Hera SpA

MIL:HER

Earnings Call Transcript 2018-Q3

[Operator]

Good morning. This is a Chorus Call operator. Welcome to the Presentation of the Financial Results as at 30th September, 2018 of Hera Group. [Operator Instructions]

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

[Tomaso di Vignano, executive]

Thank you, and good afternoon, everybody. We are here with the usual team to discuss the first 9 months of results for 2018. The results show a good continuity, vis-à-vis the first half of the year, and with the third quarter, we are able to confirm results which are in line, if not slightly ahead compared to the forecast included in the business plan.

Our revenues are up by 7.2%. Also, thanks to -- in terms of prices on net tariffs and the Energy volumes, which have all contributed significantly to the results.

As far as EBITDA is concerned, it is up by 3.3%, also thanks to the efficiency actions which continued and also thanks to the expansion of our market share in the Energy sector. And keep in mind that the energy customer expansion is equal to further 97,000 customers, to which we can also add the effects of an operation, the transaction which happened at the beginning of current quarter, and which following the final signing of the contracts, it will bring about a further 30,000 customers, which means that we will be well above the 100,000 new customer threshold, which is in line with our external growth, our external expansion, which is something that we've always focused on.

As far as EBIT is concerned, it is up by 5.2%, despite an increase -- a significant increase in accruals and depreciation.

Our pretax results are up by 9.7%, in line with the constant improvement, which has characterized all of the recent quarters and in line with the attention and the focus we place on improving our financial management.

And finally, as far as the net profit is concerned, the growth is equal to 14.1% and it certainly benefits from the tax rate. And as we'll be seeing in details, the of significant improvement, which has been happening in recent quarters and it contributes to the bottom line results.

[Technical Difficulty]

[Tomaso di Vignano, executive]

I apologize, the microphone was switched off for a minute.

Moving on to Page 2. The first figure I'd to focus on is the growth in EPS. And with a 16% growth, it is now up to EUR 0.142 over the 9-month period. And the ROE also had a good performance and it is now above 10.2%. And this result is also comforting when it comes to the choices made, both in terms of capital allocation and in terms of the already mentioned organic growth along with our ability to be efficient in our cost reduction policies.

Page 3 gives you a breakdown of the EBITDA growth. The total growth is equal to EUR 23.9 million, and we had a balanced breakdown between the regulated businesses and the liberalized ones, both of which contributed with some EUR 20 million. Although we had to take into account that the liberalized part of the business also has to subtract the non-positive effects as far as power generation is concerned due to the downtime in a couple of our plants in the first months of the first half of the year.

As far as the liberalized businesses are concerned, I'd also like to mention the increase in sales and trading volumes in both gas and electricity. The expansion of our energy customers, I mentioned earlier and a good trend as far as prices are concerned, especially in waste for the treatment of waste, which further confirmed a trend which was already present in the second quarter this year.

The net contribution of the liberalized areas -- area of businesses, minus the downtime for our plants, which are worth some EUR 17 million, gives us a final result equal to EUR 3.2 million.

I'd now like to give the floor to Stefano for the business-by-business breakdown of these figures.

[Stefano Venier, executive]

Good afternoon, everyone. As usual, I will be beginning with the waste sector. And in the Q3, we are seeing the effects of the dynamics that we already commented for the first half of the year. In fact, our performance is guided by the price trends for the liberalized treatment of waste.

Of the EUR 9.8 million, which represent the overall organic growth, I think it's safe to say that roughly EUR 7 million are in fact linked to the growth in prices year-on-year, despite slightly lower volumes. I think this is the element which characterizes Q3 this year, which contributed to EUR 2 million of the overall EUR 9.8 million growth. Besides this, we also had a good contribution from our waste collection activities. Those results were up by EUR 1 million, plus the effects on the electricity market, which were already very good last year, and which were also confirmed this year with some slight improvements.

A slightly negative impact was brought about by revenues on the tariffs to treat and dispose of the non-sorted urban waste collection, given the current prices of those bonds contracted slightly compared to last year.

Another thing which we can take note of for the third quarter, in fact, it refers to September 30, and I'm referring to the biomethane plant, which started up in Sant'Agata, you may have read of in the newspapers. We had mentioned the fact that it would have started up in the early October and we delivered. We inaugurated the plant in early October. We began the production of biomethane, besides the compost treatment activities which had already begun at the beginning of June. It is a very innovative plant, as you know, and for the time being, everything is good on this front.

