Enel Spa Unsp/Adr

Good day and thank you for standing by. Welcome to the NL Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. I would now like to hand the conference over to your first speaker today, Monica Girardi. Please go ahead.

Thank you. Good evening to all the people connected. Welcome to the full year 2023 results presentation, which will be hosted by Enel CEO, Flavio Cattaneo, and the CFO, 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 enel.com. Before we start, let me remind you that media is listening to both the presentation and the Q&A. Thank you, and now let me hand over to the CEO.

Sorry, I started, but the phone closed. Thank you. Thank you. Sorry, sorry for this delay. Thank you, Monica. Welcome to everybody. Group delivery in 2023 was strong. All the targets revised upwards in November 2023 were met. Financial are up, WDGT are near, and we recorded an outstanding improvement of cash generation with FFO up more than 60%. The positive evolution of regulatory frameworks that I will delay later confirms the potential value creation of our capital allocation and provides support to the 2426 plan delivery. On the M&A side, as promised, we are close to complete the disposal plan announced with around 90% of the target already addressed. Lastly, in light of the strong results achieved, we'll propose to the next AGM a dividend per share of 43 cents. Let's now have a look at O23 delivery on the next slide. Last year, the group recorded an outstanding financial performance across all businesses. EBITDA reached $22 billion on the back of a less volatile environment that restored the full growth potential. Net income came in at $6.5 billion, increasing by a remarkable 20% versus 2022. FFO grew almost 6 million versus last year due to the EBITDA growth, the recovery in working capital, and the managerial action already implemented. Let's now have a look at the progresses of each key pillar of our strategy, starting with the capital allocation on the next slide. Our capital allocation was selective and maximized returns while minimized risk, as promised. Europe took the lion's share, absorbing 60% of our total capex, 20% more than last year. The shift into our capital allocation strategy was already visible in 2023. I want to highlight that more than 50% of our investment have been in assets with long-term stable and visible returns. Looking at the business KPIs, we delivered a sound growth in RAP in renewable capacity and repositioning into the B2C segment. Our advocacy will support investment in regulated activities in futures. As you know, we concentrate investment into stable, visible, and remunerative regulatory frameworks. End. geographies. Over the past couple of months, we recorded a notable improvement. Italy, the implementation of the ROS mechanism is progressing as planned and includes a specific remuneration for spatial project in resiliency. LATAM, we welcome constructive discussion around the regulatory frameworks and the clear rules for tariff adjustment will on one side restore business profitability and on the other allow for a recovery in asset value. In Spain, we'll continue to work to ensure the regulatory framework will be supported from investment into energy transition. In generation, we kicked off our partnership business model with a successful transaction. At the Capital Market Day, we announced three different business models, ownership, partnership, and stewardship. In the partnership business model, investments are shared with third parties to foster capacity growth and to accelerate paybacks and returns. The recent announced disposal of a 49% stake in BESS and the generation capacity project in Italy at around 1.1 billion is an example of our partnership create value for the growth. We inherited the project from the past M&A plan, but we revised the structures of the deal to maintain the control of the asset. Additionally, we close it at much better financial and contractual conditions. And more will come as we expect to create further value leveraging our portfolio rotation. Now we'll move to the second pillar of our action. Last year, we focused on capish generation benefits. FFO reached almost 15 billions on ABDA conversion closed to 70%. This result was possible due to a more effective and cost disciplined organization leading the ratio above 80% in the second half of 2023. The effort on cost reduction is visible across the board, and it's progressing better than expected. In just six months, we were able to save around $500 million compared to the 2023 budget and $200 million year-on-year, a pace of reduction in addressable cash costs in line with the target shown in November. The disposal plan is progressing at sound multiples. As you can see in this slide, is eighth slide. As you can see, we have now closed or announced around 90% of the planned M&A deals aimed at leveraging the group. The re-engineered disposal plan has been executed at strong multiples, and in some cases, even better than comparable transactions. The latest example of our over-delivery is the sale of a 90% stake in grids located in peripheral areas of Milan and Brescia, executed at rich multiples at Stefano. We'll detail later. From now on, we focus the M&A will be on portfolio optimization to unlock resources that can be deployed at higher levels. higher returns. Moving on the third pillar of our strategy, credit metrics improved strongly, even not considering in full the cash proceeds from the M&A activities. FFO on net debt increased 10 percentage points, landing at 25%, and net debt on EBITDA was well below three times, not yet included the cash in from announced disposal. The group not only achieved the target matrix, but is well on track on its leverage. On environmental sustainability, absolute emission continue to decrease versus the base year 2017, in line with our 2030 goal. Finally, Shareholder remunerations, line 10. The resiliency of our business model, the operating performance, and all the managerial action we put in place allowed us to deliver a sound result. We will therefore propose to the AGM a dividend per share of 43 cents after buying more 7% versus previous year and implying a 7% dividend yield at the current share price. Now I leave the floor to Stefano who will dive into the detail on the financial performance. Please, Stefano.

