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

Good afternoon, ladies and gentlemen, and welcome to Terna First Half 2023 Consolidated Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our host speaker today, Mr. Omar Al Bayaty, Head of Investor Relations and Sustainability. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to Terna First Half 2023 Result Presentation. The call will be hosted by our CEO, Giuseppina Di Foggia; and our CFO, Agostino Scornajenchi. Following the presentation, we will have the Q&A session. We kindly ask to submit question to Investor Relations at Terna.it. Please Giuse, the floor is yours.

Thank you, Omar, and good afternoon, everybody. Let me -- the Annual General Meeting appointed the new Board of Directors with Igor De Biasio as Chairman and myself as CEO. I'm delighted and proud to take up this new challenge. From what I have seen, Terna is in excellent shape. Our people have outstanding skills and know how, which means we will continue to grow in a sustainable way. Energy transition is a mandatory part to a sustainable future. We intend to further enhance Terna's role in the energy transition, continuing along our strategic roadmap for the development of the electricity system of the future. Now before starting to analyze the figures, I would like to share with you the main achievements of the first part of the year. Regarding regulated activities, let me remind you that last March, we presented the new 10-year national development plan. More than EUR 21 billion of investment aimed at continuing the integration of renewable sources and the progressive result of coal-fired power plants. Terna foreseen CapEx plan will be crucial to achieve national and European decarbonization targets. I'm pleased to say we are well on track with the investment and usage in our plan. What have we achieved regarding the sustainability in the period? Four of the most prestigious international indices that select leading companies in terms of ESG best practices have recently confirmed the inclusion of Terna. Our ESG commitment is also reflected in Terna's refinancing. Last May, Terna signed an ESG-linked revolving credit facility for EUR 1.8 billion. And last week, we successfully launched a fixed rate green bond of EUR 650 million. The market reacted positively with demand of [ slipping ] supply by almost 4x the offered amount. These transactions demonstrate the group's strong commitment to introduce ESG criteria also as a strategic lever to create value for all its stakeholders. Finally, regarding shareholder remuneration. In June, we paid EUR 20.83 per share as a 2022 final dividend. So the total dividend for the year, including the interim payment of last November, is equal to EUR 31.44 per share in line with our dividend policy. After this brief introduction, let's now look at the latest trends of electricity demand in Italy. Turning to the next slide. As you can see from this chart, in the first 6 months of 2023, national demand was about 151 terawatt hours with a decrease of 5.3% on last year when national demand was 159 terawatt hours. The reduction in electricity demand in the first half of the year is mainly due to the increase in average [ in features ] in the winter period and the reduction in industrial consumption. In the first 6 months of 2023, renewable sources covered about 35% of a national demand, 3 percentage points higher than the last year. National net total production stood at 126 terawatt hours, about 10% lower than the same period in 2022. Despite that, let me highlight the increase in hydro and photovoltaic production, which grew by 18% and 4%, respectively, compared to the first 6 months of last year. I should add that in the first half of 2023, renewable sources covered about 42% of the national net total production. Now let's move to the main figures of the period. In the first 6 months of 2023, group revenue and EBITDA were up by 12% and 8%, respectively, on last year which means EUR 155 million and EUR 72 million higher than the first half of 2022. For the first time in Terna's history, EBITDA cross the record threshold of EUR 1 billion in the first 6 months of the year. We also reported a group net income of EUR 411 million, the highest amount ever with an increase of 3% on 2022. Group CapEx was EUR 831 million, recording a double-digit increase of 26% on the same period last year. Let me underline that this is a record-breaking level of CapEx for the first half of the year. This is proof of our ability on execution and confirms, once again, Terna's central role in the energy transition process. To support this acceleration at the end of June 2023, net debt stood at EUR 9.5 billion versus about EUR 8.6 billion at the 2022 year-end. Thanks to this solid set of results and our focus on execution, we are well on track on delivering our 2023 targets. So I can confirm that we will achieve all the guidance provided. Now allow me to invite the CFO, Agostino Scornajenchi, to give you a more detailed analysis of the half yearly figures of 2023.

