Enel Spa Unsp/Adr

Ladies and gentlemen, thank you for standing by, and welcome to the now nine-month 2020 results presentation. At this time, all participants are in a listen-only mode, and I must advise you the conference is being recorded. I would now like to hand to your first speaker today, Monica Girardi, Head of Investor Relations. Please go ahead.

Good evening, ladies and gentlemen. I'm Monica Girardi, Head of Group Investor Relations. A warm welcome to the nine-month 2020 results presentation, which will be hosted by our CFO, Alberto De Paoli. In the presentation, we will provide some highlights of the period, and Alberto will take you through the operational and financial performance for the group. Following the presentation, we will have the usual Q&A session. In line with what we have done recently, we ask those connected to the webcast to send questions only via email at investor.relations at enel.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 Alberto.

Thank you, Monica. Good evening, everybody. Now, let's start with the highlights of the period. I am on page number one. As you can see from the chart, at the end of September, net ordinary income is up by 9%, demonstrating the resilience of our business model, even against sudden disruptions. The distressed environment experienced in the first six months of the year has extended over the third quarter, where some recovery on the demand side came together with further weaknesses on currencies. I will detail this trend over the next slides. Despite this unprecedented scenario, the group has recorded a solid performance. Our strategy was not to put on hold and continue to deliver, and we made significant progresses on decarbonization, Since the beginning of the year, we commissioned 1.7 GW of new renewable capacity, reaching around 4 GW of renewable built capacity over the last 12 months. Simplification of the group structure accelerated further, with the completion of the second share swap in the Americas, through which we reached 65% shareholding in the company, as well as with the launch of the process aimed at merging EGP LATAM assets in Enel America's perimeter. We confirm 2020 targets, which I remind you have been set at around 18 billion for EBITDA and in the range of 5.2 billion for 2020 for net ordinary income, which therefore will grow mid-high single digit versus 2019. Let's now start by analyzing the evolution of the scenario in the third quarter. I am on page number two. As commented during previous releases, this unprecedented global emergency translated into a strong deterioration of market context impacting negatively demand and triggering a severe devaluation of currencies. During the third quarter, FX still represented the main headwind to our results. Latam currencies down on average 20% in the quarter alone, with Brazilian REI as one of the most hit. Electricity demand has shown a progressive recovery across all the countries of presence, even if still shows negative trends compared to the previous year. I will show you in the next slide the impact on business headwinds and now we are on page number three. The group's EBITDA was mainly affected by the following negative impacts. 650 million euros from the devaluation of currencies and hyperinflation in Argentina. 530 million associated with COVID-19 dynamics related to the sharp contraction in volumes for 440 million euros impacting retail activities worldwide and networks in LATAM. Discussion here with regulator ongoing to find offsetting mechanism to this situation. And then other dynamics mainly associated with dining processes impacting for around 90 million euros. Net of both COVID-19 and FX impact that is derived by the COVID impact would have been up by 8% year-on-year. Moving down the profit and loss, we recorded a negative impact on DNA worth around 180 million euros associated with the increase in bad debt provisioning. On the group ordinary net income, the COVID-19 crisis translated into around a burden of 300 million euros topped by a negative FX impact of around 130 million euros. Net of both COVID-19 impact and FX net income would have been up by around 23%. Now, distending the extraordinary environment, we are fueling our growth ambitions and I will show you in the next slide, in slide number four, things related to the deployment of CAPEX. As you can see, in the nine months, CAPEX stood at 6.6 billion euros in line with previous year. Net of currency devaluation and inflation, CAPEX would have increased by 7% in real terms. signaling the commitment and the capability of the company to deploy in investments delivering on industrial targets. Around 90% of total CapEx was devoted to renewables and infrastructure and networks in the accelerated effort to digitalize grids and to decarbonize our generation fleet. From a geographical perspective, Gross capex was deployed mainly in South America, Italy and North America. Development capex representing more than 60% of total investments reached €4 billion slightly higher than last year. Out of the total amount around 70% was