IRE (IRE) 2018-05-11 Earnings Call Transcript

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the IREN Group First Quarter 2018 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Massimiliano Bianco, CEO of IREN Group. Please go ahead, sir.

Thank you. Good morning, everybody, and thank you for attending the presentation of IREN's '18 first quarter results. Starting from Page 2, where you can find the usual summary of the performance of the group in the period, you can see that all the operating results showed growth trend. This is particularly important taking into account both the negative balance of minus EUR 3 million between '17 and '18 normally carrying elements in the absence of the extraordinary positive energy scenario reported in the first quarter '17, partially counterbalanced by the positive trend in white certificate, minus EUR 5 million. In particular, this scenario has been characterized by simultaneous 5% decrease in PUN prices and a significant increase in gas prices, which led to a reduction in spark spread and consequently in energy volumes sold. Nonetheless, the resilience and sound balance on the IREN's business portfolio allowed for a continued excellent result, thanks to organic growth experienced mainly in district heating and hydroelectric sectors to synergies in line with the business plan target and to consolidation effects linked to 2 transactions closed in '17. These results are reflected and, hence, in the net profit, which grew by 2.6%, thanks also to lower financial charges and taxes. Finally, it's worth noting that the robust growth in CapEx of plus 45% following the 32% growth already reported at the end of '17. This positive trend takes advantage of the financial flexibility achieved by the last few years and seen as the deep commitment of the company in pursuing the development guidelines defined in the business plan. Let's start the business unit section with generation and district heating, Page 3, which, during the first quarter, reported a plus 3% EBITDA growth. As already mentioned, this result has to be read in light with the -- of the normalization of the energy scenario, which did not experience the continued and positive widening of the spark spread reported in the first Q '17, related mainly to the outage on a number of nuclear power plants in France. This scenario affected both margin and volumes. As you can see, in fact, the thermoelectric production dropped by 14%, partially counterbalanced by the increase in hydroelectric production, plus 13%, thanks to better condition both in reservoir and running of the river plants. The negative scenario effect has been more than offset by several elements, the most important of which is the valuation at current price of white certificate portfolio, including both '18 and previous year certificates, which is worth approximately EUR 20 million. In terms of district heating, the expansion of networks continued, producing a structural increase in volumes sold, plus 4% in the first Q. As far as the outlook is concerned, the -- in the next few months, we expect to maintain the growth trend in the overall profitability of the sector, thanks to supportive hydroelectric reservoir levels, a slight recovery in spark spread and the already mentioned trend in white certificate. Moving on the market sector, Page 4. The EUR 4 million decrease derives from the already-anticipated absence of the positive element reported in the first Q '17 and linked mainly to the utilization of the gas stored and partially in '16 at a very low price. This element has been partially recovered, thanks to previous year balance-related commodity transport charges. In operating terms, the electricity volumes sold to end client increased by 8%, thanks to positive trend in retail clients, acquisition and thanks to the awarding of the Consip tender last year. The reduction in gas volumes sold is mainly linked instead to lower internal user to lower thermoelectric production, already mentioned in the previous slide. In relation to clients, the core of our business plan, it is important to underline the fact that in April, we launched IREN GO, a challenging and ambitious project related to e-mobility, devoted firstly to corporate and retail clients with a wide range offered, including recharge infrastructure, electric cars on long-term range, e-bikes sales and rental and so on. This project is destined also to change IREN mobility with the gradual replacement of parts of IREN car suite with electric vehicles. Furthermore, we are constantly widening our new downstream range of products. For example, we launched an IREN-branded heater for families. And some weeks ago, we launched [ acleri ] as the only authorized distributor in Italy, an innovative [ bar ] that makes it possible to enhance the photo-decorative capacity of some plants, who's ensuring cleaner air in the environment in which we live. As far as the outlook is concerned, we expect to recover the margin loss this quarter by the end of the year and report '18 full year results in line with '17, thanks to an improved scenario since the negative condition recorded in the last quarter of '17 should not recur. Moving to the networks sector, Page 5. The 7% growth reported in EBITDA is the sum of several efforts. First, the [ world ] sector has benefited from significant synergies achieved, thanks to the continuing implementation of the performance improvement initiative. On top of this, the increasing RAB, thanks to higher investment, plus 39% in '17 and plus 52% in the first quarter '18, allowed for higher regulatory revenues, the positive effects of which are directly reflected in margin. These elements, together with some other minor nonrecurring items, counterbalanced that lower new connection to the electricity networks. As far as the outlook is concerned, the same trend experienced in this quarter will offset the absence of a number of positive nonrecurring elements reported in the fourth Q '17, allowing to reach the full year '18 EBITDA in line with last year. On top of this, there is the positive effect of the consolidation of ACAM. The last business we need to examine is the waste sector, Page 6, where we find a slight reduction in margin, EUR 2 million, due to the additional cost deriving from the widening of the scope of services offered not yet included in tariffs and a worse electricity scenario with a 5% reduction in PUN, which penalize the electricity production of our waste-to-energy plant. Particularly important is the increase in special waste volumes, plus 29%, in light of the expected development of the treatment plant portfolio in the next years. In relation to the special waste, it's also worth noting that part of the margins coming from the treatment did contribute to first Q '18 EBITDA, as the REI landfill optimization process is ongoing, ending expected by first half '18. And as far as the outlook is concerned, we expect '18 EBITDA broadly in line with what was reported in '17, thanks to the full availability of REI landfill, further synergies and a marginal contribution coming from ACAM consolidation. Now I hand over to Massimo Levrino, the CFO, who will comment on the financial performance of the company.

