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Edited Transcript of IRE.MI earnings conference call or presentation 7-Nov-18 4:00pm GMT

Nine Months 2018 Iren SpA Earnings Call

Torino Dec 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Iren SpA earnings conference call or presentation Wednesday, November 7, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Massimo Levrino

Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control

* Vito Massimiliano Bianco

Iren SpA - CEO & Director

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Conference Call Participants

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* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Javier Suarez Hernandez

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Roberto Letizia

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the IREN 9 Months Results Presentation. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Massimiliano Bianco, CEO of IREN. Please go ahead, sir.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [2]

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Thank you. Good afternoon, everybody, and thank you for attending the presentation of IREN's '18 third quarter results. Starting from Page 2, you can find the summary of the performances of the group in the period. As can be seen, all the operating KPIs reported a double-digit growth. This important result is even more relevant if we consider the quality of the performances. To analyze, I would like to shift the focus on the EBITDA bridge. Even if we don't consider EUR 40 million positive nonrecurring elements, the strategic pillars, organic growth, synergies and consolidation, drive the increase of EBITDA. The total amount of the 3 companies is EUR 46 million, widely covering the negative scenario effect of EUR 15 million.

In addition, EUR 13 million of the EBITDA from higher hydro volumes. More in detail, the impact of the scenario represents a net debt of 2 main components. The first concerned the absence of approximately EUR 11 million reported in '17 related to the utilization of gas storage, bought at a very favorable price in '16. The second regard the impact of lower spark-spreads and lower thermoelectric and cogeneration volumes, partially compensated by higher performances in ancillary service and increase in the forward price. Organic growth amounts for EUR 11 million, stretching out between networks and the waste business unit.

The 3 main drivers are -- that supported the growth have been higher CapEx, which increases the allowed revenues, improved disposal capacity and higher special waste volumes. As far as consolidation is concerned, around half of EUR 20 million are attributable to our ACAM deal, affecting mainly the network business unit. The remaining amount regards the energy value chain, thanks mainly to the inclusion of our photovoltaic asset in IREN's consolidation perimeter.

Moving to synergies, I would like to underline the fact that we have already reached the target of EUR 15 million for '18 presented in the business plan. All the business units contributed to reach this goal. On top of this, we reported positive nonrecurring effects for approximately EUR 40 million. They are composed by EUR 60 million related to the recognition of white certificates for previous years linked to district heating, offset by water-managed balances in '17 for more than EUR 10 million absent this year, and minor negative elements, mainly IFRS 15 accounting starting from '18 related to new connection in energy distribution.

The 13 growth of EBITDA is reflected and enhanced the net profit. It increased by more than 32% thanks to lower financial charges and a lower tax rate.

Finally, it's worth to note the robust growth in CapEx, plus 43%, following the 32% increase already reported at the end of '17.

Let's start the business unit section with networks, Page 3, which, during the first 3 quarters, reported a 2% EBITDA growth. It should be noted that the '17 figures include more than EUR 10 million of water balances, which are absent this year. Without nonrecurring elements, the growth would be considerably higher, over 6%. Similarly, the EBITDA growth from water would be higher as in for a reported 4% to around 10%.

In terms of energy infrastructures, electricity and gas networks counterbalance each other, generating a neutral impact on EBITDA. The significant organic growth on -- of the business unit is strictly related to a remarkable 45% growth in CapEx in all the areas of the business unit as you can see from the histogram. Those investments increased the allowed revenues, in combination with the RAB growth and consequently contributed to assure stability to margins.

The business unit also showed relevant synergies during the 9 months, thanks to the implementation of performance-improvement activities.

Speaking about M&A, around EUR 10 million of consolidation are related to the water management of ACAM.

Finally, for what we regard the outlook, the positive trend experienced in the first 3 quarters, including ACAM contribution, is expected to occur also in the last one, but it will be offset mainly by the absence of more than EUR 10 million of further positive elements reported in the last 3 months of '17 related to gas and electricity infrastructure.

