Earnings Transcript for ELEZY - Q3 Fiscal Year 2024

Mar Martinez: Hello. Good morning, everybody, and welcome to the 9 Months 2024 Results Presentation, which will be hosted by the CEO, José Bogas; and the CFO, Marco Palermo. [Operator Instructions] We kindly ask you to limit your questions to the financial and operational performance during the period and to wait until the 19th of November for the strategic plan update. Thank you. And now, let me hand over to José Bogas.

José Gálvez: Okay. Thank you, Mar, and good morning to everybody. Let me, first of all, just to express my condolence to all the families affected by the storms yesterday and tonight, mainly in Valencia and Albacete. Having said that, let's start with the highlights of the period. During this 9 months of 2024, we recorded a strong financial performance underpinned by a strong delivery across all businesses. EBITDA grew at 16% versus 9 months 2023, reaching €3.9 billion, while net income increased by 33% to €1.4 billion. FFO showed a positive evolution during the period, reaching €2.7 billion with a strong improvement on -- of the cash in the third quarter. This good performance has allowed FFO over net debt ratio to stand at healthy level. All this confirms that we are in a comfortable position to achieve the upper end of the target set for the full year. On Slide number four, a brief explanation of the performance of main operational indicators. Emission-free output on the mainland is increased to 88% of the total after expanding renewable capacity to more than 10-gigawatt. The intensification of competition in a context of sustained low prices, has led to a reduction in the customer base, although in the third quarter, we have seen a change in trends. I would add that our investment in distribution, where we have allocated 50% of CapEx have resulted in the good quality indicators that we see on a sustained basis. Slide five illustrates market dynamic evolution year-on-year. Average electricity prices in the first nine months of 2024 were 42% down versus last year, despite showing a remarkable rebound in the third quarter due to the seasonality of the demand in the summer month, and a pickup in the CO2 and gas prices. Moreover, pool price volatility remain high despite a more stable commodity price scenario due to higher hydro and photovoltaic contribution. It should be noted that solar photovoltaic production keeps setting new records in Iberia, while hydro availability increased significantly, especially quarter-on-quarter. In the same way, mainland electricity demand has continued to show signs of a recovery in the last quarter, which led to a year-to-date demand growth of 1.5% once adjusted by weather and calendar effects. Demand in Endesa's area decreased by minus 1% or minus 0.2% in adjusted terms. The decline in energy-intensive industrial consumption, in particular in the paper and metal industries was mostly offset by higher activity in the service sector and residential consumption. Finally, 2024 forwards in the remainder of the year are trading at around €80 per megawatt hour with turns into around €60 per megawatt hour expected average price for 2024. Energy forwards for the next two years are trading at €70 and €65 per megawatt, respectively, on the recovery path from the first quarter levels. On Slide number six, a few more details of the generation mix evolution. 78% of our mainland capacity is based on CO2-free technologies. As a result, 88% of our production has been CO2 free, an increase of 9 percentage points year-on-year. It is also worth highlighting the important contribution of renewable energy during this period, with a 36% output increase. This improvement was the result of higher solar capacity and a significant boost in hydro production. Thanks to higher rainfall and strong reservoir level, which has brought about a 69 output rise year-on-year. On Slide number seven. As you know, last July, we announced the incorporation of a partner, Masdar, to a portfolio of solar asset as a part of the deployment of a partnership business model, representing 2-gigawatt of photovoltaic solar asset from 48 plants in operation. For Endesa, the operation retains full control of a strategic asset within our integrated business strategy, adding value through a 15 years power purchase agreement, PPA, for 100% of the output. This is strategically significant as it allows the company to maintain control over critical assets, while securing a long-term agreement for energy procurement at a competitive cost, providing financial proceeds to maintain future growth. Now on Slide number eight, we detail the main drivers of the liberalized power sales performance. The different actions and commercial campaigns allowed us to stabilize our portfolio at 6.7 million customers, same figures as in first half and above the average level of the last five years. As we expected, the decline in our customer portfolio observed in the second quarter is considerably in the third quarter. The action plan implemented by the company to retain the most valuable customer, together with the expected evolution of last quarter prices, make us confident to stabilize the portfolio in the coming months. Deep diving into the performance of our integrated strategy on Slide number nine. Unitary free power margin recorded a strong performance, reaching €57 per megawatt hour. This is the result of a stable margin at €3 billion in absolute terms, but lower liberalized sales. The margin resilience was mainly due to the following factors

