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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Snam First Half 2020 Interim Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Marco Alverà, CEO of Snam. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Welcome to Snam's 2020 interim results presentation. In terms of gas demand, there are a number of trends at play. The COVID-19 impact on a weather-adjusted basis is around 6.5% in the first half. As restrictive measures have been listed, there are signs of recovery, in particular, in the industrial sector. Turning to Snam's performance in the first half. After the closure of most of our work sites, our CapEx program has now ramped back up to pre-COVID levels. We have started the pipeline replacement between Rimini and Sansepolcro and the public permitting process via process on 4 large replacement projects, which are in the center of Italy and in Sicily, have also started. Thanks to the significant efforts put in place by our people and our suppliers to restart work sites, the EUR 100 million full year CapEx delay that we had forecast in April will now be, in large part, recovered before the year-end. Our storage and LNG facilities provided ample flexibility to the system in a period of weak demand overall. In Panigaglia, where we are revamping the second LNG tank, 31 LNG ships arrived, in line with the strong performance of last year. With regards to the energy transition, we continue to grow our footprint with the acquisition of Iniziative Biometano, Mieci and Evolve. On the international front, TAP is on track to start up in Q4. Despite COVID, work never stopped. The southern gas corridor is now completely welded, and commission and activities are occurring on the Greek and Albanian sections, including already the introduction of hydrocarbons. We have concluded the regulatory review in Austria in line with our expectations. And in July, we closed the acquisition of a stake in ADNOC gas pipelines. We continue to optimize our financial structure. We launched the first Italian transition bond for EUR 500 million. The bond was more than 3x oversubscribed, and 70% was allocated to ESG investors. The AGM approved the cancellation of around 34 million shares and authorized a new share buyback plan. In the first half, regulated revenues grew by 1.7%, thanks to higher RAB, a loud D&A and the inclusion of energy costs for EUR 30 million. As you may recall, from this year, energy costs, which previously were addressed in kind, now contribute to revenues and costs with essentially no impact on EBITDA. Our EBITDA includes a COVID impact of around EUR 6 million. This was a result of a lower commodity component in the revenues and higher costs from lower capitalizations mitigated by cost savings that exceeded the COVID-related OpEx. Our new businesses turned positive at the EBITDA level, notwithstanding continuous investments in the platform, the start-ups and the investments and the slowdown in their activities in the second quarter. Net financial charges were EUR 18 million lower than last year. The contribution of associates was in line with the strong performance of last year, excluding the one-off positive effect of EUR million that Teréga booked last year. Net debt was up 8.4%, reflecting the OLT acquisition, the payment of the dividend for the full year and the buyback carried out in January and February. Working capital was negative this semester with tariff-related impact items impacted by a change in the billing system mechanism, which we are working to normalize. Looking forward, given our solid first half results, a good outlook for our associates, favorable financial markets and ongoing cost containment measures, we're now able to offset the expected COVID impacts. And we can go back to the original guidance of EUR 1.1 billion at the same perimeter, an improvement compared to the low single digit percentage impact that have had forecasted at the Q1 results for net income. Moving to full year net debt. We confirm our pre-COVID guidance of EUR.4 billion, excluding the tariff working capital on a like-for-like basis, excluding acquisitions and any further buyback. All of our guidance, of course, is based on the assumption that there will be no further national lockdowns. Looking more closely at the Abu Dhabi deal. We are very pleased to have finalized an agreement with ADNOC, one of the largest energy companies in the world. The agreement is to acquire 49% of their gas pipeline assets in consortium with GIP, Brookfield, GIC, Ontario Teacher's and NH. This transaction was a result of a very competitive process. We were selected as the only industrial player in the process, thanks to the recognition of our industrial and technical capabilities. The company has 20-year rights on the infrastructure that connects the upstream activities to Abu Dhabi's consumption points and export and interconnection terminals. We're investing EUR 250 million with contracts backed by a AA counterpart in a strategic region with potential new opportunities, both in natural gas and in the energy transition. In June, with the agreement for the acquisition of Mieci and Evolve, we have further strengthened our footprint in the energy efficiency sector. We entered this business through the acquisition of TEP in 2018. We have grown it organically and through bolt-on acquisitions, such as TEA, a specialist in combined heat and power plants. We're now adding to the portfolio of Mieci, which is focused on hospitals and public administration; and Evolve, which offers energy efficiency solutions for buildings. With this step, we widened our range of services and clients, including the public administration, where there is significant potential. Energy efficiency is a key pillar of the energy transition and of the post-COVID recovery plan. In Italy, the government is very focused on this area and has just raised the tax deduction scheme to 110%, and this can be recovered over a 5-year period. Overall, this remains still a very fragmented market with potential growth opportunities. Let's now turn to hydrogen, which continues to gain traction. On the policy front, the EU has finally launched its H2 strategy, targeting over 40 gigawatts of capacity by 2030 and a sector coupling policy. The EU strategy emphasizes a key role of gas networks to integrate renewables and the importance of coordination between the gas and electricity infrastructure. The EU strategy targets up to EUR 470 billion of investments in hydrogen, upstream, midstream and downstream over the next 10 years. Many countries are now building their own plans with specific and ambitious targets. We have seen plans from Germany, Portugal, a consultation from Spain and the Netherlands and other countries are following suit. We're continuing to strengthen our leadership in this area. Together with 10 other TSOs, we've presented a vision for our European hydrogen backbone, a 23,000-kilometer network, which would connect to 9 European member states. This work would be 75% retrofit and 25% newbuild and would be able to guarantee flexibility and supply security at very low costs. In terms of asset readiness, we have recently tested a 10% hydrogen blend on a Baker Hughes turbine for the first time. This can compress and move hydrogen fuel blends through our transmission network of pipelines and also allow us to use the same fuel to power ourselves. This turbine will be installed at our compressor station of Istrana in the north of Italy in 2021. We are also working to develop partnerships and pilot projects and looking for opportunities to invest in leading technologies along the hydrogen value chain. In the first half of 2020, we have also delivered sound progress across each of our ambitious ESG agenda items. We continue to reduce emissions on the environmental side. On the social side, during COVID crisis, we've played a strong role in the social response effort nationally. On governance, ESG KPIs are now enshrined in our remuneration plans. We confirm our strong commitment to ESG, which is at the center of everything we do. Thank you for your attention so far. I will now hand over to Alessandra.

