Enel SpA (ENEL) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Enel First Half 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Monica Girardi, Head of Group Investor Relations. Please go ahead.

Thank you, operator. Good evening to all the people connected. Welcome to the first half 2023 results presentation, which will be hosted by Enel's CEO of Flavio Cattaneo; and the CFO, Stefano De Angelis. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send questions only via email at investor.relations@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 CEO.

Thank you, Monica, and welcome to everybody. I was appointed 75 days ago as a CEO. And since then, my focus has been on the following priorities. First, capital allocation to maximize return and reduce the risk profile on the asset base supporting growth; second, efficiency to free up resources and secure profitability. Third, core activities and geographies to run a simpler asset base and then financial -- sorry, discipline to strengthen the capital structure of the group. These will be priorities to be applied across all processes and in each place where we are to maximize the value for our all shareholders, stakeholders, granting a sustainable growth of our integrated business model. Let's move to the action we put in place on Page 3. We have started a new process on capital allocation based on detailed and tailored and flexible evaluation of the investment return. In addition, we have already launched a spending review program 100% of cash cost with an immediate focus on discretionary costs that has allowed us to already achieve 8% of savings only in June compared to the budget expectation. In the following months, we expect to extract the same level of efficiencies. We have already completed the first simplification of the group's organizational structures that underline the focus on core geographics and activities and on a clear attribution of duties. Going forward, we work to reduce inefficiency. Let's now look at the progress on the disposal plan on Slide 4. Today, EUR 6 billion have already been closed or announced and this represents 50% of the total target set for this year. I want to remind you that the closing of some of this transaction is subject to former regulatory authorization. On top of this EUR 6 billion, we have EUR 4 billion in a final stage of negotiation, and we have already received binding offers. The rest is associated with deals that are ongoing in the various stages of [indiscernible]. Due to the actions mentioned before, we are confident to achieve the deleverage set in the full year target, even if we aren't disposing all of the assets announced last year. Just to be clear, we are not in a rush to sell and we will sell only at the right price. Thank you for your attention. And now I leave the floor to Stefano to comment on the first half. Please, Stefano.

