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

Good afternoon, and welcome to H1 2023 results. I'm Zach. I will be your operator for the meeting today. [Operator Instructions] I hand over to Marco Paro (sic) [ Marco Patuano ], who will start the call this afternoon.

Good afternoon. Thanks for taking part in the conference call to present the results of the first half of 2023. The comments will be made by Renato Mazzoncini, the CEO; and our CFO, Luca Moroni. It's Friday, last day of the week. Without any further ado, I hand over to [indiscernible] Mazzoncini.

Good afternoon. I would like to welcome you all. Thanks for taking part in this conference call. You have probably read the press release with the figures. We continued to achieve very good results that are confirming, on the one hand, the solidity and the value of the strategic choices which were made with the launch of the first business plan in January '21, over 10 years. And on the other hand, since -- along this journey, there have been events that were fully unexpected. This has also proved the great resiliency that the company has had during COVID and then later when the energy scenario has caused the crazy volatility we have seen last year -- [No.] at the beginning of this year. The fact that we have maintained our growth path, looking at all CapEx and economic indicators, reflect the fact that we are heading in the right direction. In the first half of 2023, as usual, there have been positive and negative elements that you see in these slides. Among the most positive elements, we have important work of hedging of power production, which has made it possible to offset very effectively the rapidly changing scenario. So the scenario has changed more quickly than one might assume. And this has also been beneficial to the decrease of inflation and to the benefit of consumers. So there has been a faster reduction than expected. And this has allowed A2A, since we have done a timely and effective hedging, to have a very sound 2023 performance, as we can see. On the other hand, another important element is the growth of the volumes and the gigawatt per hour, thanks to wind and solar energy. So considering the new perimeter, the takeovers in the field of renewable energies made in 2022, there has been an increase in the mass market customer base, which has been very important. You see in 2022 this was a key area of attention, and as we can see, there have been 2 important phenomena. On the one hand, we have recovered margins, most of all, in a larger customer segment. And on the other hand, we have been able to increase by 0.5 million the customer base. We have, of course, all of the positive effects [ that this has been used ]. And [ thorough ] financial discipline keeping the net working capital under tight control has enabled us to close this first year half with certainly better results which go beyond expectations, if we consider the debt, the EBITDA ratio. This is partially offset by the fact that gas production and, in general, nonrenewable energy production, coal, fuel oil, for sure, have not reached expectations. And this partly stems from the import from France which has increased. 2022 had been an unusual year from this point of view. So slight downturn in consumption, most of all in winter when prices were still very high. And Italian citizens were very keen on pricing. We have seen 19% energy efficiency also [ where ] normalizing daytime temperatures. And then and very significant, there has been some reduction in electricity consumption in the industrial sector and this has had an impact on the marginality of district heating. The next slide shows some highlights that we would like to share with you. Let's just focus on the right side of this slide to comment some elements that have already been discussed with some of you. I would like to underline the fact that A2A is still moving towards research. And innovation is a changing paradigm and a market that is sometimes all too static. And this is very relevant, so we have the Noi2 offer, a very innovative proposal on the market. It's mass-market PPIs, so -- PPA between the generation business unit and the market. A2A Energy offers long-term contracts based on renewable power stations so as to have a behavior that is comparable to solar panels, to virtual solar panels. So home batteries to cover 70% of the energy consumption. This shift in paradigm is very important. It provides evidence that it's possible to do hedging between customer base and renewable energy production, hedging with mass market where the [ churn ] rate is very low. It causes greater resilience. We stand out if compared to PPAs that are made with the corporate market. And then we have city plug recharging stations, a new idea, low-power slow-recharging columns. And we are convinced that, to cope with the development of urban e-mobility, it's necessary to have low-CapEx, well-scattered recharging stations rather than having few concentrated recharging points. This is better for the grid and also if we consider how customers are interacting with this. It's like [ a home workshop ] scattered all over the cities, like in the center of Milan where more than 50 people then have own garage. And then there are also other elements that are extremely important and worth highlighting. We complete the strengthening, primary substation networks. End of 2022, we have opened 2. And the one in the province of Brescia is the third one; another 2 substations in Milan. The target is to go on increasing CapEx in the electricity grid. If you look at the details there: a RAB increase per electricity compared to the same figures last year. We have recorded a double-digit increase here, which shows how hard we have been working in CapEx to support the development of future-proof electricity [ grid ], which is fundamental, of course. We have completed the acquisition of a cogeneration power plant in Cologno Monzese. That is part of a strategy to strengthen district heating in the area of Milan. The most efficient way to have fast return on investment in the decarbonization path for heating application is district heating, but you need to have a sound grid and, of course, producers, so cogeneration power plants. And we are working to enter into agreements with [ data centers ] that are providing heat that can be recovered, as we have done with the steelworking plans in the province of Brescia. And then we have received the authorization to build the Monfalcone plant with a capacity market, one of the main plants in Milan in the field of capacity market. We have [ Siemens ] in the -- for ITC. And this is yet another important activity. In the field of collection, we are working to have a well-balanced hedging between waste collection and waste processing, waste treatment. And we think it would be wrong to have collection without treatment of waste. You might have waste abandoned on the street if you don't have a treatment plant with regular conferral of waste. And treatment without collection entails the -- running short of [ field stock ] in the neighboring areas. We are very strong in Lombardy and Piedmont in the field of treatment. We have taken part in [ conferral bids ] in Liguria region. We have been awarded 10 municipalities, Portofino, Rapallo, Chiavari, Santa Margherita Ligure, very important area for waste collection. Also, for ESG indicators, we are improving. There has been an increase in the power of the electricity grid to have more grid safety. We have reduced water losses by 3%. This is red-hot topic. We are among the companies that are investing more by citizen, so we have a per-head investment CapEx that is higher than the European average in that area in a country like Italy where we are still below the European average. The emission factor is increasing, but this is linked to the duty to maximize non-gas production with fuel oil to ensure energy delivery. And this factor is expected to decrease in the next few months. Next slide. Here you see the results that have already been [ anticipated to you ] before this call. The performances are very positive. You can see we have had an easing of the strong market tensions in 2022, with a reduction in revenues, which is good news. So we have a reduction in net working capital, which makes us more palatable to customers in mass market and also in the corporate sector, which is not bad. We are trying to change the business model and the kind of relationship we have with our customer base. The reported EBITDA, at the same time, increased by 26%; by 27%, the ordinary EBITDA. So here you see the record amount of EUR 868 million, a record level. Net -- ordinary net profit followed the trend, has been increasing by 32% to reach EUR 257 million. And in relation to these figures, we have net financial position-to-EBITDA ratio of 2.6x on a rolling basis, which is lower than expected, looking at the forecast last year. We have completed an important acquisition in the first year half. We have entered into the capital of a company which is going to develop a very important solar plant in Friuli Venezia Giulia region, the largest in Northern Italy. 60 megawatts is the capacity. And at the same time, due to regulatory effects, we have sold to Acque Bresciane the business unit of ASVT, which was a participated company with Valtrompia municipalities. It's a valley in the province of Brescia where had an integrated water service. I hand over to Luca Moroni, the CFO, who will comment the EBITDA in detail.

