AXIA Energia SA (AXIA6) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to AXIA Energia's conference for the discussion of the earnings of the second quarter of 2026. Present here today are Mr. Ivan de Souza Monteiro, President of AXIA Energia; Mr. Élio Wolff, Executive Vice President; Mr. Eduardo Haiama, Vice President of Finance and Investor Relations; Ms. Camila Araújo, Vice President of Governance and Sustainability; Mr. Ítalo Freitas, Vice President of Commercialization and Energy Solutions; Mr. Juliano Dantas, Vice President of Technology and Innovation; Mr. Marcelo de Siqueira Freitas, Vice President of Legal Affairs; Mr. Renato Carreira, Vice President of Learning, People and Services; Mr. Robson Pinheiro De Campos, Vice President of Engineering and Projects; Mr. Rodrigo Limp, Vice President of Regulation, Institutional and Markets. We would like to inform that this event is being recorded and will be made available on the company's Investor Relations website, along with the presentation being shared today, both in Portuguese and English. [Operator Instructions] Before we proceed, we would like to clarify that any statements made during this conference call regarding the company's business outlooks, projections, operational and financial goals constitute the beliefs and assumptions of AXIA Energia's executive management as well as information currently available to the company. Forward-looking statements are not guarantees of performance as they involve risks and uncertainties and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions and other operational factors may affect the results expressed in such forward-looking statements. We now invite Mr. Ivan Monteiro, President of AXIA Energia, to begin the presentation. Please proceed, Mr. Ivan.

Thank you. Good morning, everyone. The first and second quarters in the first half of the year marked by the strong expansion of our investments, highlighting the modernization of our equipment, focusing on the increase of operational resilience as well as the acceleration of disbursements in the transmission segment. Coming from the successful participation of AXIA Energia in the auctions carried out thus far, we also captured a better margin in energy trading, the positive effects in the management of our stake with the conclusion of relevant operations in the second quarter of this year, maintaining the reduction trajectory in the volume of our contingencies exemplified with the reduction in the inventory of provisions for the compulsory loans. Finally, the payment of our shareholders. We announced year-to-date BRL 7.7 billion to redeem Class C preferred shares. I turn the floor to our VP, Eduardo Haiama, who will continue with the presentation.