Thank you, Massimiliano. Good morning, everybody. I'm going to Page 7. You see that EBIT stands at EUR 177 million. You can see a slight increase of EUR 2.9 million, and this is lower than the gross EBITDA that was EUR 4 million. This is due to the growth of depreciation and amortization, and that is almost totally offset by the reduction on provision. In particular, depreciation rose from EUR 76 million to EUR 82 million, mainly related to the increase of the fixed asset and to the extension in the scope of consolidation of some companies. Provision stands at EUR 9.3 million and shows a decrease of EUR 5 million. The decrease is related to lower provision for bad debts due to the impact of new accounting standard, the IFRS 9. The adjustment of the provision are EUR 5 million, and the location or the first adoption of the new accounting standard was not accounted in profit and loss, but in the equity section of the balance sheet. EBT stands at EUR 158 million, almost stable compared with 2017. The reasons are, first of all, the financial charges for long-term bonds that stand at EUR 17 million, they decreased by EUR 4.4 million. The decrease is mainly due to the lower cost of the financial debt from 3.3% for the first quarter '17 to 2.9% in this quarter. And also, it's due to the lower stock of debt. Other financial charges stands at minus EUR 1.6 million and shows worse result, a bit worse result, mainly due to higher authorization charges. The net profit of the companies consolidated using the equity method stands at EUR 0.6 million, and the decrease of EUR 5.5 million is due to higher nonrecurring results in the company, as they are in '17. The net profit increased by EUR 2.6 million due to the slight reduction of the tax rate from EUR 32 million to EUR 30.5 million. But we confirm, for the full year, the tax rate in the range of 31%, 32%. Minority was EUR 6.6 million, they show a slight decrease of EUR 0.6 million. And now let's move to Page 8. You can see the cash flow and then the net financial position. The net financial position at the 31st of March shows an improvement of EUR 57 million from EUR 2,372 million to EUR 2,315 million, confirming the positive trend already shown in the '17 and previous years. This positive result is due to strong cash flow. And you have to consider that the net working capital had a decrease of -- an increase of 68%, but is due to seasonal reason. And the total investment are EUR 68 million, lower than in the first quarter, lower by EUR 20 million compared with the first quarter 2017. The disposals are EUR 7 million, mainly due to the sale of a stake in a small subsidiary. And now going to Page 9, you see the interest rate and the debt structure, no more important changes there compared with the previous quarter. The first pie chart on the right represents the breakdown of the gross debt. As you can see, only 8% of the gross debt is at the variable rate. The remaining 92% is fixed rate or hedged with swap. The average duration of the long-term debt is 5.6 years, higher than in the first quarter '17 when it was 4.9 years. The cost of debt, as I mentioned before, is 2.9%. It was 3.3% in the first quarter. It was 3.1% in the full year 2017. The reduction is thanks to the liability developing and fairly, in particular, to the tender offer bid in October and to the early redemption of the 2 puttable bonds, whose cost was accounted in the profit loss of prior year. The second pie chart on the right represents the breakdown of the debt structure. The pie chart shows that the IREN total gross debt is formed by bond for 57%, thanks to also to the last issue in October of the green bond with a size of EUR 500 million and 10-years tenors. And the other sources are EIB funds for 32% and loan banks of 11%. If we compare with the first quarter 2017, the increase of bond from 46% to 57% is compensated by the decrease of bank loans from 22% to 11%, only 11%. And last, we have still the availability from EIB bond funds for an amount of EUR 265 million, which are very low-cost maturity of 15 years. And now I hand it over to Mr. Bianco.

