Hera SpA

MIL:HER

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, this is the Chorus Call operator. Welcome to the presentation of the financial results as of March 31, 2018, for Hera Group. [Operator Instructions] .

I'd now like to give the floor to Mr. Tomaso Tommasi di Vignano, Executive Chairman of Hera Group. Mr. Tommasi di Vignano, you have the floor.

[Tomaso di Vignano, executive]

Thank you, and good morning to all of you. We have just concluded our board meeting, during which we also approved the Q1 results. This time, we didn't even have time for lunch because we wanted to be here at -- in a timely fashion, given all your commitments. And therefore, with my colleagues, I'd like to give you an overview of our results, which aren't complicated, in fact, given the fact that they include a certain element of straightforwardness, which is also accompanied by the positive results as underlined by the board a few minutes ago.

As you may have already seen from our press release, we have had a significant growth in EBITDA, posting a plus 5.2% at EUR 222 million, which also, given the good result which accompanied the EBITDA results and seen in terms of our net profit growth, where we closed the quarter with EUR 120.5 million, posting a plus 9.6% compared to the same period last year.

Therefore, over the past 3 months -- over the first 3 months of the year, we worked on the quality of our figures, also as far as our EBITDA is concerned, but also in the following lines in the P&L, which is something we've been working on over the past few quarters. And these results, in fact, are the outcome of a good trend as far as our operational results are concerned. based on our constant search for growth and efficiency, as usual. As I mentioned, our net profit is marked by a 10% growth with a pace which was faster compared to the past.

And another further positive element is that in terms of our financial debt, we fine-tuned the financial debt, which is something we have already done in the previous quarters. And therefore, we are at EUR 2.5 billion, slightly below what we had already achieved in the fourth quarter 2017.

So this is a summary of our figures. And then we will be going into the business-by-business breakdown, as usual. As far as our profit is concerned -- as our revenues are concerned, we had a good extension in trading, also marked by the recovery as far as the season was concerned. In the previous years, we had a tougher time in the month of January, whereas this year, we were able to recover the results, both in February and in March.

Furthermore, you will also be hearing how we worked on expanding our energy customer base with a 28,000 increase in our customer base in Q1, which also includes a number of operations as far as M&A is concerned in the specific sector.

We also did well in Waste. And as far as waste treatment is concerned, that was a sector which allowed us to post a higher impact despite the divestment from this sector in the Forli province. And we'll be seeing the figures related to this sector.

And moving on to EBITDA. I already mentioned what our growth rate was. And the important thing to note is that even as far as EBIT is concerned, we grew by 5.5%. We grew almost 10% on the pretax level, and 10% is the net profit post tax, which means that the year was off to a good start with a contribution focused, for the most part, on organic growth. In other words, of the EUR 60 million in growth, EUR 50.2 million stems from organic growth. And we'll be seeing which sectors that relates to.

Within the result we also took it to account the conclusion of an incentive linked to the Isernia waste-to-energy plant worth EUR 1.3 million. And also contributed with a further EUR 2 million to EBITDA through M&A activities.

Now going back to the way in which organic growth was achieved. As far as Energy is concerned, I mentioned the fact that a major part of the EUR 7.3 million stems from the increase in our customer base, with some 28,000 customers through transactions that had already been announced to you in the Gorizia area and the Abruzzo region, which allowed us to go beyond the 2.4 million energy customers, in line with the trend that we had given ourselves.

Also in a very ambitious way, as included in the business plan we presented to you, the sales volumes has increased both in gas and in electricity, and also in the trading activities, which had a very positive trend with a growth equal to 75% in terms of volumes.

As far as the networks are concerned, their growth was worth EUR 5.5 million. And it benefited from efficiency and innovation projects which were started in the sectors which belong to the networks sector.

As far as Waste is concerned, I mentioned the fact that the overall results for the strategic waste area is worth a plus EUR 2.5 million. And as far as waste treatment is concerned, EUR 4.9 million were brought about by waste treatment activities, including the contribution from the Aliplast company, which was fully operational within our perimeter in this quarter.

