Endesa, S.A. (ELE) Earnings Call Transcript

Good morning, everyone, and thank you for joining us today for our 9 months 2026 results presentation. With me are our CEO, Mr. Gianni Armani; and our CFO, Mr. Daniele Caprini. [Operator Instructions] And now I would like to hand over to Mr. Armani.

Thank you, Isabelle. The first 9 months of the year delivered solid financial results with EBITDA up 8% year-on-year. Net income grew by 15%, while the contribution of regulated business increased further strengthening the quality of our earnings. These results also reflect our ongoing focus on efficiencies, supporting business growth while remaining strong financial discipline. At the same time, we continue to accelerate the execution of our investment plan with network remaining our main focus. Investment in grids rose by 42% year-on-year in line with the reinforcement and expansion of the grid requirement to enable growing electrification. On Slide 4, EBITDA growth in -- is heavily driven by the contribution of our regulated business with increased -- which increased from about to approximately 50% of total EBITDA, reflecting the growing weight of network and non-mainland generation and further improving the visibility and predictability of our earnings. The solid performance translated into net income of EUR 2 billion, representing an EBITDA to net income conversion of 43%. Finally, cash generation was strong with EBITDA to operating free cash flow conversion around 80%, while our leverage remains flat with a very healthy 1.8x net debt to EBITDA. Moving to Slide 5. Let me briefly cover some of the key developments supporting the energy transition in Spain. Starting with networks, we are seeing greater regulatory visibility and a clear recognition of the need to reinforce and expand the grids. The approved increase in CapEx limits for the next 4 years, together with the promotion of flexible grid access should help accommodate a new demand in areas where available capacity is currently constrained. In particular, it is worth putting the role of network investments into the right perspective as they are not a cost burden, but an enabler to growth in electrification. The result in the resulting rise in access tariff revenues as the demand vector are incorporated more than offset the increase in system cost and the increased demand helps reduce the overall tariff. On generation, security of supply remains a key priority given the scarcity of firm capacity as proven by the TSO request to delay maintenance works as well as the repeated activation of active demand response service for large consumers. Recent developments include the extension of the Almaraz nuclear license until June 2030, the approval of capacity market network with auction steel pendings and the launch of the capacity allocation process for non-mainland territories. Finally, on demand, data center along with real estate and industrial developments represent a significant opportunity for electricity demand growth in Spain. However, unlocking the potential will require an appropriate regulatory framework and sufficient grid availability. The current draft of regulation of data center remains demanding, and therefore, more proportionate condition will be key to support the future investment and help capture the opportunity. Turning now on Slide 6. Let me spend a minute to comment the market dynamics driving the activity during this period. Following a couple of quarters in which electricity prices show showed a relative decoupling from global market trends. During the third quarter of 2026, full price absorbed far exceeding the EUR 100 per megawatt hour mark, reflecting the impact of stronger summer demand amid rising LNG prices and in particular, lower wind and hydro production. In addition, ancillary services costs increased 34% year-on-year to EUR 22 per megawatt hour, affected by the TSO enforcement operations still in place. Against the challenging macroeconomic backdrop, fundamentals remain supportive as main lender demand continues to grow and at a healthy pace, confirming the structural verification trends that underpins our longer-term outlook. In particular, in the first 9 months, of 2026. Mainland electricity demand grew by 3.3% or 1.6% in adjusted terms. Demand growth was widespread across all customer segments, in particular, residential demand recorded the strongest increase up 5% reported mainly by temperature effect on consumption. Services grew by 3.1%, while industrial demand increased by 1.3%, showing a clear sign of recovery compared to previous quarters. Recent market developments are highlighted. Once again, to the role have alighted the role of fixed-price energy contracts that shield customers from market volatility, while regulated tariffs have been directly impacted by rising energy prices. Moving on Slide 7. We continue to accelerate our investment plan with a growth in CapEx and gross CapEx increasing by 19% year-on-year to EUR 1.6 billion. This investment effort continued to support -- is continue to support operational performance in network losses have improved to 9%, while electricity distributed rose to 114 terawatt hours. On the contrary, the time of interruption was 2 minutes higher than last year due to devastating summer wildfire that strike across the whole country. In renewables installed capacity reached 11.4 gigawatt and output reached 15 terawatt hours, with 85% of mainland production coming from emission-free technologies. Finally, the supply business, as previously anticipated. We expect the customer trends to reverse in the short, medium term supported by the actions that we have implemented to remain -- to retain and stabilize our customer base. Let me now hand over to Daniele for the financial results.