Good morning, everyone. Thank you, Ivan. Moving to Slide 5, talking about the highlights of the quarter's earnings. Our EBITDA reached BRL 6.7 [ million ], up 21.5% basically due to the greater contribution of the generation segment, transmission being stable and costs being well under control in the quarter. As for the investments, an increase of 50% year-over-year from close to now BRL 3 [ million ] this quarter. As I had mentioned, generation was the main contributor for this higher earnings in the quarter, reaching a unit generation margin when we look at the free market, ACL plus MCP of BRL 96 this quarter compared to BRL 73 in the same quarter of the previous year. We were the winners in the last transmission auction with a projected ANEEL CapEx of BRL 668 million and RAP of BRL 50 million. In this quarter, we also completed the migration to B3's Novo Mercado, the segment of the highest governance level at B3. As always, we are committed to every quarter, review our Capital Allocation Methodology. And with the Board, we approved an additional allocation of BRL 3.7 billion in the first half of the year, totaling BRL 7.7 billion when we consider the BRL 4 billion already approved in the first quarter. In addition, this morning, we published a material fact with a new redemption. The first redemption of PNC shares was a test. This is also a test in its own way. In the first redemption, we had an operation of BRL 30 [ million ] that was successful. Now we reduced the period of redemption that was up to 16 business days before from the announcement to the payment, reducing it by 3 business days. We are now doing a new BRL 2 billion redemption. Finally, we've concluded the divestment of a series of minority stakes and the acquisition of control of [ UHE Três Irmãos ] on Slide 6. Now just to mention again, the increase in adjusted regulatory EBITDA as a result of the better contribution margin of generation. And as a result of that, having a direct impact on income, partially offset by the worsening of financial results due to the interest rates in the period and the slightly higher leverage. On Slide 7, this is important. We greatly increased the investments that are being made from previous auctions that we won, the transmission auction, as well as the allocations that we had in P&E, the investments in the digitalization of [ Itaipu ] from BRL 534 million in the first quarter of last year to close to BRL 2 billion this quarter. As for reinforcement and improvements, there was a brief pause here this quarter or this half year compared to the previous half year, but the trend is still a slight growth this year. So that when we look at the investments that we're making and all the backlog that we already have contracted that are slightly higher than BRL 15 billion, we should add an RAP of BRL 2 billion a year. The generation backlog that was the cap auction that we won with 250 megawatts with investments of close to BRL 1 billion. On Slide 8, in Portfolio Management, as I had mentioned, we [ uncrossed ] a series of minority stakes, including AXIA Energia, where we received close to BRL 1 billion in proceeds, stakes in 4 small transmission lines with [ Gerais ], where we had proceeds of BRL 450 million and the payment for the consolidation of the [ Três Irmãos UHE] of BRL 256 million. On Slide 9, in allocable capital. Again, every quarter, we analyze how much we have of allocated funding or to be allocated. In this quarter, we reached the number that we would have BRL 3.7 billion, considering the BRL 4 billion that we had declared in the first quarter for this half year, we will have BRL 7.7 billion of shareholder returns to be executed in the coming months. As for the redemption, going back now, we declared a redemption of BRL 2 billion with a closing price of BRL 53.71 per share. Our shareholders will have until August 14 to opt in for the redemption or to convert into common shares. And if the choice is for conversion, they would receive the shares on August 18 and if they're redeeming on August 24. Now getting into the energy trading session, Slide 11. This is just a slide to understand how much we had available for trading on ACL. It doesn't mean ACR. It doesn't mean that we didn't sell. It was available to long-term assets and the quota that we don't negotiate. So not only in the total of 11 gigawatts, but by the breakdown by submarket. Since each submarket has a different price behavior, we give you this breakdown to make your analysis easier. On Slide 12, where we show the evolution of contribution margin from generation, as I said, it has improved compared to the previous year. Now looking at the unit margin, it would have gone from BRL 80 to BRL 100 quarter-on-quarter. That's a lot due to the mix, the mix of prices and submarkets was more favorable this quarter than in the same quarter of last year. On the right, we show you a little bit of seasonality looking at MRE overall and how our available capacity would be for our energy in each one of the quarters, considering that same seasonality of MRE and the projections. On Slide 13, now a little bit about the hydrological scenario for the quarter. Obviously, the second quarter is where we start the dry season. Although El Niño did bring already higher rain levels in the South. But since the main reservoirs are in the Southeast and Northeast, there has been a short-term impact. But our view to the medium and long term, it doesn't change. Now for prices, as I talked about before, this quarter, the prices in the Northeast versus the prices in the Southeast compared to the previous year were better. That was the biggest contributor to the margin from generation this quarter compared to the same quarter in the previous year. Now talking about ESG on Slide 15. Main agendas. First was the completion of the migration to Novo Mercado, the highest corporate governance segment of B3, where each shareholder has equal and full voting rights as well as political and economic rights. We were awarded the Pró-Ética seal for 2025, 2026, a very important seal, illustrating our commitment to ethics and transparency and strengthening corruption prevention and governance and compliance practices of the company. And in the environmental side, it's important to mention 30 projects are about BRL 78 million in investment to recover the environment and the basin of the Parnaíba River, one of the main basins we have in Brazil. Slide 16 is at the top of all the headlines talking about the Super El Niño. And for us, this is part of our journey. So what's this journey that we started in 2023 is a journey for adaptation and resilience to climate risk. So in 2023, we started a deep dive into the climate risk and assessment of our generation assets. In 2024, based on this diagnosis and assessment, we defined a series of adaptation plans for our assets running risk assessment for transmission assets in 2025, but also starting in 2024. We started to implement these plans. In '26, we already have 60% of those plans implemented, expected to be concluded by 2028. It could be slightly before that. But what's most important is that this is an ongoing analysis of climate variables and all future trends looking at a 50, 70-year horizon, how we'll be prepared for any changes. And what came from this journey. First, once again, to talk about our climate event monitoring and intelligence center that has an extensive use of artificial intelligence to improve our weather models and to forecast extreme events, which is greatly helpful for our operations with 100% of our assets being monitored. And based on this journey, we've updated our methodology to assess new investments considering the climate factors. And that's already applied both for the transmission auctions and for any assets that we may be looking at, for example, for M&A operations. And I think this concludes our presentation. We can move on to the Q&A session. Thank you.

