Enel Spa Unsp/Adr

Good day and thank you for standing by. Welcome to the NL first quarter 2024 results conference call. At this time all participants are in listen only mode. And now I would like to hand the conference over to our first speaker today, Monica Girardi. Please go ahead.

Thank you. Good evening to all of the people connected. Welcome to our first quarter 2024 results presentation, which will be hosted by NL 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 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 let me now hand over to the CFO.

Thank you, Monica, and good evening, everybody. Let's start with the highlights of the period. The year kicked off with a strong performance, with ABTDA half double-digit compared to last year, and reaching $6.1 billion, while net income increased by a sound 45%. These remarkable results were driven by a solid delivery across all businesses and geographies, as I will detail later in my presentation. FFO is robust and accounts for 4.4 billion, with an EBITDA conversion at around 70%, supporting the positive evolution of credit metrics already observed in the second half of last year. The execution of our efficiency program is well on track, thanks to the no-freeze approach we set, preserving the value of the distinctive assets of the group, while firmly addressing initiatives not in line with our core business and priorities. At the end of March, we reduced the addressable cost baseline by $300 million compared to the 2022 baseline. The solid operating performance, the strong FFO conversion, and the progress made on efficiency provide ample visibility on the evolution of the year and support on the 2024 targets. Let's now dive into the operating delivery. I'm now on page three with the main business KPIs. Let me just highlight some of the most remarkable KPIs achieved. The continued effort on grid extension and performances is visible, with REB per customer increasing by around €30. Renewables production is up by almost 4 TWh, thanks to the improved hydrology in Italy and Chile, and the continued path towards energy transition with renewable capacity increasing four gigawatts compared to the first quarter of last year. As a consequence, emissions-free production accounted for more than 80% of the total, remarkably up versus the 70% of 2023, while renewables production on total increased by 12 percentage points. This progression on industrial performance resulted also in a positive impact on our customer segment as in 2024 we have been able to cover an increasing share of sales to B2C customers with the opportunity to improve our competitive position through the offer of an affordable cost of electricity to our customer and a more effective use of our industrial resources. The operating delivery translated into a strong growth in EBITDA. And I'm now moving to page four. Ordinary EBITDA is up by 12% or more than 20% versus previous year, excluding the impact of the asset we disposed last year. The operating growth resulted from a positive performance on the grids on the back of constructive regulatory updates and the strong results of the integrated business, thanks to the dynamics that I will comment later. I want to highlight that, from a geographical perspective, European countries represented the bulk of the growth, with EBITDA in these regions up by 26% versus previous year. I will now move to the results analysis starting from the networks. Greece's EBITDA increased by a sound 11% net of assets disposed in 2023. Italy benefited from the mentioned constructive regulatory updates, both on inflation and work, and the projected increased CapEx allocation. Spain recorded a slight increase year on year led by the positive impact of previous year settlements associated with quality premium. In Latin America, the performance was mainly driven by the tariff adjustment in Argentina, only partially offset by the impact of inflation in the cost side. Worth to highlight that the 2.1% Euro billion of EBITDA for the period include also 60 million associated with the Peruvian grid under disposal. Let's now continue with the evolution of the integrated business, and I'm on page six. The integrated business is strongly up year on year, increasing around 900 million, excluding the perimeter effect of the asset disposed in 2023. Renewables contributed the most, thanks to the mentioned improved hydrology mainly in Italy and Latin America. The growth from new capacity added along 2023. The removal of the clawback measure in Italy and the positive impact compared to last year of hydro shore positioning. Finally, again in Italy, the progressive reduction in the mix of sales of the 2021 share. Another relevant topic is represented by the decrease of the thermal generation associated with the lower production from coal and gas plants as a consequence of the recovery of hydro and the end of the mandatory requirements on coal production in Italy. The customer segment increased by almost 400 million, thanks to an improved marginality of the free market segment in Europe, mostly concentrated in Italy, where it's worth to mention that the customer base repricing in 2023 only started to be effective from the second quarter of last year. I will now dive into the evolution of Globus Business Lite in the next quarters of the year. I'm on page seven. We had a strong start, but it's important to highlight that quarterly results included around 300 million, which cannot be considered, sorry, which have to be considered temporary, out of which 200 million, as I mentioned before, is associated with the contribution of Peru that was not included in our full year guidance when we presented the 2023 baseline. In the next months, we expect grids to have a linear evolution along the course, supported by the existing regulatory frameworks. In the integrated business, we will contribute for around $11 billion in the nine months, on the back of a growing asset base