U.S. Markets closed

Edited Transcript of SRG.MI earnings conference call or presentation 14-Nov-19 11:00am GMT

Q3 2019 Snam SpA Earnings Call

Milan Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Snam SpA earnings conference call or presentation Thursday, November 14, 2019 at 11:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alessandra Pasini

Snam S.p.A. - CFO

================================================================================

Conference Call Participants

================================================================================

* Emanuele Oggioni

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

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Harry Peter Wyburd

BofA Merrill Lynch, Research Division - VP and Junior Analyst

* Javier Suarez Hernandez

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Snam 9 Months 2019 Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Ms. Alessandra Pasini, CFO of Snam. Please go ahead, Madame.

--------------------------------------------------------------------------------

Alessandra Pasini, Snam S.p.A. - CFO [2]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, good afternoon, and welcome to Snam's 2019 9 months results presentation.

In the third quarter of the year, we have continued to make good progress on our plan. Investments in our core business are in line with our full year budget in a regulatory environment, [whole] stability has been confirmed by the final resolution on the fifth regulatory period for storage business. The duration has been increased to 6 years and EBITDA has been confirmed.

Meanwhile, we further consolidated our Italian footprint with the agreement of our 49% of Olt, a company which has been built and manages the offshore regasification terminal located circa 22 kilometers off the Tuscan Coast, between Livorno and Pisa. Closing is expected in first quarter 2020.

We are improving our capacity to deliver new regulated services to the Italian market where we have earned EUR 14 million, plus 40% compared to the same period of last year. We are continuing to cut costs, achieving in the first 9 months of the year EUR 45 million of accumulated savings since the program was launched. Our focus on the energy transition remains strong.

On sustainable mobility, we have already reached our full year budget with 74 third-party CNG and LCNG stations contractualized. Meanwhile, the long-term potential of green and low-carbon gas has been confirmed by the joint scenarios established by Snam and Terna.

Regarding our international sources, TAP is progressing well. It is circa 90% completed and reconfirm the COD at the end of 2020. The progress on the interconnection between TAP and the Italian grid is also progressing and is circa 25% completed.

The 1st of October, Teréga has announced that bondholder has consented to modify the total net leverage ratio of the company, creating the opportunity to optimize the capital structure. On Snam capital structure, in September, we launched a 500 -- 5 years 0 coupon note and a EUR 600 million 15-year note at 1%, essentially pre-funding Snam 2020 maturities.

Looking more closely at the results. In the first 9 months of the year, regulated revenues grew by 3.2%, driven by WACC increase, the growth in the asset base and the increase in the output-based incentives. EBITDA was up 4.1% as a result of higher revenues and the further effect of circa EUR 9 million related to our efficiency program, which has been launched in 2016. A portion of this increase, circa EUR 10 million, will be reabsorbed by year-end. It is mainly due to higher gas injected in the first 9 months of the year when Italian gas demand lowered by 5% and the postponement of some cost to the last quarter. Please consider that in 2019, the new businesses are still affected by integration costs and the launch of new initiatives, so they are not providing a contribution to the EBITDA.

Net income from associates was up 29.8%, mainly thanks to the contribution of DESFA and Teréga, which will be commented later on. Net income is up 9.3%, also benefiting from lower financial charges, leveraging on continued favorable market conditions.

EBIT in the first 9 months of the year was EUR 1.125 billion, up EUR 35 million over the same period of the prior year. This number reflects the increase in regulated revenues of EUR 59 million, mainly due to the increase in the allowed remuneration, tariff RAB increase and a gradual ramp up in regulated services for EUR 4 million. The effect of the cost-cutting plan that has delivered further EUR 9 million in 9 months 2019 and is expected to generate circa EUR 50 million savings by year-end compared to 2016.

Regarding the cost-cutting activities, let me underline some examples of this benefit. The insourcing of specific maintenance facilities for EUR 1 million, the automation of some IT processes that will deliver EUR 2 million and the replacement of obsolete IT devices with ones that are more efficient and has lower maintenance cost for EUR 0.5 million.

Other components gradually offset each other. They include negative, such as the higher costs for new initiatives and related integration, M&A cost relative -- the release of a provision in 2018 and higher variable cost that's mainly related to energy cost. And positives such as lower early retirements, higher sales of materials, the adjustment to IFRS 16 and lower capital losses.

