Hera SpA

MIL:HER

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon. This is the Chorus Call operator. Welcome to the Q1 2021 financial results of Hera Group. [Operator Instructions] I'd now like to give the floor to Mr. Tomaso Tommasi di Vignano, Hera Group's Executive Chairman. You have the floor, sir.

[Tomaso di Vignano, executive]

Good afternoon, everybody. We have just wrapped up our Board meeting, which was a little longer than expected, and I hope you have received the press release today. What we want to share with you today is that in this first quarter of the year, we decided to look broadly to all of the strategic levers we use, which you are familiar with, ever since we presented the business plan to support a phase, which at the time seem to be especially complex. But in fact, what we did see was that our results were better than expected, and I think you will agree with us on that. The first quarter did have a number of fairly important things to look at, but things are going well.

Let me mention something which I think is the backbone of my presentation, namely that we are so convinced to the fact that we are headed in the right direction with good results. So much so, in fact, that we made some partial corrections regarding the dividend, as you may remember, although I'll be mentioning that later on because what we felt was fair was that since things were better-than-expected in the midst of the pandemic, we felt we could afford to review the dividend policy.

And as you'll be hearing today, we are working, and we're also looking to the future to see whether or not we can improve things even more when it comes to the forecast we have made in that initial phase, I mentioned. So this is the meaning behind the things we did. Of course, in light of the positive results we posted during the quarter, and this is what we want to present to you today.

As I was mentioning, our recipe hasn't changed, the context has changed, whereas our job was to continue to focus on the things we did, regardless of the things which happened outside the company in terms of difficulties. With Stefano, we'll be going over some figures, which show how committed we were to growth and to sustainability.

Without going into other aspects, I think these 2 are the summary of our traditional strategy. And the performance we were able to obtain compared to our expectations was better, and it had an impact on our dividend policy. And we also wanted to see whether or not other items in the business plan could be further updated. And all of these elements, I think, are important because they help us to consolidate our competitive profile during the year. Because, of course, the world didn't stop.

So what we saw, for instance, was that our ability to continue to be competitive in tenders was something that allowed us to obtain good results in the past, but we were also able to be successful even in the regulated businesses. And finally, the tenders and the regulated businesses brought about some very satisfactory results in our territory.

We have experimented a couple of tenders in the waste sector, in the waste collection business, specifically and also in the water sector. And the most recent tender, we made a bid in was for the gas distribution sector, making it the very first gas distribution tender in our area. And we have put a lot of effort into focusing on all of the events in the period. We also had a number of new elements in the business that we will be able to announce officially as soon as possible.

So the results we posted are in line with the trends we had seen during the previous year before we had to face all the problems you're familiar with. And now let's see what numbers we're actually referring to.

The main results started to happen once things started getting back to a somewhat normal situation after we were able to overcome a few of the critical aspects. I'm referring to the problems linked to the lockdown period. And another thing, which was beyond our control was, of course, the mild winter last year, which didn't help us, of course, in our job. Whereas this year, the situation links to the COVID pandemic, at least as far as governments and institutions, we're able to deal with it. Despite a certain degree of confusion they had, they did try to choose a path to overcome the pandemic. And even the climate wasn't as it was last year. So these 2 elements, of course, are part of the general positive scenario.

Moving on to the business by business breakdown. The growth we're seeing in Q1 is a purely organic form of growth, and I will be explaining the reason behind that. You'll be seeing from the figures that all we have is organic growth. EBITDA was up by EUR 13 million, EBIT was up by EUR 11 million and the net profit was up by EUR 8 million. And the interesting thing to note is that besides a good growth, we will also be able to allow our free cash flow to grow by 3x compared to the same period last year. That, too, I think, is always useful, especially when you plan to grow even more in the coming months. We have EUR 150 million in Q1 this year compared to the EUR 50 million we had in Q1 last year. So all in all, I think our results were in line with what we were expecting.