and improved marginality of the renewable generation compared to last year, on the back of an optimized and more integrated energy management system, Retail segment is set in line with planned assumptions that included a progressive and sustainable normalization in BTDA. And lastly, a reduced and expected BTDA contribution from the thermal generation. The expected trends I mentioned are completely in line with actuals and with our bridge ABTDA explanation presented last November in the Capital Market Day when we were targeting and explaining the 2026 ABTDA guidance. I will now provide an update on the cost reduction program that is on page 8. The effort on cost reduction is visible across the board and is rolling out better than expected. In just nine months, we were able to address around $300 million savings compared to 2022, covering 30% of the $1 billion target shown in November. Half of the cost reduction has been recorded at holding level, where we have rationalized the G&A expenses. The other half is associated with projects across businesses and geographies, such as, to give an example, in the U.S., where we have implemented a restructuring program aimed at optimizing running and external costs in the region not related to the renewable generation management. Moving now into the earnings evolution on slide 9. Ordinary group net income increased by almost 45% versus last year. DNA are almost in line versus last year. While financial expenses decreased by 200 million year-on-year, In terms of mix in the financial expenses, we have, comparing to last year's, the charges on gross debt are mostly in line also because we have reported basically the same level of net financial position in the last 12 months. In other financial expenses, we have booked A positive effect of edges that is a non-cash item, so we will see this later when we will address the FFO, that is expected to normalize over the quarter if we will move back to the scenario that we projected in our capital market day industrial plan. At the moment, the result is related to the present situation of the interest rate and FAX curve. Income taxes increased mainly on better economic results. And finally, minorities reduced compared to previous years thanks to the geographical mix that is more skewed towards Italy. Cash flow that I have anticipated is on the next slide. I already represent the 4.4 euro billion, a result that is up by around 800 million versus the first quarter of last year, confirming our focus on improving groups' cash generation. Also in this case, we will look at the moving part of the evolution in the first quarter. Working capital was 200 million negative, but improved half a billion when comparing to last year, on the back of the positive evolution of the underlying business, the reabsorption of the negative impact associated with government measures, and the positive capex seasonality. Cash out for taxes was 0.2 billion, broadly stable versus previous year, while financial charges were affected by the increased interest rate and sorry to make adjustments in the discussion, but last year the 0.5 interest expenses in terms of cash, it's not linear also because we had a one-off of 100 million related to the Brazilian M&A program. Worth to highlight that the results of 2024 was negatively impacted by the payment of the gas arbitration in Endesa that worth half a billion. Excluding this extraordinary cash outflow, FFO would have reached almost 5 billion. Let's now move on the net debt slide on page 11. Net debt came in at €60.7 billion, including €600 million of negative impact from currency movements which have a no-cash nature. As I said before, negative impact on debt, partially positive impact on the P&L in terms of financial expenses, both non-cash investments. Over the period, CapEx was fully funded by the FFO, recording a sound positive difference that was 1.7 billion. Active portfolio management was positive for 0.2 euro billion on the back of the closing of the U.S. solar and geothermal deal that we closed at the beginning, the early beginning of the year. No impact is observed. accounted in EBITDA and ordinary figures for this quarter related to this segment of opposition. Dividends cashed out amounted to 2.4 billion as we paid the interim dividend in January. I want to stress that we have already signed deals worth more than 6 billion that are still pending to be closed. On this, we are confident that the bulk of those deals will be cashed in by the end of this semester. Taking into account the contribution of these deals, the pro forma net debt would have stood at around €54 billion as already presented in the capital market day and in the occasion of the full year 2023 results. And now some closing remarks. The strong results that we achieved in Q1 are supported by a resilient business model across all the countries of presence. We are well on track to deliver on all of our business plan pillars as we will continue to be selective on our capital allocation, maximizing returns and minimizing risks. discipline on costs and focus on financial and environmental sustainability. Our disposal plan is progressing as planned and we will be able to cash in the most of what announced, I repeat again, by the first semester. Finally, we confirm once again that the underlying evolution of the business is strongly supporting our planned targets and this implies an upside potential to the shareholder remuneration in terms of dividend per share, totally in line with what was anticipated at the Capital Market Day by our CEO. Thank you for your attention and move to the Q&A session.

Thank you, Stefano. Our analysts sent us a sound list of questions. We will try to be as efficient as we can, packing up the topics. So one of the most popular is about guidance. The numbers in the first quarters look to be particularly strong. Can you provide the building blocks to bridge not only by GBL but also by region?

