Enel SpA. (OTCPK:ENLAY) Q3 2023 Earnings Conference Call November 7, 2023 ET
Company Participants
Monica Girardi – Head of Group IR
Stefano De Angelis – CFO
Conference Call Participants
Operator
Good day, and thank you for standing by. Welcome to the Enel nine months 2023 Results Conference Call. At this time, all participants are in listen-only mode.
I would now like to hand the conference over to your speaker today, Monica Girardi, Head of Group of Investor Relations. Please go ahead.
Monica Girardi
Thank you, and good evening to all of the people connected. Welcome to the nine months 2023 results presentation, which will be hosted by NLCF for Stefano De Angelis. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send questions only via email at investor.relations at nl.com. Before we start, let me remind you that media is listening to both the presentation and the Q&A session. Thank you.
And now let me hand over to Stefano.
Stefano De Angelis
Thank you, Monica. And good evening to everyone. Let’s start with the highlights of the period. During the nine months of 2023, the group recorded a strong and consistent operating and financial performance across all businesses. EBITDA is up high double digit compared to last year and reached €16.4 billion on the back of a less volatile environment that restored the full industrial growth potential of the group. FFO grew €5 billion in the third quarter, landing at €10.6 billion, nine times higher than one year ago, thanks to the EBITDA growth and the recovery of the dynamics that affected the working capital evolution last year.
On the back of a strong underlying operating performance, we revised upwards ordinary EBITDA and net income targets. Finally, we confirmed our financial leverage ambition with a performance net debt on EBITDA ratio to range between 2.4 and 2.5.
Operating delivery came in quite strong as well. I’m now on page two with the main business KPIs. All our operating performance metrics continue to improve year-on-year. Production from the renewable is up by 12 terawatt hours, driven by recovery in hydro availability and 4 gigawatt of new capacity added over the last 12 months. This brings emissions-free production at the end of September at 73% of the total, up by 12 percentage points year-on-year, confirming the strong growth already witnessed in the first half. Energy sold to B2C in the Italian and Spanish liberalized market grew by 5%, confirming the appeal of our commercial offering.
Finally, RAB/per grid customer reached around €650 per client, up by 6% versus previous year. The investment that food our asset base are analyzed in the next slide. The investment stood at €9.4 billion and were allocated as follows. €5.4 billion supported our integrated strategy with renewables accounting for more than €4 billion and customers development for the rest. It is worth to highlight that CapEx in generation include around €800 million of investments in best capacity in Italy, for which the remuneration is covered by the capacity market regulated mechanism.
€3.9 billion was spent in grids to expand and upgrade our networks, increasing the regulated asset base. From a geographical perspective, more than 60% was invested in Europe, with a lion’s share spent in Italy, mainly in grids, followed by Spain, Latam, and then the United States. Their location is pointed to a strong focus on core geographies, where margins and cash generation are supported by visible regulatory frameworks, a less volatile environment, and continuing operation.
Let’s now move on page 4 with the main drivers of the EBITDA. Ordinary EBITDA market, the sound 29% grow year-on-year, net of more than 600 million perimeter effect, mainly associated with the disposal of asset close over the last 12 months. This result was driven by the integrated business, which increased by €3.3 billion versus 2022, on the back of a normalizing environment, as I will detail in the next slide. Networks that were up by around €800 million year-on-year, thanks to regulatory updates in countries where frameworks allow the pass-through of recent macro volatility.
Finally, the stewardship business model contributed for around €100 million, as we sold in September our Enel Green Power 50% share in Australia. It is worth to highlight that on a year-on-year basis, the stewardship model weighted negatively for around €200 million due to the gains associated with Ufinet and Mooney transaction that was accrued in 2022.
From a geographical perspective, it’s worth highlighting that European countries were 70% of the total EBITDA of the period. I will now move to the results analysis by business, starting from the integrated one on page 5. The integrated business is up 46% versus 2022, or more than €3 billion year-over-year. Italy represents the bulk of this growth, with more than €3.3 billion increase year on year, driven by a more balanced position between sales to B2C customers and generation, which benefited from renewable production and power price normalization.
Iberia is negative for around €200 million year-on-year, as the normalization of the retail business was offset by the negative evolution of the margin in the gas segment when compared to last year. The evolution of the integrated business in other countries was positive for around €100 million, thanks to the strong performance in Latin America on the back of higher renewable production compared to last year, mainly in Chile, and the contribution of new install capacity, both in the U.S. and in the Latin America. The stewardship business model recorded a negative change year-on-year of around €200 million, as I explained, also commenting on the previous slide.
