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Edited Transcript of IRE.MI earnings conference call or presentation 13-May-19 3:30pm GMT

Q1 2019 Iren SpA Earnings Call

Torino May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Iren SpA earnings conference call or presentation Monday, May 13, 2019 at 3:30:00pm 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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* Dario Michi

Fidentiis Equities S.V.S.A., Research Division - Analyst

* Emanuele Oggioni

Banca Akros S.p.A., Research Division - Analyst

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Roberto Letizia

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

* Sara Piccinini

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research 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 Group First Quarter 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Massimiliano Bianco, CEO of Iren Group. 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 first quarter results.

Starting from Page 2, I want to highlight the growth drivers that have characterized this quarter. In particular, the good results achieved in the networks and waste are attributable to the development of the strategic pillar, while the energy and market business unit have been affected in different ways by the energy scenario.

As far as the EBITDA is concerned, the increase in operating results have benefited from the energy scenario, which has had positive effect on the generation business, partially offset by negative effects on the supply. In more detail, the generation business has been characterized by higher hydroelectric volumes, a normalized scenario with positive price spreads, a recovering cogeneration thermoelectric volumes and a lower MSD contribution. Conversely, the energy scenario has (inaudible) margins in the supply side. In addition, the mild temperature recorded in the first quarter have led to a decrease in the heating gas volumes sold, affecting both business unit for EUR 10 million.

Organic growth in synergies continue to follow the path underpinning the business plan, in particular thanks to networks and waste businesses. The organic growth is supported by the investment made over the years, which positively affect the EBITDA for EUR 6 million. With regards to synergies, the strong result achieved in the past will encourage us to do our best to obtain further synergies in the coming years.

As far as consolidation is concerned, the positive results are composed of the contribution of ACAM, San Germano and Spezia Energy Trading. The full contribution of these companies will be reached in the next few years, thanks to the exploitation of all opportunities that caused synergies. This year, the contribution from these small companies will be lower than expected because of the presence of integration cost that will not be reported from 2020. In detail, San Germano will incur cost related to its disposal plants and waste indiscernible] in '19. CMT Company, a subsidiary of San Germano, will incur costs regarding the full functionality of its plants. Lastly, the results of Spezia Energy Trading are influenced by cost-related customer base integration and the commodity supply. Overall, we expect the contribution from these new companies of EUR 4 million, EUR 5 million this year that will go to EUR 8 million, EUR 10 million in 2020.

Finally, the EBITDA has been affected by negative nonrecurring elements equal to EUR 16 million reported in '18 in the energy and business -- and market business unit, mainly related to white certificate sales and balances. Below EBITDA, the results have been impacted by higher depreciation due to the acceleration in capital-intensive investment, plus 26.5% compared to last year as outlined in the last business plan and the depreciation costs related to acquired companies. The CFO will talk about these areas in more detail later.

Let's start the business unit section from Page 3 with the network sector that we reported ago an EBITDA of 6%, mainly related to the consolidation of ACAM equals to EUR 5 million of higher contribution only this quarter, which is consistent with the yearly contribution of ACAM consolidated since April 1, '18, expected to be around EUR 22 million in the Water business, thanks to the implementation of U.S. best practice and synergy extraction. On top of this, the increasing RAB, plus 4% compared to full year '18 thanks to higher investments, plus 12% in the first quarter '19, allowed for higher regulated revenues. The positive effect of each equals to EUR 2 million has directly reflected in margin. The investment planning for the next few years, mainly in the water cycle, will enable to go our (inaudible), favoring a more stable operating cash flow and a more visibility on margins. As far as the outlook is concerned, the same organic growth trend experienced in this quarter is expected to recur during the year, allowing for a slight increase in the full year '19 EBITDA compared to last year. On top of this, the positive effect of the consolidation of ACAM reported in first quarter, which will remain constant throughout the year.

Moving on the waste sector, Page 4. The 15% growth reported in EBITDA is the sum of several effects. Firstly, the organic growth achievement is due mainly for the lack of our ability over a landfill in the first quarter '18, while today, we can exploit the entire capacity of the plant. The positive effect is not repeatable in the remaining quarters of the year. The organic growth has also benefited from higher waste quantities managed, plus 30% compared to the same period in '18 and disposed in our plants, in particular the special waste treated, which grew by 23%. The higher volumes have contributed to the achievement of plants' situation with a consequent increase in waste-to-energy electricity sold, plus 23%. The waste management increase in the first quarter '19 is mainly related to the consolidation of ACAM since April 1 of last year and San Germano since January 1 of this year. They contributed in this quarter for roughly 100,000 tonnes. As I said before, in '19, the group could reach the full contribution of ACAM with an expected EBITDA in the waste business over EUR 3 million.

