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

Good morning. This is the chorus call conference operator. Welcome, and thank you for joining the Snam announces partnership with De Nora conference call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Marco Alvera, CEO of Snam. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to our conference call on the acquisition of a strategic stake in De Nora, global innovator of sustainable, clean energy and water treatment technologies. This transaction is complementary to Snam's broader strategy on hydrogen. As you know, and as we will detail further in our strategy presentation next week. We have been a leading proponent of the importance of clean hydrogen and decarbonization. We're very committed to this because we believe that hydrogen is the only option to decarbonize hard to abate sectors. Also, hydrogen will provide a cost-competitive way to transport and store renewable energy and because it costs of green hydrogen are coming down rapidly. Governments worldwide have also come to this view, and the race is on to introduce hydrogen strategies in many countries, not only in Europe. In Italy, over the weekend, hydrogen guidelines were announced, including EUR 10 billion of investments for 5 gigawatts of electrolyzer capacity by 2030. This policy support will enable significant investments in the hydrogen value chain with the EU estimating investments up to EUR $0.5 trillion by 2050 and BNF looking at EUR 11 trillion for hydrogen worldwide 2050. In this context, Snam is ahead of the curve with a strategy that is focused on ensuring the readiness of our assets to deliver hydrogen and low-carbon gases, and at the same time, fostering the development of the overall value chain. The De Nora investment supports this ambition because its technology is strategically positioned in nodal points of the value chain, both upstream and downstream of our infrastructure. We believe that this will enhance the value of our key infrastructure assets as well as offering our shareholders exposure to an attractive growth market. We pursue this opportunity in a highly competitive environment for 3 reasons. First, we acquired a strategic stake in a one-of-a-kind asset that has significant growth potential and upside at a compelling valuation. Second, we formed a partnership with a global leader in key hydrogen technology. Third, we see an opportunity to transfer a stake in the De Nora investment as a seed asset for new energy transition platform. The growth comes from De Nora's leading position in 2 key sustainability trends: water treatment and green hydrogen. While our key strategic focus is on green hydrogen, the water segment itself is fast-growing and very attractive and also have some synergies with the Snam's business. De Nora's edge in green hydrogen technologies will enhance Snam's industrial strategy on hydrogen development. It is not just an equity investment, but a partnership to enhance opportunities for both companies along the value chain. For instance, we could even consider establishing operating ventures with De Nora on specific projects. I will now hand over to Alessandra, who will take us through some more details on the transaction and on the company itself. Ale?

Thank you, Marco, and good morning, everybody. The transaction involves the acquisition of around 33% of De Nora from Blackstone, which is exiting the investment after more than 3 years owning to its investment horizon and the mandate of this specific tactical opportunities fund. Snam will have 3 seats on Den Nora's Board, 2 of which will be filled by Marco and myself, and will be represented on the newly established strategic and technical scientific committees on hydrogen. Snam investment would be approximately EUR 0.4 billion, valuing the old group at EUR 1.2 billion, implying an EV/EBITDA multiple on 2020 expected EBITDA or slightly more than 13x, which is at the low end of valuation of comparable companies and especially, compelling given the company rapid growth trajectory with an EBITDA CAGR of over 8% over the last 3 years. The De Nora family third-generation on from [ Morenci ], the company legendary founder, is the other key shareholder and owns the remaining 67% of the group. The company is managed by a well-respected team that we know well and that we've been having business discussion with, even prior to this opportunity arising. Indeed, part of the reason why we were keen to acquire the stake and De Nora keen to have us in their shoulder base was because we have a compensation on the importance of hydrogen, the role the company should play in this megatrend and of the potential for De Nora to express its full value in the public market at the appropriate time. As customary, we have discussed this transaction with rating agencies co-appreciate the sensible and disciplined approach on technology related to the energy transition and decarbonization that a transaction like this offer. Whilst rating metrics remained comfortably within our self-imposed threshold, rating agencies appreciate the fact that De Nora represents a seed asset for a new investment platform. As a result, Snam would retain exposure to R&D in a key space, such as hydrogen, which will play a growing role in our infrastructure, while limiting its capital deployment and protecting the low-risk profile of both its business and financial structure. Even assuming De Nora to remain within Snam perimeter, rating metrics would remain comfortable within the threshold set by the rating agencies. For those who do not know the company, here is some highlight. De Nora is recognized as a leading company on electrodes and water technologies. In electrode, De Nora is the largest provider of both electrodes themselves and of coding for electrochemical processes serving, among others, chlorine and cost to [indiscernible] market. Its experience, supply chain and unmatched technology in electrodes give it an edge in the fast-growing green hydrogen market as well as producing electrodes. De Nora has a joint venture with ThyssenKrupp called [indiscernible], which codevelops, assembles and installs electrolyzer. It also has the right to appoint CTO to the JV. The node also works with operators in the fuel cell segment, including ASC Energy. In water, De Nora has leading technologies with a focus on disinfection and filtration for municipal and industrial use. Overall, its position in the market, which is over 50% in some segments. And it's growing aftermarket pace make it a very resilient business, growing EBITDA by circa 20% in 2020 over last year, despite a global downturn is another example of the resilience of this business, which still retains very attractive upside potential. De Nora's success is built on this technological leadership. It has 3 R&D centers and 12 manufacturing sites, employing approximately 1,600 people. I'll now pass it back to Marco to continue the discussion. Thank you.

