Energisa S.A. (ENGI3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Energisa's Conference Call to discuss the results of the second quarter 2021. We would like to inform you that this event is being recorded. [Operator Instructions] Both audio and slide show for this presentation are being broadcast simultaneously by a webcast and may be accessed through the website, ri.energesia.com.br. Before proceeding, let me mention that forward-looking statements that may be made during this conference call regarding the company's business prospects, operating and financial projections and goals are based on beliefs and assumptions of Energisa's management as well as information currently available to the company. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions, as they relate to future events and therefore, depend on circumstances that may or not occur. General economic conditions, industry conditions and other operating factors may affect the company's future results and may lead to results that differ materially from those expressed in such forward-looking statements. Now I would like to turn over to Mr. Ricardo Botelho. Please, Mr. Botelho, you may proceed.

Well, thank you, operator. Good afternoon, everyone. We will start another important teleconference for the results of the second quarter of 2021. Here with us today, we have Maurício Botelho, DRI and Financial Vice President; Gioreli De Sousa, Vice President of Distribution; Alexandre Ferreira, Vice President of Regulation; Daniele A. Salomão, Vice President of Human Resources; Antonio Carlos Tovar, Director of Corporate Finance, New Consensus Director of Revenue Protection; Roberta Godoi, Vice President of Energy Solutions; and finally, our Investor Relations team. To kick off our presentation today, first of all, I'd like to kindly ask you to look at Slide #2. It should be read carefully before we make any decisions on investments by the company. And then on Slide #3, I would like to present the highlights for the meeting today. They include the performance in the energy market, energy losses, quality indicators, DEC and FEC, delinquency rate, collection rate, net RAB evolution and Parcel B evolution with the tariffs for this year. Special highlights throughout our presentation today will be on 1 important factor we have observed in Acre and Rondônia in terms of operational efficiency, improvement for client services and financial results. We expect to overcome the internal goals for the transformation plan, and we'll celebrate with you. And then after that, Maurício Botelho will present the financial highlights, investments and advances in the Transmission segment, I'm sorry. And finally, we are going to open for Q&A. On Slide 4, we have the operational highlights of the group, and the performance in the energy market, which had the highest growth in 9 years for the second quarter with an increase of 7.9% when compared to the same period last year. Even though the market in 2020 was impacted by the COVID crisis, this recovery demonstrates that we're going back to track with our -- in full power, growing even when compared to prepandemic levels. Actually, we're present in a large part of Brazil, and our 11 concessions were benefited by the recovery of economic activities this year, with a growth in the consumption of energy in this quarter, especially those located in the southeast of the country. Also in the consumption classes, all of them had an expressive growth. Industrial consumption with an increase of 14.4%, has guided the positive results for this quarter, which was leveraged mainly by the cement production sector, textile, food, vehicle parts, mining with the resumption of the consumption market for these projects. For the residential class, which is the most important 1 for the group and represents 40% of the total, was also a highlight, improving 4.7% in face of the energy increase recovered with a good performance of losses that we will demonstrate immediately after. I would also like to highlight that the growth higher than 2 digits in the business class in the order of 13.1%, which was harmed in 2020 with the paralyzation of the activities in business and services since the COVID first wave. All of our 11 distributors have benefited from this growth and it has been possible because of the advance of vaccination and this social distancing flexibilization. However, the class is still below the pre-pandemic level. The rural class has had a relevance in the growth of consumption with an increase of 4% and this was leveraged by the production of egg, soy, rice, cattle raising, especially in the Mato Grosso do Sul concessions, Tocantins and Inner São Paulo state because of the higher irrigation services in Paraíba and Sergipe. In Slide 5, we can see that the average consumption of Energisa is 200 bps higher than the national average in the last 10 years. And I would like to highlight that in the last quarter, our performance was lower than the average in Brazil, but this is perfectly explained by the facts that happened in 2020 in the peak of the pandemic as it can be clearly shown in the graph. With this, the comparison basis was harmed. And now on Slide 6 and 7, we can see the losses with a highlight for Rondônia and Acre since December 2019. In this quarter, the 12-month curve, the indicator