Thanks, Flavio. Good evening, everybody. In this slide, you see all the action we put in place since May last year. What we did in the second half of 2023 and what we will do in the near future fully supports our plan ambitions. But I'd like to add some other supportive pieces on this. As the CEO mentioned, our advocacy will result into constructive frameworks for grids. On the integrated margin, additional renewable capacity and medium and long-term edges on production will couple with commercial policies and bundle offering, improving customers' loyalties and securing margins. We will also benefit from the elimination of different extraordinary energy taxes in Europe introduced during the energy crisis. Lastly, we are working to implement additional and structural changes to further reduce areas of potential volatility, lowering our exposure to commodities and turning around unprofitable assets. From the next slide, I deep dive into financials evolution. I'm on page 13. In order to allow a clean comparison of the main drivers of growth, we have highlighted in 2022 EBITDA the contribution of disposals. On a clean base, EBITDA is up by 15% compared to last year. This operating growth resulted from a good performance of grids due to regulatory updates that more than offset the negative effect of the CPI on costs. and a strong increase in the integrated business whose positive performances came also on the back of a normalizing environment that drove the rebounding of the negative dynamics affecting last year, as I will also detail later. From a geographical perspective, European countries were almost 70% of the total EBITDA for the period. In the next slide, you can see the reconciliation between the ordinary EBITDA of 2023 and its baseline into 2024. This proposal announced so far that in part will be finalized in 2024 will lead to a rebase of our ordinary performance, whose impacts were anticipated at the capital market day in November. On a full year basis, disposal will carry a 1.3 euro billion life or life adjustment on 2023 ABTDA baseline and around half a billion on net income, mainly as a consequence of the deconsolidation of Peru and Romania. Worth to remind that in 2023, we account for the non-recurring impact from the gas arbitration that will not repeat itself this year. Both BTDA and net income baselines came in in line with what originally projected and presented last year. I will now move to the results analysis by business, starting from the grids. This performance, once excluding the impact of assets disposed in 2022, proved flattish year on year, with organic performance offsetting the stewardship contribution recorded in 2022. On top of the resilient performance of the business, it is worth mentioning that the 5% growth in REB The positive expected outcome of our continuous advocacy activity and our investment plan give high visibility to our ambition to expand the BTDA contribution of this business line. Let's now continue with the evolution of integrated business on slide 16. The integrated business is strongly hap year on year. Italy represents the bulk of this growth, driven by the rebound in the retail segment, the recovery of the hydro production, and power prices normalization. In Spain, the positive evolution of the retail business was offset by the negative performance of the gas business, including the one-off impact of the Qatar arbitration. The operating growth in the rest of the world was negative as the growth from renewable development and the hydro recovery in Chile were more than compensated by the one-off gain recorded last year from the one-off sale of gas contracts in Chile in the fourth quarter of 2022 and the negative comparison on tax partnership impacts in the U.S. Finally, stewardship contributed positively for around 200 million year-on-year. Focusing on future, I want to stress that the integrated business model will support margins across the plan in light with expectation. Looking at the different geographies, in Europe, 100% of the renewable production is backed by sales to the B2C and small, medium enterprises. And on top of this, pre-edges protect generation margins from backward trends. In countries outside Europe, renewables are fully covered by long-term PPAs, eliminating in full any risk associated with falling power prices. Additionally, in countries like Colombia and Chile, we may lever on our flexible capacity to reduce short-term volatility in the energy markets. I will now dive into the earnings evolution. Age 17. Ordinary group net income came in at 6.5 euro billion, increasing by more than 20% versus last year, driven by the ABTDA performance already commented. DNA slide increase versus 2022 reflected the organic expression of our asset base, while the net financial charges were impacted by an unfavorable interest rates environment which affected the 20% unedged portion of our debt. Income taxes increased on better economic results. And finally, the improved earning mix shift towards Europe contribute to the significant expansion of the post-minorities net results. Cash flow is on the next slide. increased almost $6 billion thanks to a strong improvement in cash generation in the second half of the year. Working capital and provisions impact, after having recovered in Q3 the negative impact of 2022, continue to improve also in Q4, totaling a positive contribution of $1.3 billion in the full year cash flow. Looking at the other moving parts, in the second half, cash out for taxes was in line with the scheduled tax due installments. It's worth to remind that, as commented during first half results, the first six months of 2022 included the lump sum payment of the solidarity contribution in Italy for around 0.6 billion. Finally, financial charges were affected by the increase in interest rates as already commented. Let's now move to net debt evolution on slide 19. Net debt came in just above $60 billion, with FFO generating the period that modern government investment needs. Active portfolio management landed at $3.5 billion on the back of the disposal of Romania and photovoltaic assets in Chile, as well as the sale of the 50% stake in greece i want to stress that on top of what already cashed in during 2023 at the beginning of january we announced the closing of the u.s solar and geothermal deal for approximately 300 million and we have already signed these were more than 6 billion that have still to be cashed in in 2024 taking into account the contribution of these deals the proforma net debt stood at around 53.5 billion, reaching already the target announced for the full year. And now I hand over to the CEO for his final remarks.

