Italgas SpA

MIL:IG

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Italgas First Quarter 2022 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Anna Maria Scaglia, Head of IR. Please go ahead, madam.

[Anna Scaglia, executive]

Hi. Good afternoon, ladies and gentlemen, and thank you for joining us. Today, we will walk you through Italgas first quarter 2022 results. I'm Anna Maria Scaglia, Head of IR, joined by Mr. Paolo Gallo, our CEO; and Mr. Gianfranco Amoroso, our CFO. We will address any questions you might have at the end of the presentation.

I leave now the floor to our CEO, Mr. Gallo.

[Paolo Gallo, executive]

Thank you, Anna Maria, and welcome to everybody. I will start my presentation from chart number -- Slide #2. This is a summary of our results of the first quarter of 2022. Our numbers benefited from a strong RAB growth, thanks to all investment we carried out in 2021. And thanks to the strong contribution we received from our ESCo businesses, in line with the trend that we have already anticipated in the last quarter of 2021.

Then we have 2 negative impacts. The first one is what is already very well-known is the X factor, 3.53% that was not compensated unfortunately, by inflation, not yet. And then the other one was the lower allowed return 70 basis point. The overall sum of the 2 elements was equal to nearly EUR 16 million, and we were able to compensate -- nearly to compensate all these amounts. Remaining on the other part, there has been a focus on cost, very strong. We were able, on a like-for-like basis to reduce the cost, and therefore, we were able to accelerate on the EBITDA, as you can see and on EBIT, despite the large negative impact of the regulation. This coupled with our very low cost of debt led to an adjusted net income growth of 9.5% in the quarter.

Let's move to the following chart. Let's get into the CapEx investment. CapEx reached EUR 180 million, were lower than last year, as anticipated, as already anticipated, considering also the some of the investments are going to be completed very soon like the Sardinia networks or, for example, the smart meters. Differently from last year, we booked very little working capital contribution in the first quarter. Gianfranco will explain in the cash flow later. But the main driver has been the bonus, the so-called bonus gas that, in any event, we will recover during the first semester. Net debt slightly improved, slightly reduced. We were expecting larger reduction, but because of the bonus gas, it didn't happen, to EUR 4.1 billion.

Let's look -- let's have a look at the CapEx side. EUR 180 million invested in the first period. Mainly, if you can see the only area that has shown an increase is the digitization that shows -- is very important because that shows our commitment to digital transformation of the network because in the first quarter, the investment relevant to smart meter has been close to 0, very close to 0 because the replacement plan is practically completed.

Development repurposing of the network still attract the majority of our investment. In Sardinia, as you see, we approached the completion. Few kilometers have been added to the overall network, but we have installed additional 6 new small-scale LNG storage and regasification plant. We have already reached 56 installed in Sardinian service. Our goal is around a little bit less than 90 to be installed during the plan period. In the period, we have also added 130 kilometers of new pipe, installing more than 100,000 smart meters, including the replacement of the faulty ones.

If we move to the following slide, we can take a look at the result from an ESG point of view. The first slide is relevant to the greenhouse gases emission. In the quarter, we saw an increase in terms of emission from gas leakages. The overall emissions increase in respect of 2021 first quarter emission by 8.6%. The increase is mainly driven -- well, it's mainly driven by the gas leakage and by the strategy that we have adopted in the first quarter in respect to the last year.

In fact, we decided not only to increase the number of kilometers investigated. The increase has been almost 50% more than last year. Remember that we have the goal in 2023 to inspect twice per year the overall network, but also because we decided to attack the area that according to the data collected during 2020, 2021, as, let me say show the more possibility to find leakages. And in fact, we find -- we found more leakages, but the good thing is that the amount of cubic meters of natural gas leak per kilometer survey has decreased. So that is a very good news, meaning that we were able to also reduce significantly the time needed to fix the problem.

In general, if you look at the number in terms of percentage of the volumes injected, our leaks are still impressive very low. Relevant to vehicles, the CO2 emitted by the vehicles remained constant, slightly decreased due to the slight decrease of kilometers that were consumed during the first quarter of 2020. If we take a look at the other element that we normally consider is the net electricity and net energy consumption that was down by more than 7% in relation to 2021.