As far as waste collection is concerned, there was a EUR 2.5 million decrease entirely related to the exit of the Forli activities from our group's perimeter.

And finally as far as the results of the others are concerned, which include public lighting and [ TLC] , even here, if we consider the size of that business area, we posted a good result in the quarter worth EUR 1.7 million in terms of EBITDA.

This is a summary of the results, which is very straightforward, which is exactly what characterized the quarter.

And I'll give the floor to Stefano to go into the business-by-business breakdown.

[Stefano Venier, executive]

Thank you, and good morning. Well, beginning as usual with the Waste business, we posted a growth worth some EUR 2.5 million over the quarter. The more sizable part of the growth was linked to organic growth.

Now the organic growth component which had the biggest impact are prices, which is what we underlined also over the past 2 quarters in 2017. The prices, which all-in-all, posted a growth in the first quarter last year, which was worth some EUR 3 million. This is the figure which stems from the growth of prices, which hovered between 10%, 15% and 20%, depending on the various sector.

Another components compared to last year which posted a positive contribution is the change in perimeter, which affected our activities in this business. And besides Forli, which was mentioned a number of lines, which is underlined in this side, even the revenues from the sales of energy -- electricity compared to last year post a minus EUR 1 million to EUR 1.2 million, driven by the fact that as you may remember, Q1 last year posted a very high [ point ] value, especially in the month of January, given the French situation. And this year, despite having values which are above average and above our budget, in the comparison, they do have a slightly negative figure.

Among the other business news, the more relevant refers to the new biomethane plant which we have already illustrated on previous occasions. And on the slide here, you have a synthesis of our upcoming deadlines. We are now in the final construction phase. We expect to upload the very first part of the waste beginning in July. And it will be followed by 3 months' testing period and it will be fully operational over the last quarter this year.

The key figures in this project, which as you may remember, is worth 135,000 tons, of which a 100,000 refer to organic West and 35,000 refer to other types of biomass, especially greenery, which will bring about 7.5 million cubic meters of methane, which in our case, we chose to inject directly into the Snam network, this Snam high-pressure network, so that it can then be used in the connection points with a special focus on transportation.

In terms of underlying business trends are concerned, I mentioned the prices. I mentioned electricity, we're still missing volumes. As far as urban waste is concerned, we're facing a stable situation, the volumes which are entirely similar to Q1 last year. As far as industrial waste is concerned, demand is quite high, as seen by the price dynamics. And as far as we're concerned, our volumes were in line with Q1 last year or slightly below those figures. These are the essential elements in the waste sector.

Moving on now to the networks area on Page 5. As usual here, we have collected all of the activities which pertain to the regulated distribution business, which includes water, gas, electricity and district heating. In this case, we were facing some positive dynamics, with results which grew by some EUR 5 million with different components.

The water sector grew by EUR 2.3 million, benefited slightly from some greater revenues due to the effect of the investments made at the end of last year and also due to increased efficiencies which brought about roughly 50% of the result you can see.

As far as gas distribution and district heating are concerned, certainly, district heating contributed with greater volumes compared to last year, thanks to a thermal quarter which was slightly colder. In gas distribution sector, we have some further revenues linked to premiums on service.

And a positive contribution which I wish to mention since it is something we seldom do, although I think this time, it deserves to be mentioned. And I'm referring to the activities we have in Bulgaria referring to a gas distribution and sale which accounts for 14,000 customers, a country in which we rank #2 in the country. 14,000 customers, which means that it is a sector which, compared to the Italian context, would be quite modest. Whereas in Bulgaria, it is a sizable presence, which is growing with some 2,000 to 3,000 customers per year.

In electricity distribution, we also posted positive results worth EUR 1.1 million electric premiums and higher revenues, also given the investments made.