So we have... Remember that we have declined, let me say, the nine months as 11 billion as integrated business and 6 billion as grid. So we are talking about 70 euro billion of balance to full year ABTDA generation. When we look at the countries, as per your question, We have a similar distribution, but we have 12 billion coming from Europe and 5 billion coming from the rest of the world. Of the 12 billion coming from Europe, we expect two-thirds approximately coming from Italy and really the rest coming from Iberia. When we look at Latin America, We see a resilient deployment of the business and of the BTDA in Latin America with some expected contribution coming from the activation of the renewable plants in Brazil. And the U.S. adding up, let me say, some incremental growth compared to what we have already observed in the first quarter.

Second question is on the contribution from assets under disposals to the 2024 EBTA. Yeah.

Sorry, I have the microphone turned off. The bridge of the guidance, this is important to remark that we provide in the presentation, is net of the announced disposal and it's completely in line with the capital market day perimeter and targets. This is also because, and in accordance to accounting standards, the 2024 ordinary result will report the BTDA from assets disposed until the date of the closing. As of today, we have normalized Peru results in the first quarter for approximately €0.2 billion. If we consider the expected closing date of the entire country, remember that we have generation and distribution as two separate deals, we may expect, we may guide the 350 million BTDA on top of the capital market day guidance, meaning 200 million that we have excluded in the bridge plus 100 billion of the number that we will present on top of the bridge of the 70 euro billion.

The third question is on the cost baseline reduction. What is the projected level of savings to be achieved in 24? And can you exceed the targeted reduction over the planned period?

What now, being OBEX, we have... in some case more visibility that we may have when there is other third parties involved. So I would say that today we have a very good level of visibility to reach for 2024 600 million results. But it's a matter of fact that efficiency and cost-effectiveness is a regarding and continuing effort, so we will always try to do more. At the same time at this stage we will feel confident on the saving plan and it's early but not unfeasible to increase the target for the current year and looking forward. So any update will come probably in November.

The fourth question is about the FFO, and I would say generally the underlying moving parts, including the working capital. Improved FFO conversion continues in the first quarter after the full year 2023. You guided for an expected 60%, 65% conversion. Do you still see this as a reference level for the full year?

Yes, for sure. Talking about FFO conversion, it's always difficult to have this discussion explanation along the year because there are impacts of seasonality affecting especially the working capital and the tax settlements due date. We have managed and continue to manage our group operation, also trying to optimize and neutralize working capital and provisions swings. As an example, take into account what I mentioned before, that the Qatar arbitration system in the first quarter have a negative impact on working capital of half a billion because it was included into the EBITDA of 2023 but paid on January 2024. Another important point is that in the first quarter of each year and also in the third quarter of each year, the FFO on ABTDA benefits from the regarding reduced tax cash out. So, summarizing, we expect to confirm full year 2024 to be absolutely in line with the historical best conversion rate and as I already mentioned, above 60%.

We stay on the same topic somehow. Looks like your target of cash flow neutrality is set to be reached. Can you anticipate an increase to the 24 ADPS up to 70% of earnings?

The financial sustainability is, as you know, a staple of our plan. And we have at the same time anticipated a step up of dividend per share in case of cash flow neutrality. And this is just applying a 70% payout ration to the guided group net income. So what I want to reaffirm is that we share a simple and predictable commitment on the shareholder return guidance. And during the capital market day, the CEO clearly stated that the industrial plan sets of results implied an annual increase in dividend per share. And what I can tell you today is that we are progressing well on executing this plan.

There is another question around the plan. Still comfortable with the 26 guidance, any relevant moving parts versus plan targets? Yes.

I would say no, no meaning any relevant moving parts. So yes, we are comfortable. No, we don't see any major moving parts or discontinuities versus the plan. You know that we share a plan that have no M&A, no extraordinary operation, no extra disposal plan for what we have already basically achieved. So we are diligently executing on the strategy and I hope also from the external the results are visible and appreciable.

We have a couple of questions on our retail activities. in Italy. Analysts are asking what's the associated churn of the first quarter and what are the main drivers that you project for the future?