As for San Germano instead, we expect in '19, an EBITDA equal to EUR 4 million; and in 2020, a contribution of EUR 6 million, thanks to the restarting of the plants, waste and the extraction of synergies. At the present, the percentage of sorted waste collected is equal to 65.5%, an increase of 1.3% compared to full year '18. With the acquisition of San Germano, now our group serves roughly 3.3 million of inhabitants in 350 municipalities in the waste collection business.

As far as the outlook is concerned, we expect consolidated increase achieved in the first quarter, which make us confident to reach our '19 EBITDA slightly better than what was reported in '18. The development of door-to-door collection in the city of Turin will lead to higher cost, which will be recorded only in 2020, and the disposal plant separation will allow us to keep the operating margin cost down during the year.

Moving to Page 5. It's important to analyze the main drivers which enabled the energy business unit to grow. Hydro generation despite a dry quarter has benefited from higher volumes and full price compared to last year and the sale of white certificate with another positive results of EUR 6 million.

Cogenerative and thermoelectric generation had 2 opposite driver. Firstly, higher production volumes, thanks to lower reported electricity. Secondly, despite the increase in CO2 cost, the group reported an increase in spark spread of plus EUR 4 per megawatt power compared to the first quarter '18, which led to EUR 12 million EBITDA increase. This positive trend has been partially compensated by the lower contribution from the MSD market that reported a result of EUR 9 million, minus EUR 10 million compared to the same period of last year.

As far as heat generation is concerned, the sector has been impacted by higher heat spark spread, thanks to the developing gas cost. The positive contingent effect of the increasing margin has been partially compensated by lower heat volumes distributed due to the mild temperature recorded in the period that have negative effect on the margin for about EUR 5 million.

I would like to highlight the significant increase in CapEx, plus 67%, related to the development of distributing networks and the plant maintenance costs scheduled to improve efficiency.

In addition to the generation scenario, it's important to note the absence of the contribution of white certificate sale for about EUR 14 million reported in the first quarter '18, from in part of the EUR 60 million reported in the first half of '18. This negative effect has been partially offset by other positive elements equals to EUR 6 million.

As far as the outlook is concerned, excluding this extraordinary sale of white certificate recorded in '18, we expect our result in line with the past year despite the expire of green certificate equal to EUR 32 million and an ordinary hydroelectric production. We expect also the positive spark spread will persist during the year, along with the MSD market normalization.

The last business unit to examine is the market sector, Page 6, where we find a reduction in operating results due to different components. First, the lower gas volumes sold to end clients is mainly due to the mild temperature recorded in the first quarter '19, which led to a negative performance for about EUR 5 million. The high volatility of commodity price characterizing the last 6 months, strongly bullish in the fourth quarter '18 and strongly bearish in the first quarter '19, led the group to implement in the short term a hedging policy aimed at fixing '19 margins in advance for the commercial activity.

The decrease in unit margin affected both electricity and gas sectors. The first has suffered the higher PUN price in the face of [block] and sales prices, reporting a lower result of EUR 1 million. The gas sector did not benefit from the drop in gas price due to a hedging policy aiming at margin stabilization causing a negative result for EUR 5 million. On top of these scenario variables, there were further reduction in margins due to the absence of positive balances related to the commodity task for charges equal to EUR 8 million reported in the first quarter '18, equally splitting the 2 sectors. Despite the negative scenario, the active commercial policy implemented in recent years and the expansion of high value-added services offered led to a further increase in our customer base, now standing at around 1.8 million clients, plus 6% compared to last year.

The contribution of Spezia Energy Trading acquired in September '18 was negligible within this quarter equals to EUR 0.2 million. Because of higher costs related to the customer bill integration and the commodity supply, we expect a company contribution of about EUR 2 million in '19 and EUR 3 million in 2020.

As far as the energy value chain is concerned, the volatility of the energy scenario has been managed by balancing the risk across the entire value chain. On one side, the drop of gas cost led to negative result in the market division due to a conservative hedging policy combined with the gas volume reduction, lowering the possibility to get some opportunities on uncovered sales. On the other side, the gas cost reduction has led to higher margin in this repeating, thanks to lower gas equivalent cost and also to improve the generation spot price.