There is plenty of room to consider other opportunities even externally because as we had said in the press release when we approved our most recent business plan, we have been continuing to work externally, and therefore, we are very close to the signing of operational agreements, which will be implemented towards the end of Q2.

And I think these agreements will be able to launch some signals and messages to our competition, especially in the waste sector. And more specifically, in the industrial waste business, where we are well positioned. But which also has to have a specific geographical approach because, of course, it's never a good idea to travel too far between one's assets and one's clients. We have to make sure that we have a presence in regions other than our traditional ones. That's what we will be announcing soon during the next meeting we'll be having. Because, as I said, the agreement will be formalized by the end of Q2. That's when we intend to finalize the transactions we've been working on over the past few months.

We have also had some negative signs, of course. As you know, the safeguarded tenders will reduce a little bit. We obtained a little bit less than what we expected, but that's not necessarily a bad thing. As you know, that market is made up of bad payers, and therefore, we'll be seeing what the future will hold regarding these tenders who weren't awarded this time around.

As far as other things, which didn't work as we expected, I have to underline the fact that we had a stop in the Teverola plant, which lasted for a good part of the quarter, which, of course, had an impact on the ancillary services business, which did very well in 2020. Although we are beyond that, the plant is now up and running again, and therefore, the problem has been solved.

So as I was summarizing what we've seen earlier, given the things I've said, we -- I think we have to mention the fact that we have been able to overcome the negatives that we saw at year-end investor, which had an impact on the growth that we were able to obtain during the quarter investor due to the lockdown and due to the mild weather. We want to be positive, which is what our numbers deserve, I think. Because our plans, in fact, haven't been reduced in any way. And in fact, the upcoming 9 months will see us working hard as we did during Q1. And there are quite a few wonderful things that we'll be able to do.

I'll hand it over to Stefano now, who will be very happy to give you some -- even more specific details.

[Stefano Venier, executive]

Good afternoon, everybody. Let's begin with Page 4 on the presentation with a business by business breakdown. We posted a slight decline in the Networks sector as we'll be seeing later on. This is the consequence of some of the effects of tariffs stemming from 2020, partly due to a burden on electricity and efficiency. And in Q1 2021 compared to 2020, we had higher cost for electricity.

As far as Energy is concerned, we made another significant step forward from EUR 138 million last year, which included the contribution of the recently consolidated activities of Ascopiave Company. Whereas in Q1 this year, we stand at EUR 151 million, which includes some of the synergies and efficiencies we worked on in 2020.

Within that figure, we also have the positive results we obtained from the energy services, especially the activities led to incentives on condominium renovation works. And we were also able to benefit, as the Chairman was saying, from the better weather. Besides having a -- some higher activities, the better weather had a positive impact on gas.

In the Waste sector, we had a slight growth, which is the compensation, the offsetting of a slight decline in the risk collection vis-à-vis a good trend in waste treatment and recycling. The volumes were higher compared to last year. Plastic recycling activities went very well, as we'll be seeing. They've improved by 8% to 9% compared to 2019. And the price of electricity in this case also leads to a positive effect compared to the cost I mentioned earlier. The Other activities have a slight growth boosted by public lighting.

On Page 5, you have the details on an area by area level, referring to the various regulated businesses. Gas distribution is slightly on the recline, minus EUR 1.3 million, due to energy efficiency and the tariff review, which, as I mentioned, happened in early 2020. Last year, we were able to offset that with other items, which were one-offs. Electricity was stable. Water is minus EUR 2.2 million that has an impact bought about by the cost of electricity and a few reviews on WRG.

And then as far as district heating is concerned, we had an improvement equal to EUR 1.1 million. The business by business breakdown. And this is one of the questions you always ask. In Q1 2021, as you go to EUR 130 million, EUR 55 million of which refer to water distribution, the EUR 11 million refer to electricity distribution, EUR 56 million referred to gas distribution and the remaining part refers to district heating. This is it in a nutshell. The Chairman was mentioning the trends referring to the tenders for concessions.