Not a short answer. But it's important to say that the chart trend and also the chart dynamics in the first quarter, but it's not something that happened in this quarter, are impacted by the 2023 turmoil in the energy market tariffs and energy bills continue to concern the consumer and small business customer base. The whole market suffered from an extraordinary client's proactivity in taking action to reduce the energy bills after the spikes in the first half of last year. The Italian authorities released reports shows that the entire market experienced a spike of churn that, according with the energy price trend, is expected at the same time to normalize along 2024. Having said this, we are not on the wait-and-see mode. We have set, as we announced, a new management team and organization for the global retail activities. We have presented, launched, and we are commercializing a completely new offer and Through a new sales channel strategy, we have introduced customer-based management tools and proactive customer-based repositioning actions. In some cases, this is also important, limited by the present regulation. And lastly, we have been awarded, as announced, a significant and valuable share of the regulated customer experience. bid by ARERA last February. That will be effective from the 1st of July. Summarizing, our commercial strategy on new customer addition is already playing out. And with the present market scenario, we are confident to set a normalized churn rate and a positive customer-based trend by the year-end.

You probably partially already answered the next one, which is about the competition. If we are observing a competition which is becoming more aggressive and how the offerings are evolving in Italy.

As I said, the energy price spike in 2023 boosted competition because it created a window of opportunity in tariffs and also taking benefits for the constraints that I mentioned before, and temporal lag. in active customer-based management. What is important is already now the retail market is set with offering that are at tariff prices that imply fair margin and more rational competition.

We move to another part of the integrated margin. First quarter hydro conditions really strong. How do you project them for the full year? Do you project a big increase in hydro?

The first quarter after a regular low resources last year we experienced a record high resources this year is starting from the end of the quarter this is important to say because you saw a very huge spike in the comparison between 2024 and 2023, but this is related to the 2023 results. The very strong resources in outro is something that starts to happen at the end of the quarter and in April is still on, let me say. This happened also in South America, especially in Chile, This is not something that we have complete control, so we cannot take this as a fact that is an upside, definitely upside for the year. So we will update in the next quarter, but it's not 100% manageable from our side because it depends from natural resources availability.

We received a question on financial expenses while the presentation was ongoing, so I think you already answered to this one, but just to make sure the message was clear. Financial expenses are low versus expectations. Is this underpinning a bit versus your estimate for the full year?

No, it's important, the question, and it's important to... to repeat and to also to guide you to look at the cash financial expenses because The answer depends if you focus on the cash financial expenses impact meaning the FFO or the PNL impact meaning and targeting the net income. The PNL financial expenses as I said were impacted by the mark to market on currency and interest rates edges. The reversion of this accounting effect as I said will depend on the curves along 20 In the FFO, we have a more organic figure, so looking at cash financial expenses, we don't see any remarkable deviation from the trajectory underlined of our guidance for the full year.

I think we actually completed all of the questions related to the first quarter and the business, maybe just the last one. An analyst is asking what kind of exposure to the fiscal credit for the super bonus do you have in case of government retroactively apply extension from the credit from four to ten years?

We managed these topics last year. We have a very limited exposure on this, both on the financial and on the economic side. So it's not a relevant topic in our future projection and expectation. And as always, we manage discontinuities each quarter, so it's not something that worries us today, considering what is the question. Okay.

Okay, we move to a little bit of various topics, a bit unrelated to the to the numbers. The first one is if we can share any news about the grid regulation in Spain.

Yes, in Spain, if we say about evolution, evolution will, let me say, start from December of 2024 if we look at the agenda of the Spanish regulator. As you have heard and as everybody is discussing, there is a very strong priority. This may be anticipated. That is the definition of the regulatory rate of return for the next cycle that starts from 2026 and will be applied until 2031 as there is a clear common need in the industry for a fair and reasonable return on capital and this have to come through a change of the existing rule scheme of calculation but it's something that again is is a real common need in the industry. In addition, we expect a new framework to address another very relevant topic, that is the upgrades in capacity, quality and resiliency of the networks that support the future energy transition. In one word, the scheme that we have discussed and we are applying in Italy. The preliminary discussion, because we are in this stage today, are positive, but it's clearly early to make any assessment and economic consideration at this stage.

We have a couple of questions related to the SLBs. People are asking if we can share a bit of framework of what happened in 2023 and what's the financial impact associated with the step up in the coupon.

First of all, it's important to... reminded that the Scope 1 emission achieved by the Enel Group in 2023 was well below the level in 2022, not enough to meet the target set for last year. As you probably know, I expect that you know, the miss was completely due to non-predictable exogenous factor were a very relevant weight and came from the ARERA coal maximization decree that was the one that in Italy power utilities were required until September last year for third quarter of the year to maximize the coal base power generation in order to save gas and contribute to the energy system security. We were already aware of this trend when we were projecting our industrial plan, so it's 100% included in our projection, this step up to 2023 target. At the same time, I want to stress that we want to continue to play a leading role in decarbonization. This is absolutely clear. But we will grant at the same time any... Let's hope that this will not happen again if we consider the global impact of the Russian-Ukrainian political crisis. But we have to grant also our mandate to secure the energy system in countries where we operate.

