IRE (IRE) 2017-05-11 Earnings Call Transcript

Good afternoon, everybody. And thank you for attending the presentation of Iren's '17 first quarter result. As you can see from Page 2 of the presentation, the positive trend that characterized the last 2 years has continued into this quarter. All the operating KPIs, in fact, show a double-digit grow. It is important to outline the fact that all -- the EBITDA increase of EUR 26 million, approximately 65% derives from a combination of organic grow and scenario factors, proving how the company has been able to fully exploit the opportunity of -- by this scenario, thanks to an active aging policy and sound strategic operating choices. On top of these, we achieved a further EUR 4 million of synergies in line with the business plan forecast, while an additional EUR 5 million of incremental EBITDA stemmed from M&A transaction already closing in '16, in particular Atena in Società Acque Potabili. As far as EBIT is concerned, it reflects the good performance at EBITDA level, while net profit is even more improved thanks to lower financial charge due to the liability management operation closed last year and lower taxes due to the change in U.S. percentage from 27.5% to 24%. Moving on the business unit section. Let's start with the generation and district heating were a result benefited from the exceptional increase in comprises experienced in the last 6 months. In particular, 24% of EBITDA grow achieved in the first quarter '17 is attributable to the ability of the company exploiting the already cited grow trend. The thermoelectric/co-generation sector (sic) [ thermoelectric/co-generative Sector ] benefited from higher spark-spreads. The hydroelectric sector benefited instead directly from the sharp increasing comprises than offset the lower volumes per user equal to minus 45 gigawatt hours, minus 18% in passive [indiscernible]. In addition, the more active management of IREN's generation fleet, thanks also to it increased the flexibility due, for example, to heat the storage buildup in the last few years allowed the company to better exploit ancillary services such as MSD. With regards to this strategy, the impact of [indiscernible] trend on each production was neutral as low as temperature reported in the first 45 days of '17 were offset by warmer temperature in March. The higher volumes sold approximately plus 3%, therefore, derives directly from the 4% increase in volumes heated. As far as the outlook for the next 9 months is concerned, we don't think that the exceptional scenario experienced in the last 6 months will persist. As it was mainly linked to the outage of a number of French nuclear plant. In any cases, profitability will be maintained by the effective way of proactively managing of our plants already showed by the group. Moving to the market business unit, the slight grow in EBITDA stemmed from 2 opposite phenomena. The first one is electricity sales sector, and it is linked to the already mentioned trend, which, in this case, played a negative role as opposite to offset the net in generation sector. Anyway, the sector it was more than affected by a very positive performance forecasted in gas sector, driven by the utilization of our gas storage bought during summer season at lower prices. Particularly important, the focus that the group put on end clients, it led, first of all, to 87,000 grow in terms of number of clients in the last 12 months and to an outstanding 70% additional electricity volumes sold through this segment, thanks also to [ constant ] and selected business client. Such an important grow could not be completely reflected in margins in the short term. And in the presence of exceptional negative trend, as of course, this quarter. But it has a very important stabilizing rule in [ near ] profitability on our annual base in a more standard scenario. The focus on end clients, in particular, on repeat clients is also seen in the launch in last months of the so-called new dumping project, an innovative and powerful marketing project aimed at turning the sale of a simple commodity into high-rewarding customer experience. Part of this project is the new massive, the sizing campaign launched 1 week ago. The first in years for Iren, which has been involved all our reference territories with billboard, radio, print and new media advertising. As far as the outlook for the next 9 months is concerned, the gas sector, the extra profitability reported in the first quarter is likely to offset the worse scenario expressed in the fourth quarter compared to last year. '17 full year results on gas sector should be, therefore, in line with what we reported in '16. With regards to electricity sector, it's worth noting that we had already declared that we were expecting a worse electricity scenario for '17 compared to '16 in which we reported approximately EUR 20 million of extra margin. But the exceptional trend experienced in particular in the first 2 months of this year worsened our expectation on electricity supply profitability. Before moving on next business unit, I think that in order to understand the real impact of these exceptional scenario on Iren's account, we should consider the energy value chain as a whole. Bond prices in fact works as a proxy of sale prices for the generation business unit and as a proxy of support procurement prices for the electricity supply sector, obviously, with opposite outcomes. Taking into consideration the entire energy value chain, even considering such a short time frame, we see that the impact on the PUN trend on our accounts is definitely positive, and it's worth approximately EUR 7 million, EUR 8 million. This performance stemmed from a clear attribution of responsibility from end -- from an integrated vision and management of the 2 business units, generation and market, with the aim of maximizing the group profitability. Finally, these results are even more significant in consideration of the safe risk policy -- profile of the company. It is linked, first of all, to structural reasons. The majority of Iren's generation plan, in fact, is connected to a specific networks. It guarantees higher and more stable margins, but with less flexibility compared to full [ margin ] plans in particular in the winter quarters. The safe risk profile over the group is linked as well to Iren risk policy in which low risk taking is one of the key elements. Moving on to network sector, Page 5. The 4% growth reported in EBITDA is the sum of several effect, including also a number of extraordinary items. In particular, the energy infrastructure section benefited from the synergies achieved in the quarter in line with the business plan target and from the changes in scope of consolidation thanks to Atena, they consolidated from May 16. This element more than offsets higher prices for the purchase of so-called white certificate due to previous year's obligation and therefore nonrecurring in the future. The Water sector was also positively impacted by a change in the scope of consolidation, mainly due to Atena and residual concession coming from Acque Potabili and achieved a synergy which more than offset a number of minor negative elements. The strategic initiative of the company for the year will focus on continue the synergy's extraction process as approximately half of the total synergy achieved derived from the Network Business Unit. Moreover, we are waiting for the gas concession tender in which we are currently incumbent and where we're also keep an eye on other tenders, which are within our reference area. The last business unit to expand is the waste sector, Page 6, where we find a remarkable 22% increase in EBITDA. And like the last 2 years, the excellent performance is not attributable to external grow but to the outcome of a sound policy, both in waste collection and waste treatment/disposal. The waste collection sector benefited mainly from efficient collection system implemented day by day in our reference area. IREN is committed to a progressive adoption of European best practice in terms of door-to-door and pay-as-you-throw sorted waste collection scheme. Emblematic in this sense is a system adopted in the whole Municipality of Parma, which allowed for a certain waste collection percentage of more than 75%, widely beating the European target at 2020, 70% in a territory of approximately 2,000 -- 200,000 inhabitants. Overall the average sorted waste collection percentage in Iren territories amount to 59% against an average national level of 47%. The waste disposal sector was positively impacted by [indiscernible] of waste-to-energy plants, which allowed for higher electricity recovery. As far as the treatment sector is concerned, it's working not in Iren's improvement in penetration in the special waste treatment market, volumes up by 18%. Summarizing, the focus of the company in the future will be the implementation even more effective sorted waste collection system together with higher penetration in the special waste sector in light of the expected development of the treatment plan protocol in the future. Finally, I'd like to confirm that the positive impact on Iren's EBITDA deriving from the acquisition, the REI landfill in Turin, that took place at the end of last year will start to contribute from the next month. Now I hand over to CFO, Massimo Levrino for comments on financial performance of the company.