I'll go to a typical question I am asked, which is, how the EUR 139 million of EBITDA are split up for 2018? These stem in the following way: EUR 57.4 million from gas distribution, EUR 55.5 million from water services, EUR 10 million refer to electricity distribution and the remaining amount refers to district heating.

The final business area is energy supply, therefore. As I already mentioned a few minutes ago, generally speaking, the quarter was slightly colder compared to last year, during which, we sold some 22 million cubic meters more compared to last year on the residential market, which is worth some -- a further 2%.

It was a strange quarter because as you may remember, January was mild, and then it was very cold between the end of February and mid-March. This obviously brought about a certain degree of discontinuity given in the gas procurement sector, and gas trading therefore, allowing us to obtain some positive benefits, which in turn contributed to the EUR 6 million growth, which you can see in the left-hand graph.

Allow me to mention the fact that this result also has to take into account 2 negative phenomena. The first refers to the divestment from the activities we had in the city of Sassari and Sardinia, which we sold to Italgas group in early April, which means that, that activity was deconsolidated in Q1 this year. This was a business which had an overall yearly result worth EUR 3.5 million, and therefore, Q1 has an minus EUR 1.2 million.

Plus, we also had the fact that in the first 3 months of the year, and we'll have the same situation second 3 months, given the fact that it'll be up and running in the first few days of June. We had the most important power plant with a Hera stake, which is the Teverola plant, which is down for maintenance. Which is a plant which gives us the highest contribution in terms of production and in terms of dispatchment. And the fact that this asset was not available had an impact compared to the previous year for some EUR 4 million. Which means that we absorbed negative impacts worth some EUR 5 million. And despite that, we posted a EUR 6 million growth.

The final element which supports this result is, of course, our customer base. Which is now up to 2.4 million. I had already commented during the yearly results conference call that at the end of February, we had gone beyond the 1 million customers in electricity. And to those, we have to add 1.4 million gas customers, which brings us to a grand total of 2.4 million.

Now the electricity market which is now -- which now has further 60,000 or 70,000 customers over the past 12 months, is also partly reflected in the electricity volumes sold, which were equal to 3 terawatts per hour in the first quarter with a growth of equal to 500 gigawatts per hour, which include 300 in the business retail sector.

And this is the general results. I'll now give the floor to Mr. Moroni to comment the good performance in our financial cost, in the tax rate and in the cash flows, which, as the Chairman was saying, is another positive note as far as this quarter is concerned.

[Luca Moroni, executive]

Good morning, everyone. The net results for Q1 is positive with a plus 10%, with a positive contribution also from our financial management, through which, we continue to fine-tune a number of items linked to the cost of debt. Although the major contribution this time stems from interest charges which we applied to the safeguarded customers, which have a certain system.

Tax rate is at 30%, much like at the first quarter of last year, with a continuous benefit stemming from all of the fiscal optimization measures that we have already implemented as of the end of last year, and even beyond that in the previous exercise, which will continue to bring about positive results throughout the year.

If we look to the cash flows. As you can see, the free cash flow is at around EUR 40 million, brought about by an operational cash flow equal to EUR 226 million and brought about by a EUR 69 million variation in net working capital.

And one of your possible questions may be on this shift, which is a volume effect for the most part, both in terms of energy certificates that we will be cashing in, in the upcoming weeks and months; and also due to the normal seasonality of the first quarter, which was marked by an increase in volumes due to the Salvaguardia market. These were figures which had been were entirely included in our yearly target.

Then we have the typical differences between funds and fair tax, and financial burdens and CapEx worth EUR 75 million. With this EUR 40 million I mentioned, we also completed a number of minor M&A transactions. And we also had a buyback, which was worth some EUR 10 million. Which means that the total cash flow is at a little over EUR 20 million, which, as I mentioned, allow us to fine-tune our net financial positions at EUR 2.5 billion, which, on a rolling EBITDA basis, allows us to have a lever equal to 2.5x. Which means that we are doing quite well in terms of cash flows, which continue to be quite sizable, allowing us to have the opportunity to maintain the financial flexibility that we already mentioned as we were commenting the year-end results for 2017.

