Enel Spa Unsp/Adr

Good day and thank you for standing by. Welcome to NL9 Month 2022 Resorts Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Monica Joadi. Please go ahead.

Good evening, ladies and gentlemen. Welcome to our nine-month 2022 results presentation, which will be hosted by our CFO, Alberto De Paoli. In the presentation, Alberto will provide you some highlights of the period, and we walk you through the operational and financial performance for the group. 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 Alberto.

Thank you, Monica. Good evening, everybody. Let's start with the highlight of the period. I'm on page number one. During these first nine months, the operating evolution of the business grew strongly. Renewable development continued to be robust. Volumes in the free market segment have grown significantly and investments in networks increased by 15% year on year. The challenging market context created by the energy crisis in Europe prolonged and amplified its magnitude along quarters. This, coupled with the measures implemented by the governments, which weighted increasingly in our working capital. Notwithstanding all of this, our strong liquidity was a solid support to our business and allowed us to face the market disruptions observed in the last few months. Disposal progressed as planned. aiming at simplifying, crystallizing value and improving the risk return profile of our asset base. Given the year-to-date performance of Latam and Iberia, we have good visibility on EBITDA trajectory for the full year and we can confirm our EBITDA target ranging between 19 and 9.6 billion euros. On the bottom line, The combination of higher contribution of our subsidiaries vis-à-vis the domestic market and a higher bed debt driven by a two times turnover increase will result in a moderating earnings growth compared to our original expectations. Additionally, we see a mounting risk associated with windfall taxes in Spain that we prudently want to reflect in our guidance. The business evolution and all the managerial actions that we will activate in the last quarter supports our confidence in the net debt target for full year, which we see landing between 58 and 62 billion euros. Worth to highlight that changes in guidance do not impact the fixed DPS of 40 cents for 2022. Now in the next slide, I drive into some business development indicators for the nine months and i'm on page number two in renewable we built 2.1 gigawatts here to date resulting in an increase of 4.8 gigawatts compared to september 2021 in customers Electricity sold in the free market grew by 14% versus previous year as a result of a larger customer base and a higher unitary consumption, as I will detail later in the presentation. On networks, investments reached almost 4 billion euros, 40% of the group's total capital. We continue investing to consolidate further progress in the quality of the service delivered to our clients in infrastructure that are protected by regulatory frameworks that recognize automatically an adjustment for CPI and reflect rising rates. The evolution of our business, considered with an unprecedented energy crisis, which triggered government's intervention waging on our financials as represented now on slide number three. As you can see from the chart, in Europe, governments intervened on tariffs and fiscal matters over the past months, adopting measures which were detrimental to our financials. All these measures had a limited impact on profit and loss, but have affected progressively our net debts in 2021 and 2022, accruing, as of September, a total of around 8 billion euros in items that are pending to be collected from governments or public entities in Italy, in Spain and in Romania. These items have grown 5 billion euros since December last year. Over the third quarter, existing measures have been extended and new ones introduced for additional 3 billion euros, deteriorating the group's working capital, as you will see later in the presentation. Government's intervention overlapped with extreme energy trends, and I am now on page number 4. Looking at Italy, strong operating dynamics bode extremely well for our future as we added 1.5 million customers year-to-date. Volume sold increased more than 41% on a combination of higher unitary consumption and lower level of churn. However, extreme trends this year affected our short-term results, in particular the unprecedented low level of hydro production, which remained below the historical average in each quarter, higher energy volumes absorbed by our customers, and low hydro created an unexpected open position, which accounted for a total of nine terawatt hour in the nine months. The average pool prices increased almost three times versus last year, resulting into materially higher costs to cover the open position. Under the normal conditions, the growth of retail fundamentals would have returned 1.7 billion euros on EBITDA and 1.2 billion euros on net income. Then, on slide number five, we talk about the strong liquidity position that helped us in navigating these turbulent weathers As you can see, this 25 billion euros of liquidity, of which almost 7 billion in cash and the remaining 18 billion in readily available committed credit lines. Notwithstanding the extremely volatile commodities environment, we have been able to manage the situation. We consider the group's liquidity position as more than satisfactory to face the turbulences we are living And we don't see any short-term risks that might impact the solidity of our balance sheet. We have progress in streamlining our asset base. On slide number six, you see summarized what we have been done so far. We have, as of