quite sure from when we will have to start counting the 6 months period provided for in the law. On top of that, it's possible for the administration to request additional data. In such a case, it's possible that the 6-month period be extended for the delay in providing such a commission. So there's no visibility on that. We assume that it should have been sometime in the middle of February. So there's not been any additional request, it should end by the middle of August, but we do not have more visibility than that.

So I think regarding EMPL, right now on the table, there is a [indiscernible] scenarios because negotiations are in place that all the scenarios move between 2 streams on the first that would be the most positive stream is that some level of agreement is reached. And therefore, some gas keeps on flowing, and we would see some level of results, coming from EMPL. And the level of EBITDA that we would see from EMPL will depend on the agreement that is reached. And on the other side of the spectrum, it would be that absolutely no agreement is reached. And therefore, EBITDA goes to 0, and we'll have to close the side -- the operations that we have there. And it totally depends on the agreement that is reached.

[Operator Instructions] We currently have no further questions. I'll hand back over to the management team for closing.

Thank you, Charlie, and thanks, everyone, for joining us for our presentation. We look forward to see you at 12, where we will be presenting our strategic plan '21-'25 where we can discuss strategic matters at length. So thanks, everyone, and hope to speak to you in a while. Thank you very much.