Interconexión Eléctrica S.A. E.S.P. (ISA) Earnings Call Transcript & Summary

Today, we have Mr. Bernardo Vargas, CEO; Carolina Botero, CFO; Olga Patricia Castano, Chief Strategy Officer; Cesar Ramirez, Chief Electric Power Transmission Officer; and Ernesto Carrasco, Chief Road Concessions Officer. My name is Diana Cardona, Investor Relations Specialist. This event is being broadcast in Spanish, with simultaneous translation in English. [Operator Instructions] To begin this presentation, I give the floor to Bernardo, who will begin by presenting the relevant events of the quarter. Go ahead, Bernardo.

Thank you. Good morning, everyone. Welcome to our meeting of the first quarter of 2021. Let's start by going on to the next slide. So we go to the highlights of the period. First, on March 26, we held our General Shareholders Meeting. I would like to highlight some of the main highlights. In 2021, we distributed COP 1,303 per share. This is the highest dividend in the company's history, representing an increase of 93% when compared with the previous year. The total dividend payment was above COP 1.4 trillion and will be funded with our own cash without the need to incur additional debt. Since our income has been historically high, we had one of the highest profitabilities in 2020. And we started the year with a significant availability of our resources. So we increased the dividend amount. During 2021, the dividends we received from our affiliates were increased by 87%. Throughout this decision, ISA continues to take advantage of value generation for its shareholders. As for the composition of the board of directors, I would like to mention that the appointment of 3 new independent members took place at the meeting. These are independent members. They are Dr. Ana Fernanda Maiguashca, who has a large trajectory, she's been a co-director of the Bank of the Republic; Dr. Diego Munoz Tamayo, he's a lawyer in one of the law firms most representative of the sector; and Jorge Andrés Carrillo, who presented his resignation on April 29 due to his new commitments as General Manager of Empresas Publicas de Medellin. As a result of that, we expect to replace Dr. Carrillo's -- we expect the nominee to be announced in the next few days. With these appointments, we maintain 7 independent members of the 9 that make up the current board, which is beyond the legal requirements and is evidence of our strong commitment to high corporate governance standards. Another item announced in the General Shareholders Meeting was the project for the sale of 100% of shares held by the company in Internexa. As we mentioned before, this decision has the best risk/benefit balance for ISA's shareholders. And in our judgment, this is the best, as I already said, risk/benefit balance for ISA shareholders, and it's going to benefit in a very relevant manner Internexa. This responds to the strategic objectives of the group since Internexa has the potential to achieve a more solid growth and consolidation of its businesses in the telecom and ICT regional market, which is a very dynamic market. And it's representing in the international market the highest marks [indiscernible]. As far as 5G, this is a step forward, very important for Internexa. ISA has the opportunity to manage its portfolio in a better manner, focusing more on businesses with a risk/return payoff that is better adjusted to our investment profile. Let's go to Slide 4. During the first quarter of the year, investments totaled COP 1.9 trillion. Most of these investments were in Brazil, where we concluded the acquisition of 100% of shares of PBTE, for approximately COP 1 trillion, which will represent -- this was announced in our previous conference. This will represent annual revenues of approximately COP 128 billion for ISA. The remaining investments for the quarter were focused on advancing electric power transmission projects in Peru, Colombia and Chile. This year, in 2021, we maintain our growth dynamics, with 24 electric power transmission projects that are under execution as well as 7 roads projects located in the different territories where we are present. All of them will bring future revenues to the group and will contribute to reach our investment target for this year, which amounts to COP 5.7 trillion. Let's go to Slide 5, please. Before I give the floor to Carolina Botero, I would like to say that the positive results shown by ISA Group remain. As you can see in this slide, for the first quarter of the year ISA demonstrated significant growth regarding revenue, EBITDA and net income when compared with the same period of 2020. These better results are mainly associated with the consolidation of new projects and companies within our finances as part of our permanent growth strategy. Another relevant fact that I want to highlight that demonstrates the company's efficiency and profitability is ROE performance, which has reached one of its highest levels in the history of ISA, going from 15.6% at the end of 2020 to 17.1% in March of 2021, which reflects the efficiency and profitability with growth to which we are committed to. I will now give the floor to Carolina. She will detail these results further. Let's go to Slide 6, please.