And within the end of the year, we will have another stage in the strengthening of our asset base, which is an essential part of, our approach to the circular economy when it comes to the treatment of sorted material. And I'm referring to the very first significant investment in our Aliplast company in the Nevada site, where in the upcoming weeks and within the end of the year, we will be inaugurating a new line for the cleaning of PET, allowing us to increase the volumes of recycled PET and investment, which was worth some EUR 8 million.

There are no special or substantial elements which characterized Q3. There is a great deal of continuity compared to the results posted in the initial part of the year.

Moving onto the next stage and moving on to the networks sector. You have to bear with me because I will be going through the various elements of a business-by-business level, which contributed to this improvement, which is close to EUR 20 million year-on-year, which you can see on the right-hand side of the graph, EUR 186 million in the water sector with a plus EUR 8 million result. Part of this contribution came from the tariff updates following the investments made in this sector, which is worth EUR 3 million or EUR 4 million. The remaining EUR 4 million were brought about by increasing efficiency in our operations along with an increase -- an improvement in commercial management quality.

As far as gas distribution is concerned, at the end of September, we posted EUR 98.2 million in terms of industrial margin. In this case, EUR 3 million are connected to revenues from tariffs along the lines of the same motivations I mention for water. Slightly less than EUR 3 million are linked to white certificates, which is something we manage with a great deal of attention since they are so important for our activities, and the remaining part stems from efficiency on the business.

Finally, we also have electricity distribution, which also improves by 8.5%, equal to EUR 2.5 million.

Even in this case, EUR 1 million is linked to a change in revenues and the remaining portion links to other activities included in the business.

Finally, district heating. The improvement percentage here is significant. Although we know the percentages can be misleading. Of course, it depends on the page you refer to. In absolute terms, the increase is worth EUR 1 million, and that is essentially driven by the increased volumes in that specific business.

It's worth taking note of the fact that a component which is typically important in the development of this regulated business, and I'm referring to the revenues linked to the accessories such as new meters or the moving of meters. Unfortunately, in the first 9 months of the year, we had a continuation of a weak situation, which means we stand at around the same levels we had last year, which were among the lowest of the past 10 years, which shows that the real estate and industrial sectors still a little slow in Italy.

All in all, the result of this activity is satisfactory, we feel. Given the fact that we've reached the EUR 326 million, generally speaking, for the first months of the year.

Moving onto the third area of business, which as the Chairman was mentioning earlier, was a little slowed down by the asset management activities. Therefore, if we consider this distinction, we'll note that the supply and training part of the business had a positive result worth EUR 11.8 million, most of which due to gas activities, which benefited from greater volumes and some margins, which were better compared to the previous years, especially in trading. Whereas the electricity part of the business had a marginal contribution to the results, although we know that last year, we posted some very good results. Generally speaking, as you can see on the right-hand side of the graph, we are now well above the 2.45 million customer mark, and by running up these figures, we would reach 2.5 million customers and I'm sure that is something we will be achieving by the end of the year. We'll be at the 2.5 million mark, of which 1.4 million refer to the gas customers. The remaining 1 million customers are electricity customers.

In terms of customer base in terms of the supply services, we have to mention an event which took place in September, the effects of which will -- have started to be felt in early October. And I'm referring to the new FUI and default market in the gas sector.

As of the past, we made a bid in the tender, which is managed by the national authority. The outcome of the tender allowed us to broaden the customers we manage, which for the upcoming 12 months will cover roughly 50% of the accounted territory. I'm referring to the last instance service for domestic customers. Whereas, in the default market for enterprises and public administration, we now have 9 areas, allowing us to increase the users we serve by a further 40,000 with a contribution to marginality, which will be around EUR 5 million at the end of this year and EUR 5 million in early 2019, in general terms.

And just to give you a breakdown of the margins. Out of the EUR 216 million, which represents the supply margin to September 2018, roughly EUR 108 million refer to gas supply and trading and the remaining EUR 95 million refer to electricity and supply trading. And the final portion refers to power generation services, which as I mentioned, suffered compared to the first 9 months last year, given the fact that the plant we have a stake in the Teverola plant, was stopped for a few months due to maintenance issue. Whereas the Sparanise plant had 1 unit on maintenance for a longer period due to an accident.

Besides this, of course, another element, which impact is the reform on the -- in balances market, which went through a radical transformation, as you know, in October this year -- October 2017, excuse me, in October 2017.

Moving on to the lines below EBIT and EBITDA. We have had a further contraction in financial management, which is now at EUR 65.5 million over the first 9 months of 2018. Besides our managing of the debt, another element which contributed to this was the proceeds from credit management, especially for the last instance markets.