Moving on the waste sector, Page 4. It can be noticed, a slight EBITDA growth of around 1%. Particular importance, in our opinion, is the development of door-to-door collection systems in new municipalities in the area of Turin and Reggio Emilia. In particular, it contributed to increase to 63.5% the sorted collection in our reference territories. However, this improvement led to higher costs that will impact also the '19 figures, with the positive effects on margin starting from 2020, when the new collection process will be fully setup.

On the contrary, the remarkable contribution of organic growth, synergies and the margins coming from the contribution of ACAM enables to offset the increased costs and some extraordinary elements related to '17 tariffs. More in detail, we already like the increase in the special waste volumes treated internally, plus 36%, which contributed to improve the situation of our plants. The 38% increase in CapEx concerned mainly the initiative of maintenance and the development of the door-to-door collection.

In terms of outlook, we believe that the results will be in line with '17. The positive results due to ACAM contribution and higher volume treated will be partially offset by scheduled maintenance activities on waste-to-energy plants. However, it's important to highlight the development of the business unit from our strategic point of view. In terms of M&A, the group recently completed 2 deals: San Germano, ongoing finalization, with a full acquisition of 100%, is a company that serves more than 140 municipalities, with a population of more than 800,000 inhabitants and almost 350,000 tonnes managed per year. And SETA, consolidated with the equity method, service more than 30 municipalities close to Torino, with a population of more than 220 inhabitants -- and 202,000 inhabitants and almost 100,000 tonnes managed per year.

For with regard the energy sector, which include the generation, district heating and energy efficiency, the around EUR 80 million increase in EBITDA is affected by the extraordinary sale of EUR 60 million of white certificates as already explained in the first semester presentation. As far as the volumes are concerned, it's worth highlighting the strong increase in hydroelectric production, combined with thermoelectric and cogeneration production drop, also due to a different mix of production. Furthermore, regarding the energy scenario, the remarkable reduction in clean spark-spreads, led by an increase in cost of gas and CO2, has been almost counterbalanced by ancillary services for an amount of EUR 70 million, about EUR 30 million more than in the same period of '17. In fact, the flexibility of thermoelectric and cogeneration plants allow us taking several opportunities on MSD markets.

It's worth noting that a part of the EUR 50 million investment the period supported the development of district heating, a sector which Iren is a leader in Italy. In particular, the volumes treated increased by almost 2.5%, reaching around 88 million cubic meters that will start to contribute by the end of this year.

Synergies and consolidation contributed to improve the results, in particular, thanks to the inclusion of the photovoltaic assets in the group perimeter, with a contribution of more than EUR 5 million.

Concerning the outlook, the positive result of the business will be subject to persisting high volatility in the energetic scenario, however, we think that it's worth commenting in the outlook more in depth after the analysis of the market business unit in order to examine the whole energy value chain.

Moving to market sector, Page 6. The EUR 2 million decrease in EBITDA derived mainly by the impact of the gas sector due to the absence of EUR 11 million reported in '17 linked to the utilization of stored gas purchases in '16 at a favorable price. In addition, a negative impact is also due to the adverse energy scenario. The corresponding decrease in margins have been partially offset by balances of previous years for EUR 5 million. On the contrary, the electricity area reported a slight increase of EUR 2 million, which derives from the combined effect of a reduction in sales margin to the higher full price, offset by a hedging policy on procurement and other previous year balances.

It's worth highlighting that the number of clients has continued to grow, around 40,000 more in the first 9 months, reaching approximately 1,750,000 clients. In addition, to further investment -- the further investment in the improvement of New Downstream and a proactive customer-based management allowed the significant reduction of the churn rate, already one of the lowest in the market.

Finally, we are widening our services portfolio with E-mobility solution, according to our strategic approach of pushing on new technological services. Also, for these business units, I would like to stress the importance of external growth in line with the strategic direction of the group. An example is the acquisition of Spezia Energy Trading in September. The company, based in Liguria, focuses on small and medium enterprises for a total of more than 40,000 point of delivery not included in the overall number I've already mentioned of the portfolio customer base.

