Good day. Thank you for standing by. Welcome to the annual first half 2023, the results conference call. At this time, all participants are in listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Monica Girardi, Head of Group Investor Relations. Please go ahead.
Thank you, operator. Good evening to all the people connected. Welcome to the first half 2023 results presentation, which will be hosted by Enel CEO, Flavio Cattaneo, and the CFO, Stefano De Angelis. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send question only via email at investor.relations@enel.com. Before we start, let me remind you that media is listening-
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to both the presentation and the Q&A session. Thank you, and now let me hand over to our CEO.
Thank you, Monica, and welcome to everybody. I was appointed 75 days ago as a CEO, and since then, my focus has been on the following priorities: First, capital allocation to maximize return and reduce the risk profile on the asset base, supporting growth. Second, efficiency to free up resources and secure profitability. Third, core activities and geographies to run a simpler asset base. And then financial, sorry, discipline to strengthen the capital structures of the group. These will be priorities to be applied across all of processes and in each place where we are, to maximize the value for our all shareholders and stakeholders, granting a sustainable growth of our integrated business model. Let's move to the action we put in place on page three.
We have started a new process on capital allocation based on detailed and tailored, and flexible evaluation of the investment return. In addition, we have already launched a spending review program on 100% of cash cost, with an immediate focus on discretionary cost that has allow us to already achieve 8% of savings only in June, compared to the budget expectation. In the following months, we expect to extract the same level of efficiencies. We have already completed the a first simplification of the group's organizational structures that underline the focus on core geographics and activities, and on a clear attribution of duties. Going forward, we'll work to reduce inefficiency. Let now look at the progress on the disposal plan on slide four.
Today, EUR 6 billion have already been closed or announced, and these represent a 50% of the total target set for this year. I want to remind you that the closing of some of these transaction is subject to a former regulatory authorization. On top of these EUR 6 billion, we have EUR 4 billion in a final stage of negotiation, and we have already received binding offers. The rest is associated with deals that are ongoing in the various stages of progress. Due to the action mentioned before, we are confident to achieve the leverage set in the full year target, even if we aren't disposing all of the asset announced last year. Just to be clear, we are not in a rush to sell, and we will sell only at the right price.
Thank you for your attention. Now I leave the floor to Stefano to comment on the first half. Please, Stefano.
Thank you, Flavio. Let's start, I'm on page six, with the highlights of the period. During the first half, the group recorded a strong and consistent operating and financial performance that offers a good visibility on the evolution of financials for the rest of the year. The EBITDA is up high double digits compared to last year and reached EUR 10.7 billion on the back of a less volatile environment that restore the full industrial growth potential of the group. Funds from operation is robust and accounts for EUR 5.4 billion, even stronger than historical levels, thanks to the EBITDA growth and the further recovery of the dynamics that affected the working capital evolution last year.
The execution of our EUR 21 billion disposal plan is well on track, with deals closed in 2022 or agreed more recently, totaling around EUR 12 billion, of which around EUR 5 billion still to be cashed in, pending authorizations, as Flavio mentioned before. Operating delivery came in quite strong as well. I'm now moving on page seven with the main business KPIs. Our developing machine has stopped, with renewable capacity increasing 4.6 GW over the last 12 months, the risk in our generation output with 67 TWh of renewables production. Emissions-free production in the semester accounted for 73% of the total, up sensibly well since previous year. Customers in the liberalized market increased by 1.2 million, thanks to a commercial offering that was appealing and affordable.
Revenue asset base per grid customer increased by 8% on the back of new investment and the indexation of the asset base to inflation. Investment that fueled our asset base are analyzed in the next slide. I'm on page eight. The CapEx stood at EUR 6.4 billion and were allocated as follows: EUR 3.7 billion supported our integrated strategy, with renewables accounting for almost EUR 3 billion and customers development for the rest. EUR 2.6 billion was spent in grids to expand and upgrade our networks, while increasing the regulated asset base. From a geographical perspective, more than 60% was devoted to Europe, with the lion's share spent in Italy, followed by Spain, Latin America, and then U.S. This allocation is pointing to a strong focus on core geographies, where margins are supported by visible regulatory frameworks in a less volatile environment.