Thank you, Gianni. Now turning to Slide 9. The reported EBITDA amounted to EUR 4.6 billion, including EUR 0.2 billion workforce restructuring provision. Excluding this effect, EBITDA grew by 13%. Net income rose by 15% to EUR 2.0 billion while net ordinary income, which is not affected by the sales provision increased by 22% to EUR 2.1 billion. Net financial debt was EUR 1.1 billion higher to EUR 11.2 billion, with the net financial debt-to-EBITDA ratio remaining at 1.8x. Moving to Slide 10. We are going into the details by business at the EBITDA level. The strong performance during the period is mainly due to the contribution of Networks EBITDA, which rose by 25%, while generation and supply EBITDA grew by 3% thanks to strong results in customer and non-mainland business, which were partially offset by a decline in renewables. Turning now to our network business on Slide 11. The gross margin increased by 20% year-on-year to EUR 2.2 billion, mainly driven by the new regulatory framework [ enforce ] since January 2026 and the previous year's resettlements resulting from the update of certain remuneration parameters booked in Q1 and Q3. Within this more favorable context, we significantly accelerated investment with the network CapEx up 42% to EUR 0.9 billion devoted to grid strengthening and expansion to support growing electrification. This accelerated investment is translating into continued RAB growth, reaching EUR 11.3 billion. Turning now to Generation and Supply. Gross margin slightly increased year-on-year, underpinned by the resilience of customers and the stronger contribution from non-mainland generation. Customers' gross margin increased to EUR 1.6 billion, driven by a solid gas business and an improvement in power supply margin. which benefited from the contract revision and hedging strategies carried out, as well as from lower sourcing costs, which largely absorbed the rise in ancillary services. Renewable gross margin decreased to EUR 0.7 billion despite cumulated higher volumes as a consequence of weaker achieved prices and a more negative shape effect, particularly in the third quarter with stronger solar output and lower wind and hydro resorts. Finally, conventional generation remained broadly stable at EUR 1.8 billion. This was mainly supported by no mainland generation with regulatory framework improvement, including higher remuneration rate and better on the recognition, fuel cost optimization, and the positive impact of previous year's resettlements in the court of earnings. This was partially offset by the normalization of the gas management margin. Now on Slide 13, turning to integrated power and gas unitary margins. The free power margin remained broadly stable year-on-year at EUR 53 per megawatt hour, reflecting the dynamics previously commented in a scenario of lower sales. For full year, we expect it to hold at this level. Looking ahead, we maintained a strong power hedging position with around 90%, 80% of 2027 and 65% of 2028 volumes already secured. In gas, unitary margin declined by around 9% to approximately EUR 9 per megawatt hour, normalizing from previous levels while total volumes slightly decreased to 52 terawatt hour. We progressed on 2027 and 2028 hedging strategy amid the current volatile price scenario. Moving to Slide 14. Efficiencies continue to deliver tangible savings with adjusted fixed costs decreasing by 8% year-on-year. These gains more than offset inflationary pressures and the costs associated with business growth supporting the ongoing reduction of our cost base. Beyond these results, we advanced our transformation plan initiatives aimed at structurally reducing our expenses and simplifying the organization. This includes greater digitalization, automation, NII end-to-end process simplification. Moving now to Slide 15. Net ordinary income reached EUR 2.1 billion, up 22% compared to previous year, reflecting the strength of underlying operating performance and positive nonrecurrent effects. D&A slightly increased to EUR 1.7 billion linked to higher investment. Financial results improved by EUR 0.1 billion year-on-year, mainly driven by late payment interest income recognized following several favorable administrative and judicial rulings. Finally, the effective tax rate remained broadly stable at around 24%. Turning to next slide. The cash generation remained robust with operating free cash flow reaching EUR 3.5 billion and representing a strong cash conversion of around 80%. Net financial debt increased by EUR 1.1 billion. The solid cash generation largely funded investment needs while also supporting EUR 2.6 billion of shareholder remuneration, including the dividends paid and approximately EUR 0.9 billion related to the share buyback program. This strong financial position is also reflecting in operating free cash flow to net debt ratio of 36% over the last 12 months as well as the solid leverage ratio which provide us with a significant headroom to accelerate investment and capture future growth opportunities. And now I hand over to Gianni for the closing remarks.