Let’s now move on page 6, talking about the great EBITDA performance that stood at €6.1 billion EBITDA, up by 15% versus previous year. In Europe, this EBITDA reached around €4.4 billion. In Italy, the performance was supported by higher tariff, mainly associated with RAB growth and indexation to the CPI.
In Spain, EBITDA grew by €200 million, thanks to the updated distribution remuneration for 2017-2019 period, which generated a negative impact in 2022. Finally, as part of this growth, we accounted for the elimination of the higher cost recorded last year in Romania to cover network losses. Excluding this item, Romania agreed to prove it almost flat year-on-year.
Talking about Latin America, the contribution of the growth was around €100 million, backed by the positive impact from tariff adjustment in Rio Ceara [Ph] in Sao Paulo, and higher volumes distributed that more than compensated the negative perimeter effect. On a like-for-like basis, the growth of the EBITDA in Latam would have been around €370 million.
Let’s now move on to slide 8, where we have the analysis of the results related to the earnings. The ordinary group net income came in at €5 billion, increasing more than 65% versus last year, driven by the strong EBITDA performance already commented. D&A are almost flat versus 2022, as a consequence of higher amortization and higher level of investment, offset by lower level of bad debt provision due to better credit collection and also lower level of turnover.
Net financial charges increased by around €600 million, mainly due to the worsening of interest rates environment, which affected the 25% unhedged portion of our debt. Income taxes increased due to the taxable income expansion, boosted by the operating result, while the tax rate proved to be almost stable.
Finally, the minorities were driven by the rebalanced geographical mix. I move to the cash flow now on slide number 9. Funds from operations stood at €10.7 billion, showing a sound €9.5 billion increase versus September of last year, thanks to the improvement in working capital dynamics, which are now progressing towards a normalized trend.
Cash flow produced in the period is more than doubling the average of the last four years and represent a regular high in absolute terms. Worth to highlight that working capital is in line with the historical evolution and recovered €7 billion versus previous years.
In the fourth quarter, we expect this normalization trend to be confirmed. Looking at the moving parts in the third quarter, cash out for taxes was €0.3 billion. And as discussed in previous call, just keep in mind in the first six months of 2023, there was the impact of the lump sum payment of the solidarity contribution tax in Italy for around €600 million, while financial charges based in country stood at €0.9 billion, also in line with the third quarter of last year.
I’m now moving on page 10 with the net debt evolution. The net debt at the end of September came in at €63.3 billion. Over the period as discussed before, funds from operations contributed positively to the net debt evolution for €10.6 billion. Net CapEx amounted to around €9 billion that is split in €9.4 billion gross investment deployed, reduced by the grant’s contribution over the period. This resulted in FFO after cap positive for €1.5 billion.
Total dividends amounted to €5.1 billion as in July, in LSPA paid the final dividend installment for this year. Active portfolio managed landed at €700 million as the bulk of the deals announced so far have yet to be cashed in. I want to stress here that taking into account the €2.6 billion already cashed in from the deals closing after September 2023, the cash generation for both organic and non-organic activities cover almost in full both CapEx and dividend. This is an equilibrium that we aim at maintain structurally going forward.
Adding the expected cash in from this sign and their respective agreed financial terms, the pro forma net debt would have stood at around €57 billion, down around €3 billion versus the full year 2022. Despite the negative impact of €1.2 billion deriving from non-cash items such as foreign exchange dynamics and leasing accounting effects.
Let’s now go more in deep on page 11 on the execution of the M&A plan. As of today, we have closed or announced deals impacting positive our net financial position for around €6.5 billion. These already closed account for €2.8 billion while around €3.7 billion have been agreed and still to be cashed in pending final regulatory approvals.
I again underline that the €2.8 billion is just partially reflected in the net financial position at 30 September 2023 because we cashed in €2.6 billion after the closing of the nine months results but before this conference call. So this is cash in our accounts. I’m referring to the €2.8 billion just to be clear. In the nine months, the EBITDA contribution associated with the asset disposed or to be disposed totaled around €800 million as you can see in page 11.
And now finally we move on page 13 where we have the update of our full year guidance. As shown in this slide, the new guidance range for ordinary EBITDA is set to be at €21.5 billion, €22.5 billion while the net income target moved to €6.4 billion, €6.7 billion. These upgraded targets are a function of a stronger operating performance in Italy where the retail margin improved sensibly and a higher contribution of the network’s division.
