Enel SpA

MIL:ENEL

Earnings Call Analysis

Enel Achieves Strong Growth with Increased Investments and Positive Cash Flow

Enel's third quarter results reflect solid growth, marking a 6% increase in ordinary EBITDA to EUR 17.4 billion and a 16% rise in net income to EUR 5.8 billion. Investments totaled EUR 7.8 billion, primarily focused on regulated assets, yielding predictable returns. Significant contributions from Italy and Spain accounted for over 70% of EBITDA. The company maintains an optimistic revenue outlook, forecasting net debt-to-EBITDA reduction to 2.4x and cash flow from operations (FFO) expected to improve to 6% by year-end. Enel remains committed to its capital allocation strategy and will present further details at the upcoming Capital Market Day.

Strong Financial Performance in 2024

Enel's financial results for the first nine months of 2024 indicate a robust performance. The ordinary EBITDA reached EUR 17.4 billion, marking a 6% increase from the previous year. Ordinary net income rose significantly to EUR 5.8 billion, a 16% year-on-year jump, underscoring the company’s solid earnings trajectory. These figures reassure investors about the company's stability despite external pressures.

Investments and Capital Expenditure Focus

The company invested approximately EUR 7.8 billion over the nine-month period, focusing more than half of this capital on grid infrastructure. This strategic investment aligns with Enel’s objectives to enhance regulated assets, which are known for providing consistent and predictable returns. Moreover, nearly 70% of total investments were allocated within Europe, highlighting a commitment to operate in stable markets like Italy and Spain.

Operational Efficiency and Earnings Growth

The consistent EBITDA growth is significantly attributed to operational efficiency. On a like-for-like basis, EBITDA increased by 13%, which is noteworthy considering a challenging market landscape. This improvement was facilitated through strategic energy management practices and a focus on high-performing sectors, particularly in Italy and Spain, which produced over 70% of the group’s ordinary EBITDA.

Cash Flow and Financial Prudence

The cash flow from operations (FFO) stood at EUR 9 billion. However, management noted a working capital deficit of EUR 2.9 billion, largely attributable to seasonal factors and specific one-time events. Despite this, overall cash generation is expected to recover in the last quarter of the year, aiding in full-year financial goals. Management expects the net debt-to-EBITDA ratio to reach 2.4x by year-end, positioning Enel favorably compared to industry averages.

Strategic Focus on Renewables and Integrated Business

Enel's integrated business segment saw a substantial growth of EUR 1.6 billion year-on-year, with renewables contributing significantly due to a surge in production and strategic hedging. The company also anticipates a long-term normalization of its retail EBITDA starting in 2025, which is crucial for sustaining growth and adapting to market changes.

Guidance for Future Performance and Dividends

Looking ahead, Enel has confirmed its financial targets for 2024, indicating that this year's operational strengths will continue to manifest positively. Investors should anticipate updates on shareholder remuneration, including dividends per share, during the upcoming Capital Market Day on November 18. The company aims to provide clarity on its financial ambitions and anticipated performance metrics for the next year.

Navigating Market and Regulatory Changes

Management highlighted the importance of ongoing regulatory consultations, particularly in Spain, which could impact future investments. A focus on geographical and portfolio diversification reflects Enel's adaptive strategies in response to fluctuating market conditions and regulatory dynamics.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Enel 9-Month 2024 Results Conference Call. [Operator Instructions]

I would now like to turn the call over to your speakers, Omar Al Bayaty, Head of Investor Relations; and Stefano De Angelis, CFO. Please go ahead.

[Omar Al Bayaty, executive]

Good evening, everyone, and welcome to the 9-month 2024 results presentation, which will be hosted by Enel's CFO, Stefano De Angelis. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send question only via e-mail at [e-mail].

Before we start, let me remind you that media is listening to both the presentation and the Q&A session. Thank you. And now let me hand over to our CFO.

[Stefano De Angelis, executive]

Thank you, Omar, and welcome to everybody. In the third quarter, the group extended the strong and predictable economic and financial results, which played out linearly throughout the quarters. Across all metrics of performance, we are walking the talk of the 2023 Capital Market Day, delivering on all the commitments undertaken.

Focusing now only on financials. Ordinary EBITDA for the 9 months came in at EUR 17.4 billion, up by 6% versus previous year. Ordinary net income at EUR 5.8 billion is up by 16% year-on-year, confirming the trend observed in the first half of the year.