Thank you, Massimiliano. Good afternoon, everybody. We are going to Page 7. This chart shows the first quarter Iren result from EBITDA to net profit. Starting from EBIT that stands at EUR 174.4 million, you can see an increase of 13%. And this growth is, of course, due to the increase of EBITDA that, as mentioned before, increased by EUR 26 million. The increase of EBIT is EUR 20 million and it is affected by the growth of depreciation, amortization that rose from EUR 70.6 million to EUR 76.4 million mainly related to the extension in the scope of consolidation with the company, Atena, and through the acquisition of the company Acque Potabili [indiscernible] water concession located mainly in the remote west of Italy. The provision is stable at EUR 14.2 million. EBT stands at EUR 158.8 million, up 28.4% and this increase is higher than the increase of EBIT due to lower charges of financial items that I'm going to describe in detail. First of all, financial charges for loan and bonds stand at EUR 21.5 million, and they decreased by EUR 2 million from EUR 23.7 million (sic) [ EUR 23.6 million ] to EUR 21.5 million, that basically the decrease was due to a lower cost of the financial debt, thanks to the liability management did last years, in particular in November 2016. The other financial charges stands on EUR 1 million, and shown an improvement of 7% -- EUR 7 million due to the positive contribution of the fair value of [indiscernible] appears not [indiscernible] and to lower cost actualization -- for actualization charges on the provision. The net profit of the company is consolidated using equity method gave a positive contribution of roughly EUR 5 million, this is due to higher nonrecurring results in the company as [indiscernible]. The group net profit increased by EUR 27.8 million due to the increase of EBIT, first of all, and through the reduction of tax rate from 37% to 32%, thanks to the reduction of U.S. from 27.5% to 24%. Minorities was EUR 7.2 million with a low decrease compared to the first Q of 2016. And now going to Page 8, you can see the cash flow, the net financial position. Net financial position at the 31st of March 2017 shows an influence of EUR 36 million (sic) [ EUR 35 million ] from EUR 2,457 million to EUR 2,421 million (sic) [ EUR 2,422 million ] confirming the positive trend already shown in 2016 when the reduction was EUR 170 million and without considering the extension in the scope of consolidation of the [indiscernible] data. And this improving especially due to the cash flow that is in fact, it is considered as sum of net profit and depreciation, we have EUR 172 million of the cash flow with an increase of EUR 21 million compared with the same period in the 2016. The net working capital showed an growth of EUR 53 million due to a seasonal trend, and to the extension in the scope of consolidation of Acque Potabili that I mentioned before. It is also important to taking into account increasing the revenues by about EUR 170 million in the first quarter. The total investment were EUR 47 million and with a slight increase compared with the last year. The consolidation that stands at EUR 26 million (sic) [ EUR 28 million ] is related to the acquisition by stake of 40% [ Liguria ] that was carried out through a capital increase equal to EUR 50 million and through the acquisition from Acque Potabili where the business branch composed of the integrated water concession for an amount of EUR 30 million. The fair value of derivatives had a decrease of EUR 11 million and this in particular due to the fair value -- negative fair value of the commodities. And this fair value gave a negative impact in the next financial position at the end of the March. And lastly, going to Page 9. You can see the interest rate and debt structure. The first pie chart on the right represents the breakdown of the gross debt, and as you can see, only 11% of the growth debt is at the variable rate, the remaining 89% is fixed rate or [indiscernible], this ensure, of course, stability in cost of debt using presence of future possible increase of the interest rate. The average duration on long-term debt is 4.9 years, slightly lower than in 2016. The cost of debt is 3.3% instead of 3.4% in the -- at the end of 2016 and 3.6% in the first quarter 2016. Then to the other thing [indiscernible] that I mentioned before. The second pie chart on the right represent the breakdown of the debt structure. The pie chart shows that Iren's total gross debt is formed by bond for 47% (sic) [ 46% ] thanks to the -- also to the last bond issue of EUR 500 million at the end of October 2016, and the other financial sources are EIB for 32% and loans from bank for 22%. There are no changes compared with 2016. In the first quarter, Iren's signed a new contract with EIB for a new loan of EUR 75 million usable in a number of future tranches. So the total liability of -- from EIB funds rose and now it is equal to EUR 185 million all loans with a maturity -- a future maturity of 15 years amortizing. Now, I hand it over to Mr. Bianco for the closing remarks.

