ISA Energía Brasil S.A. (ISAE4) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the conference call of ISA CTEEP to announce the results of the second quarter of 2021. This conference call is being recorded. [Operator Instructions] This conference call is being simultaneously transmitted on the Internet at the webcast, at the address, www.isacteep.com.br/ri, where you can also find the respective presentation for you to download. Slide selection will be controlled by you. A replay of this conference call will be available right after its end. Before continuing, we would like to clarify that statements made during this conference call relative to ISA CTEEP's business prospects, operation and financial projections and goals are beliefs and assumptions of the company's management, and they are based on information currently available to ISA CTEEP's management. Forward-looking statements are not guarantee of performance because they involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of ISA CTEEP and may lead to results that will be materially different from those expressed in such forward-looking statements. Today, with us, we have Mr. Rui Chammas, CEO; and Carisa Portela Cristal, CFO and IRO. They're going to make the presentation. The other executive officers of the company will be available for the Q&A session. Now I would like to give the floor to Mr. Rui Chammas, who's going to start the presentation. Please, Mr. Chammas.

Good morning, everyone, and thank you very much for attending ISA CTEEP's conference call. I am Rui Chammas, and today, I will be presenting with Carisa Cristal, our CFO, the results of the -- that were published yesterday, and we'll be talking about the main issues of the company. Please now move to Slide 3. The second quarter of 2021 has been marked by the growth strategy of the company with the first half of the year, with the PBTE, the Piratininga Bandeirantes line that was acquired in March. In this manner, we had a net revenue of BRL 772 million, the adjusted EBITDA of BRL 666 million and a net income of BRL 248 million. The company continued its growth strategy through investments and improvements in order to assure quality in transmission services totaling, in the quarter, BRL 78 million and EUR 137 million accrued numbers until June. And likewise, investments in greenfield projects that we acquired in past auctions totaled BRL 265 million in the second quarter and almost BRL 500 million in the first 6 months of the year for sustainable growth, and we are making efforts to have continuing profitability and efficiency. ISA CTEEP has completed the energization of Aguapeí project in the first half of 2021, 6 months before the deadline, with a CapEx of 40% efficiency as compared to the regulator. We also got the license for installation of the projects of Biguaçu and Três Lagoas connecting the states of São Paulo and Mato Grosso do Sul. It's important to remember that the company has already paid BRL 1.8 million. And in terms of ESG, we highlight that we raised more than BRL 700 million in our last issuance of debentures that are used for the auctions that we won, and also, we are now compliant within the American developments green bond transparency platform, which reinforces our commitment to sustainability, providing transparency and security in terms of the green bonds that we issue. Now please move into Slide #4. On this slide, we highlight an important event that took place in this period. In April '22, after a resolution, ANEEL decided the result of the administrative appeal that ISA CTEEP had filed, recognizing that the company has the right to the installment that had been suspended for 2021. And then there was a reduction in the curve of payment of the financial component for the cycle of 2021, '22, '23, as you can see in the lower chart in the slide that you can see on the screen on this slide. For subsequent cycles payments will go back to levels that we had forecast so far in a very similar way. So there is a longer flow of payments, which provides value to the company. Note that in the new flow that will end in [ '28 ], the total amount of the payments was added of BRL 1.8 billion, and this leads to an addition of BRL 700 million. So according to this system, this does not change the sustainable strategy of the company in spite of the reduction of the cash flow in the first 2 years in the chart that you can see on this slide, so that we will keep our strategy and our pursuit to maximize value generation for all our shareholders and stakeholders. Now moving to Slide #5. Here, you can see our focus in promoting growth with the generation of sustainable value, reinforcing our commitment to sustainable value creation and providing energy to our country. As I have mentioned in the highlight, we have amounted BRL 137 million in the first half of '21 with 67 projects that received this investment in contrast with 78 in the same period in 2020, an increase of 76%, showing our -- the company's ambition to grow. We have a potential to double the level of investments and improvements. Today, we already have been authorized by ANEEL for -- to have an investment of over BRL 1.8 million that will be invested in the next 4 years. One of the investments that we are expecting are about BRL 300 million, a little bit more than double of what we had in the first half. So these investments in the development of the power industry in Brazil demonstrates that the existing investments are even more relevant than investments that are necessary in greenfield. We estimate, from '20 to '30, the investments -- that BRL 60 billion will be invested in the country, and what we are doing here is to use our base to go on growing using the opportunity for our company. For greenfield projects, we have invested a total of almost BRL 500 million, BRL 498 million to be precise, and investments for 2021 are greater than BRL 1 billion. We also -- when we talk about the PDE for greenfield projects for the country, and we have the potential of investing [ almost 30 years ] between 2020, 2030. There will be an auction in the second half of this year organized by ANEEL. The estimates for the December auction is investments of up to BRL 2 billion with 5 lots being auctioned, and the company has already diligently started the analysis to know in-depth the lots that are being auctioned so that we can bid, and we can combine growth with profitability. Now moving to Slide #6, where you can see the greenfield projects that, today, the company is conducting. In the slide here with all these bar charts in the company, you can see the installation license, the project and the evolution, considering all activities. The company is within schedule and the budget for the period, keeping the same discipline and work in all projects in spite of the impact of the pandemic. As I said before, and as we have announced before, too, we completed the energization of Aguapeí project in January, and other projects are moving at a good pace, and we are going to have earlier completions as according to ANEEL's schedule. Now I give the floor to Carisa, our CFO, who is going to give you more details about the financial results of 2021. Carisa, your turn.