Last time, we talked about the water tender for Rimini. We still haven't had the official assignment yet. They are still working on assessing the offers, and we will wait patiently for the final outcome. We have also reached the final phases in the tender for the gas distribution concession in the Udine 2 cash material.

Moving on to the Energy sector. Things went very well. Especially the part links to sale of gas, electricity, which has a slight dip worth EUR 1.2 million. But as we mentioned earlier, we do know that as far as 2021 is concerned, our presence of the Safeguarded market is significantly lower compared to what we had in previous years. And this, of course, brought about a reduction equal to EUR 7 million from that side of the business in the quarter, but we also had EUR 6 million and better profitability in the liberalized market, which almost entirely offset this change.

As far as gas is concerned, things went very well. We have higher volumes. We have better margins. And in fact, these results will be derived on to the rest of the year as well. We mentioned the procurement coming in from the TAP pipeline. We have 300 cubic meter supply from that. This has been brought ahead of schedule compared to the initial schedule, which would have led that gas pipeline to started in July 1. And therefore, this is a good trend that we saw in Q1.

$7.2 million referred to value-added services and energy services. Of the EUR 7.2 million, we have EUR 6 million which are connected to incentives for condominiums. This is the Super Ecobonus or the facade bonus and all of those other incentives, which refer to renovation activities as a way of improving energy efficiency of buildings. The remaining portion of the EUR 7.2 million is refers to value-added services.

In power generation, we have a EUR 5.1 million contraction, which is essentially brought about by the lower profitability in the ancillary services market. Linked to the stop of the Teverola plant we had in February and also partly due to the fact that the extraordinary situation we had during March and April last year. With a higher demand this year, we did not have the same conditions we had last year. So it is the combined effect of these 2 things I mentioned. Although the results of the energy sector for the quarter were extremely satisfactory.

And then finally, moving on to the Waste business. As I mentioned, the waste collection business has a EUR 3.3 million decline compared to Q1 last year. On the one hand, this is due to the cost of disposal, which grew in the special waste sector and also grew in the urban waste sector. And then on the other hand, we also have a waste collection management cost linked to the need to use personal protection equipment, which, of course, has an impact on these types of activities.

Then when it comes to plastic recycling, things went very well, as I mentioned, we have a plus 17% in volumes compared to 2020. But also as a way of giving you a more reliable comparison, we have a plus 8% compared to 2019, which means that we are swiftly heading towards our target, which is equal to almost 100,000 tons of recycled plastic. The margins are also very good. Based on the dynamics linked to the cost of the virgin polymer, which, of course, is also linked to the oil market and some shortages, which had an impact on the entire commodities market on the global scale.

When it comes to the liberalized market and specifically, industrial waste, we have a result up by EUR 3.5 million. We posted larger volumes in Q1 as far as special waste is concerned, roughly 50,000 tons. The prices are the same, if not slightly improving. Then we have, of course, the profit from -- with energy plants by digesters and biomethane. And therefore, the sum of all of these positive elements brought about a plus EUR 3.5 million growth and then we have others which are worth roughly EUR 1 million.

Finally, another thing I wanted to mention, which is linked to the period. It was something we finalized during the month of April. As we had already said, we had submitted our plan to reduce climate change in gas to 2030 to the science-based targets committee. And after submitting our plan, we received the formal recognition that we are a company committed to reducing an increase in temperature below 2 degrees, which is linked to the Paris Accord, which translates to the reduction of gas emissions in all 3 perimeters by 17% in 2030, 15% in 2024 and 5% by 2020, is something we already achieved at the end of the year.

In Italy, there are only 12 companies which have obtained this kind of recognition. So more recent ones are just a handful. And globally speaking, there are 1,300 to 1,400 declarations, whereas only 600 companies obtained this recognition from science based targets, which is also a recognition, which then leads to all of the ratings from other agencies, but it also has an impact on the guidelines linked to the taxonomy. I think this was something important to mention since it isn't something other companies typically have.