And now we'll dive into CapEx evolution and how this reflected into the EBITDA performance. Over the period, we deployed investment for around EUR 7.8 billion and more than half of the CapEx was spent in grids, in line with our strategy to increase our focus on regulated assets that provide visible and predictable returns. The rest was allocated to support our integrated strategy.

From a geographical perspective, we confirm our goal to rebalance our capital allocation as almost 70% of the total were deployed in Europe, accounting for more than EUR 5 billion. As a result, more than 70% of the group ordinary EBITDA was coming from Italy and Spain and around 80% from Tier 1 countries, meaning Italy, Iberia and United States. From a business perspective, we delivered sound results in both our grids and integrated market business line that I'm going to comment starting from next slide.

Over the past years, quarterly results reflected high volatility often driven by nonrecurring items such as capital gains and nonlinear impacts from trading of commodities. Since last year, EBITDA performance has been consistent with around 25% of the yearly guidance and the positive year-on-year comparison delivered each quarter of the year. This result has been achieved thanks to the mentioned portfolio strategy focused on geographies and assets with sound and visible returns that do not only support the strong economic performance, but also allowed us to have a more linear progression along the quarters of the year.

On the other hand, a business-oriented optimization of the energy management that I will comment in the slide related to the integrated business has been one of the main priority of the management team. Overall, and on a like-for-like basis, EBITDA is up by 13% versus previous year, despite a tough market and macro environment compared to our expectation, especially in the first part of the 2024.

I will now move on Slide 5 to comment on the grid performance. Grids EBITDA stood at EUR 5.9 billion, up by 6% year-on-year on a like-for-like basis. We recorded a strong performance in Europe, driven by Italy, up by approximately EUR 200 million versus 2023 as we continue to leverage on a higher CapEx and supportive regulatory framework. Spain showed a resilient performance, increasing by EUR 100 million versus previous year. Worth to highlight that, as you know, the consultation on the new regulatory framework is ongoing, and this will be crucial to provide the needed support to investment in the country. The most recent outcome is in line with industry expectations.

Latin America increased by approximately EUR 100 million as a result of the positive contribution from tariff indexation. And this happened also in Argentina, where the new government is proving a firm attitude on reshaping the economic environment to support private investors. Those positive actions offset the negative impact of CPI on OpEx as well as the perimeter effect linked to the Peru disposal.

Let's now continue on Slide 6 with the evolution of the integrated business. First of all, it's worth to highlight that power and commodity portfolio management is now forced to maximize the value of our distinctive and flexible generation asset base, matching profiles between the different energy sources and a wide and differentiated customer demand.

Looking at the evolution year-over-year net of perimeter, the integrated business increased by a sound EUR 1.6 billion. Renewables presented in line with our mid- and long-term ambition we shared last year during the Capital Market Day, the bulk of the growth, improving by around EUR 2.3 billion versus last year.

Here, the main drivers are: Approximately EUR 600 million improvement resulting from the implementation of the successful hedging strategy and storage capacity that was installed in the end of 2023 at the beginning of 2024; around EUR 900 million from 8 terawatts of higher production, mainly driven by the better hydrology across all countries; EUR 600 million contribution from the new capacity that was deployed; and lastly, EUR 350 million came from the removal of the clawback measure in Italy that offset other minor negative impact that I'm not going to comment because we have a lot of minus of this minimal impact that were offsetting by this important removal of the clawback.

Worth to highlight that the strong result has been achieved. And I remember how the market was worried about in the first part of the year of a tough price environment that especially in the first half, it was, I would say, not exactly in line with our projection. Now the market is showing a pool price that is mostly in line with our projection, but we will update you on the next Capital Market Day.

Moving to the thermal generation commodity. This group of activity declined EUR 200 million year-on-year, in line with the planned assumption and back to a normalized performance, mainly due to the 19 terawatt lower production, mostly as a consequence of -- by the end of the mandatory requirements we had, especially in Italy on coal production.

Finally, normalization of retail EBITDA is progressing in line with plan expectation. The downward price revision after the spike occurred during 2022 and the first part of 2023 in the commodity market is now fully implemented. Sorry, starting from 2025, we expect a normalized trend in this business segment in line with our mid- to long-term ambitions.