In terms of outlook, this is the scenario that will be in line with one experienced in the 9 months, the market business unit is going to suffer from the PUN steady increase. However, considering the entire energy value chain, it's important to highlight that the impact of the scenario, PUN and gas prices, if we exclude the absence of approximately of EUR 11 million related to the use of gas storage in '17, is positive, for a total of about EUR 10 million, led by stronger contribution from hydroelectric generation and MSD activities, partially offset by lower clean spark-spreads.

Now I hand over to Massimo Levrino, the CFO of the group, for comments on the financial performance of the company.

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [3]

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Thank you. Good afternoon, everybody. We are going to Page 7. The chart shows the 9-month results on EBITDA to net profit. Starting from EBIT, that stands at EUR 410 million. You can see an increase of EUR 71 million, a bit lower than the growth of EBITDA. This is due to the growth of depreciation and amortization, that is partially offset by the reduction in provision.

Depreciation rose by EUR 22.7 million, mainly related to the increase of fixed assets and to the extension in the scope of consolidation, in particular, to the company, Iren Rinnovabili and ACAM. Provision stands at 37.6% -- EUR 37.6 million, sorry, and then show a decrease of EUR 10 million. The reason is the decrease of -- the decreases towards the reduction of the operational risk of EUR 7 million affected by the release of some provisions. The second reason is related to a bit lower provision for bad debt of EUR 3 million.

EBT, earnings before taxes, stands at EUR 366 million, a strong growth of EUR 73.7 million, 25%, compared with the first 9 months 2017. The reasons are, first of all, the financial charges for loans and bonds that stand at EUR 52 million, that decreased by EUR 10 million. The decrease is mainly due to the lower cost of financial debt, from 3.2% in the first 9 months '17, to 2.8% in '18, and this is a reduction of 40 basis points, minus 14%.

The other financial income, at positive, stands at EUR 6.5 million and shows a better result of EUR 3.5 million, mainly due to the positive contribution of the fair value on derivatives.

The net profit with the company, consolidated using the equity method, stands at EUR 0.7 million, the decrease of EUR 3.7 million compared with the first 9 months '17 due to higher nonrecurring results in 2017 relating particularly to the subsidiaries, Astea and ASA. So the participation adjustment stands at EUR 2.1 million, and the decrease -- with a decrease of EUR 6.6 million that is due mainly to the adjustment accounting in 2017 of the equity investment in Salerno Energia. This adjustment was accounting according to the international accounting standard, IFRS 3.

Going to net profit. The group net profit was EUR 236 million and shows a growth of EUR 57 million, a 32% increase due to the increase of EBT, first of all, and to the slight reduction of the tax rate from 31.5% to 30.1%. We assume that this tax rate will be for the full year 2018 and will be in the range of 30% to 31%, 1% less that's announced into the first half, almost in line with the tax rate of the business plan. Minorities were EUR 19.4 million, a slight decrease of EUR 2.2 million. This is due to a lower net profit of the controlled company, Iren Acqua.

Now we are going to Page 8. You can see the cash flow and the net financial position. The net financial position, at the end of September 2018, shows a reduction of EUR 158 million, without considering, of course, the effect of the financial debt related to the consolidation of the new acquisition, and I am referring to ACAM and ReCos, for the 1st of April, and to Spezia Energia and Maira from September '18. This trend is even better than the trend shown in the first 9 months of last year, confirming the positive trend starting at the beginning of 2015.

If we consider also the cash flow out for consolidation, the net financial position rose from EUR 2,372 million to EUR 2,395 million, a slight increase of EUR 23 million. This positive result is due to strong cash flow, in percentage an increase of 30% compared with the first 9 months '17.