Marco Palermo: Thank you, Pepe, and good morning, everybody. As we had anticipated, financial results had an excellent performance, notably in the third quarter in terms of both EBITDA and net income. EBITDA reached €3.9 billion, up 16% on the first nine months of 2024, while net income was €1.4 billion, 33% higher than previous year. Finally, a strong cash generation in the period with a remarkable performance also in this third quarter. We now turn to the analysis of the EBITDA evolution key drivers. I'm now on Slide 13. In distribution, 7% EBITDA increase, as we will explain later on. The integrated business of generation and supply increased by €0.4 billion on the back of the strong performance of customers' EBITDA, both in power and gas. The larger contribution from the renewable business. And on the other hand, conventional generation remains flat. The main factors behind this flat evolution are the normalization of the thermal activity and the lower short position contribution that are offset by better gas margin. The structure and adjustments segment, which reflects the 1.2 levy impact in both years remains flat. Moving into deeper analysis. We are on Slide 14. Generation and supply EBITDA is up 20% versus 2023, reaching €2.6 billion. Looking at the moving parts of the period, gas business, which represent the bulk of this increase recovers from last year extraordinary negative situation, as already detailed. Free power margin is mostly in line with last year, as Pepe just commented on. Finally, our ongoing focus on efficiencies drove fixed cost improvement. On Slide 15 now. Grid's EBITDA stood at €1.5 billion, up by 7% versus previous year driven by a gross margin increase, mainly explained by the positive outcome of the final remuneration for the year 2020, and the fixed cost and other improvement, thanks to the provision reversal associated to the sale of the optic fiber network and achieved efficiencies. Moving now to the analysis below EBITDA. I'm on Slide 16. D&A increased mainly due to the investment effort carried out in renewables, distribution and retail. Net financial results decreased mostly on the back of lower average gross debt, but in a context of higher interest rates. And finally, tax rate reached 27%, affected by the non-deductibility of the 1.2% temporary energy tax booked in Q1. As a consequence of the above, net income EBITDA rate improved 5 percentage points versus previous year. Moving to the next slide related to the cash generation. FFO reached €2.7 billion. The main moving parts being first, negative working capital of around €0.6 billion, mostly affected by the payment of the Qatar arbitration in Q1; and second, a favorable evolution of income tax outflows, while net financial expenses were slightly above last year. Excluding the mentioned extraordinary gas arbitration paid this year and taking into account that last year, we cashed in around €0.4 billion from non-mainland regulatory working capital accumulated backlog, FFO would have increased by €0.8 billion, proving that the sound cash generation throughout the period. On Slide 18 now. Net financial debt remained flat versus the full year 2023, standing at €10.4 billion. The strong cash flow generation of the period was enough to compensate our investment needs as well as the dividend payment. Moreover, gross financial debt slightly decreased over last year, while cost of debt rose to 3.6%. Finally, our strong commitment to a strict financial discipline has resulted in robust credit metrics. Good examples are the 2.4 times leverage or the 44% FFO on net debt ratio. And now, I hand over to Pepe for the closing remarks.

José Gálvez: Thank you, Marco. The strong set of results achieved in the first 9 months of the year are once again clear evidence of the importance of our integrated strategy. This result also translated into a robust cash generation being instrumental in maintaining healthy credit metrics. On the back of these figures and also taking into account the recent ruling on the social bonus to be booked in the fourth quarter, we expect to conclude the year at the top end of the announced guidance. Thank you for your attention and let's now move to the Q&A.