As far as the outlook is concerned, we expect a recovery in margins, in particular in the fourth quarter '19. The full year '19 EBITDA of market business unit will be in line with the '18 recurring results, close to EUR 100 million, thanks to the repricing policy and an updated hedging activity, which we enforced from April despite a negative thermal impact of EUR 5 million and residual effect on margin of EUR 15 million. It's important to point out that the last 2 temporary elements are expected to be recovered next year.

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, Massimiliano.

Going to Page 7, the chart show the results from EBITDA to net profit. EBIT stands at EUR 171.7 million (sic) [EUR 171.8 million]. The slight decrease of EUR 5.5 million is due to the growth of depreciation and amortization from EUR 86.7 million to EUR 97.7 million, roughly an increase of EUR 11 million, mainly related to the growth of fixed asset to this change on the scope of consolidation to the company outcome in San Germano and lastly due to the IFRS 16 accounting standard application.

Provision to bad debt stands at EUR 4.7 million, a slight reduction compared with 2018. The forecast of the provision for the full year 2019 should be roughly EUR 40 million.

EBT stand at EUR 151.9 million. It showed a slight decrease of EUR 6.1 million in spite of the reduction of the financial charges for bank loans that stand at EUR 16.7 million, and they decreased by EUR 0.4 million due mainly to lower cost of financial debt. Other financial charges stands at EUR 1.76 million and show us a result of EUR 1.5 million mainly due to the IFRS 16 effect.

The net profit of the company consolidated using the equity method stands at EUR 0.1 million. There is an improvement of EUR 0.5 million compared with 2018. The reason is that it's no longer included in the company consolidated with equity methods and now is classified as available for sale, and in 2018, both had losses for EUR 0.9 million.

The group net profit decreased by EUR 3.3 million. The tax rate had a slight reduction from 30.5% to 29.8%, but the forecast for the tax rate for the full year 2019 is in the range of 30%. Minority was EUR 6.6 million, and they are stable.

And now let's move on to Page 8. You can see the cash flow and the net financial position. The net financial position at the end of March 2018 shows a reduction of EUR 33 million from EUR 2,453 million to EUR 2,420 million without considering the effects deriving from the application of the IFRS 16 accounting principle that adds a significant impact of EUR 105 million.

Now I would like to focus on these topics, the application of IFRS 16 as effects on EBITDA, depreciation and financial charges but, overall, the impact on net profitability around. In this quarter, we reported a positive impact on EBITDA equal to EUR 3 million and a negative impact on depreciation for about EUR 2.2 million and on financial charges for EUR 0.8 billion. We expect that the effect reported in the first quarter will be applicable in each quarter of 2019.

Coming back to net financial position, the positive result is due to higher cash flow. If we consider the sum of net profit, depreciation and provision, the cash flow has an increase of EUR 20 million.

The net working capital showed that there is a slight growth of EUR 14 million. The total investment were EUR 86 million instead of EUR 68 million in 2018, so we had an increase of EUR 18 million. The consolidation process, in particular San Germano for EUR 27 million and Busseto for EUR 4 million contributed to higher financial debt for EUR 31 million.

Derivative played a negative role in the net financial position for EUR 42 million. In retail, derivatives affected negatively the result for about EUR 11 million. And in the same way, the commodity derivatives contributed to higher financial debt for EUR 32 million.

Going to Page 9. You can see interest rate and debt structure. The first pie chart on the right represent the breakdown of those debts. As you can see only 10% of the gross debt is at a variable rate. The remaining 90% is fixed rate or hedged with swap. The average duration of long-term debt is 5.2 years, and it was 5.6 years in 2018. The cost of debt is 2.6% instead of 2.9%. A significant reduction by 10%. The reduction is then, of course, to the liability mentioned did last year, and this is in line with our expectation.

The second pie chart on the right represent the breakdown of the debt structure. The pie chart showed that the Iren total gross debt is formed by bond for EUR 63 million, represent also to the last year -- last issue in 2018 of the second green bond, and the same percentage in 2018 was 57%. The other financial sources are in EIB funds for 25% and loan from banks for 12%. And lastly, we still -- we have the liability offer, EUR 150 million from the EIB funds.