Thank you, Bernardo, and good morning, everyone. I am very happy to be with you again to explain the excellent results of the group in this first quarter of 2021. Let's go to Slide 7, please. [indiscernible] quarter show us that the group continued towards a sustainable, profitable growth path. Both revenues and EBITDA have grown by 14.3%, and net income has grown by 34.2%. The main reasons, which will be detailed in the following slides, are the following. First of all, like Bernardo said, the consolidation of new companies, such as PBTE in Brazil, Orazul in Peru and Ruta Costera in Colombia, which were not part of the consolidated figures in the first quarter of last year. Second place is the energization during the first quarter of the year of the Aguapei Interconnection in Brazil and the Quellaveco Connection in Peru, plus other projects that commenced operations after the first quarter of 2020. The third effect ?- the positive effect on revenues of the extended national consumer price index in Brazil and the IPP in Colombia. Fourth, the growth of expenses below revenues as a result of the group's continuous committed work to ensure efficient management of its AOM expenses, which is already showing visible results. Finally, it's important to note that consistent with our purpose of efficiently managing our capital structure, prioritizing the lowest-cost sources that respond to the cycle in which the company finds itself, the board authorized the subscription, issuance and placement of foreign debt bonds in the international capital market for up to $400 million as well as the execution of a domestic and foreign debt substitution operation. Next slide, please. Slide #8. During the first quarter of 2021, operating revenues were COP 2.4 trillion, 14.3% more than the same period of 2020. This change was explained by several factors. One, as we explained earlier, the consolidation of Orazul as of the third quarter of 2020; Ruta Costera as of the fourth quarter of 2020; and PBTE as of March 2021. Second, in ISA CTEEP and its companies, higher revenues were recorded given the IPCA update, with a favorable impact of more than COP 86 billion; also, change of the contractual asset due to the application of the CVM rolling, for COP 36 billion; and 100% of PBTE was incorporated, representing an additional COP 9 billion. In addition, higher revenues in Colombia due to the incorporation of the UPME calls, higher connection services and higher PPI. All of these factors implied a positive impact of more than COP 35 billion. Entering into operation of several projects in Colombia in 2020, in Chile and Peru bringing additional revenues of COP 6.5 billion. Higher revenues from the Road Concessions business unit for COP 105 billion due to the consolidation of Ruta Costera and higher revenues associated with concession maintenance and toll management in Chile. The Telecommunications business unit increased revenues by COP 7.6 billion due to the higher consumption of internet services in Peru and Colombia. Construction revenues increased by 39% compared with the first quarter of 2020, due to the application of the construction margin in ISA CTEEP and its companies following the CVM's pronouncement, explained in our fourth quarter 2020 conference call. We must include the increased construction activity in countries like Peru and Brazil and the consolidation of Costera. As a financial asset, it also generates revenues for this reason. Let's go to the next slide. EBITDA for the first quarter was above COP 1.5 trillion, an increase of 14.3% over the same period of the previous year. Aside from the previously explained information regarding revenues, the EBITDA performance was also a consequence of the expense performance in the quarter, which was