Let me give the floor to Luca, who will comment -- Luca Moroni will be commenting our cash flow performance, which, as the Chairman was saying, certainly was a very positive element which should have resulted this quarter. And these results again allow us to meet the commitments we give ourselves on investments, which this year, when it comes to CapEx and financial investments, it will be equal to over EUR 660 million. But this performance will also allow us to make some acquisition choices, which may be small, but which are significant nonetheless, with the right degree of flexibility and with the right spirit, the right confidence, which is always useful.

At last but not least, this good result that we were also able to share with the Standard & Poor's agency gave us another positive recognition last Friday.

[Luca Moroni, executive]

Thank you, and good afternoon, everybody. This is Luca Moroni. There are 2 things to say from a financial standpoint. On the one hand, the good cash flow we had in Q1, which is in line with the commitment we had made in terms of our CapEx, as was already said, it's something we'll continue to commit to in the forthcoming quarters. And we've also paid very close attention to our net working capital.

We're working hard, therefore, we are continuing to focus. And once again, we were able to obtain a very good result. If we compare this performance to the same period last year, we had EUR 150 million in the quarter, which, as we said, is 3x the cash flow we had over the same period in 2020. And I think that number speaks for itself.

And what better way to start the year. And to celebrate the good news we received after several years, we have been working on it, we received an upgrade from Standard & Poor's to BBB+, which I think is a definite proof of how Hera Group stands financially vis-à-vis the sector.

As far as our leverage is concerned, we stand at 2.7x compared to the 3x net debt-to-EBITDA we had in 2019 and 2.86x in 2020. We were able to reduce the ratio by a further 5%. And we are continuing in our optimization process, allowing us to have the flexibility we need when it comes to looking at future developments in a very competent way.

Well, I think we've said everything we had to say. We are very confident. I think these figures not only show how good the quarter was. I think it's also proof that we are almost beyond situation everybody was scared of. And at the same time, we were able to continue to have the right energy to continue to work in the same way in the forthcoming quarters too. As you heard as far as our investments are concerned, without taking any steps back compared to what our company intends to achieve as far as development is concerned. That's all as far as I'm concerned, and I'll open the floor to any questions you may have.

[Operator]

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

[Javier Suarez Hernandez, analyst]

I have 3 questions for you. The first is just -- as far as the general context is concerned, just second to refer to the quarter results. As far as the context is concerned, as Hera had to see in the Italian government's recovery plan drafting. And how does company management see the recovery plan? Does it see it as a further opportunity for the company? And links to this, do you think that the simplification decree drafting has a chance to support the company structurally speaking in many of your businesses? So this is the first question on context.

Moving on to the results. First of all, I'm interested in understanding the expansion of your customer base because despite the difficult situation, the companies continue to grow the customer base, I'm interested in your commercial policy. And what impact is it having on your development with gas and electricity customers. Of course, the context did help to a certain extent, but I also wanted to speak about the underlying business development and electricity and gas supply.

The third question, the CFO mentioned the positive contribution of the net working capital in Q1. That something was quite surprised with positively. Can you tell us what are the manager elections allowing you to obtain these results on the operating cash flow, which is so positive.

[Tomaso di Vignano, executive]

Let me answer your questions in the order you estimate. As far as the context is concerned, do we have a part in drafting the recovery plan. Well, we certainly participated because I think I read 10 different diversions, 10 different drafts. So I spent a lot of hours reading them. We also contributed both through our categories association with a number of ideas and projects. And we also contributed with some ideas or remarks, which especially in the second phase, was considered.

Now so far, we have the strategic guidelines and the various items regarding the resources to allocate the resources are available at this point. And the next phase will be to understand what will be done after the European Commission approves the recovery plan. It's a matter of understanding how these funds will be used. What we've heard from a few different contexts is that some resources will be devoted to flag projects. But as a utility company, we won't be seeing a major impact from that. There may be 1 or 2 larger projects, which may have an impact on some of our utilities. But I think the interesting part of the project will be linked to the tenders to access the resources.