[Operator Instructions] Our first question is from Felipe Andrade with Itaú BBA.

I'd like you to please talk about 2 topics. First, about the investments of reinforcement and improvements. If the company expects to reach revenue of BRL 5 billion this year, income of BRL 5 billion this year? And second, considering the stronger El Niño and looking at at least the end of the first quarter of next year, I'd like to hear about AXIA Energia view, not only about the short-term effects in terms of available energy, but the dynamics expected for prices in the North if the scenario remains until next year. We saw here a volume of purchases in the second quarter. So I'd like to understand if there's any relationship with that in that sense.

Felipe, thank you. The first question about investments, I'll ask Élio to answer. And the second about El Niño and the consequences for Rodrigo Limp.

Felipe, thank you for the question. You mentioned here about the reinforcement and improvements. We talk about the resilience of assets are essential, and we've been increasing since 2022, '23, starting from BRL 2 billion, BRL 3 billion, closing 2024 at BRL 3.3 billion, '25 with BRL 4.5 billion, and this agenda obviously advances. Our objective is to close at around BRL 5 billion, BRL 5.5 billion throughout 2026. And we won't stop here. The objective here is to invest more in our assets, reinforce resilience even more. This investment brings returns to shareholders as well. So it's very adequate, and we will continue seeking growth. Thank you.

Thank you as well for the question about the effect of El Niño in energy prices and portfolio. We already perceived an increase in rainfall in the South region. We had in the South, the highest rainfall in the last 2 years, and that naturally brings pressure downwards in the short-term prices, especially July, August and September with the recovery expected starting as of October. And in our portfolio, we consider all possible scenarios. El Niño as a concept has some effects that tend to increase intensity. For example, higher rainfall in the South, we already saw a reduction of rainfall in the North and Northeast regions and temperatures above average in the majority of the country without a clear definition of what happens with rainfall in the Southeast, which is where we have the majority of our reservoirs. So in our forecasts and looking at everyone that monitors this, we see the forecast of having a strong El Niño until the first quarter considering the summer and the rainy season. So if these effects are confirmed in the North and Northeast may also increase price volatility in terms of strategy, what we consider is this increase in volatility and the price range that may happen depending on the intensity of each of the scenarios, naturally seeking to expand sales, especially in the North and Northeast submarkets where we have more energy available.

Our next question is from Bruno Amorim with Goldman Sachs.

I'd like a quick follow-up about capital allocation, specifically on reinforcements and improvements. Could you comment a little bit about how much this desire to increase investment is because in the financial viewpoint, the returns are positive. And how much of it is somewhat to mitigate operational risks because of investments in an asset that's underinvested asset in the context that we saw with NTN-Bs at 8%, the SELIC rate at 14%. Cost of capital today is very high vis-a-vis regulatory returns. So the idea is to understand whether you do see a return or a very high spread in terms of cost of capital adjusted risk or if the more operational side of the decision also has a significant weight in the decision to increase investments in this area.

Bruno, I'll start. It's Ivan. The risk is infinite. So this management of operational resilience is taken very seriously by the company. And at the same time, combined with that, we have very adequate returns, and I'll ask for more details.

Thank you, Bruno. Thank you, Ivan. About reinforcement and improvements, first aware that this is mandatory investment of each concessionaire. We have to do that for the resilience of the assets in the long term. With that said, whenever we look at regulated investments, we look at the history of the behavior of ANEEL with a very strong alignment with the agency, increasing the adequate returns so that the concessionaire can allocate capital irrespective of the macroeconomic scenario with a robust financial position at every moment. I'm noting that tariff reviews occur every 5 years. And occasionally, when there is a very strong breakdown, it could happen in a shorter period. For that, so whenever there is a shift in the macro view in terms of liquidity or any different scenario or the opposite, when there starts to be very strong tailwinds, it doesn't make sense to do the payments far from detached from the reality. So when we look in the long term, the perceived returns are very compliant to each of the different moments. And historically, that's what's been happening. So the decision, as Ivan said, first, in terms of resilience and the need to maintain the assets thinking about the long term. But on the financial side, it is our confidence in the role of regulation in Brazil that has always been constructive since it's attracting the necessary investments for those who are here for the long game.

The next question is from Arthur Pereira with JPMorgan.