Enel Spa Unsp/Adr

I would now like to hand the conference over to our speaker today, Monica Girardi, Head of Group Open Vector Relations. Please go ahead. Thank you, and good evening to all of the people connected. Welcome to the nine-month 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.

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 a 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 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 2 with the main business KPIs. All our operating performance metrics continue to improve year on year. Production from the renewable is up by 12 TWh, driven by recovery in hydroavailability and 4 GW 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, REB per grid customers reached around €650 per client, up by 6% versus previous year. The investments that food our asset base are analyzed in the next slide. The investments 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 includes 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 Greece, 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 four with the main drivers of the EBITDA. Ordinary EBITDA market the sound 29% growth 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 euros 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 five. 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 regarded a negative change year-on-year of around 200 million, as I explained also commenting the previous slide. Let's now move on page 6, talking about the grid ABTDA performance that stood at 6.1 euro billion ABTDA, up by 15% versus previous year. In Europe, this EBITDA reached around 4.4 billion euro. In detail, in Italy, the performance was supported by higher tariff mainly associated with RAP growth and indexation to the CPI. In Spain, EBITDA grew by €200 million thanks to the update of distribution remuneration for the 2017-2019 period, which generated a negative impact in 2022. Finally, as part of this growth, we accounted for the recognition of the higher costs recorded last year in Romania to cover network losses. Excluding this item, Romania's grids proved 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, and Sao Paulo, and higher volumes distributed that more than compensated the negative perimeter effect. On a life-for-life basis, the growth of the BDA in La Dama would have been around 370 euro 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 euro, increasing more than 65% versus last year, driven by the strong EBITDA performance already commented. DNA 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 a 25% unedged 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 nine. Funds from operations stood at 10.7 euro billion, showing a sound 9.5 euro 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 represents a regular high in absolute terms. Worth to highlight that working capital is in line with the historical evolution and recovered 7 billion euros 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 that 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 euro. while financial charges paid in Q3 stood at €0.9 billion, also in line with the third quarter of last year. I'm now moving on to 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 operation 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 a FFO after cap positive for €1.5 billion. Total dividends amounted to €5.1 billion, as in July INEL SPA 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 covers almost in full both capex and dividend. This is an equilibrium that we aim at maintaining structurally going forward. Adding the expended cash in from deals signed in 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 positively our net financial position for around €6.5 billion. Deals 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 euro billion just to be clear. In the nine months the ABTDA contribution associated with the asset disposed or to be disposed totaled around 800 milio as you can see in the 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 ABTDA is set to be at €21.5-22.5 billion, while the net income target moved to €6.4-6.7 billion. These upgraded targets are a function of a stronger operating performance in Italy, where the retail margin improved significantly and an higher contribution of the network 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 a clean baseline for setting the group's life-or-life performance into 2024. On the back of this strong and improved operating performance, we can confirm a NAPDAT-BTDA 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 conclusions. 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.

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 to the guidance. 2023 upgrade guidance on EBITDA and net income. Can you walk us through the moving parts to reach full-year targets?

Well, considering the performance accrued in the first nine months, as shown in the – sorry, sorry for the microphone. As you can see in the slide, considering the performance accruing the first nine months and the quarterly progression, we expect an EBITDA in the last quarter of, let's say, at least 5 billion euros 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 aspect, 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 point that may play out differently, for example, hydro and regulatory or fiscal intervention from governments. We know that we are still walking through a very volatile environment with some political and macro issues still very relevant and pending, so it's in our duty to take also into account these variables setting our guidance.

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?

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 stewardship and so on. So I think that now we have a better view, a better forecast looking at the resilient and consistent performance of the 23 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.

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 debt 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.

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 ABTDA net income approach. 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 the regulatory process. 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 perform an adept 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.

I have 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?

