Ren Redes Energeticas Nacionais SGPS SA

ELI:RENE

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the REN's 2018 First Quarter Results Presentation Call. Today's conference is being recorded. At this time, I would like to turn the call over to Ana Fernandes, Head of Investor Relations. Please, go ahead.

[Ana Rosa Fonseca Pereira Fernandes de Matos, Head of Investor Relations]

Hello, everybody. Good afternoon. Thank you for joining us on this Friday for the first quarter results conference call. It's not a surprise that I'm joined by Rodrigo, Gonçalo and João as usual. Gonçalo will go through our presentation after Rodrigo's remarks. And then we will open for questions. Rodrigo?

[Rodrigo Jorge de Araújo Costa, Chairman & CEO]

Okay. Well, Ana, thank you very much. Good afternoon all. As Ana said, we're going through the first quarter results. As you had a chance to look, there is not any big news, any unexpected surprises as usual. Today and yesterday, we had a couple of very busy days. Yesterday, we had our Annual Shareholder Meeting. We had, I believe, a good meeting. We got the approvals in all the topics of the agenda. You will have to listen to us most probably for the next 3 years. And I think the shareholders are quite happy with what happened in the past 3 years and the way we delivered the business plan. And also especially 2017, it was, by any measure, a very good year.Following the General Shareholder Meeting, we had the first board meeting with the new board. Now we have 2 -- one board member was replaced, one of our Chinese nonexecutive board members was replaced with another one, also with the same type of background, an engineer on the electrical side. And we also had the pleasure to announce and confirm, because it was announced when we present the list, a new independent nonexecutive board member, Professor Manuela Veloso. She's a scientist. She is based in the U.S., in Pittsburgh. She's the Dean of the Artificial Intelligence area in the University of Carnegie Mellon. We are quite excited by having her joining our board. In fact, also today, it was announced that she's going to lead, in New York for JPMorgan, a new initiative on artificial intelligence. It seems that we spot a very good person to join us on the board. We're very glad about that new board member.Today, we had our Capital Market Day. Maybe some of you attended it, I'm not sure. The fact is, the presentations, they were posted in the regulator website at 10:30 a.m. this morning. We believe we delivered the presentations without surprises again as usual, same strategic pillars focusing a lot on good operation certainly in terms of service and cost, also with the usual financial discipline and control and new investments, according to our very, very strict rules to make sure that we are ready to another new good period and making sure we keep -- we are able to propose every year the same dividend. We also announced that we want to keep going with exactly the same dividend policy.And in a nutshell, I think this is what we did this morning. Again, we went through the -- a lot of the detail that -- the small things we can share. Of course, we also finished with a very good Q&A, where we had the chance to answer to a lot of questions. We are quite happy with the feedback we got during the meeting and after the meeting. And we look forward to deliver the strategy that it's very similar to the previous period.And with that, I will go back now to the quarter results and I will leave you with Gonçalo.

[Gonçalo João Figueira Morais Soares, Chief Financial Officer and Executive Director]