Thank you, Marco, and good afternoon, ladies and gentlemen. Adjusted EBITDA in the first half was EUR 1,107,000,000, down EUR 4 million compared to the same period of the prior year. As Marco mentioned, from this year, the recognition of energy costs, which were addressed in kind until 2019, is included in the regulated revenues and cost lines, but remains essentially neutral at EBITDA level. The 4 in this slide, we have represented regulated revenues and other core items net of energy costs. The decrease of regulated revenues is due to a decrease of the commodity components year-on-year of EUR 15 million due to the volumes also related to COVID and as compared to a very strong year on volumes in 2019, higher tariff RAB and a loud D&A of EUR 17 million, compensated by a gradual reduction of input-based incentives. The increase in core fixed costs of EUR 3 million was mainly due to lower capitalization for EUR 4 million related to the lockdown, partially offset by lower costs, mainly due to savings and COVID. On top of this, last year, we benefited from the release of a preretirement fund for EUR 2 million. In the first half, we have also benefit from lower accruals for EUR 6 million, and the new businesses contributed positive for more than EUR 1 million for the first time despite the slowdown suffered due to lockdown and continuous investment on the platform. We expect them to gain momentum in the second part of the year. Adjusted net profit in the first half 2020 was EUR 578 million, essentially flat compared to last year. This was driven by the operating performance just commented, lower net interest expenses of EUR 18 million, thanks to the full effect of the liability management executed in December, the natural bond rollover and treasury management optimization and the OLT financial income. The slight decrease year-on-year of the contribution from associates, owning largely to the one-off effect of EUR 6 million, related to a tax release happened in 2019 in Teréga. TAG had instead a better performance, which compensated Interconnector UK decrease and Italgas decline due to a new regulation. The lower taxes are due to a decrease in earnings before tax and the reintroduction of ACE. Cash from operation was EUR 749 million, including EUR 150 million of working capital absorption that includes EUR 113 million of tariff-related items, also because now we receive some billing information from Acquirente Unico, which has temporarily lengthened the billing time line and EUR million of balancing activities. Cash flow from operations fully cover CapEx and CapEx payable and partially financial investment outflows, mainly OLT, and some other cash items occurred in the first half. Other outflows for the period have been the dividend payment for EUR 770 million and the share buyback for EUR 111 million carried out between January and February. This led to a net debt at the end of the semester of EUR 12.9 billion. We confirm full year net debt guidance of EUR 12.4 billion on a like-for-like basis and excluding working capital movements. We continue to expect negative working capital for approximately EUR 0.1 billion as per our original guidance as we are working to normalize the billing delay the strike above. Being on a like-for-like basis, the net debt guidance does not include the recent ADNOC acquisition and Mieci and Evolve for a total amount of approximately EUR 300 million. And it doesn't include any further possible buyback. Let me now give you an update on the Snam debt structure. In the first quarter, as discussed, we secured EUR 740 million of new term loans. And in June, we issued our first transition bond for EUR 500 million at a cost of 0.75% and a tenor of 10 years. This brings our total sustainable financing instrument to approximately EUR 6 billion or about 40% of total committed facilities and bonds. As with regards to that breakdown, at the end of the first half, the fixed rate portion is in line with our 3 quarter fixed floating debt 2020 guidance, which we confirm. The maturity profile is well spread over time and our liquidity profile remains strong with EUR 3.2 billion of undrawn credit line. Maturity of medium- to long-term debt is circa 5.5 years, in line with our targets, and as a result of liability management efforts executed in the first half of 2019 and longer tenor funding. With reference to share buyback program, in February, we have concluded a repurchase fund for EUR 150 million executed under the original shareholder meeting authorization for -- sorry. And we have obtained in June the approval for a new share buyback program for a maximum amount of EUR 500 million of -- worth of share. And we have also canceled in June at the AGM the cancellation of circa 34 million shares. We are now ready to take any questions you may have.