Thank you very much, Giuse. And let's start with revenues analysis, moving to Page #8 of the presentation. Total revenues in the first half of 2023 increased by 11.6%, reaching EUR 1,485 million, up by EUR 155 million versus last year. The growth was attributable both, to regulated and nonregulated activities, which contributed for EUR 110 million and EUR 45 million, respectively. . Let's now go into the details of the revenues evolution moving to the next slide. Regulated revenues reached EUR 1,263 million, EUR 110 million better than last year. The increase was mainly driven by the investment acceleration made on the national grid and the higher output-based incentive effects related to the higher benefits generated for the system. Nonregulated revenues reached EUR 222 million, 25.3% higher than last year. Nonregulated growth was mainly attributable to the increase in revenues coming from Brugg and Tamini, and to the higher contribution of the Energy Solutions, mostly related to LT Group. International revenues were set to 0 in accordance with IFRS 5 accounting standard referred to assets held for sale. Now let's go through operating cost analysis at Page 10. As you can see in this chart, total operating costs stood at EUR 466 million, 21.4% higher than last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competencies and increased level of activity. While no regulated activities have been impacted mainly by higher costs for the purchase of raw material and services related to Brugg and LT Group. Let me now analyze EBITDA, moving to the next slide. Due to the previously mentioned effects, first half 2023 group EBITDA reached EUR 1,019 million, EUR 72 million better than last year. The increase was mainly attributable to regulated activities, which contributed for about EUR 67 million more versus the same period of last year, showing an EBITDA of EUR 990 million in the first half of 2023. Let's now have a look to the lower part of the profit and losses. Turning to Slide #12. The Depreciation and amortization amounted to EUR 380 million. The increase versus last year was mainly due to the impact of new assets becoming operational in the period. As a consequence, EBIT reached EUR 639 million, 5% higher versus the first half '22. We reported net financial expenses at EUR 59 million. The increase versus last year was mainly due to the high level of inflation registered in the period and to the increase of the interest rates, partially mitigated by the increase in capitalized financial expenses and financial income on available liquidity. Taxes stood at EUR 169 million, EUR 8 million higher versus last year, essentially due to increased profit and to positive one-off item recorded in first half of '22. As a consequence, our tax rate stood at 29.1%. As a result, group net income reached EUR 411 million, 3.3% higher versus the same period of last year. Moving to CapEx analysis at Page 13. In the first half of 2023, total CapEx amounted to EUR 831 million, 26% higher than last year, confirming the solid acceleration aimed at enabling the energy transition process. Indeed, we invested about EUR 777 million in regulated activities. Among the main projects of the period, it's worth mentioning the Tyrrhenian Link, the Paternò-Pantano-Priolo installed Sicily, and investments in stabilization devices as synchronous compensators. Among CapEx categories, Development CapEx represented 50% of total regulated CapEx. The sales CapEx stood at 12%, while asset renewal and efficiency was 38%. Nonregulated and other CapEx stood at EUR 54 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis shown on Page 14, net debt at the end of June 2023 was about EUR 9.5 billion, around EUR 900 million higher than 2022 year-end level, and mainly as a consequence of the investment in the period and of the reduction of net trade payables vis-a-vis the 2022 year-end. During the period, we generated an operating cash flow of EUR 750 million, which sustained the CapEx acceleration made on National Grid. Let's now make a deeper analysis of our debt profile. Moving to Page 15. In line with our cautious and proactive debt management approach, at the end of this first half, we registered a fixed over floating ratio or gross debt of about 89% and an average duration of about 5 years. Moreover, in April, Terna successfully launched a 6-year fixed rate single trans bond issue for a total amount of EUR 750 million, issued with a spread of 70 basis points over the [indiscernible], and an annual coupon of 3.625%. In addition, few days ago, Terna launched a 10-year fixed rate green bond addressed to institutional investors for a total amount of EUR 650 million. The issuance has been very successful in the market and the final spread of 90 basis points over the [indiscernible]. The green bond will have a duration of 10 years and will pay a coupon of [ 3.8775% ]. The net proceeds from the issue will be used to finance the company's eligible green projects defined in compliance with the Terna green-bond framework. Moreover, with the aim of confirming our leadership in the sustainable financial market, let me just recall that in May, Terna signed an ESG linked to revolving credit facility a total amount of EUR 1.8 billion. This transaction allows Terna to count on a liquidity appropriate to its current rating for strengthening the company's financial structure and demonstrate the group's strong commitment to the introduction of the model, which aims to reinforce sustainability at a strategic level for creating value for all its stakeholders. Thank you very much for your attention. Now before starting the Q&A session, let me leave the floor to Giuse for her closing remarks. Please, Giuse.

Thank you, Agostino. So having seen the strong set of results for the period, let me conclude this presentation with some closing remarks. First of all, Terna will continue leading the energy transition process by providing the state-of-the-art services and ensuring security of supply and efficiency for end users. As stated in the presentation, despite the extremely challenging scenario and the significant investments required to meet the needs of the system, Terna continues to preserve a solid and sustainable capital structure as well as maintaining a low risk profile. This is our commitment also for the future. In addition, Terna will carry on guaranteeing value creation for our stakeholders focusing on the execution of the actions foreseen by our industrial plan. Sustainability is a fundamental part of our business model. Our strategy will ensure we maintain a high-quality standard of service in a system characterized by increasing complexity. Our strategy will also keep us on course to reach a national and international decarbonization targets. Sustainability is not only what we do, but also how we do it. It is part of our way to manage business from the circular economy to dialogue with the local community from science-based decarbonization targets to diversity and inclusion initiatives. This is the way we want to ensure a common sustainable growth path to all Terna stakeholders. Now before moving to the Q&A session, let me say that I'm sure our strong commitment and enthusiasm will guide us towards future growth and allow us to face all future challenges. And we are already working on the new plan that we expect to present by the first quarter of 2024. Thank you for your attention. We are now ready for the Q&A session.

