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Hello, this is the Chorus Call operator. Welcome to the presentation of our results as of the 31st of March, 2018, for the ACEA group. [Operator Instructions]
You will now hear from Mr. Giuseppe Gola, the CFO of ACEA. The floor to you, Mr. Gola.
Good afternoon, everyone, and welcome to the conference call for the presentation of the Q1 2018 results of ACEA group. First of all, we're presenting results that are very good, at least in line with the guidance we communicated with the results of 2017. Should we go to Page 2 in the presentation, you'll find the financial highlights. And in particular in the first quarter of 2018, the ACEA group produced revenues -- consolidated revenues for EUR 745 million, up 2.7% as compared to the first quarter last year. EBITDA is EUR 229 million, plus 6.9% compared to last year. And let me remind you that our guidance then for full year 2018 was a growth anywhere between 3% and 5% over 2017. And of course today, we are actually in the higher range of the guidance. The EBIT is EUR 127 million, plus 8.7% and the group net profit is EUR 77 million, i.e. plus 17.8% over last year. As far as CapEx is concerned, it's pretty constant. CapEx now stands at EUR 133 million, up 5% over last year and in line with our guidance. Net debt stands at EUR 2.482 million, up 2.5% as compared to the end of 2017. And here again, as we'll see in detail, is perfectly in line with the guidance we communicated, which means that the net debt at the end of 2018 should stand anywhere between EUR 2.6 billion and EUR 2.7 billion.
Should we switch to the following page, here you'll see the main growth driver for EBITDA. EBITDA for Q1, well of course, one major growth driver comes from the 2 regulated businesses, in particular, we see a growth of EUR 7.9 billion for water and a growth of EUR 11 million for energy infrastructure. Energy infrastructure includes a nonregulated component, meaning the production of energy. So EBITDA is accounted for at 77% (sic) [ 76% ] by regulated businesses and the remaining 24% comes from nonregulated businesses. 41% is the percentage both for water and energy infrastructure, then come commercial and trading, environment, overseas and engineering and services.
The following Page does show data by business area. In particular, Page 4 shows the water performance. EBITDA growth by 8.9%, up to EUR 96.4 million as compared to EUR 88.5 million in the first quarter of 2017. An important factor comes from the consolidated holdings using the equity method. So holdings in other water companies where ACEA has relevant stake. In particular, the profits from companies consolidated using the equity method now stands at EUR 7.9 million as against EUR 4.9 million last year. The main growth drivers are ACEA ATO2, up by EUR 3.8 million in particular because of tariff effect. And the companies consolidated using equity method, as I told you there, again quite relevantly. And this is mainly due to Acque [indiscernible] in Tuscany. The CapEx for the water at a EUR 67.3 million, up 18.7% compared to the last year.
Following page, this is the area that contributed to the growth of EBITDA most of all in the first quarter. And I'm referring to energy infrastructure. EBITDA increases from EUR 83 million last year to EUR 94.4 million in the first quarter of 2018, up 13.2%. In particular growth comes from distribution, EUR 9 million more. And we can actually say that those EUR 9 million -- well about EUR 7.5 million of those come from the energy balance and the EUR 7.5 million are mainly due to the update of tariffs. And so this includes a structural effect on 2018 for about EUR 2.5 million, plus the effect of recovering rates vis-à-vis 2017, which accounts for nearly EUR 3 million.
EBITDA also grew thanks to generation EUR 1.2 million more. And in here we posted an increase of thermal and hydropower, also because the Tor di Valle facility is now back to full capacity and operations. And also because the hydropower increased -- production increased also because the first quarter this year was very rainy. Then public lighting is improving its performance by EUR 0.9 million as an outcome of the completion and continuation of the LED plan we started in June 2016. As far as business indicators are concerned, the average workforce is pretty stable, the number of end users too, whereas the total electricity produced is increasing.
Commercial and trading, the EBITDA here is stable at EUR 23.4 million, that's a tiny little bit of growth compared to last year. And this little growth is due to offsetting the reduction of energy sold, thanks to the increase in the sales of gas and gas customers served, plus a tariff increase in the enhanced protection market, which allowed us to offset the drop of customers on the free markets.
