Enel Spa Unsp/Adr

Good day, and thank you for standing by. Welcome to the E&L nine-month 2024 results conference call. All participants will be a listen-only mode during this conference. I would now like to turn the call over to your speakers, Omar Al-Bayati, Head of Investor Relations, and Stefano D'Angeli, CFO. Please go ahead.

Good evening, everyone, and welcome to the MindMount 2024 result presentation, which will be hosted by Enel 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 investorrelation at enel.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 our CFO.

Thank you, Omar, and welcome to everybody. In the third quarter, the group extended the strong and predictable economic and financial results, which played out linearly throughout the quarters. Across all metrics of performance, we are walking the talk of the 2023 Capital Market Day, delivering on all the commitments undertaken. Focusing now only on financials, ordinary EBITDA for the nine months came in at 17.4 billion, up by 6% versus previous year. Ordinary net income at 5.2%. billion is up by 16% year-on-year, confirming the trend observed in the first half of the year. And now we'll dive into CAPEX evolution and how this reflected into the EBITDA performance. Over the period, we deployed investment for around 7.8 billion And more than a half of the capex was spent in grids, in line with our strategy to increase our focus on regulated assets that provide visible and predictable returns. The rest was allocated to support our integrated strategy. From a geographical perspective, we confirm our goal to rebalance our capital allocation as almost 70% of the total were deployed in Europe, accounting for more than 5 billion. As a result, more than 70% of the group Ordinaria BTDA was coming from Italy and Spain, and around 80% from tier one countries, meaning Italy, Iberia, and United States. From a business perspective, we deliver sound results in both our grids and integrated market business line that I'm going to comment starting from the slide. Over the past years, quarterly results reflected high volatility often driven by non-recurring items such as capital gains and non-linear impacts from trading of commodities. Since last year, EBITDA performance has been consistent with around 25% of the yearly guidance and the positive year-on-year comparison delivered each quarter of the year. This result has been achieved thanks to the mentioned portfolio strategy focused on geographies and assets with sound and visible returns that do not only support the strong economic performance, but also allow us to have a more linear progression along the quarters of the year. On the other hand, a business-oriented optimization of the energy management that I will comment in the slide related to the integrated business has been one of the main priority of the management team. Overall and on a like for like base, ABTDA is up by 13% versus previous year. Despite a tough market and macro environment compared to our expectation, especially in the first part of the 2024. I will now move on slide five to comment on the grid performance. Grid's EBITDA stood at 5.9 billion, up by 6% year-on-year on a like-for-like basis. We recorded a strong performance in Europe, driven by Italy, up by approximately 200 million versus 2023, as we continue to leverage on a higher CAPEX and supportive regulatory framework. Spain showed a resilient performance, increasing by 100 million versus previous year. Worth to highlight that, as you know, the consultation on the new regulatory framework is ongoing, and this will be crucial to provide the needed support to investment in the country. The most recent outcome is in line with industry expectation. Latin America increased by approximately 100 million as a result of the positive contribution from tariff indexation And this happened also in Argentina where the new government is proving a firm attitude on reshaping the economic environment to support private investors. Those positive action offset the negative impact of CPI on OPEX as well as the perimeter effect linked to the Peru disposal. Let's now continue on slide six with evolution of the integrated business. First of all, it's worth to highlight that power and commodity portfolio management is now forced to maximize the value of our distinctive and flexible generation asset base, matching profiles between the different energy sources and a wide and differentiated customer demand. Look at the evolution year-over-year net of perimeter. The integrated business increased by some 1.6 billion. Renewables presented in line with our mid-long-term ambition we shared last year during the Capital Market Day, the bulk of the growth improving by around 2.3 billion versus last year. Here, the main drivers are approximately 600 million improvement resulting from the implementation of the successful hedging strategy and storage capacity that was installed in the end of 2023 and the beginning of 2024. Around 900 million from eight terawatts of higher production, mainly driven by the better hydrology across all countries. 600 million contribution from the new capacity that was deployed. And lastly, 350 million came from the removal of the clawback measure in Italy that offset other minor negative impact that I'm not going to comment because we have a lot of minus of this minimal impact that were offsetting by this important removal of the clawback. What I like that this strong result has been achieved And I remember how the market was worried about, in the first part of the year, of a tough price environment that, especially in the first half, was, I would say, not exactly in line with our projection. Now the market is showing a pull price that is mostly in line with our projection. But we will update you on the next capital market date. Moving to the thermal generation commodity, this group of activity declined 200 million year on year in line with the plan assumption and back to a normalized performance mainly due to the 19 terawatt lower production mostly as a consequence of by the end of the mandatory requirements we had especially in Italy on coal production. Finally, normalization of retail EBITDA is progressing live with planned expectation. The downward price revision after the spike occurred during 2022 and the first part of 2023 in the commodity market is now fully implemented. Sorry. Starting from 2025, we expect a normalized trend in this business segment in line with our mid-long-term ambitions. I will now