Net profit for the period was up EUR 74 million compared to last year. On top of EBIT growth, this was driven by lower interest expenses of EUR 25 million, thanks to last year liability management exercise, funds were lower and treasury optimization carried out during the first 9 months. This was partially offset by the absence versus 9 months 2018 of the income from TAP shareholders loan. In fact, TAP has completed its nonrecourse financing at the end of 2019. The positive performance of our resources, driven by the trends realized already in the first half. These are: the acquisition of DESFA completed at the end of 2018, its performance in the first 9 months of 2019 has been driven by the surge of gas demand increase; DESFA contribution in full 2019 is expected to be more than twice as much as the acquisition budget and is expected to normalize going forward; the higher results of Teréga, mainly driven by the increase in asset base, lower depreciation related to the acquisition premium and the positive one-off effect connected to the release of a tax provision accrued in 2017 of EUR 6 million, which will be partially absorbed by a few million euros one-off charge related to the payment of the constant fee to Teréga bondholders. Taxes were higher due to a higher earning before tax. The tax rate for the period was 25.8% on EBIT, including associates versus 26.3% in the first 9 months 2019. The lower tax rate is mainly due to the increase of the share of net income arising from the contribution of the sources. On a full year basis, the previously indicated tax range of 26% to 27%, we now expect to be towards the lower end of the range.

Turning now to the dynamics driving our cash flow. Cash flow from operations for the period amounted to circa EUR 1.2 billion, considering EUR 146 million of negative income from working capital movement. Of this, EUR 180 million negative related to the payment in favor of Cassa servizi energetici e ambientali tariff, in order to regularize the overcharges and penalties cashed in, in the last years, minus EUR 85 million in tariff-related items, of which EUR 42 million additional target components and EUR 43 million due to overcharging and penalties. And a positive contribution of EUR 157 million related to taxes that will be paid in November.

The operating cash flow covered net investment and equity cash flow, mainly including the payment of the interim and final dividend of EUR 746 million, leading to a net debt at -- for the 9 months at EUR 11.9 billion. For the full year, working capital is expected to be essentially in line with guidance.

And now, let me give you an update on our debt structure. In the first 9 months, DCM and EIB funding amounted to approximately EUR 1 billion with an average maturity of 9 years and an average yield of approximately 1.3%. This replaced EUR 770 million bond at an average cost of circa 3.8 expired in first half '19. Thanks to the actions completed so far, we've been able to achieve a significant reduction in terms of cost of debt versus the same period of the last year of 30 basis points.

Moreover, in September, we completed a significant funding exercise for EUR 1.1 billion of which EUR 500 million at circa 5 years, the first 0 coupon issued by (inaudible) to achieve this target and EUR 600 million bond with a maturity of circa 15 years, the longest tenure ever issued by Snam so far. Thanks to this exercise, we have already almost addressed the funding need for 2020, whilst locking in today's very favorable market conditions.

On the banking side, you will note that we have achieved the target in the business with our EUR 3.2 billion sustainable loan. We're getting a discount of 2.5 basis points in the facility margin starting from April 2019. We have extended the maturity of the EUR 3.9 billion loans, out of which the EUR 3.2 billion syndicated just by 1 year up to July 2023, and December 2024 for EUR 2 billion and EUR 1.1 billion, respectively. And EUR 700 million bilateral term loan by 1.5 years at negative cost.

In the remaining part of the year, we will be focused on the following: continuous focus on treasury management optimization and optimization in our financial structure, including our sourcing.

Thanks to the actions completed so far and the continuous focus on utilization, we can confirm the guidance in terms of net financial charges we've been able to provide in July.

Thank you for your attention, and we'll now be pleased to answer any questions you may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Javier Suarez from Mediobanca.

--------------------------------------------------------------------------------

Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

I have 3. The first one is on the numbers. On Slide #6 and on the net working capital evolution, there is a negative impact of EUR 146 million. If you can share with us what that number should be by the year-end. That is on the cash flow statement.

And also on Slide #4, you are showing on the evolution of controllable fixed cost, EUR 6 million contribution from the ongoing efficiency program, where that number should be by the year-end? That is the first question.

The second question is on the regulatory development. There is -- the regulator has probably the final ruling on gas storage. As part of that confirmation of the WACC at 6.7% into -- in the period '19-'21, if you can share with us other information from that final ruling on gas storage that you think is important to highlight. And also, you have any -- if you want to share with us any -- your reading of the last consultation, document on regasification -- Olt regasification activity.

And then the third and final question is on the acquisition of Olt that you announced by the end of September. You can share with us the rationale for this acquisition and also the multiple that you are paying for 2019.

--------------------------------------------------------------------------------

Alessandra Pasini, Snam S.p.A. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Javier. So on the first question on numbers. On working capital, we essentially confirmed what we indicated in the past. So we indicated our year-end guidance of net debt was factoring circa EUR 100 million of negative effects from working capital. That's still the number we have in mind, so that's confirmed.