COP 857 billion, 14.3% higher than in the first quarter of the previous year. For this, we must understand the dynamics of both construction and operating expenses. So construction costs increased by 26.4% due to the higher construction activity in Peru, especially in the COYA-YANA project. In addition, we should mention increased electric power investments in Brazil and the incorporation of Costera. Operating AOM amounted to almost COP 482 billion for the quarter, increasing by 6.3% compared with the same period of 2020, mainly due to the consolidation of the new businesses and projects. It's important to note that the group is constantly working on and committed to the efficient management and rigorous control of AOM expenses. As evidence of this, AOM operating revenues increased by 10%, compared with AOM increase of 6.3%. Both variables exclude construction. EBITDA margin reached 63.8%; and 75.1%, excluding construction. For the first quarter of the previous year, these indicators were 63.8% and 74.3%, respectively. Let's go to Slide 10, please. Net income for the first quarter totaled COP 508 billion, an increase of 34.2% over the same period of 2020. This change, aside from including the effects explained above in EBITDA, was also explained by the 118% increase in profits in companies where ISA exerts joint control and significant influence, mainly as a result of a higher IPCA and general market price index in Brazil and the enforcement of the CVM's pronouncement, which had a positive effect on its revenues. This was partially offset by higher depreciations due to the entry into operation of new companies and projects in the group. Profit also results from a 14% increase in net financial expenses due to the inclusion of Costera and PBTE, plus a debt to finance the acquisitions made during the last year. As a result of higher net income, income tax and minority interest increased by 27% and 14%, respectively. The latter corresponds to the percentage of net income distributed to shareholders outside the ISA Group. Net margin reached 21.5%, several points higher than the 18.3% recorded in the same period of the previous year. Slide 11. Financial indicators continue to be a clear demonstration of the strength of our businesses. Operating EBITDA margin was 75.1%, which demonstrates a financial strategy focused on the permanent profitability of our operations. ROE reached one of the highest levels in its history, which reaffirms our commitment to grow profitably and generate sustainable value for our shareholders. The net debt-EBITDA indicator registered an increase, but it continues at levels that are adequate for companies with our characteristics and even below the requirements to maintain our current risk rating. These results allow us to continue leveraging our growth. Let's go to Slide 12, please. As of March 2021, the consolidated financial debt amounted to COP 24.2 trillion, an increase of 6.4% compared with December 2020. The main reasons of this increase were: one, exchange rate effect, of approximately COP 1.2 trillion, explained by the 8.9% devaluation of the [ dollar ] against the U.S. dollar and the 7.2% devaluation against the Chilean peso; two, increased debt in CTEEP, who issued bonds of COP 441 billion, as well as PBTE's debt consolidation of COP 240 billion; three, the above increases were offset by lower net debt in Chile, Peru and Colombia, where reimbursements exceeded debt disbursements. Indebtedness indicators continue at the levels observed last year, as the increasing debt was accompanied by a higher EBITDA generation. Now I'll turn the call over to Olga Patricia Castano, our guest in this results conference. She will talk about the achievements of our ISA2030 strategy. Paty, go ahead and welcome.