Thank you. In conclusion, moving to Slide 10. I would like to point out that while in '15 and '16 results were significantly impacted by the contribution derived from the change in the scope of consolidation, in particular [indiscernible] in PUN, you see in particular this quarter's results are instead only marginally hit by M&A transaction. Nonetheless, the performance is still very positive with a double-digit growth in all operating KPIs. One of the growth driver was a significant performance in energy value chain that was led, on one end, by a clear attribution of our responsibilities and, on the other hand, by a more integrated view between generation and market sector. This trend underlines the sound strategic guidelines outlined in the business plan and its punctual implementation, showing more, in general, how the group has set a new internal standard in terms of efficiency in processes and the effectiveness of action. All these elements allow us to be confident in a EBITDA forecast at the end of this year of between EUR 800 million and EUR 810 million, taking into account the worse scenario compared to '16 with a net debt EBITDA ratio lower than 3%. In term of the net profit, it's too early to give any prediction, but we expect it to be higher than EUR 60 million. We can now start the Q&A section.

Okay. Thank you, very much to everybody. See you soon. Bye.

[Operator Instructions] The first question is from Javier Suarez of Mediobanca.

I have 2 or 3. The first one is on your latest statement on the guidance for the EBITDA in 2017. You have mentioned something between EUR 800 million to EUR 810 million. Can you specify for us what is inside these numbers in terms of contribution from the -- from ancillary services from the MSD market? I'm interested in the absolute contribution of the ancillary service market during the first quarter of the year, which is your full year expectation. That is on the EBITDA guidance for 2017. Then, I have noticed that on the EBITDA consolidation equity consolidated line, there is a contribution of EUR 4.9 million that you have defined as a nonrecurring item. Can you explain us how this going to evolve through the year and the number that we should expect by the year-end? And to what this is related to? And the final question is on the white certificates, I think, that's in the presentation in slide number -- I think it's in Slide #5. You have mentioned that there's a negative contribution from higher cost of white certificates. But during the presentation you mentioned that as a -- or you presented that as a one-off. So should we assume that this is something related to previous years and therefore, should not be replicated during the next quarter of the year?

