A2A S.p.A. (A2A) Earnings Call Transcript & Summary

Good afternoon, this is the Chorus Call conference operator. Welcome, and thank you for joining the A2A Group Nine Months 2020 Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. Renata Bonfiglio, IR Manager of A2A Group. Please go ahead, madam.

Thank you very much. Dear all, good afternoon and welcome to our conference call. Renato Mazzoncini, CEO; Andrea Crenna, CFO will present our first nine months results based on the material sent to you and available on our website. After the presentation, we will address some of the questions which we -- analysts have sent to us in advance, and thereafter, we will have an open M&A session. I now hand you over to Renato Mazzoncini, CEO. Please go ahead.

Okay. Thank you. Thank you, Renata. Good afternoon to everyone and thanks for joining our conference call. Some minutes of delay, but I just finished the Board 3 minutes ago. The Board has just approved the result of the first nine months of this 2020. It was a very harsh period for all marked by the spread of COVID-19 emergency. We have managed the company, first hand for most to keep on providing our services to our communities with unchanged continuity, quality of services and investment, guaranteeing at the same time our employees’ health and security. And believe me, I am very satisfied and proud of the group operating direction to these difficult times. Likewise, we have undertaken an impressive recovery plan, which has allowed us to offset most of the negative economic impacts as well we see during this presentation. To start with, and look at Slide #3. Let me briefly sum up our main achievements in the last three months. In September, as you may know, Unareti got the final award to the Milan gas tender after the final pronunciation of the Council of State. Of course, we are very proud and very happy for this decision of the Council of State. We signed two crucial Memorandum of Understanding. One with SNAM on technological cooperation with the aim of studying the development of hydrogen projects in the context of decarbonization of the energy sector in Italy and in Europe, hydrogen strategy. And as you all know what -- how many resources Europe would be able to develop to hydrogen research. And when you invest a lot in research, new business will normally be born. So we wanted to be here. Particularly interesting for us is the team of hydrogen blending to power thermal power plants, with a reduction of CO2 emission and with this consequent possibility of extending the useful life of our thermal system even in a scenario of strong decarbonization. Even more important for the business repercussion already in the short, medium term is the agreement with SUEZ signed in October, truly the foundations for creating a new player of excellence in the industrial waste treatment, a huge market both in Italy and in Europe level. Through our subsidiary LGH, we acquired Agripower, an Italian company focused on energy generation from biogas. And last but not least operation in October, in this complex context, we issued a EUR 500 million, 12-year corporate bond with a record low coupon, that is 0.625%, a great achievement for us. In November, just in the 1st of November, we started to manage and consolidate AEB, that is the Brianza multi-service company, you know that also, in this case there was discussion with the administrative law and that is also on the track, but the new company started two weeks ago. Today on top of delivering a solid 2020, our main focus is on the finalization of our 10 years new industrial plan, and I forecast to approve the new industrial plan 19th of January and so to present to the market the 20th of January after the approval of our Board. Okay, we can shift to Slide #4 to look to the highlights of this 9 months. So we recorded very good result. So looking, sorry, on the left plus and on the right minus of this period. So we recorded a very good result on retail customer base. In spite of the critical period and commercial slow down, we have added 91,000 new customers, 6% more in free mass markets compared with December '19, and we are very proud to say that today the free market customer base accounts for 57% of the total customer base. And you know the difference of value between customers in free market and the others. Also, B2B electricity volumes were also very positive, up to 1 terawatt hour, that is 14% plus of the last year. Waste treatment price have grown once again, average about 8% compared with the same period of the last year. And then last but not least, recently acquired companies in the waste treatment sector, that is Electrometal both -- on the end of 2019, and Agritre, both in the first quarter positively contributed to our EBITDA. These positive factors contributed to mitigate the strong negative impact of COVID, but in particular on the right, you can see a weak energy scenario partially offset by this an effective forward hedging policy, limiting the net negative effect to just over EUR 23 million; lower gas volumes consumption 11% less in energy retail business due let's say to climate, particularly milder last winter and of course COVID-19 lockdown. A reduction in regulated allowed revenues for electricity and gas distribution, as decided by the