of total loss were in the order of 13.11% with an extensive reduction of 0.66 percentage points when compared to March. And it is the highest value for this area. And I would like to reinforce that the consolidated losses of the group for this quarter were below the regulatory limit for the first time since the fourth quarter of 2018, when we started recording the losses for Rondônia and Acre. This performance is explained by the consistent improvement in the electrical system, also the use of technology and analytic intelligence and capacity building of all of our employees. All of these measures have led us to reduce the loss indicator in all 11 distributors when we compare March 2021 and June 2021. The Mato Grosso and Paraíba distributors have had descending curve -- descending loss curves with levels that are close to the regulatory limits. Paraíba has produced its best results since September 2019. And the losses in the second quarter of 2020 in the peak of the first wave of the pandemic were explained by the restrictions in our PO team. I would also like to highlight our Rondônia and Acre concession where in Slide 7 I present, since 2019, the trajectory of losses with improvements of 5.8% and 7.3%, respectively. And then when we compare this to March this year, we can see that in June and March 2021, these reductions are even more relevant. With that, for Rondônia, we have decreased the distance between this indicator and its regulatory limit in 2.5 percentage points when compared to a distance of 4 percentage points presented in March 2021. The Acre concession has performed below the regulatory limits since December 2019 with a relevant increase in performance in March and June 2021 with reductions of 2.4% and 3.3% percentage points, respectively. In both companies, the loss reduction was accelerated by the implementation of analytical tools and management tools of the processes that are used in all of the companies of the group. And the system migration took place in December 2020 and March '21. In Slide 8 and 9, we can see the performance of the DEC and FEC quality indicators of our 11 distributors with excellent results in both indicators. This quarter, the companies who had their historical minimum in DEC where Energisa continues with a reduction of 2.9 hours or 14.7% when compared to June 2020. Overcome its historical minimum in the previous quarter in Energisa Paraíba with a reduction of 1 hour in the interruption. Once again, I would like to highlight the good progression in Rondônia and Acre in Slide 9 shows a trend toward decrease since December 2019 with a reduction in the duration of interruptions of 17 hours and 8.4 hours, respectively. Rondônia remains above its regulatory limit with a difference of only 4.37 hours, and we are working to have the connection of the 9 isolated systems in the state take place this year. Regarding the FEC indicator, all of the 11 distributors remain below their regulatory limits, with a highlight once again to Rondônia and Acre, who have their historical minimum in the second quarter. These 2 companies also have presented a decreasing trend for this indicator of frequency of interruptions with a reduction, which is 10x and 9.5x, respectively since December 2019. And in Slide 10, we can see the results for the group of distributors with an improvement of 0.7 percentage points, and this is still impacted by the COVID pandemic. The actions that have been implemented have allowed a gradual recovery and the results confirm the expectation of sustained improvement. We have also had a decrease of BRL 142.6 million when compared to the second quarter in 2020 in the delinquency. And even with this improvement, the scenario is challenging. However, it is more optimistic if compared to last year when the indicator reached record levels. Our collection actions with more flexible payment offers and access to digital media has contributed for a better performance in this indicator. And in the graph below, we can see the performance for the quarter in Rondônia and Acre, which have reverted their provisions for PPECLD continuously. In Slide 11 and 12, we can see the progression based on the liquid payment of Parcel B in the distributors, Borborema, Minas Gerais, Nova Friburgo, which had their reviews performed by June '21. And the South/Southeast distributor with a review in July this year in Paraíba. And then we can see the graph with an increase in the net base for the fifth cycle. When compared to the last 2 quarters, these results reflect investments and good asset management, which has been done consistently in these companies with a highlight to Energisa South and Southeast and Paraíba. With this progression, I'd like to show you in the next slide where we have had improvements in the payment of Parcel B. In other words, we were able to guarantee an increase in 4 of the distributors in the South, Southeast and Paraíba, which together have an actual increase of Parcel B of approximately BRL 72 billion when compared to the previous quarter. And we can also see that this performance once again shows the company's discipline with the main leverage we have whereas we provide improvements in our services to all of our clients. And now I turn over to Mr. Maurício Botelho, who will present the financial highlights for the quarter.