Mar Martinez: [Operator Instructions] Okay. Thank you, Pepe. Thank you, Marco. Alberto Gandolfi from Goldman Sachs. Please Alberto, go ahead.

Alberto Gandolfi: Thank you, thank you Mar and good morning. Thank you for taking my questions. I'll stick to three, but I'll be brief. The first question is on capital allocation. I'm not going to be overly explicit because there's going to be a CMD in November. But just to see your priorities, we have not seen a proposal for the allowed return in power grids. We don't know if you can step up CapEx. So I guess the question is, how do you balance the very strong long-term opportunities for growth in Spain with this vacuum -- regulatory vacuum? We have seen the press talking about you potentially bidding for hydro assets in Spain. So what I was trying to ask you here is how do you bridge this next 12, 18 months, whereby we're not going to have very much regulatory clarity? Are you open to acquisitions? Are you open to a share buyback? How do you rank the use of capital between organic growth, external growth and return of capital to shareholders? The second question is on data centers. You've been very vocal, very open. Recently, you disclosed that you awarded nearly 3-gigawatt of connection to data center developers. I wanted to ask you; can you give us an update on that? Who did you award these connections to? Is it to intermediaries or is it directly to tech companies that are going to build directly data centers? And how much do you expect for Spain as a whole by 2030? So not just you, the whole country. I'm trying to gauge the power demand implications from it. Last question, I think you were very clear already, Pepe. You said that the €2 megawatt hour should be seen now as a normalized level for the gas unitary margin. Can I ask you; can you confirm that how much of this is hedged for next year, the year after, perhaps? This has been a very volatile driver of your P&L. So I was trying to understand if there's any clarity that reduced the value at risk of this item? Thank you for taking my question.

José Gálvez: Okay. Thank you very much, Alberto, for the question. First of all, with regard to the capital allocation, I would say that we should understand that -- and I think I've said that in the last Repsol presentation, we are in the best sector in the best moment. So we are facing a lot of opportunities in the future. The first thing that I think is that we should have a strong balance sheet just to go ahead with all these opportunities. But we should take care, as you have said, about where to allocate the capital. Well, first of all, you have asked me about M&A. Well I would say that current market context bring some M&A opportunities as long, as always, they fit into our equity story and create value for our shareholders. But also, in that sense, we are trying us to do that. Again, we -- as you know, the operation that we did with Masdar, looking for -- having retained control, while maximizing our productivity and returns on invested capital that is a reversal movement, but always looking just to have a strong fire to go ahead with the future. And in terms of regulation, I would say the same. I think that mainly, in distribution, but also in the Island, there are many opportunities that will be based on the right and fair remuneration of these activities. But I'm absolutely sure, if you look about the National Energy and Climate Plan for Spain, they are absolutely focused on electrification and networks. That means with a huge increase versus the previous plan, the plan of 2020. And that means that the government would do all the things just to get this plan. And it is clear that we need just to have a fair regulation. So we will -- trying to think about the long-term expectation, there are a lot of them, and we will select the more valuable for our shareholders. Talking about the data centers, you're right, we said that we have today approved a connection of about 3-gigawatt. That is the figure that we have today. That means there are something around 50 -- I would say, 50 more or less sites. So that means that there are not very big one, but the one that we have approved. We have direct conversation with the final user of these data centers. And also, we have been talking with intermediate just to look for this. How much data center could be in the year 2030? I don't know. But what I will say is that in our expectations is we will see more than 15 terawatt hours in the year 2030 coming from these data centers. Just to explain the normalized gas unitary margin, I would ask Marco, just to.

Marco Palermo: Thank you, Pepe. And good morning, Alberto. Question number three, so on gas margin. I guess that with amount of sales that we are seeing right now that is somehow lower than previous year, so ranging probably for the full year, approximately 60, 70 terawatt hour. I guess that with this, the margin that we do expect on a normalized basis is not yet the one that we are seeing right now. So the €2 per megawatt hour that we are seeing right now is not yet the stabilized gas margin. So we see something higher than that.