Thank you. Good morning, everyone. I hope to find you well. It's a pleasure for me to be with you today to tell you an integrated view of the advancements of our 2030 ISA strategy. As Carolina and Bernardo mentioned earlier, all we saw were tied to the strategy. The strategy is not something we can see isolated from the rest of compensations that we have from one quarter to another. This integrated view can give us some perspective and to relate this specific information of the trimester with respect to the challenges that we have for 2030 and also for the consolidated results. I want to say that in 2020, a year that was characterized by high uncertainty due to the COVID-19 pandemic, demanded our companies to respond to the crisis with timely actions to guarantee the security and the health of our employees, to guarantee the continuation of operations and our services. This was a priority. But also it obligated us to have a profound reconsideration of our goals, the pandemic consequences of the near and the long and medium term, and also the strategic paths that we have. And we had to sense the environment and the interpretation of all these signals. We made a risk analysis, internal and external. From the beginning of the pandemic, we started to identify some signals that we did in -- we identified things for the maintenance and operation of those projects, the supply in every one of our businesses. We evaluated the impacts. We conducted analyses that if this would question the strategic decisions we had made up to 2030. I talk about this because we're going to refer to this 2030 strategy with a calmness of having subjected these decisions to the elements that we had initially considered for this strategy, and we needed to reevaluate this. So we took this to the board of directors. And together as a group, we have strengthened the strategy, that it considers sufficient strength to have taken on the projects that we have prioritized. Let's remember with this clarity of having passed last year's test as we reflect on this, that this strategy has a sustainable value at the core. This is a concept that has 3 dimensions that complement each other. The first dimension is to generate value to the shareholders. In this sense, we wanted to have financial challenges to 2030, and we had to consider our previous strategy. The second dimension of this concept of sustainable value is to create a social and environmental impact. Our strategy will contribute to the care of our planet and to fulfill our goals in the sustainability in education, industry and innovation. And the third dimension in this concept of sustainable value is to have a current corporate effect. So we want that the impact, social and environment, to be ongoing in the long term. So that way, we can offset the corporate obsolence so we can develop our businesses and this to be with the sector businesses and also in the digital platform so we can continue to be the strong company that we are today. So ISA wanted to create value over time and to transcend those goals of merely financial to include an environment goals and social goals so we get into a world more digital, but also more uncertain. Next slide, please. These choices are made in business actions that look to have a balanced portfolio. We mentioned this before, where we explained that this search for balance in the portfolio is what allows us to balance concepts like risk and profitability to adjust our expectations. This is balanced because it seeks to have a balance between growth in concentration as well as incursion into new territories. And it's also balanced because it seeks to have balance within vision, exploring new businesses, looking into our close businesses that we have, but we also want to have new challenges in the sectors where we operate. Next slide, please. With this, we have goals in mind that you know very well for 2030. In addition to those goals through 2030, we also defined medium-term goals, what we have denominated so that we don't lose sight long term, so we can keep track of the short-term objectives and actions we can take. So we can link the permanent analysis of the environment dynamics and the constant dialogues and challenging that we have so we challenge ourselves to meet our objectives and to follow up the implementation rhythm of the group. So these goals for 2030, we have defined 2 cohorts: one for 2022 and another for 2026. As we can see in the slide, the definition of these goals, some give higher drive to the period and which we'll have to accumulate these early results, taking advantage of the opportunities we have. And there are other indicators. By nature, the more impactful results will be seen towards the end of the periods. For example, we can see the value to the shareholders. We have goals for 2022 that show, by cohort, equidistant to our 2030 goals. But entrepreneurship will require in the beginning to develop more capabilities, but then the response will accelerate towards the achievement of those goals. Let's go to the next slide. We can see how we're doing with respect to those goals. I want to go through the main advancements and to put them in perspective with respect to the first cut in 2022, which is our first driving goal, and also with respect to 2030. As to the indicator to have an increase, a minimum increase of [ 60% ] in 2030, it's important to review and to recognize that at 2020 we had COP 6 billion in EBITDA, which represented 24.4% with respect to the previous year and represents that we are fulfilling our 97.6% of our driving goal of 2022 and 34.9% in the goal for 2030. As far as investments, we had $10 billion in businesses and geographies. We have accumulated 70% with respect to the driving goal of 2022 and 19% with respect to the final 2030 goal. If we look at our goal for 2030 to reduce 11 tons of CO2 waste, at 2020 we had a reduction of 6 million tons of CO2 that we reduced off the planet. This was due to the Jaguar project, but it's also taking into consideration impacts in the efficiency in our operations. With this, we have even exceeded our goal for 2022. But this is one of these goals that, as we always say, it's better early because these are positive impacts to our planet. As far as to the goal and the dimension of corporate governance, I'm going to refer in a slide ahead to the innovation theme. But now I want to specifically highlight this objective we have for 2030 to invest $2 billion in new energy projects. One of these goals, we have to prepare many competencies and