Thank you, Ale. Let's now take a closer look at the De Nora's hydrogen business and why the company is so well placed to capture the upside from the growth in this market. First, its product and key area of expertise, the electrode is the engine of the electrolyzes and contributes and determines its overall performance. Making good electrodes means being good at the coating, the mix of metals, which are often precious, which are inked on top of the road and determine its cost and efficiency. De Nora's coating is the best in the world for alkaline electrodes. This competence cannot be easily replicated as it requires deep and focused electrochemicals expertise. De Nora has a large team purely focused on this with around 20 people. The De Nora technology that powers the electrolyzer products sold by the JV with Thyssen is a top performer in the market for current density, lifetime and reliability. And thanks to the chloralkali production, capacity and experience, the JV can offer reliable performance guarantees to customers and scale up production in the short and midterm. This helps explain why the De Nora, Thyssen JV has been preselected to supply neon, the world's biggest green hydrogen project and why De Nora supplies many of the leading players in the alkaline electrolyzer market. Alkaline electrolyzers are actually complementary to PEM electrolyzers, such as those manufactured by ITM, the U.K. group in which we've invested recently and signed a commercial agreement with. Alkaline electrolyzers have the advantage in terms of costs and proven performance, while PEM can be compacted in less space and have a greater flexibility in terms of ramping production up and down quickly. This makes alkaline better suited for large-scale baseload applications, which are expected to account for around 60% of the electrolyzer market, and PEM is better positioned to serve the transport sector and to offer flexibility services to the grid. There are actually potential synergies between the 2 technologies. The acquisition of the stake will allow Snam to benefit from De Nora's exposure to the fast-growing electrolyzer market. Given the recent policy announcements, we expect over 40 gigawatts of capacity in Europe alone by 2030, which implies sales of EUR 20 billion to EUR 40 billion for electrolyzer companies in the next decade. At the same time, the ability to leverage De Nora's technology on top of ITMs means that our hydrogen team is now better positioned to gain access to new hydrogen infrastructure projects. Being able to feel the best competencies in the upstream segment is a key differentiator, especially in this phase of the market, where each major project is the first of its kind and needs to be specially designed. Snam and De Nora will also have the opportunity to leverage its competencies and position along the value chain to create additional opportunities for both companies. We expect De Nora's water business to also grow significantly. And we're interested to see whether access to the technology and to projects that De Nora is involved in could provide further optionality for Snam in the forum of opportunities to cross-sell the competencies that we've accumulated in the management of our gas infrastructure. The investment in De Nora has strong industrial and financial rationale, and we're happy to invest with a long-term horizon. However, we expect to confirm a part of our stake in a new investment platform that we're planning to launch in 2021, enabling us to maintain the strategic benefits of the partnership, and as Ale mentioned, contain our overall financial exposure. This new investment platform will be focused on projects and companies operating in the energy transition with a focus on hydrogen, benefiting from the growing levels of interest in this segment and the lack of specific investment platforms in the market. The investment management professionals for this platform have been identified, and Snam plans to be an anchor investor in this platform. The launch of this vehicle will enable us to enhance our exposure to energy transition companies, assets or projects through a limited and ring-fenced investment and maintain our operational focus on our core business. So to sum up, this new partnership and energy transition investment platform will provide Snam investors with exposure to fast-growing markets and strengthen the company's own energy transition strategy. As we will see next week at our strategy presentation, our growth is based on the opportunities afforded by our existing infrastructure assets, and we're looking -- and we're working to capture additional upside from the energy transition super cycle. Thank you very much for your attention. And with Ale, we're now pleased to take any questions.

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

Three questions from my side. The first one is on Snam's role in the hydrogen opportunity. Obviously, the company has been very active during the last few years on this opportunity and has been starting to take stakes in different companies through the value chain. So I wanted to -- if you can explain us how do you see Snam's role through that value chain evolving? That would be the first question. Because, obviously, that is part of the business that is likely to be regulated and part of the business that is going to be not regulated. And I just wanted to have a clarification of how do you see Snam's role on that opportunity. The second question is related to the announcement of this platform of investment into the energy transition. I think that you have mentioned that you intend to limit and ringfence your exposure to this investment. You can help us to understand how you are planning to limit and ringfence that exposure? And the third question is on the -- probably next week, we are going to have more information on that. But if you can give us some color on the total size of that investment fund. How do you see the total equity investment that the company [indiscernible] can put in this fund?