Mar Martinez: Thank you, Alberto. We have now Pedro Alves from CaixaBank.

Pedro Alves: Good morning. Thanks for taking my question. The first one on the hedges in your sales for 2026, which have increased from roughly 60% to 70% in terms of your inframarginal production. So likely benefiting from this power price uplift on the forward curve. So what's the level of the hedged price right now for 2026? And where do you expect to land by the year-end? And secondly, if you can comment on the outlook for supply margins, which seems sequentially stronger than the previous quarters. So what's your outlook for the coming quarters? Thank you.

José Gálvez: Good morning, Pedro. Thank you for your questions. So regarding the hedge of 2026, of course, we are still in the process of doing our job. So we will expect by year-end just to rise this number progressively, I would say, with what you have seen until now. Question number two, regarding the supply and regarding, I guess, basically, the churn rate. What we are seeing on the market is a situation with still very high competition. So the churn rate still remains very high. But on the other hand, the competition again, it's on the channels. It's not so much on price, frankly. Despite all this, so despite basically conditions as well as we have seen in the first 6 months of the year, in the third quarter, we have been able just to stabilize our customer base. So -- I mean -- and that's what we think will -- where the situation, we think will stay until year-end. Thank you.

Mar Martinez: Okay. Next analyst is Manuel Palomo from Exane BNP.

Manuel Palomo: Hello, good morning everyone. Sorry, but my first question will -- I will insist on the last one, it's a follow-up. It's on the loss of gas and electricity clients that has been significant year-to-date. I note that we are already on the 30th of October. So I guess that we would have now maybe a better view. Any thoughts on what will be the evolution towards year-end? Should we assume that from now on, it's going to be stable? Or that we could assume that there'll be additional losses in the number of clients? And also, I would be interested to know what is the type of customers that you're losing? Are you taking -- I don't know, if you're taking any measure in order to tackle the loss of clients? Second question is a follow-up on another question that was asked before, which is about the gas margins. There's been a significant improvement. We are already at around €2 megawatt gas margin. But for the full year 2026 guidance was at €7, if I recall well. So do you think there's still a chance that you achieve it? Or maybe a situation has got a bit worse? And lastly, it's a clarification. In the slide number nine, you are giving the hedge inframarginal output. Given that you will continue to add megawatts in the coming years, I guess that both PV and wind mainly, could you share with us what is the total volume of inframarginal production that you expect by 2026, just to know what is the amount of open terawatt hours that you have at this point? Thank you very much.

José Gálvez: Okay. Manuel, thank you very much for the question. I will try just to give you some color about the first one, and then Marco could go deeper in this question and also to answer the second and third question. The loss of customers, you are right. And you know, first of all, and we are worried about that, but I will try just to explain our position here. First of all, the scenario that we have had mainly in the second quarter of this year, with reduced electricity and gas prices versus the year 2023, something around 50%, more or less. In that context, what we have seen is an increased activity of mainly a small supply companies. These kind of companies, in my opinion, I'm not sure if I am right or not. But in my opinion, try to sell based on forward prices and try to buy based on spot market. So when they -- when we have -- they have these very low prices, they are more aggressive than in other times in which prices are higher. On the other hand, there are the oil and gas companies that combines offers of power, fuel discounts. I don't know if this is right or not. For sure, it's a very good thing for the oil and gas companies, but they have a strong position that I don't want to comment, but that is what happened. Then the small supply companies, and also the oil and gas companies, are the ones trying to capture more customers. But I should say that this competition is not so much based on price discounts, but more aggressive, I would say, push commercial campaigns. So therefore, supply margins remains at attractive level, I would say. On the other hand, the customers that have left our customer base are those with the highest churn rate and the lowest value added for us. So taking all into account, what we say is we are not happy as because of the loss of the customers. But we have stabilized these losses. We are expecting more stable customer base in the future in the third -- in the fourth quarter and in the next year. We are maintaining, even more increasing the margin that we have in the supply market. Well, we are dealing with a problem that we have seen in the past many times. The result of all what we have done really give us more value than the ones that we had previously. And well, I will give the word to Marco.

