Snam S.p.A. (SRG.MI) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Snam First Half 2025 Consolidated Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Francesca Pezzoli, Head of Investor Relations at Snam. Please go ahead, madam.

Good afternoon, ladies and gentlemen, and welcome to the presentation of Snam H1 2025 consolidated results, which were approved by the Board earlier today. Our presentation will be divided into three parts. First, Snam CEO, Agostino Scornajenchi, will share his opening remarks, offering an overview of recent market development, regulatory updates and the main industrial and financial milestone achieved during the period. Luca Passa Snam's CFO, will then provide a detailed review of our financial performance. After that, Agostino will return for some closing remarks, followed by our Q&A session. With that, I'm pleased to hand over to Agostino.

Thank you very much, Francesca. Good afternoon, everyone, and thank you for joining us today. This is my first call since my appointment as Snam's CEO in May. I'm honored to lead such a solid organization, which is a pillar of the energy system and plays a central role in ensuring energy security for our country and for Europe. I found a company with strong fundamentals and [indiscernible] people. Let me begin by highlighting a few key facts that underscore the central role of Italy's gas infrastructure. Each year, we transport around 600 terawatt hour of energy, twice the amount carried by the electricity grid and at less than 50% of the unit cost. Approximately 40% of this gas is used in gas powered generation, producing around 120 terawatt hour of electricity. This accounts for about 45% of Italy's total electricity output and up to 70% on days where renewable generation is low. In addition, we delivered more than 110 terawatt hour for industrial and hardware-based sectors, including steel, ceramics and chemical subsectors. Moving now to Slide #4. The energy crisis and geopolitical situations have reshaped perception of energy security across Europe. This has triggered the need of strengthening gas infrastructure. In a few years, the country shifted from a system largely dependent on pipeline infrastructure from Russia to a more diversified mix including growing imports from [indiscernible], Azerbaijan via the top pipeline and liquefied natural gas. LNG, in particular, more than doubled versus '21 accounting for 30% in H1 '25, supported by new regasification terminals in Piombino and Ravenna. It has created the need of the new marine infrastructure requiring a new set of engineering and operational competencies. Moreover, gas plays a critical role as a stabilizing energy sourcing system increasingly dominated by intermittent renewables. And such as Spain's blackout highlight the importance of determining the appropriate [indiscernible] of traditional generation near to ensure system security without creating excess capacity. Rather than focusing solely on an energy transition, we strongly believe we are entering into an energy addition or energy integration phase based on balanced mix of energy sources to maintain both competitiveness and sustainability. Let me now turn to some key trends at Page 5. In the Italian gas market during the first half of '25. Between January and June, gas demand in Italy reached 33 billion cubic meters, a 6% increase compared to the same period last year, marking the first rebound in 4 years. Residential and commercial sector were up by 3%, largely due to slightly colder weather condition, while industrial demand remained broadly stable. The key driver of the increase was the thermoelectric sector, which grew by 1%. This underscores the critical role of gas fired power generation in balancing energy system, especially as we integrate an increasing share of renewable energy. The flexibility provided by gas plants proved to be vital to maintaining grid stability in the context of greater intermittence and this is a European phenomenon with gas powered electricity production up 17% in Europe. Exports have also risen sharply, growing roughly fourfold compared to the previous year, driven in particular by flows from Tarvisio. Looking at supply flows, we have seen a notable shift. Pipeline imports decreased by 1.8 billion cubic meters more than offset by liquefied natural gas imports, which rose by 2.4 billion cubic meters with a significant 32% increase. This growth was supported by the full return to operation of the oil terminal in Livorno and the startup of a new terminal in Ravenna. As a result, liquefied natural gas accounted for over 30% of Italy's gas imports. This contributes significantly to announcing both the country's energy security and the diversification of supply sources, which is crucial in today's complex geopolitical environment. We have been able to successfully navigate sudden shift in market dynamics and gas flows, ensuring security of supply, thanks to the flexibility of Snam's existing infrastructure, further enhanced by the addition of new regasification terminals. In H1, '25 we progressed on the strategy delivered. I'm now at Page 6. Let me remind the key highlights on gas infrastructure. Works on Phase 1 of the Adriatic