move to the slide seven where I will update you on the progress in the efficiency program. Our focus, as you may see, is continuing to bear fruits and is progressing in line with our front-loaded expectations. As of September, the program reached around 600 million savings compared to 2022, 60% of the 2026 target set again at the capital market day. Around 75% of the reduction is related to a rationalization of the business portfolio, while the remaining portion has been recorded as a spending review action mainly related to the optimization of cash costs like the general and administrative ones. To be clear, This is also the footnote. When I refer to the rationalization of business portfolio, this analysis do not include any perimeter or disposed asset changes. So it's based on a like-for-like analysis and accounting. Moving to slide eight, I will commend the income of the period that came at 5.8 billion, as I told before, up by 16% versus last year. For what regard the DNA that I remember always include also the bad depth, The increase was also driven by the higher amortization mainly in Italy and Spain of the back of investment deployed that was just partially offset by the impact from the asset disposed. Financial expenses decreased by 200 million year on year, thanks to the lower charges on debt, we'd finally benefited from the net debt reduction and lower cost of debt. There is also the impact of higher contribution from associates. Income tax increase mainly on higher profits. And finally, minorities proved flat year-on-year on the back of the better year-on-year results, especially in Italy and the United States that resulted in a lower dilution at the bottom line. It is worth to highlight also that reported net income increased by 38 percent compared to previous years. I like to remark on this because as I said also starting from the capital market day The difference from the past and from some benchmark in the industry, the exclusion of the capital gain from the disposal of Peru assets in the ordinary results is aligned and consistent with the guidelines provided to the sheroes and financial community. To size the relevance of these topics, the report of the BDA, as we can see in the slide, includes 1.4 billion positive capital gain that was not part of the business result presentation. When we will see in 10 days or more or less, you will see that again, we will provide you updates and we will not include any stewardship capital gain. And as I already stated, but we are coming to this event, when we will close the Lombardy network asset sale, this will provide another capital gain. This will not be again included in the ordinary net income. Also, we will maintain a 10 percent share in the SPV that we are creating to close the operation. Let's move now to slide 9, where we will discuss it by the cash generation at FFO level. The result was $9 billion. And this still does not reflect the fully respected result due to the seasonality of the working capital changes. Consequently, when I move to the moving parts, I start exactly from this important and relevant topic, that is the working capital that is worth minus 2.9, sorry, billion. And as you know, the accounting, economic, and financial impacts of the operation has normally a time lag that may affect significantly the working capital dynamics, especially in the case of one-off items or discontinuities in the underlying business results. As we have already commented in the first half results conference call and highlighted in the slide, we regard the two main significant items in the period, the Qatar-Laudo and the CO2 settlement in Italy. That is important to carve out from the trend analysis being based on one-off and non-organic circumstances. On the other hand, the organic working capital revolution reflects a multiple set of variables where we have full visibility and control, thanks also to the more linear trend of our business operation that I have already commented. Consequently, we are now more than confident that delivery in the fourth quarter of the year, benefiting from the reversal of the above mentioned seasonality and the contribution from our cooperation will drive us to the full year ambition, both in terms of cash generation and financial leverage. Moving to the other items of the FFO, let me add some color to the trend underlying the four year results. Cash out for taxes was 2.4 billion higher versus previous year, mainly due to the balance of the 2023 accrued income tax already paid in the nine months. As a consequence, the four quarter 24 cash out will normalize. Financial charges that are 300 million lower versus last year have finally reflected the reduction of our outstanding debt and will present a consistent trend in the fourth quarter. I move now on slide 10 to continue on the cash exploring what is next to the FFO. As you may see, we landed at 58.2 billion. And on top of the FFO contribution, the net capex amounted to 6.1 billion. as we cashed 600 million of grants and 1.1 billion from the partnership with Sosteneo in Italy related to our best capacity project. The FFO minus CAPEX for around 3 billion and the active portfolio management where the disposal plan cash-in is the main items with 3.8 billion fully covered dividends payment and delivered the 2 billion leverage in our net debt. Taking into account the contribution of the signed deals, net debt would have already stood at around 56 billion euro at the end of September. And now I will move to some closing remarks. Our resilient and balanced risk-return asset base across all countries of presence is set to deliver consistent economic and financial results. The focus on a firm financial discipline and the execution of the disposal plan at high multiples allowed us to rapidly deliver the group with a net debt to BTDA ratio expected to reach 2.4 times by the end of this year, well below the sector average. The restored balance sheet solidity and the confirmed management focus on accountability and operating excellence set the foundation of a long-term sustainable growth. Finally, the strong and linear quarterly performance observed so far allows us to confirm all the economic and financial targets set for 2024 on the back of proven resiliency and harmful visibility on the evolution of the last quarter of the year. On this, we remind you that on November 18, we will present the new strategy plan and we look forward to see you there. Thank you for your attention, and now we move to the Q&A section.