It refers to the EBITDA? No, just a small part. Honestly, as I said before, if you look at the... The disposal, you have into your accounts the impact of Romania, and we have put the Romania BTDA impact in the presentation. Regarding Sierra, this was not, what is important, this was not shared with the market and this is not a compliance last year, but clearly the impact of the disposal plan announced last year And the related BTDA impact was not all happening starting from the 1st of January 2023. So, for example, CRA was exiting the group BTDA that was part of the BTDA 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 cashing. So what is important is that you have to consider that giving a close answer is not a huge portion of the BDA 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 perimeter just in the final part of the year. I don't know if it is clear, but Monica can...

Follow up. What is the expected level? I come back to simple probably questions. What is the expected level of CapEx for 2023?

Let me say something around 13 billion. 13 billion. Don't ask me about the impact of the disposed asset. No, there is nothing about that. It's negligible. It's negligible.

Can you elaborate on financial expenses for the nine months and the projected trajectory to year end?

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...

I think we answered all of the questions regarding the guidance, if I'm not wrong, otherwise we'll come back later. I'm moving to 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?

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 of the profit arising from renewables and also from when we refer to the customer base.

Italian EBDA. What is the expected EBDA for full year for the renewables? Do you see the possibility of a return of the clawback mechanism?

Very good question. 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 close-back. clearly in the nine months that was accounted for almost 400 million euro in the nine months under percent related to the first part of the year in this moment not having a regulation that has cost for accounting or booking for the 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.

An analyst is chasing another question on guidance, which I was sleeping 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?

It depends on the mix of the of the business, not just having to account the historical performance. Lili, I understand your question that 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 taking into account that this is the result post minorities so you have also to take account into minorities and then you have to to take into account the different level of probability that we are, let me say, associating, for example, the political scenario and the decision that can be related. By the way, let me say, if you look at the ratio, and Monica can help me because it's part of the story of the industry, the ratio I think that in the past was in the range of 30 to 40%, so we are not so far from the historical average.

Okay, I think that the, where I was, retail, so a number of questions about retail, increasing competition, how churn rate and bad debt progressing, which level you forecast for year end, for both?

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 in terms of churn is best in class. So we have an impact, our impact was the impact of an industry, it's not a company specific issue. Our plan, again, without anticipating anything, 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 required 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 followed the industry Our response will be part of the Capital Market Day strategy and will be announced in just two weeks.

Could you provide an update on your expectations about power market liberalization in Italy?

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 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 liberalized. we have still this part of the consumer market that has to be liberalized. What we are expecting now is that the liberalization 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... Safeguarded. Safeguarded. I don't know if it exists regulatory speaking 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 liberalization. But we expect this process to be confirmed along the next two quarters.

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.

No, not because of the regulation. What is important is also to understand why there was this different behavior 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. The consumer response 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 did not happen, but was less strong than in Italy. But again, coming to the stride question, there is no impact for the structure of the regulation.

Okay, I think we have three questions, more on the financial slash FFO. Networking capital, can you provide some details on current levels of working capital and expectation into year-end?

No, as I said before, we expect a normalization of the working capital. This is because what was the main topic that was, let me say, impacting the 2022-2023 change in net working capital that was regulatory-driven is now being completely reabsorbed. So we expect, let me say, the... let me say, the business normal effect, that means, let me say, a normalization of that spiking impact in terms of networking capital in our FFO.

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-linked bonds with observation data at year-end could miss their targets of emission reduction. Could you provide some update?

Let me say, generally speaking, talking about, and again, this will be part in two weeks of a different... 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 the receipt. 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 The mission, it's clear for everybody that what happened along 2022-2023 was an extraordinary situation. As everybody knows, we were part of a mandatory behavior 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 normalization, 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 doing our work on making the proper calculation, but again we will not escape from any discussion, open discussion about this topic.

I think we cover 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... May I ask whether the dividend policy will also be addressed, updated, guided at the CMB?

It will be for sure guided, updated, who knows.

Okay, I think this question is closing officially the call. For any unanswered questions that I might have missed, we will follow up. Our team is, as always, at your disposal. Thank you so much.

Thank you. Bye-bye. See you in two weeks.