Terna S.p.A. (TRN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Terna First Half 2020 Results Presentation. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question in the session, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. And now I would like to hand the conference over Omar Al Bayaty, Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Terna First Half 2020 Results Presentation. It's my pleasure to introduce you, Terna?s CEO, Stefano Donnarumma. Stefano, the floor is yours.

Good afternoon, everybody. Welcome to the First Half 2020 Results Presentation. Last May, the AGM appointed the new Board of Directors with Valentina Bosetti as the Chairwoman and myself as CEO. I found a very solid and healthy company. We drive the competencies and the morale, which will continue to grow in a sustainable way as it has done in the recent years. In these first two months, I have met a very motivated management team and colleagues that I would like to thank for their support. Together, we will do our best for Terna and its stakeholders. I strongly believe Terna is a fundamental asset for the country. And therefore, I am very proud to lead such a strategic company. We want to enhance the Terna center role in the energy transition, while contributing to the [indiscernible] to our investment with a constant attention towards value creation and our stakeholders. Now before starting to analyze the figures, I would like to share with you a snapshot of the main achievements of the period. As shown in the chart, regarding domestic regulated activities, we can confirm no relevant impact coming from the COVID emergency. With the full restart of the main cost action sites. Moreover, important facts forward have been done in terms of authorization procedures in order to accelerate our investment. Regarding the nonregulated reconsolidated Brugg cables for which the closing was signed at the end of February, concerning international power lines in operation in Brazil and Uruguay proceeded in line with the expectations. Finally, let me remind you that in June, we paid $16.53 per share as a final 2019 dividend. It is vigilant to underline that during the COVID emergencies, employees' health and safety have been a priority for Terna. Indeed, the Terna company introduced all the necessary measures to guarantee the continuity of the electricity servicing for safety. This will be the case also in the future. We have started a process here in safer interaction of our employees in the offices. After this introduction, let me start with the presentation with the latest trend of the electricity demand in Italy turning to the next slide. In first six months of the year, due to the lockdown measures imposed by the COVID emergency, national demand was 144 terawatt hour, 8.9% lower versus the same period of the last year, when national demand was about 158 terawatts. Mind that in April, we adjusted the strongest decrease. With minus 17% compared to April last year, slightly recovering in May and June with the minus 10% and minus 15%, respectively. Let me also highlight that in the first six months of the year, variable sources covered 40.5% of the demand compared to the 55.5% in the corresponding period over the last year. Concerning national net total production, this has stood at 151 terawatt hour with a strong increase registered in solar and hydro production, which grew by 9% and 8%, respectively, versus the same period of last year, confirming the strong growth trend for venerables already highlighted in the past month. Despite the challenging situation of -- on the electricity market caused by COVID, then I was able to manage the grid, ensuring a high-quality of service and security of supply for panel users. Now let's move to the main figures of the period. In the first six months of the year, group revenues and EBITDA were up by 8% and 4% respectively, which means 85 and 15 million higher than last year. Moreover, we reported a group net income of $378 million, 11 million higher versus last year - versus last year, while group CapEx stood at 421 -- sorry, $428 million, 80% more than the first half of the last year, confirming the strong CapEx acceleration even in this complex [indiscernible]. To support this CapEx acceleration, our net debt stood at EUR 8.85 billion, versus about $8.3 billion at year-end last year, fully in the -- fully in line with our expectation and following the usual seasonality effect. Now I will leave the floor to Agostino Scornajenchi for a deeper analysis of the two years.