today, executed and are in the process of completing several deals. The disposal of our stake in Enervasha had an impact in the nine-month net debt of around €500 million due to the deconsolidation of Russian debt, while the equity value of around €140 million has been cashed in in early October. In July, we announced the sale of the transmission activities in Chile, which is expected to be closed by the end of the year and will generate a cash of around 1.3 billion dollars. In September, we signed a deal for the sale of Goiais, a rural network in Brazil, which was no more fitting with our strategy. to grow in highly urbanized areas and fully seize the opportunity arising from the group's integrated footprint in the context of the energy transition. The total consideration will amount at around $1.4 billion. The closing is expected by year-end. We dispose thereafter of thermal plants in Brazil for around $100 million. And the disposal plan announced so far in total will impact positively 2022 net debt for around 3.5 billion euros, out of which only 500 are visible in the third quarter of the year. In the next months, we will continue to focus on the creation of a much skimper group, exiting from non-core business and geographies and improving the risk-return profile of our portfolio of assets. And now, before diving into economic and financial results, let's have a look at the last transaction on the stewardship business model. I'm on page number seven. A couple of weeks ago, we have announced the sale of a 50% stake of grid expertise. Our new company focused on the acceleration of the digital transformation of power grids through advanced network technologies and solutions offered to DSOs worldwide. The agreement valorized the company at 625 million euros for the 100% enterprise value, a value that could reach up to 1 billion based on potential deferred payments included in the agreement. CVC will pay a total consideration of approximately 300 million euros for the 50% stake. And the overall transaction is expected to generate a positive impact in the EBITDA group, in the end, the group's EBITDA of approximately 500 million euros and the positive effect on the group's consolidated net debt of around 300 million euros. The closing of the sale is expected by the end of 2022. And now we move to the economic results on slide number nine. starting with the EBITDA evolution. Despite a strong volatility, our operating deployments upset the challenging environment and ordinary EBITDA came in 1% up versus 2021 if we exclude around 200 million of non-recording items recorded last year. In the first nine months, the main dynamics observed can be summarized as follows. Networks came in almost flat year on year, as tariff indexation in LATAM and efficiencies offset the work reset in Italy and the government's measures implemented in Romania, which we expect to recover by the year end in light of the agreement reached a few days ago with the regulator in Romania. The management of the integrated margin was negative for around 200 million euros with generation contributing positively for around 900 million euros, customer segment dropping around 2 billion euros on the back of the dynamics already anticipated in Italy and that I will detail later on and portfolio optimization activities contributed positively for 1 billion euros, almost entirely absorbing the negative effect recorded on customer segment. Finally, the stewardship model added 330 million euros, mainly through EUFINET and MONI disposal. I will now dive into the EBITDA evolution for networks on slide number 10. Ordinary EBITDA stood at 5.3 billion, decreasing by 3% versus previous year. Going in detail by country, Italy decreased around 80 million euros due to the negative effect associated with the last year regulatory review, partially offset by efficiencies recorded in the period. decreased by around 100 million euros on lower tariff and increase in fixed cost. The weak performance in Romania is related to the delay in the recognition of the higher cost due to price spike incurred to cover network losses. A few days ago, at Sente, we reached an agreement with the regulator And starting from the next quarter, we can fully book the differences between the realized cost and the recognized cost for 2022. Latin American countries, net of Argentina performed extremely well, contributing for around 350 million euros, mainly thanks to tariff indexation for 280, almost entirely in Brazil. Currency devaluation contributing for around 160 and efficiencies for other 80. These positives have been only partially offset by impact of CPI increase and lower margin associated with the IFRS 12 and development OPEX in Brazil. Argentina continues to show no sign of improvement, recording a negative year-on-year results of more than 60 million euros once again lacking the overview recognition of the investments in tariff. And finally, EBITDA evolution has been negatively impacted by a negative non-recurring for around 180 million in Iberia. Moving into the EBITDA evolution of global power generation and an elite global retail, we are now on slide number 11, where you can see that in nine months, Ordinary EBITDA lands at 7.2 billion euros flat year on year, excluding 200 million of non-recurring recorded in 2021. I will now dive into the dynamics observed in each geographies. As you can see from the chart, Italy suffered the most from energy tensions, with EBITDA decreasing more than 1.3 billion euros on the back of a contraction of the integrated margin for around 1.7 billion, originated by a widening of imposition covered by expensive sources. And I will detail later on in the next chart. And rest of