Having in mind our capital market data in two weeks, in slide 11 you could see the impact of the nine months EBITDA of announced disposal while in the annexes you can find all the building blocks to calculate the clean baseline for setting the group’s like for like performance into 2024.
On the back of this strong and improved operating performance, we can confirm an EBITDA ratio at 2.4, 2.5 calculated on a pro forma basis taking into account the deals closed that have still to be cashed in, the deals announced still to be closed and the ones that are in well advanced phase of negotiation. We will update you on the disposal plan and associated impacts in just two weeks so please bear with us.
Let’s now share some conclusion. The strong set of results achieved in the first nine months of the year are a clear evidence of the focus in our management as on delivery, improvements and execution. A solid cash flow generation is to us a founding brick of a resilient company that aims at creating value for shareholders and more in general for all of its stakeholders.
Ongoing progresses on disposal are set to simplify the group’s asset base supporting our goals of returns, maximization, reduction of risk, efficiency and accountability. Thank you for your attention and let’s now move to the Q&A section.
Question-and-Answer Session
A – Monica Girardi
Thank you Stefano, I’ll be your voice as always. Thank you for all of the questions submitted. In light of the upcoming capital market day we will be taking only questions on the content of the presentation we just shared with you. We received a number of regulatory and political questions that I do apologize but will be answered in a couple of weeks. So let’s start with the set of questions that pertain the guidance. 2023 upgrade guidance on EBITDA and net income, can you walk us through the moving parts to reach full year targets?
Stefano De Angelis
Well considering the performance within the first nine months, sorry for the microphone, as you can see in the slide that considering the performance between the first nine months and the quarterly progression we expect an EBITDA in the last quarter of let’s say at least €5 billion with a clear upside potential as there are some moving parts which are clearly supportive to the results.
First the integrated business that we continue to see having a positive performance both in the renewables and retail. The grid’s performance is solid, consistent and visible so we do not expect any change in the trend that we have accounted and recognized in the first three quarters. And finally in the stewardship, let’s say business unit, let’s call it in this way, we will account for the positive impact of the Greece deal already closed, announced, closed, cashed and so on.
On the other side, so coming from this positive trend we have to keep in mind that there are also some points that may play out differently, for example hydro and regulatory or fiscal intervention from governments. We know that we are still working through a very volatile environment with some political and macro issues still very relevant and plenty so it’s in our duty to take also into account this variable setting our guidance.
Monica Girardi
Okay, next is still on the guidance. In the last quarter of 2022 you generated around €7 billion of EBITDA, why this year you expect only 5-6, what are the main moving parts?
Stefano De Angelis
Again, I think part of the answer was already answered. I think that we have also to consider that last year in the fourth quarter there were significant, let me say one-off accrued results related to stewardships and so on, so I think that now we have to have a better view, a better forecast looking at the resilient and consistent performance of the 2023 quarters.
So starting from again this €5 billion minimum performance expected, I think that comparing to the last quarter of 2022 is not the proper way of having a direction of what we can expect for the full year 2023.
Monica Girardi
We have a number of questions around the net debt for full year, why you are not sharing the level of net debt for full year, what is the net EBITDA target for full year on actual non-performer basis, what are the transactions, I’m packing all of them, expected to be completed by year-end, what do you expect net debt to be by year-end, so lots of questions around the net debt.
Stefano De Angelis
So I completely understand the question, so let’s say to be very direct. If I had to project the net financial position without having a 12 billion disposal plan targeted last year, it would be very easy to have a very simple and let me say coherent approach compared to the EBITDA net income. Having let me say significant moving parts related to the disposal plan, as you have seen, there are these that we have closed four months ago that we do not see any critical elements today for being cashed in, but we cannot say that it will be cashed by the 31st of December because it’s depending from the final stage of a regulatory improvement that depends from the authority in Latin America.
Again, there are deals that we are in these days still negotiating, so we have decided to share with you the most updated figure in terms of both reported and like-for-like performance and that expectation taking into account all the last updated negotiation impacts related to the M&A in two weeks.
So as I said before, please bear with us. This is to give you a more updated figure, not to have some figure that we don’t want to share. We want to share the best figures and I think that in two weeks having also the CEO with us would be the proper moment to share the last figures, then the best estimate available.
Monica Girardi
I would add one small follow-up on the guidance of EBITDA which is just coming through. How much of the guidance increases due to the improvements of business, while which part is for keeping the disposals for longer?