Okay. Thank you, Javier. So I start it from the last point. Yes, the cost of white certificates are related to previous year's obligations. So we do not expect that this is a recurrent cost. So if it's correct, do not consider for the next quarter this cost. About the guidance, you asked about the MSD contribution, the contribution on MSD in this quarter was roughly EUR 20 million plus in the range of EUR 5 million compared to last year. And what we expect for full year is the same level of what we add in the '16, so in a range of EUR 45 million. About your second question, I ask Massimo to answer.

Now looking back in the year 2017 the result will be close to 0. And so we've said that positive result in the first quarter.

And can you clarify to what this is related to? So where these EUR 4.9 million of equity consolidated contribution is coming from? And this should be 0 because of the contribution for their activities or because of the evolution of this EUR 4.9 million?

The results -- we think that the results, the net profit -- the net loss of [indiscernible] will set to the positive results of the first quarter.

And therefore, we should actually mark 0 at that line in 2017 not assuming any improvement in the regulation for all, correct?

Yes. It is like this. We do not assume in what Massimo said, any positive impact arising from the clarification in the regulatory framework, that in any case, we expect will happen in the next few months.

The next question is from Enrico Bartoli of MainFirst.

A few questions from my side. First of all, on the market business. Two things. You mentioned that you expect, if I understood well, a worsening of the electricity supply margins. Could you elaborate a bit on this? And what are the drivers of this decrease in the electricity supply margins? And then on the gas side, if you can quantify the impacts on EBITDA from the several price that you got from the storage or in other way, if you can provide us a normalized EBITDA for this quarter in -- in normalized for market condition? Then I have a question related waste, you mentioned a positive trend in the special waste business in terms of prices and volumes. If you can provide some details and if this trend, you expect, that it's going to continue over the next quarters? And finally, on the cost of debts, if the 3.3% is your guidance for the full year and if it's reasonable you have more or less EUR 20 million of interest charge in the quarter if it's reasonable to multiply that for -- by 4 for the full year?

I [indiscernible] Massimo the last questions.

Last questions, yes. It's cost of debt, our forecast are -- of a cost of debt are slightly lower than 3.3%, but in general we think that will be 3.2%. Then to the fact that the early relation or [indiscernible] will be -- they give benefit started from October 2017. Referring to the interest charges we think that EUR 20 million market price, 4 is a correct forecast for the full-year financial charge.

Okay. But our view on supply, about the trend that we expect in next quarter on gas supply, the impact of the benefit we had from the gas storage is in a range of EUR 8 million. So vis-a-vis the amount of the impact from the gas supply that is it will not be recurrent. And we expect to achieve the profitability on the gas supply compared to last year out of this -- on this asset. But the energy supply, as we said last year, and we said before, we are -- we work in an integrated view of generation [ in ] market. So we -- our expectation of a reduction of EUR 20 million compared to '16 worsened in the first 2 months of this year. And with the reason because we expect a worse scenario during this year. But as I said before, as an integrated view we had positive impact to managing in a combined way that the EUR 2 million [indiscernible] in the first quarter, the positive impact of this way of manage the energy value chain gave us benefit for approximately EUR 7 million, EUR 8 million. For the next month, we expect to keep our profitability in generation and to, let's say, receive well impact of the negative compared to '16 impact of the change in scenario that we expected last year. About the special waste, we are continuing to grow, as you know for us, special waste are a part of the value chain in the Waste sector and allow us to maximize the profitability of our plant. First of all, our plant are related to full [indiscernible] waste treatment and disposal, but we use special waste to maximize the profitability, so we keep the positive impact when we not use our plants and we have more when we have space in our plants to use -- to disposal fleet special waste. So we are growing while we don't need to grow. And also, we are continuing to grow in a range of 50,000 tons per year on average because first we need to increase and we are doing our plants capability.

The next question is from Meris Tonin of Intesa Sanpaolo.

Just 2 quick questions. The first one is a general update on M&A and external growth. You have been studying many this year and the main one on Genoa and [indiscernible] La Spezia, if you can provide us an update on that side. And the second question is on CapEx. We saw in the quarter, CapEx almost [ land ] to last year. Can we expect an upward trend during the following quarters and general target for the year? And also given understanding, if you also provide the target for the net income for the full year.