The net working capital showed a decrease of EUR 32 million. The total investments were EUR 286 million, and it was EUR 61 million higher compared with the first half 2017. The disposals were EUR 17 million, and are referred to the stake -- to the sale of our stake in investments we made in Mestni and our water concession in Novara. The dividends paid from the group were EUR 113 million, of which EUR 91 million of these are to either shareholders, an increase of EUR 24 million compared with the 9 months 2017.

The fair value of derivatives gained a positive contribution of EUR 14 million. With reference to the full year, we expect to have about EUR 450 million of total CapEx and EUR 210 million for consolidation, taking into account the 2 M&A activities already announced of San Germano and SETA.

Going to Page 9, you see the interest rate and the debt structure. The debt structure is influenced by the issue on the 12th of September on the second green bond with the size of EUR 500 million and tenure of 7 years and a cost of 2.85%. In fact, the first pie chart on the right, that represents the breakdown of the gross debt, shows that now 100% of the gross debt is at fixed rate or hedged with the swap. The average duration of long-term debt is 5.5 years, higher than in the first 9 months '17 when it was 4.8 years. The cost of this, I already mentioned, that is 2.8%, from a reduction of 40 basis points. This is due to liability, in particular to the liability did in the last year.

If you look at the second pie chart on the right, you will see the breakdown of the debt structure. The pie chart shows that IREN's total gross debt is formed by bond of 70%, and the other financial sources are 30%, of which 26% from EIB funds. With reference, maybe we are still at a liability of the funds for an amount of EUR 235 million, which are loans with long-term maturity.

Now I hand it over to Mr. Bianco for the closing remarks.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [4]

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Thank you, Massimo. As far as the closing remarks are concerned, moving to Slide 10, I would like to highlight the quality of the positive results reached in all strategic pillars, which contribute to create an efficient and value-creating group. Our business model is once again sound as it is capable of achieving important results even in a highly volatile market scenario like the current one. Organic growth increase is due to investment in all business units. Improved flexibility of freelance generation plants allows to cope with periods of negative scenario. Furthermore, CapEx in networks led to a growth in regulated activities. Synergies targets are achieved, thanks to the integration and rationalization processes following the implementation of several performance improvement projects. Territorial consolidation has been one of the most significant growth drivers in recent years, and it will continue to be so in the future. We continue to evaluate potential M&A transactions in our business sectors, and we are confident to reach our targets before expectation. Moreover, the important cash generation allows us to achieve consolidation containing the net financial position.

To close my presentation, we confirm the guidance presented in our business plan for the full year '18. We expect an EBITDA between EUR 920 million and EUR 930 million. In terms of net financial position, we expect the net financial position to EBITDA ratio in 2.6 area, 2.8, excluding nonrecurring elements. We expect a net profit higher than EUR 270 million. The result includes the extraordinary sale of white certificates and the liability management cost for approximately EUR 20 million before taxes that we expect to do by the end of this year.

We can start now the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Enrico Bartoli with MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [2]

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A few questions from my side. First of all, on -- regarding the comments that you made on the expected results and the expected evolution of the margins in the market division, could you elaborate a bit more on how you managed to have so resilient supply margins in the electricity business considering the increase in the full price, particularly in the fourth quarter? And could you remind us your hedging policy in this kind of business? And also, if you can spare some comments on the supply margins in the gas business because you mentioned that, last year, obviously, you had this positive impact from gas in storage, but net to this, I calculated that, actually, supply margins are improving. So if you can provide some details about this trend as well? And second question is related to the waste business. Also here, if you can give us some more details about this additional cost that you had in the third quarter. I understand that, probably, you think that this will be repeated in the fourth quarter and probably, in 2019. So if you can give us some flavor on the evolution of the EBITDA in the waste business that you expect in the next quarters? And finally, I didn't get -- you mentioned in the end of the presentation some costs that you expect to be accounted in the fourth quarter for liability management and other impacts. So if you can please repeat that.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [3]