I will now move to the Slide 7, where I will update you on the progress in the efficiency program. Our focus, as you may see, is continuing to bear fruit and is progressing in line with our front-loaded expectations. As of September, the program reached around EUR 600 million savings compared to 2022, 60% of the 2026 target set again at the Capital Market Day. Around 75% of the reduction is related to a rationalization of the business portfolio, while the remaining portion has been recorded as a spend review action mainly related to the optimization of cash costs like the general and administrative ones.

To be clear, this is also the footnote. When I refer to the rationalization of business portfolio, this is not -- the analysis do not include any perimeter or disposed asset changes, so it's based on a like-for-like analysis and accounting.

Moving to Slide 8, I will comment the net income of the period that came at EUR 5.8 billion, as I told before, up by 16% versus last year. For what regard the D&A that I remember always include, also the bad debt, the increase was also driven by the higher amortization mainly in Italy and Spain off the back of investment deployed that was just partially offset by the impact from the asset disposed.

Financial expenses decreased by EUR 200 million year-on-year, thanks to the lower charges on debt, which finally benefited from the net debt reduction and lower cost of debt. There is also the impact of higher contribution from associates.

Income tax increased mainly on higher profits. And finally, minorities proved flat year-on-year on the back of the better year-on-year results, especially in Italy and the United States that resulted in a lower dilution at the bottom line. It is worth to highlight also that reported net income increased by 38% compared to previous years.

I'd like to remark on this, because as I said also starting from the Capital Market Day, the different -- from the best and from some benchmark in the industry, the exclusion of the capital gain from the disposal of Peru assets in the ordinary results is aligned and consistent with the guidelines provided to the shareholders and financial community. To size the relevance of these topics, the reported EBITDA, as we can see in the slide, includes EUR 1.4 billion positive capital gain that was not part of the business results presentation.

When we'll see in 10 days, more or less, you will see that, again, we will provide you updates, and we will not include any stewardship capital gain. And as I already stated, but we are coming to this event. When we will close the Lombardy network asset sale, this will provide another capital gain. This will not be, again, included in the ordinary net income. Also, we will maintain a 10% share in the SPV that we are creating to close the operation.

Let's move now to Slide 9, where we will discuss by the cash generation at FFO level. The result was EUR 9 billion. And this still do not reflect the full year expected results due to the seasonality of the working capital changes. Consequently, when I move to the moving parts, I start exactly from this important and relevant topic that is the working capital that is minus EUR 2.9 billion.

And as you know, the accounting economic and financial impacts of the operation has normally a time lag that may affect significantly the working capital dynamics, especially in the case of one-off items or discontinuities in the underlying business results. As we have already commented in the first half results conference call and highlighted in the slide, we recorded 2 main significant items in the period, the Qatar [ Laudo ] and the CO2 settlement in Italy. That is important to carve out from the trend analysis being based on one-off and nonorganic circumstances.

On the other hand, the organic working capital evolution reflects a multiple set of variables where we have full visibility and control, thanks also to the more linear trend of our business operation that I have already commented. Consequently, we are now more than confident that delivery in the fourth quarter of the year, benefiting from the reversal of the above-mentioned seasonality and the contribution from our collaboration will drive us to the full year ambition, both in terms of cash generation and financial leverage.

Moving to the other items of the FFO, let me add some color to the trend underlying the full year results. Cash out for taxes was EUR 2.4 billion, higher versus previous year, mainly due to the balance of the 2023 accrued income tax already paid in the 9 months. As a consequence, the fourth quarter '24 cash out will normalize. Financial charges that are EUR 300 million lower versus last year have finally reflected the reduction of our outstanding debt and will present a consistent trend in the fourth quarter.

I move now on Slide 10 to continue on the cash, exploring what is next to the FFO. As you may see, we landed at EUR 58.2 billion. And on top of the FFO contribution, the net CapEx amounted to EUR 6.1 billion as we cashed EUR 600 million of grants and EUR 1.1 billion from the partnership with Sosteneo in Italy related to our BESS capacity project.

The FFO minus CapEx for around EUR 3 billion and the active portfolio management where the disposal plan cash in is the main items with EUR 3.8 billion fully covered dividends payment and delivered the EUR 2 billion deleverage in our net debt. Taking into account the contribution of the signed deals, net debt would have already stood at around EUR 56 billion at the end of September.