Now again, back to Massimiliano.

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

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Thank you. As far as the closing remarks are concerned, we move to Page 10, I want to highlight the main driver of our business model that have allowed us to reach positive results.

Firstly, the integrated energy supply chain allowed us to manage the market volatility.

Secondly, Iren's well-balanced business portfolio with approximately 74% of the margins coming from regulated and quasi-regulated activities allows us to generate an operating cash flow, which enable us to implement the investment plan in our business plan.

Thirdly, the investment made in the last few years have supported not only the organic growth we reported this quarter but will also have positive effect in the coming years.

Fourthly, '19 will be a transitional year. We are working for that to do but with larger-sized sustaining higher cost -- structure cost, necessary for the achievement of the business planned targets.

Lastly, we have been carrying out some M&A transaction on the small size that will fully contribute to the EBITDA starting from 2020 onwards. In order to sustain our external growth path, we are launching tomorrow our treasury share buyback program with a first tranche of EUR 20 million.

As far as the guidance of '19 is concerned, in line with our business plan target, we confirmed the last vision on EBITDA at range EUR 880 million, EUR 890 million. Despite the negative climate effect, we are confident to reach higher level of the range. Investment debt EUR 570 million and net debt-to-EBITDA ratio at 2.9 considering the negative impact on the implementation since January 1, '19 of the accounting method, the IFRS 16, affecting the net financial position for about EUR 100 million.

Thank you for your attention, and now we can start the Q&A section.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Dario Michi of Fidentiis.

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Dario Michi, Fidentiis Equities S.V.S.A., Research Division - Analyst [2]

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The first one is on the guidance you have just provided for the market vision results to be in line with 2019 calendar figures. I was wondering if you could please detail how this figure compares with the target announced in the latest business plan of EUR 131 million for 2021 and in the former business plan, which is pointing to EUR 127 million that's for 2020.

And then if you could please add some details on the implementation of the buyback program for the EUR 20 million you have just mentioned.

Thirdly, an update on M&A activity with reference to [Chibua] and Ascopiave, if any news.

And lastly, on the old terminal, how is proceeding your scouting activity for the hypothetical sale of the terminal to a third party?

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

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Thank you for your questions. So about the guidance on market business unit, as I said before, you are to consider for the current year '19 results will be in line with what we reported last year without the -- looking only at the recurring elements, so close to EUR 100 million. Then we have to consider that this year, we have right now some other impacts, the EUR 5 million related to a very mild temperature that occurred in the first quarter and then other impact that are mainly related to our hedge policy in the range of EUR 15 million. So you are to consider a sort of normalization that is our for the market business unit in EUR 120 million for 2020. On top of this, you have to consider the, let's say, organic growth that is related to growing our customer base with respect to be consistent with what we did in the last year, so 30,000, 40,000 clients per year. So considering this, we confirm our target for market business unit.

About buyback, we'll ask Massimo, our CFO, but first I would like to answer to your question on M&A activities. As you know, we are firmly committed in continuing our path of growth also on external growth on the M&A side. We expect to announce a small deal in waste in the next days, and we are -- we still have a very significant deal list we are working on for small-sized deals.

About [Chibua], we know that the region has approval in the last week, a sort of resolution that ask the regional government to propose to the council or the region the IPO or sort of law that will allow for the IPO of Chibua . But any case, we are still confident that we will have a chance to discuss a sort of our proposal that we did at the beginning of this year that is a sort of joint venture that we aim to control in renewable energy. So we are still confident even if the region said -- asked the government of the region to work on law for the IPO.

About Ascopiave, we are interested in the opportunity, and we did in weeks -- in 1 month ago if I can remember, our nonbinding offer for that.

About royalty, we are continuing to work in order to understand if there are better opportunities compared to what we still have. And we will have until the end of September that is to exercise our option to sale, to first state our stake at the same condition that (inaudible) did. And so we have time in the next 3 months to understand what is the best option to exercise for this transaction.

Massimo, about the buyback?

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

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Yes. About the buyback, it is -- the execution of the buyback, we have already announced a few weeks ago, and we have issued a few minutes ago the press release. And Iren has granted the mandate to Goldman Sachs to coordinate and to secure the first tranche of the buyback program on behalf of Iren and in order to make the trading decision related to the [problem of segregation] and full independence from the company for a maximum amount of EUR 20 million. And this program will be completed within 6 months starting from the 14th of May 2019, so tomorrow, starting from tomorrow.