[Operator Instructions] The first question is from Harry Wyburd of Bank of America.

So first one, clearly, there are some things that have gone a little bit better in the first half of the year, I think, than you expected, notably finance costs. And obviously, a lot of the COVID-induced factors will not recur next year. So I wonder if you could just confirm that. Does it look -- if we're thinking about next year, does it look like we're sort of going into next year with a slightly higher kind of base than you'd expected and that perhaps the outlook for 2021 has slightly improved? And is there any way of trying to quantify that or quantify what's gone better than your expectation on a full year basis? And then just a second one on M&A. So you've done -- how are you thinking about any further M&As? Is this going to lead to a pause now? Or do you still feel you have balance sheet headroom to do further M&A deals?

Okay. Thanks, Harry. So on the revenue side, you know that it's not the full impact of the lower volumes is reflected in the Q1. So you could almost extrapolate the EUR 6 million that Ale said is the first half impact almost linearly. So you could -- you think about a EUR 10 million -- perhaps EUR 10 million, EUR 11 million, EUR 12 million overall impact for 2020. You mentioned the better financing costs than we had at the Q1 kind of guidance adjustment, I would call it. And as I mentioned, some -- and Ale mentioned, some of our associates are proving resilience. So I wouldn't necessarily extrapolate to start into 2021 with a higher base, but we'll talk about 2021 in November when we look at the plan. Regarding M&A, as always, we don't comment on specific timing or opportunities. ADNOC, we are very happy with. It's a relatively small investment in a very secure contractual framework. It's a very strategic partnership that we're in, both with the financial investors and with ADNOC. And it's a key region that, as you may have seen, has announced the latest 2 records when it comes to solar costs. Yesterday, they announced a new auction at EUR 11.5 per megawatt hour, which is indeed a lot lower than many analysts had anticipated. So it's not only a key hydrocarbon part of the world, but it's also accelerating very fast, the whole region, on new energies and the energy transition. So hopefully, this is a starting point for additional opportunities and projects in the area. Regarding the headroom, we've mentioned previously we see 57.5% as our reasonable kind of upper limit. Although, technically speaking, we could go as high as 60%, but I'd like today to confirm the 57.5%.