From the point of view of profitability and EPS, the Chairman already briefed you, and therefore, let me just update the tax rate performance. And consistently with the end of H1 and the end of last year, as through September 30 this year, besides the amendments made by the previous government on the IRES tax, we have also felt the benefit links to incentivization of the hyper amortization, extra amortization and ultra amortization, you can choose the name you prefer. And I'm referring to the incentives for research and development and Industry 4.0 and sales promotion.

I'll now give the floor to Mr. Moroni for a few comments on the cash flow.

[Luca Moroni, executive]

Good afternoon, everyone. We concluded the first 9 months in 2018 with a net financial position equal to EUR 2,064,000,000, in line with last year's figures with a debt-to-EBITDA ratio, which is equal to 2.6x.

The operating cash flow production, prior to the distribution of our dividends and other operations, which is equal to EUR 62 million, which stem from an operational lever of EUR 534 million, which is already commented, of course, in the business-by-business breakdown.

We had an absorption of our net working capital equal to EUR 153 million, which stems from 3 aspects: the first is the volumes and prices, especially for those customers stemming from the last instance market and more specifically, from the Salvaguardia market plus the gas provisions, which as usual, this year we have an absorption on the working capital, driven by the supply to the Rimini.

And finally, the alignment process on debt to suppliers, which is at around 60 days on average.

As far as investments are concerned, we invested EUR 284 million in terms of CapEx invested during the 9-month period. As we already saw during the H1 presentation, we distributed a dividend equal to EUR 150 million, which means that our debt is, in fact, stable compared to the previous year and it is affected by the seasonality of the end of September that will be seeing the natural development vis-à-vis the last few months of the year.

I believe we have given you a very straightforward presentation concerning our performance, which is very much in line with our programs. In fact, we have achieved 42% of our EBITDA growth target compared to 35% of the business plan time horizon. Therefore for this point of view, this is further confirmation of the fact that we are moving ahead very well. And as we mentioned earlier, our target as far as the end of the year is concerned is to be above the EUR 1 billion EBITDA threshold, which was our target. And given today's figures, I think we are confident we will be able to achieve that threshold. Our growth has continued, the financial and tax management has continued very well.

And at this point, I'll open the floor to any questions you may have.

[Operator]

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

[Javier Suarez Hernandez, analyst]

I have 3 questions for you. The first refers to the Waste business, Slide #4. You explained that the organic growth you mentioned, which is equal to EUR 10 million or EUR 9.8 million specifically, is due to prices. What is your feeling for 2019 is concerned? How sustainable is this price trend? What kind of visibility do you have for 2019? That would be very interesting. And can you also explain the minus EUR 3.7 million, what is that due to? And moving onto Slide #6, second question on the supply activities. I'd like to hear what your view is on the evolution of supply margins in the gas and electricity? And from your point of view, what can the evolution of the margin be in 2019? And the third question is on the Infrastructure business. I'd like to have a focus on the Water business and the Water Distribution business. We read recently that there was a hearing at the Environment Committee in Parliament. Can you give us a view on the discussion concerning the new legislation on water? Any possible statement, any further clarification on the topic, that would be much appreciated.

[Stefano Venier, executive]