Thank you, Flavio. Let's start. I'm on Page 6 with the highlights of the period. During the first half, the group recorded a strong and consistent operating and financial performance that offers a good visibility on the evolution of financials for the rest of the year. The EBITDA is up high double digits compared to last year and reached EUR 10.7 billion on the back of a less volatile environment that restored the full industrial growth potential of the group. Funds from operation is robust and accounts for EUR 5.4 billion, even stronger than historical levels, thanks to the EBITDA growth and the further recovery of the dynamics that affected the working capital evolution last year. The execution of our EUR 21 billion disposal plan is well on track with deals closed in 2022, all agreed more recently, totaling around EUR 12 billion, of which around EUR 5 billion still to be cashed in pending authorizations, as Flavio mentioned before. Operating delivery came in quite strong as well, and I'm now moving on Page 7 with the main business KPIs. Our developing machine has stopped with renewable capacity increasing 4.6 giga over the last 12 months, derisking our generation output with 67 terawatt hours of renewables production. Emissions-free production in the semester accounted for 73% of the total, up sensibly versus previous year. Customers in the liberalized market increased by EUR 1.2 million, thanks to a commercial offering that was appealing and affordable. Revenue asset base per grid customer increased by 8% on the back of new investment and the indexation of the asset base to inflation. Investment that foods our asset base are analyzed in the next slide. I'm on Page 8. The CapEx stood at EUR 6.4 billion and were allocated as follows: EUR 3.7 billion supported our integrated strategy with renewables accounting for almost EUR 3 billion in customer development for the rest. EUR 2.6 billion was spent in grids to expand and upgrade our networks while increasing the regulated asset base. From a geographical perspective, more than 60% was devoted to Europe, with the lion's share spent in Italy, followed by Spain, Latin America and then U.S. This allocation is pointing to a strong focus on core geographies where margins are supported by visible regulatory frameworks in a less volatile environment. Additionally, around 80% was spent in core countries in continuing operation, while the remaining portion is associated with investments on asset, including the strategic repositioning program, whose impact on net debt would be recovered once they're consolidated. Let's now move on the main drivers of the EBITDA on Page 9. Ordinary EBITDA marked a sound 29% growth year-on-year despite -- 29%, sorry, despite around 500 million perimeter effect, mainly associated with the disposal of assets we closed over the last 12 months. The integrated business represent the bulk of this growth with a EUR 2.2 billion increase year-on-year, [indiscernible] by a notable 50% as a normalizing environment drove the rebounding of all the negative dynamics that affected 2022. More in the [ dates ], it's worth to mention 4 major topics: the recovery of production from renewables, mostly associated with hydro normalization versus an extremely dry 2022 covered with production coming from the newly installed renewable capacity. Second, the reduced volatility allowed us to move towards a normalized production from thermal. Third topic, the margin of [indiscernible] activities that are now back to pre-energy crisis level as well as the impact of portfolio optimization. And lastly, this positive has been partially offset by the clawback measures implemented in Europe. On the network side, the EBITDA stood at EUR 4.2 billion, up by EUR 600 million year-on-year on the dynamics that I will summarize in the next slide. The stewardship business model regarded a negative change year-on-year for around EUR 200 million and is associated with the gain from Ufinet disposal recorded in last year. I want to stress here that the EBITDA of the first semester does not include any nonrecurring gain from the stewardship business model, while in the following quarter is expected to contribute to the results for around EUR 500 million, thanks to the deals already announced. Last remarks from -- comes from the geographic perspective where the European countries accounted for almost 70% of the total EBITDA of the period. As I said before, next slide is about the grid performance. I'm on Slide #10. The grids EBITDA stood at EUR 4.2 billion, increasing 40% year-on-year. In Europe, EBITDA growth is in line with our expectation for the core markets where the Italian grids benefited from higher tariffs mainly associated with the revenue asset base growth and the indexation to the CPI. On top of this growth, we accounted for the recognition of the higher cost recorded last year in Romania to cover network losses. In Latin America, the contribution was for around EUR 100 million, thanks to the inflation dynamics and higher volumes distributed that more than compensated the negative perimeter effect coming from the sale of the Goiás grid. On a like-for-like basis, the growth of EBITDA LatAm would have been around EUR 250 million. Looking closely at the regulatory framework in the period, tariffs were adjusted upwards in Rio, Ceara and Sao Paulo. While in the future, the performance in either should be supported by the WACC adjustment mechanism that is pointing to an increase. Let's now continue the analysis of the result with the earnings evolution on Slide 11. Ordinary group net income came in at EUR 3.3 billion, increasing 52% versus last year, driven by the strong EBITDA performance already commented. D&A are flat versus 2022 as a consequence of higher amortization for a higher level of investment, neutralized by lower level of bad debt provisioning due to the turnover dynamics. Net financial charges increased by around EUR 500 million year-on-year, out of which EUR 400 million were associated with higher financial expenses on the back of the worsening of interest rates environment affecting the variable portion of the debt, which in total accounts for 26%, and second, a higher level of gross debt. Income taxes increased versus previous year by around EUR 600 million due to the taxable income expansion base boosted by the operating result, while the net -- the tax rate proved almost stable. Finally, Minorities was driven by the rebalancing of the geographical mix. Moving on Slide 12, we have the cash flow analysis, where we can see that the funds from operations stood at EUR 5.4 billion showing some EUR 4.7 billion increase versus the first half of last year, thanks to the improvement in working capital dynamics, which are now progressing to a normalized trend. In particular, I will also highlight that working capital is in line with historical evolution for the first semester a record almost EUR 3 billion versus previous year. In the next quarters, we expect [indiscernible] to move back to a normalized trend driven by the business dynamics. Looking at the moving parts in the second quarter, the cash out for taxes was EUR 1.2 billion impacted by the lump sum payment of the solidarity contribution in Italy for around EUR 600 million, while financial charges paid in Q2 stood at EUR 1.2 billion due to the well-known schedule of the coupons payment, balancing the lower Q1 cash impact. On next slide, on Slide 13, we have the net debt evolution. The net debt came at EUR 62.2 billion. Over the period, the funds from operation contributed positively to the net debt evolution for EUR 5.4 billion, as commented before. Capital expenditures amounted to EUR 6.4 billion, slight increase versus previous year. It is worth to highlight that assets under disposal are included in the CapEx figure and account for more than EUR 1 billion in the period, while their contribution to the FFO is limiting, being mainly projects and assets in the early stage of development. If we exclude the cash outflow from those assets, the FFO minus CapEx would have been almost neutral. Dividend payment amounted to EUR 2.4 billion, while foreign exchange dynamics and leasing recorded a negative impact of around EUR 600 million on debt. These items generated a noncash delta on net debt of around EUR 1 billion if we compare the semester's stock of debt to last year 1. Active portfolio management contributed only for EUR 1 billion as the bulk of the deals announced so far have yet to be cashed in. Accounting for the agreed financial terms of these deals, the pro forma net debt would have stood at around EUR 57 billion, down around EUR 3 billion versus full year 2022. This performance translates also on credit ratio progress. And now moving to Slide 14. Our strong commitment on a strict financial discipline is driving us on a concrete path to a sustainable leverage. Therefore, the main focus would be on [indiscernible] all the regulatory approvals needed to cash in from disposals that have been announced so far while improving the structural ability of the group to generate cash and achieve a profitable growth. All this will result in a more solid and stronger credit ratio, which is instrumental to generate value in the future. Concluding my section of the presentation on Slide 15, it is important to the mark that while we have embraced the company's strategic priorities, we are fully focused on delivering on targets, doing our best to improve and accelerate on the execution. Let me now conclude saying that the guidance for the full year 2022 -- 2023, sorry, is confirmed. And I now hand over to the CEO.