Europe down of 120 million due to the impact associated with the retail price cap introduced in Romania. In Iberia, integrated margin management contributed positively for 740 million euros, as the net effect of increasing generation margin and lower marginality on the retail business, impacted by increasing sourcing costs, has been positive for around 250 million euros. Additionally, portfolio optimization added around 470 million euros. In North Africa, In Latin America, the development of renewables added more than 300 million, of which 150 in the US, and FX contributed positively for around 180. To conclude, the non-recurring items recorded in 2022 amount to 150 million euros. Now, let's have a focus on the operating dynamics that affected our margins in Italy during the third quarter. I'm on page number 12. In the third quarter, we expected to sell around 10 terawatt hours to clients contracted on fixed price. Our expectations were based on a normalized temperature and a churn rate almost in line with the semester. The summer and September proved to be much hotter than expected, and clients' churn rates went further down, taking advantage of our favorable commercial offerings. All this created around 2 TWh of unexpected open position that pushed down our margins in retail versus the expectation that we had for the quarter. I am now on slide number 13. where you can see that Q3 was expected to generate around 400 million positive contribution to EBITDA, thanks to sales to customers with fixed price contrast of the already said 10 terawatt hours, repricing activities, driving revenues up by 20% versus H1, and a full hedging of expected cost for the 10 terawatt hour set. We secured the repricing in line with expectations, but the other dynamics of the quarter yielded instead a negative impact of 700 million euros on margin due to the open position of only two terawatt hours that we had to hedge at a price almost of 450 euros in the quarter. Eventually, such deviation resulted in around 300 million of EBITDA reduction during the last three months. Let's now see how the evolution EBITDA will play out in the last quarter of the year. As you can see from the chart, we are going to confirm the guidance for the EBITDA 2022 built the way you see. We started from the ordinary EBITDA of the nine months, the 12.7. In the last quarter of the year, we expect network to contribute for around 2.5 billion euros, thanks to the positive regulatory adjustment in Romania and an additional benefit from LATAM countries. Generation and trading to range between 2.8 and 3.1 billion supported by around 300 million renewables growth, a ranging contribution of our conventional generation and trading activities, depending on the volatile evolution of the commodities market and between 300 and 500 million negative impact from further contraction in hydro production vis-à-vis last year. Global customers is said to contribute 500 to 800 million euros on the back of the growth in Enel X, the expected reduction of sourcing costs in Romania, partially compensated from the lower EBITDA contribution in Italy. The range shown in the slide is linked to the evolution of consumption in the last quarter. Finally, our stewardship business model will contribute for around 500 million euros, thanks to the already said Grisberg-Pease deal announced in October. All these elements allow us to confirm our ordinary EBITDA guidance for 2022, despite the extremely volatile environment we are operating in. Let's now continue the analysis of the results of the nine months. I'm now on slide number 15, where we show the evolution of earnings. Ordinary group net income came in at 3 billion euros. On the back of the dynamics commented the EBITDA level and higher DNA recorded in the period, only partially offset by lower taxes. DNA are up year-on-year by 600 million euros as a consequence of 400 million amortization on higher investments deployed and effects impact. 200 million euros, bad debt accruals, mainly in Italy, up on higher turnover in the period. Net financial charges marked an overall net income improvement of around 100 million euros, thanks to the accelerated debt refinancing carried out during the last 12 months, which brought down cost of debt by 20 basis points versus September 2021. Income taxes decreased by around 400 million euros, mainly driven by the lower economic results and the adjustments recorded in previous year on the fair taxes that more than offset the negative one-off accounted in Italy for the legislative decree on energy bills rise that worth 70 million euros. Higher minorities' interest due to the higher contribution from our subsidiaries versus the result of Italian entities resulted in a lower net income for around 100 million euros. Well, despite an EBITDA that we see still in line with group here and targets, its composition is profoundly different from expectations and triggers an adjustment to the bottom line guidance as showed in slide 16. The dynamics explained at EBITDA level lead to a different geographical mix in our earnings with a different contribution to the bottom line. DNA are expected to be around $200 million higher than in the plan on the back of the higher debt driven by higher revenues on an unchanged unpaid rate. Worth to highlight that we took a prudent approach in our revised estimates for the full year as we added also an hypothesis of the possible new taxation in Spain on which discussions are ongoing and there is no clarity if it is approved and on the final outcome. We consider this proposed taxation to be illegitimate and contrary to the provisions of the European Community Regulation and we are monitoring the ongoing parliamentary process with the aim to assess litigation actions if and when the regulation is approved. Considering these moving parts and in light of our cautionary approach, we set a new range for our ordinary net income between 5 and 5.3 billion euros. Let's now move to the cash flow on slide 18. Group FFO stood at 1.1 billion euros. Similarly to what happened in the first part of the year, the group's cash production was affected by a severe swing in the working capital for 8.6 billion euros associated with government measures and the current energy market context. Deep diving into the working capital, the dynamics are as follows. 