Line are moving forward steadily with 42% of the pipe installation completed and progress on the compression station reaching 20%, with overall completion at 35%. The BW Singapore regasification unit more offshore Ravenna began operations in May. Short-term auction have already allocated capacity for June and July with 4 vessels having arrived so far. The first half of the year, Italy received more than 100 LNG tankers, nearly half of which coming from the U.S. for a total volume of about 10 billion cubic meters. At the end of June, the storage exceeded 70%, approximately 10% higher than the European average. At the end of July, we are about 80%. Moving to our energy transition platform. The first phase of the CCS project in Ravenna has delivered solid technical results. Permitting for the pipeline is at an advanced stage and the process for storage has recently begun. We expect the technical regulation on CO2 transport to be published soon. We look forward to greater regulatory clarity to move ahead with the next phase. On Biomethane, we have 72 megawatts already in operation, authorized or under construction, and our mission is to speed the ramp up and maximize the value of the asset. [indiscernible] backlog is broadly stable at EUR 1.4 billion. With regard to the H2 backbone, we have been awarded EUR 24 million contribution by the Connected Europe Facility, Energy Program to cover approximately half of the [indiscernible] studies. Let's look now at sustainability. 32% CapEx aligns with the EU taxonomy and 61% with SDGs in H1 '25, while sustainable finance reached 86% of the total. We expect '25 Scope 1 and 2 CO2 emission down approximately 20% versus 2022, which is our baseline. As part of our commitment to transparency and biodiversity, we have published our first TNSD task force on network-related financial disclosure reconciliation table. We have also launched our First Employee Share Ownership Plan supported by a dedicated communication campaign aimed at reaching our entire workforce. Let's now move to the H1 results at Page 7. We have delivered a sound performance despite persisting volatility. Adjusted EBITDA of EUR 1.492 billion is up by 5.3% year-on-year driven by growth in regulated revenues. Adjusted net income of EUR 750 million plus 8.5% year-on-year thanks to higher EBITDA and greater contribution from associates, only partially offset by higher depreciation and financial churn. Investment at EUR 1.122 billion were broadly in line with H1 '24 following the completion of works related to the Ravenna LNG terminal. Net debt reached EUR 17.6 billion, mainly reflecting the investment carried out and the dividend payment. The average cost of debt was stable at 2.5%. Standard & Poor raised Snam's rating to A- following the upgrade of the sovereign and confirming our strong credit profile. Let's now move to key regulatory updates. The regulator has changed the RAB indexation from '25 to [indiscernible] index of consumer price with the European Union countries related to Italy, the so-called IPCA Italy. At the same time, the [indiscernible] for '24 was updated to 7.9% from 5.3% to recover past adjustments. Therefore, 2025 tariff RAB was lifted to EUR 26.2 billion from EUR 25.8 billion. On May 22, Arera published a consultation document that contains some adjustments to the implementation criteria for the lost-base regulation and the general guidelines for the progressive implementation of the Full Ross by 2028, with a transition period '26, '27. It adopts a step-by-step, proportionate approach designed to ensure a small transition for all market participants. The Council of Ministers approved on June 30, a draft flow for the definition of a legislative framework for carbon capture and storage, hydrogen and machine emission reduction. The draft now needs to pass through parliament, and it will lay the groundwork for establishing a CCS market in Italy, and the attributes to Arera, the role of regulator for the hydrogen and CCS market. Several progress were made on the financing front. In an extremely volatile geopolitical context, we have successfully issued our U.S. dollar -- our first U.S. dollar multi-tranche sustainability-linked bond totaling USD 2 billion and USD 1 billion first EU Green Bond. Very good job, Luca. With this transaction, we have completed the refinancing for the full year. Moving now to our associates portfolio. March, the stake in ADNOC gas pipeline was sold to [indiscernible] for EUR 234 million. May, we have successfully placed via accelerated book building, the sale of a portion of Italgas option rights and partially sold the capital increase deal within our stake by approximately 2%. In addition, we have recently concluded our exit for -- from ITM Power for an amount of EUR 11.5 million equivalent. With regard to OGE acquisition, the closing is subject to some condition precedents that were partially met. In particular, no other shareholder exercised the right of the German Antitrust Authority provided the green light. The process for the foreign direct investment clearance is ongoing and our base case is to close the deal by the end of Q3 this year. Now I hand over to Luca for the comments on financials. Please, Luca.