Thank you, Stefano. Let me conclude with some closing remarks. In the first slide, I pointed out our priorities and the managerial action implemented are set to improve our cash generation to strengthen the capital structure of the group. I strongly believe a stronger set of financial ratio will result in a more resilient company. And the commitment with shareholders will not change and we'll maintain an appealing and sustainable dividend policy. Our priorities are and will remain aligned with the interest of investors and stakeholders. In November, we'll present the new strategic plan and we'll disclose also in numbers, obviously, our priorities will foster the total shareholder return of this group. Thank you for your attention, and Monica, let's open to Q&A session.

Okay. Thank you. Now we open the Q&A session. We have received many questions associated with the strategy in the future, and how this translates into numbers. I may ask you to bear with us for a few months, just a few as the plan would be presented soon. And you will -- I'm sure you will find the answers to all of your questions at that time. So we have an hard stop. So we will try to be as efficient as possible and pack -- and we packed up a bit the questions that came through. First set of question is directed to the CEO. Can the CEO elaborate on his view on the sector and the priorities for the group?

Well, we have shown in the presentation our current priorities. We are focused on improving efficiency across the group and enhancing profitability through a leaner organization and business footprint. At the same time, we continue to invest in the group's integrated business with a view to maximize the risk-adjusted return and growth. This will remain as a key areas of focus also for the future. But the details of our strategy will be presented in our next Capital Market Day.

Second question, new management has been in place for a few months, I would say, just a couple. But may we ask 1 positive and 1 challenge that you have found surprising so far.

The first one positive, undeniable know-how of Enel people and their commitment for change. Regarding the challenge, the complexity of group processes and organization, in some cases, such complexity has created inefficiencies and ineffective capital allocation. But as I mentioned before, we are already working on it.

Thank you. The third question is if you see any major discontinuity to the equity story.

Actually, the Capital Market Day will be the day when we'll present discontinuities or continuities. There will be focus on execution, first of all, efficiency and better capital allocation to boost a sustainable growth. And I'm sure we'll not -- you will not be disappointed.

A popular question is about the offshore wind. Is there any interest to develop?

This is a very popular question. We confirm the usually consideration of Enel. We don't consider offshore wind like an asset that can generate more profitability rather than the current ones.

Disposal plan. What is the expected contribution from the M&A deals for '23 and '24, is a setup of the disposals possible or even needed in your view?

As you have seen in the presentation, for this year, we have announced deals worth around EUR 6 billion, and we have a EUR 4 billion currently in the final stages of negotiation on the back of the binding offers received, this is very concrete. Our intention is to continue the disposal plan, but not at any price. This is clear for my commitment is preserve the value of the asset of Enel that this value is for all our shareholders. In any case, we were working to achieve the level of debt that we have in a full year target and M&A is an instrument, but not only the lever that we have.

Really clear. The sixth question is about rumors that were pointing to a possible sale of the stake in Endesa.

The answer is very simple, totally [ unfunded ].

Strict to the point. Can the new strategy impose significant changes to the dividend policy?

I repeat again, no changes to the dividend policy. It is our intention to maintain a sustainable and attractive dividend policy.

I think you mentioned at the beginning, but maybe for people that were connecting late is the Capital Market Day confirmed for November in line with previous years?

Absolutely in line with the previous year. Capital Day Market will be in late November, details will be available soon.

Good. I think we can now move to a set of questions that are probably more suitable for our CFO. 2023 targets. Can you walk us through the moving parts to reach full year targets and potential upside to guidance?

Let's make this balance to analysis. So start from the first half EBITDA, we should have, let's say, between EUR 9.7 billion and EUR 10.3 billion in the second half to meet the guided range. Looking at the different business line in the next 6 months in the integrated business, we see further normalization that will reflect also in the trading profit due to a less volatile commodities environment. For the grids, the underlying performance, we continue to be solid in the core markets compared to first half '23. Keep attention when compared on a year-on-year basis because we have to analyze and reflect the impact of the disposed assets. The stewardship model, as I said before in the presentation, will contribute with around EUR 500 million, mostly coming from the deals just announced. And this is also in line with the guided EUR 1.5 billion cumulative target for the 2025 plan. Summarizing the underlying business is performing strongly. Say that we see lots of moving parts, which may play out differently than expected as, for example, the hydro and uncertainty about the government fiscal policy potentially also retroactive. So as of today, we're going to confirm the numbers shared with the market in November last year, I think that they are highly visible for us.

Integrated margin is improving substantially, what would be necessary to continue improving it in the coming years? Are you going to achieve the targets?

It's important to say that the integrated margins are back to normal levels -- improving, but back to normal levels after 2022. There was a [indiscernible] we have many times mentioned the strategic priority and execution approach that will drive our action in the next years. Sustainable capital allocation efficiencies as an enabler of fast and profitable execution towards a variable growth. As the CEO said, you will see in a few months how this will translate also into numbers.

Net debt for 2023, what are the possible upside that you -- that could bring that further down?

Again, as I think clearly explained by Flavio, we are fully committed on the leverage targets and see them comfortably at reach. Thanks to the progresses on the disposal program on which we are working with a value-driven approach, but it's important to say also thanks to all the -- the action we put in place will result into strong and long last improvement of the businesses, which will be run more efficiently and will be supported by a capital allocation set to create more value and a sustainable growth.