Thank you, Stefano. Let's start the Q&A session. As we approach the capital market day of a matter of days, we will not take questions on the broader strategy, and we'll focus only on questions about the results of the presentation just commented by Stefano. So the first question. Guidance has been confirmed despite strong numbers that would point to upside. Do you have any visibility on negative in coming the last quarter?

As you see in the presentation, we are and we have presented the slide on the quarterly trend to share with you the pretty linear deployment of our results through the quarters. It's clear that things are moving as expected on the back of the improved resiliency of our business model and the ample visibility on the underlying operating dynamics. So on this, we can confirm the full guidance as already commented by the management in the six months results call.

Thank you, Stefano. We received one question regarding the shareholder remuneration. Will you officially disclose the level of DPS for 2024 at the next capital market day?

It's easy to answer this question because having just 10 days between today and the capital market day, we will update the full set of our strategy and financial ambition in more than one week. So let's expect, you can expect, I suppose, this important event to be acknowledged about our shareholder remuneration policy.

Thank you, Stefano. One more question. Clients' auction of the regulated segment have been onboarded since July. What has been the EBITDA contribution and what do you expect the recurring yearly contribution to be?

Yeah, this is a good question, because it helps us to clarify this. Not regarding dynamics, because it's a case that I think happened just in Italy to have customer auctioned by the government. So this auction for us is a unique opportunity to onboard a significant number. We are talking about 1 million, more than 1 million. Probably you remember that at the beginning, but the auction was made at the beginning of the year and cleared as part of this customer. But this do not impact in any way the economic results. We will just receive that customer. We will just pay the discount for the customer we have received. So this customer, you have to consider that resilient customers. In the market today you have a lot of customers that create a sort of washing machine because they are trying to find the best offer. These customers were impossible to be moved from their provider. Now we stand in the strong focus also from Enel and the other players that We were trying to absorb these customers to the free market one for years, and especially in the last six months. So it's a very good customer base, Resilient Quad, that will migrate to a free commercial offer at the end of the period. So it will not long stand for all his life, for 20 years in this stage. They discounted that will be paid just and only, sorry, along the customer life in the customer base of Enel, meaning that if one customer left Enel in July, August, or September, we will just pay that month of discount. So it's not like an acquisition. If I acquire a customer through an agent, I have to pay a commission, a fee, that If the customers will migrate after one year, I will not recover my money. In this case, I pay the discount just for the period that the customer remain my customer base. If I migrate the customer that is my ambition in my free commercial office, I will stop to pay this discount. So it's absolutely a positive value that we are bringing. because we will focus on shifting these customers to the fully liberalized product offer, but also we will lever on different products and services we may bundle and sell to this customer base that have a commercial relation with Enel.

