Empresa Distribuidora y Comercializadora Norte Sociedad Anónima (EDN) Earnings Call Transcript & Summary

Good morning. On behalf of Edenor, I would like to thank everybody for participating in this conference call to discuss the second quarter ending June 30, 2024. We will also highlight important recent developments and advances in our efforts to strengthen our position as an energy leader. If you would like to receive our earnings release or presentation, you can download them easily from the Investor Relations section of our website located at www.edenor.com or contact our Investor Relations team to request the document. This event is being recorded. After the company's remarks are completed, there will be a question-and-answer session, for which you may submit questions through the webcast chat. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Edenor's management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operational factors could also affect the future results of Edenor that could cause results to differ materially from those expressed in such forward-looking statements. Now let me pass the call to German Ranftl, our CFO, who will guide us through the presentation.

Thank you, Solange. Good morning, and welcome to everybody. Your presence here is very important to us, and we hope to provide you with a good understanding of Edenor performance during the second quarter of 2024. Before beginning our review of our quarter with you, we would like to announce the appointment of Mr. Daniel Marx as Chairman and CEO of the company. The Board of Directors of the company in its meeting held yesterday accepted the resignation of Mr. Neil Bleasdale for personal matters as a Chairman and Board of Directors and CEO of the company, even his position as regular Director. After this, the Board appointed Mr. Daniel Marx as a Chairman, member of the Executive Committee and CEO of Edenor. He has a long and distinguished record at the highest level in the public and private sector business. The change will be effective as of August 31, 2024. Before -- highlights, business strategy. Before moving to the discussion of our financial performance during the second quarter of 2024, I would like to take a few minutes to reemphasize our business strategy. We are highly focused on continuing to develop a sustainable business and to be positioned as a leader in the region through technology and innovation. Our business performance has seen a major improvement in the starting of the implementation of normalization of the tariffs from February 16 of this year. This restored the financial equilibrium of the company and needs to maintain in the long term through a 5-year tariff review. The completion of the 5-year full tariff review, which will be defined tariff for 2025 to 2029, will be completed by year-end. This should further enhance our financial performance and increase our opportunities for growth over the long term. This will continue adapting our Distribution business to meet and benefit from the changes of the energy transition and to broader our scope of business opportunity, which would include investments in renewals, conventional energy generation, nonregulatory business and critical minerals. I would like also to highlight some important recent developments. Our results for the second quarter on the first 6 months have been benefited substantially from the tariff increase implemented in mid-February of this year with an EBITDA pricing to ARS 77.4 billion in the second quarter of 2024 versus of last year of ARS 27.6 billion. The 5-year tariff review process has actively been moving forward and looks to set to be completed in line with the original schedule by the end of this year. A public hearing is scheduled for October 1. This week, we issued $100 million equivalent in Class 5 and Class 6 notes at a very attractive rates or year bullet at 9.5% coupon or Class 5 and notes. This followed the issuance of $124 million, equivalent in Class 3 and Class 4 notes during the first quarter. Together, this has to essentially improve our debt profile. Standard & Poors, FIX and Moody's, Argentina have rated the National Scale credit rating -- ratified, sorry, the National Scale Credit Ratings. The national government continues to move forward on the regulatory for which a clear objective to normalize the regulation of the energy sector. This has led to a series of moves since the beginning of this year. A major 319.2% transition tariff increase became effective on February 16, 2024. This led to a major improvement in EBITDA, which was ARS 77.4 billion in the second quarter of 2024 versus the prior for both the second quarter and the year-to-date periods. Monthly adjustment to be value-added for distribution started in August, in line with estimated future inflation, 3% on VAD. The adjustment for the months of -- from May through July will be included in the new tariff as part of the 5-year tariff review process. This estimation is approximately 25.86% of additional increases that we will receive. The government continues to implement gradually a reduction in energy subsidies. We continue to work together with our advisers and the regulatory to continue to make progress on the 5-year full target review. As mentioned, this is on schedule and expected to be completed by year-end 2024. The company has been paying its energy purchase cost to CAMMESA on schedule since April. It has also been paying on scheduled the reschedule payments from past due debt with CAMMESA. Additionally, it's negotiating a payment plan for some additional debt that is remaining with CAMMESA. Finally, it is worth noting that the Argentine Congress recently approved a major law, known as Ley Bases, which is expected to provide major investment opportunities. Amongst its provision, it's a new program called RIGI, El régimen de incentivo para grandes inversiones in Spanish, which provides incentives for major new investors or new investments. This is expected to encourage both foreign and domestic investments in Argentina. It is especially applicable to invest in the energy and infrastructure sectors. Now let us look on the financial results, which show significant improvements during the quarter. As you can see in Slide 10, sales roses 28% year-to-year in the second quarter of 2024 in constant currency pesos to ARS 436,721 million in the second quarter of 2024. This was mainly due to the impact of the tariff adjustment plus an increase in consumption by residential customers of 1.9%, which