conversations, and we have to unlock the path so we can make these investments at the end of our strategy and to achieve these goals. That's why, so far, the advancements we've had show this logic of the indicator and show the determination we have to make sure that this path is clear. Here, we have to mention the solar plant in ISA -- and has cut CO2 emissions by a vast amount, and this is a [indiscernible] to this energy cost. We also advanced in [indiscernible], with Chile, Peru and Brazil regulators so we can incorporate the storage of energy at a greater scale. We're also working in the structuration to have an energy storage system in Colombia. We're going to participate in May in the bidding for this project. This advancement shows that we are on the right path and also show us that, internally, we are going forward in our management of our goals, and we have digital transformation and organizational advancements, [indiscernible] in visible advancements [indiscernible] allow us to consolidate these results. I should mention some of these actions in digitalization in some of the projects. We consolidated digital systems. We have more than 300 robots. We created the first robotics lab to increase the robotic services. And we have a digital strategy centered in ISA, prioritizing short projects. And we've also incorporated analytics and AI strategies so we can have image processes and AI. And we advanced, very important for these times, the security in the group to strengthen this capacity that we already had and making sure that we are always current with the latest technologies. Next slide, please. I wanted to mention these achievements in 2020, in line with our objectives that we have embarked for 2030. It's important because at the annual [indiscernible] allows us to see the advancements toward those goals. But Carolina and Bernardo advanced to those advancements, but they already talked about the EBITDA and the profitability or the investments done in the sense, because they already mentioned that. I want to talk about the other indicators that also support during this quarter. As I showed in the results of 2020, we're still on this path, with the enthusiasm that we are relentless and we are advancing always with the fulfillment of the indicators of service, providing these services and increasing our capacities. I also want to highlight our employees who have been evaluated as their performance. We obtained an 87% of our employees in that higher quadrant. So we have the capacity to continue achieving our goals that we have for 2022 and for 2030. Next slide, please. I said that I would talk about some of these achievements in the innovation area. We wanted to link that chapter and this forum because we know that even though the results, the relevant financial results, show a lot about what we're doing, and you know this doesn't come out of nowhere, linked to this topic, ISA has defined with more determination and has made in a more visible manner in our strategy. And it's been working on this for a long time. We want to tell you about the advancements we've had so you can link them to the other results that we want to achieve in the future. As far as different points to highlight, I want to mention we implemented a process for innovation management. We have 400 ideas and projects in one, and only one, platform, which is the management tool that allows us to have a more dynamic process. And we have a more traceability of all these projects that we have on the path to innovation. I also want to mention that we have different challenges in the ecosystem at the local/international level. We have had alliances, very specific work with allies and partners. I want to mention, too, in the roads concession we have a technological intellectual network in the sector of roads so we can increase security in road security. Our CTEEP joined a company so we can -- on top of these advancements. I should tell you that this emblematic event that we have at ISA of the knowledge journeys, for this year it has a very important relevance to the innovation that we are pursuing which link ideas and projects and solutions that will be presented in terms of innovation and that form part not only of the overall strategy, but also the ecosystems in the countries where we participate. We also strengthened the innovation system with the formation of innovation committees for each of our affiliates, and we invited those members of those committees so we can have sophisticated conversations so they can challenge ourselves. And we have these sales, which are in pilot form, but we want to have --. With this, we basically want to maintain this pipeline of projects full so we can have traditional projects, but also to incorporate new energy projects. Our portfolio, we want to materialize new business models. Next slide, please. All these advancements that I have told you about, we've invested $12.83 million in innovation projects, and we obtained in one year, for 2020, $2.55 million in revenues, which have already been registered in new services and projects, and also innovation projects that had a redundancy of costs for $1.93 million in 2020. Both revenues and cost reduction have an annual impact that we expect -- and that also allow us to continue with our innovation efforts. Next slide, please. With this, I wanted to give you another [indiscernible] to those results of 2030 compared with the 2022 driving goals. I want to say that ISA's performance has been outstanding, especially considering the challenging situation of last year and this moment. Within this context, ISA will try to transform the experience gained and the resilience shown up to date, incorporating in a constructive manner the uncertainty and the restrictions that we foresee in the short term. We will continue to contribute to the development and recuperation to the economic recovery post pandemic in those countries where we have presence. We will continue to protect the security and health of all people so we can continue the continuity of services and the continuation of projects, as is characteristic of ISA, with high-quality standards and keeping a great connection with our providers and a highest priority in the protection of our planet. This is the time to show our greatness, and we invite you to show greatness actions to add to the solution. We wanted to have this integrated view as to how we're doing in our 2030 strategy and how we continue firm in the search of these objectives. Go ahead, Carolina. Are there any questions?

