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

Good morning, ladies and gentlemen, and welcome to ISA CTEEP's conference call to present its earnings from the third quarter of 2021. [Operator Instructions] This call is also being broadcast online through a webcast, which can be accessed at ISACTEEP.com.BR/ri, where you also can download our power point presentation. Slides will be controlled by you. A recording of this event will be available right after it is concluded. Before we continue, we'd like to clarify that any statements made during this conference call about ISA CTEEP's business perspectives, any projections, operational and financial goals are simply beliefs and assumptions from the company's management. They are based on information that is currently available for ISA CTEEP. Remarks about the future are not a guarantee, and they involve risks, uncertainties and assumptions because they refer to future events and therefore, depend on circumstances that may or may not come to pass. Investors and analysts should understand that the general conditions, industry conditions and other operational factors can affect ISA CTEEP's future results and can lead to results that differ materially from those expressed in these forward-looking statements. We have with us today Mr. Rui Chammas, CEO; and Carisa Portela Cristal, Financial Director and Investor Relations, who will give us the presentation. Other executives from the company will be available during the questions-and-answers session. I would now like to pass it on to Mr. Rui Chammas, who will begin his presentation.

Good morning, everyone, and thank you for being in this conference call for the third quarter of 2021 for ISA CTEEP. My name is Rui Chammas, and I'm going to present the results for the third quarter of 2021 published yesterday. And we're also going to give you an update on the main topics for the company. Let's start on Slide 3. In the third quarter of 2021 was marked by the company's growth strategy and sustainable development. We had expressive increase in investments in our assets through improvements in the operation pillar. We got an approval from ANAC to use the first object incinerator done in our transmission lines. So that will reduce maintenance interruptions and maintenance, and it will reduce by 80% time to remove objects from lines. We'd like to reiterate our commitment to operational excellence with the highlight on operational indicators, the company's non-supplied energy index had a reduction of 21%. And these results were only possible despite the water crisis and adverse weather effects due to this new strategy. So with that, we posted a net revenue of BRL 678 million. And year-to-date in 2021, our adjusted EBITDA was BRL 261 million, 11.8% above the same period in 2020. The company continued its growth strategy by inaugurating the Lorena substation, the first one to be completely digital in our interconnected system. We would also like to highlight the investments that we've made in improvements and reinforcements. As I've mentioned, a part of our growth strategy is the result of these investments that aim to improve our transmission. There were BRL 700 million in the first quarter -- excuse me, in the third quarter of 2021 and BRL 791 million in the first 9 months, a growth of nearly 100% versus the previous year. Investments in greenfield projects were BRL 293 million this quarter and BRL 790 million until September this year. In order to maintain our sustainable growth, we've made efforts to reach continuously efficiency and profitability for our projects. I'd like to conclude these highlights by announcing the company's dividends. In July 2021, we paid BRL 331 million. And in November, the company got the approval to advance dividend payouts and interest on equity, utilizing BRL 163 million. So in 2021, ISA CTEEP is consolidating its growth strategy with development investments and BRL 2.8 billion in payouts for the company's shareholders. Now let's continue with Slide #4. I. Here, we can see our growth strategy. The company is still focused on promoting growth with sustainable value generation. Therefore, the investments that we've made in 2021 year-to-date already represent BRL 2.6 billion. With that, they're higher than the investments that were made in the last 3 years, with a growth of 48.5%. Disregarding brownfield, it would be 23%, which reinforces our commitment to create value through projects that contribute to the company's expansion and growth. So when we look at our retrofitting projects, we need to realize that there has been an increase in investments of 91% compared to the same period of 2020. And 72 projects have already received energy. And besides that, the company has been authorized by ANEEL to execute an investment of BRL 2.3 billion in new investments. We have to say that the projection for energy according to EPTE requires continuous investments, reinforcement improvement representing BRL 60 billion until 2030, when we consider all agents. So ISA CTEEP is doing its share by modernizing its sector according to our responsibility. In brownfield, we invested BRL 185.4 million in RAP, and we're going to need more greenfield projects at an order of BRL 30 billion into 2030. We're also analyzing 5 lots for transmission that will take place in 2021 so that we can define the ones in which we will take part in the next months. Our goal is to go into projects that will make sense into our sustainable growth strategy. We continue on Slide 5, where we see highlights from our greenfield projects. On the slide, we see the ten projects that are being developed under the company and 3 of them, Bataguassu and Ivai are taking place with Taesa, while the other ones are 100% under the company's responsibility. Here, we can see how we are obtaining the implementation license and also how the project is advancing, considering all activities until the investment is concluded. We can see that despite being in a challenging scenario, the company is within schedule and within budget in all of its projects. So we've maintained discipline and a continuation of all the greenfield projects. Until September 2021, we had these ten projects in our portfolio. As I said in the beginning of the presentation, we inaugurated the Lorena substation in Itapura in October. This is the first totally digital substation in the national interconnected system. So we foresee that this will reduce the capex from the regulating company. In the past, we've handed over 4 greenfield projects. The average capex efficiency is 83% and an anticipation of 11 months on average. So now we'll continue with our financial results for the third quarter of 2021 with Carisa.

