Enel Spa Unsp/Adr

Good day and thank you for standing by. Welcome to the NL First Half 2024 Resorts Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll 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 and good evening, everybody. Welcome to the first half 24 results presentation hosted by NL's CEO, Flavio Cattaneo, and the CFO, Stefano De Angelis. Following the presentation, we will have the usual Q&A session. We ask people 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 the CEO.

Thank you, Monica, and good evening to everybody. Let's start with the highlights of the period. The strong performance of the beginning of the year extended also in the second quarter, with visible progress on financial results, the leveraging, and efficiencies. To date, we have cashed in more than 5 billion from disposal and we have taken a step further with the partnership deal in Spain as just announced. All this confirms our confidence on 024 delivery. We see the result to move towards the top of the range with a positive impact also in our dividend. Indeed, I remind you that our dividend policy allows us to pay up to 70% of our ordinary earnings if cash neutrality is reached. Let's now dive into the details of our performance. Financial results improved visibly. Ordinary EBITDA came in at 11.7 billion, up by 9% versus previous year. Stefano will elaborate on the main drivers later on in the presentation. Ordering net income is up double digit, confirming the trend observed in the first quarter. Cash generation remains strong, with FFO reaching 5.5 billion and providing some coverage of the net capex. These results are supported by managerial action put in place so far. We record further improvement in the regulatory frameworks across our operation due to our ongoing advocacy activities. In Italy, we welcome a set of degrees that can be a game changer for the renewable development. Still in Italy, on July 1st, we welcomed in our customer base the client leaving the regulated segment. In LATAM, we enjoy the stability of the regulatory frameworks and appreciate the ongoing constructive discussion with the various regulators. Value creation is mainly achieved through a carefully planned capital allocation. In line with our strategic pillars, capex networks account for more than 50%. More than 65% of total investment were deployed in Europe. As a consequence, industrial parameters improve across the board. RAP customers stood at around €650. Renewables production on total increased by 10% point, while the share of emission-free production reached almost 85%. This industrial performance benefited also our customer segment, with fixed sales covered by renewable production for almost 90%. In the period, we recorded a significant progress also in the partnership business model. In the first six months of this year, we have already completed two deals worth around 2 billion out of six to be cashed in by 2026. In particular, following the successful completion of the partnership with Sosteneo in Italy, today we announced a partnership with Masdar on solar assets in Spain. These are two clear examples of how we can enhance the value associated with our project. In the partnership business model, investments are shared with third parties to foster capacity growth and to accelerate paybacks and returns. And more will come. I will now move to the second pillar of our action. Over the second quarter, we continued to progress on efficiencies. In just 12 months, we reached around 500 million savings versus 0.22. And now we are halfway through the 1 billion target set in November 0.23. More than 70% of this reduction is associated with the project across business and geographies, while the rest has been recorded at holding level due to the rationalization of operating expenses and overhead reduction. Let's now focus on the third pillar of our strategy, financial and environmental sustainability. In two years, the quality of our results improved thanks to the managerial action implemented in the last 14 months. Notwithstanding the perimeter effect, EBITDA is up by more than 40% and it is clean of any capital gain. Operating cash flow produced organically increased by almost 8 times. Net net on EBDA improved strongly. Not yet included around 2 billion cash in from announced disposal. And now... is now positioned as one of the less levered companies in the sector. On environmental sustainability, emission intensity recorded a remarkable 41% decrease over the past 12 months. And now I leave the floor to Stefano who will deep dive into the financial performance of the period.