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Thank you, Enrico. So about supply, as I said during the presentation, the slight, let's say, positive result of supply, considering the negative impact to that, the rise in price, we said we saw in the last month, is due in part because of our hedging policy. We usually hedge from 60% to 80% of our portfolio, and then we also use old instruments we can use as a natural hedge, considering the whole value chain we manage. And a part of this is also, and a part of, let's say, a slight positive result in supply that we saw in the whole is related to, and as I mentioned, let's say, a non -- a balance from previous years in the -- that affected the supply. So the combination of these 2, a high-level hedging and some positive impacts are because of balances of the previous years, drove to the result I showed before. Our outlook by the -- for the end of the year, we expect, let's say, the negative impact of the commodity price on the supply business unit for the -- at the end of this year, in the beginning of the next year. And we expect to recover the profitability in the supply by the end of next year. So we expect to normalize the contribution of the supply business during the second half of the next year. So this is the -- what we expect in the supply. So when you say, in the short term, it seems that there is a higher margin on gas. It is because of the combination of the hedging policy and the previous year balances. About waste collection, we are working very hard in an extension of door-to-door mechanism mainly in Torino and in Reggio Emilia. Because of these, we are investing, so you see the impact of this on CapEx, but as well in the short term that means, up to the end of next year, you will also some kind of cost that you are -- you cannot have in CapEx and you will not fully recover in the tariff like -- called, for example, the activities that are related to the information to people, to how to manage the new way of collecting waste. So these are worth a few million during the next 12, 18 months. But of course, it affected the poorer part of the cycle, that is the collection phase. By starting from 2020, we expect, of course, to end this kind of cost, and so to normalize the profitability of the collection phase with a wider part of our collection that is in door-to-door mechanism. About the liability management we expect to do by the end of the year, I'll ask Massimo to answer it.

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [4]

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Okay. This amount is linked to, first of all, to the issue of the last green bond that gave us liquidity and it was a prefunding. Now we are confident to use part of this proceed, roughly EUR 170 million, to reimburse existing loans, which have a tenure of 2, 3 years. And the cost of this activity is estimated in EUR 20 million. This will allow to optimize the cost of debt and to achieve the target with just cost of debt in the next year.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [5]

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Okay. I think I answered to all your questions, so do you have any other question?

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Operator [6]

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The next question is from Javier Suarez with Mediobanca.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [7]

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This is also on the waste business, following Enrico's question on the -- when you are mentioning these extraordinary start-up costs related to the expansion of door-to-door collection in your area, can you quantify the total additional cost that you think the company has to assume during 2018 and maybe 2019 to complete that expansion process? So a quantification of what do you consider the impact on the EBITDA on these extraordinary start-up costs, that would be very helpful. Also, on the waste business, you have been mentioning the recent M&A development on SETA and San Germano. The question here is more qualitative. What is adding -- these acquisitions will be adding into your portfolio in the medium term, and strategically, why these 2 M&A activities are important for the company. And the third question is on Slide 5 and on the energy business. Obviously, stripping out the extraordinary sales of white certificates, on the increase for the EBITDA that the activity has had, you can give us a sense of what is driving that hike, is that the main contributors are the ancillary services, that I think that you mentioned are higher and something like EUR 30 million than previous year? And you can help us to understand the dynamic between hydro generation and then a traditional thermal generation.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [8]