Thank you very much, Ricardo. And now let's move on to Slide #14. Here, we're going to highlight the controllable expenses, which were reduced 11.9% in the semester and 4.6% in the quarter. We have PMSO, which grew 5.3% in this semester and is below the IPCA inflation of 8.3% and IGPM of 35.8%. And then in this quarter, we can see a total of BRL 663.7 million, an increase of BRL 110.2 million when compared to the second quarter of 2020. It's important to highlight that in the second quarter of last year, it was the first wave of the pandemic where we adopted severe contention measures for costs and service delays, in addition to the benefits that were granted at the time by means of a decrease in labor payments based on provisional Measure 963. And then for PMSO in the first quarter of 2020, which is before the pandemic, it was BRL 648.4 million, and so we had, in fact, a nominal increment of only 2.4% in face of this normalized expense level. I highlight in the second quarter an increment of BRL 27.1 million in expenses with materials and this results from a combination of factors such as increase in the price of commodities and the resumption of activities when compared to the same period last year. And this is the result of higher expenses such as steel parts and accessories. And in the service line, we had an increase ranging in the order of BRL 23.8 million in the quarter due especially to the resumption of the activities with a higher volume of services. On Slide 15, we have the EBITDA for the second quarter with an increase of 90.5% or BRL 658 million when compared to the second quarter in 2020. In the accrued for the year, the increase was 70.8% or BRL 1.1 billion. And this performance is explained especially by the increment in Parcel B of the distributors, which totaled BRL 602.7 million in the quarter and was impacted by the reviews and readjustments in the tariff. In addition to that, we also had a contribution from the regulatory EBITDA of the transmission without the O&M revenue, the EBITDA. Without nonrecurring effect and noncash effect between the quarters had a growth of 109.8% and reached the level of BRL 1.25 billion. And then moving on to Slide 16. We're going to talk about the adjusted EBITDA the last 12 months. In this graph, we can see that the volatility is removed as well as the seasonability, and we had an increase of adjusted EBITDA on annual basis of BRL 695 million when compared to the first quarter of this year, and it is BRL 1.7 billion higher than when compared to the last 12 months. And PMSO also went down from BRL 2.82 billion in the second quarter of 2020 to BRL 2.65 billion this quarter. And the PMSO ratio for EBITDA went down from 74.9% in the second quarter last year to 48.2% in this last quarter. And we are now going to the next slide. We are going to talk a little bit about Acre and Rondônia. Ricardo had already mentioned this. We had an excellent recovery in these 2 areas. We have demonstrated the PMSO and adjusted EBITDA progression in these companies. And as you can see in the 12-month graph that we have had continued slow reduction in PMSO in the 2 companies since the first quarter of 2020. And an increase was recorded only now in the second quarter, and this was impacted in large part by the factors that were mentioned previously. We can also see the adjusted EBITDA, which resulted in a joint variation for the 2 companies of BRL 52.7 million when comparing the second quarter of '21 to the first quarter of '21. This growth is even higher. It is of BRL 611 million when compared to the performance of these companies -- when we compare the performance with that of the first quarter of 2019. In Slide 18, we highlight the progression of the 2 last acquisitions. And please note that after the initial period of consolidation of the 2 former state-owned companies, we have already operated with overperformance of 54.4% when compared to the regulatory EBITDA. And Energisa Rondônia went from a negative EBITDA and now we are in the positive. However, it is still lower than the regulatory level. In Acre, since last year, we have overcome, we are above the regulatory EBITDA. And there is still a lot more to do, but we can see that these companies are gradually being transformed into efficient companies. In Slide 19, we're going to talk about our net profit. In the quarter, we recorded BRL 749 million when compared to losses of BRL 88 million in the second quarter of 2020. And here, we have some exclusions. We have excluded noncash and nonrecurring effects in addition to other effects. And the growth in profit is still relevant. The profit was BRL 355.3 million between quarters with an increase of 397.1% or the equivalent of BRL 218.9 million. And it's important to mention that Energisa has maintained its position of paying for dividends every semester and decided to pay BRL 0.65 per unit as dividends, equivalent to 35% of the net profit in the semester, representing BRL 235.3 million and then on August 18, 2020, the shares are going to be negotiated ex dividends and payments will be made on September 29. And then on Slide 20, we're going to talk a little bit about our debts and it was BRL 13.9 billion, representing a decrease of BRL 314 million when compared to the debt in March 2021. And in the second quarter this year, we performed 15 operations, including expansion of deadlines, rollouts, which totaled BRL 1.5 billion, with a capitation of BRL 3.1 billion in the year, and we have concluded the quarter with a robust cash position of BRL 5 billion. And the average time of our gross debt is 4.1 years and the average cost is 7.8% in the year when compared to 5.15% in March 2021. CDI is our main index and it is 64.9% of our debt. The leverage indicator, the net debt, according to the adjusted EBITDA closed in June at 2.5x when compared to 3x in March 2021. And when compared to the second quarter of 2020, we represent an expressive reduction of 1.2x. The covenant limit of the net debt by EBITDA for the 2021 year is 4x. In other words, a more comfortable situation in this indicator. And then moving on to the next slide, we can see our investments in this quarter, which were in the order of BRL 909.2 million, an increase of 35.4% when compared to BRL 771.5 million in the second quarter of 2020. And this increase was observed for electric and nonelectric asset values. And taking into account the electric assets, there was a growth in investments in the order of 41.3% or BRL 226.3 million. And of the total investment in this period, 78.6% were directed to the distributors and 13.5% to the transmissions that are being constructed. And in regards to these investments in distributed generation, we have 11 ongoing projects, of which 4 have been inaugurated this semester with investments of BRL 48 million and a capacity of 12.7 MWP. And the investments for the second quarter this year for the projects under construction, we have a total of BRL 125 million in Minas Gerais and Rio de Janeiro. And in 2021, we have record investments that totaled BRL 3.8 billion. In the distributors, we're going to have BRL 2.8 billion invested in the transmitters and in Rondônia, the expected investments are of BRL 747 million, of which BRL 314 million in electric assets and BRL 410 million from special liabilities, including the interconnection of 9 insulated systems in the second semester. And the concessions of Mato Grosso and Mato Grosso do Sul together represent about BRL 1 billion in investments. And then in the next slide, we're going to talk about transmission. We can see our enterprises of transmission, which represents BRL 283.1 million in -- for the 2021 cycle. And we find a concession contract on March 30 of Energisa Transmissora Amazonas with a payment of BRL 239 million to Amazonas Geração, and this refers to the acquisition of the existing assets in this concession. We have also received 30% of the RAP in the month of May this year, and this is retroactive to April. We expect an average anticipation between 12 and 18 months, including the revitalization of the existing assets. In the last month of June, we had a victory in the ANEEL auction. And this is -- includes the acquisition of a new yard of 138 kV of the e Gurupi Substation in synergism with Energisa Tocantins Transmissora. And I finalize my presentation with a very good piece of news. We had the approval of BNDES and BASA for the funding of our transmission project in Tocantins, and the amounts are BRL 166 million and BRL 327 million, respectively, totaling BRL 493 million or about 75% of the estimated CapEx. I thank you for your attention. We're now going to open for Q&A. Operator, please.