Marco Palermo: Hi, Manuel. So question number two. Gas margin, 2026. So the formal answer is that we will actualize guidelines. The less formal answer is that given the level of hedging that we have for 2026, I would say that we look comfortably to margins in 2026. Then question number three, total volume of inframarginal production in 2026. What we are seeing now is approximately 45 terawatt hour as a production in that year. Thank you.

Mar Martinez: Thank you, Manuel. Next question comes from Jorge Guimaraes from JB Capital.

Jorge Guimarães: Hi, good morning. I have two questions. The first one is related with the news about M&A. There were some news in Spanish press that you could be interested in acquiring hydro assets from Acciona Energia. So my first question is -- and given the price tag that was mentioned, around €1 billion, how would you make -- create value with -- after paying that price for these assets? That will be the first one. The second one is a bit of a detailed question. If you can give us some visibility about the internal PPA price in the deal with Masdar? And the final one is a bit of a follow-up on the margin question. If you can give us some visibility about the supply margin for 2025 [indiscernible]? Thank you very much.

José Gálvez: Okay, Jorge. Let me say, as I have answered before, in the current market situation or context, there are some M&A opportunities. As I have said, we will go ahead, this, as long as they -- these opportunities fit into our equity story and create value for our shareholders. So that is -- and in the generation business, our focus is on wind and hydro that is clear, with hydro asset. And as always, I would like just to underline this, provided the price is attractive, not in other cases. And Marco, if you want to answer the...

Marco Palermo: Thank you, Pepe, and good morning, Jorge. So question number two regarding the PPA price of Masdar. Of course, we can't disclose. What I can say is that as we commented before, this is a price that is, of course, lower than our LCOE, and our LCOE is more in the 40 than in the 30s. So -- I mean, that's what I can elaborate on that. And the third question regarding the supply margin in 2025. Well, I would assume that is something stable when you look at what we had with -- in the first nine months of 2024. Thank you.

Mar Martinez: We move now to JPMorgan, Javier Garrido. Please go ahead.

Javier Garrido: Yes, good morning everyone. I would like to ask about the 2024 guidance, which, if I understood correctly, you said in the call that you expect to reach the top end of the net income guidance range, including the Supreme Court ruling on the social tariff's side. I really, really struggle to reconcile that with the performance year-to-date. So I just wanted to double check first that you are still expecting €1.3 billion to €1.4 billion of EBITDA in Q4, in line with the guidance you provided for a different quarter in Q1? And second, with €1.3 billion to €1.4 billion EBITDA, why you should be only getting to €1.7 billion of net income for the full year? You can let us know if there is any negative exceptional you are assuming if there is anything, especially in the fourth quarter. Otherwise, if the €1.7 billion guidance is simply a very conservative number. Thank you.

José Gálvez: I will try to -- thank you, first of all, Javier, for the question. I would like just to give you, again, some color and then Marco will go deeper in it. Well, first of all, you are a traditional analyst. And always what you have hear about us is that we are confident that is what we say. We are confident to reach. In this case, we have been more pushing -- saying that we are confident to reach the upper end of the full year EBITDA, full year net income. You never know. We are not expecting any special thing in the last quarter. But we prefer just to be cautious and to be confident, and to say that is a typical sentence to be comfortable about reaching our objective. But Marco, could you elaborate a little bit more?

Marco Palermo: I guess that actually you commented what I wanted to say. So -- but thank you for the question, Javier.

Mar Martinez: Well, next question comes from Rob Pulleyn from Morgan Stanley.

Robert Pulleyn: Thank you and good morning everyone. And I have one question, and I'm going to go a bit wild. So may I ask given the so-called nuclear renaissance in the U.S. and especially the Constellation Microsoft contract on 3-mile Island, may I ask what is the likelihood that Endesa could participate in this theme? Whilst your nuclear plants are earmarked for closure starting in 2027, is there a scenario whereby even if the regulator and the Spanish system doesn't want this technology, that Endesa could run some nuclear capacity on a private contract, such as with a U.S. tech company? Thank you very much.