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Okay. Thank you, Javier. So starting from the impact of the start-up costs that we cannot transfer to tariff for the beginning of these activities, we can assume for the next, let's say, 18 months a total amount of EUR 24 million, considering the current perimeter of area where we are working on the extension of door-to-door collection. About the strategic value of the latest transaction in waste we did, mainly in San Germano because we start in the next weeks to consolidate this company, that we will own 100%, as I mentioned before, San Germano runs, let's say, medium-term contracts that will last, on average, for, let's say, 5, 6 years that it's on now. So the -- in 140 municipalities, mainly in the same area where we currently manage this business, so our historical area, especially in Piedmont, and some interesting prospect area like Sardinia. So the strategic value of this transaction that right now worth in terms of additional EBITDA, let's say, EUR 6 million, EUR 7 million in the current contracts they have, is the opportunity that we'll have to extend this contract, of course, in tenders that we expect will be done in all these areas. And probably, in the medium term, this kind of contract will become a concession on wider area, where the contracts that are right now, a contract related to single municipality we expect in the medium term and we expect also because of the forthcoming regulation in the waste sector will allow for concession on a -- period of concession that we expect to be longer than what is right now, that is a contract on a single municipality and on a length that is, on average, 5 to 7 years. So the strategic value is to manage 100 of municipalities, where, in the next future, we expect we will have the opportunity to increase our presence. SETA is quite different because SETA has already a concession in an area that is contiguous to the -- to Torino City, and so right now, we do not consolidate, but we will manage SETA. And the other -- the partner of SETA in the ownership of the company are 1/3 the municipalities in the area, so we can expect also there to have the opportunity to increase our stake, then to consolidate and so to have a concession that is -- that will end in right now in 2020, '28. So that is very, very significant in terms of a strategic value transaction for us. About the -- our outlook in generation. The -- right now, the contribution, as I said, of either generation has been very, very significant because of volumes and prices. What happened in thermoelectric was a reduction in volumes, a very poor contribution because of clean spark-spreads that were close to 0, but the ancillary service counterbalanced these with a very, very high contribution. As I said, in the first 9 months, we had EUR 70 million of managing in MSD that is EUR 30 million more than what we did in the last -- last year in the same period. It is not easy what -- to understand what will be the mix of MSD and the spark-spread volumes in the future, but what we expect is that if we will see an increase in the spark-spreads, we will see a reduction in the MSD or the opposite. If we will persist a poor spark-spread, we can expect a significant contribution from the MSD. So at the end of the day, we expect a very stable contribution that will arise from the thermoelectric generation we manage.

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Operator [9]

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The next question is from Roberto Letizia with Equita SIM.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [10]

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Back on the liability management that you're going to do in next week. What is the benefit on the interest charges that we are going to see from next year onward, I guess? Then a consideration on the net income because if I strip out all the, say, nonrecurring elements for this year and even considering that the guidance is a net profit in excess of EUR 270 million, it seems to me you are already now at an organic level of EUR 270 million net income, which is the same level you were expecting naturally for 2021. So we would like to understand if you -- or you can point us the current situation is leading you to beat the net income targets for the coming year? So we should consider the 2000 -- EUR 270 million for 2021 a bit conservative, also in light of the next advantage that you're going to gain on the interest cost from the liability management. If you can elaborate a bit on the outlook on the net income for the coming year.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [11]

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Thank you, Roberto. To comment before asking Massimo to answer it, first, of course, unfortunately, I have to remind everybody that starting from next year, we do not have any more not only the white certificates that are the nonrecurring elements of this year, but starting from next year, we will not have any more of our green certificates. And of course, these we will offset in the next 2, 3 years, but we -- it will be worth EUR 40 million.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [12]

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Yes. But that was already in the guidance, so we knew that already.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [13]

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Yes.

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [14]

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Yes.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [15]

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No, no -- yes. And second, and of course, as well as it was our business plan, also the liability management that we expected to do by the end of this year, we were aware of these when we presented our business plan at the end of September, so our expectation on cost of debt in the medium term is also related to the expectation we had in the next, which we will implement, about the liability management we expect to do. So Massimo, please, some more details about this?

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [16]

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Yes, yes. Our goal, I remember, that is to reduce the cost of debt, from 2.8% in 2018, to 2.4% in 2021. So in 3 years, so we have to reduce by 40 basis points after the 40 basis points of cost of debt. So this means that our 10 million, 15 million, 16 basis points each year, so it's in line of our forecast.

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Operator [17]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [18]

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Okay. Thank you very much to everybody. Bye.

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Operator [19]

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