relevant authority, ARERA, with these EUR 6 million in nine months and EUR 8 million full year. And of course, the impact of the COVID-19 emergency that you can see in the next page. At Slide 5, we see overall the group has shown really strong resilience. Group's net exposure towards COVID-19 has been quite limited, thanks to the action undertaken since the very beginning of the pandemic emergency which have offset most of the negative FX. Our estimated net FX in these first 9 months compared with the same period of 2019 on the EBITDA is about EUR 10 million, let's say this value is talked alone. The measured impacts as we discussed in our last presentation are related to energy scenario that hit hard generation and district heating, lower contestable energy demand as a consequence of a lockdown, about 7% in the first nine months and slowdown of commercial activity in energy retail with a direct consequence on the new appreciation of -- in the customer base is very difficult to -- in this situation to do activity of commercial activity. Main mitigants include a conservative hedging strategy still in place on the fourth quarter, a strong cost saving plan, both on labor in agreement with unions, let's say, really with a strong community of intent with the unions and, of course, other operating cost and the positive contribution from newly acquired companies in BU waste, business unit waste. As far as net financial position, temporary working capital increased due to COVID-19 accounts for about EUR 35 million as of the 30th September. However, our liquidity profile has improved by additional EUR 550 million committed credit facilities. This position was even strengthened in October through a placement of the bond as said before. In Slide #6, you can see the A2A ESG initiative ongoing. Main ESG initiative includes massive remote smart working of more than 4,000 employees, from mass 4,000 employees went directly smart working. In this moment to prepare the new situation, our guys able to work in smart working with our instruments growth to 6,500. So really a huge number. Let's say all the employees in this moment are able to work in smart working. Started since the very beginning of spread of COVID-19 to ensure business continuity of course while avoiding to endanger the safety and health of workers. Leveraging also on the most important digitalized process with, let's say it's also in this case an opportunity for new way to work and new digitalized processes. So in order to maintain a high level of services despite the lack of physical interaction and in order to ensure business continuity at the main technological plant of the group, for example, thermal power plants, larger [ WTE ], network control rooms. So we organized specific recovery plans, have also being prepared to allow a possible quarantine live at the plants because it's clear that if we have a problem in the control room, we are not in the condition to say -- to hold the guys that work in a controlled room, okay guys, you can stay at home because there is instruments that is not possible to remotalize. Well, in addition also after the excellent result arrived from smart working, we boosted the company digitalization plan to increase the flexibility of the company for the new normal, that we hope that we will arrive as soon as possible. As a multi-utility, we have a great responsibility towards our community and territories. We are putting strong effort in strict cleaning and disinfection aimed at fighting against this terrible virus. The indication by the Superior Institute for Health is interesting. This is in relation to the disposal of masks by thermal destruction has reopened a positive debate in Italy on [ WTE ]. To understand the problem, the mask alone in Italy amounts to 300,000 tonnes, 400,000 tonnes per year, equal to the in differential waste of two Italian regions such as Marche and Abruzzo. So it's clear that if we have to destroy with thermal destruction all these masks, our [ WTE ] and in particular the new [ WTE ] in particular in the center of southern Italy are more and more necessary. Okay. So we can arrive to Slide #7 with the key financial indicators. Just a quick overview over our main figures before Andrea Crenna provides more insights. The reported EBITDA is EUR 822 million, reduced EUR 64 million versus the first 9 months of 2019, so 7% less. But excluding nonrecurring items, the decrease is equal to 5%, mainly due to a weak energy scenario, which affected the BU generation trading, only partially mitigated by an excellent performance in energy retail, 6% more; and waste, 6% more. So during the insight presented by Andrea, you will see that in this moment really the problem was in the BU generation linked to the energy scenario. The Group net income at EUR 219 million, 12% compared to -- less compared to 2019 as discounted the lower EBITDA and higher depreciation from our strong investment plan. We are committed to hold it despite the tough situation, partially mitigated by reduction in net financial expenses. Excluding the M&A impact, the net financial position increased by EUR 95 million mainly due to the net working capital absorption affected to COVID-19. Now I give the floor to Andrea Crenna, our CFO, for a detailed analysis of the result from Slide #8.