The main contribution in absolute terms came from industrial gas consumption, 11 terra joule lower than last year, thanks to the plan that we are putting in place to improve the performance of our pre-heating system, and that is not going to be ended. We are -- we still have a lot of creating systems to be upgraded, refurbishment, and we expect bring down the specific consumption that today is at 1.16, below 1. It's the number of cubic meters used to pre-heat the system for a 1,000 cubic meters to be pre-heated.

Electricity consumption was lower due to the efficiency that we introduced in Italgas Acqua. And as I anticipated, vehicle consumption reflect, as I said before, the lower number of kilometers traveled. That is the picture relevant to the ESG parameters that we consider. Remember that on those 2 items, we have the targets by last strategic plan in 2027, 30% reduction in CO2 emitted, 24% reduction in net energy consumption.

Now let's take a look at the results, economic results. First of all, let me say that in the first quarter of 2022, we don't have any adjustment, one in 2021. As you remember, we adjust our numbers to exclude the cost of the bond buyback transaction that we carried out in February 2021. When we compare the first quarter of 2022 with the same period of last year, I'm trying to underline the major facts. As already anticipated, the impact of the regulation was about EUR 16 million lower compensated by RAB growth, EUR 10 million, and a higher contribution from the ESCo, EUR 17 million.

Overall expenses increased by EUR 5 million, driven by our risk activity. Depreciation and amortization was up by EUR 4 million due to the higher CapEx recorded last year. Tax rate, Gianfranco will explain later. And as a result, our adjusted net profit increased by 9.4% -- 9.5% in respect to the first quarter of 2021. Our adjusted net profit increased by 9.4% -- 9.5% in respect to the first quarter of 2021.

Let's try to analyze a little bit more revenues and costs. Regarding the revenues. Revenues increased by 6.2% in respect of the first quarter of 2022. As you can see, the RAB growth and tariff adjustment contributed for nearly EUR 12 million, out of which EUR 10 million are related to RAB increase. We booked about EUR 4 million additional in a split between previous year adjustment and other regulated revenues as a delta. And then we have the 2 major elements, the increase driven by the ESCo, mainly by the ESCo EUR 23.4 million, driven by the ESCo Seaside and Ceresa mainly and by gas.

And the other one is the nearly EUR 60 million of the regulation impact on our business, work review and X-factor. Let me say in regard to elements about the ESCo. ESCo contributed in line with the trend that we have already seen in the last quarter of 2021. Even though I would say probably slightly better than what we have anticipated. And from Gaxa point of view, increase of the revenues in Gaxa are mainly driven by the increase of the commodities. And as you know, we have announced at the end of March, beginning of April, we have agreed to sell the majority of the company, 17%, to [indiscernible] a minority stake.

This implied that starting from the next quarter, the company won't be any more consolidated line by line once the transaction closed and the closing of a transaction is expecting during this week. The last element to be main is very little and limited contribution of the remaining -- of the smart meter replacement. The reason being is that we have very little numbers to still to be replaced. These are the most difficult, the most secluded, the most difficult to access because the customer does not give the permission to do it. So that's the reason why I would probably say that the replacement of the traditional smart meter is really completed, still a few are left outside.

Another picture of the revenues is given in Slide #9. It's a different way to see. It underlines the difference regarding distribution tariff contribution for meter replacement. The one that I just mentioned, we didn't reach the 1 million because very limited number has been replaced and the other distribution revenue. You can see very clearly the strong increase in the other revenues driven by our ESCo business.

Comment on the cost. First of all, let me say that on a like-for-like basis, we were able to achieve another strong quarter cost structure, 8.6% effect of last year. We will see in a moment which is a major component. On the other side, because of the increase of revenues from the ESCo point of view, we have recorded an increase of costs for EUR 14 million, with an EBITDA -- and you can make an easy calculation with an EBITDA of the ESCo business in the range of 15%. We had a negative contribution from the white certificate of nearly EUR 0.5 million.

So if you take a look at the other view of the cost, you can understand where we were able to gain significant efficiency in respect of last year. We were able to reduce the net external cost significantly on the distribution area. While you can -- from a net labor cost, if you add what we spend more in the other activity with what we spend less in the distribution, the net is 0. And the other increase significant is on the next -- net external cost, as I said before, is driven by the ESCo.

Now I'm leaving the floor to Gianfranco for the remaining part of the presentation. And then we will be here for any questions you may at the end of the presentation. Thanks.