Thank you, Paty. Now we give the floor to Diana Cardona so we go into the Q&A session.

Thank you, Carolina and Paty. Let's start with the name from Nicolas. What's the question? It has to do with CapEx and execution. We've seen that the investments executed were approximately 1/3 of the estimated for this year. Are you perceiving an acceleration, higher acceleration than we estimated? Can we expect higher investments, higher than COP 5.7 trillion for 2021? Cesar or Bernardo, do you want to answer this question?

Nicolas, what we showed for the quarter was in line with what we expected. Well, what always happens. We are in a permanent search of opportunities of growth. What we want to achieve is we want to achieve the year's goal, but if we have things that could be strategically interesting for the group, of course we will take advantage of that. Plus, we have public bids. If they happen throughout the year, it could have some investment opportunities. Most likely, this will happen next year. The answer is we expect to fulfill our budgetary goals, and we hope that we can achieve this.

Thank you, Bernardo. The next question is from Juan Gallegos. There are many people who are asking this same question. It has to do with the theme of TAESA. Juan Gallegos, from Porvenir, asks, the CEMIG was going to sell its participation in TAESA. Is this participation, have you made any progress in this regard?

For a long time, we've been analyzing the possibilities in Brazil, and one of them is the possibility to acquire more shares in TAESA. We have counselors that have been supporting us, and we are dedicating a lot of time evaluating opportunities and alternatives. It's early to say to the market what path we expect to take. We expect that this announcement that was public by [ CEMIG ] unfolds in a more clear manner and we understand better the market conditions. But be assured that we are highly attentive to understand and interpret the movements that are happening in Brazil with respect to TAESA, and we'll take advantage of the opportunity presented to us if we see that this is profitable for the group.

Thank you, Bernardo. We have another question, from Andrés Duarte, from Corficolombiana. How long do you think these electrical storage technology will become a source as a backup, such as we do with gas today?

I'm going to allow Cesar to respond this. But this is already happening in the world. The storage technology has been advancing, and it's been relevant to the cost, and we expect this to continue progressing. Most likely, this will allow us to strengthen of nonconventional renewables to this equation. Cesar?

Well, this is a very interesting question. This is about the concept about ?- it's a concept of flexibility. To the extent that we create possibilities of facilities to store this energy nonconventional, they have a -- power has been subjected to tests about these generations. Here, we see the power storage technology, and this gives a firmness to the company. But with a company, it makes the networks play a fundamental role, and ISA and the networks have a great opportunity for us. ISA, in the very short term, as a regulator not only in Colombia, but also in Brazil, Chile and Peru, will seek to have a model to implement solutions in this area that allow us flexibility to the network, to have a solution that strengthens the system as a whole, not only focused solutions in the site of generation. When will this happen? I think as we progress in the facilities generation of nonconventional energies, the regulars -- so that as investments happens we can continue along this path. So we have high expectations that the bidding in May, which will be the first one not only in Colombia, but in the region, it's going to be a public bidding at the network level. We think it's going to be highly successful, and we are very interested in it. Additionally, in Brazil, we already implemented a solution, and we have a reinforcement to strengthen in the businesses and operations with a high profitability. This will facilitate the generation of nonrenewable, highly valuable, but also to control other parameters.

Thank you, Cesar. This is a question by Edgar LAiton, from Primera Página news agency. He's asking, how is the Internexa project going? Is there [indiscernible] bank investments? And when do you expect the investment resources from this generation?

The Internexa process has investment backing for a while already. We have lawyers. We have a full team, supporting personnel. You know that this has to comply with the 2026 regulations and be very clear to the territories. These steps are already happening. So this, we think it's going to follow Step 1, and we expect this to happen in the next couple of months. Nonetheless, we expect to finish the process at the end of the year. This is what we intend to do, and we are committed to this. We think it's a very interesting project in the markets, and it's clear for us that this is the best for the group and our businesses.

The next has to do with the Road Concessions business. What's the concept of this for the following 2 years? How is the roads entered into operation in Peru?

Ernesto Carrasco will answer that.

Thank you, Bernardo. As far as roads, we said earlier there are projects, very interesting projects, in Colombia and Chile. The governments have very aggressive plans of growth. In Chile, they have 14 projects in the bidding process, for $6 billion. They started this year already. At this moment, [indiscernible] we expect that this year we'll have 2 additional processes, in [indiscernible] and [indiscernible]. And then in 2022, we also expect additional bidding processes. In Colombia, last year were announced the 5G projects. Soon, the results for the bidding will be announced. We expect them for May. And we have additional 2 projects. All parts of the 16 projects that amount to $8 million of investments in the Road business. With respect to Peru, it's going a little bit slower in Peru. We're going to have a private initiative bidding in the periphery early, and we're looking to be -? this is going at a slower pace. So our efforts are more concentrated in Colombia and Chile.

Thank you, Ernesto. Okay. We ran out of time. Thank you for being with us today in this conference. We expect to have you in future meetings. In the next slides you will find name and contacts of people within ISA personnel. We'll be watching your input and any questions you may have. Have a wonderful day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]