Additionally, around 80% was spent in core countries in continuing operation, while the remaining portion is associated with investments on asset, including the strategic repositioning program, whose impact on net debt would be recovered once they consolidated. Let's now move on the main drivers of the EBITDA on page nine. Ordinary EBITDA marked a sound 29% growth year-on-year. Despite around EUR 500 million perimeter effect, mainly associated with the disposal of asset we closed over the last 12 months. The integrated business represent the bulk of this growth, with a EUR 2.2 billion increase year-on-year, up by a notable 50%, as a normalizing environment drove the rebounding of all the negative dynamics that affected 2022. More in the details, it's worth to mention four major topics.
The recovery of production from renewables, mostly associated with hydro normalization versus an extremely dry 2022, coupled with production coming from the newly installed renewable capacity. Second, the reduced volatility allowed us to move towards a normalized production from thermal. Third topics, the margin of retail activities that are now back to pre-energy crisis level, as well as the impact of portfolio optimization. Lastly, this positive have been partially offset by the, well, no clawback measures implemented in Europe. On the network side, the EBITDA stood at EUR 4.2 billion, up by EUR 600 million year-on-year on dynamics that I will summarize in the next slide. The stewardship business model recorded a negative change year-on-year for around EUR 200 million, and is associated with the gain from UFINET disposal we recorded last year.
I want to stress here that EBITDA of the first semester does not include any non-recurring gain from the stewardship business model, while in the following quarter, it is expected to contribute to the results for around EUR 500 million, thanks to the deals already announced. Last remarks comes from the geographic perspective, where the European countries accounted for almost 70% of the total EBITDA of the period. As I said before, next slide is about the grid performance. I'm on slide number 10. The grid's EBITDA stood at EUR 4.2 billion, increasing 40% year-on-year. In Europe, EBITDA growth is in line with our expectation for the core markets, where the Italian grids benefited from higher tariffs, mainly associated with the revenue asset base growth and the indexation to the CPI.
On top of this growth, we accounted for the recognition of the higher costs recorded last year in Romania to cover network losses. In Latin America, the contribution was for around EUR 100 million, thanks to the inflation dynamics and higher volumes distributed, that more than compensated the negative perimeter effect coming from the sale of the Goiás grid. On a like-for-like basis, the growth of EBITDA in Latam would have been around EUR 250 million. Looking closely at the regulatory framework, in the period, tariffs were adjusted upwards in Rio, Ceará, and São Paulo, while in the future, the performance in either should be supported by the work adjustment mechanism that is pointing to an increase. Let's now continue the analysis of the result with the earnings evolution on slide 11.
Ordinary group net income came in at EUR 3.3 billion, increasing 52% versus last year, driven by the strong EBITDA performance already commented. D&A are flat versus 2022 as a consequence of higher amortization for higher level of investment, neutralized by lower level of bad debt provisioning due to the turnover dynamics. Net financial charges increased by around EUR 500 million year-on-year, out of which EUR 400 million were associated with higher financial expenses on the back of the worsening of interest rates environment, affecting the variable portion of the debt, which in total accounts for 26%. Second, a higher level of gross debt. Income taxes increases versus previous year by around EUR 600 million due to the taxable income expansion base, boosted by the operating result, while the tax rate proved almost stable.
Finally, minorities were driven by the rebalancing of the geographical mix. Moving on, slide 12, we have the cash flow analysis, where we can see that the funds from operations stood at EUR 5.4 billion, showing a sound EUR 4.7 billion increase versus the first half of last year, thanks to the improvement in working capital dynamics, which are now progressing toward a normalized trend. In particular, it was to highlight that working capital is in line with historical evolution for the first semester, it recovered almost EUR 3 billion versus previous year. In the next quarters, we expect this item to move back to a normalized trend driven by the business dynamics.