Page 7 shows the environment business. Environment also has a pretty stable EBITDA at EUR 14.1 million, here we have some compensation effect for the Iseco company, where EBITDA increased by EUR 3.3 (sic ) [ EUR 0.3 ] million, whereas the Aquaser company lost compared to last year because of lower sludge recovery operations, which is mainly due to the uncertainties we have on current regulations. The business is expected to be regulated by a new net lower anytime soon. As far as the cleaning and disposal of ashes are concerned, we have a lower average than last year, treatment and disposal decreased and electricity produced is 89 gigawatts hour against 87 last year.
Let's look at smaller businesses. Overseas has a pretty stable EBITDA. Engineering and services is slightly decreasing because of lower services to the companies in the group. And the holding company's EBITDA is worsening slightly, mostly because during 2017 the ACEA 2.0 project was completed and in the first quarter of 2017 this project included an opportunity for us to capitalize the cost of human resources in the holding company for this project, whereas this is not possible this year. As far as the workforce is concerned, the facility management business was transferred from engineering and services to the holding company.
Now let's look at the items after EBITDA. EBIT is up 8.7% at EUR 127 million and net profit is up 17.8% and stands at EUR 77.4 million. In particular, depreciation is up 12.6% and it stands at EUR 77.5 million, this is the same effect we saw at the year-end 2017. Increased depreciation is due mainly to bigger investments that have been completed and implemented during 2017. And in particular in IT assets, they have a shorter useful life and a higher depreciation rate. Then we have EUR 21 million of write-downs. Here again, there's a slight growth as compared to last year. Here let's remember, we have a new accounting principle and the new system to account for provisions because of the first-time adoption of IFRS9. Now in the future, it's not necessarily said we are going to have bigger provisions though because of timing. So some provisions are anticipated as compared to the previous accounting system. But all in all, we don't expect any structural change as compared to what we used to have in the past with the existing accounting principles. The provisions, as I said, are sharply decreasing because last year, the first quarter of 2017, we had provisions for early retirement and redundancy scheme, which is not going to be present this year. We have already made for all provisions in 2017. And in the second part of the year, we'll see whether we'll need some provisions to be set aside for 2019. So because of all this, all indicators and all economic ratios improved and in particular, net profit increased from EUR 65.7 million to EUR 77.4 million, which is in line with EBITDA after taxation, of course, because taxation increased by EUR 4 million because of a higher taxable base. Tax rate is stable and stands at 30.4%.
Let's now look at cash flow. Total cash flow is negative by EUR 60 million as compared to the previous year where we posted a negative cash flow of EUR 108 million. So let's look at the main drivers behind that change, in particular, the change in net working capital. So in this quarter, the absorption of working capital was about EUR 100 million. So as indicated at the year-end of 2017 -- well at year-end 2017, we overperformed in particular in the fourth quarter of 2017, in managing the working capital and that overperformance was classified as partly structural and partly kind of an early disbursement of cash flow through 2017, which was going to be used in the first quarter of 2018 too. So we are now in a position to confirm what we said at year-end 2017. Of that EUR 100 million, about EUR 50 million can be ascribed to the anticipated cash flow we accounted for in 2017. Then to support the interpretation, let's say, of that number, the construction of that number, the remaining EUR 50 million, well about EUR 25 million is working capital absorbed because of regulations like there was a premium, the regulatory leg, the [ water ] accounting system so these are actually revenues that are accounted for now but generate cash in later years. Another EUR 25 million is the structural absorption of working capital, which is actually to be fulfilled in the first quarter but it's something we're not surprised by, we kind of expected it. So having seen the total EBITDA, total investments, the free cash flow is virtually neutral as against the free cash flow last year, which absorbed EUR 65 million. As far as the financial charges are concerned, they are pretty stable at EUR 20 million. We isolated the change in provisions, so these are actually the provisions we made mostly for credit servicing cost and so this is under the EBITDA line and so -- and are having an impact on the company's cash flow. So the total cash flow absorbed is EUR 60 million, which is perfectly in line with our expectations.
In the following page, we see the actual impact of cash flow and the net debt that used to be EUR 2 million -- sorry, EUR 2,421,000,000 at the end of 2017 and it's EUR 2,482,000,000 at the 31st of March, 2018. Here again, we're perfectly in line with our guidance, which was anywhere between EUR 2.6 billion and EUR 2.7 billion. The medium value of guidance should be what we expect by the end of the year. So by the end of the year, we expect EUR 150 million of working capital to be absorbed. And we're now working to bring the overall performance towards the EUR 2.6 billion mark in our guidance.