allocated to renewables mainly in North America and Latin America and 25% has been invested in infrastructure and networks. Looking at the 2022 period, around 85% of asset development capex is already addressed, providing high visibility on industrial target for the planned period. Focusing on the progress we made in renewable growth, now we move to energy and green power on slide number five. In the first nine months of the year, as said, we have built around 1.7 gigawatts of new renewable capacity with 900 added only in the third quarter of 2020, reaching around 4.1 gigawatts of renewable built over the last 12 months and confirming the capability of the group to pursue the growth trajectory set even in difficult context. Renewable production increased by 6% versus last year, while production from conventional generation sources decreased by almost 30% as a consequence of the cold phase-out process we are putting in place. Worth to remember that following a sharp acceleration in cold closures, the group cold capacity is now below 10 gigawatts for the first time in nano history. As a consequence of the shift toward renewables, the share of emissions-free production increased to 65%, 10 percentage points higher than the same period of last year. Finally, the future development of new renewable capacity is supported by a vast pipeline of around 110 gigawatts In the third quarter, we added seven gigawatts to the mature phase, reaching 51 gigawatts at the end of the nine months. Now, before going into details on the financial performance, let me briefly summarize our progress on group simplification on slide number six. In September 2020, the Board of Directors of Enel Americas announced the launch of a related party transaction for the merger of Enel Green Power assets in Latin America in Enel Americas. The company has also appointed the independent appraisers, which by mid-November will present the third-party assessment of the fair value of Enel Green Power assets. The merger, I recall you, is subject to the elimination of the 65% shareholding limit established by the bylaws which will be voted together with the whole transaction during the EGM expected to be held at the end of December. Thanks to this merger, Endel America Structure will be aligned to the rest of the other subsidiaries of the Group This will allow to maximize synergies and to reduce operational and financial risks. According to calendar, if approved by the EGM called by the Americas, the transaction should be completed by the second quarter 2021. Let's now have a look to the financials of the first nine months of the year, and we are on slide number eight. EBITDA set stood at 13.1 billion euros in line versus previous year. Group net ordinary income increased to 3.6 billion euros, 9% higher versus the same period of last year. FFO reached 6.6 billion euros, down 18% versus last year. The delta versus the previous year is still negative, but FFO has shown recovery signs compared to first half, mainly thanks to improvements in working capital dynamics in line with what anticipated during the first half release. And finally, group net debt stood at 49 billion, increasing by 8% versus year-end 2019. Before going through the details of the financial performance of each division, let me comment Group EBITDA on slide number 9. As already commented, EBITDA at 13.1 billion show a solid improvement of the underlying operating performance despite the adverse effects devaluation and hyperinflation in LATAM EBITDA would have increased by 4%. Resiliency of our European networks has been supported by solid regulatory frameworks while in LATAM volumes dynamics represented a hit in operating performance. On generation and retail, the new capacity deployed has driven the improvement in the operating performance, while the integrated management of margins continue to project the economic results against the market fluctuations. Now we will move into a deeper analysis on the financial performance. Now on slide number 10, we will start from the global power generation. Here in the slide, We take a look at the performance of the global power generation division, while in the following two slides, we will go more in detail through the performance of energy and power and conventional generation. Global power generation ordinary EBITDA stood at 5.1 billion euros, 10% higher versus the same period of the last year. Excluding negative impact of FX, by 17%. The unitary gross margin increased by 10% in the period. This improved profitability comes from a higher share of renewables in the mix compared to the year ago. Worth to remember that last year performance included around 100 million euros capital gain associated with the full consolidation of our North American asset as well as 160 million positive contribution associated with the early termination of a PPA contract in Chile. Furthermore, as already commented during the Q1 and first half result calls, the period has been positively impacted by a provision reversal in Spain for around 170 million euros. Now, for the next two