Thank you, Flavio. Good evening, everybody. I'd like to highlight that notwithstanding the energy scenario continues to be impacted globally by the declining price trend, the resilience of our operating results leverages on the integrated end-to-end model we have implemented. that is based on a market-driven energy management tailored on different generation assets and country-specific regulation. On the other hand, we benefit of the new capital allocation focused on visible and risk-balanced financial returns and efficiencies already achieved in this semester. As concrete evidence, we close the first half with an ordinary EBITDA up 16% on a like-for-like base, supported by the progression of grids performance on the back of constructive regulatory updates and the positive renewables generation contribution to the integrated business performance. From a geographical perspective, European countries EBITDA accounted for 73% of the total and increasing 13% versus previous year. As you may remember, this was something we have guided in our Capital Market Day. I will now move to the business segment results. I am on page 11. As I commented in the previous slide, net-off the 2023 disposal, grid stability increased 4%. In Italy, while the increased CAPEX efforts will sustain a growing path moving forward, we recorded positive regulatory updates both on inflation and work. Spain proved almost flat year on year and some issue is starting to be addressed and key regulatory topics will be crucial for future growth. In Latin America, the operating performance benefited of the new rules for tariff indexation with a relevant and positive contribution from Argentina, only partially offset by the impact of inflation on cost. Let's now move with the evolution of the integrated business. Again, the net of perimeter, the integrated business increased by a sound 1.5 billion. Renewables are confirming its growth driver role already observed in the second half of 2023. The 3.7 billion EBITDA booked in the first half of this year was supported by different positive items that I am going to comment. First of all, we have higher resources available, mainly driven by better hydrology across all countries. This accounts for approximately 800 million. We have the contribution of the investments we were performing last year and in this first half of 2024 that accounts for approximately 300 million. We do not have, when we look at the comparison year-on-year, the 200 million clawback measure in Italy. And as also a result of the different energy management model we have implemented, last year we had a 600 million negative impact of the either short position that also affected the 2022 results. Don't forget that a potential head with represented by the poor price drop in Italy and Spain was more than offset by the increased portion of edging in the integrated margin energy management. Sorry. When we move to the thermal generation, the decline trend is linked to the 12 terawatt lower output on the back of better hydrology and the end of the mandatory requirements on coal production that we have commented many times in the last year. Finally, retail EBITDA decreased 100 million as they expected the normalization of margins in Italy is now compared on a year-on-year basis with the impacts of the repricing of the entire residential customers program in late 2022 and first quarter 2023. Remind that in Italy at that time the forward pull price was higher than 200 euros. The short-term positive impact on margin of debt repricing is now normalizing, and we are working hard to recover on the negative customer base impacts, leveraging on our bundle strategy and reshaped offer portfolio. Moving into the earnings evolution on slide 13. We see that the magnitude of the net income expansion compared with last year has been supported by the greater EBITDA conversion rate that stood at 34%, halved by 4 percentage points year-on-year. More in details, the DNA that includes bad debt provision increased following the business investment trend, partially offset by the perimeter reduction for the assets disposed. In terms of conversion, we saw a positive contribution of 1 percentage point. The contribution was also positive with the flat financial expenses that will start to benefit from net debt reduction thanks to the cash-in of the M&A deals realized at the end of the second quarter of 2024. After the deduction of taxes, net income benefited also from a higher contribution from countries with a greater equity interest, as a consequence of the geographical reposition of the business in Europe. Worth to mention, finally, that the first half reported set of results is higher than the ordinary figures we are reporting. Let's now move on this slide related to the cash generation. The FFO stood at 5.5 billion, slightly higher versus the first half of last year. Focusing on the moving parts, let me start with the Delta working capital that were minus 2.8 billion. As you know, the economic and financial impact of the operation has frequently a time lapse that may affect significantly the cash flow in the working capital short-term dynamics. In the first half of 2024, we cashed out the gas arbitration and we settled the CO2 2023 provision affected by the extraordinary coal generation spike we have commented many times. On top of this, working capital was impacted by the recurring seasonality of cash costs and especially capex. Considering the non-recurring items, that will not affect the second half cash generation and adding to this the reversal of the seasonality effect, we have full visibility on the second half cash flow being able to support our ambition in terms of net financial position and the cash neutrality target commented many times. Cash out for taxes was 1 billion lower versus previous year as in the first half of 2023 we paid the solidarity contribution in Italy and a portion of tax payments in Italy shifted to July. Finally, financial charges are in line with previous year. Don't forget that we were foreclosed. approximately one year into the region of 60 billion. And we had also 2 billion of health for sale that now is let me say less than 100 million, that was generated financial cost. So the benefit of the reduction of the reported net debt plus the for sale debt will start to contribute positively to the net income from the third quarter 2024. With this, I move to the net debt that came in at $57.4 billion, including a $700 million of negative impact from currency movements which have no cash impact. In that period, FFO more than covered investment needs, with FFO minus net cap being positive for $1.6 billion. Net capex amounted to around 3.9 billion as we received 500 million of grants and we cashed 1.1 billion taxed to the closing of the partnership with Sosteneo in Italy. Active portfolio management was positive for 4 billion at the back of the closing of the U.S. solar and geothermal deal that we performed at the beginning of the year in Peru disposal in the second quarter. I want to remind that we have already signed deals worth more than 2 billion pending to be closed. Taking into account the contribution of those deals, the net debt on EBITDA ratio is already landing a target 2.4 times, one of the lowest figures among the peers in the industry. Let me now quickly remind all the M&A deals executed. The solid financial structure we have been able to reach allows me to state we have basically completed the M&A plan, aiming at deleveraging the group. The range year disposal plan has been executed at strong multiples and in some cases significantly better than comparable transactions. The latest evidence of our over-deliveries is the compression of the sale of the assets in Peru that resulted in around 4 billion cash sheets recorded at the end of the semester and a debt consolidation of around 900 million euros accounted as air for sale. The execution of the deals allows us to strengthen the group financial profile, add financial flexibility and unlock resources to support the industrial plan execution. Moving on to the guidance for the full year. or the update with the same structure in the first quarter, so I will update you to the second half for 24 performance at a BTDA level. We had a strong semester, as you know, but it's important to highlight that results included around 300 million associated with the contribution of the Peruvian asset we dispose in May and June. That was not included in our CMD guidance. So, excluding this part of the result, in the next month we expect WITS to confirm a linear positive evolution around the quarters, supported by the existing regulatory framework and solid investment plan. The integrated business will contribute for around 7.5 billion, as renewables will continue to improve thanks to the enhanced integrated energy management, more than offsetting the reduction in thermal generation. And the retail segment will progress in the normalization in Italy, where we are completing our reposition in progress. The results achieved so far and the expected trends, aligned with our CMD assumptions, provide us visibility and growing confidence on full-year 2024 EBITDA, which is expected to move towards the higher end of the guided range. And now I hand over to the CEO for some closing remarks.