Thank you, Stefano. Well, the strong results achieved are clear evidence of our focus on improvements and delivery. Ongoing progressives on disposal are set to, first, simplify the group's asset base. Second, improve efficiency and accountability. Third, reduce risk. And lastly, support our goals of returns maximization. All these will be a net positive also for our shareholders. We reiterate our commitment on the target set during the capital market day, confirming our effort on the execution of the plan. The continued focus on cash generation and strict financial discipline point to potential upside in shareholder remuneration starting from 2024. Thank you for your attention, and let's now move to Q&A session.

Thank you. Thank you to all of the analysts that sent their questions over. Let me start with a few questions which might be answered by our CEO. A set of questions around the disposal activities. So the first one is about Peru. Currently you have not disclosed any update on the closing of the Peruvian asset. What is missing to get the final approval?

All the most relevant authorization has been obtained. I think you will shortly have an update on this. It's not long waiting for the fine and closing the deal.

The second question is about a recent deal. At the beginning of March, you have announced the sale of a distribution asset in north of Italy. What is the strategic rationale behind this transaction? Will you account the gain for the sale in the ordinary figure? And if that's the case, are you envisaging the payment of an extraordinary dividend?

Let me say, regarding the strategic rationale, in Capital Market Day, we have defined our attention in some case also in italy for uh in this case we have discussed about the swap no but the swap is in terms of uh cell the grid where is uh quite impossible obtain uh the new remuneration with the new incentive like in the north of italy where The grid is updated many times and invest in the south of Italy where we can obtain an external premium for residency. And this asset, this deal, it has been part of this strategy. Regarding the special dividend option, I don't think now is time to discuss about it. But what I can say is that the value of this transaction support, let me say, the total shareholder return. By the end of the year, as I said in the presentation, we think we have created The environment for the evolution of our dividend in line as promised in the capital market day, even starting from 2024.