was partially offset by a reduced demand. Energy sales evolution. Edenor customer base reaches 3.3 million customers, 1% more versus the second quarter of 2023 due mainly to an increase in residential customers. This increase reflected greater market discipline measures and the installation of 300 -- sorry, 3,890 smart meters in the second quarter of 2024 to convert clandestine connections into formal participants in the electricity system. Distribution margin. The distribution margin for the 6 months increased significantly to ARS 354 billion, up 76% versus the first half of last year. The rise was largely driven by the major improvement in the second quarter of 2024, up 94% versus the second quarter of 2023 to ARS 201.3 billion. The positive effect from the tariff adjustment implemented from mid of February 2024, which more than offset the negative effect of the lower volumes and higher cost due to the subsidies reduction. EBITDA. Second quarter EBITDA was a positive result of ARS 77.4 billion, a sharp stream from the last year loss of ARS 27.3 billion. The main factors driven the improvement were the following: Positive impacts, higher revenues that resulted from the tariff adjustment [Technical Difficulty] element in February and further reductions in energy losses from 15.3% in the second quarter of 2023 versus 14.9% in the second quarter of 2024. Net financial expenses. Financial expenses on Slide 14 of ARS 132.5 billion in the second quarter of 2024, was up 2% versus the second quarter of 2023, mainly due to the CAMMESA debt considering interest and the impact of the devaluation of [indiscernible] last December. Net results. On the net income, Edenor reports a net profit of ARS 47.3 billion for the second quarter versus last year loss in the second quarter of ARS 17.9 billion. The improvement was due to the better operating results. The sharp rise in the net income, of course, despite a lower positive effect of RECPAM versus the second quarter of 2023. CapEx. For the second quarter, we invested ARS 76.9 billion, up 23% versus the last year second quarter, which accumulated CapEx of ARS 134.7 billion for the first half of this year. Our investment program remains strong and reflecting our unwavering commitment to improve service quality, which is evident in the strong improvement that have been achieved in our service indicators. our investment program, spending allocation is made to fulfill our commitment to meet rising demand, further improve service quality and reduce nontechnical losses. Now looking at our operating indicators, energy losses. We achieved an important reduction in energy losses, reaching 14.1%, down from 15.3% year-to-year. This underscores our continuing efforts to find solutions to this challenge. Our multidisciplinary teams are consistently focused in finding innovation ways to compete energy losses. These efforts are complemented by our market discipline initiatives that are aimed to curbing inefficiencies and irregularities, also analytical tools powered by artificial intelligence of mounted inspection efficiency and our market discipline actions continue to detect and rectify irregular connections. It is important to remember that the 14.9% total loss, 9.7% are technical losses, which are recognized by regulatory entity in our target. Quality of service, as mentioned earlier, our investment plan is continuing to provide improvement in service quality by reducing the duration and frequency of the outages, which have been on and down over past -- since 2014. These levels are and have been comfortable exceeding the levels required by the regulatory entity. At the end of the second quarter of 2024, the SAIDI and SAIFI indicators show 8.7 hours duration of outages and 3.6 average outages per client, respectively, in the period, both close to record levels. This recovery in service is mainly due to the strong investment that the company has made over the last decade. The investments have been focusing on implementing improvements in operational process and the adoption of technology applied to the operations and management of the network. Financial debt. This week, as I told you before, we issued $100 million in Class 5 and Class 6 notes at a very attractive rates. This follows the issuance of $124 million in Class 3 and 4 during the first quarter of this year. Together, this has substantially improved our debt profile. Pro forma total debt is now $300.5 million. Total net debt is $42 million. With the improvement in our risk profile due to important changes on the regulatory front, the 3 rating agencies that cover us, Standard & Poors, FIX and Moody's, each made positive moves, one notch related to our debt earlier this year. Standard & Poor's and FIX raises their ratings and Moody's improves their outlook. We view these changes as a very positive signal. Most recently, Standard & Poor, FIX and Moody's have ratified the national scale credit rating. Maturity schedule. In this slide, you can see the maturity scale of our debt as of June and our pro forma for the recent transaction in which we issued $100 million in Class 5 and Class 6. Closing remarks. To close, I would like to reiterate several key points showing in Slide 15 that are the following. We remain focused on future transformation growth opportunities. The changes to our corporate purpose in our bylaws will allow us to open the spectrum of growth opportunities to other segments like energy generation, critical minerals, adapting our distribution business to the changes of the energy transition. We are an industry leader in Argentina with a leading 20% market share in the electricity distribution business. The 5-year tariff review process should continue to result in material improvements in EBITDA and net income as well as to keep making investments to further improve the quality service to our clients, continue to transform the grid into a smart grid with technology and innovation. These improvements have restored partially the economic equilibrium of Edenor. The company is in the right track and is working accordingly with the regulatory entity to finalize the tariff increase for the last 5 years in order to have a stable and predictable plan for the coming future. With this, now we would like to open the call for questions. To ask questions, please send in writing message through the IR Edenor or through a Q&A menu. Identify yourself and stating that you have a question. We thank you again for the support and your engagement as shareholder and bondholder.