Thank you, Agostino, and good afternoon, everybody. Moving to Slide #9. Out of the total, around EUR 1.1 billion of investment broadly in line with the previous year, 32% EU Taxonomy align and includes. With regards to gas infrastructure, H2 Ready replacement, [indiscernible] compression station, biomethane plants connections. As for the energy transition businesses, H2 and CCS, a large part of biomethane pending on planned technical standards and energy efficiency, excluding cogeneration. SDG alignment sits at 61% of which the majority goes towards SDG-7, 9 and 13, respectively, affordable and clean energy, industry innovation and infrastructure and climate action. More than 50% of CapEx and development investment reflecting the company industrial growth phase. Let's now move to H1 2025 EBITDA analysis on Slide #10. EBITDA for the year was EUR 1.492 billion plus 5.3% compared to last year or plus EUR 75 million. The growth is mainly attributed to regulatory items for a total of around EUR 70 million related to the recognition of the 2024 Deflator update for EUR 52 million, the adoption of the Italian IPCA for the RAB revaluation starting in 2025 for around EUR 50 million, partially counterbalanced by the WAC decrease for around EUR 50 million. Regulatory revenues increased for around EUR 54 million. Stogit Adriatica that entered into perimeter from the 3 of March 2025 and positively contributed by EUR 18 million. Ravenna FSRU the started operation in May and contributed by EUR 4 million. In detail, the regulated revenues growth was driven by Transport and Storage revenues increased by around EUR 77 million linked to the investment plan execution. Fast money effect for around EUR 11 million, higher allowed OpEx mainly due to inflation. These effects were partially counterbalanced by the absence of LNG extra revenues recognized in second quarter 2024 for around EUR 40 million, the output-based reduction of around EUR 70 million versus last year, mainly attributable to the storage reverse flow services and the expected phaseout of input-based incentives. The increase in gas infrastructure operating cost, about EUR 30 million is mainly attributable to lower costs in large part due to inflation and new hires. With regard to the energy transition business, the EUR 8 million EBITDA contribution is mainly driven by Biomethane supported by higher volumes. As for the full year, our guidance is EUR 2.850 billion EBITDA, which does not reflect the positive impact of 2024 Deflator update, which accounts for around EUR 52 million, nor the switch to Italian IPCA index for RAB evaluation starting in 2025, which is worth approximately EUR 40 million for the full year. As described at Page 11, during first half 2025, our associates contributed to the group net income by EUR 204 million or plus EUR 47 million increase compared to the same period of the previous year. Out of the total contribution, EUR 131 million came from our foreign associates and the remaining EUR 73 million from the Italian associates. Let's dive into the performance of each one. TAP slightly higher year-on-year contribution is driven by inflation-adjusted tariffs and lower net financial expenses. With 15% of Italian imports covered in the first half 2025, TAP is the second largest import route by a pipeline with commercial operations start of the 1.2 bcm expansion in January 2026. Construction works are also completed and commissioning activities have already started. SeaCorridor's operating performance remained broadly in line year-on-year with approximately 11 Bcm of gas transported to Italy in the first half of the year, confirming it as the country's leading import [indiscernible]. Terega contribution was slightly lower compared to the first half 2024 mainly due to higher energy costs, driven by strong storage withdrawals as well as higher interest expenses following a bond refinancing in 2024. Moving to Austria. TAG benefited from the new regulatory framework, which removes volume risk, allowing TAG to fully record allowed revenues versus last year, bringing net income contribution to positive. Also GCA performance benefited from the new regulatory framework, however, offset by a worsening [indiscernible] booking situation, which will be recovered from T+2. In H1 2025 we recorded a significant increase of exports from Italy to Austria underline the strategic relevance of this route. Desfa lower contribution is due to low production premium on LNG imports and export to Bulgaria, now in line with historical trends. However, Greek demand rose by 15% compared to first half 2024, driven by a colder winter and a higher demand for power generation. Alexandroupolis FSRU is expected to be back [indiscernible] by the beginning of the next thermal year 