On the efficiency program, we will -- we are targeting at circa EUR 50 million, sorry, of overall efficiencies of our cost-cutting plan since the beginning of the start, so that's the number that I confirm.

When it comes to regulation on storage, I think that you are right. I mean, WACC, of course is -- and the detail one of the factor, I think it's important to remind that the length of the regulatory period has been extended to 6 years, which gives a lot of visibility, and that's clearly positive. The calculation of the tariff RAB has been confirmed and so methodology again, dismantling cost continue to be recognized and the OpEx 2020, calculated on the basis of related variable 35 year of 2019 has been confirmed and will be updated through the usual dry price cap mechanism. And I think the other important point is that the guaranteed factor strengthened to 100%.

So all in all, everything gives, if anything, more visibility to the storage business than it was before. When it comes to the other ongoing consultation, I don't think -- there's nothing specific to say. It's not that the consultation is progressing well. We've been having -- we are in constant dialogue with the regulator on this topic, but we are in the middle of it.

When it comes to Olt, I think the acquisition is important because we all -- we have access and exposure to all of the 3 infrastructure which brings LNG to Italy. In the case of Olt, clearly, it's regulated and differently from LNG, which instead is an exempted asset and therefore not regulated.

It's also important because it focuses on the possible contribution that LNG terminal can lead on small-scale LNG development. And so of course, we are working on it already on our existing terminal, but that's something that also characterize Olt going forward and so this is equally important.

I think, as you saw, we paid exactly the same price that the other future partner paid. With -- I think multiple is probably not the right way of characterizing this acquisition, but it's a multiple, which is accretive to us because it's a significant discount to where we trade at. But also, it's fair that we all know the regulation in the case of LNG is a guaranteed factor, so I think we are -- we paid an adequate price, we think, for that asset, which has a strategic -- give us a strategic opportunity to cover the entire market in terms of existing infrastructure in LNG.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question is from Enrico Bartoli of MainFirst.

--------------------------------------------------------------------------------

Enrico Bartoli, MainFirst Bank AG, Research Division - MD [5]

--------------------------------------------------------------------------------

The first one is relating to operating costs. If I'm right, in the third quarter, actually they went down significantly to last year, even considering the negative one-off that you had in the third quarter '18. So I was wondering if there were some seasonal effects or special effects there and if this trend can be extrapolated also for the fourth quarter.

The second question is related to associates. There have been a continuing growth in the contribution for our associates in the 3 quarters this year. It's reasonable to assume that this trend will continue also in the fourth quarter, considering also the reconciliation on DESFA?

The third one is regarding guidance. Considering the 9-month growth in EPS, which is almost double digit, the guidance, obviously, 7% increase for the full year is still reasonable? And in case, can you elaborate a bit why we should expect a slowdown in the growth in the fourth quarter? And then last one is, if it's possible to have the breakdown of EBITDA in the 9 months between transport, storage and other activities?

--------------------------------------------------------------------------------

Alessandra Pasini, Snam S.p.A. - CFO [6]

--------------------------------------------------------------------------------

So thanks. On operating costs, we did some phasing element that needs to be considered. So you should -- the 9 months had benefits from lower cost because some activities was postponed to the last quarter. Let's say, rough EUR 10 million number is constant, you will see coming up in the fourth quarter, which still, as usual, will be lighter in terms of overall contribution versus the full year. I think in our view, between 20% and 22% contribution to fourth quarter in general in terms of rising rate.

When it comes to associates, I think that, overall, you should assume some sort of, possibly talking about DESFA, normalization, i.e. the last quarter again will be lighter versus the first 3. In particular, there will be some tariff-related items. So 2 things worth remembering on DESFA for the last quarter: one, some tariff-related items; and two, as you will have seen, we have signed an agreement for the sale of all of the -- not just Snam, but also Senfluga, to the holding company that controls DESFA. The sale of 10% of our stake to a Greek investor, Copelouzos. We expect this to be completed by year-end and that, of course, will reduce proportionally the contribution of DESFA. So I think that should help in not assuming additional one-off, actually, normalization of some of the strong performance we have had in the first 9 months, particularly, as I said, around DESFA.

When it comes to guidance, we're not here to say anything different from what we said in July. So we confirm the 6% to 7% guidance in terms of growth that we gave you in July.

And in terms of breakdown in terms of transport and storage. I think, in the annexes, you do have some breakdown. That is what we usually provide for key assets and regulated and nonregulated costs, which I think is consistent with the illustration we always give.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question is from Harry Wyburd of Merrill Lynch.