As far as financial ratios are concerned, the net debt to equity ratio is -- sorry the net debt to LTM EBITDA ratio is 2.9 stable as compared to the end of 9 -- of 2017, whereas the net debt to equity ratio is 1.4x. We actually placed some bonds successfully in the month of February. We issued 2 tranches, the first was variable-rate EUR 300 million 5 years with Euribor plus 0.37%. And the second tranche was EUR 700 million, 9.4 years of duration and fixed rate of 1.5%. So in this way, the structure of the debt we carry has a fixed rate of 73%. The average cost is down to 2.7% (sic) [ 2.27% ] after this issuance. And the average duration increased up to 5.9 years. As far as the agent -- the rating agencies are concerned, they confirmed our rating structure BBB+ for Fitch and Baa2 for Moody's, and both presented a stable outlook.
Now this is all for my presentation and you have questions, I'll be happy to take them.
[Operator Instructions] First question Javier Suarez of Mediobanca.
I'm Javier from Mediobanca. And I may ask something you have presented but I connected quite late so please apologize for this. So my first question is about working capital. I see in Slide 10 that there is a negative contribution by EUR 100 million. And I would like to have an update, if possible, on the managerial actions that the company is taking to put that working capital under control. So that number we see here, EUR 100 million, where do you expect it to be by year-end? So that's my first question. Then I have a second question on the evolution and contribution of the equity-consolidated subsidiaries. If I'm not mistaken, this was about EUR 9 million in the fourth quarter. So could you please explain where this comes in terms of breakdown by individual companies? Could you please give us a clearer picture of the origin of the EUR 9 million? And something else, which is a bit surprising for me is the contribution of electricity distribution, which is actually plus 12% for the division. So could you please explain why there was this growth in electricity distribution?
Javier, thanks for your questions. I will try and be as exhaustive as possible. So as far as working capital is concerned, that EUR 100 million, once again, sorry for repeating for those of you who were here since the beginning of the presentation. So as we explained when we presented our performance for 2017. In the 2017 results, we had an overperformance on the working capital in the first -- in the fourth quarter. And that overperformance eventually generated cash, so part of that could be considered structural whereas another part, this should be seen as a kind of an advance towards what we expected we would make in 2018. Now I can confirm what we said at the end of 2017, because about EUR 50 million of that EUR 100 million should be seen as a kind of an advanced accounting for 2018. As far as the remaining EUR 50 million is concerned, while EUR 25 million is normal working capital absorbed, whereas the other EUR 25 million is due to the effect of regulations. So of course, that belongs to working capital too, but it's mainly due to revenues that are accounted for in this quarter but will actually be converted to cash, not even in the following quarters but rather in the following years. And I'm referring to regulations such as water premium, water payment and regulatory lag for the electricity components. So the EUR 25 million of that EUR 100 million is actual working capital. As to the trend over the rest of the year, well we do have some seasonal performance. The first quarter is always the most challenging in terms of working capital. So we can't possibly think that, that EUR 100 million result will be repeated in the next few quarters too. Actually my expectation is that compared to the guidance targets we gave for -- in terms of our financial provision -- net financial provision, if we think of target in the median values, which is EUR 2.35 billion of net financial position, well that target is compatible with working capital of about EUR 150 million throughout the year. So that means that in the following quarters the overall absorption of working capital is likely to be about EUR 50 million. So we are working to reduce that EUR 50 million, if possible. We're not in a position to tell you with certainty right now, but my target is that of curbing it down to a very small number. Let me now come to your second question on the companies accounted for with the net equity method. Well basically -- well their contribution increased from EUR 4.9 million to EUR 7.9 million. This is arguably consolidation with equity method of our stake in this company. So the percentage of net profit, which is proportional to the stake held by ACEA in each of those consolidated companies. The biggest contributor here are the Acque group that -- well last year it accounted for EUR 1.9 million, this year it's EUR 3.1 million. Then Publiacqua, it used be EUR 1.9 million and this year it's EUR 2.4 million. And Acque Industriali, which used to be EUR 7.7 million -- sorry, EUR 0.7 million and it's EUR 1.4 million this year. So this growth -- all these companies are improving their performance even though we are not in a position to expect this growth to be confirmed, at least not in this magnitude for each individual quarter in the future. But basically, we expect these companies to increase their contribution in the full year like they did in the first quarter. If there are any extraordinary item, was the question? Well not necessarily, not necessarily for this quarter. As far as we know, there are no extraordinary items or nonrecurring items. However, this is not pertaining to the EBITDA of individual companies. It's about their net profit, of course. So there might be some differences that are not necessarily going to be repeated in the same way in each individual quarter. Then we have a one final question on growth from energy infrastructure. So the growth of distribution, in particular, which was up by about EUR 9 million. Well that EUR 9 million growth may be explained as follows: Nearly EUR 7.5 million of that comes from the energy balances from tariff, in particular. But that tariff effect may be classified to be about EUR 3 million improvements of tariffs as compared to 2017. And EUR 4.5 million is due to, kind of, a structural tariff effect for 2018. So we should expect a trend over the year, which means this EUR 4.5 million should be considered to be repeatable in the same trend, whereas the EUR 3 million is a one-off item.