Looking at the moving parts in the second quarter, the cash out for taxes was EUR 1.2 billion, impacted by the lump sum payment of the solidarity contribution in Italy for around EUR 600 million. While financial charges paid in Q2 stood at EUR 1.2 billion, due to the well-known schedule of the coupons payment, balancing the lower Q1 cash impact. On next slide, on slide 13, we have the net debt evolution. The net debt came at EUR 62.2 billion. Over the period, the funds from operation contributed positively to the net debt evolution for EUR 5.4 billion, as commented before. Capital expenditures amounted to EUR 6.24 billion, slight increases versus previous year.
It is worth to highlight that assets under disposal are included in the CapEx figure and account for more than EUR 1 billion in the period, while their contribution to the FFO is limiting, being mainly projects and assets in the early stage of development. If we exclude the cash outflow from those assets, the FFO minus CapEx would have been almost neutral. Dividend payment amounted to EUR 2.4 billion, while foreign exchange dynamics and leasing recorded a negative impact of around EUR 600 million on debt. These items generated a non-cash delta on net debt of around EUR 1 billion if we compare the semester's stock of debt to last year one. Active portfolio management contributed only for EUR 1 billion, as the bulk of the deals announced so far have yet to be cashed in.
Accounting for the agreed financial terms of these deals, the pro forma net debt would have stood at around EUR 57 billion, down around EUR 3 billion versus full year 2022. This performance translate also on credit ratio progress, and now moving to slide 14. Our strong commitment on a strict financial discipline is driving us on a concrete path to a sustainable leverage. Therefore, the main focus will be on monitoring all the regulatory approvals needed to cash in from disposals that have been announced so far, while improving the structural ability of the group to generate cash and achieve a profitable growth. All this will result into a more solid and stronger credit ratio, which is instrumental to generate value in the future.
Concluding my section of the presentation on slide 15, it is important to remark that while we have embraced the company strategic priorities, we are fully focused on delivering on targets, doing our best to improve and accelerate on the execution. Let me now conclude, saying that the guidance for the full year 2022, 2023, sorry, is confirmed. I now hand over to the CEO.
Thank you, Stefano. Let me conclude with some closing remarks. In the first slide, I point out our priorities and the managerial action implemented are set to improve our cash generation to strengthen the capital structures of the group. I strongly believe a stronger set of financial ratio will result in a more resilient company, and the commitment with the shareholders will not change, and we'll maintain an appealing and sustainable dividend policy. Our priorities are, and will remain aligned with the interest of investors and stakeholders. In November, we'll present the new strategic plan, and we'll disclose, also in numbers, obviously, our priorities will foster the total shareholder return of the group, of this group. Thank you for your attention, and Monica, let's open to Q&A session.
Okay, thank you. Now we open the Q&A session. We have received many questions associated with the strategy in the future, and how this translates into numbers. I might ask you to bear with us for a few months, just a few, as the plan will be presented soon. I'm sure you will find the answers to all of your question at that time. We have a hard stop, so we will try to be as efficient as possible. In fact, we packed up a bit the question that came through. First set of question is directed to the CEO. Can the CEO elaborate on his view on the sector and the priorities for the group?
Well, we have shown in the presentation our current priorities. We are focused on improving efficiency across the group and enhancing profitability through a leaner organization and business footprint. At the same time, we continue to invest in the group's integrated business with a view to maximize the risk-adjusted return and growth. This will remain as a key areas of focus also for the future. The details of our strategy will be presented in our next Capital Market Day.
Second question: new management have been in place for a few months, I would say just a couple, but, may I, we ask, one positive and one challenge that you have found surprising so far?
The first, one positive, undeniable know-how of Enel people and their commitment for change. Regarding the challenge, the complexity of group processes and organization, in some cases, such complexity has created inefficiencies and ineffective capital allocation. As I mentioned before, we are already working on it.
Thank you. The third question is, if you see any major discontinuity to the equity story?
Actually, the Capital Market Day will be the day when we'll present discontinuities or continuities. They will be focused on execution, first of all, efficiency, and better capital allocation to boost a sustainable growth, and I'm sure will not, you will not be disappointed.
A popular question is about the offshore wind. Is there any interest to develop?
This is a very popular question. We confirm the usually consideration of Enel. We don't considering offshore wind like an asset that can generate more profitability rather than the current ones.