Okay, I think the last part of your answer is already covering the next question, which was on the environmental strategy of Enel going forward. We can move on the next, which is on the Brazilian grids, and in particular on Sao Paulo, if you can share how the situation is evolving.

As you probably heard, the situation is now recovering clean. It was also a media crisis. Remember that this was related to an emergency registered in November last year for the extreme weather condition in both Sao Paulo and Rio de Janeiro. If we look at the results in the first quarter of 2024, these are completely in line with the expectation of both for financial results and industrial performances. At the same time, we have all the operation and organizational efforts devoted to improve technical and commercial KPIs, reinforce the resilience of the grids, strengthen the industrial capability with internal and external resources. In parallel, we are also working on the corporate and institutional relations area. and specific institutional and communication plans have been launched to reinforce and give also evidence of the commitment of Enel Group in Brazil and especially in the grid operations.

Complete different topic. Analysts are asking about the AGM agenda. We saw that Enel will present to the AGM the renewal of the Share by Back program. What are the conditions to activate it?

First of all, it's important to remind that the Shared By Back Program is the renewal of an existing and absolutely appropriate instruments to deal with different objectives that are declined in the proposal and there is no exception compared to the previous ones. If some conditions occur, specific activation of the Shared By Back Program will be submitted to the Board of Directors and communicated to the market before execution.

We move to a set of questions, Stefano, on M&A. The first one is on the Peruvian disposals. If you can share an update on the timing.

Yes, as I said before in the presentation, we have two different deals. We knew We learned in my case that the distribution being a strongly regulated asset that was signed before will be closed before the end of the quarter. It's important that we do not make specific update in the presentation, but all the authorizations were granted in Peru, so the update is all the authorizations are granted in Peru. We are now waiting the process, the final process in China. The buyer is a Chinese company, so they have their their process there and so we expect in some weeks let's say by June for sure to have the deal finally closed. Distribution generation that have been signed later will be closed earlier I think it's a matter of days

Okay, the next one is on the UK. Press speculates on a potential acquisition of grids in the UK. Can you share any comment? What's the underlying thinking here? And can we expect other non-organic repositioning?

But as also the CEO, we do not comment on press speculation, as I could say, a code of conduct, you know, because... And we will never do it, by the way, because this behavior is set to maximize the effectiveness of our position in any potential deal, relevant or not relevant. We came from a very tough disposal plan where we have on the other side a counterpart that were absolutely aware of our intention to sell. So for sure we will not disclose any comments clearly stay in the mandatory requirements if something happens one day.

Okay, the next is on the battery storage. We continue on the deal closing topic. If we expect the battery storage deal in Italy still to be finalized by the first half of this year?

I think it will be the fastest track M&A project of the program. Again, I think that in June finally we will change part of the presentation and the speech because we will have let me say, finalize the most of the 2023 and also announced in 2024 M&A program. So again, to be clear, it will be, it is completely in line and we expect to close as announced by the end of June or maybe sooner.

If I'm not mistaken, we are landing to the last one. And the last one is about the sale of grid assets in Italy. If we decided upon the accounting of the capital gain, if it's going to be in the ordinary figure, and if we are envisaging the payment of an extraordinary dividend.

I think that the question may be answered, reminding that this deal not declined as for clear reason was included in our M&A updated plan communicated in November. You remember that there was asset swap generally. it's not a decision that we make on our account the operation it's the accounting standard and also respecting what was the historical application of criteria and methodologies what is really important to state that the deal was considered for the structure that we were discussing in November and we have finalized the signing date to be reported as a reported capital gain and nothing has changed compared to the structure of the operation so something has to change in the structure of the operation, it's not a decision. may change i don't think that it will change there is no discussion that drive us to change but what is important is not that we decide one day in the plan we have no extraordinary relevant topics that is we may have one some million because we sell some pipeline in u.s but i don't consider this extraordinary this is part of ordinary course of the business

Okay, so I think we have completed the list of questions that were sent by our analysts. So with this question, we can end the call. The Investor Relations Department, as always, is available for any follow-up call from now on. Next stop, July, with the first half results. Thank you, everybody.

Thank you. Have a good night.