[Tomaso di Vignano, executive]

Thank you, Mr. Moroni. And I think the conclusions are quite easy today. I mentioned the fact that the results were good and straightforward. And all the things we have highlighted are consistent with that. Following the shareholders' assembly, we are now proceeding with the very first announced variation as far as the dividend is concerned, which will be worth EUR 0.095 per share. And during the assembly, we also confirmed our dividend plan for the other years included in the business plan according to the elements that you are already familiar with, which means that we are fully in line with our expectations.

I'd now like to give you the floor for any possible questions you may have.

[Operator]

[Operator Instructions] The first question is from the Italian teleconference call, Javier Suarez, Mediobanca.

[Javier Suarez Hernandez, analyst]

I have 2 or 3 questions for you. The first is on the Energy business, Slide #6. Looking at my figures, I think the real surprise refers to the gas business. Can you give us some more granularity as to the evolution of EBITDA in the Energy business, in terms of volumes, in terms of the number of clients and your trading activities? In other words, how much did these 3 components benefit positively? Could you give us some further details, in fact, to understand what the underlying dynamics are? The second question is on the Waste business, Slide #4. Even here, you posted growth. And I'm interested in understanding, what is the growth posted by Aliplast? You referred to stable volumes and a major growth in the underlying prices, is this interpretation correct? And we are referring to a double-digit growth in the underlying prices for special waste treatment. And my final question refers to the fact that in the cash flow statement, you mentioned the negative effect at the working capital, this minus EUR 69 million on Slide 8. How much should this be by year end? Should that number be assumed to be 0 by year-end, or is it otherwise?

[Stefano Venier, executive]

I'll begin with the underlying developments on Energy. As I mentioned, we sold 22 million cubic meters more. And this, of course, gives us a further margin compared to last year, somewhere between EUR 1.5 million and EUR 2 million. Plus to this result, we also have to consider a contribution from trading activities, given the fact that the volatility of the volume prices in Q1 gave us a number of opportunities on our positions. And this can be worth another EUR 2 million. Of course, this is less recurring compared to the previous item I mentioned. Also as far as the gas sector is concerned, there's a component within the volumes which we posted, a further figure compared to the end of 2017 which is worth some EUR 3 million. We then have the contribution from electricity. In the electricity supply business, the result posted was related to some further volumes, and the result was worth EUR 1 million approximately. What is the underlining customer dynamics? Well, in volumes, we sold more because we had slightly increased sales in the Maggior Tutela market worth 200 gigawatts per hour. Whereas in the business and retail sector, we had some further 300 gigawatts per hour. Compared to -- further 90,000 customers added to our customer base. Compared to 12 months ago, the electricity customers went from 911,000 to 1.07 million. In the gas sector, customers grew by 15,000, moving from 1,385,000 to 1.4 million, which means that in the gas sector, the dynamics on volumes which brought about those changes is essentially linked to the different thermal season -- or the different thermal characteristics in Q1 compared to last year, not so much due to the customer base. Whereas the higher volumes in electricity are also partly linked to the plus 90,000 customers. In the Waste business you had a question on the Aliplast contribution compared to last year in Q1. That is worth plus EUR 3 million on the overall total, whereas regarding prices, it is true that we have certain products which compare to Q1 last year, had double-digit increases. And this is especially linked to the dry materials which have a different destination. And by dry material, I mean dry waste, which grew significantly. Another significant increase, a double-digit increase, was the growth in hazardous industrial waste or complex industrial waste. And these types of waste increased even above 20%. But in this case, we're only referring to a few thousand tons, nothing major, therefore. In total, the waste managed in Q1 was worth -- was 20,000 tons below Q1 last year, 50% of that is urban waste and 50% of that is industrial waste.

Your third question was on the working capital. Luca?