We received a strong set of questions. For the sake of time, we have grouped some of them together. We will begin with a series of questions for the CEO, then we will move on further questions for CFO. So Giuse, the first group of questions are related to the CapEx plan. Any expectation of further increase?

We are well on track with the execution of our CapEx plan, and we are committed to maintaining our strategic road map towards the energy transition. Indeed, last March, we presented the new national development plan with more than EUR 21 billion of investments expected in the next 10 years. And we are focused on execution any other consideration about our CapEx plan will be part of the discussion of the new business plan that we foresee to present by the first quarter of 2024.

Thank you, Giuse. Regarding dividend policy, are you [indiscernible] any change?

Well, our dividend policy is fully sustainable and is aimed at maintaining the right balance between fair shareholder remuneration and the sustainability of the investment plan. I believe that each guarantee is constant and predictable growth as well as full visibility over the planned period. As I mentioned before, any other consideration will be part of the discussion of the new business plan in -- by the first quarter of 2024.

About international strategy, we can expect any updates?

The consolidation of LatAm activities will allow Terna to maximize the value of the international portfolio, optimizing the group's risk return profile. At the same time, we will continue to scout for other opportunities. This may also be with the partnership and will be selected ensuring a low-risk profile and linked capital absorption, leveraging the know-how developed by Terna.

Thank you. We are also receiving some questions about potential interest in new geographies for international development.

Well, our focus will be addressed on those markets with high growth profile and low country risk. We will take a gradual approach offering and leveraging our know-how in the design and operation of infrastructures.

We are receiving also a questions about WACC update. If you can give us a comment about that.

They allowed -- the work will be subject to an evolution to verify if the threshold foreseen by the trigger mechanism is met or not. The observation period for the main macroeconomic variables in the formula will close at the end of September. Since the calculation of the parameters and the potential review is still subject to the evolution of the main variables in the coming months. For the time being, we cannot provide you with precise guidance on the expected WACC final value for 2024. I can only tell you that an update they allow the return being slightly given the level at which rates are today. It's too early to comment about 2025 allowed WACC level.

We received also some question related to the TotEx framework. Any update on that? What's your view?

We strongly believe that the introduction of TotEx would be consistent with the part already undertaken towards an output-based approach. The framework will be focused on targets and benefits for the system with the rewards linked to outcomes. In the TotEx approach, we see an opportunity to create further value for the electricity system and the shareholders. It could promote an even higher overall efficiency through new output-based regulatory measures, ensuring benefits for the system. We are fully committed to TotEx and satisfied about the progress made with the resolutions on output-based incentives.

Regarding output-based incentives. Do you think that the level of output-based is sustainable?

The current framework rewards Terna for the benefits we are able to guarantee to the system. This is mainly through the reduction of ancillary services market cost and the reduction of a bottleneck among and within market zones. I believe that our collaborative relationship with the regulator will continue with the common objective to enable the energy transition in Italy always ensuring the security of supply and efficiency for end users. In this regard, I think that the reliable track record the regulator has always shown, and its decisions will also be reflected in the design of output-based incentives.

We received also questions on procurement and authorization. Could you provide details on project execution?

Yes. Once again, I underline our CapEx plan is solid and safe, and our projects are well on track. Regarding procurement, despite the challenging scenario, potential shortages of raw materials do not represent a risk for Terna. So I can say that we are on the right path regarding the authorization process, construction activities and procurement in line with the milestone set in the updated industrial plan.

And about renewables. Any updates on renewables installation rate in Italy?

Until 2021, the installation rate was around 1 gigawatt yearly, while in 2022, around 3 gigawatts have been installed. Diesel growth in the pace of installations has also been confirmed in the first month of 2023. In fact, since the beginning of the year, about 2.5 gigawatts of new renewable capacity have been installed. The acceleration is ongoing, and we need to see a range of coordinated and integrated actions to stay on track.

Yes. And about that, which are the necessary measure to accelerate renewable development?

We need to further speed up the installation rate of renewable energy sources to achieve the decarbonization target foreseen by the [indiscernible] scenario. The time required for a permit needs to be renewed and the profitability should be more visible.

And some question about storage. Are there any news about this development, could Terna be [indiscernible]?

Despite its pivotal role in the energy system, storage capacity has not grown significantly in recent years, mainly due to the lack of a proper investment signals from the energy markets. Our plan does not include any investment related to storage projects. Storage should be developed through market actions, and Terna cannot be directly involved. We strongly reiterate the importance of storage development for the electricity system, and we will actively monitor its evolution.

Thank you, Giuse. Last question for you. There is a question regarding field and grow balance in Terna equity story. What's your view about that?