[Audio Gap] that is in front -- sorry, the usual proceeds of the $100 million debt that we have right issue is infrastructure. We will continue in the process of continuing improving the business plan of the company.

There is another question from [Audio Gap]

The second quarter figures give us an indication of the future earnings potential. We are at good start point and it would not commit to analyze that number. Certainly, for 2024, the full EBITDA will be somewhat less because of the weaker quarter of the year. The rating agencies estimate can be considered that are in accordance with our numbers for this 2024. So I would suggest you to go into the reports of the rating agencies on that.

The numbers -- I will add that the numbers are, S&P has an estimation between ARS 475 billion to ARS 325 billion, estimation of EBITDA and Fitch has an estimation of $252 million. There's another question [Audio Gap].

Yes, I would say, yes, it's going to be a process that needs to be still regulated, and, put in a way, normalized with the regulatory entity because today we don't have regulations in that respect. But I would say that's going to be part of the process of the industry market will go for. I wouldn't think that that's going to be the goal for the future.

[Audio Gap] of our investment plan to renew of [indiscernible]

Not for the moment. We just have created the new company that's going to be a subsidiary of Edenor and it's called Edenor [indiscernible] but we will start analyzing different projects and different alternatives for the future.

There is another question. We do have a increase in [indiscernible] by how much?

Yes, we did have an increase, and the increase as of August 1, and it's a 3% over the value-added distribution amount. Okay. Thank you very much for your participation and your questions on our quarterly conference call. Please do not hesitate to contact us our Investor Relations department for any further inquiries you may have, and good morning to all of you, and have a nice day.