Disposal plan, what is the expected contribution from the M&A deals for 2023 and 2024? Is a step up of the dispose as possible or even needed in your view?
As you have seen in the presentation, for this year, we have announced deals worth around EUR 6 billion. We have EUR 4 billion currently in the final stages of negotiation. On the back of the binding offers received, this is very concrete. Our intention is to continue the disposal plan, not at any price. This is clear for. My commitment is preserve the value of the asset of Enel, that this value is for the value for all our shareholders. In any case, we were working to achieve the level of debt that we have in a full year target. M&A is a, an instrument, but not only the lever that we have.
Really clear. The sixth question is about rumors that were pointing to a possible sale of the stake in Endesa.
The answer is very simple: are totally unfounded.
Strict to the point. Can the new strategy impose significant changes to the dividend policy?
I repeat again, no changes to the dividend policy. It is our intention to maintain a sustainable and attractive dividend policy.
I think you mentioned at the beginning, but maybe, for people that were connecting late, is the Capital Market Day confirmed for November? November, in line with previous years?
Absolutely, in line with the previous year. The Capital Market Day will be in late November. Details will be available soon.
Good. I think we can now move to a set of questions that are probably more suitable for our CFO. 2023 targets, can you walk us through the moving parts to reach full year targets and potential upside to guidance?
Let's make this balance to analysis. Start from the first half EBITDA, we should had, let's say, between EUR 9.7 billion and EUR 10.3 billion in the second half to meet the guided range.
Looking at the different business line, in the next six months, in the integrated business, we see further normalization, that will reflect also in the trading profit due to a less volatile commodities environments. For the grids, the underlying performance will continue to be solid in the core markets compared to first half 2023. Keep attention when compare on a year-on-year basis, because we have to analyze and reflect the impact of the disposed assets. The Stewardship model, as I said before in the presentation, will contribute with around EUR 500 million, mostly coming from the deals just announced. This is also in line with the guided EUR 1.5 billion cumulative target for the 2023-2025 plan. Summarizing, the underlying business is performing strongly.
Said that, we still see lots of moving parts which may play out differently than expected, as, for example, the hydro and uncertainty about the government fiscal policy, potentially also retroactive. As of today, we can therefore confirm the numbers shared with the market in November last year. I think that they are highly visible for us.
Integrated margin is improving substantially. What would be necessary to continue improving it in the coming years? Are you going to achieve the targets?
It's important to say that the integrated margin are back to normal levels, improving, but back to normal levels. After 2022, there was a black swan. We have many times mentioned the strategic priority and execution approach that will drive our action in the next years. The sustainable capital allocation efficiencies as an enabler of fast and profitable execution towards a valuable growth. As the CEO said, you will see in a few months how this will translate also into numbers.
Net debt for 2023, what are the possible upside that you, that could bring that further down?
As, I think clearly explained by Flavio, we are fully committed on the de-leverage targets and see them comfortably at reach. Thanks to the progresses on the disposal program, on which we are working with a value-driven approach, it's important to say also, thanks to all the action we put in place, with results into structural and long-lasting improvement of the businesses, which will be run more efficiently and will be supported by a capital allocation set to create more value and a sustainable growth.
Stefano, can you elaborate on financial expenses for the first half and the projected trajectory for year end?
We expect to stay on the same level as in the first half. As the positive impact on the disposal, we progressively reduce gross debt amounts and consequently, the cost of debt.
Going back one second to disposals, when do you expect to achieve closing for the deals already signed?
As said and stated in the presentation, most of these deals are subject to regulatory approvals that have to be met before we can close the deal and cash in the announced deal value. You have a slide in the backup, that with the status of all these deals announced so far. As you may see, at the moment, we are not facing any concern regarding the mandatory step to be performed. By the way, short-term differences compared to the expected timeline, if not related to rising relevant issue that we don't see today, as I said before, won't affect the fundamentals and should be taken into account accordingly.
How can you manage the debt target, with the potential delay in closing and cashing in of the M& A deals?