Okay, we move to another question about recent transaction. What is the strategic driver of the sale of the battery storage system in Italy?

But this is an example where at the beginning, this transaction was into the list for the disposal and considered as stewardship. Indeed, the first idea was to sell 80% of that. And the first offer for 80% were 1 billion. That we have transformed this deal. In this case, we have changed the deal into partnership. In this case, we consolidated the deal even because it's very visible and regulated business, at least in the major part. and we have obtained more than the amount uh regarding to the 80 percent indeed we have obtained 1.1 billion for 49 percent while we are we were closed to sign for 80 percent of at 1 billion

Last one on the M&A side. Are you happy with the current portfolio or is there more asset rotation to be expected? What regions or activities would you consider for an asset rotation strategy?

We intend anyway to maximize returns on investment capital. We are happy. However, we remain mindful of market opportunities. Let me say we keep an eye on what we can be able to create value accretive for the group without jeopardizing our business profile. What we have done so far demonstrated that we can create value with asset rotation, and asset rotation is accretive only if investments are profitable. For this reason, in light of what we said in the capital market day, we fixed a minimum 300 basis point return over work calculated in each geographies and by technology.

We move to, we stay with the CEO for a question around the retail business. So tenders in Italy, what's the strategy behind the participation into the auctions? How much are you going to get in terms of marginality in light of the discount we had to pay to bid for those clients? And was the impact from tenders included in the plan or no? And will you be able to replace customers before the expiry of the transitionary contract?

Let me say, first of all, we have selected the areas based on the opportunity to increase our market share indeed we have see the area where we are not incumbent not only in power but also in gas and then i explain why potential value of the customers because we are selected areas also where there is a lower churn and higher income per capita and I just said for the 1st, 1, where we have. The areas where we are, where we is not the incumbent in a power, but is a night at the 2nd, the player in gas. There is many possibility for the cross selling. And this is the return of this cross-selling mitigate totally what we have spent for the acquired this client. We have improved our competitive positioning. Because we are acquiring a portfolio of customers with no acquisition cost and the price is lower than similar transactions in the market have done in the past, the other players. The discount will be monthly and it's not due if the customer moves out to the liberalized segment. While instead, if we buy from the other company, we pay upfront, even though the client choose other player. And I don't think this, I think that allow us to address our action in a good way. The impact is not relevant for this year, for our balance sheet for this year. And my expectation is a positive at the end of the story.

Okay, I think we ended with the question that had to be answered by our CEO. Thank you, Mr. Cattaneo. We move to a set of questions on financials. So moving into the CFO area, the first one is on the EBDA 23 that came in line with the midpoint of the guided range. Is this a consequence of the lost arbitration on LNG in Spain, or was there any different upside-down side versus expectations we set in November?

Yeah, let's say that it's correct to say that the main impact was the Qatar arbitration, then you have the volatile of this business with a lot of moving pieces. But to summarize, the impact is 100% related to the Qatar arbitration. So as we adjusted the 2023 baseline, you can see we have three

sum up the the qatar impact in order to reach our expected the starting point for for the cmd industrial plan a btda guidance second popular question is about the guidance for 24. so midpoint of the guidance is 22.4 billion euro can you walk us through the moving part to get there from full year 2023 yeah