Thank you. As you could appreciate, the management team is focused on the implementation of the business plan pillars to deliver organic, clear, and predictable growth. Our action restores the sound production of operating cash flow and will bring leverage from one of the highest to one of the lowest in the sector. The concrete approach we are implementing, together with the strategic focus on profitability of our investment, efficiency and advocacy, will result in a different company, more profitable, resilient and able to deliver value. All of this will couple with a dividend payment that will satisfy our shareholders. Thank you for your attention and let's now move to the Q&A session.

Thank you. We now move to the Q&A session. I'll start with a set of questions directed to the CEO. The first one is on guidance. Numbers continue to be strong, and you confirmed the guidance. What factors could drive a revision upwards?

Let me say everything's going well. And as I said before, we see the old 24 numbers to move to the upper part of the range. But it's not the right moment now to talk about a potential revision of the guidance that remain the existing ones.

Second question is on shareholder remuneration. When will you officially disclose the level of DPS for 24? In case it will be above, as we said, above 0.43 euros per share, how does this translate to 25 and 26?

But let me say, this is a mathematical approach, no? Because our dividend policy is extremely clear. If we reach cash flow neutrality, this is the case so far, we'll pay up to 70% of the net ordinary income. As I said before, we see these conditions. Four years to come, our capital market day is in November, and you will have the answer to your question. Having said that, everyone is able to calculate in your mind the result.

Addressable cost baseline reduction. Do you see an acceleration of your program and potentially an upgrade?

Let me say, first step is to reach the first target. And we are focused on delivering this target announced in the Capital Market Day. Again, this will be something we will discuss in the next Capital Day. We have shown to the market our ability to reach in advance, because one billion was the target for three years, and we have reached 50% of the total target in only one year.

I go back to the guidance out of 26. Are we still comfortable about the guidance in that year?

Yes, we are.

Next question is on the evolution of the retail clients in Italy. We recorded a negative evolution on retail clients in Italy. What are the main drivers of this evolution and what do you project for the future?

As discussed in the first quarter, the evolution of the client base, the customer base, is a consequence of price strategy executed before our appointment. We are now adjusting prices, moving back to market conditions and a fair marginality. I want to stress here that our churn rate is below the market average and in July we have already a clear sign of recovery. All this is in line with what's forecasted and at the moment we don't see reason to be concerned.

Next question is about the regulation in Spain. Any news on the grid's regulation? How can you define your capital allocation in absence of visibility on the regulatory framework?

We have met the Spanish government clearly explaining that it's difficult to increase our allocation of resources in the grid without a supportive regulatory framework. This is not just our position, but we share this view also the industry. We think the government understood and a fair agreement will be reached.

When do you expect to secure the extension of concessions in Brazil like it happened for other companies operating in the country?

The law has been already approved and allows an extension of 30 years to all distribution companies if, of course, the quality metrics are met and capex is spent to maintain them to the future. Our concession meet the requirement, so we will apply for it in line with the timeline defined by the authority. I think in the next six, eight months, we can reach the final step to sign a new contract. But the law, it has been already approved.

We have a bunch of analysts asking about the renewable deployment in Italy. In particular, they're asking if we can share our views about the approved laws to accelerate renewable deployment in the country.

I think we talk about Fair2 and FairX decrees. It can be interesting for development of renewable and represent an enable for accelerating further investment. Regarding the decree on eligible areas, the impact on our pipeline will depend on the response of each region. They have six months to comply and we wait for them to work on this before drawing our considerations.

Again, a number of analysts are asking about the disposal plan, congratulating on the execution, and they're asking also if there is a headroom for acquisitions and what would be the ideal target here.

So far, nothing on our table.