2025, 2026. Interconnectors contribution, remains in line year-on-year since we are reaching the yearly regulatory cap thanks to capacity almost 50% booked until 2026. EMG contribution is substantially in line versus first half 2024. We do not expect to record material deviation on the early contribution from the upstream interaction occurred in June. [indiscernible] only 1 month of income contribution while you can see the consolidated reported level, the capital gain. Italian Associate book is mainly driven by Italgas overperformance in the first half and by higher contribution from Adriatic LNG following an increase of Snam participation in company from last December. For the full year, we expect approximately EUR 360 million, EUR 365 million of contribution from Associates assuming OG contribution starts in fourth quarter. You will find in the appendix, the updated info pack with detail contribution in data over all our associates. Let's now move to the first half 2025 net income analysis on Slide #12. Adjusted net income for the period was EUR 750 million, plus 8.5% compared to first half 2024 due to higher D&A by EUR 51 million following rising investments and entering to perimeter of Stogit Adriatica from March and Ravenna FSRU from May. Higher net financial expenses by EUR 22 million, mainly driven by a slight increase in financial expenses related to debt, reflecting higher financial indebted with an average cost of net debt flat at approximately 2.5%, lower non-debt related financial income, in particular, lower interest related to the default service. Higher contribution from Associates, as already commented, which was the result of higher [indiscernible] associate contribution for EUR 20 million and higher Italian associates for EUR 27 million. Lower [indiscernible] reflected higher contribution from Associate to EBIT as well as accredit adjustments rate 2024 income taxes. It is important to note that the EUR 1.35 billion net income, full year guidance does not include the positive impact of the 2024, Deflator update, which is worth around EUR 52 million nor the switch to Italian IPCA Index for RAB evaluation starting in 2025 estimated approximately EUR 40 million for the full year. Turning now to cash flow on Slide 13. Cash flow from operations for the period amounted to around EUR 1.118 billion and was the result of EUR 1.039 billion of funds from operations and EUR 79 million working capital cash generation. The change in working capital was mainly driven by regulatory working capital with around EUR 300 million of tariff-related items, mainly driven by additional tariff components. Around EUR 330 million absorption due to balancing and settlement activities and default service and about EUR 100 million cash generation mainly driven by super bonus fiscal credit decrease. Net investment for the period amounted to EUR 1.575 billion, including EUR 564 million of cash out related to Stogit Adriatica and around EUR 133 million of ADNOC disposal cash in. Other outflows were related to the payment of dividends for EUR 955 million, resulting in a change in net debt of about EUR 1.342 billion. EBITDA cash conversion reached a very healthy 78%. Moving to Slide #14. Net debt amount to around EUR 17.6 billion at the end of the first half 2025. Net cost of debt, which is calculated as financial charges, net of liquidity income on average net debt for the period remained stable at 2.5%, while fixed floating mix is at 89%/11%. Sustainable finance ratio is at 86% well on track to reach our long-term target of 90% by 2029. The new sustainable finance framework has been published, including the new targets on carbon neutrality for Scope 1 and 2 by 2040 and net zero for all scope by 2050. Following the publication, Snam successfully placed its first U.S. dollar multi-tranche sustainable green bond totaling $2 billion. It represents the first sustainability-linked transaction globally with a net zero emission target across Scope 1, 2 and 3. Moreover, in June, we have published the European Green Board fact sheet in full alignment with the European Green Bond standards. Following it, we issued our first green bond aligned with the European green bond standards for a total amount of EUR 1 billion, the largest European green bond by European corporate so far. Following these two transaction, [indiscernible] is completed, leaving the remaining part of the year for further opportunistic pre-funding activities. Credit ratings were confirmed by Moody's and Fitch, Flowing OG acquisition announcement while Standard & Poor's raised Snam positioning to A- following the upgrade of the sovereign, providing the strength of our credit metrics and business profile. I will now hand over to Agostino for the closing remarks.