Thank you very much. And good afternoon, everyone, on my side too. Significant growth, plus 26%, of EBITDA that brings us to EUR 868 million on an ordinary basis, with a growth driven by the excellent performance of the generation and Market BUs, with the other businesses, Waste and Smart Infrastructures, recording a few million euro more or less versus the previous year. Let us now look at the key factors determining this growth. We are on Slide 6, on generation. Generation, as [ anticipated ] by Renato, showed a very good performance, especially due to a management -- a very effective hedging strategy management which allowed to offset some negative elements, especially the lower production from gas plants because production based on coal and oil was stopped during the second quarter; and also the normalization of MSD margin, as anticipated of -- through the first quarter for this year. Particularly good results but also anomalous results of 2022 are now coming to a normalization stage, reaching levels that are slightly less than half of last year on an annual basis. So very good, especially thinking about a portfolio management of the different generation sources that allowed us this year too, as last year, to keep a good balance with a management of risks that turned out to be quite reduced. This allowed us to reach the highest possible margins in the first half. Now let us look at the Market. The Market has completely recovered. The results of 2022 paints 2 different phenomena. The first among all of them is recovery of margin in 2-year contracts which suffered last year due to the scenario. And they give a recovery contribution of about EUR 50 million; and then an additional contribution from [ the lot won in auctions ] both in safeguard -- in a safeguarded market and in more protection sector, which allowed us also to invest part of the margins on some customers that still had fixed-price contracts. And we could not shift them to variable-price contracts as a result of the resolution of the antitrust authority, and so they ended up fixed price -- with fixed-price contracts with [ same ] prices but outside of market since abruptly and suddenly the energy market returned to normal. So the Market is now [ expressing ] 3.5 million customers in terms of customer base; and a marginality of EUR 122 million, EUR 123 million. Now Waste. As I anticipated, it's slightly [ under, decreased ] compared to the previous year, with 2 positive elements, 1 on collection where we have higher revenues, but also we have better cost efficiency, cost effectiveness; minus EUR 6 million on treatment due to the standstill of a couple of plants and the postponement of a couple of months of plants that were supposed to be commissioned this year, in the first parts of this year, but then has been postponed, which values will be fully recovered in the second half of the year. Smart Infrastructures, Slide 9. Here we can see that margins on electric grid and on gas are providing good contribution due to the review of the revenues element, plus EUR 7 million for the 2 main [ grids ] of our management; EUR 5 million coming from the water cycle; and a slight decrease on heat management due to the thermal condition on the last parts of the period, basically the end of winter. So the [ electricity ] part, RAB. Electricity is increasing, plus 15% compared to last year, EUR 953 million of electricity; EUR 1.578 billion for gas, which grows, again, by 6%. Slide 10 shows some P&L figures after commenting EBITDA in detail, EUR 188 million (sic) [ EUR 880 million ]. We have EUR 380 million in D&A, the increase of which compared to last year is the result of the increased investment or increased CapEx during the period, during the 6-month period. And then we have risk provisions because, last year, we had a release in this part due to the increase in interest rate, especially with regard to post management of dumps. And this is a mid-long-term date which must be actualized due to accounting principles, so probably the rate had a positive effect last year which was not repeated this year. Bad debt provision is good, which is not affected by the effects of the customer base belonging to the safeguarded sector. We will see the effects a bit more in the second half of the year. Financial charges, EUR 69 million but -- compared to last year, due to the effects of the increase in interest rate. Today, the cost of debt is 2.4% versus 1.6% last year. EUR 379 million is EBT, E-B-T. EUR 114 million paid in taxes, so EUR 256 million, deducting the minorities. That's the net ordinary result. So we have $23 million (sic) [ EUR 23 million ] one-off special items concerning the fiscal effects, the positive fiscal effects, deriving from payment of withholding or replacement taxes on the disposal of some assets. So EUR 280 million in terms of EBT. CapEx is reflected on Page 11, and I give the floor to Renato.