And hello, good afternoon to you all. Thank you for joining. So let me go through the slides. I'm on Slide #2 now. So in terms of the highlights, EBITDA was up almost 4% by EUR 4.7 million. It reached EUR 128.4 million. This is basically due both to the, I'd say, the positive impact of Portgás now being in the accounts. And this was, on the other side, counterbalanced by the fact that we already knew that remuneration will be coming up because not only of the revision of the regulatory framework but mainly because of the evolution of the rates. And so these kind of cancel each other out. But because of some things in cost that I'll go through in a little bit, EBITDA ended up going up. CapEx and transfers to RAB have displayed a positive evolution. But it's, I'd say, still very early on to make any kind of comment.Net profit stood at EUR 13.1 million. This is slightly below last year. And this is mainly driven by amortizations. The reality is that financial costs have been coming down at a very fast pace and have started to come down but, I'd say, at a slower pace, which then translates into this higher pressure in terms of net profit.As what you can see in financial results, they are actually slightly worse. I'll explain it to you. There's a nonrecurrent item that occurred last year that also tends to explain this. But this is also explained mostly by the increase in net debt. And apart from that, I would say that the other main event was that Fitch reaffirmed our rating of BBB with a stable outlook, which came out April 11 this year.In terms of Slide #3, results at a glance. We went over them. So EBITDA up almost 4%, net profit down almost 3%. CapEx was up. But as we say, it's not really at this stage very meaningful. And so let's look at what happened with the rates and why we are having this impact in terms of regulated assets. So if we go to Slide #4, it's very easy to see what has been going on. So we see that electricity base rate came from 6.5% to 5.2%. So it is a mix of these 2 things that I told you, not only the regulatory framework changed and is new. But mainly, you can see in the graph, the rates have been coming down. And then gas is the same. Although the regulatory framework is the same, the reality is that the rates trend pushed down and keep pushing down the regulated returns. On Slide #5, you see CapEx. So you see that this is going up but it already includes also Portgás, which is around EUR 4 million. We know that Portgás will have a CapEx of around EUR 20 million, EUR 25 million per year in the coming period. That being said, the fact that the other one is decreasing, we also have been telling you that CapEx should decrease this year versus last year without Portgás. But to be honest, this first quarter is kind of still kind of meaningless. But that being said, we know that this is the trend that we are going to see on a yearly basis.Slide #6. You can see the evolution of average RAB. So here, it's basically the Portgás evolution and acquisition that drives this increase from 1 quarter to the other. And the rest is, I'd say, is the normal one. You know that in any normal year, most of the CapEx is done at the last quarter. So normally in the first, second and third quarters, you tend to see a decrease in average RAB and then you tend to see that being compensated or not. In our case, as we said, this year CapEx is going to be below depreciation, normal CapEx. So you will see this coming down slightly.On Slide #7, you have both of these things put together. So on electricity, you have remuneration coming down because both of the RAB and of the rate. And mainly because of the rate, you see that it accounts for almost EUR 7 million. On the natural gas transmission, the same story. So it's mainly a rate story. But asset base also comes down a little bit. On Portgás, you see that you have a bigger negative impact from rates. But at the same time, actually that asset base is going up, so it compensates a little bit. And this is going to -- this slide shows very well the trend that you should see this year.In terms of OpEx, you see this increase of 21% but it's because of the inclusion of Portgás. If you take it out, OpEx will be coming down. The personnel costs that you see there, I'd say that is more or less the trend that you could expect on a yearly basis. External supplies now, this is -- you have several nonrecurrents in here. But the main one is the one that is signaled below in the notes. You have this transaction cost of Electrogas last year and they were incurred in the first quarter. The ones from Portgás are later on. But these ones were incurred in the first quarter. And so it makes this change. Even though, for instance, last year, we didn't issue bonds and this year we did, even though that, you have this decrease of EUR 1.5 million. So it's true that you should expect OpEx to come down even without the M&A cost. I think that this 2017 M&A cost will make it always to come down along the year. But even without those, you should expect OpEx to come down a little bit on a yearly basis.So you have then on Slide #9 just a further detail of pass-through costs. The only thing that we would add is that subsoil occupation levies, which are things that we have to pay and then repass to the end consumer in their normal bills at the Portgás, at the gas distribution line, okay? But we wanted to isolate it so that you understand that there is a new item here that you are able to understand exactly how all of these items vary along the year. On Slide 10, and you can see the summary of EBITDA. So basically see the first 2 columns are the ones that are more important. So EBITDA from Portgás and asset remuneration. And then the other ones, OpEx contribution has to do with this. You also have a lot of costs that typically come up later in the year. So I would say that this tends to be smaller in the future. There is one point, moving forward, that I want to point out to you is that asset remuneration now has only a few months is what we've noticed. And you've probably noticed that recent rates are lower than average. So we are noticing that, as time goes by if rates stay where they are, this tends to decrease the average. So it's normal that on the second quarter, we'll feel a little bit more pressure than we are feeling now and that it may become larger than the impact from Portgás, okay? So the rates were, I would say, slightly below what we anticipated. I think that's what everybody anticipated, slightly below. So it's putting a little bit more -- it's going to put a little bit more pressure. You don't see it yet because we are only doing the average since October, okay?Going to Slide 11 on below EBITDA. So depreciation is nothing much. What you see is the evolution of -- and the inclusion of Portgás again. On the financial results, you see this increase in cost. So I'd say that there're 3 impacts here. There's average debt that goes up because of the Portgás acquisition. There's the net debt -- the cost of net debt that comes down from 2.6% to 2.3%, which actually more than compensates this. And then there's again a nonrecurrent cost relating to Electrogas. It was a positive impact in financial cost last year of around a couple of million euros because of exchange rate gains that we had when we concluded the transaction, in that between concluding and paying, there was an exchange gain and that was around EUR 2 million. And that's why you see this worsening one. If not, you'd be seeing it. If you didn't have that, you'd see it improving around [ EUR 1 million ] or a little bit less than [ EUR 1 million ], even though net debt is going up, okay? And taxes, I'd say, same thing. As you know, we account for the levy 100% in the first quarter. And so this is what you are seeing here. And there's nothing new or unexpected tax-wise, I would say.So in terms of net debt and moving to Slide #12. We are expecting that net debt goes down this year. That being said, we are not expecting it to go down so much. The reality is that net debt at the end of the year was already a little bit lower than we anticipated. So we started the year at slightly below what we anticipated. There is, in this quarter, some working capital impact again. So I think that Ana then can go through with you in more detail if you want. As you know, it depends on the quarter and the years on, I'd say, on, for instance, we were talking about the business plan. On the business plan on a 4-year horizon, the impact is meaningless. But sometimes in any given year, it can be -- it can have some impact. And in this case, it's becoming positive but then an issue of also lower CapEx. And that is the story. But that being said, we do expect that net debt should come down during the year but perhaps not so much as it is coming down right now. And in terms of credit metrics, we are, I'd say, in a comfortable level of credit metrics, fresh off the capital increase. So I think that we are at the place that we plan to be, which is in the 11%, closer to the 12% in terms of FFO/net debt. So moving to Slide 13, just the result of why net profit is actually coming down. So what you see is that now you don't have so much of an impact coming from reduction of financial costs because those were anticipated. But you are still feeling now the impact in the rates that remunerate the assets. We anticipated that but now it's catching up with us, which is normal, I'd say, widening and tightening of this spread that occurs on a regulated [indiscernible]. So final remarks before moving into Q&A. I'd say that nothing out of the ordinary, pretty good, I'd say, quarter and sound financial numbers. And we have the story of cost cuts and lower asset remuneration. Apart from that, nothing much. We still are enjoying this extremely high corporate tax rate of close to 40%. It is what it is. We continue to fight, although there is no main news that we can share, I think, with you, apart from what we already told everybody on the Capital Markets Day today. And so I think this is perfectly in line with what we have in the budget and with the numbers we presented today in the Capital Markets Day. So thank you very much for listening. And now we'll open the floor to any questions we may have. Thank you.