As far as the waste prices are concerned, honestly speaking, we aren't rethinking our approach. We are in line with the growth. We have also had some contacts with other players, which attended the Rimini fair, which is the most important waste fair in Italy. And just a few days ago, this week, in fact, as far as waste treatment of prices are concerned, we are not expecting any surprises. And despite statements made by a few political entities, the prices are also brought about by the shortcomings for the lack of waste treatment assets, especially in certain parts of the country. In fact, it cannot even be defined as the crisis anymore. It's a real disaster in terms of the number of assets available. Along with that, we also have a possibilities to go along new paths with new approaches for players that of course requires new investments and new initiatives. So of course, the waste treatment sector has to step its game up, and there are no clues as to a possible slowdown in prices, not from the market side, at least. As far as supply is concerned, you are asking us how are -- we see the future margins. Well, it's easier to answer for gas than electricity. As far as gas is concerned, all of the raw material procurement activities have now been concluded. We have signed the new contract for the 2018, 2019 thermal year are now concluded. And compared to the previous year, margins have been holding. There may have been some minor fine tunings, which are fairly natural in a scenario with growing prices such as the one we had ever since May or June this year. But again, nothing major, nothing worth mentioning, I think. In the electricity sector, as you know, as far as our industrial customers are concerned, we have launched a commercial campaign in the recent weeks for a part of the market. And compared to last year, in these first 9 months, we have been seeing a slight reduction in margins. Again, the motivations are the same ones I mentioned earlier. And there's a reasonable level of continuity with a few effects stemming from competition, which exists, of course. And given a market context in which whenever industrial customers have to pay a higher price for commodity, they obviously have some further difficulties to deal with. But looking forward, I don't expect any major changes on the market. As far as yesterday's audition is concerned, the audition we attended yesterday as a company. Although the audition lasted over the past 2 days, the enterprise association mentioned and the -- and companies -- individual companies are also stated, as you've read in the press today, we feel there is a certain distance between ourselves and the solutions in the bill. There's a distance on 3 or 4 main points. The water industry, and it is an industry, is very complex over the past 3 or 4 years. It has been able to bridge the infrastructure gap, especially in sewage systems and purification systems, which dated too many years ago. In this industry has a program its investments in the long term. It cannot look at things in the short-term. And this is a fundamental element that we wanted to underline and this is something that all companies mentioned. And by all companies, I mentioned that not only did the committee listen to the largest and listed companies, they also received the publicly-owned companies, the company's which are owned by public-private partnership, and they were also attended by the in-house companies. And all companies said how important it is to have players which have a sizable entity because we have major challenges to face. As far as the past is concerned, I mentioned the challenges we have to face. And as far as the future is concerned, we have to face the effects of climate change, which are even more challenging and they require skills, competencies and size. And any solutions, which envisages a fragmentation of players on provincial level would be going back to 30 years ago, in fact. And it wouldn't allow this country to be able to deal with the problems it has. The second aspect that all stakeholders, all players agreed on, was how important the authorities' role was in terms of revitalizing the water system, both in terms of investments and in terms of the mechanisms required to increase the quality for citizens. As a direct consequence of this debate, all of the main players, and I'm referring to the statistics we have concerning the larger players. And I'm not just referring to the listed players, but also the large in-house companies such as [indiscernible] and others. Again, all of the players have reached a level of investment per inhabitant which is equal to at least EUR 40, with a total invested amount which in general, is above depreciation, which means that implicitly all of these players are reinvesting a major amount, if not all of their profits, into the business itself. And they're doing so to strengthen and improve the quality of the system. This is another aspect that all companies agree on. And as a way of concluding my comments on these recent events, I have to say that the people who were present at the meeting -- people who were present when I took the floor, certainly understood the topics we were trying to explain.

[Operator]

[Operator Instructions] The next question is by Roberto Letizia Equita SIM.

[Roberto Letizia, analyst]

I'd like to have some further information on the new contracts you mentioned when describing the energy sector, the FUI and the default contracts. If I understood correctly, these 2 contracts will bring about an EBITDA contribution worth EUR 10 million, but I may have misunderstood. Is that so, did I understand correctly? And is this on top of the business plan figures or if they replace any other item included in the business plan? Can you please clarify this item for me?

[Stefano Venier, executive]

Let me make a distinction. As far as the short term is concerned, vis-à-vis the business plan. In the short term, we were already managing certain territories with the FUI and default services. These services -- these tenders, we had bidden would have expired September 30. Therefore we made a new bid in the new tender. The profitability of these activities up to September 30 on a yearly basis but keep in mind that I'm referring to a thermal year. Therefore these margins are always distributed between Q4 and Q1 of the following year. That was worth EUR 5 million. The new tender allowed us to broaden the perimeter of our services, meaning that this broader perimeter will bring about a margin which is worth EUR 10 million to EUR 11 million, EUR 5 million of which will refer to Q4 2018 and EUR 5 million will refer to Q1 2019. After that, in September 2019, presumably there will be a new tender. I'm saying presumably due to a simple fact that there will be a new tender without any amendments to the regulation. The new tender will of course have a 12-month duration. How does this compare to the budget or to the business plan? Well, compared to the budget, the plus EUR 5 million in the Q4 are on top. As compared to the business plan is concerned, we -- our hypothesis was that, in this last instance market plus the Salvaguardia market, the tender for which will be happening in November, our forecast was that in the years beginning in 2019, we may have had an overall probability worth some EUR 50 million. Obviously, the FUI default tender allowed us to start doing some real figures to that hypothesis, something that we hope to improve thanks to the tender, which will be happening within the end of November.

[Operator]

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

[Tomaso di Vignano, executive]

Well then, thank you very much for your attention, and we will talk to you soon, probably for the presentation of our new business plan. Thank you.

[Operator]

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