An update on M&A. As you know, we have a target of EUR 100 million in canceled potential additional EBITDA arising from M&A in the next year that are not included in our business plan. We confirm that we are working on a several dossier, and the sum of all the opportunities we are examining are more than our target. We don't see any concern about the possibility of the growth to be the leader in the [indiscernible] in the consolidation process. The 2x traction you mentioned [indiscernible], the first [indiscernible] is now not anymore on the table because of the [indiscernible] of the [indiscernible] Genoa so we'll wait what will lead after the election in June and what the [indiscernible] Genoa we decide after the election, at the end of June or July. And we expect that they -- we'll discussing [indiscernible], but of course we don't know in which tense. About [indiscernible] La Spezia, is the company trend that there's a business or waste cycle in the water, there is public tender, the deadline is in the next 2, 3 weeks to present EBITDA, of course, right now we are starting above this, of course, the business are interesting for us. About the CapEx for the year, we have a target, let's say, a bit higher than what we reported in the first quarter, mainly related to regulated activities remain in network-based businesses. We can assume for the full year and a CapEx in a region of EUR 350 million. Of course, the increase in our CapEx in the year and not linear in [indiscernible] it was the second half of year has a higher percentage of production. We don't give a usual any guidance in terms of net income. As I said before, we expect an increase compared to what we did last year it was 174.

If I may. Can you recap the contribution from small M&A deals that you completed last year, especially Acque Potabili in new concession acquired from Acque Potabili and [indiscernible]?

Expense of the EBITDA on quarter?

On annual target.

On the Acque Potabili, the contribution of let's say the network's water concession arising from Acque Potabili, it's in a region of EUR 3 million on annual basis. And what we expect for the [indiscernible] activity of the land field we bought in [ Italy ] is in a range of EUR 35 million.

[Operator Instructions] The next question is a follow-up from Javier Suarez of Mediobanca.

I have a couple of follow-ups. The first one is on the, again on the white certificates. Can you explain us your open position of white certificates and what could be the cause, if you're long or short on white certificates? And the impact that this has positive or negative on your -- at P&L through 2017? And you have any view on the first consolidation document on white certificates, the Italian energy regulator has published, that would be helpful. Then second question is on the, coming back again to the contribution from the ancillary service for 2017. It's not conservative to assume the same contribution done last year at EUR 45 million or why are the company believe that the contribution in 2017 is going to be similar to the one in 2016 after seeing a very good first quarter? And then the third question is on the minority line, can you give us a guidance of the minority line that you -- we should expect in the P&L in 2017?

I don't understand the last question.

The last question is, minority line in the P&L, you have reported in the first question 2017 minus EUR 7.2 million and I was wondering if you can give us a guidance of that line through 2017, the full-year impact, negative impact, obviously, in 2017.

About the MSD what we expect in this year is to be in line with [indiscernible] because the good quarter -- the first good quarter '17 is comparable to the very good at last quarter '16. So considering these 6 months, last quarter '16 and the first quarter '17 has a nonrecurrent scenario, we considered that this is the reason because we expected the same contribution in '17 as it was in '16. Of course, if the scenario will -- again will be different in the last [indiscernible] our expectations for change. But right now, we consider the last 6 months as not recurrent. So we confirm that we expect in a region of EUR 45 million, the contribution of our MSD on our results. About white certificates, as I said before, that the negative impact was related to obligation of previous year. What we expect that the price of white certificates will be stabilize in the next future because in the last few months we saw very, very high level, and of course, this is the reason because we do not expect any other cost related to white certificate. Is it positive what the authority is thinking about how to stabilize white certificate prices? We will see at the end of the consultation and in the next months how we'll -- the authority will implement that will make any about this. Of course, on the other hand, we also are interested in the evolution of white certificate because this could be an opportunity for us in order to increase the project we've already done in generation of white certificate that could be for a group like we are with several business opportunities to increase the profitability. Massimo, please.

It's not clear that the question but I am looking at the presentation on 2016, the result of the first quarter 2016 was minus [ EUR 0.4 ]. I don't know, now the results are positive for EUR 4.9 million. I don't know the question [indiscernible] you made.

So the question is the following. The line...

Sorry. Minority was different, yes. EUR 4.8 million in the first. But now at EUR 7.2 million and probably, is affected from the result of [ Mediterranean ] that is the [ major ] our subsidiary [indiscernible] consolidated. And is quite close, that is not a huge difference. It's a difference of roughly EUR 2.4 million.

And where do you see -- and where could we see these number by year-end in 2017, the full year?

Yes, you remember that in 2016, the result was affected by the negative -- less positive results from [indiscernible] again I can forecast that the minority in 2017 could be the same amounts of 2016. So ...

Like 22?

Yes, 22 -- 20, 22.

[Operator Instructions] Gentlemen, there are no questions registered at this time.