Stefano De Angelis
It refers to the EBITDA. Increasing EBITDA guidance. No, just a small part. Honestly, as I said before, if you look at the disposal, you have into your accounts the impact of Romania and we have put the Romania EBITDA impact in the presentation. Regarding CRA, this was not, it’s what is important, this was not shared with the market and this is not compliant last year, but clearly the impact of the disposal plan announced last year and the related EBITDA impact was not all happening starting from the 1st of January 2023.
So, for example, Ceará was exiting the group EBITDA that was part of the EBITDA guidance just in the last part of 2023. The same, for example, for other assets that are now part of a delay in terms of cash-in. So, what is important is that you have to consider that giving a close answer is not a huge portion of the EBITDA that is moving our guidance related to the undisposed asset because the timetable in terms of EBITDA impact of the disposed asset included in the 2022 guidance was just a little part because in that moment was took into account that this business would have exit from the [Indiscernible] just in the final part of the year. I don’t know if it is clear, but Monica can follow up later.
Monica Girardi
What is the expected level? I come back to simple probably questions, what is the expected level of CapEx for 2023?
Stefano De Angelis
It will be, let me say, something around €13 billion. Don’t ask me about the impact of the disposed asset.
Monica Girardi
No, there is nothing about that. It is negligible.
Stefano De Angelis
It is negligible.
Monica Girardi
Can you elaborate on financial expenses for the nine months and the projected trajectory to year-end?
Stefano De Angelis
But now, as you have probably seen, in this quarter we are now at the same level of the third quarter of 2022. What does it mean? That we have reached, let me say, the new normality in terms of cost of capital, meaning that we do not expect an increase, so now we expect to have clearly having the same level of gross debt and net debt and the same level of variable and fixed part of debt, we may expect a stabilization looking at the full year 2022 of the cost for…2023. 2022. Sorry, 2022.
Monica Girardi
We move, I think we answer all of the questions regarding the guidance, if I’m not wrong, otherwise we’ll come back later. I move into a set of questions pertaining to business. Can you provide an update on hydro levels across the group and how they compare with your plan assumptions? Can hydro be an upside versus plan?
Stefano De Angelis
Don’t go into too much details. Let’s say that the hydro level now seems to be a very positive news, but let me say, if you look at the last three years, we are now, let me say, stabilizing at, let me say, again, at the normal level of hydro. So this is part of what we are calling a normalization of the profit arising from renewables and also from when we refer to the customer base.
Monica Girardi
Italian EBITDA. What is the expected EBITDA for full year for the renewables? Do you see the possibility of a return of the clawback mechanism?
Stefano De Angelis
As you have seen, we have €300 million of EBITDA accounted, let me say, reported for the nine months. This clearly shows a strong recovery when we compare to the first half, where we were affected by the clawback. Clearly, in the nine months, that was accounted for almost €400 million in the nine months, 100% related to the first part of the year. In this moment, not having a regulation that ask us for accounting or booking for the clawback, this is not included in our results. As I was saying before, our full year guidance takes into account the proper, let me say, protection from any potential impact arising from changes in the political and taxation framework all around the world, not just in Italy.
Monica Girardi
An analyst is chasing another question on guidance, which I was listing outside the list. Can you elaborate on why the EBITDA guidance upgrade is €1 billion while the net income guidance is upgraded by only €300 million?
Stefano De Angelis
It depends on the mix of the business, not just having to account the historical performance. Clearly, I understand your question. If you make the proportion, you will have an impact of €300 million, that is 30%. That is, let me say, something below our historical performance. So we may expect to have something positive taken into account that this is the result of minorities. You have to take into account into minorities and then you have to take into account the different levels of probability that we are associating. For example, the political scenario and the decision that can be related.
By the way, if you look at the ratio, and Monica can help me because it is part of the story of the industry, the ratio in the past was in the range of 30% to 40%. We are not so far from the historical average.
Monica Girardi
Okay, I think that the retail, so a number of questions about retail, increasing competition, how to rate and back that progressing, which level you forecast for the end? For both.
Stefano De Angelis
First of all, keep in mind that the churn clearly related to the situation that we have arising from the commodity price and what happened in the retail price, the churn in Europe, all across Europe, have a negative impact for the industry. Don’t forget that in Italy and in Spain, our performance is best-in-class. Our impact was the impact of an industry, it is not a company specific issue. Our plan, again, without anticipating nothing, will focus strongly into this new normality, meaning that we expect the competition in the retail market, not just for the regulatory changes, but for the dynamics that happened in the last two years. We require a stronger focus in retail activities, in consumer ability, in loyalty increase, in effective bundle strategies and so on.