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Operator [5]

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The next question is from Enrico Bartoli of MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [6]

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The first question is related to your hedging policy. My interpretational results is that, actually, you have had your procurement in terms of gas for the market division, but you're quite free on the power generation division. I was wondering if this is correct interpretation and if this is going to continue over the next quarters and particularly if the expansion of the margins that I understand you're expecting for the second half of the year in the gas market division is due to the fact that just back the rollover of the contracts we signed our clients and then the recovery on marginality on prices.

Second question is related to the power generation business. You had an increase if I'm -- I calculated well of hydro production in the quarter, while in the system, it was significantly down. If you can give us some explanation of this and what you think that is going to be the evolution of hydro production next quarters. And still on the power generation, I guess you didn't have any impact from the expected expiration of green certificate this year. If you can remind the amount and when you expect that to start to have an impact from this.

The last one is related to financial charges. Actually, they were more or less flat compared to last year with a reduction of the cost of debt as you indicated. First of all, if you can give us the impact of IFRS in the quarter and what you expect for the year, if there were any one-offs in the figure that we see and if it would be correct to multiply by it 4, the EUR 20 million that we saw in this quarter.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [7]

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Okay. Thank you for questions. So about hedging, it is correct. We hedge our portfolio sale, so both retail and business sale, but we have more opportunity in the generation about gas procurement. So it is correct, and we will be taking the same -- we will have the same policy for the forthcoming months.

About the recovery on final clients and clients, we expect that the repricing that we finalize to do in these months will have a material impact in the second half of this year, mainly in the fourth quarter because also the higher volumes, so we expect to recover margins in the fourth Q because of this.

About, yes, hydro generation, we had an increase in volumes, and of course, we had the opportunity to use also our capacity storage in reservoir. So what we can expect for the full year production, close to right now 1.3 terawatt hour for '19. So let's say 1.5 or 0 or 1 5 0 2 minus 10, what we did in '18.

So about the expiration of green certificate, it started in February of this year, and the impact on the '19 will be EUR 32 million and a bit more starting from next year.

Massimo, can answer you on the financial charges.

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [8]

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About the -- yes, financial charges, we think that there are several questions. First of all, there are no one-off item on the first quarter financial charges. So if you multiply it for 4, you could estimate the full year financial charges.

As far as the IFRS 16 is concerned, I confirm that the major impact is on the financial indebtedness for EUR 105 million.

But the impact is very low on the profit and loss. It's very low because in the first quarter, we have a positive impact on EBITDA equal to EUR 3 million and the negative impact on depreciation for about EUR 2.2 million and a negative impact on financial charges for EUR 0.8 million. We expect that this effect for the first quarter could be applicable also in the next quarter 2019. So you can multiply by 4.

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Operator [9]

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The next question is from Roberto Letizia of Equita SIM.

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

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I would like to go back on the guidance and the guidance on EBITDA, EUR 880 million, EUR 890 million. Want to be sure that these numbers -- whether the numbers include or exclude the EUR 12 million in positive impact at EBITDA level from the IFRS 16? And what is actually is waiting -- in case they are included what else is waiting on the results on the full year base against the market division as you indicated? But just can you please clarify how the IFRS 16 impact on EBITDA account on the guidance, please?

Would like to have possibly an indication on the trend in the second quarter. Because I guess the second quarter is going much better in terms of hydro and rainfalls.

Would like to understand whether your indication of 1.3 terawatt hour, for example, already includes the trend in the first part of the second quarter, which I guess is going better.

And I want to understand if the market division already will benefit probably in the second quarter from also temperature that have probably caused some increase in the gas and heat consumptions. Want to understand if this is happening or not.

And you mentioned the M&A that you are probably going to close soon the small deal part. Can you please indicate to us in case all the negotiations you are currently taking ahead for 2019 in terms of M&A what could be the full year impact from the external growth potential?

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

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Okay, and thank you for your question. About guidance, I confirm what you say that the impact on EBITDA includes -- or the guidance include the impact on the EBITDA of IFRS 16.