slides, we focus on Enel Green Power and conventional generation, starting from page number 11 with Enel Green Power. We reported an ordinary EBITDA of 3.4 billion euros, or 3% higher versus last year. As mentioned in the previous slide, in 2019, we recorded a positive capital gain for a total amount of 180 million euros for both the North America capital gain and the early termination of PPA in Chile. None of these not recurring effects recorded in 2019 and the effects impact underlying EBITDA would have increased by 16%. This operating performance was mainly impacted by the following dynamics. A positive impact of around 250 million euros coming from the additional capacity installed in 2019. An increase of 160 million euros coming from an improving performance of hydro power plants roughly 75 million euros for higher prices, fully hedged for 2020 and 2019, and 20 million euros of efficiencies. The FX impact this year counts for 230 million euros of negative impact. Moving now to slide number 12, discuss about conventional generation and trading results. Ordinary EBITDA increased 27% and came at 1.7 billion. This positive performance has been led by trading activities which are up by more than 400 million euros. The main drivers of the improvement are the following. The short position in Spain that impacted positively for €150 million, the gas portfolio management that worth around €170 million, and then positive contribution for €80 million associated with the better performance of trading activities, mainly in Italy. On conventional generation, we remind you that the period has been positively impacted 70 million euros, while last year the ordinary EBITDA included the positive contribution associated with the early termination of a PPA in Chile for around 80 million euros. None of these one-off items the underlying operational performance decreased by 15%, or around 190 million euros. And this is mainly due around 150 million euros associated with lower volumes and regulation in the highlands, in the Spain highlands, and roughly 90 million euros of FX depreciation in Latam. Then we got positive items in terms of higher efficiencies in Italy and Spain for 60 million euros and other positive impact because of our hedging strategy for prices mainly in Italy. Now moving on page number 13, let's take a look on infrastructure and network results. Here, ordinary EBITDA stood at 5.8 billion euros, decreasing 6% versus last year. The European countries' EBITDA increased by 4% versus last year, demonstrating once again the resiliency of our European networks, which have been supported by a solid regulatory framework. In Latin America, the persisting contraction in volumes demand have had a negative impact on our operating performance of around 140 million euros made in Brazil. In October, there has been a recovery in the consumption, which has bounced back almost to the pre-crisis level on a year-on-year basis, mainly in Chile and Brazil. As said, in the first half result call, discussions with regulators are ongoing and we expect further to what has already been done to offset financial impact and action to be taken to offset the economical impact. In addition to the volumes impact, the main moving parts of the period have been the following. Around 180 million euros positive impact related to the investment Italy, a currency devaluation that impacted more than 300 million euros the business, and CPI on OPEX that had a negative impact of roughly 60 million euros. As commented in the previous result releases, the reversal of the provision in Spain impacted the ordinary EBITDA for around €180 million. Last year, we had €150 million positive impact coming from the regulatory settlement we made in Argentina. Now, moving on retail, on slide number 14, As you can see from numbers, despite the challenging environment, retail operations continue to work properly, adding 400,000 new customers in the liberalized market over the last 12 months. EBITDA declined by 4% year-on-year due to a sudden decline in volumes, particularly in the B2B segment. If we look closely at the free and regulated markets, free market EBITDA declined of around €120 million or 6% and this is mainly attributable to a temporary long position driven by a sharp contraction in volume in Italy and Spain of 5% and 11% respectively. In Italy EBITDA declined 4%, or around €60 million. And average unitary margins for both B2B and B2C segments were broadly unchanged. So the only relevant impact was on the long position to be sold to the market. And in Spain EBITDA declined by 18%, or more than €90 million. Romania had a different trend. Retail EBITDA increased by 35 million euros on better energy margins. The regulated market increased 2% or 10 million euros, and then we are still progressing on efficiencies in this field, and we recorded efficiencies in excess of 70 million euros, both in free and regulated market, mainly in Italy. Now, before going through the financial management section, let me comment on our progress in efficiencies on page 15. Looking at the chart, you