Thank you very much, Luca. In conclusion, we have reported solid financial results across all key indicators, while making tangible progress in the execution of our strategic plan. This confirms the strength and the resilience of our business model. The broader energy and geopolitical landscape remains volatile and complex. In this context, central load of gas within the energy system has become increasingly evident. Our infrastructure has proven essential both in supporting supply diversification and in providing the flexibility need to balance the market that is increasingly reliant on intermittent renewable sources. Looking ahead, we benefit from strong visibility, and we are very comfortable on track to deliver or even exceed our full year '25 guidance. As Snam's new CEO, I am fully committed to delivering sustainable growth, maximizing long-term value creation for all our stakeholders, and preserving the company's robust financial position and flexibility. We move forward with confidence, supported by solid fundamentals, a clear strategy and the purpose-driven organization ready. And on this, let me thank all these Snam people for the tremendous effort and professionalism, they put in their daily activity. In conclusion, things are ending in a very volatile energy environment. Snam wants to play a central role and we're shaping the energy sector toward the future. We are now available to take all your questions in a live Q&A session. Thank you very much.

[Operator Instructions] The first question is from Javier Suarez of Mediobanca.

Three questions. The first one is a high-profile I guess, question after the publication in the Italian press of the first draft of the energy decree that should be approved by the council of Ministry anytime soon. The question is which are the implication of that energy decree for a company like Snam and the implication for your strategical priorities? That is a question for the CEO. Then Second question is on your guidance. So the numbers -- the net income that the company has released represents circa 5% of -- 55% of the net income target and the guidance is not considered an important regulatory update. So the question is what is preventing you from increasing the guidance. It's just for the sake of being conservative -- there is something that we should be aware of that is preventing for increasing that guidance at this stage? And then the third question is, a specific question on the carbon capture and storage activity. If you can provide more color on the long-term strategy from the company and that activity and the implication that this may have for a company like Snam?