And now I will move to some closing remarks. Our resilient and balanced risk return asset base across all countries of presence is set to deliver consistent economic and financial results. The focus on a firm financial discipline and the execution of the disposal plan at high multiples allowed us to rapidly deleverage the group with a net debt-to-EBITDA ratio expected to reach 2.4x by the end of this year, well below the sector average. The restored balance sheet solidity and the confirmed management focus on accountability and operating excellence set the foundation of a long-term sustainable growth.

Finally, the strong and linear quarterly performance observed so far allows us to confirm all the economic and financial targets set for 2024 on the back of proven resiliency and harmful visibility on the evolution of the last quarter of the year. On this, we remind you that on November 18, we will present the new strategic plan, and we look forward to see you there.

Thank you for your attention, and now we move to the Q&A section.

[Omar Al Bayaty, executive]

Thank you, Stefano. Let's start the Q&A session. As we approach the Capital Market Day of a matter of days, we will not take questions on the broader strategy and we'll focus only on questions about the results of the presentation just commented by Stefano.

So the first question, guidance has been confirmed despite strong numbers that would point to upside. Do you have any visibility on negative incoming the last quarter?

[Stefano De Angelis, executive]

As you see in the presentation, we are and we have presented the slide on the quarterly trend to share with you the pretty linear deployment of our results through the quarters. It's clear that things are moving as expected on the back of the improved resiliency of our business model and the ample visibility on the underlying operating dynamics. So on this, we can confirm the full guidance as already commented by the management in the 6 months results call.

[Omar Al Bayaty, executive]

Thank you, Stefano. We received one question regarding the shareholder remuneration. Will you officially disclose the level of DPS for 2024 at the next Capital Market Day?

[Stefano De Angelis, executive]

It's easy to answer this question because having just 10 days between today and the Capital Market Day, we will update the full set of our strategy and financial ambition in more than 1 week. So let's expect -- you can expect, I suppose, this important event to be acknowledged by our shareholder remuneration policy.

[Omar Al Bayaty, executive]

Thank you, Stefano. One more question. Clients' auction of the regulated segment have been onboarded since July. What has been the EBITDA contribution? And what do you expect the recurring yearly contribution to be?

[Stefano De Angelis, executive]

This is a good question because it helps us to clarify this -- not recurring dynamics because it's a case that I think happened just in Italy to have customer auction by the government. So this auction for us is a unique opportunity to onboard a significant number. We are talking about 1 million, more than 1 million. Probably you remember that at the beginning, but the auction was made at the beginning of the year and cleared part of this customer, but this do not impact in any way the economic results. We will just receive that customer, we will just pay the discount for the customer we have received.

So this customer, you have to consider that our resilient customer in the market, today, you have a lot of customers that create a sort of washing machine because they are trying to find the best offer. These customers were impossible to be moved from their provider, notwithstanding the strong focus also from Enel and the other player that we were trying to absorb these customers to the free one -- to the free market one for years and especially in the last 6 months.

So it's a very good customer base, resilient one that will migrate to a free commercial offer at the end of the period. So it will not long stand for all its life for 20 years in this -- let me say, in this stage. They discounted that we'll be paid just and only, sorry, along the customer life in the customer base of Enel, meaning that if one customer left Enel in July, August or September, we will just pay that month of discount.

So it's not like an acquisition. If I acquire a customer to an agent, I have to pay a commission, a fee that -- if the customers will migrate after 1 year, I will not recover my money. In this case, I pay the discount just for the period that the customer remain in my customer base. If I migrate the customer, that is my ambition, in my free commercial office, I will stop to pay this discount.

So it's absolutely a positive value that we are bringing because we will focus on shifting these customers to the fully-liberalized product offer, but also we will lever on different products and services we may bundle and sell to this customer base that have a commercial relation with Enel.

[Omar Al Bayaty, executive]

Thank you, Stefano. And we received one question regarding M&A. And on M&A deals, is there any risk of delay of closing beyond 2024?