see that over the period, operating expenses decreased by 7%, or more than 400 million euros, mainly driven by the efficiencies recorded in the period and FX effect. Efficiencies, which accounted for almost 200 million euros, have been registered mainly in retail and conventional generation, and we are well on track to reach our target 1.2 billion euros accumulated OPEX savings in the 2020-2022 period. Finally, we recall that, as already commented during the previous result pre-desis, the current nominal level of OPEX, which amounts to 5.4 billion, has been positively impacted also by the provisional release in Spain for around €350 million. Now, we have gone through business drivers, and now we can move to the financial management section, starting on slide number 16, where, as said, ordinary group net income came in at €3.6 billion or plus 9%. Now, in the next slide, we will show in detail the main items that have supported the growth in earnings during the first nine months of the year. And now we are on page 17. So, the rise in group net ordinary income is derived to lower DNA and financial expenses, better results from equity investments and the reduction in minorities' interest, which more than upset a higher tax rate. DNA slightly reduced versus last year as a consequence of lower depreciations in Italy, Iberia and Chile, thanks to cold impairment made in 2019, which more than upset the increase in bad debt accruals related to COVID-19. and investments deployed. The reduction in financial expenses is in line with our efforts to decrease the cost of debt, which declined by around 40 basis points versus the end of 2019. Taxes increased by around 130 million euros, mainly due to an increase in the handling before taxes, and because in 2019 we recognized some deferred tax assets in the USA, Argentina and Chile. Minorities decreased by 17%, reflecting operating dynamics mainly in Italy and Latin America, and an increase in Enel Americas and Enel Chile stakes. Moving now to cash flow, and I am on page number 18, FFO stands at 6.6 billion euros, partially recovering the negative effect related to COVID-19 dynamics recorded in the first half of 2020. In more details, the dynamic underlying the FFO compared to the previous year can be explained as follows. EBITDA almost in line with previous year, considering also the provision reversal in Spain, which has no cash impact. Change in provision increased by around 300 million euros, mainly due to the high and bad debt accruals to COVID-19. A negative 1.1 billion delta working capital versus previous year, mainly deriving from lockdowns in different countries, as already commented during the previous results call. And then lower financial charges paid consequence of lower cost of debt. On working capital dynamics, it is worth to highlight that out of the 2 billion extraordinary impact we have shown during the first half, 700 million have been already recovered. We will continue to focus on improving the working capital, monitoring and of COVID-19. At the end of the nine months, investments made were fully covered by the generation of operating cash in spite of the adverse scenario. Let's now take a look at the net debt on slide number 19. Net debt has stood at 49 billion euros, around 1.5 billion euros lower than the level of June. Changes are driven by neutral free cash flow, as commented, and dividends paid for 4.6 billion euros. Cash outflows related to the increase in the share of Enel Americas and Enel Chile through the equity swap. New hybrid bond emission accounted as equity. The valuation of local currencies against euro had a positive impact of around 1.7 billion euros, bringing debt at strike price level. We remind you that we have around 3.9 billion hybrids still fully accounted as debt, and we have recently launched a consent solicitation for the holders of 3 euro denomination in order to align the terms and condition of these bonds with those of perpetual hybrid bond issued last September and to account them as equity when the process will be finished. And now move to page 20 for closing remarks. As just pointed out, we have been experiencing an extreme and unforeseeable scenario with headwinds ranging from micro variables to operating dynamics. Despite this very challenging environment, we have been able to deliver a solid operating performance with a 9% growth in net ordinary income, demonstrating that our integrated business model is protecting results against sudden disruption. During the third quarter, we observed signs of recovery, particularly on volumes and prices. As expected, new renewable additions accelerated and last quarter deployment plans will support the achievement of the 3,000 megawatt target for the full year. The completion of the merger between Enel Green Power LATAM and Enel Americas will unlock new sources of value while reducing groups minorities. our dividend floor grants and high single-digit year-on-year growth and an attractive 5% dividend yield. Thank you for your attention and let's now open the Q&A session. Monica, the floor is yours.