Thank you very much, Renato, and good afternoon to everybody. We start from Page 9. There is the usual waterfall of the EBITDA. We have an overall situation, which is not very different from H1 in the sense that more than 100% of the total variance stems from our generation business unit. And we'll see in a second, as already mentioned by Renato, actually more than 100% of the performance of the generation comes from this scenario. The other BUs remains quite resilient overall, and in a couple of cases, we'll touch, we actually have recorded a positive growth. The COVID effect on this 9 months versus last year have been not material, roughly EUR 10 million. Clearly, this as well is the outcome of a gross impact much stronger netted by all the recovery activities we have been able to deploy. If we move to Page 10, in the generation, you see we have performance of the plants, which is negative by EUR 43 million. And this is more than 100% due to this scenario, scenario has been very tough. The PUN prices have been down over 30%, clean spark spread down 60%, clean peak spark spread down 35%, not to mention the clean dark spread that in some months at least in 2019 slightly positive. And the CRR has been completely negative, and we will see also some of the consequences in a second. The total gross scenario effect driven by these numbers, certainly, let me say partially influenced by the worldwide COVID crisis, though it's very difficult to neatly split what is due by the COVID and what is not, has pulled results down for over EUR 90 million. More than 60% of this gross effect was neutralized through hedging. What is left, which is the number you see, is mostly the price effect on our hydro productions as the volume effects have been very, very negligible. Performance on the ancillary services, EUR 118 million is absolutely equal to last year, so it's flat year-on-year. And then just to mention though the amount is not material, we have recorded a EUR 5 million loss on the disposal of all the inventories -- remaining inventories in coal. That's because clearly the clean dark spreads have been negative, are expected to remain negative, so it was more convenient for the company to sell off all the inventories of coal rather than keep it or burn it. If we move to Page 11 on the market, the market results was actually better than they appear in the slide in the sense that let's consider separately the retail performance to the energy efficiency and public illumination. The retail, and as already mentioned, that was up 6%. Once again, we're holding quite nicely on the margin, especially considering the contribution from the regulated components. We have got very, very nice growth, up 8% on volumes on the electricity B2B. We clearly got contributions for the stronger higher customer base, plus 91,000. The only negative driver has been the performance in the gas volumes, partially because of the mild winter, in January and February and March of this year and partially because of the COVID effects from the small and medium enterprises. On the other side, the energy efficiencies and public illuminations are clearly reporting not very satisfactory results, minus EUR 12 million, but we have and you have to keep in mind that EUR 8 million out of EUR 12 million are temporary effects expected to revert in the fourth quarter, and these are related to the white certificate timing dynamics, if I can say so. It's basically a time when the white certificates are either recognized in the public illuminations or are annulled basically by the distributor, which this year will be in Q4. Last year was basically in May. So that are timing difference is on that item. If we move, Page 12, it's waste business unit. It's, as you see, a nice performance. This is not news in the sense that we now some quarters, we actually are reporting good performances. The underlying drivers as always the same, so I won't use lots of time. Just to briefly recall all of them, increasing treatment prices. We've got higher volumes of electricity generated. You remind -- you might recall that last year we got some plants closed for extraordinary turbine maintenance, which this year clearly we don't have. We have new plants like the plant in Muggiano for plastic treatment and as Renato mentioned, we've got some M&A activity. And these results have been achieved despite strongly negative energy prices in this business unit as well, the energy which is generated by WTE and sold to the network. The lower energy prices hit this BU for about EUR 10 million. If we move to the networks, the network profitability is overall contracting EUR 5 million, which is minus 2%. From the chart, the result is negative because of the district heating. So let's talk about this before. District heating has penalized by both a mild winter, same rationale underneath the volume -- gas volumes I just commented on the market; and as well the scenario. The price at which we sell our heating services is indexed to the energy prices to the pool specifically and to the gas prices, the P4. So with both declining clearly, prices of district heating have gone down. On the networks, you all know that the approvals by the authority, the ARERA in spring this year were negative in the sense that especially on the recognized operating expenses, we got the reduction. That reduction is expected to be for an amount close to EUR 10 million on the full year. You don't see these effects on the 9 months because here we have a situation, which is the opposite of the public illumination, that positive temporary effects which depends on when the white certificate for the distributor will be annulled, which is going to be in November. On Page 14, the usual waterfall to the net income. I only would like to give you a quick comment on the risk provisions. You overall see flat. These provisions include bad debt provision. COVID is generating some delays in our credit collection, especially retail customers in the market business unit. But so far, we haven't recorded significant deterioration in the receivable quality, i.e, higher delinquency rate, which basically means that yes, we have increased the provision but very slightly. The difference between the first 9 months of last year was just EUR 2 million. So the quality of the portfolio changed [indiscernible]. On Page 15, we are increasing 5% CapEx. In H1, we were up 1%. We have tried not to -- we actually do the best not to limit any rollout of our expected investments. Clearly, the COVID generated some difficulties, the lay off of some of our projects during the lockdown in spring. So we're lagging a little bit behind our budget. But we, at the 9 months and especially on the full year, we are planning to have more investments than 2019. And I'm sure Renato might comment on further later on. Finally, on Page 16, the waterfall of the EBITDA. You see we have EUR 227 million negative. We were slightly higher in H1, that's depend on the seasonality of our business. And we, on the full year as we will see in a second in the guidance, will be more or less where we are expecting to be, with the number already disclosed to you in July. The net working capital, I just commented. Yes, COVID-19 is providing some delays in collection, but let me say are quite limited. On the 9 month, we have gone 2 days more than last year DSO. We are expecting a bit more on the full year to come up with the [indiscernible], but it's fair to say that as of today the performance is slightly better than we [indiscernible] on the net working capital. I would like to give the stage back to Renato to comment on the guidance.