So there was a negative impact, this negative impact was an industry negative impact. Our performance follows the industry. Our response will be part of the capital market day strategy and will be announced in just two weeks.
Monica Girardi
Could you provide an update on your expectations about power market liberalisation in Italy?
Stefano De Angelis
Yes. I know the answer, I’m quite tired. Sorry, I’m just taking some time to recover my voice. You know the Mercato Tutelato [Ph] story that is several years. Just to remind, it’s easy for us that are Italian, but along this year, 100% of the business segment is now liberalised. We have still this part of the consumer market that has to be liberalised. What we are expecting now is that the liberalisation will be in the agenda for the next two quarters, let me say. What we expect is that the continued regulated customer base will be something higher than was expected in the past. The name in Italian is salvaguardia. I don’t know how to translate into English. It’s a special safeguard. I don’t know if it exists in some other countries, but it’s the part of the customer base that will continue to be regulated.
Our approach in terms of participation to these bids will not be the same of the business segment because we intend to participate, we intend to have, let me say, a safe and fair share of this market also after the liberalisation. But we expect this process to be confirmed along the next two quarters.
Monica Girardi
Before moving to a set of questions on financials, there is one on the electricity distributed in Italy, which is down 5.2% year-on-year and Spain up 1.9%. The question is if these volumes changes have any impact on EBITDA?
Stefano De Angelis
No, not because of the, let me say, the regulation. What is important is also to understand why there was this different behaviour in Italy when compared to Spain. You know that in Spain there was a strict control of the tariffs that do not happen in Italy. So the consumer respond in Italy was to save the maximum they could in terms of energy consumption, while in Spain this was, I wouldn’t say that this not happened, but was less strong than in Italy. But again, coming to the strike question, there is no impact for the structure of the regulation.
Monica Girardi
Okay, I think we have three questions more on the financial/FFO. Networking capital, can you provide some details on current levels, working capital and expectation into year end?
Stefano De Angelis
No, as I said before, we expect a normalisation of the working capital. This is because what was the main topic that was, let me say, impacting the year 2022-2023, changing networking capital that was regulatory driven is now being completely reabsorbed. So we expect, let me say, the business normal effect, that means, let me say, a normalisation of that spiking impact in terms of networking capital in our FFO.
Monica Girardi
Okay, we have a couple of questions on the financial strategy. Recently there have been a number of press articles about the fact that the sustainability link bonds with observation data at year end could miss their targets of emission reduction. Could you provide some update?
Stefano De Angelis
Let me say, generally speaking, talking about, and again, this will be part in two weeks of a deeper analysis presentation. In terms of, let me say, issue of bonds, we do not expect to have any change. I think that this was another question that we are now looking at. There is no reason to change the way in which we are accessing the capital market, that for us is becoming a mainstream, but also for many issues and investors.
Regarding the emission, it’s clear for everybody that what happened along 2022-2023 was an extraordinary situation. As everybody knows, we were part of a mandatory behaviour in terms of energy production, in terms of coal, also inventories. So this clearly affected our emission. We don’t want to escape by any, let me say, financial impact in terms of bonds. What we will do, we will do the proper calculation, we will do the proper normalisation, but if there is no waiver, we will not challenge, we will not fight the waivers if it is not possible. We do our duty to help the country, to work for the independency and to sustain the energy market in that period. If this had an impact in terms of bond regulation, we will face this impact. We don’t want to escape from this, but again, let us do our work on making the proper calculation, but again, we will not escape from any discussion, open discussion about this topic.
Monica Girardi
I think we covered most of the questions we received, if not all of them. I just need to pass to you one question which is probably ending swiftly the call, which is, may we ask whether the dividend policy will also be addressed, updated, guided at the CMD, please? Sorry? May I ask whether the dividend…
Stefano De Angelis
Sorry, sorry. What, what, no, again.
Monica Girardi
May I ask whether the dividend policy will also be addressed, updated, guided at the CMD?
Stefano De Angelis
It will be for sure guided, updated, who knows?
Monica Girardi
Okay, I think this question is closing officially the call. For any unanswered questions that I may have missed, we will follow up. Our team is as always at your disposal. Thank you so much.
Stefano De Angelis
Thank you, bye-bye. See you in two weeks.
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