About second quarter, it's not so easy right now to say what's going on for sure. There has been in these days a better situation in terms of volumes of water for hydro generation. And because of this, we can expect, of course, a better situation what -- compared what -- with what we said 1 month ago about fully -- in the conference call for the full year. But we have also to consider the positive result in the first Q about hydro production is also related, remaining green certificate in the first 40, 45 days of the year that allowed us to use as much as possible our reservoir in order to produce electricity. So we cannot have a material impact at least, and we do not expect right now a material impact for what in the last 1 month. So we can't confirm 1 point -- close to 1.3 terawatt hour of production, and we expect overall on the year including the green certificate minus EUR 15 million in the hydro production.

About the colder temperature that we had in the last 2 weeks, of course, this could allow for a small positive impact, but we do not expect a material change because the consumption that we used to have in March is totally different than the consumption that you can have if it is cold at the end of April of -- and the beginning of May. So we can assume very few millions of positive impact of this but not more.

About M&A, as I said before, we expect to finalize a very small transaction about a plant in the waste business unit in the -- for coming days, but it will be very important for our strategy going in plants but not materially, especially in the short term on figures. So right now, what we can confirm is what I said before about the contribution of EUR 4 million, EUR 5 million from consolidation for this year, but all of them related to the already done transaction. And right now, it's too early to say that it will be something more during this year.

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

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But let me -- sorry if I interrupt you, but let me ask you better because I know -- I'm not asking for a specific name or specific situation, but just like to understand if the deal flow, in general, whatever names are included in this deal flow, that potentially can happen during 2019 has a reasonable interesting high, low value or even 0 because probably you already know that the deal flow currently has no potential contribution, no potential or additional contribution this year. Can you clarify these topics, please?

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

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Yes, of course. Excluding large transaction, as we mentioned before, that could be [Chibua] or Ascopiave or whatever of that size. But including only the very small deal we are working on, we can assume that we are working on several million, let's say, EUR 20 million, EUR 25 million of potential EBITDA. But right now, it's impossible to say what is the probability to finalize them. So we are still working on a large number of opportunities, but right now, we are not confident. But one that we will announce in a few days, we are not confident to finalize in a short term the one of that.

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Operator [14]

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The next question is from Emanuele Oggioni of Banca Akros.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [15]

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The first one regards the gas generation business. Could you give us some details on the MSD outlook in the -- for the full year and also for the Q2 and also about the spark spread evolution?

And then as regards to the M&A activities, I wonder which could be the maximum financial leverage in terms of net debt on EBITDA in case of a big deal for sure?

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [16]

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Okay. Thank you for your question. Starting on your question about M&A. As we said in the -- in our business plan, we are very confident right now in a leverage level of 3x net debt to EBITDA. Of course, we expect to be close to that value by the end of this year because our strong increase in CapEx that we are pushing. But in any case, we are -- we think that if it will be a significant transaction, we can also overcome this level in the short term. So it's not easy to say what is the level that we can reach in this case. But for sure, looking at the opportunity we are working on right now, we can say that we can afford all of them. And if I look at the transaction we are working on of a larger size, even in that case, we think in the -- let's say, the transaction scheme that we are working on, we can afford also them without any other support on equity. About the...

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [17]

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Excuse me. Excuse me. I think the correct ratio would exclude the IFRS 16 in terms of debt. So without it, we are you considering the accounting impact of EUR 100 million within the debt?

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

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We -- in our guidance for this year to point now, we include the impact of IFRS. So to the point now that we expect by the end of this year includes the impact of EUR 100 million of IFRS 16. So right now, it is not anymore an issue, the IFRS 16. So we include that in our guidance, in our thinking about the capital structure or the build.

About the MSD outlook for the year. As I said before in the first Q, we had a very poor contribution compared to last year, EUR 9 million compared to close to EUR 20 million last year. What we can expect for the full year is something, let's say, in a range of EUR 50 million contribution of MSD that is much lower than what we had last year that was roughly EUR 80 million.

In terms of spark spread, on the other side, we expect a higher contribution because of last year. As you remember, we had a very, very poor contribution from the spark spread side and volumes. What we expect this year is to have a contribution in terms of spark spread of EUR 6 or EUR 7 per megawatt, more than what we had last year, of course, with higher volumes because of the positive spark spread.

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Operator [19]

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Our next question is from Sara Piccinini of Mediobanca.

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Sara Piccinini, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [20]

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I have 2. The first one is on Slide 8, on the working capital. It's EUR 14 million, so it looks minimal in this quarter. If you can explain the dynamics behind the actions that you've taken to contain the working capital and if you have an expectation by the year-end on the level of working capital.