[Gianfranco Amoroso, executive]

Thank you, Paolo. We are now on the EBIT on Slide 12. EBIT amounted to EUR 242 million, marking a significant increase of more than 9%. This increase is the result of a EUR 60 million increase in EBITDA, driven by a remarkable increase in revenues that we have already commented for EUR 21 million, while the cost increased for just of EUR 5 million. The other block in the chart is related to the D&A, almost EUR 4 million higher than the previous year, mainly driven by the higher depreciation related to the CapEx executed in the last 12 months that as you know, includes the CapEx of 2021, which reached the level of more than EUR 865 million.

Commenting the net profit and moving to Slide 13. Adjusted net profit after minorities reached a level of EUR 89 million, up over the same level of the EBIT 9.5%. The net financial expenses were EUR 40 million, just 0.4% higher than last year, not considering the special item for the bond buyback performed in February 2021. This result was achieved despite higher average gross debt related to the prefunding activities that we carried out in 2021. The contribution from associates decreased by EUR 0.3 million, nothing especially to comment except that in the coming quarters, this line will reflect also the contribution of the remaining minority stake in Gaxa.

We accounted finally for EUR 34.5 million of income taxes, marking a tax rate of 26.9% just above last year at 26.5%. We are still benefiting or the super bonus tax scheme and also the scheme that drove the result to the tax rate that you see in the slide.

Now moving to the cash flow. Our operational cash flow reached almost EUR 200 million and was able, as you can see, to fully cover the CapEx executed in the first quarter. In addition to the usual component, net profit before minorities and depreciation and other noncash items that accounted for EUR 95 million. Net working capital brought a positive contribution of EUR 10 million. I would like to spend a few words on the latter. As you might have noticed that the significant variation compared to the first quarter 2021 and the fewer more closer to first quarter 2020 in terms of contribution of -– by the working capital.

Let me say that last year, we benefited from a particularly strong dealing seasonality. This year, several items impacted the working capital that we had in the first quarter. In particular, we faced almost EUR 50 million negative related to the so-called bonus gas, reducing the positive impact of the billing seasonality in the first quarter to EUR 94 million, about EUR 50 million less than the first quarter of 2021. The impact of the bonus gas has to be considered temporary and will be recovered from Gaxa with a delay of a few months. So we will expect that this phenomenon will reduce and go back to the usual figure in the second quarter. Also explaining other components -- component of the low working capital. On the negative side, we have also reported the higher amount of receivables due to super bonus and eco-bonus for about EUR 12 million. This is a consequence of the strong impact of the activity of the ESCo that we have already commented. CapEx brought a cash outflow of about EUR 107 million, resulting in a free cash flow at the end of the quarter of EUR 21.6 million.

On the right side, the financial investment and disposal lock includes the net impact of the cash outflow to acquire, as already announced, a 6% stake in Picarro and the deconsolidation of Gaxa intercompany debt. At the end, this resulted in a net debt reduction of EUR 25.3 million in the quarter.

Let me now make an update of our debt structure at the end of this first quarter. Nothing in particular to be commented. Thanks to the exercise, the liability management and the new bond issuance carried out last year, also combined with the new bond and the new banking loans executed towards the end of last year. We retain now a significant amount of cash, more than EUR 1.25 billion available on bank accounts. In addition to that, let me underline that we continue to leverage one of the lowest average cost of debt, less than 1%. I would add well inside 1%. A very limited exposure to interest rate volatility because more than 92% of our debt is fixed with a tenure of around 6 years and substantially lower refinancing risk for the next 2 years. The receivable amount of the 22 bonds has been repaid last January. Next bond repayment, as you know, as you can see also in the slide is going to be the one expected in March 2024.

To comment on the balance sheet on the following slide, Slide 16. Net invested capital amounts to almost EUR 7.2 billion with an increase of almost EUR 85 million compared to the end of 2021. Fixed capital dropped by EUR 149 million, mainly as a result of the reclassification among asset for sale. On the liability side, consolidated debt was EUR 4.955 million, including the impact of IFRS 16 for EUR 77 million with a decrease of EUR 25 million compared to the year-end 2021.

I leave now the floor back to Paolo.