--------------------------------------------------------------------------------

Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [8]

--------------------------------------------------------------------------------

Two questions for me, please. Firstly on, like you mentioned, there's an opportunity to optimize the capital structure there. So I see that means an opportunity to extract some cash from the business by increasing the leverage there. So have I understood that correctly? And what could be the quantum of cash that you could potentially release from that?

And then on Olt, just -- I don't know if you've mentioned this before, but could you just give us a guide to the overall level of net income or EPS accretion you expect from that deal? Because, if I understand correctly, you obviously book associate income on your stake, but you'll also book interest income on shareholder loans to the business. So if you could just give us -- help us understand what the income statement lines are that are going to be affected by that deal and then the overall level of accretion we should see more in an annualized basis?

--------------------------------------------------------------------------------

Alessandra Pasini, Snam S.p.A. - CFO [9]

--------------------------------------------------------------------------------

Thank you. So in terms of structure, since I meant 2 things: one, when it comes Teréga, we have carried out a consent exercise, which means that we may optimize the Teréga capital structure together with other shareholders, but this is not something you should expect this year.

When it comes to our capital structure optimization, what we mean is that everything we can do to benefit from the current positive market conditions is something that we will consider doing on our existing debt. So effectively, organizing tenure and cost for Snam, similar to what we have been doing over the past several years. So this is not necessarily extraction in cash, but optimizing our debt structure and costs.

So when it comes to Olt, I think that we will, of course, have a better sense of actual numbers when it would come in the course of 2020 and it's also a function of when we will be coming out -- coming into the company.

I think you will need to remember that the structure envisages a shareholder loan that is remunerated and so the contribution that this will give to Snam will be effectively given by 2 components. On one side, the remuneration of the shareholder loan and on the other side the contribution to net income. So I don't want to go into details that are not public at this stage as this transaction is not yet closed, but the overall return of this asset is consistent with what we yield on our regulated Italian asset bases. And the contribution that we will see going forward will be a combination of these 2 elements where, effectively, the shareholder loan component weighs slightly more or more than what we expect to make in terms of net income contribution.

As you can imagine, this is still subject to some city, and I don't think it would be appropriate for us to get into more disclosure vis-à-vis the actual number -- numerical contribution that Olt will give. But hopefully, this sale we're making a little bit -- if you look at the old numbers from here and you can make your own assessment of what the equivalent contribution will be for us going forward.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question is from Emanuele Oggioni of Banca Akros.

--------------------------------------------------------------------------------

Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [11]

--------------------------------------------------------------------------------

I have 2 question left. One is on Olt, but in term of I wonder if you could share with us the potential synergies you can extract from the company. And the second one or the second question is on Teréga, if there is any update on the impact based on the latest consultation document on your figures.

--------------------------------------------------------------------------------

Alessandra Pasini, Snam S.p.A. - CFO [12]

--------------------------------------------------------------------------------

Thank you. As it relates to Olt, we will step into an existing facility, which has a number of contractual arrangements for the operate -- the O&M of the company. So probably, operational synergies is something that may come more later on rather than immediately, but that's, of course, something that we will be working on. I think what is really important for us is more the commercial synergies, the fact that we will have a platform where the presence in all the 3 terminals operating in Italy in a time where cargoes number is increasing and that will allow us to optimize our strategy and effectiveness on small-scale LNG presence.

When it comes to Teréga, as you know, there is an ongoing consultation document, which has provided the possible range of WACC for transport business, 3.6 and 4.4, with a delta proposed of 50 bps of storage. Essentially, what is the vision look at is normalizing the cost of debt for lower risk-free rates, which we're seeing in the market and factoring a tax decree, which has been proposed, which envisages a lower corporate tax rate in France.

As you can imagine, we're in the middle of a consultation with regulation, we don't guide on what we expect. But factually, you can make the math if we end up in that range, what could be the implication for us.

We are positive the dialogue will be regulatory is constructive and there are a number of other items that are being discussed. So despite the perception that WACC would actually have an impact, we are still working with the company and our partners to try and offset part of this, which reflects the different macro environment in our numbers. But we expect the consultation to be still ongoing and the final decision to come by year-end. So it's not the right time for us to provide specific -- more specific comment on this.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Ms. Pasini, there are no more questions registered at this time. I'll hand the floor back to you for your closing remarks.

--------------------------------------------------------------------------------

Alessandra Pasini, Snam S.p.A. - CFO [14]

--------------------------------------------------------------------------------

Thank you very much to everyone for your time and attention.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

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