The next question is from Javier Suarez of Mediobanca.

One is on the hydrogen opportunity. The question is, when the company is going to update us in November on the business plan, does the company intend to extend the length of the business plan in terms of number of years to reflect that hydrogen opportunity? I'm asking this because I have the impression, hearing from other companies during their quarterly reporting, that companies do look at the hydrogen opportunity as kind of a medium-term thing when I have the impression that maybe companies like your company will have to accelerate on CapEx to be an enabler of that opportunity. Do you think that, that is a fair statement? That's the first question. The second question is on your conversations with the Italian energy regulator. If you can update us on any potential development of the possibility of giving some remuneration for the fully depreciated assets with regulation kind of mirroring the one that Spain has. And the third question is on the simplification decree. It seems that the government intends to accelerate the gasification of Sardinia. If you can help us to understand how that could be affecting your business plan.

Very good. Thank you very much, Javier, for your question. On the first point, I think if you look back at last year's plan, we were already giving long-term outlooks for the growth in the RAB, which remains a significant part of what's driving the rest of the plan. I saw other people to go out to 2030. We're still drafting the plan. What we may do, like we did before, is give some flashes on the outer years, but the plan will remain in the same time horizon with the granularity that you are used to seeing. But we will try to provide as much guidance as we have. Please keep in mind that as Europe has just begun to really address its hydrogen policy, it will still be too early in November to be able to give the full detail of how the network and the networks across Europe will develop. But certainly, there is a very significant opportunity out there, as I mentioned earlier. On your second question, we really like, as you know, the Spanish regulation when it comes to fully amortized assets. We have had a number of encouraging exchanges with our own regulator. And we are in discussions, and we hope, by year-end, to have some news to be able to share with you. Regarding your third question, the simplification degree, it's very positive that Sardinia is in there. I wouldn't read it necessarily as a sign, that sort of being as the top of the list, but it's very good to have Sardinia there. Overall, the effort the government is trying to push ahead with is to streamline the authorization process. Right now, we have projects that can take above 5 years to get the VIA, the final VIA, which I mentioned, we have initiated already for some of our own replacements. The idea is rather than going in series and having one ministry after the other give the okay, which leads to significant lead times, we would like -- and the government is following us and other companies' advice on this to try to move it into a situation where you start with the permitting process in parallel, so that you don't have any lead times or you minimize the lead times. So it's -- I think it's a good sign. Let's -- it's gone through one chamber. Let's see how the final law comes out. But certainly, it's a step in the right direction, as I've mentioned before. Thanks, Javier.

The next question is from José Ruiz of Barclays.

Just 2 questions. The first one is regarding the EU hydrogen strategy. I mean, my key takeaway is basically that the document is talking about the availability of the energy infrastructure for hydrogen kind of calling a semi-public service. I was wondering, in your conversations with this -- or your agreement with these 10 TSOs in Europe, how are you going to anticipate demand? I mean, what is the time when you have to start investing? Because, I mean, clearly, the idea is that you have to anticipate, you have to make available infrastructure before demand is there. And the second question is related to big debates among macro economies regarding inflation and deflation. If you can share a little bit of your views. I mean, going forward, what is your expectations of a big inflator in Italy to go up or down?