Thank you, Daniele. Let me conclude with a few messages. First, following the first results, the sound results reported. We confirm our net ordinary income guidance of more than EUR 2.4 billion despite the more challenging market conditions expected in the fourth quarter. Looking at the broader energy landscape in Spain, the importance of capacity to ensure security of supply is increasingly recognized as a key process as was made on nuclear life extension and the approval of capacity payment mechanisms. At the same time, electricity demand is growing, reinforcing our positive outlook for Spain and the acceleration of electrification. On fixed-price powered offering, in a context of higher price volatility, this provides greater protection to consumers than a regulated tariff. And to support this acceleration of electrification grid investment will be essential to unlock new conditions and allow additional demand to materialize. Finally, we will represent our strategic plan update in February 2027, providing a more comprehensive view of our strategic priorities going forward. Thank you for the attention, and we will now open to a Q&A session. But let me, before going forward on the Q&A, let me express our condolences at the family that and the relatives that have been affected by the train accident occurred this morning, in the high-speed line Madrid Sevilla. We are close to the families. And of course, in this context, our discussion on the numbers is quite not important.

Thank you, Gianni. For the Q&A, in addition to our CEO and our CFO, we will also be joined by the General Manager of Institutional Affairs, Regulation and Sustainability, Mr. Jose Casas, who will cover the regulatory questions raised. We received many questions ahead of the call, which we have grouped by topic. In particular, we received questions from Meike Becker, HSBC; Jenny Ping, Citi; Manuel Palomo, BNP Paribas; Fernando Garcia, RBC; Jorge Alonso, Bernstein; Javier Garrido, JP Morgan; Pablo Cuadrado, JB Capital; Peter Bisztyga, Bank of America; Pedro Alves, Caixa Bank; Arturo Murua, Jefferies,;Rob Pulleyn, Morgan Stanley; Alberto Gandolfi, Goldman Sachs; and Javier Suarez from Mediobanca. Thank you all for your participation. The first question is about our 9 months results. What were the main drivers of the strong performance in this period.

As said, the main drivers for performance were mainly growth in network, of course, driven by higher investment. This is a progress that is rolling and will have an impact also in the future. And also the regulatory framework that is has been modified this year and ruling on the positive ruling on previous year settlements that we has been registered this year. In addition, we had the clarification and resettlement with court rulings on non-mainland regulation that has reset and clarify the regulation on this kind -- this part of the regulated business. Retail has expressed a very resilient model, in particular in defending the value of customers. in the context of rising prices and also in the context of higher ancillary cost services. Lower renewables earnings and lower prices registered by renewables in the first half of the year have been in any case, offset -- partially offset by our gas wholesale margins. And efficiency program has been one of the key drivers in providing a more effective processes and also more efficient cost management.

Next question is on full year guidance. Given the strong performance, is there a scope to raise 2026 guidance further? And how far above the EUR 2.4 billion net ordinary income target could Endesa go?

Thank you. We have not raised our guidance in this context given the volatility of prices that we are registering and also the unusual condition -- weather conditions that we have registered all through the third quarter with a significant lack of production both in hydro and particularly in wind, that has affected also the availability of firm capacity in the market. In these conditions, we don't see a change in the fundamentals of our business. And in the position, the competitive position of Endesa, but we don't -- we cannot foresee the future, at least on short-term client conditions. And for this reason, we have not been changing the guidance.

I think the next set of questions is for our CFO, Daniele. Starting with nonrecurring impacts, we have been asked about the total amount recognized in 2026 and what investors should consider as the underlying earning in this space going forward?