Thank you, Massimo. Before moving to the closing remarks section, Slide 10, I would like to say some words on commitment of the group since its inception in adopting strategies and making investment decision that take into account of environmental impacts. Environmental sustainability is firstly seen in the energy value chain through our commitment to decarbonization with approximate 2.8 million tons of CO2 emission avoided in '17, plus 4% compared to '16, thanks to the development of district heating, a sector in which the group is the leader in Italy. Moreover, approximately 86% of our energy and heat production comes from renewable or/and renewable-like sources. This commitment has been recognized by '17 Carbon Disclosure Project, which awarded the IREN Group with the highest score for the second consecutive year, level A. Only 5 companies in Italy out of the 103 examined have been awarded with a similar score, and IREN is the only local utilities company. The focus of the company on EESG topics has been also recognized by ISS-OEKOM, one of the most important global independent companies involved in assigning sustainability ratings, which, in April '18, rated IREN as a Prime B-. We are particularly proud of this result as only 13% of the 163 utilities rated by ISS-OEKOM have received a Prime rating. Finally, as already mentioned, we are committed to market business unit result -- we have commented the market business unit results. In April this year, we launched IREN GO, an important step towards 0-emission mobility. As far as the closing remarks are concerned, moving to Slide 11, I would like to point out how well the company reacted in the presence of unfavorable conditions. I think that this reaction has been possible, thanks firstly to the efficiency gain and process carried out during the last 3 years, which made it possible to shorten and speed up the decision-making process, which is now more effective; secondly, to the IREN's well-balanced business portfolio with approximately 70% of the margins coming from regulated and quasi-regulated activities; thirdly, to the human capital of the group, the proper consideration which is one of the strategic pillars in our business plan. Having said that, in light with the positive results of the quarter, taking into account a positive expectation in terms of energy scenario, including the ACAM contribution, we are quite confident that we will be able to report improved full year '18 results compared to business plan target. In particular, EBITDA full year '18, we are aiming at EUR 850 million, EUR 860 million, on top of which should be updated the contribution from the inclusion of ACAM in IREN's scope of consolidation starting from 1st April. This will -- and then -- and overall, EBITDA expectation for the full year is EUR 870 million, EUR 880 million. In terms of net financial position, after the ACAM consolidation, we expect at the end of the year below [ EUR 2.5 billion ] and to keep the ratio, net financial position to EBITDA between 2.8, 2.9. And finally, we expect a net profit in line with what was a positive year-end of '17. A strong operating result will be -- will in fact offset the absence of the OLT positive one-off reported last year. So now we can start the Q&A session.

No, I think that you responded to all of them. I was just curious if you can give us some more granularity on the reasons why the ancillary market has been so good.

Let's say the largest reason, in our case, was the capability to use more for MSD market, the cogenerative plants, because we had, for a larger part of the quarter, a lower utilization of production of heat. But also, the market allowed for -- needed a larger ancillary service because the very discontinued need during the day of this plant allowed for a more flexible use of the thermoelectric plant. So I think that in general, the market had a larger MSD contribution.

[Operator Instructions] Mr. Bianco, there are no more questions registered at this time.

Okay. Thank you very much.

Have a good day.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.

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

The first one is on the generation and district heating business on Slide #3. The question is, out of the EUR 102 million of EBITDA, if you can unravel for us that number and giving us the contribution from district heating, white certificates and ancillary services that are included into that number. And more on the concept, can you help us to understand why ancillary services this quarter has been similar to the one due to the first quarter 2017? I guess dynamics has been different, and I was wondering if you can give us clarity on why the market has been so rich and which are your expectations for the full year 2018? That is on the generation. Then on the supply business, on Slide #4. I was wondering if you can give us some light on the evolution of the margins and profitability of clients that you are seeing on the market, the total evolution and the number of clients on electricity and gas, and the profitability that you do see, and the impact that this business or the evolution of this business during the next quarter of the years, what -- which is your expectation there? And then the final question is on the waste business. If you can give us, on Slide #6, the breakdown of the EBITDA of EUR 36 million between collection and maybe contribution from special waste. When -- how you do understand this that there has been a contraction on the profitability of the collection business because cost has not been reflected into the tariff. And if this interpretation is correct, when you are expecting those costs to be injected into the tariff and there to see a normalization in the margins? And the very final thing is, what do you -- have you seen in terms of prices for special waste collection? I think that the -- you mentioned a significant increase in the volumes, but I was wondering if you can give us some light on the underlying price dynamics on special waste.