Yes. Let me just underline that once more, for the third consecutive year, we have had the first year half growing. Compared to previous year, growth has been by 7%. And let me just underline that the most important part are on the left, EUR 281 million development. And it's also important to look at the quality of the development. So the Matarocco wind park in Sicily, in the province of Marsala, where we have installed 30 megawatts, 8 wind blades with high performance to strengthen the greenfield capacity of our wind power plants. We would also like to highlight that we continue to have good alignment to the European taxonomy and to the SDG targets. About 70% of the eligible CapEx is aligned with the SDGs; and 75%, 70% of the CapEx is aligned with the European taxonomy. Therefore, we continue to invest on the main growth lever we have. And Slide 12. Very quickly, let me just comment the net free cash flow. Let me just echo the concept of proactive risk management. Among the risks, we also have the financial risk, which is managed with [ thorough ] discipline. The figures are self-explanatory because, as you can see here, we are generating operating cash flow exceeding EUR 600 million after proactive management of the net working capital, where then Q2 has released cash for about EUR 250 million after absorption of [ EUR 380 million ] in Q1, also in line with the seasonality of our business. And as I said earlier, with [ thorough ] management of the net working capital, EUR 640 million allow us not only to fully [ spend ] our CapEx but also part of our dividends. We therefore have EUR 114 million PFN (sic) [ NFP ]. And the ratio with EBITDA is 2.6x, as opposed to 2.8x end of last year. The result of this performance that we -- based on this, we have revised our guidance by EUR 100 million; as you can see on the EBITDA, EUR 1.74 billion, EUR 1.780 billion. That's the range considering some elements, positive elements, on the generation side, most of all, at fixed the prices linked most of all, on the one hand, to the end of the clawback; and to the hedging, which has allowed to have attractive pricing. And there is also a negative effect arising from coal-fired energy production and CCGT that is decreasing. So we have a net ordinary income with, of course, [ a record ]. It's a very important value, EUR 450 million, EUR 460 million (sic) [ EUR 470 million ], which is self-explanatory. And now some takeaways, without any further ado, so that there is more time for the Q&A. The takeaway are guidance revised upward, thanks to the important -- to the significant industrial performance. We continue to invest to support the growth in Italian infrastructures. And the decarbonization process is involving us as key players. And we'll keep a keen eye on the net financial position. We are proud of the fact that we can keep our CapEx level with [ thorough ] financial discipline. And now let's start the Q&A.