Okay. The first 2 questions are tied. So our focus, and we'll talk about this extensively next week. But our focus remains on our core assets, and we see a lot of potential to continue to grow the [ rat ], as we've discussed in the past, and hydrogen really allows for that growth to continue. The stake in ITM is a very small stake. What's important with ITM is really the commercial agreement. De Nora is something different. Because of size, it's a one of a kind opportunity. And the platform is really a way to say, these types of investments are better suited for a dedicated platform with a dedicated management that invests in these businesses for financial gain. At Snam, we want to retain the synergies that we talked about. We want to retain the exposure to the technology at a time when we see really the bottleneck being on the manufacturing side and on the technology side between what some of the stated policies ambitions are and where the market will be able to develop. In terms of investment amount, the investment amount would be smaller than the De Nora investment for Snam in the platform. For order of magnitude, just take half of the investment amount that we're talking about today as our commitment, as a seed investment. So that's the type of capital, and that's the type of ringfencing. So a platform that allows us to remain very focused and disciplined on the investments that the management team makes with some of our seed capital. And at the same time, remain very focused on our, let's say, regulated or contracted businesses we've done until now.

The next question is from Alberto Gandolfi with Goldman Sachs.

It's two/three questions for me, please. The first one is a little bit of a slightly different angle to a question just asked. So I was trying to understand more of your master plan, and I know you can elaborate next week. But I'm trying to understand here, are you really trying to become just an incubator of technology so that you can accelerate the creation of a hydrogen ecosystem? And what's your exit strategy? At some stage you'll get out, that's the piece what Iberdrola did with Gamesa 20 years ago to create the wind industry, or are you also trying to open up a whole new business line in hydrogen for Snam, which might include, at some stage, going down the line of producing even hydrogen yourself. So that's the first one. And the second question is, I think you said in the slide that 60% of the revenues of De Nora are electrodes. Is that entirely for hydrogen? Just to make sure I understand. And as a tag along on this question, are you taking a view on alkaline versus PEM here just because your PEM investment was EUR 33 million and your alkaline was EUR 400 million? Or is it just opportunistic, so we shouldn't read too much into it. De Nora was available with a bigger stake, and that's why you just spent more.

Okay. Great. So indeed, we'll talk more about this next week. But to give you some of the highlights. I think we're not looking at production of hydrogen itself. If there were a situation, and it's not something that we're currently envisaging. But if there were a situation down the line where we're invited to invest in electrolyzer infrastructure, either as a regulated investment or as a contracted investment where we don't take the commodity exposure. And let's remember that all these investments require significant policy support. So we may look at that investment. In terms of ecosystem, we are certainly looking at technologies from R&D point of view as we've shown with our [ conducive ] experiment, and we're doing R&D work. We're collaborating with most, if not every, of the other TSOs across Europe to try to have as much as we can in open source to technology. We don't envisage creating a whole ecosystem that we can then spin-off. And when we look at these opportunities on a stand-alone basis, certainly, we haven't made a bet of one technology versus the other as they tried to show with our slide earlier. We actually think that these are different technologies that will suit different applications. PEM is small and flexible. So you should think of PEM for trucks where you need refilling stations, which have -- it also has a lot more ability to scale up and down, but it's more expensive. So something like neon, where you're in the desert, baseload, large scale, it will be outlined, something like refueling infrastructure, maybe with a dedicated electrolyzer will be PEM. And there's actually quite some synergies, as I mentioned, between the 2 technologies. So we think they will take -- and we mentioned 60% electrolyzer will be out of the line for PEM, but we really don't know. It could be 50-50, but there will be a huge, huge market for both. Now 60% is electrodes, but only a small -- a relatively small part of that today is hydrogen. And that's because hydrogen electrolyzers don't really exist as a market, they're all very niche markets. We visited, I think, most, if not all, of the current manufacturing capabilities. There's still a long way to go. ITM, in fact, is at the forefront building what we think is the most advanced giga factory. But there's still a lot of scaling up to be done on the manufacturing side. And so the -- we're really investing in almost a steady-state EBITDA, as Ale said, with significant upside potential on the current business model of De Nora. And hydrogen is really something to come in terms of contribution to EBITDA.

The next question is from Enrico Bartoli with Stifel.

That's 3 as well. First of all, regarding Slide 8, you show this expected profile for installation of electrolyzers over the next years. Can you give us, say, your hint on what you expect in terms of growth from De Nora, considering this kind of profile after the 8% per year that was achieved in the past years? And second one is related to the possible synergies that you could have on, let's say, the downstream part of the hydrogen value chain. You signed several MOUs also in this part recently. If you can elaborate what this acquisition would help in order to develop also that part of the chain? And the third one is on economy of sale. If within De Nora, there were some significant reduction in terms of cost of production electrodes, you mentioned that now, of course, hydrogen is just a small part of the business. But what also you expect in terms of trends in production costs over the next years?