And then the second question is on synergies. If I remember correctly, at the latest results presentation, you say that for this year, the level of synergies in the guidance should be EUR 10 million, slightly lower than in the past at EUR 15 million, EUR 20 million. Is this related to the integration costs that you were mentioning in the presentation? And also, if you see from 2020 an acceleration of the synergies, if you can provide any color on this.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [21]

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Okay. Thank you for your questions. Starting from your last question, synergies. I confirm that our guidance expectation for this year is EUR 10 million. And this includes, of course, integration costs that I mentioned in our presentation before and as well includes the cost that we have -- that are related to the, let's say, bigger size of (inaudible) in order to achieve our target in the business plan. So '19 in this sense will be sort of a transition year on synergies. Of course, if we will not change our permit, we can only confirm the synergy that we already have in our business plan. But the work we are doing will allow if we will be able to increase our permit with the M&A and the consolidation process, that the work that we are doing will allow for further synergies in the transactions.

About your question on working capital, please, Massimo?

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [22]

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Yes. Very good outperformance of our working capital, is very good this quarter. We think that we can keep under control our working capital also in the next quarter. Of course, we have to consider the increase of revenues. In the first quarter, there was an increase of about 20%. So we could have some increase in some figure. But we are also considering the [seasonality] of working capital. But in general, we are very confident to keep at a low level the working capital by the end of the year.

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Operator [23]

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The next question is from Enrico Bartoli of MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [24]

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A few follow-ups. First of all, you provided a guidance on EBITDA. Can you spend a few words on net profit? If I remember well, you were expecting lower than EUR 250 million, if this is confirmed. And if you can give us a hint if you expect it to be higher or lower than in 2018.

Second question is regarding the D&A and evolution for the next quarters. There was obviously an impact in the first quarter from the consolidation of ACAM. I would say probably that this is going to slow down over the next quarters, if this is correct. And I understood well that actually provisions are going to be around EUR 40 million, so a significant reduction to last year. So if you can provide some guidance on the evolution of D&As over the next quarters.

And the last one, the new board of the company. There is a member coming from Anu Genova, if you can update, if there are any discussions regarding some possible agreement over a joint venture with a company for the waste treatment there in Genova?

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [25]

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Okay. Thank you, and so about -- every time I start with the last question. The new board, yes, we have a lot of new Board Members. On Anu Genova right now, there aren't any discussion about, let's say, the integration of Anu Genova with Iren. And the mayor of Genova said a few days ago again that he's not interested in sort of a combination with other players.

In any case, we are working hardly on the plans that Liguria and Genoa need in order to recovery and dispose urban waste in the whole region, and we expect also to present the proposal for new plants as we did 1 month ago for La Spezia that we present a new project for a plant for the treatment of organic waste. We expect to present a new proposal also for Genoa in the -- for coming days in order to have an overall capability to manage the system of recovery and disposal in the urban waste in Liguria.

About D&A, please Massimo?

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [26]

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Yes, about D&A, it's correct. It's -- next quarter, we expect a lower increase because of the consolidation of ACAM that's already had effect in 2018, so it's lower.

About provision, EUR 40 million roughly is our forecast, but you have to say that it's quite stable compared with 2018. Because in 2018, there were in this item also other item, not for bad debt or for other industrial waste. Now we started -- starting from the previous quarter to reclassify the provision, including provision for bad debt, only bad debt. In fact, we changed the definition. Now you can see provision for bad debt without other elements of provision. So you can say that -- I can say that in 2018, the provision for bad debt was EUR 43 million, and that we forecast that would be roughly the same in 2019.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [27]

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About our guidance on net profit, I say that we cannot give a guidance because it's too early for us to understand. But we can say that we expect to be in line with last year, and we can assume that we will be in region of EUR 250 million.

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Operator [28]

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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 [29]

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Yes, very briefly. Can you please remind us what is going to be the EBITDA accretion in 2020 that you expect from the EUR 570 million of capital expenditure that you are going to realize this year, please?

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [30]

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Thank you for your question. It's quite difficult to give an answer where -- we can assume from EUR 5 million to EUR 10 million. But for sure, it is better if we will check these figures, and our investor later will give you the right number. But we can assume right now, EUR 5 million to EUR 10 million.

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Operator [31]

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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 [32]

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Okay. Thank you very much to everybody, and see you soon. Bye.

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Operator [33]

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