[Paolo Gallo, executive]

Just to close with few remarks. We reported a strong top line, driven by RAB increase and ESCo despite year negative regulatory impact. Cost efficiency continued, driven by digital transformation of the company. We reached a partnership with Edison regarding Gaxa to strengthen the commercial effort, and we maintain a minority stake there. We are also entering to a minority stake with Picarro as already discussed. Just a remark on Greece, we should close the DEPA infrastructure by, let's say, during -- probably toward the end of the month of May. And immediately thereafter, I hope to see all of you in person when we are going to present to you the new strategic plan 2022, 2028. It will be done on June 15. We will announce our strategy, and we will provide you with the usual targets update for 2022. So I'm anticipating the answer to your question, which are the guidance, guidance will be given on June 15. Thank you. I will give you the floor back to you for questions, and we will answer any questions you may have.

[Operator]

[Operator Instructions] The first question is from Javier Suarez with Mediobanca.

[Javier Suarez Hernandez, analyst]

Three questions. The first one is on the cost cutting that has been impressive. So if you can elaborate on the main or the key managerial actions that are behind and if there is still a space or room in your view to continue reducing the cost base of the company on the traditional activity? The second question is on the regulatory framework in Italy. The competition decree has not been published yet. That goes beyond obviously the mandate of the company management. But can you share with us with you what are the latest on your dialogue with Italian administration.

And it is fair to say that the delay in the approval of that competition decrease would mean that the company is going to reallocate CapEx to the great subsidiary and activities there. And the third question is on the big picture, repower you is a radical change in the energy strategy for the continent. So from your point of view, is there a change in the view that Europe looks at gas distribution infrastructure? Any comment on European appreciated?

[Paolo Gallo, executive]

The first question, cost starting. As you know, the traditional way to reduce the cost, we have been using, let me saying '17, '18, '19, then really, we were able to achieve the most out of those days. What we are seeing now is a different cost cutting. So it's not a traditional anymore. It's mainly driven by digital transformation. And sometimes, we ourselves are astonished, let me use this strong word by the numbers that we are able to reach, and that is mainly driven by the effect of the digital transformation. Let me make you just an example to make it clear.

Maybe it's a small one, but give you the idea that the cost cutting is everywhere in the company. You have seen that we have reduced the number of kilometers traveled by our cars. Why? Because we are comparing periods that are very similar and on the contrary, if you look at the 2 periods first quarter of 2021 and 2022, we have less restriction in 2022. For example, we have seen a significant contribution in the direction by a new application that was developed by the digital factory to have to produce -- to produce estimate of cost for new -- for example, for new connection completely from our control center from our offices.

Without the need to go in person close to the customer to see which is the cost related to the intervention. That is the savings that we have seen in kilometers travel, there you have savings CO2 emitted. That is a saving in amount of gasoline or CNG use, but is also up an efficient way to use the time of our personnel. And I can continue with other examples like that brought by the digital transformation of the company. So I'm expecting that this trend will continue and will not come only from like in the past in the traditional way, okay, I'm reviewed the procurement activity that is the saving. I have reviewed the organization that is the reduced number of people and so forth. That is not going to happen anymore in such a strong way. It will come from the digital contribution on our day-by-day activity.

On the second question is very simple. The [ la concurrence ] is still in discussion at the parliament. There are thousands of requests of modification. You know that the overall situation is not -- I mean, probably the government is a different priority. If we have to make an estimate, we will probably -- we'll probably say that by midyear, so end of June, beginning of July, we should see something about this to become low.

On the last one, I'm sorry to say I disagree with your view about the RePower EU. RePower EU does not change the energy or ecological transition, it does only accelerate. To make it clear, RePower EU envisage how to replace the gas that is coming from Russia, 155 billion of cubic meter of gas coming from Russia will be replaced by many intervention by 2030. But I want to underline 2 of them that are extremely important from our perspective. The first one is biomethane. European Commission foresee that by 2030 in Europe, in the European Union, there will be 35 billion cubic meters of biomethane produce, and it's a very challenging objective, very extremely challenged. Considering and out of the 35, probably around 8 will be in Italy. In Italy, today, we produce around 0.5 billion cubic meter.

So moving from EUR 0.5 billion to EUR 8 billion, it's an incredible life. The remaining -- so 25% is about biomethane. Another 25% by 2030 is the hydrogen produced locally or imported, and we are talking about green hydrogen. So out of 155 million, 50% will be replaced by any user local production, biomethane and hydrogen. And that's a challenge for everybody, and it's a challenge also for -- and especially for the gas distribution companies. They need to be prepared to accept in their network, different kind of gases such as biomethane, hydrogen, synthetic gas. So the acceleration that everybody has to do between now and the next few years is to make the networks available to set those gases. Otherwise, those objectives will never be reached. Imagine that in the 50 or 55, the biomethane production was half of the 35 billion cubic meters, and the hydrogen was 1/3. So in other terms, the European Union to bring to 0 the dependence to the Russian gas -- as said, very, very extremely challenging objective in which the gas infrastructure will play a crucial role in order to have the opportunity to meet those objectives.