It's lot of question on this topic. As understand and share the relevance of this topic, so let me elaborate on a different angle. As the CEO mentioned in the presentation, some of the action on which we are already undertaking, and we will continue to focus, will benefit our structural recurring cash generation. This will contribute to reach solid credit ratios and a sustainable leverage. That's why we are confident that the combination of a diligent execution of the disposal plan and a fast implementation of the mentioned strategy and action will drive us to the debt target. Moreover, in this framework, we have a clear vision about the M&A as a driver and accelerator towards a sustainable leverage.
What's the level of CapEx that you see for 2023?
As already guided, we expect the CapEx to be around EUR 13 billion. Again, keep in mind that a portion of this investment is associated with operation that will be discontinued.
Where does management see the best risk-adjusted return for capital allocation, and why?
Again, this would be the main focus of the November Capital Market Day. Let me say that the... we have a clear strategic priority in this sense, the sustainable electrification that will be realized through our integrated value chain, the, you know, core geographies, is the right place to generate growth, and these adequate risk-adjusted returns. Again, in November, we will show you a complete framework that will address, I'm sure, this topic.
Can you provide an update on hydro levels across the group and how they compare with the plan assumption? Can hydro be an upside versus plan?
Moving to the figure that I think is the most important driver to answer this question. The hydro production in the first half amounted to 28 TWh, up by 4 TWh compared to previous year, mainly thanks to a recovery, and it's a recovery in Italy and a good performance in Latin America. Reserve water levels are in line with the assumption, thanks to an exceptional resource availability recorded in Chile during June, and the hydro availability in Italy, which only during May and June, was back to the normal seasonal average. Net-net, as a consequence, for the full year, we do not expect significant deviation compared to our assumption.
We focus on Italy now. The Italian EBITDA renewable went back to a positive result. What is the expected level for full year? What has been the impact of clawback in the first half?
As we saw in the presentation before, the results of the six months has been achieved, thanks to the improvement, that is a normalization, recorded in hydro availability, coupled with the normalization of the commodities market, and despite the impact of the clawback, which in the first six months of the year, has accounted for more than EUR 200 million.
Retail, how are the churn rate and the bad debt progressing? Which level you forecast for year-end for both?
Looking clearly at Europe, in Italy, the churn rate is now at a high single-digit that is in line with our expectation. Over the next month, we expect competitive pressure to be higher and see churn rates to gradually rise to market stance at a double-digit level. The action on this topic, again, will be part of our Capital Market Day strategy. Looking at the short-term figures in Spain and Iberia, we are already experienced a churn higher than previous year, but we expect to remain stable at this level as we are actively, and would say also proactively, managing through our commercial offers. Regarding bad debt, as I said in the presentation, we are seeing on economics, a reduction trend driven by the commodity price and no relevant variation in payment performance.
This is why, for the next months, we expect the trend of the semester to Yes. be confirmed.
Can you provide an update on your expectations about power market liberalization in Italy in terms of customer base evolution?
The elimination of the regulated tariff in Italy is now set for next year. The moving of this deadline had progressively reduced the size of the customers involved and the related economic impacts. At the same time, we have to say that the legal and regulatory framework is still under discussion, and we expect to have a clearer picture to update you in November.
Is there any impact from recent issues with wind turbines on existing generation plants or on projects under development?
In our company, in financial expenses, there is no significant impact expected from this topic in light of the limited exposure and the several warranties that are associated with the supply and service agreements of the turbines. Concerning project under development, we are monitoring the situation, and we will proactively manage the situation, also tapping into our extensive pipeline, should the case be.
One question on net working capital. Stefano, can you provide some details on the reabsorption of the impact from government measures?
In the first half, to a direct answer from a direct question on a figure, the impact of the reabsorption of regulatory measures stood at EUR 2.8 billion.
Stefano, I stay with you for what it appears to be, in my list, the final one. Does management consider Enel primarily a growth or a dividend equity story, and why?
Let's say that these are cluster for the financial market and strongly depend on the benchmark you choose. We, on our side, we work in the industry, and we want to create sustainable growth, value, and increasing returns for our stakeholders, and our new plan will be positioned for that.
Okay. I think with this question, we can say we conclude the call. As always, the Investor Relations team is completely at your disposal in case you need any follow-up. Let's chat next in November. Thank you.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day!