5 billion euros of government and regulatory measures accounting for about 8 billion euros in total on our debt figure as analyzed on slide number three. Compared to first semester, this item increased 2.8 billion euros as it includes also the mandatory coal and gas stocks, the cap on gas prices in Iberia and the recognition of the tariff equalization mechanism in Italy. 3.7 billion impact from the energy market context, which is up by 2.3 billion versus first half due to the increase in the total turnover due to a combination of higher volumes sold and the price dynamics observed during summer. Then 1.1 billion of capex seasonality flat versus the first half that will be fully reabsorbed by year-end in line with historical trend. The remaining positive 1.2 billion euros impact is driven by the managerial actions implemented in the third quarter to tackle all the previously mentioned negative dynamics. Worth to highlight that net of government intervention and electricity prices dynamic, the evolution of our working capital would have been completely in line with what can be considered a normalized and recurrent business trend. To year end, we will maintain our focus on the implementation of all the managerial actions that allow us to optimize the working capital movements and we will continue to closely monitoring the external context in order to manage these dynamics as effectively as we can. Finally, income taxes and financial charges paid accounted for 3.2 billion, decreasing year on year, mainly thanks to the liability management program executed in 2021. Let's now take a look at net debt on slide number 19. Actual net debt stood at 69.7 billion euros. The main operating moving parts described in the chart are the following. The positive 1.1 billion FFO already commented. Investment for 9.4 billion euros up 17% year on year. Dividend paid for 4.8 billion euros. 0.7 associated with our disposal program. mainly disposal and acquisition program, mainly related to the consolidation of the ERG renewable assets and the debt deconsolidation of Leonard Russia, and around 4.1 billion euros linked to currencies revaluation and new leasing. I would like to remind you that our net debt figure must be adjusted for around 3 billion euros of accounting effects related to FX hedging. And additionally, it does not include the 3 billion euros positive impact associated with the disposal transaction in Chile and Brazil that we have already announced and that will be cashed in by the year end. Net of currencies and disposal operating net debt would have been equal to 64 billion euros and out of the impact of the working capital would be by far less than 60. In the next slide, I will guide you through the evolution of net debt at the end of the year. Now I'm on page number 20. Starting from the net debt figure at September, we expect the following moving parts. positive FFO contribution expected in the 8-10 range, driven by the dynamics on EBITDA already commented and working capital evolution. In particular, on the net working capital, we expect to recover between 5.5 and 7.5 billion euros, mainly thanks to the managerial actions we will continue to implement and the absorption of the 9 months negative dynamics associated with the business seasonality. This allows us to improve the EBITDA conversion into FFO in the last quarter of the year. We will count for additional capitals of around 5 billion euros and we are projecting further active portfolio management up to 2 billion euros, reaching around 5 billion euros, including the transaction in Chile and in Brazil already said. I want to stress here that we will also work to neutralize the impact on our net debt of currencies movements to tackle the volatility induced by the pure accounting of currencies evaluation and strengthening At the end of the year, therefore, we see a range of net debt between 58 and 62 billion euros, depending on the group cash flow generation and the timing of the cash-in associated with the disposal still to be announced. And now, some closing remarks before the Q&A. The operating underlying of our business were extremely strong. and their evolution bodes well to the achievement of medium and long-term objectives. The focus for the last quarter of the year will be on cash generation and balance sheet strengthening, as we will implement all the managerial action needed in order to reinforce and restore the recurring EBITDA conversions into FFO and bring the level of net debt in line with the target set. We will continue to progress in creating a much simpler group, focusing on activities only in countries and businesses that fit with our strategy. This will allow us to unlock additional resources, enhance the profitability. Despite the revision of the net income target for the full year, our transparent and simple dividend policy remains unchanged. Therefore, we confirm the fixed DPS of 40 cents for 2022. On November 22, we will present our 2023-2025 strategic plan. We look forward to seeing you there. I think we can now open the Q&A session. Monica.