Thank you very much, Stefano. Good afternoon, everybody. Let's now start with revenues analysis at Page eight. Total revenues in the first six months of 2020 increased by 7.8%, reaching $1183 million, up by $85 million versus the same period last year. The growth was mainly attributable to regulated activities, which contributed for more than $20 million. Moreover, mind that from this quarter, we consolidated the newly acquired Brugg cable, a leading operator in the underground cable sector for which the closing was signed at the end of February. Let's now go into the details of the regulated and nonregulated revenues evolution moving to the next slide. Regulated revenues reached 1,025.20 million better than last year. The increase reflects charge evolution driven by our investment activities, while other regulated revenues increased by $9 million. Mainly as a consequence of higher revenues related to the quality of service. Nonregulated and informational revenues reached $158 million, about 70% higher than last year. This growth was mainly due to the integration of Brugg cable and the higher contribution deriving from private interconnected projects. Now let's go to operating cost analysis on Page 10. As shown in the chart, total operating costs stood at $307 million, 22% higher than the last year. The increase was mainly attributable to group consolidation and to tenacious volume dynamics, partially offset by lower costs related to quality of service. For a deeper analysis of the group OpEx components, let's turn to the next slide. Starting from regulated operational expenses, we reported $197 million, substantially in line versus last year that's tied to the strong increase of our asset base. Nonregulated and informational operating expenses amounted to $111 million, $49 million more than last year, mainly due to Brugg cables' integration. Net of this perimeter effect, nonregulated and international operational expenses registered an increase of about $7 million, showing the cost dynamic fully 112. Let me now analyze EBITDA moving to the next slide. The above-mentioned effects, group EBITDA reached $876 million, $30 million better than last year. For registered positive EBITDA contribution, both com regulated and non-related and international activities, which grew by $14 million and $16 million, respectively, versus last year. This increase was mainly attributable to higher regulated revenues as well as the contribution coming from group cable acquisition. Let's now have a look to the lower part of the profit and losses, turning to Page 13. Depreciation and amortization amounted to $302 million. The increase versus last year was mainly due to the impact of new assets becoming operational in period. As a consequence, EBIT reached $574 million, $16 million higher versus the first half of 2019. We reported net financial expenses of $29 million, substantially in line with the same period of last year. Taxes stood at $165 million with a tax rate of 29% on average, almost in line with the same period of last year. Consequently, the group net income reached $378 million, $11 million higher versus the same period last year despite a higher depreciation and amortization level led to the mentioned acceleration of investments. Moving to capital expenditure analysis at Page 14. For the first six months of 2020, total CapEx amounted to $428 million, 8% higher than the same period of last year despite the extension of the main construction side as a consequence of the restricted measure linked to the COVID-19 emergency, and confirming Terna grid ability to pursue its objective despite the critical situation. Indeed, we invested about $401 million in regulated activities. Among the main projects of the period is worth mentioning enables our rationalization, the validation of synchronous compensators and asset renewal. The non CapEx categories, the belt on CapEx stood at $141 million, which means 35% of total regulated CapEx. Asset renewal and efficiency was $191 million, to 48%, while defense CapEx was $69 million, representing the receival of 17%. Nonregulated and other CapEx stood at $27 million, which includes capitalized financial charges and other investments. Regarding net debt and cash flow finances, net debt at the end of the first six months of 2020 was $8846 million, $588 million higher than 2019 direct level, mainly as a consequence of the CapEx consideration made on the national agreement, the final 2019 dividend and taxes paid in June, and some regulatory pass-through items. Let me confirm that on the working capital side, we registered no relevant delays on cash settlement, there was no issue with bad debts. Moreover, the delta working capital increase shown in the chart was related to the increase of service market payments connected to the applied evolutions, that will be we absorbed in the coming months. Let's now make a deeper analysis of our debt file on Page 16. Our best management approach is staying and keeping a high level of efficiency in a solid financial structure, potentially mitigating any potential financial risk. Indeed, at the end of the period, we registered a fixed over floating ratio on gross debt of about 8% at an average ratio of 4.5 years. As a consequence of the proactive debt management activities delivered, cost of net debt at the end of the period remains in line with year end 2019. Finally, let me just remind you about Terna's rating confirmation made by all the main rating agencies and the renewal of the $8 billion EMTN bond program. Moreover, just three days ago, we launched a new rate bond dressed to institutional investors for a total amount of EUR 500 million and an actual cost equal to 0.78%, the lowest ever non Italian corporates for a green bond and for issues over 10 years, demonstrating Terna's leadership role in sustainable time. Now before to start the Q&A session, let me leave the floor to Stefano for his closing remarks.