[Operator]

[Operator Instructions] We'll take our first question from Carolina Dores with Morgan Stanley.

[Carolina Botacini das Dores, Equity Analyst]

I have two. One, it's on results. So I noticed that even though you've increased the RAB because of Portgás, the energy levy, the [indiscernible] value has not increased. I was expecting it to increase a bit. Is this because there's a waiver on gas distribution? If you can elaborate on that. And my second, if you don't mind, I have a follow-up on the Investors Day. On the contribution of the EUR 400 million investments of inorganic growth, Gonçalo, you mentioned that you expect a contribution of EUR 20 million on the EBITDA and that's towards the end of the plan. But what I had understood is that the EBITDA that you've given for '18 in '21, it's a range and not an average. So in a way, the EUR 20 million is the contribution of a full year of that investment of EUR 400 million. It's my interpretation, right. And I guess, a follow-up on that is that putting it another way, what is the earnings contribution in 2021 that you are expecting to have from the EUR 400 million of investments? This would be very useful, so we can isolate how much EBITDA and earnings are coming from the Portuguese business and how much earnings and EBITDA you're expecting from new businesses or inorganic investments.

[Gonçalo João Figueira Morais Soares, Chief Financial Officer and Executive Director]

So first question is because you don't see the levy going up in our case because as we structured and we bought the company, we are isolated from that amount for a certain amount of years. So we are not responsible to paying that amount in some years, okay? So that is why you do not see it there, okay? The second thing relating to the EUR 400 million, yes, EUR 20 million is the yearly impact of -- and I was referring to 2021, the yearly impact, it's around that figure that you have on 2021 of impact. It translates in terms of net income of, let's say, something like EUR 12 million, EUR 13 million, something like that, okay?

[Operator]

And we'll take our next question from Jorge Guimarães with Haitong.