Thank you very much, Javier. It's a pleasure to take your questions. Regarding in general, let me say, the strategy of Snam and the approach related to what is happening on the legislative framework. Well, I think that we do have an environment in which we have to face, as mentioned, high energy cost also some increasing concern for the security supply. Since our life in the latest 4 or 5 years with the crisis flowing invasion of Ukraine, and also, this is something that is continuing with recent events and blackout events that happened not so far from here. So there are some concerns about visibility of the electricity systems and the long-term perspective about such sector. We do appreciate a lot, the effort of the government in trying to find long-term solutions to the complicated issues that involves the proper structure of the market after 30 years of functioning of a certain market system that probably was defined several years ago with different priorities and the criteria that now need to be updated. So we are very positive on this. But we don't want to play, let me see, a passive role. We want to play a proactive role in supporting institution in finding the right solution. We presented the last January a business plan. And I say we, meaning that the business plan is not my business plan, it's the business plan of the company. I personally will be focused in ensuring continuity and delivery. And at a certain point, we will update such business plan. I want to ensure that Snam will remain a key pillar of the European energy system and the current [indiscernible] of the security of supply, especially when the geopolitical market dynamics are changing rapidly, and unpredictably. What we know is that today, the gas molecules represent more or less 30% of the energy mix, and this represents the main source of electricity in the country. We also consider financial discipline as an essential element of our strategy. We will continue seeking the right balance between investing for growth while maintaining a solid capital structure in order to be able to deliver long-term value for all our shoulders. We are also conducting an in-depth review of our portfolio of associates and all the ancillary businesses to assess how they best fit with our strategy, maximize their value creation for Snam and stakeholders. Regarding your second question on the update -- potential update of the guidance. Well, you're right. We are talking about very positive results. And based on the results at the end of June, we are more than comfortable to deliver the guidance even to exceed such guidance. You have also to consider that the EUR 1.35 billion of adjusted net income guidance does not reflect the positive impact from the Deflator update, which accounts per se of around EUR 52 million. So for sure, there is a good possibility that we will exceed such guidance. But we have to consider that having taken the role of Snam CEO -- and I'm now currently conducting a thorough review of all potential upsides and risk. If not, [indiscernible] anything well. But while the initial signs are more than encouraging, I believe it's still [indiscernible] to formally revise the guidance before completing such analysis. Although we expect that additional EUR 90 million Deflator update, at least will be finally delivered. We will come back on this in November when we commence our 9-month results. Relating CCS. Well, from a technical standpoint, let me say that we are continuing to advance in the Ravenna CCS project with a very good partnership with ENI. We consider that CCS will be a relevant part of our industrial issue. And this is something that it will be enacted with what we just explained during the presentation. We know that we will need a certain amount of gas to continue to provide technical support to the electricity system and to industrial sector. This is what I mean with energy integration we have to integrate our gas, and we have to accept that a certain part of CO2 needs to be emitted. So the question is not how to put gas to zero, because this is impossible from a technical standpoint. But how can we manage this in a sustainable way? CCS is a technology tool that we want to explore at the best of our possibility, and this is what we'll do in the coming future. Ravenna exercise is an excellent example what Italian technology can do in partnership with the relevant players. And aside this, we consider very positive the decision of the government to start discussing about the future regulation on CCS. We will follow it and we will provide all our support to this evolution.

The next question is from James Brand from Deutsche Bank.

Agostino, Congratulations on joining Snam and I wish you luck in the new role. I just had one question actually, and that was on new incentives. As I understand it, the regulator is working on potentially kind of two or three new incentives for you or maybe two new incentives and you can propose one. So I was just wondering whether you could give us some more detail in terms of how you think those incentives might look the new ones that the regulator is looking at, like how are they anticipated to work and the more they be bought in?

Well, I think that you are talking about the consultation document issued by Arera at the end of May that contains adjustment to the implementation criteria for the Ross based regulation. And of course, it includes also some element in order to anticipate -- some hypothesis about the impact of some outlook-based incentives. Well, that's for sure. And interesting, too, we will explore it. We'll do our best to take [indiscernible] this evolution of the regulation. But let me tell you that we will follow proportionate approach. We want to -- not to use this tool with, let me say, speculative approach. We try to do our best to implement evolution that will provide real changes for the benefit of the final customers, but without creating any relevant modification to our risk profile.

The next question is from Bartek Kubicki of Bernstein.

Two questions, one big picture and one company-specific. The big picture is related to the EU-U.S. still announced over the weekend where EU is going to buy a much bigger amount of energy from the U.S. So I just wonder how do you look at this from a gas infrastructure perspective? Because I guess it also means importing much more gas to the EU market. So your view whether it's actually feasible and whatever is enough transport LNG capacity in Italy to take more U.S. gas? That will be the first one. And second, the company specific [indiscernible] at EU regarding funding structure. I recall in the past, Snam used to have much higher proportion of floating debt. I think it was even hitting around 25% years ago. Now you have 11%, so you have kind of fixated a higher amount of your debt. Is it like this to be going forward? I mean you want to have much more fixed debt in the funding structure? Or this is only temporary and in future you will be financing with short floating debt as well?