And I think that from this point of view, it will be important to create a system with the regional governments or the regional entities involved, especially when it comes to the water cycle. And when it comes to the energy sector. And in fact, in the energy sector, there is a reference to resources made available for hydrogen activity, something we're already working on in a partnership with other companies in the sector. Beginning with Sinana, but also with a few industrial companies in the sector, such as Sapio or companies which use hydrogen like Yara, for instance, or other companies like Marazzi, which produce tiles. But we're also working with local entities, specifically with the Emilia-Romagna with the Municipality of Ravenna and the Municipality of Bologna. In those areas, they will be receiving essential resources.

Then when it comes to the production of electricity or actions which can be taken in the water sector, we do have some projects in the pipeline, which are, of course, projects which are added on top to the ones we have already drafted and planned for the upcoming 4 or 5 years within our business plan investments, and given the fact that there will be other reasons available, they can give us a further boost.

Then of course, there's the indirect effect. I've mentioned in the past. And that, too, will inevitably bring benefits. I was reading today that Italy's GDP forecast has been reviewed now stands at 4.5%. And then, of course, there is a flow of resources, which will bring about requests for further services, electricity, traditional commodities and waste treatment, too. These are all services, which of course, are things we do for our customers, for new connections and new businesses.

But in a nutshell, this is all new demand, which, of course, sees us as primary players on the territory. And this is yet another indirect effect of the recovery plan. The simplification degree you mentioned. I've already read 2 or 3 drafts. I think we are still in a phase during which the decree is being fine-tuned. But when it comes to a few items, such as simplification for the implementation of the Super Ecobonus for refurbishment works and condominiums or when it comes to renewable energy linked equipment or biomethane plant, it seems to me that there is the will to have a clear time frame for these activities.

Of course, we'll have to wait and see. We'll have to wait for the final draft. And then we'll have to see how the various institutions who will act on a local level. So that this essential effort can be successful so that these resources will be used locally. And of course, it's not just us. There are plenty of companies waiting for these opportunities.

As far as the supply side of the business is concerned we are, of course, evolving progressively. When it comes to our supply policy, of course, we are a company which is expanding. It is growing. It is still easier to grow with our electricity customers compared to our gas customer base where we have a situation which we are the former incumbent, and therefore, we have a larger market share and a lower possibility to grow.

And with the Ascopiave deal, we had essentially a customer base, a gas customer base that we look to in that deal, meaning that there are greater opportunities for electricity. And an electricity effect, there is a better chance to offer value-added services. We began, as we've already mentioned in the past, we began with some value-added services for energy efficiency. Those services were very simple, that we started offering electrical mobility services on 4 and 2 wheels.

And then we added household systems. And in a few days' time, we'll also be launching an offer for photovoltaic electricity production. We made the acquisition of a company in this business at the end of last year. We had a few months to get our activities in line. And in a few days' time, we'll be making our commercial offer in the photovoltaic sector, which, for the time being, we are advertising with a specific channel on the market.

And how are we doing? Well, I have a slightly different opinion compared to what you were saying. 2020 was a complex year for supply businesses, the lockdown limited our activity to work on a door-to-door basis, which is one of our traditional channels. Although it did help to consolidate our digital channels. So what we're currently trying to do is to continue growing in the digital sphere as we revitalize our efforts when it comes to the physical channels so that we can go back to the pace we had in the past.

Then, of course, linked to these, we also have opportunities, which stem from the last instance market. So the concept market, for instance, in which there is a more opportunistic approach, and that's something we're always ready to look at. In January, in fact, we won 9 concept materials. The last one was for gas distribution for the upcoming 18 months that will offer another boost. It will be an on-top opportunity compared to the trend line that we have been maintaining for quite some time now.