Thank you, Isabel. have communicated in the previous call, around EUR 200 million of extraordinary items coming from mainland, non-mainland and distribution. What I want to remark is that this one-off impacted also the current remuneration and the future remuneration. So while we were saying that it was an impact of around EUR 200 million. What I can say that this impact obviously improved. And we have some dozens on top of EUR 200 million impacting but this is regarding previous year items. This is both for distribution and non-mainland. Then what I want to say is that the underlying earnings base remains strong. And the distribution or remuneration scheme has improved and will sustain our results in the quarter and in the future. And regarding generation and supply, as also Gianni said, we have a lack of revenues in renewables. This is mainly due to the fact that our power generation distribution during the year was concentrated more in the initial months of the year with lower prices. And now we are experimenting a lower lack of resorts, especially in wind and hydro in this part of the year. Finally, and I take all the questions regarding our margin. Regarding our customer base. what we are experimenting and what we are estimating for the October month is that we have reduce our loss of clients of customer base, more than 50% respect of what we have experimented in July and June and in the previous quarter. This is due also to the -- all the measures that we have implemented, we have revised our channel. And what we believe is during the next -- the final of this year and the of the next year, this phenomenon will be over.

And going slightly deeper on margins, how do you expect the free power margin to evolve considering generation prices, high ancillary services and reduce our position opportunities? Perhaps you have already answer part of this question.

The margin, the retail margin was resilient to the higher ancillary services. We maintain the margin and we translate part of ancillary services because they were very high. but this is not affecting our margin right now.

And just one more question on gas margins, if you can go deeper on that.

We are very positive on gas margin because what we are seeing is that now we can hedge future margin for gas at higher prices than expected for the next years and also 2028.

. Okay. Next question is on ancillary services cost, and I think this time is for our CEO. What is your estimate for this cost and regulatory or market developments could help bring them down over time?

We are experimenting. We are experimenting a significant growth in ancillary service costs, 40% to the end of September. The total amount is above EUR 4 billion, and we forecast at the end of the year between EUR 5.5 billion and EUR 6 billion estimate of total cost. It's clearly a significant impact on which retail customers have been protected for a significant part by liberalized market, but is totally transferred in most of the B2B contracts. For this reason, we have been registering a negative impact on mainly on supply, the retail part of supply by EUR 200 million, and that is partially offset by EUR 100 million on the thermal generation. In the long term, we see that clearly, we need a significant plan, investment plan and that should be implemented in the short-term possible time in order to guarantee a better dispatching program for all Spain and also more secure exercise system equilibrium during the providing of the provision of energy. And this, of course, may require the contribution of all the players. But in regulated terms, we see that most of the markets in Europe, like as it has been implemented in Portugal are transferring this cost in regulated fashion to customers, being this shared cost for security that should be supported by all consumers. Clearly, there is a value also in implementing and guaranteeing firm capacity that is also flexible in the longer term.

Thank you, Gianni. And now looking at the market context, we are asking for our key -- the key sensitivities that Endesa has to power prices, inflation and interest rates for 2027, 2028?

On commodities, being that we have a limited exposure to an edge volumes up to 2028. We don't see a significant impact. Clearly, the impact is mainly on investment strategy, in particular in regulated businesses. Given the fact that the Spanish regulatory framework still does not provide an indexation to inflation in current market conditions and with a short, only a short-term impact, this may not be affecting the strategy of investments, but it's clear that in a repeated -- and in a longer-term scenario with high inflation specific provision or an intervention from the regulator will be needed. On the debt part, this probably Daniele, I would say it much clearer, but we have a limited exposure given the fact that more than 50% of our debt is at fixed rate and in our scenario short -- long-term scenario.

Yes. So Gianni, I confirm what you have said. We have a great part our debt at fixed interest. And what I can say is also our indebtedness of the company is not so.

Next question is on efficiencies. Given the strong impact of your efficiency measures, how much further upside can we expect, considering that Endesa is already perceived as a very efficient company?

In reality, efficiency is a never-ending process, particularly being in the middle of such a technology change. We have to review our way to manage business in all the processes that could be affected by the addition of information technology, in particular, artificial intelligence. We are now running one of the rounds of plants that we have put in place with a 9-month result that cut costs by 9% year-on-year with an impact of around EUR 140 million that we registered at this point. We expect future further saving in the fourth quarter, and we are starting for a new wave in 2027.

Okay. I had another question about competition, but I think it has been covered by Daniele. I don't know if you want to add something more, but otherwise, we can go to the next one. So next one is on the shares outperformance. They are asking what do you see as the main catalyst for further upside from current high levels.