Thank you, Rui. Good morning, everyone. Talking a little bit about the financial performance on Slide #7. Here, you have the results of the quarter with a positive result with the completion of our project of PBTE. As we said, we have more than BRL 40 million revenue due to the completion of PBTE, so that the net revenue has reached BRL 792 million, and the adjusted EBITDA, excluding nonrecurring items, was BRL 666 million, BRL 100 million above the same period in the year before. In the quarter, PMSO had a growth of 9% with a variation below the inflation for the period. Total O&M costs and expenses were impacted by the provisions that we made for the private pension plan and for the retirement of our employees and also to comply with CPC 33. We had an expense of BRL 11.9 million in the quarter without any cash effect. On Slide #8, you can see the highlights of the company's consolidated debt. As you know, we have renowned financial solidity. We raised BRL 773 million in green bonds through the issuance of debentures, and funds will be used for their composition of CTEEP cash to face investments in the lots of the auction that will take -- that took place in December 2019, and we also issued commercial promissory notes amounting to BRL 1.2 billion for investments that the company is going to make in the next few months. The gross debt closed the quarter at BRL 6.8 million and the company's cash at BRL 1.4 billion. The cost of the debt are approximately 9.6% -- 9.6 year, whereas average time is 6.9 years. So net debt over adjusted EBITDA is 1.9x, and it is at convenient levels because the more restrictive EBIT for the company is 3x net debt over adjusted EBITDA. Now on Slide 9, you can see return to shareholders. As we said, ISA CTEEP has paid out in 2021 BRL 1.9 billion, and BRL 1.4 billion were released in 2021 already. The company is constantly assessing its capital structure is in its debt capacity, and we also look at the opportunities for growth, and in terms of allocation of our profits, well as try to maximize value so that we keep our commitment with payout with at least -- being at least 75% of the regulatory net income. Now I'll give it back to Rui.

Thank you. And now to conclude my presentation, I would like to summarize on this slide our pillars. Our goal is based on sustainability, respect to all the best practices in ESG and aims to maximize sustainable value generated to be shared with our stakeholders. We are always pursuing excellence and operational efficiency to ensure the reliability of our assets. We manage our assets based on improvement growth through greenfield and/or M&A, expanding the assets managed by the company. And also, we're always looking for new businesses like we recently did with real estate businesses. So that will lead to a strong cash generation that will allow us to grow this much with, of course, dividend distribution, as Carisa said. So that's a summary of our strategy that I'd like to share with you, and thank you for listening to this presentation for the second quarter of our results. So we'll now continue with the questions-and-answer session. I'll let the operator continue.

[Operator Instructions] [ Luisa Conjoto ] from Itau BBA will ask the first question.

I have a couple of questions, actually. The first one is about the tax reforms. Considering the latest proposal presented, I'd just like to know if -- looking at the transmission segment, will the benefit remain with the company? Or will this be passed on? How do you expect this will impact the next tariff changes? And still along the same lines, concerning dividends, since there's a possibility of taxing dividend payouts, should we expect any additional extraordinary payout for this year considering the company is so well leveraged? And if you'll allow me one last question related to the real estate market. You've been advancing in real estate projects, and they have a high likelihood of generating value for the next year. So if you could give us some more color on what lens you believe can be sold, and if you have any partnerships for the short term. That's all.