[Luca Moroni, executive]

Yes, as far as working capital is concerned, our year-end forecast is in that range. We are at around EUR 80 million, an EUR 80 million difference year-on-year.

[Operator]

The next question is by Roberto Letizia, Equita SIM.

[Roberto Letizia, analyst]

I have a first question on the political environment. We've been reading of a possible agreement between the Five Star Movement and the League. With this possible new government, will there be any negative or positive impacts on your businesses? As far as the waste prices which you referred to, can you give us an idea as to how much of this shift is structural? Is this price dynamic due to the crisis on the ability to treat waste? And therefore, can we expect similar scenarios for the second half of 2018 and 2019? Or is it simply something pertaining to the first part of the year, which will then be reabsorbed? Then I have a couple of more questions on figures. Can you give us a breakdown of your G&A to understand the effects of provisions of bad debt? And I also wanted to know whether there will be an impact from IFRS on your figures this year. And if so, how much of that will have an impact during Q1 and on the entire year?

[Luca Moroni, executive]

I'll begin with your last question, G&A. As far as the accruals and depreciation compared to previous year are concerned, we had an overall growth worth EUR 7 million, most of which is linked to amortization for the delta investments and the delta parameter for Aliplast, which contributed to over 50% of this shift. As far as the procurement for the [indiscernible] credit fund, this is also linked to the first effects of IFRS 9. There's a difference between last year worth some EUR 9 million, which is a first indication as to the effect of the implementation of this accounting principle. Overall, the accruals of the first Q was worth EUR 23 million. And on the entire year, because this was the first quarter of it being applied, on a yearly basis, this sort of EUR 2 million contraction will be prolonged -- or replicated, rather, even in the following quarters, and it may perhaps even be improved slightly. As far as the waste sector is concerned and the general political environment, I'll leave the floor to the Chairman.

[Tomaso di Vignano, executive]

As far as prices are concerned, in the waste sector, I don't think this is a short-term situation. For a number of quarters now, we have been seeing an increase in prices, which is the direct outcome of the shortcomings as far as waste treatment assets are concerned throughout the country, as recognized by everyone explicitly, even in the recent days. Also by those -- and this is per actually your first question, who -- those movements who oppose waste-to-energy plants. So either we do something about this both in terms of the quality of governance as far as the authorizations are concerned, and also as far as the amount of assets available to deal with the waste sector. Or based on our vision, these prices will not be reabsorbed in the short term. In fact, there is still room to increase the prices, given the asset shortcomings. And I'm sure we all read the papers. And up to a few days ago, we were reading articles about 1/3 of the country facing an emergency as far as waste is concerned. Now I don't have a -- the real situation in each city, of course, but I'm sure that the Green Book published rate for Italia expresses its concern, given the shortcomings the country has in terms of waste disposal assets. And therefore, the answer to your question on prices is quite clear and consistent. More generally speaking, speaking of the future government. Typically, I try to study the situation and I prefer to refrain from offering a point of view, given the fact that we still have no clear idea as to who the government is going to be made up of. And we only have pre-electoral documents which show the position on individual topics. Therefore, before we become concerned or worried, I think it's better to wait and see. And in one of your notes, I read some possible crisis points, and it seems to me that there are no real certainties, in fact. If we look at the situation in the water sector as far as infrastructure is concerned prior to the reforms, you can certainly understand the difference there was -- or the difference in the country 3 years ago. And I'm sure that the situation will be considered very carefully. And the same goes for waste disposal plants. Whether we like them or not, I think there are a number of cities in Italy which truly have the need to have waste disposal assets, although they may not admit to having this need. And the same goes for possible aggregations or possible consolidation. If we want to push all of Italy to look to in-house solutions, we can go in that direction, of course. But the real industrial game-changer came about in those parts of the country where a focus on the industry was made. Therefore, I would prefer to refrain from expressing views until we see the position that the new government will have.

[Operator]

The next question is by Enrico Bartoli, MainFirst.