I start from 2021 or 21.2. So this means that I'm not considering into the bridge, the Qatar, because it's already adjusted. Sorry, sorry. So taking the two different pieces of our business, we have the grids that have... as I underlined in my presentation, that have very positive growth looking forward. It's in the range of 400, 500 million net of FX or DEFX that we have included in our project and especially CPI. This gives us a high visibility because, as I stated before, the 5% growing grab, the rating in place, Tariff adjustment and the new ROS regulation are 100% in line with our industrial plan projection. So we have a very strong visibility on this piece of the expected growth. When moving into generation, we have 1.5 approximately expected growth. in terms of ABTDAE. This comes from basically Italy where we have a higher production because don't forget that in 2023 we have a first part of the year that was still strongly affected by the hydroavailability. So we have a normalization of the existing capacity that transform into production. We have the uh the code of the best that start to have a growth contribution in terms of the btda and we have a normalization of the pricing because in 2023 the renewable energy in italy that was still based on previous year contracts and also affected by the club back for the first six months were in the range of 60 euro per megawatt now as we say before we have already 100% pre-edge this energy and the related revenue to more than 100 euro. In America, we will benefit from an organic growth of capacity that is driven by the investment that we already booked in 2023 and that we are finalizing along with 2024. We have a positive contribution from the U.S. that that we take into account to the results of the turnaround plan that we have put in place there, and a better comparison also in order in terms of the tax partnership year on year impact on comparing 2024 to 2023. Finally, and I think this is important, especially in this market concept, in the retail segment in Italy, we were already projecting let me say a normalization in 2024 so we have a declining impact at group level of approximately half a billion because we were 100 percent aware that the level of margins that was generated along 2022 was not possible to be projected in the structural long term and so we have already included in our project let me say a normalization after the 20 dramatic 22 2022 result the external 2023 we have now rejected and normalized the btda contribution from the retail active activity especially in italy wine in spain we see let me say a normalized trend already in place in 2023 retail last but not least also including in the starting point the qatar arbitration in spain we expect the gas business to have a progressive improvement improvement already in 2024 that will became stronger and stronger in 2025 and 2026. Lastly, we were, let me say, prudent also in terms of trading that was quite neutral in terms of changing direction in the plan. and for what regards also the stewardship contribution to the BTDA. So all this one could be positive upside in the next quarters of 2024. Sorry to be very long, then Monica for sure will have to.

Thank you, we're clear, detailed and clear. Okay, we move to the next one, SFO improvement extended in Q4, full-year conversion really high. Can this be taken as a benchmark for the year or for the next three years?

2023 was an extraordinary year, but also a very normal comparison in 2022. in the fourth quarter we start to see and normalize if you see the the evolution of the networking capital and provision uh the cash flow you see that also in the fourth quarter we have a positive contribution of half a billion summing up the two the two components so we expect to move back to an eye let me say normal or standard range of 60 65 percent in in 2024

Next question is on the net debt guidance for 2024, which is based on a range between 53 and 54. If you can detail the moving parts starting from the 60.1 billion euro of 2023.

The exercise could be quite simple if we consider that we will enter into the three years industrial plan with our guidelines that is not to generate additional debt to finance the dividend payments. So if we took the impact that we are expecting to cash in from the M&A, that is more than $6 billion, as I already stated, that we have also another billion that is in the, let me say, very short list to be finalized. And this will represent, let me say, the last piece of the puzzle that compound the 11.5 billion of M&A disposal plan that we described in the Capital Market Day. So if we consider the M&A activities, if we consider that the FFO generated by the EBITDA minus CAPEX and minus the tax and financial charges will cover the capital expenditures. And if you sum the 6.5 billion expected from M&As, you may see that we are in a neutral situation. That means that we are already there with the 53.5 billion. That means the 2.4 ratio in terms of net debt on BTDA.

I think the explanation of the bridge is actually covering the next one, which was about the projected FFO level and considering the capex and dividend commitments. Do you envisage a 24 to be already Africa's flow neutral? You just said, basically.

Also reminded that you have to consider the M&A cash-in of the deal already signed along 2023 and the beginning of 2024.

The next one is about retail. Retail EBITDA in Italy reached an unprecedented level of 4 billion in 2023. Do you expect to achieve the same result also in 2024? Is this level of EBITDA sustainable in the long run?