Thank you for your question, [ Luisa ]. I'll split this answer into 3 parts with 3 people. So I'll answer your question about the government, and then I'll let Carisa talk about dividend payouts, and finally, we'll comment on real estate business. So your question on income tax and its impact is very important. Our contracts are very clear. So any changes to income tax -- taxes are excluded from any kind of passing on. So this reduction will not impact us at all. So these resources would stay with the company, and the same, of course, would work otherwise. If there were any changes, regulators would not receive any challenges. Regarding payouts, I'll pass it on to Carisa, and then we'll talk about real estate. Go ahead, Carisa.

Thank you for your question. So looking at the tax reform proposal, we see that it's already being changed even before it goes to Congress. The company understands that we still need to wait for it to be finalized so that we can plan for anything. We want to look at the exact approach we want to have for dividends to see if they will be taxed and how they will be taxed. Regardless of that, the company will maintain its commitment of paying at least 75% of regulatory profits, and whenever it's possible, we have looked at opportunities for paying out more. An example of that was last year in which we -- our payout was 83%. So I'll let Silvia talk about real estate projects. Silvia, go ahead.

Thank you, Carisa. So about real estate, there are several fronts here concerning projects that have a higher need for changes, that is when we have electrical assets. They involve a higher maturity. So that will take some more time so that we can have something robust here. It will definitely involve partnerships. We don't have any right now, anything closed at least, and at the right time, we will look at that. Parallel to that, we have some opportunities for the short term. So we have ongoing negotiations for that, and we intend to have some sort of results to present during the second half of this year, if everything works out.

Guilherme Lima from Santander Bank will ask the next question.

My question is about your growth. You mentioned greenfield and brownfield growth. So I'd just like to know if you assessed the transmission assets from C3E; what you thought about that competitive environment; if you're going to analyze the [indiscernible] assets, which will go to the market. And considering the transmission auctions, what is most relevant for you? And what are you analyzing to select, what you're going to bid in? What are you expecting in terms of competition?

Thank you, Guilherme. Thank you for your question. So to answer your question about growth, I'm going to let Silvia answer as she is our Market Development & Strategy Director. Go ahead, Silvia.

Thank you, Rui. So we did look at C3E. We -- and I think the biggest opportunity there is the fact that it has very similar qualities to ISA CTEEP. Its main contract is very similar to ours, 059, and there's something different in these batches that are sent to auction in the current format. So the characteristic here is that it has strong improvement. So we believe that, that's an opportunity for generating value. At ISA CTEEP, we've made many efforts led by Dayron to increase the amount of investments, and we have a lot of experience in carrying them out, so planning, getting authorization from ANEEL. So for example, we have authorized reporting from ANEEL to the amount of BRL 1.8 billion. So this is an opportunity that we saw and we're very interested in. However, we did put together a proposal in our business plan that we believe we could execute, and we also looked at all the risks and liabilities mapped in the diligence plan with the support of outside specialists. Unfortunately, it was not enough for -- first, to win considering there is so much competition. So I think the challenge for us will be how -- since we have our continuous improvement process, we need to look at how we can become more competitive without letting go of our sustainable development criteria and without forgetting our financial discipline. So that's, of course, non-negotiable even if it means that we won't win every time. In the case of [indiscernible], the asset is also very similar to the 055 contract and the 059 contract with CTEEP. So we need to look at other conditions to see if it will make for an attractive business plan in generating value to shareholders, and this will still be assessed. As for the auction, we will probably take part. I think that's a part of our usual activities. We plan in advance. We study all the batches available and according to what we believe has the most competition and the most synergy with our portfolio, then we get prepared for a bid, but we also foresee that there will be strong competition.

The next question was asked by Mr. [ Rubens ] in the webcast platform. He writes, "I'd like to know what will be the impact of the ERP reduction in the 2021 to 2022 cycle as well as '22 to '23 in the payouts during this time."

Rui, should I take that one?

Yes, of course. Go ahead.

Rubens, thank you for your question. So when we look at the impact of RBSE, or RBCE, excuse me, as we had said, we have a voucher for the next years, where we'll go back to the same levels from July 2023. Now we've already had the resolution from ANEEL in July of 2021 describing the new cycle for '21, '22, which already includes that adjustment. Their original RAP will go from BRL 2.8 billion to BRL 2.3 billion. That's only for the 059 contract that was impacted by re-profiling. So when we look at that, the reduction is about BRL 790 million for the '21-'22 cycle, which will not probably be very different for the '22-'23 cycle. So that's the cycle we expect, and this, of course, is offset by new operations coming in, new reinforcements and also an update of RAP from the IPCA Index. This year, we had an impact of BRL 200 million. So this is what we foresee. There will be a reduction from July 2022. It will improve. But as you can see, it's not such a significant drop as it will be offset by new projects and also the new update from our RAP. So did that answer your question?