Okay, thank you, Javier. Just a few seconds to -- for the -- so the first, on generation. So we can start from the MSD contribution. The result of the -- we reported for ancillary services was very -- we are very satisfaction of this because we manage to keep the same performance we had last year. And this was because, as you know, the temperature in January mainly was very, very low. We had a very hot month. And this allowed in this period mainly, but let's say in the full quarter, to use our generation fleet that usually is devoted to the fleet, also for MCD, as we started to do in the last 2 years, but we did a bit more in this quarter because of the [ heat ]. So this allowed us for a higher level of what we expected in ancillary services. So what do we expect in the full year is to have the capability to keep the same -- roughly the same level of ancillary services in the full year that, as you can remember, is it was roughly EUR 50 million on the year. Of course, this -- it could be affected by the capacity market, introduction in the market that we expect it will be affected by the end of this year. But right now, not having all the elements about the mechanism, we keep ourselves about this. And we expect right now that it will be neutral for the power profitability. About the margin on supply, we can say that we are not seeing any material change in margins, and so we can assume that's stable. Of course, in the quarter, as I said, we had a difference because of the storage of gas. But if we see the full year, we expect to, let's say, have the same profitability with last year, also including that positive effect we had last year. On waste, we expect to recover by the end of the year the additional cost we had in the quarter for the start-up in the expansion scope of work for the collection. So by the end of '18, we expect to recover. About the special waste, as you know, we don't have our -- actually consider the REI landfill. We don't have any plans that are devoted to special waste. And the largest part of our capability in terms of waste-to-energy is devoted to urban waste. So we have seen an upward trend in the prices of special waste. But the goal in the volumes that we are running the last years and also in this quarter is for the future when we will be able to complete the investment we are doing in increasing our treatment capacities and, of course, if we will be able to increase our capacity in the M&A transaction. So right now, this positive trend is not reflected in our margin in a material way. About -- just a moment. Just -- I think that I answered to all your questions, please.

The next question is from Enrico Bartoli of MainFirst.

First of all, I'd like to come back to the power generation business. You mentioned the EUR 20 million contribution from the white certificates. Can you give us an indication on the contribution that you expect for the remaining of the year and if you can compare that with the full year 2017 contribution from these certificates? And on the outlook for power generation, you also mentioned that you expect some recovery in spark spreads and some higher hydroelectric volumes. Could you elaborate a bit more about this? And second question is related to ACAM. So I understand that the EBITDA you expect this year is around EUR 20 million. Could you provide some more details on the contribution by business of this? And if you can give us a hint of the synergies, and so the evolution of the business that you expect in ACAM once the company is fully integrated in the structure of IREN? And the third one is, if you can provide us some update on the discussions on M&A with other counter-parties that you may have, if there are any news on this, if we can expect any news by the end of the year.