Stefano Gamberini from Equita SIM will ask the next question.
I'm sorry I also connected late, so let me apologize if I'm asking something you presented earlier. So first of all, I'd like to understand about that EUR 4 million impact in one quarter. So that means the tariff would increase by EUR 12 million over the year? So can you help us understand what kind of mechanism will feed the distribution tariff by as much as EUR 12 million this year? And in particular, what part of that is noncash for this EBITDA is through distribution? Then I have a second question, which is about water. Would you please be so kind as to tell us about the new CapEx from the contribution in 2017 and 2019 -- sorry '18? And then I have a question on depreciation. I see that, that has increased by about EUR 2 million. Is that due to the IFRS9 impact? Could you please elaborate on write-downs as accounted for under IFRS9? And is that a trend for the quarter? Or how much should we expect for the full year? And then one final question on the general scenario. Last week, an amendment was presented by a Five Star member of the parliament, who was asking to let the water competencies that are currently managed by the energy authority to be managed by the government or the parliament. This amendment was not approved so far, we'll have to see what happens in the future. But in general, do you see any risk there? Should we really end up having a similar situation, especially in the water business?
Okay, I'll try and answer your questions. Some of them are really detailed. As far as distribution is concerned, this growth in tariffs is more or less what we expect. In all likelihood, it's not going to be perfectly linear. But it's not too different from what we expect for the full year performance. So this first quarter, distribution growth is expected to continue throughout the year. And a great part of that growth is noncash, because it's actually going to be cashed in with the bills of next year. So as I was explaining earlier, the working capital absorption -- well overall, we consider we have about EUR 25 million of working capital absorbed by a noncash impact of water premium of contributions in [indiscernible]. So the water premium for the first quarter was about EUR 107 million, which is in line with what we had last year. Then there is a compensation component, I don't have the information -- detailed information with me now. But there's actually one component, which may be estimated to be anywhere between EUR 10 million and EUR 15 million, which comes from the electricity distribution business, and these are revenues that are accounted for in the first quarter that are going to generate cash not this year but on the next year. Now as far as your question -- your second question is concerned, I don't have detailed numbers with me, but actually what we are accounting for is always in line with the tariffs that have already been agreed with the [ lag end ] for 2018. Well, your third question is much more difficult, of course, and much more challenging on the possible amendments presented with the parliament. Well of course, we're not prepared to make any comment on that amendment. Personally, I believe that the likelihood of seeing real effects in the short run is a very limited likelihood. But this is all about politics. And I'm going to abstain from any kind of comment on politics. But oh yes, you were asking about evaluation too. Well, actually there is an increase of about EUR 2 million in the provisions because there was a change in the accounting method actually. So our credits are now accounted for and evaluated in a totally different system and way. I don't expect this to be replicated on the full year in exactly the same way, because the change of accounting method would actually imply that some write-downs and some provisions will be anticipated in time. And I expect that the full year performance will be more similar to last year and should end up being about EUR 85 million, EUR 86 million, including provisions and write-downs for the whole group. So it should be less than proportion of to what we posted for the first quarter of 2018.
So EUR 75 million, EUR 80 million would be the write-downs. And overall, how many provisions do you expect for the year? If you have some guidance there.