[Operator]

The next question is from Emanuele Oggioni, with Kepler Cheuvreux.

[Emanuele Oggioni, analyst]

The first one is on the ATEM and Naples 1 you lost the appeal to the Council of State rejected your appeal. So I wonder, until this ATEM will be consolidated? And how much could be the industrial reconstruction value you could cash in and when during the I suppose this year or already next year?

[Paolo Gallo, executive]

About the timing and the timing for the consolidation, I would add. We are considering all the procedures that are in place and have to be completed. We expect to deconsolidate the ATEM by the end of the year, not earlier. In terms of the values, the value is, of course, one of these procedures that I mentioned because the to be exchanged and agreed between all the parties involved. I can give you a figure of a rough EUR 300 million. And I can add that we can expect a material capital gain based on this value and on the value that we have in our balance sheet.

[Operator]

The next question is from Stefano Gamberini with Equita SIM.

[Stefano Gamberini, analyst]

Also for me, a few questions. First regarding the M&A situation. Do you have some changes on the market or everybody still waiting for the new competition and what could be the new competition situation in the forthcoming months in the second part of the year? Or there are some new deals that could it could be on the table. The second regarding the situation in Belluno, you recently won also a national court. I mean is the national court, what are the next steps and when you could have the definitive final going live for this concession? And finally, regarding these revenues from ecobonus and energy savings. In the first quarter, the growth was substantial and very, very high. Could we expect the same trend in forthcoming quarters? Or are there some seasonality in this quarter? Finally, I can add just a few comments, if you can, on Greece, after 6 months, 7 months, I don't know if you have some chance to speak with the regulator in Greece or to have a little bit better idea of the situation of these networks. And if you have some comments to share with us?

[Paolo Gallo, executive]

Let me start with the M&A. We have -- well, we cannot disclose at this time anything, but we have some deal going on. Hopefully, it will be announced soon in the second quarter. Let's say, if we do a nice job, we will be able to announce by the time. So there are some movements still not as much as we would like to see. But we had something on which we are significantly working and it's quite interesting, but more than that, I cannot say. On the Belluno side, you know that we wanted to consider the stat against the [ communi ]. So that part of the court is closed. Against the other operators, we won a [ TAR ] and then it's going to have considered start in the month of June, let me say, a discussion. And then we expect probably either before August or immediately after the final judgment on consider staff. That is Belluno. And just to make a remark, we submitted was September 1, 2017, 5 years.

ESCo revenues, no, we don't have any seasonality. That is the -- that is an increase that we expected to have slightly higher than we expected. And that is mainly due to the fact that even it has been changed, the super bonus scheme, we were running on those interventions that were supposed to achieve 30% completion by end of June, even though now has been, I think, postponed. But we didn't know before. So we were running about putting ourselves on the safe side about a number of interventions that -- for which 30% should have been completed by end of June to avoid to lose the super bonus 10% advantages. So we -- if I have to say, I'm expecting that those level of revenues will continue to stay in the quarters to come.

Regarding Greece, as you know, we are still waiting the final approval by the regulator. It should arrive, let me say, any days in this, let me say, this week or maybe next week that we -- that is the time schedule that we are expecting. In the meantime, we have started to talk about the regulator on a regular basis. The regulator is waiting for us to come and become the owner of the 3 companies to start the discussion about the new regulation that will apply starting from January 1, 2023.

So we are ready. We have steady. Now we know a little bit better the companies, not as good as we would like to see because there are still some limits imposed by the funds about the discussion we have with this company, but we have increased. As you know, we have appointed, let me call it, the project manager for Greece since March. She is working hard on all the subjects. She's been several times in Greece. She has been in touch with management of the 3 companies. So more and more, we are getting use of those companies. But of course, we are waiting for the closing to really become enter into the company and see what's going on. But we are quite confident that the things are processing well. That's it.

[Operator]

[Operator Instructions] Ms. Scaglia, gentlemen, there are no more questions registered at this time.

[Anna Scaglia, executive]

Okay. So many, many thanks. The IR team, we have -- all in here if there are any further emerging questions. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.