[Jorge Guimarães, Equity Research Analyst]

I have two questions. Firstly, regarding your EBIT objective of EUR 475 million to EUR 500 million and trying to relate it with the free cash flow metric, how much of that would be noncash EBIT? And secondly, I would -- it would be helpful if you can clarify your view about the special energy tax because you apparently included the special energy tax in your earnings guidance after 2019, meaning after the end of the current government term here in Portugal. So it would be very helpful if you believe that you are going to pay after 2019 or it's just a matter of conservativeness. I mean, what is your view about this tax?

[Rodrigo Jorge de Araújo Costa, Chairman & CEO]

I will take the second question first about the tax. I think your point and your question about if we were being conservative, yes, that's the case because the uncertainty is so big at the moment. We have the case -- as I said before today, we had some hope that in a period of 3 to 6 months maybe the courts will have a first decision, we don't know. But it would be -- it would not come as a surprise if they decide in this following period of 3 to 6 months, I would say, before the end of the year. And then we will see and we will have to reset some expectations maybe on more -- on the positive side, maybe on what it is today. The way we draft our plan is we are keeping the case in the courts. We are keeping our concern in terms of the tax we pay or Gonçalo already mentioned that also in the call today. But we have to -- in the way we build the plan, we prefer to be more conservative. And you have to see it as a worst-case scenario in terms of what can happen there. We still believe that something will happen in that front. But there is not much we can really do. This is really on the hands of the government executives to decide what they want to do or not. And that will depend a lot on the decisions of the courts. And we always like to explain, this is an extremely complex case. This is -- we are talking about different cases with different courts. We are talking about different type of appeals we will be able to do also, depending on the verdict. And to be very, very straightforward, we have no visibility at this point on what will happen. We hope that it will be good sense. But this is a situation that it's well beyond our control. And we are just doing what we can do, which is to act through our lawyers in the courts. And I think we have a good case. Gonçalo, do you want to...

[Gonçalo João Figueira Morais Soares, Chief Financial Officer and Executive Director]

Yes, there's one question -- I don’t know if I got it all. But then Ana can kind of come back to you and give you a fuller answer. So the EUR 175 million you see there is the cash flow after CapEx and taking from EBITDA, the amount of EBITDA, which is noncash, is not a significant amount. It can be around EUR 40 million. But I think that Ana can go with you a little bit in further detail. But I want to make sure that I understand well your question and -- so that we gave you the proper answer. This is like capitalized salaries and things like this that are included in here. But then Ana will go back to you to make sure that we give you the correct answer, okay?

[Operator]

[Operator Instructions] We'll take our next question from Sara Piccinini with Mediobanca.

[Sara Piccinini]

I have actually just a few remaining. The first one is what is your assumption for the business plan about the gas remuneration from 2019? Are you expecting the regulator to align the remuneration for gas transmission to the one of electricity or you expect it to remain pretty much the same? And the second question is just on -- if you can give your guidance on the tax rate by -- until 2021?

[Gonçalo João Figueira Morais Soares, Chief Financial Officer and Executive Director]

The only thing we can tell you is that, of course, we are going to be -- and we cannot have a very specific answer to that question of the gas. And what we expect is that the framework is going to be stable. It's going to be in the same kind of logic. What you can expect, that the rates are going to be in the logic of how market rates evolve. I mean, you have a very strong historic of how the regulator looks at this, how they make rates go up a little bit and down as rates go down. So I mean, we cannot give you a very specific answer. But I'd say that you should not have a surprise. I think the regulator tends to be very stable and very kind of technical in this. The second question you asked is the tax rate. I think what we were considering, if I'm correct, and that is the tax rate that we have now, which is 29%. So that's what we consider. Typically, we tend to even have slightly below that. But in the business plan, and you can use that, we use the full marginal one, which is around 29%.

[Operator]

And it appears there are no further questions at this time. I'd like to turn it back over to Ana Fernandes for any additional or closing remarks.

[Ana Rosa Fonseca Pereira Fernandes de Matos, Head of Investor Relations]

Okay. Well, it's no surprise. I mean, we had lots of questions coming from the Capital Markets Day anyway this morning. So thank you for your patience for hearing us in the morning and in the afternoon. You know where to find me if you have any further questions. For now, I wish you a great weekend. And I hope to see you guys soon. Bye.

[Rodrigo Jorge de Araújo Costa, Chairman & CEO]

Thank you.

[Operator]

And that concludes today's call. Thank you for your participation. You may now disconnect.