[Operator Instructions] First question, Javier Suarez from Mediobanca.

The first question is about the guidance. I would like to have more details about the guidance and the net debt-to-EBITDA at year-end, the guidance about the CapEx. If I remember correctly, last time was 3x. And CapEx was about EUR 1.4 billion, so can you update with a comparison? And the second question relates to the latest details of [ saving ] levels we have for 2023, 2024 for internal generation and for [ clean spreads ]. And the third question. Can you help me understand the main dynamics that you see in the business of generation for 2024? Because there are new elements. I would like to have your view of the production with the CCGT plants which have suffered this year for imports from France. What do you expect in 2024? I know it's not easy to make an estimate, but I would like to have your latest estimates; and ancillary service markets, the contribution in 2024; and the price levels that you expect in 2024, to see how the profitability of EBITDA and power generation is going to evolve from 2023 to 2024. Last question, about net working capital: In first year half, net working capital is around EUR 100 million, EUR 108 million. What's your expectation in terms of net working capital at year-end?

Let me just the answer to the first and third question. The first question, about the guidance, so net debt on EBITDA. Our target is to stay below 2.8x. As to CapEx, I can only confirm EUR 1.4 billion. This was actually the value that we had already shared with you. Concerning generation dynamics in 2024, the main variable, of course, is hydropower. In 2023, hydropower is still suffering because of the -- little snow in winter '22, '23, most especially on the alps. This has been, remain a factor of contribution. And now our production levels are, by far, better in Southern Italy, in the region of Calabria, [ for instance ], than on the alps. Even if it's raining, we cannot replace the snow that has not fallen last winter. Therefore, it's reasonable to assume that, if we have a more normalized rain situation, hydropower production can go back to average historical value, 1 terawatt hour more than we are assuming for 2023. This is very relevant, of course, because as Luca will explain you more in detail, part of this production is already covered. And we are working at attractive prices. As to the energy import from France, we expect that the import levels we are seeing right now are quite normal, so there will be this component also in the future. CCGT, as it's always the case, act as a plug as temporary solution. We expect CCGT, in the next few years, to be less active, to be working less. This is the reason why we have taken part in the [ conferral bids ] on the capacity market. So we should consider, well, they will do. They will be in function for several hours, but the capacity market will be the key element. And already today, the capacity [ marketing ] is contributing significantly to the financial performance of these plants. On the contrary, I don't expect any significant reduction in the MSD margin compared to 2023. It's, by far, lower than in 2022. Because we have the new capacity market plant to be running at full swing in Monfalcone that will start operations in '25. And it's unlikely until when we can have a normalized MSD situation, so we are still expecting we have a quite positive 2024. As to prices, the forecast or the scenario we are looking at is quite stable compared with the setting today. We have got to use to -- unexpected events, but I cannot see any hints which might alter the price scenario on the supply or on the demand side. Demand is a bit weak, but it cannot significantly affect the price; and also the arrival of the regasification plant at Ravenna in 2024, which will strengthen stability. There is a limited capacity, so -- considering the market which is absorbing [ 60 cubic million, 65 cubic million ], so it's -- will not disrupt the balance between supply and demand, so the forecast for 2024 is still very positive. Luca?

As far as the net working capital performance is concerned, for the second part of the year, we expect some increase in credits concerning the safeguarded area, which we believe we can manage proactively. The expectation is still in line with the guidance for PFN-over-EBITDA ratio that was given, so we believe we will be able to flexibly manage this parameter within these values. As to hedging, as we said before, for 2024, we are already working ahead with fixed-price production, so whatever comes from renewable energy production -- we've already covered more than 50% of productions with an average price, as quite interesting, slightly higher than this year's, which on average is about EUR 150 per megawatt. So we'll say, very good also in this respect. So 2024 should be easier in terms of hedging and risk management. We are still open because this market is not as liquid as fixed-price production on the parts concerning CCGTs where we can work a little bit more, especially towards the second part of the year, year-end. As to the hedging of 2023, you will remember, on the fixed-priced part, we are hedged up to 70%, 72% with value in excess of EUR 150, EUR 155, EUR 156, whereas for CCGT we are hedged at around 70% with an average value which is above EUR 25 per megawatt.

Next question, by Stefano Gamberini from Mediobanca -- Equita. [ Sorry ].