[Enrico Bartoli, analyst]

I also have some questions. I have a question on electricity. Can you give us an idea of the Teverola plant impact? Also in terms of full year, can you comment on the trend regarding sales margins for electricity customers in the quarter and what you expect of the upcoming quarters? As far as Waste is concerned, I have a general question. Given the reduction of recycled material from China, do you expect impact on prices of intermediate material? And as far as interest are concerned, the interest from the safeguarded customers, can you give us some figures on what can we expect for the entire year?

[Stefano Venier, executive]

As far as electricity market is concerned, the impact in Q1 for the Teverola plant which was stopped for maintenance which was worth EUR 4 million, as I mentioned. In Q2, this will be replicated, but the figure will be lower. Last year, in fact, we had, the month of January, with the effects you're all familiar there, and its benefits. And then in the month of April and May, which are the less active months in MSD, and therefore in that case, there was no production. It then will start again in June. That is also an intermediate month which is quite slow, in fact. But Q2 will roughly be half of what we had in Q1. And from then on, that should account for the entire effect of the thermal production plants for the year. And then during the year, of course, we'll be seeing how the activity will go concerning the new provisions. On the electricity margins, I don't have anything new to say vis-a-vis the 2 previous quarters. If we look at the retail sector, nothing much has changed. And if I look at the business sector, we're simply seeing the effects of the contracts closed in Q4 2017, which had the slight fine-tuning as compared the previous year. But that doesn't imply any major figures. The topic of China is pretty complex because it also relates to the value of the primary and secondary materials we have in the country through the consortia. To date, we still haven't seen any effects on urban paper and plastic. We haven't seen any major effects on the valorization of this material through consortia. But were the closure of the Chinese market to be prolonged. And if I remember correctly, the price of paper is less than EUR 20 per ton. As far as plastic, the supply is far, far above demand. Therefore, if the situation were to continue for the remaining months in 2018, even the stability of the consortia's pricing would be subject to a review, although it's hard to give you a forecast. As far as the valorization of this material from the industrial standpoint is concerned, well, from a certain point of view, I think we chose wisely when we decided to focus on Aliplast because we can look to certain productions which would otherwise be of a lower value. And the quantities of plastic which is not treated by Aliplast, it refers to -- what we were saying earlier, we were suffering a bit. And in effect, it is the only material in the waste cycle which is posting lower prices compared to all of the other part of the business. Although the negative effect stemming from this was already included the positive EUR 3 million I mentioned earlier.

[Luca Moroni, executive]

On the interest for the safeguarded customers, the positive effects we had on the financial management, it was something above EUR 5 million. EUR 1.5 million to EUR 1.8 million of this is an extraordinary event which stems from a dividend which was distributed from a minority share we have. And therefore, we have to look at EUR 4 million. This includes EUR 1.5 million to EUR 2.8 million which refer to pure financial management. The remaining part refers to the delta between the delay interests. And if we take the EUR 4 million and multiply them for the four quarters, that would be the figure we expect to have by the end of the year, some EUR 8 million to EUR 9 million.

[Operator]

[Operator Instructions] The next question is a follow up by Enrico Bartoli, MainFirst.

[Enrico Bartoli, analyst]

I have a further question. Can you give us your impression on the delay of the opening up of the residential electricity customers? And what impact they may imply compared to your business plan forecast.

[Stefano Venier, executive]

It's far too early. I hope that provisions will be complied with in Italy. That is a provision which expects that market to be opened up within a certain amount of months. Otherwise, it will become a self-fulfilled prophecy. The market has to be opened up, and we cannot continue as we always had.

[Operator]

[Operator Instructions] Mr. Tommasi di Vignano, gentlemen, for the time being, there are no further questions.

[Tomaso di Vignano, executive]

Well, thank you very much. And we will go back to work, hoping that things will continue as they have so far. Thank you.

[Operator]

This is the Chorus Call operator. The conference call is now over. You can disconnect your telephone. Thank you.