I think that I've already partially answered to this question. If we consider the starting point of 2023, no, because the BTDA in the retail segment was also leveraging on an extra or DII price scenario. That's why we have prudently decrease the contribution of the retail business along 2024. In the medium and long term, we are building up a commercial strategy and a bundle offering, a loyalty actions and activities that we will allow to restart from the normalized 2024 APTDA contribution and considering this not reducing part of our BTDA also from 2025 and 2026.

A question on working capital, which I believe you answered during the presentation, but just maybe to remind the main building blocks, can you please comment on the key drivers of the positive working capital evolution in the second half of the year?

Yes. As I said, in the third quarter, we have completed, let me say, the normalization of in the nine months if you remember in the nine months we finally reached let me say a positive uh networking capital price provision uh contribution and in the four quarters so we moved back to have the historical and traditional seasonality so one of the main drivers for example was the capex let me say level accounted in the four quarter that is paid partially in the quarter and more than a half is paid in the first quarter of the year. But this is a structural trend that now is visible that along the 2022 and 2023 will dramatically offset by the regulatory measures that generate, if I'm not wrong, 5 billion of negative impacts in the annual working capital change.

Next question, it's about a popular one, declining power prices. Basically, the market is assuming that for 2024, there are no major concerns, but is asking if we can share a sensitivity of our financials to declining power prices for 2025 and 26, looking at the open position.

So starting from the presentation, as I said before, the consumer and the small medium enterprises is something that back up our production. What does it mean? That we are not considering this an edge anticipating, but we are pre-edging the prices of the business plan, let me say, and this depends strongly on our expectation, based on the forward curve. What does it mean? In 2024, we are still not matched 100% of our renewable production in Italy with our consumer customers, but we have already edged let's say, more than 100% of our revenues, as I said before, with prices that were higher than the present one. If we look to 2025, this represents more or less 80% of our average production that, if you remember, our business plan was approximately 25 terawatts from renewable generation in Italy. In Iberia, this is approximately 70%. Moving forward, this trend is continuing to improve in terms of coverage day by day, so it's not something that we will update in the next six months. If you will meet us in one month, probably the 70% has become 80% or this may be stopped because of the trend in pricing. What is important that the backup represented by the consumer segment is very level because we have to keep in mind that we are applying an integrated strategy, and then the backup represented by the consumer and the small-medium segment give us the best price condition into the market in terms of integrated margin. In the past, a significant portion also, I would say, of the matching was due with top clients that do not grant the best price. condition today and looking forward.

Okay, talking about retail, and I think if I'm not mistaken, it's the last question for tonight. Analysts are asking about competitive dynamics in the retail business in Italy, and if you can just share a bit of color on around the clients and the churn of the clients.

Yes, in Italy it's clear that in the last 18-24 months there was a shock in the market in terms of pricing. What is important looking at our performance along 2023 is that the evolution of the free customer base in Italy is the result of three different dynamics. One is the chart rate that in 2023 was influenced by the second quarter 2023 price increase that transformed into invoices starting from the second half of 2023 and this generate a wave of chart that is still in place. We have responded starting from the second half with the acquisition that is the second wave. This is progressively ramping up powered by the new offer portfolio and still in progress sales trend reorganization. The last one is the migration from the regulated customers where Enel was taking a significant portion of the share of the incumbent operator that it's enel this migration impact has progressively reduced for let me say a volume of this customer base and especially due to the energy price dynamics that happened in the in the second half as i said the commercial actions are in the ramping up stages both in retention that in acquisition areas. So a consistent recovery is expected along 2024. Okay.

I think we have answered all of the questions that came through. So thank you, Mr. Cattaneo. Thank you, Mr. De Angelis. Thank you to all of the people that were connected. And we'll see in a month at the first quarter results.

Okay, bye. Bye-bye, everybody. See you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.