Yes it did. The next question was also asked via webcast by Ms. [ Tania Cazela ]. She asks, "How will taxation on dividends impact shareholders? Do you have any strategies to not reduce that payout to shareholders?"

As I said, It's important to explain this. I'm sorry, Rui. Can you repeat your question, please?

Of course. There are 2 questions from [ Tania Cazela ]. "How can taxing of dividends impact shareholders? And number two, do you have any way out in order not to reduce dividends payout to shareholders?"

While talking about taxing, we have already mentioned this issue. In fact, the company has been monitoring everything that is going on with the bill, but we do not yet have the final bill. It's still being drafted. We don't know how the final version will be in terms of taxing of dividends. If you remember, the first version of the bill, that the suggestion of 20% general for any shareholders. Today, we are differentiating this 20% of shareholders within the same economic group just outside Brazil. So we need to wait and see what they are going to do, how this is going to evolve to design an action plan in order to minimize the impact for our shareholders. Right now, we do not have any action plan with that regard because we are still studying what will be the impact of this law.

The second question also from the webcast platform comes from [ Gabriel Diaz ]. "Does the company have the intention of delivering all projects in construction still in 2021? Could you highlight which projects are likely to be delivered and completed this year?"

Thank you for your question. So our Projects Director is going to answer the question.

Thank you, Rui. Thank you, [ Gabriel ], for your question. So in fact, we still have the forecast of energizing 4 projects or 5 this year. So we have Aguapeí, as Rui has already mentioned, was energized in February this year. The Lorena project, we started already the phase of energization in July, and we are planning to complete its energization at the end of August, more or less. Next, we have the 3 Lagoons or the Tres Lagoas project forecast to be energized in December this year and Aimorés and Paraguaçu projects, which are the projects that we have in partnership with [ TAESA ]. And so we are going to continue energizing them in the last quarter of the year. Thank you very much.

Our next question comes from [ Joemar Moreira ], also from the webcast platform. "With regards to investment, researching new technologies such as, for example, wireless power transmission, is CTEEP preparing itself for these innovations?"

Thank you for the question, [ Joemar ]. I think that it would be good for Silvia to comment our innovation plan and tell everything that we've been doing in the innovation front. Thank you.

Yes. Thank you, Rui. Well, in terms of innovation, we've been promoting several discussions, and actually, nothing happens in the area of innovation, but throughout the company. And then we'll ask Gabriela to tell us a little bit what we are doing in terms of operation and maintenance, but I'll tell you a little bit how we structure our innovation management process in CTEEP. So innovation is one area that is at the service of strategy, and within our strategic pillars and our objectives and our guidelines for sustainable growth, governance and control and having a positive social and environmental impact. And thinking of the long-term sustainability of the operations of our company, we have structured a program where we have concentrated our innovation efforts on a few pillars that we call areas of strategic opportunity. One is asset reliability. The other one is maintenance productivity. The other one is structuring of offers and optimal projects. These are the projects that are more geared towards the core and our conventional businesses. But we also have new businesses, the idea that are more disruptive in terms of our current core business focusing on energy and involving more state-of-the-art or more disruptive technologies that might not yet be commercially feasible yet, but we need to keep up with them and to be ready once they become feasible -- commercially feasible, as you said, in terms of wireless transmission. So we design road maps where we discuss and monitor new technologies and promote these cases together with the areas, and we may have pilot projects, partnerships, consults to the innovation ecosystem through the open-innovation platform to bring in start-ups and other companies and whatever they offer in terms of innovation on these fronts. And then I'm going to give the floor to [ Gabriela ] to tell you what we are already doing today in terms of innovation.

Thank you, Silvia. Thank you for your question. And as Silvia mentioned, our sustainable development strategy for our asset base has innovation as one of its pillars. So invest in research and develop research on new technologies. So in the second half, we are going to energize the first digital substation in Lorena, which will provide productivity gains to us and also reduce risks. And just this week, ANAC has approved the drone that started from an innovation project, and ANAC unanimously approved it, the use of that equipment to provide more security and safety and maintenance activities. We also have artificial intelligence applied to our operations center that will provide us faster and more reliable decisions in our operations centers. So there are many initiatives going on, but the ones that are more ready to be applied in the short term are these ones that I have mentioned.