No, we don't have a guidance there. What I was saying earlier is that we do have some recurrent provisions and write-downs for risk funds. And in this particular quarter, we made no provisions, unlike last years, for early retirement and redundancy schemes. We do not expect to make provisions for that in the second or third quarter too. Because at the end of 2017, we had already provided for everything we needed to manage the early retirement and redundancy schemes for 2018. For full year at the end of the year, we will review the situation and see whether we need any provisions to be satisfied for 2019 for this particular purpose.
Next question Enrico Bartoli of MainFirst.
Once again sorry, I may be asking questions you have commented on before. But first of all, I would like to ask you about waste. In this quarter, there was a slight decrease of EBITDA, so could you please provide us with some details of the reason why? And on the possible trend for the following quarter? Then I have a question on the commercial part. I see that the volumes of electricity sold keep decreasing whereas EBITDA in this quarter is either flat or even increasing. So could you please give us an idea of the performance of margin? And why -- I guess there was an increase in unit margins as compared to the first quarter last year. Then my third question is I'm reading on the press that there are some dealings on the possible doubling of the Peschiera pipeline. So could you please update us on the authorization procedures? How is it performing there? And how likely is this to really go through? And how likely are you to get this investment authorized?
Well, as far as waste is concerned, well currently we don't see big challenges there. Actually, the slight decrease of EBITDA was due mainly by the decrease of EBITDA of the Aquaser company, which is the company that manages sludge disposal. Most of all, they do it for the captive markets, so it's largely produced by ACEA group companies. And today, the Aquaser company reduced its volumes because there are some regulatory uncertainties there. So we are actually expecting a minister's decree that should review these current regulation, which makes it very difficult for us to use the sludge recovery facilities properly. So we're still counting on that. As far as the commercial performance is concerned, as I was saying earlier, we do post a loss in the volumes of electricity sold vis-à-vis the same time last year. Part of that is structural, because we actually decreased the number of customers that have high volumes and low margins, it's kind of a daily fact of the strategy that ACEA has adopted in the previous years. We actually have decided to really change our customer base and transform it. So from now on, we don't really expect to see any more decreases in the amount of energy sold. Margins are actually offset because we command better margins from the enhanced protection market. There was a tariff update that allowed us to recover the margins and also we slightly increased our volumes in gas. As to the doubling of the Peschiera facility. Well, there's nothing especially new there. So all I can tell you is comment on our own in-house production. During -- this project is a part of the budget bill and the Ministry of Infrastructures and Transports considers the doubling of the Peschiera aqueduct as one of the facilities to be funded in the next year. Now clearly, we are working to try and speed up the authorization procedures and to begin, if possible, during 2018 to start designing the new facility. Of course, as we speak, we don't yet have a very specific or a clear definition of the contribution, which will come from public money that's going to be helping us to create those works without having an impact on tariffs for ACEA versus the part of the funding, which is going to be provided directly by ACEA itself. The only thing that's certainly now is that ACEA will be actively engaged in actually executing this program, both the design and construction part. So it's certainly going to have a positive impact on the ACEA's business. But the connection between public investments and the investments made directly by ACEA may actually substantially change the economic evaluation and assessment of this project. However, what I can tell you now is that we can confirm we have the necessary conditions to start developing that project. And of course, it will occupy a number of years.
[Operator Instructions] Next question is a follow-up from Stefano Gamberini of Equita SIM.
Yes. Just a very quick thing. Under EBITDA, I see there is a contribution of EUR 8 million, which, if I'm not mistaken, comes from [ associates ]? Could you please elaborate on that?
It's nothing exotic. I mean, you may remember that last year we completed the acquisition of the TVS (sic) [ TWS ] group in the first quarter last year. And the value of that acquisition was about EUR 3 million, if I'm not mistaken. So that was the cost of the acquisition, whereas the value of the assets we have consolidated -- the fair value of those assets was higher and it was about EUR 11 million in the end. So with -- at prudence accounting approach before actually including that one-off item in our P&L, we decided to wait for 12 months and perform a complete assessment of assets without incurring any risk of over evaluating them. So this is just the consolidation of that deal. So the acquisition has been performed at a particularly good price compared to the value of the assets in the companies we have acquired.
[Operator Instructions] Mr. Gola, we have no more questions at this stage.
Okay then, thank you very much for attending and we'll get back to you at the end of July and the Investor Relation's office will be very happy to take any further questions from you. Thank you very much. Goodbye.