Then you had a last question on our working capital. Maybe Luca wants to reveal our secrets to you.

[Luca Moroni, executive]

Well, let me just say that I think our strength lies in the numbers. We have been working on our numbers for a very long time. This has become one of our strengths, in fact. We're able to extract a great deal of value from those numbers. And that allows us to be one step ahead of the pack, allowing us to invent new things once we are able to consolidate the more efficient ways to manage our credits. And that, of course, I think, is bringing about some very positive results, indeed.

[Operator]

The next question is by Enrico Bartoli, Stifel.

[Enrico Bartoli, analyst]

I have some questions for you. Going back to the supply side of the business. Can you give us some update on the cross-selling activities for the Ascopiave customer base? Then you also commented the gas business and the new supply stemming from the TAP pipeline, can you quantify this impact a little bit more? And on a like-for-like basis, can we expect further improvement in Q4 this year? Although I do believe the TAP pipeline was already up and running at end of last year.

Then a question on the water sector. Can you give us some details referring the lower EBITDA in Q1? And then you also mentioned the tender you were awarded in Rimini. Does that imply a CapEx growth compared to what was implicitly included in the previous concession?

And then a final question, you mentioned EUR 27 million growth in EBITDA linked to value-added services in the Ecobonus. Do you think this growth will be structural even in the upcoming quarters?

[Tomaso di Vignano, executive]

When it comes to the cross selling activities, for the Ascopiave customer base, of course, last year, things were conditioned by the things I mentioned earlier. In Q4 last year, we got back on our feet, and we are obtaining results, which are in line with our expectations. Of course, you can't do everything overnight. At the end of 2020, we were able to obtain EUR 9 million in synergies for the first year alone. A small portion of that was brought about by a further cross-selling activity to those customers. The rest was at better margins and other linked things.

So we're quite pleased with how things are going. Our partners are pleased as well. The results we're obtaining are very good. In fact, they are slightly above our expectations, as I mentioned. So for the time being, things are going quite well.

As far as the TAP pipeline, yes, we have to count further 3 months because Q2 was already included in the previous projections. Keep in mind that the procurement is flat, and we obtained 300 million cubic meters. It's roughly 75 million per quarter. So this quarter, we have 75 million cubic meters from that source there. And in economic terms, it is a contribution worth EUR 1 million, maybe if I were to give you a value.

The water sector, yes, the dip is linked to higher cost for electricity and partly also due to a number of operational costs which are the highest we had in this quarter. Of course, all companies have to have certain criteria when it comes to complying with personal protection equipment. And of course, that implies higher costs. And we had to recognize these costs to the companies. We have some of these costs ourselves. It's just the way it is. So these are the 2 more significant elements, which had an impact on the quarter.

And as far as the CapEx is concerned, for Rimini, as we mentioned, even less time, we're waiting for the formal decision of the tender to be made. This is taking up more time than expected due to a few administrative elements. I don't think we're far from the final decision to be formalized.

And as far as CapEx, our CapEx commitment is concerned, packable already included a business plan. There was a growth, of course, compared to the business plan. The project, which had been open to tender envisage investments for the 5 or 6 historic years. And keep in mind that in the Rimini area, we still have the final phase of the so-called PSPO plan, the plan for the safeguarding of the coastal area. The seawater, which required some EUR 80 million. But again, all of those figures are already included in the business plan. Nothing different.

And then there was a final question, which I can't remember. The super Ecobonus, yes. We have capitalized on that. And that's something, of course, that we will be continuing to use during the year because, of course, we have included the part pertaining to Q1 in our figures. We have a remaining 3 quarters of the year. So on a yearly basis, we will be seeing a benefit, which is larger than the one we saw for Q1, of course.

[Operator]

Mr. Tomaso di Vignano, gentlemen, there are no further questions for the time being.

[Tomaso di Vignano, executive]

Well, thank you very much then, and we will see you next time then. Thank you. Goodbye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]