I think Gabriela, it's worth mentioning the drone, the main advantage of that is to eliminate objects that go -- well, the aim of this type of drone is to eliminate any object, any foreign objects that hit our transmission lines like kites or birds or -- and then we put fire on them, and we don't need to deenergize. There's no downtime in our transmission lines.

The next question comes from [ Fabio Giobin ].

How is the hydric crisis? How can it impact us in 2021 and in 2022?

Thank you, [ Fabio ], for your question. I think that it's worth mentioning the business model in transmission. So that transmission business is not related neither to the price or to the flow of energy. So the hydric crisis that generates tension all over our industry, the power industry because it will lead to more expensive power as we are having today or maybe any changes in the flow of energy does not affect distribution businesses. There's just one issue that, to us, is even more important is to assure the reliability of the system if we have a hydric crisis as we are having very short rainfall, and thank you very much for your question.

Next question from [ Anderson Gomez ].

What was the cause -- what was the cause for the reduction in the company's profit? And what do you envisage for -- what's the outlook for coming quarters, in 2021?

I think it's important to explain. Thank you, Rui. Anderson, thank you for your question. When we look at the company's performance in the quarter, they're really excellent, indeed. What happens is that in 2020, we had an even better performance due to some nonrecurring items that, of course, if they are not recurring, they're not recurring again this year, so same things that happen every 5 years. So if we think what happened last year, in a periodical tariff review, we had the impact due to the recognition of the equity cost, which was something that we -- the market was already aware of, and all transmission companies were entitled to have that, but it had not yet been incorporated in the RAP, which is the allowed annual revenue. So everything that was until July 2017 was incorporated back then, and this had an impact in the regulatory result of about BRL 800 million, and this is a nonrecurring event, one-off that's not going to happen again this year. The other thing were our operations last year. We had 2 relevant real estate operations that provide additional results to the company of BRL 248 million. And as Silvia mentioned, even though we are looking at real estate operations, so far, nothing has happened in this area. If you take out these 2 factors, if you look, you will see that the EBITDA margin gets a lot better. It goes from BRL 570 million in 2020, in August -- Q2 to BRL 670 million this year, and then there is an extra BRL 100 million. Well, where do these BRL 100 million come from? Well, they come from company's management. So we had more than 70 projects that went live just this quarter, and we are talking about projects going live for almost a year. We had 2 projects, greenfield projects that also started operations this year. We also had the acquisition of PBTE, and we had this full result. So all these factors combined demonstrate that if we take nonrecurring events from last year, the performance in the second quarter of '21 was really excellent and even a little bit better. So this is my answer. Thank you very much.

The next question comes from [ Tadeo Azevedo ].

Congratulations on your performance. I would like to hear the reason for the increase of your indebtedness or financial leverage.

Well, thank you for your congratulations. It's really teamwork of the company. And Carisa will talk about our debt. Carisa, please.

Thank you, Rui. [ Tadeo ], thank you for your question. Well, in fact, you see that there is an increase last year, but this increase has a few reasons. First, we have the inclusion of PBTE, and this is a little bit than BRL 1.5 billion, a little bit more, which required us raising new funds to do this acquisition. So we have also issued our green bonds of -- in terms of debentures to deal -- to do what has to be done in the -- of the lots that we acquired in the auction that we had in late 2019. We're also issuing promissory notes to bear all other investments that the company has that we have in the pipeline for growth. So this, in fact, has led to an increase in the company's indebtedness. But if we look, we're still at a very good level in terms of our covenants. So net debt over adjusted EBITDA is 1.9x, and our most restrictive covenant is 3x net debt over EBITDA. So the company, we can increase even further our leverage and would still be okay at a good level as compared to others, still have great room in terms of leverage, okay? Thank you.

[Operator Instructions] We are now ending our Q&A session. I would like to turn the conference over to Mr. Rui Chammas for his closing remarks. Mr. Chammas, please.

I would like to thank everyone for your interest in the release of the results of our second quarter. I would like to reinforce that our Investor Relations team is available if you have any questions about our performance and our strategy. Thank you all very much. Have a good weekend, and I would also like to thank everyone and the operator. Thank you.

ISA CTEEP conference call has now ended. We thank you very much for your participation. Have a good day, and thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]