Thank you. Thank you, Andrea. Well, aware that the next few months, November and December will be critical. Our forecast for the full year 2020 depends also on the COVID-19 evolution. And we assume the general situation will remain in these 2 months, but as I said before, how our organization is completely ready to shift in recovery plan and so we accordingly confirm the guidance given in July during our first half presentation. So an EBITDA of about EUR 1,140 million, including around EUR 20 million of positive nonrecurring items. And this including 2 months contribution of the new company consolidated IB for about EUR 5 million. The CapEx, as Andreas said just now, are expected higher than in 2019, confirming the trend seen in 9 months in a range between EUR 670 million and EUR 710 million. And I do like to highlight the important investment effort, but despite the 2 handout months of lockdown also for our suppliers, we reach exceeded 2019 last year, already a record here for A2A for investment. Particularly important investment is mainly due to the new developments because if we look only the CapEx for development, the number is a 30% more compared to 2019, and therefore very important for the future growth of our EBITDA. Net free cash flow is negative for about EUR 300 million, excluding M&A impact, mainly due to the growth in investment and dividends distributed in May that if you remember was EUR 240 million. Well, let's say, I think that for the general presentation, we can stop, also not to spend more time. I know that there are some...

We can now go ahead with the Q&A session based on recent questions. I will ask the questions from the analyst to the CEO. Just tell me when I can start, please. Can I go ahead?

Renata, I go -- I can't -- okay, I tried to move forward the question of the analyst. But we received the first question...

I can start with the question, the first one. Can I go ahead?

Yes.

I will. New green deal and recovery fund. Opportunity for A2A. And what is the company doing in view of the upcoming business plan?

Okay, thank you. Well, surely new green deal recovery fund are an opportunity for our company. Related to the factor that how our core business is focused on energy production, so all the topics in the energy transition is on our path and circular economy. In particular, the renewable electricity production, energy storage and also gas and hydrogen, we talked it before, but also the topic of the energy efficiency comprised by district heating that is very core for our company. Circular economy, distribution network because we have to work in the future a lot in smart distribution REITs and e-mobility. We are the second player in Italy for charging infrastructures, digitalization and so on. Our strategy and long-term business plan will take in consideration all these opportunities. A good example to be concrete is the project to recover heat from the Cassano d'Adda thermal plant, 1.4 terawatt hour for year to be used in the Milan district heating. The project is EUR 500 million of CapEx, present an excellent profitability if assisted by a nonrefundable financing of EUR 200 million. And this request for funding has also been stronger reported to the municipality of Milan and presented in the list of Italian project for the recovery fund and their examination by our government. Our company presented a list of investment for an amount of EUR 3 billion useful for the recovery plant and also the recovery fund. And also this amount, I think, that is very clear. And in particular, I think that the opportunity of a new green deal for our company can be really strong, strong boost and in the new industrial plan, you will see that we want really to be protagonist in this new green deal.

Okay, the second question is on the EU hydrogen strategy. Is that kind of follow up on what you said at the beginning of the presentation. So do you think A2A would play a role without the opportunities and of course you can make -- you can give more color on the Memorandum of Understanding with SNAM.

Yes, Renata. Well, it's clear that all Europe is talking about hydrogen, seems to be a lot of money. So as I said before, I think that when you spend a lot of money, research, some business will born surely. Our group is expected to play a key role as defined in the Memorandum of Understanding with SNAM. The collaboration between our company and SNAM signed 25th of September focused primarily on A2A's most relevant project where SNAM will offer its support in the study analysis and evaluation of flexibility. In particular, there are some project under discussion. For example, conversion of A2A thermal power plants from coal to hydrogen or natural gas/hydrogen blending or retrofit solution for existing A2A gas turbines for hydrogen or natural gas, hydrogen blending, or solution for the production, storage and transport of hydrogen produced from renewable sources. But let's say to be once again concrete, a good opportunity comes from the conversion of our plant, thermal plant coal fired in Monfalcone. As you know, we have a very big thermal power in Monfalcone. But in this moment, it's, let's say, closed because the energy scenario brought the coal out of the market, but the Friuli Venezia Giulia region has expressed a strong interest in leading applied hydrogen research project in Italy, and SNAM has an important gas pipeline passing through that territory. So it seems that the situation in Friuli Venezia Giulia can be very, very interesting because it's absolutely necessary to have our thermal plant because the Port of Trieste needs power for cold hiring and for all the electrification of the port. Of course, the project can be more and more interesting if there is a forecast to reduce the CO2 emission. SNAM is very interested to have a center of research on hydrogen in Friuli Venezia Giulia. And I think that Monfalcone can be right place to start with the cooperation with them. So I imagine a concrete activity in hydrogen.