I have a question concerning 2024. Luca, can you help us understand those 120 million of annual improvement in terms of EBITDA? I think that part of it may come from this hedging of more than 50% of production so there is no more clawback. I was wondering about margins in CCGT because this year we have exit margins helping us with lower volumes. So what should we expect for next year [ as delta ]? The other element I wanted to understand was on Market. This year, in the Market area, you said there are EUR 50 million as an effect of the existing contracts which will probably disappear next year, so can we expect a further improvement in Market or not for next year? And also concerning estimates, I have a question on Waste, on Waste division. You said that we were flat in the first half, but you have a guidance of 380 million, 390 million of EBITDA in the first part of the year, a 10% growth. Do -- you confirm this, thanks to the new plant, so will it be possible to have an additional improvement next year? The other topic is renewal of concessions. I wanted to understand whether there is some innovation here or some novelty. Can we expect something to happen in the summer time, or is everything going to be postponed? I think it's an important topic. Since there is a change in senior management [ of Iren ], I was wondering whether there is some novelty in this respect too.

Stefano, I will [ start around ] the tail of your questions. As to the renewal of concessions, I would say we are in line with what we said a few months ago or for the previous quarter end and during the meetings we had in interim. We are confident that we will find a positive path for the concessions where the deal leading to the engagement [ and the ] necessary investments to guarantee the performance of this plant won't suffer or -- affected by some changes. For instance, in the alps and glaciers lying above, they require hydraulic interventions and works in order to go back to the original power. And also these plants have to be equipped with pumping stations, if possible, to guarantee storage mechanisms that would help with the development of renewable sources. We are working on that. I don't think we will see anything new this summer, but we expect to have notice by year-end. As to Waste, the guidance says, and it dictates it by the facts, that there are some plants that recorded some delays, which we didn't see that much in the first half, but they are going to reach their full potential this year already. I'm thinking of Parona district heating system or other plants that we commissioned at the end of last year, which they -- which have their own learning curve that must be completed, but this year, we believe, is the year in which all these investments will come to full capacity. Well, first of all, for the whole year, we are enjoying the effects of the safeguarded, and next year, we will have auctions for the protected area. So we take it for granted that it's going to be a year of major growth, so we are working on the 2024 forecasts and we expect an increase. As to the second question, I didn't understand what you were referring to, so I hand over to Luca.

Let me just point out one thing, Stefano. It's not an accounting effect on Market. It's a real effect of margin increase. Last year, we discounted some effects, one of which was the erosion of margins on 2-year contracts, which we are recovering this year, but it was -- part of the promise -- premises; part of the prices, [ sale ] prices, between generation and Market. So the margins we are recording on the Market are real and through which bring real revenues and so EBITDA then transforming into cash. As to 2024, if I understood your question, you're assuming a growth of about EUR 100 million. Now we are working on our new budgets and plans. We have some positive elements that allow us to have a positive view for 2024. For instance and most especially, we should see a revision or a review of the regulation terms, in the infrastructure sector, on the regulated gas, electricity and hydraulic cycle. We should have the positive effects of the trigger of [ UACC ]. All analysts are making similar considerations in line with us, so 80, 90 basis points of increase last -- next year. We will see, when the observation window closes, what the final numbers will be. We will have a positive effect of inflation, a deflating effect. And OpEx also will play a role, which will give a good contribution coupled with good effects on Market and coupled with the positive effect of Waste which continues -- with investments continues to generate consistent growth in line with what it has achieved in the last few years. This puts us in a fairly good position.

Well, which points you with a year-on-year growth, well, besides the guidance changes -- changed in a year.

One last question, about district heating. There we can have a surprise in terms of changes in regulations affecting EBITDA. Or do you think that with the new regulations there are no risk in terms of EBITDA?

Well, we have a positive view. We are happy to see the possibility of regulations here. Today, district heating is -- in some cities and especially Milan, we see it as the main source of decarbonization of cities from the viewpoint of heating systems, which is, after mobility, the #1 problem in cities. So district heating has a very good effect also in terms of reduction of CO2. It's more effective than heat pumps. We have to push on this side because Milan has the biggest potential because today we only have 20% of district heating. So the regulation here, if carried out correctly -- and we have no reason to think that it will not be carried out correctly. The latest regulation was on water; and it brought new investments and good remuneration, as far as I know. This sector, when we talk about this sector with rating agencies, it's [ enormous ] regulated sector, so we should actually go for fully regulated. We are thinking in terms of [ RAB-based ], so it will have an impact on EBITDA. Being a regulated EBITDA, the value will be different. The ratios will be different, so we are assisting and contributing to in-depth studies on regulation. I had a talk yesterday with the president of the regulatory bodies and it was quite good.