Thank you, Enrico. In fact, from the ACAM, as I said, we expect the contribution of ACAM by the end of this year, considering that we will -- we started to consolidate that starting from 1st April of EUR 20 million. EUR 20 million, as you know, ACAM runs 2 businesses that are the water cycle and the waste cycle. We can say that the largest part of the EBITDA arise from water, and we can say right now, 80% roughly from water and 20% or something less from waste. In terms of synergies, of course, we are working hard in these weeks to integrate as far as it's possible the company in our group. And I think that we are doing already a good job on this. And we can right now only confirm that you can assume taking into account contribution on a full year base of EUR 25 million, EUR 26 million per year, we can reach in a medium-term, 3 years, 4 years, EUR 30 million of contribution in doing that. Also, we will work, in order to exploit it, all the possibility to increase the RAB of the company in the water business because the company had a very significant financial constrain in the past. And so there is a need for investment that is important, and this could be an opportunity in terms of increase the RAB of the company. On M&A, in general, we can only right now confirm that we have a very long list of small deal on which we are working on. And we still are confident that some of these will be completed by the end of this year. So right now, we -- I don't have any news on this, but the fact is that we have a very long list of discussion that are running right now. And because of this, we expect to do something in the next future, that means 12 months, 15 months. About the question on generation, the white certificate, it is important to explain that the contribution related to white certificate during the first month is linked to the upward trend prices. So that continually created the condition to mark-to-market the white certificate already owned by the end of the year last year. So this allowed for a peak in contribution [ for the right fifty year ] for the EUR 20 million I said. The price for this mark-to-market we used was EUR 250 per white certificate. So what we can say as our expectation by the end of the year that we will have other positive contribution for the white certificate that right now, we can say that are expected in a range of EUR 5 million, EUR 10 million more. This also is related to what will happen for the -- you for sure know the decree that is ongoing. At the end, it is expected to be issued by the minister by the end of this month. And of course, it will be important in understanding the net impact of the white certificate on our account because, as you know, we are not only a company that generate white certificates. We do this in the -- mainly in the cogenerative power plant and the district heat activity. But as an energy distributor, of course, we have an obligation. And the trend in prices in white certificate affected both. About the spark spread, right now, we expect to recover from what we saw in the first quarter, it is, on average, EUR 5 as a spark spread. We can expect an increase, let's say, EUR 2, EUR 3 in the full year evaluation. And of course, this could allow more profitability and more electric generation. And on the other side, we have an expectation in terms of volumes of plus 10% in hydro production, considering also that last year, we did not suffer like the system in the strong reduction in volumes.

The next question is from Roberto Letizia of Equita.

Just one question from my side, on the guidance, especially the guidance on net income. So when on EBITDA, you expressed a precise number; and on the net income, you said a comparison with 2017. But actually, I have different net income, depending on the adjustment made, because last year, you had also the provisioning for the workforce in the region of EUR 20 million. So I was wondering if you were actually referring to the reported EUR 238 million or to a different number. Can you better clarify this? And then a follow-up on what you just said on the white certificate. So you expect some EUR 10 million more. I wonder if you can share the price that is below this additional EUR 5 million, EUR 10 million. So you mentioned EUR 254 million, the EUR 20 million realized so far, but you are adding EUR 5 million to EUR 10 million. I was wondering if you already assume a massive decree in the white certificate price for the rest of the year or if this EUR 5 million to EUR 10 million already sit in the range of EUR 250 million?

Starting from the first question about net profit. Now it's too early to have, I'd say, a very detailed guidance on net [indiscernible]. Of course, what you say there is correct. So our expectation is to be in line; to be also, let's say, something more than what we did last year. And -- but right now, we cannot say -- we don't have any elements to say something different that's, let's say, in line, other there could be also something more than what we did last year.

Sorry, but maybe I was not correct. I accept that kind of guidance, it's perfect. But I only want to be sure that when you say in line with last year, you intend the 238 report is...

Yes, yes.

Okay, that was my question.

No, no, okay. Okay, thank you. And about the white certificate, let's say that the expectation we have for the full year is at the EUR 250 price level for the full year. So taking into account the dynamic of the white certificate during the year, both are -- so for the coming quarters. So our expectation is not related to a change in the evaluation that we did of our white certificate at EUR 250.

Yes, a follow-up always on the guidance, I'm afraid. But there are several changes with regards also to the capacity payment introduction, but you said you expected it by the end of the year. But actually, I know in the previous conference calls, you said that now it is probably a matter of 2019. So I was wondering if you included anything from the capacity market in this guidance for the year? And then if you can spend a word about the possible, now let's say, highly probable additional postponement of the liberalization of the retail market. Can you remind me what were you including in the strategy targets as potential contribution or damages? I can't remember that number precisely on the liberalization of the retail.

Okay. About capacity, we do not include any contribution about the capacity market in our guidance. What I can say right now, as well in our business plan, we said every time that we assume that the ancillary service contribution will be offset or partially offset by the capacity market. But the sum of both the mechanism will be equal. So right now, we don't do any assumption in terms of a change in our profitability because of the introduction of the capacity market. Let's say the same about the liberalization, we think that this is a good positive news if the liberalization will be in the time that the law right now is set, so 1st July '19. But right now, we don't know the mechanism of the full liberalization of the electricity market and because of the -- we did the -- we didn't do any assumption in our business plan because of this. So this could be an upside not included in our business plan.