Thank you, Stefano. And we received one question regarding M&A. And on M&A deals, is there any risk of delay of closing beyond 2024?

Let me see. The deal are progressing without any, let me say, sign up to be delayed by basically the authority, but these are minor, these we are not talking about, you remember and I remember perfectly the Peru deal that was affecting 50% of the distribution of a country. We are talking about a minor part of the network that is sold to the next door network operator and just a minor part of the photovoltaic generation where we are selling a minority stake, so we don't expect any delay on this cash-in, on the closing of these two deals.

Thank you, Stefano. One question regarding working capital. working capital continue to be negative. What is the expected level for the year end?

I suppose that the question came before my 15 minutes description of the dynamics, but as I say, let's go directly to the end. We have full control of the payable receiver, let me say, of the organic component of the working capital. As you have seen, You may listen to my description. There are sometimes some specific items like the Qatar, but also these, it's in our radar. So we were perfectly aware of the working capital of September. I have to explain to you, but we are confident, really more than confident that we will get the ambition and the target we have shared with the financial community for the end of 2024. OK.

Thank you, Stefano. We receive to retake the question regarding the shareholder remuneration. If we can repeat. So the answer for shareholder remuneration will be officially disclose the level of DPS for 2024 after the next capital market day?

Ah, sorry, because I was not understanding what was the problem. Yes, you have just to wait 11, 12 days. On the 18, we will share, we will explain also the strategy of the industrial plan, but for sure you will receive an update on the shareholder remuneration, including the dividend per share.

Thank you, Stefano. One question regarding FFO. FFO conversion was at 52%, down from 65% last year. What is the level of FFO you expect for year-end?

As I said before, the 52% is clearly... impacted by the seasonality that I have also described. So it's not what we are looking for, let's say, what we are expecting. The recovery of the working capital, we will bring this figure to Let me say something that began with six by for sure, because again, if you make a calculation of the recovery we have to make on the working capital, it's clear that our ambition is to stay on the level of last year, 65%. You have to consider that when I say this year, I have the Qatar. negative impact this was a positive impact last year but we want also to improve along the plan but for sure 52 is not a benchmark let's say that's something that starts with 6 thank you Stefano we received the last one CAPEX CAPEX slowdown versus previous quarters

What is the expected level of capex for the full year?

Let's say let's divide the capex amount into segments. In networks, and I would say all in commercial investment effort, there will be no delay for sure. Again, it's like the working capital. What we accounted as CapEx, it's already progressing in these days. For what regards the, let me say, the development and the renewable capacity, you know that we continue to assess investment opportunity in light of their profitability and especially their risk profile. So in this case, we may suffer some delay. But this delay is, as we said before, our CEO, I think, stated each time that talk with the financial community, we are not going to investment because we have committed on an amount. We have committed on an amount of value generated. If we don't have for some hundreds of million project this year to be approved, look for other opportunities that, again, will generate the target of value added. And I repeat the entire risk-return profile of the investment, because we value the investment like a rating. We use A, AAA, because it's not just the spread. I may receive an investment that is full merchant, solar in Spain, 300 basis point, I will not look at it, no? Because the risk that you have today kill the 300 basis point to the level that is not acceptable for us. And we not consider the integrated customer base in the valuation because we put ourself in a scheme that we are not leveraging on the customer base when we evaluate the new capacity on renewables. So no delay in networks and commercial. We may face some delay. At the same time, maybe that in six, nine months, we accelerate because we found a fantastic bid for capacity in Italy with a very good remuneration. So we will participate and we may recover the saving account this year.

Thank you, Stefano. That was the last one.

And so I hope to see you all. Please listen to me. On the 18, we... We will present, as I said before, also the DPS per share. That is, I think, as I said before, will be for sure part of the update. So thank you so much for your attention, and I hope to see you there with my team and with the CEO on the 18th of November for the Capital Market Day.

Thank you. You may now disconnect your lines. Thank you.