José Gálvez: Okay. Thank you for the question. As you know, we have a plan defined by the Government of Spain regarding to the shutdown of the different unit of nuclear power plants. So that is what we have today. And that means that we are going to shut down the first one Almaraz in the year 2027, and the last one in the year 2035. So that is what we have. Many times, I have said that from an intellectual point of view, I am against this shutdown of this close of the nuclear power plant because I think, first of all, that the life of this plant has not been demonstrated, taking into account what happened in the U.S. that could be higher than the 45 years that we have today here in Spain, reaching 60 and/or even 80 years. And I think that we have or there are many reasons why to maintain these nuclear power plants. Having said that, we will do whatever -- what the Government in Spain and the energy policy of Spain will mark for the future. So that is clear for us in an intellectual -- from an intellectual point of view, we will continue trying to convince the government and others about to the continuity of this -- yes, because we really believe it is a good thing for Spain, but we will do whatever the strategy or energy policy of the government will act us.

Mar Martinez: Okay. Thank you. We go now with the last question that comes from Javier Suarez from Mediobanca.

Javier Suarez: Hi, good morning and thank you for the presentation. Two follow-up questions on the regulatory update on distribution. So the reason is much more on the intangible than the tangible. So the intangible is that can you update us on any conversation with the current administration to accelerate investment? I'm saying this because there is a sense of urgency comes from additional demand in the system that doesn't seem to come with the same regulatory sense of urgency. So would you expect that the regulatory document that should be unveiled in December will provide the sector, and Endesa now enough visibility to start and accelerate CapEx on the distribution network? And maybe a second question that is related to the first one is that in your scenario, when do you think that we are going to see additional demand from artificial intelligence-related technologies or new data center? Is that something imminent, i.e., that you expect to see in the next several years and that goes beyond in your -- further down in your business plan? Thank you.

José Gálvez: Thank you, Javier. Regarding to the regulation, the distribution, I agree with you that it is urgent, and we need some visibility. Having said that, we have had some -- I was going to say many, some conversation with the regulator about this. I am very confident about what the regulator is going to do because they are aware, absolutely, about the need of reinforce, the network. So I am confident based on our conversation. And I would like us to thanks the regulator, this conversation that give us comfortability, and we will see what happened at the end. But I am confident. On the other hand, it's not only to be confident, it's just to give a signal, a clear signal. So we are asking just to have something or more visibility or formal visibility, let's say, that as soon as possible. And with regard to the increase in demand due to the data centers, I would say that our expectation without data centers, it's an increase of 15 terawatt hour for -- in the year 2023, more or less. On top of that, we will have -- on top of that, we will have another 15 terawatt hours that would be coming from the data center. That would be our expectation for the future. If my colleagues don't correct me because when I have said the 15 terawatt hour, they have seen me with a strange face. No, it is right that we are -- okay. They agree with me, 15 plus 15. Marco?

Marco Palermo: Okay. Just on the regulatory framework, I guess that Pepe commented everything, just here to remind that when we apply the European framework to the current market condition, I mean we end up with a range that is -- a remuneration that is between 7.3 and 8.7. So on the additional demand, I guess, also on that Pepe elaborated. What I want to remind here is that -- we have been considering space on the grid on the network for the last, I would say, 3, 4 years to data centers, totaling approximately, I would say, probably at the end of the year, it will be close to 3 gigawatt for our grid. So -- I mean, and not all of this could probably come online and end up having a real data centers behind it. But something should start to kick in probably, I would say, next year or the following. So there has been some work that has been done during the last few years. So -- I mean, this should be somehow a progression that sooner or later, we should start to kick in.

Mar Martinez: Okay. And now, this was the last question from the conference call. Thank you very much, everybody, for your participation. And just remind you that the IR team is always available for any further questions. Have a nice day.