Okay. Thank you, José Ruiz. So on the European hydrogen strategy, what they've done to address the issue that you raised, which is the usual chicken-and-egg issue with energy infrastructure, they have built a hydrogen alliance, where they have the -- trying to put together the supply and the demand around the same table. What we think is that there will be an early stage, which is going to be mainly about clusters developing. And the issue will be how to supply those clusters with hydrogen. These will be, let's say, subsidized clusters, where logistics will not be optimized, and there can be some movement of hydrogen on trucks and some dedicated small pipelines around those clusters and some electrolyzer capacity around those clusters. Then there's going to be an intermediate phase, where the -- from clusters, you move to hubs and regions. There, we can see an early stage of development of dedicated pipes as well as freeing up some of the current pipes used for methane to create dedicated capacity. And blending can play a role in this intermediate phase. The role of blending will be a function of the membranes and of some of the experiments that we are carrying on that we're leading the way on, such as the one with Baker Hughes I mentioned and the one we did earlier in the year and last year with the 5% and 10% blending down in Southern Italy. The 10 TSOs have joined forces. There is ample scope for CapEx in the plan that we proposed. I think it goes from around EUR 27 billion to EUR 64 billion. Keep in mind that we think, as I mentioned, that 75% of the steel is hydrogen ready. So it's not so much a question of the steel in the pipes itself. It's more a question of the stations, the compressors, the folks that we need to build to separate eventually. And really, the key question for all of this remains a storage, where we still don't know if we can go into the existing reservoirs with blending and at what percentage we can go there. So I think Europe is approaching it the right way. If we think about how the gas industry started, we didn't have the luxury of this kind of concerted alliance and this kind of effort to design a system that makes sense for all stakeholders. And we also have a very significant state money of different sorts at play between the European Green Deal and the recovery funds and the just transition mechanisms. So there's also a lot of capital available out there to smooth it out to the bumps that inevitably happen when you really start an industry from scratch. The good news is that everyone is in full execution mode. All the players we talk to are thinking about building hydrogen business units inside their organizations. There's a strong team across Europe that is emerging. We're involved in many of the panels and debates and meetings with the -- our government, other governments and the European Union. So I think we're moving in the right direction and I think Europe is really going to lead the way on this. When it comes to your second question, the outlook that we read about in the papers and in the forward curves is more deflationary than inflationary. So we don't expect an increase in our deflater going forward, but, again, we'll continue to monitor what the macro economists think and what the forward curves are and we'll update you on this in November.

Next question is from Enrico Bartoli of MainFirst.

The first one is regarding ADNOC. You mentioned that this agreement, this JV could provide the opportunity for additional business development in the area. If you can elaborate a bit on this, if you think that there is the opportunity to be involved in the management of other pipe -- gas pipeline networks or you are thinking also about other businesses. Second one is just a clarification on what you said about the potential in terms of CapEx in the development of this hydrogen European lead. You mentioned this EUR 27 billion, EUR 64 billion. I guess that mainly this is for a European level. What do you think that could be the potential for Snam within this project? And the last one is regarding the new buyback program, if you have already some visibility on if and when it would be activated in case in the second half of the year.

Thanks, Enrico. So I don't want to create expectations in the Middle East, but, certainly, it's an area where they are very attracted to what we are doing in CNG and in small-scale LNG. They have a lot of their own gas resources, and they see an opportunity to use gas, which they can sell at a much lower margin. And this is true for many countries in that region, that they can sell a diesel or oil at globally to use that gas domestically, both in cars, CNG and in trucks. And there's also, of course, an opportunity in hydrogen today in the region. Like in most countries in the world, the electricity and solar projects are completely disconnected from the molecules. And as they have led the world with these recent record-breaking, big-capacity auctions, it's 2 gigawatts for this one, and I think it was a similar size for the previous one, the opportunity to turn some of this electricity especially, they will have a lot of excess renewable in the very warm, very sunny days, turn some of that into hydrogen for domestic use to, again, free up the export potential, I think, is a common thread. So you know we have the Snam Global Solutions, which is targeting NOCs to sell our own capabilities and technologies and services. The opportunities are a little bit about around Snam Global Solutions, and partnering with ADNOC gives us a footprint in the whole region as well as trying to develop some of our energy transition start-ups, giving them a window onto that part of the world. Regarding the third question -- sorry, your second question was around the hydrogen CapEx and the 10-year -- and the 10-TSO plan. As I mentioned, the flagship -- the high-level CapEx opportunity is between EUR 27 billion, EUR 64 billion. That's what's been identified in our work with Navigant. This is overall. We have a share of that, which is below our share of, let's say, natural gas transported in Europe. So if we have a 20-something percent share of the European gas market, our share of that CapEx is below our share of gas because our network is quite ready actually. And some of the replacements that we have to do, we have to do anyway regardless of hydrogen or not. But we'll try to give you as much clarity as we can in November. Regarding buybacks, as you know, we don't give guidance on our buyback initiatives. So you'll have to follow us to see what we end up doing. Thanks, Enrico.