After having illustrated the strong set of results for the period, let me conclude my first results presentation as the chair with some closing remarks. Firstly, Terna's folks will continue to be domestic or activities to further enforce and give an increase in Terna's leading role in the energy facilitation process in order to generate greater value for all stakeholders and for whole account. Moreover, thanks to our managerial effort, we will ensure that we will maintain the company's low-risk profile and preserve our solid financial structure. Despite restrictions imposed by COVID emergency, we can confirm all our targets. I am sure that our strong commitment and efforts here will guide us into a future growth and allow us to face all upcoming changes. Indeed, we are already working on the new strategy plan that we foresee to present in the last quarter of this year. Thank you for your attention. We are now ready to open the Q&A session.

Thank you so much. Ladies and gentlemen, we will now begin our question-and-answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. And once again, please, if you wish to ask a question, press star one on your telephone and wait for your name to be announced. Thank you so much. So, the first question will come from the line of Harry Wyburd from Bank of America. Please go ahead.

Q I've got three. So firstly, on CapEx, you kind of alluded in the press release to an acceleration in CapEx and the revision for the long-term plan. What kind of time frame could we have on that? I mean, typically, you update the market in spring or in March time. But I guess things are moving very quickly with the crisis and of course, with the European stimulus. So just interested to know, if you are indeed going to raise your CapEx, how quickly could we get an update on that? Second question is just on the sort of mechanics of increasing your investment. Obviously, there's a big push from the top-down from Europe to increase investment, clearly, from Italy as well that you operate in a permit driven environment and a lot of these permit and license and some decisions are taken very locally. So, do you think the permitting process in Italy can keep up with the desire to raise investment? And will you be able to get the necessary permits to significantly ramp your CapEx any further given that you've already ramped up significantly in the last couple of years? And then third question, just very broad-based on the strategy. I think under the previous CEO, there was quite a strict policy on international investment. And you're kind of unique now in that you're one of the only one out of your peers who have sort of avoided having massive adventures in the U.S. or in Latin America or even in space for some of your peers. And I guess that purity of earnings is sort of showing in so far as you've had a very good earnings trajectory this year, and there's not many things to worry about in your numbers. So, I'm interested to know, do you think that, that sort of strict discipline on basically limiting your footprint in foreign markets is going to continue? Or do you think there might be a change on that front?.

A So, starting on the CapEx acceleration. First, my first consideration is that as you can -- as you may understand, during this spring, we had some difficulties to proceed on our CapEx activities regarding the stop of activities coming from the emergency, COVID emergency. But our organization was able during the last two months to start again with all the activities and to accelerate week per week and at the moment, we are more than 100% in terms of product production activities, productivity of investments. My opinion is that we will be able to arrive in the end of the year in line with prospective of investments. And I think that this opportunity for us to accelerate investments will be also used in the planning of the new program for investment because the needings in our country and for this kind of network and also by considering the needings of the energy transition period will allow us to consider also new investments and possible acceleration. Also related to this topic, it's important to -- it's important to consider the authorization process. In this period, as you probably know, in Italy, the government is working on simplification decree. And we consider this -- this is an opportunity for us. We want to approach to the new planning also by considering a short time, shorter time to implement investments. So, it's an opportunity for Terna. Regarding international activities, at this point, we are going on with the normal activity and program and process. There are some opportunities, but our position is, in any case, to stay at a low capital level and low-risk profile. But in the meantime, it's interesting to proceed with our program.

And the next question comes from the line of Enrico Bartoli from Manifest.

Q First of all, I want to wish good luck to Mr. Donnarumma for the new adventure. Three questions from my side. First of all, on the nonregulated revenues, there was a very sharp increase in the contribution in the second quarter. You highlighted that this is partially due to the consolidation of Brugg cables. If you can give us some details about the contribution of Brugg to revenues and EBITDA and also elaborate -- give some details about the evolution of the other nonregulated revenues in the quarter. And if this trend can be assumed also for the next quarters? Second question is regarding the debt. Mr. Scornajenchi highlighted the success of the green bond. If you can update us on the cost of debt that you expect for the full year. And if you think that the credit markets in this moment would provide additional opportunities for Terna to optimize the cost of debt. The last one is on the working capital that evolution that you highlight in the presentation. I was wondering if this $400 million increase in the first half is going to be partially resolved during the second half. If you can provide some details on the evolution by the side as well.