[Stefano De Angelis, executive]

Let me say, the deal are progressing without any, let me say, signal to be delayed by the -- basically, the authorities who have to. But these are minor -- these, we are not talking about, you remember and I remember perfectly, the Peru deal that was affecting 50% of the distribution of a country. We are talking about a minor part of the network that is sold to the next door network operator and just a minor part of the photovoltaic generation where we are selling a minority stake. So we don't expect any delay on this cash in on the closing of these 2 deals.

[Omar Al Bayaty, executive]

Thank you, Stefano. One question regarding working capital. Working capital continued to be negative. What is the expected level for the year-end?

[Stefano De Angelis, executive]

I suppose that the question came before my 15 minutes description of the dynamics. But as I say, let's go directly to the end. We have full control of the payable receivable, let me say, of the organic component of the working capital. As you have seen, you may listen to my description, there are sometimes, some specific items like the Qatar, but also these -- it's in our radar.

So we were perfectly aware of the working capital of September. I have to explain to you, but we are confident -- really more than confident that we will get the ambition and the target we have shared with the financial community for the end of 2024.

[Omar Al Bayaty, executive]

Okay. Thank you, Stefano. We received to retake the question regarding the shareholder remuneration. If we can repeat, so the answer for shareholder remuneration will be officially disclosed, the level of DPS for 2024 after the next Capital Market Day.

[Stefano De Angelis, executive]

Sorry, because I was not understanding what was the problem. Yes, you have just to wait 11, 12 -- on the 18th, we will share, we will explain also the strategy of the industrial plan. But for sure, you will receive an update on the shareholder remuneration, including the dividend per share.

[Omar Al Bayaty, executive]

Thank you, Stefano. One question regarding FFO. FFO conversion was at 52%, down from 65% last year. What is the level of FFO you expect for year-end?

[Stefano De Angelis, executive]

Let's say, as I said before, the 52% is clearly impacted by the seasonality that I have also described. So it's not what we are looking for, let's say, what we are expecting. The recovery of the working capital, we will bring this figure to, let me say, something that begin with 6% by year-end for sure because again, if you make the calculation of the recovery we have to make on the working capital, it's clear that our ambition is to stay on the level of last year, 65%.

You have to consider that when I say this year, I have the Qatar negative impact. This was a positive impact last year. But we want also to improve along the plan. But for sure, 52% is not a benchmark, let's say, that's something that starts with 6%.

[Omar Al Bayaty, executive]

Thank you, Stefano. We received the last one, CapEx. CapEx slowdown versus previous quarters. What is the expected level of CapEx for the full year?

[Stefano De Angelis, executive]

Let's say, let's divide the CapEx amount into 2 segments, no. in networks, and I would say all in commercial investment effort, there will be no delay for sure. No. We are -- again, it's like the working capital, what we will be -- we accounted as CapEx is already progressing in these days. For what regards? The -- let me say, the development and the renewable capacity -- you know that we continue to assess investment opportunity in light of their profitability and especially the risk return profile.

So in this case, we may suffer some delay, but this delay is, as we said before, our CEO, I think they stated each time that talked with the financial community, we are not going to investment because we have a commitment on an amount. We have committed on an amount of value generated. If we don't have for some hundreds of million projects this year to be approved, we will look for other opportunities that, again, will generate the target of value added.

And I repeat the risk return profile of the investment because in our -- we value the investment like a rating. We use A, AAA because it's not just the spread. I may receive an investment that is full merchant, solar in Spain, 300 basis points. I will not look at it, because the risk that you have today killed the 300 basis points to the level that is not acceptable for us. And we'll not consider the integrated customer base in the valuation, because we put ourselves in a scheme that we are not leveraging on the customer base when we evaluate the new capacity on renewables.

So no delay in networks and commercial. We may face some delay. At the same time, maybe that in 6, 9 months, we accelerate because we found a fantastic bid for capacity in Italy with a very good remuneration. So we will participate and we may recover the saving accounted this year.

[Omar Al Bayaty, executive]

Thank you, Stefano. That was the last one. And so...

[Stefano De Angelis, executive]

So I hope to see you -- please listen to me on the 18th. We will present, as I said before, also the DPS per share that is, I think, as I said before, will be, for sure, part of the update. So thank you so much for your attention, and I hope to see you there with my team and with the CEO on the 18th of November for the Capital Market Day.

[Omar Al Bayaty, executive]

Thank you.

[Operator]

This concludes today's conference call. You may now disconnect your lines. Thank you.