[Operator Instructions] Our first question from Carolina Carneiro, Crédit Suisse.

I have 2 questions. The first one, in this semester, you had a very good performance in terms of default, and this was before the most recent facts. I would like you to comment whether you expect to have any changes in this level, because of the increases in the tariffs or if you haven't seen that yet and perhaps you have already worked or are trying to mitigate the impact? And then the second topic, if you can comment. You have been very active in EGD. And this week, we've seen a new project to discuss EGD, which will probably be reported next week. And so could you please comment a little bit about your expectations of what it's being negotiated?

Well, we are going to divide this answer. About the role of tariffs in the default, we have seen the results in the residential area, and we did have an impact. We have had increases in default payments. Now your second question, I'm going to turn over to Alexandre and Ricardo. So that they can both answer this question.

Well -- Thank you, Carolina, for your question. So you would like to know what our impression is about the project and what is the impact on our companies. The agreement has not been voted by the Congress. And this is how this will have to be solved. This is not beneficial for anybody, not for the distributor generation sector, among others. And we have a 12-month period after the law has been approved. And for those who come in between month 3 and 18, the old rules will be applied until 2031. And those who come in after month 19, we will have gradual increases and Parcel B will have to be paid totally to the distributor. And so based on the view of the distributor and the difference between the payments of the whole parcel. And this payment in different steps is something that will probably lead to increases for the consumers. This is well known and we have been are discussing this for a while. There is a specific rule for shared cases after month 18 and 19, the parcel will be paid and then 40% of the transmission parcel and 100% of the tariffs. So I believe that we will have enough time to adjust to the new rules and the assets will be managed in the long run. This is our opinion about PLD and its impact on the business.

Our next question is from Andre Sampaio from Santander.

Good afternoon. I'd like to ask a quick question about Parcel B. I know that there is a reasonable possibility that we will have an impact of inflation on the tariffs in addition to water shortage. So what do you see this for next year?

Good afternoon, this is Alexandre. Regarding the perspective for Parcel B next year, what we see in a welcome example of what happened this year. We are trying to do something with the government, so that we can comply next year. We've seen this happen early this year when we're trying to find solutions. We have had a winning solution. This is being dealt with ahead of time with more time than what we did last year. So I do not see any problems for next year.

Our next question is from Marcelo Sá, Itaú.

Well, actually, there is a question by Andre. In the beginning of the year, NIL carried out a study and it showed that if we did not control tariff increases, we would have an increase of 18%. And then with all of the measures that we're taking, we would have an increase in average of 10%. And then we have payments of Parcel B and other measures that were taken and ended up being successful. But I know that if we have a stock, which was not taken into account for next year, and we have very high levels of EG, yes, at high levels and I know that there's a lot of pressure. And part of it somehow is already being taken into account, but we still have some amount left. And when we look at all of these factors, next year, we're probably going to have another year with some tariff pressure. So why do you think that the impact is not going to be as relevant for next year?