Next question is on the retail again in Italy. Can you share some details on the customer acquired through the auctions in January?

Yes, at the end of the period, we have added around 1.1 million customers from the actions. Many clients already migrated to the free market and multiply offers.

I think the questions to the CEO are completed. I would move now to the CFO. Stefano, can you provide building blocks to bridge our targets to year-end by region?

Regionally speaking, let me say, in Europe, we expect a second half of the BTDA higher than 8 billion. with the rebalance of the mix in favor of the Iberian business, on the back of the normalization of the integrated margin in both regions, whose direction had different drivers, but both in line with our expectation. For Adam, we are excluding Peru, don't forget, so we, in the guidance, I am excluding any perimeter effect. We will continue to perform our growing path also versus the past of the year, supported by the incremental ABTDA contribution of the investment in renewables and the rolling tariff adjustment implementation. United States and other countries will contribute for around half a billion.

I think the presentation was clear on working capital dynamics, but maybe worth to repeat that again as we are receiving a few inbound questions on the movement in working capital and what is the projected level for year-end.

As I say, the presentation, maybe to give some additional details, The second quarter was impacted by some negative seasonality and one-off related to 2023 economic items like the CO2 settlement that is a mandatory process with the fine settlement date. On top of this, I want also to take note that we have to optimize for an entire region the funding across the last two quarters. taking into account the huge liquidity related to the cashing in the M&A assets that was basically with one specific direction to the South American business. But let me say, as I mentioned before, we have full visibility that the negative dynamic is temporary and will be reabsorbed by the year-end.

Okay, next one is on the net debt guidance for 24. If you can provide the expected moving parts to get to our net debt guidance for the year.

Yes, so if you look at page 14, we have shown what may be an expectation of the FFO for the second half of the year, just taking into account the rebalance of the first half working capital dynamics and excluding from the first half the 2023 one-off. Adding to this the tax payments at the end of the year and the, let me say, stable, slightly declining financial expenses payment, in the second part of the year we are guiding for an FFO that will be higher than $8 billion. Take this figure and keep in mind that if we have something that is exceptional, positive or negative, that have no negative effect, this change, the FFO, but may have the compensation in other part of the debt. So in this figure, I'm not consider any extraordinary potential impact happening in the next six months. In net capex, we expect an impact that is basically similar to the first half of the year because we have still to cash in a similar portion of grants based on the capex we are realizing in Italy and that is funded by the PNRR. And the deal that we have announced will be part of the partnership program. So if you consider the cash-in of the grants expected for the second part of the year, additionally on top of the 500 million already cashed in in June, And the cash-in, the closing of the investor deal, the asset rotation in Spain by year-end, we will have a cash flow impact in terms of net capex of around $4 billion. We have already paid dividends, and we have also the dividends in South America that will account for less than $3 billion. And we have another 1 billion coming from M&A that in this case is not part of the partnership model that is the grids in Milan that we again expect to close by year-end. If you sum all this figure, more than 8 billion, minus 4 net capex, minus less than 3 dividends, plus 1 M&A, you will have positive results of 2 billion. That is exactly what drives us in the direction of the leverage that we are projecting for the second part of the year.

Two questions on renewables. Hydro conditions are really strong. How do you project them for the full year?

Well, all around the world, let me say, after the tremendous trend registered in 2022 and part of 2023, we are experiencing a really good semester for hydro production. Mainly in Chile, because in Europe we have a normalized hydro production because it was a very negative... performance realized in 2022 and 2023. And this allows us also to maintain a good level of reservoir. Regarding the outlook of second semester, we are projecting a positive semester, mainly driven by, again, Chile, where we see high levels of snow reservoir and hydro... And in Argentina also we will have the impact, don't forget that we have one of the most important assets in terms of hydro in South America represented by the Argentinian hydro asset. For the remaining areas we expect projects that are, let me say, positive but in line with the historical trend that is what we consider into our budget and guidance.

And the last one, I would say, Stefano, if you can provide granularity on the targeted renewable additions for this year and for the capacity currently in execution.

The additional capacity we have gathered is 100% confirmed because we don't see any change in the program in the spending already booked in the, let me say, last 18 months. We have this 2 gigawatts. This was deployed in Latin America, mainly in Brazil. and this is part of the upside of the trend in the BTDA I was commenting before for the second part of the year because this asset will be 100% productive and able to generate additional BTDA. In Europe we added around 550 MW, mainly in Italy, while the red was added in North America, 400 MW, and Australia. Again, we are completely in line. Honestly, we have anticipated part of the program, especially in North America. So we are confirming the guided number for 2024.

If I'm not wrong, this is concluding the call. Thank you so much for being with us tonight. Our department is always at your disposal to answer any questions you still might have. And we wish you a really good summer break.

Good evening.