Okay. Then now we are talking about simplification law and other government interventions in the energy sector. The first question is, what are the potential impacts for A2A [indiscernible].

Well, I think that of course the simplification law will have a positive impact in our business, because it can help to accelerate investment. In this moment, the main problem that we have in Italy in all our companies is the capacity to do real investment for problem of authorization. And in many business and consolidated regulatory framework for utilities like renewable, storage, electric vehicle and energy efficiency and so on, we have to simplify the process. So this law is -- can be very useful to reduce the timing of all the process of authorization. As you know, the simplification law starts from the need of -- for our country exactly to focus all the process necessary to achieve the decarbonization objective defined by European community. And so let's imagine that how our measures -- other measures will also follow to facilitate the energy transition and the circular economy. So I think that it is surely possible for our government to do also better and we are working inside the Confindustria, inside the Utilitalia to push other law and other simplification, but this simplification law says that the government understood that it's absolutely necessary simplification. And I think of that this is the first step of right path.

Okay. Further on, do you expect further incentives for renewables?

Well, we expected the implementation of some new measures as described in the NECP, our national plan -- integrated plan for energy and climate, such as the simplification and rationalization and administrative procedures for investment in many areas as for renewables. For example, simplification, also the authorization procedure for the investment such as that repowering is, in my opinion, is foolish, but in this moment, it's hard also to do repowering. And simplification and shortening in the environment impact assessment. And in addition, there are other measures, specifically focused on renewable. So I think that in this moment the problem, let's say, is not incentives in money but it is absolutely necessary to have speed in the procedures.

Last but not least, in this front, do you expect an acceleration of the government's tender process in Italy?

Well, acceleration, now, frankly speaking, we don't expect in an acceleration since we haven't had any news in the last month from regulatory and legislative front. So surely this is a problem, there are some companies that are pushing a lot for tender, for example, Italgas with others. I think that the tender of Milan that we won is a good example to say to our country that the participation to tender is a win-win option for local authorities and companies, but if I imagine that in the last semester we see lots of tender of gas, no Renata, I don't think.

Last question on the regulatory front. Any comment on the ARERA recent positioning regarding the gas and electricity walk update as of 2022. Will you expect positive or neutral continuity.

No, I don't have any comment, and we expect neutral continuity. I don't think that we'll see next year some changes in this.

Now on to M&A and strategic partnership. The analysts would be interested on an update on AEB Gelsia and key highlights of the company?

Well, very quickly on 1st of November, as I said before, we entered into AEB share capital with a holding of 34%, but we have a governance rights that enable consolidation. We have the CEO of the company and in the border we have a majority of the votes. The new AEB, thanks to A2A contributions will have an EBITDA of more than EUR 50 million. The project foresees the achievement of integration synergies is equal to about 5%, 10% of EBITDA. The business plan is worth over EUR 300 million of investment in the next 5 years. In 2019, some highlights, we recorded EUR 246 million of revenues and EUR 38 million of EBITDA, and the net income equal to EUR 12 million with the financial position of neutral of about EUR 4 million. The main business units are networks, market and waste. So very similar to our company. The hearing of our regional administrative court concerning the claim filed against the municipality of Serino proving the transaction is scheduled on December 2, but we don't expect any surprise and this is the reason for why we decided to start with the company 2 weeks ago.

Okay. Now on about the Agripower deal, can you give us some details on that please?

Agripower, we closed the deal September 30. It was an operation done by LGH, won the auction for the repurchase of entire share capital of Agripower that was a part of the Gruppo Maccaferri and the completion of the transaction is expected by the end of January 20, in a couple of months, next January. The price paid for the entire share capital is EUR 10 million while the value of the company is EUR 74.4 million. The group generated approximately EUR 42 million of consolidated revenues in 2019, and an EBITDA of EUR 16 million. The implicit multiples of the transaction are therefore equal to 4.7, the consolidated EBITDA of 2019. So we are very happy and the average residual duration of the incentives is 8 years. So there is surely room to grow.

Another question, if you can give more color on the memorandum of understanding with Suez.