Thank you, Rui. Good morning, everyone. On Slide 6, we're seeing our results for the quarter, which were affected by a reprofiling of the RBSE, which was partially compensated. This took place mainly due to an adjustment in our cycle for 2021 and 2022. Considering the positive variation of IPCA and FX effects and also greenfield projects, which were concluded in the last 12 months. It also includes the acquisition of PPE. So our net revenue reached BRL 758 million, a reduction of 8% versus the third quarter of 2020. Our PMSO manageable PMSO due to one-off or nonrecurring effects was BRL 140 million for the third quarter of 2021, up 8% versus the third quarter of 2020. And it was below inflation, which was about 10% throughout this period. This result was due to increased personnel expansions due to labor payments, medical assistance and increased expenses in cyber risk insurance and the IPTU tax. For the 9 months figure, our manageable PMSO was BRL 412 million, an increase of BRL 7.8 million versus the first 9 months of 2020, and this was also below inflation. Among the effects, as we already said, we had higher expenses with materials and services, especially surveillance and digital transformation. So our adjusted EBITDA was down 13% versus the third quarter of 2020. The total was BRL 593 million at the end of the third quarter. Year-to-date, it went up 12% and the adjusted view. When we see adjusted, this excludes nonrecurring extraordinary events in 2020, which includes the impact of the adjustment installment and the reprofiling of the RBSE. So after we mentioned these effects and adding them to the gains from the real estate operation. Our net -- our adjusted net income was BRL 910 million at the end of the first 9 months, up 33% versus the first 9 months of 2020. It's important to highlight that we also had a BRL 1.7 billion cash generation, 14% above the same period in 2020. Slide 7 shows our consolidated debt. We have a solid debt position with competitive cost of debt and a AAA rating in our national scale. We were approved to capture BRL 950 million through the 11th issue of debentures in October 2021. At the end of September, our gross debt was BRL 6.3 billion with a cost of 11.7% a year and an average term of 6 years. Our increased debt is due to changes in the macroeconomic scenario with higher indicators such as IPCA and so on. IPCA, in fact, had the biggest high across all indices, and it has the biggest part of our debt. We've been trying to extend our debt through longer credit. In comparison to the ones we already have. So we would like to pass on some confidence about the solidity of our business, and this can be seen in the extension of our average term. Our net debt to adjusted EBITDA proportion was 2.2x, which is below our most restrictive covenant, which is 3x. This is due to RBSE reprofiling. On Slide 8, we are showing how much was returned to shareholders. As we said on our first slide, ISA CTEEP is presenting BRL 2.8 billion, while in payouts, BRL 1.2 million due to our 24:1 fiscal year and the remainder, referring to previous years. The company is always looking at our capital structure and debt capacity. And we're also always analyzing growth opportunities in order to maximize value generation. I'll now pass it back on to Rui for his closing remarks.

Thank you, Carisa. The results of the quarter just confirm the strategy that we have defined and presented to all our shareholders. And it's here materialized in an absolute way. So efficiency, operational excellence shown by our results, our productivity preserved in the best control of fixed costs and innovation, optimizing future gains and also offering greater safety to our operation. By managing our current existing and increasing investments in improvement and retrofitting project. It brings more efficiency, modernization, and it improves the basis of regulatory compensation, which ensures a successful future. We've expanded our greenfield projects and also the consolidation of the size of our company. To scale, which in itself means growth, added by efficiency, which means added value in all operational synergies that we have built throughout time. It generates robust cash, which serves to enhance growth and also provides additional payout. This is the strategic objective of our company. This is what we have obtained in this quarter, maximizing value, which is shared with all our stakeholders. With that, I close the presentation and hand it back to the operator so that we can now start our Q&A session with myself and the team. Thank you very much.

[Operator Instructions] The first question comes through webcast Reynaldo Dantes. Considering the possible change of income tax for 2022, which might be published by the end of this year. TRPL 4, will it pay out more dividend? And what about the interest on equity? What do you plan for it in 2021?

Reynaldo, thank you very much for your question. Well, in fact, the company has been monitoring closely all the tax reform. As such, our goal and at our practice, as to pay at least 75% of the regulatory results. Considering cash generation of BRL 1.7 billion that we've had year-to-date, the company has decided to anticipate now to October, BRL 863 million of dividends and interest on equity, which tend to be analyzed and paid out only the end of the fiscal year. We simply anticipated that because if the tax reform really is enacted that may somewhat hinder the advantage of our shareholders. And this is why we decided to anticipate it to October this year.

The next question through the webcast, [indiscernible]. Well, thinking about the 5-year perspective, what would be the highest risk to the profitability of the company in your take?

Thank you for the question, [indiscernible]. When we think about the long run, we have to understand that we work within very well-structured regulation. And we don't anticipate any risks along these lines. We have really operational and financial discipline, which serves as a model to others. And as a consequence, we have really sustained our performance throughout time. The main challenge we face more than risk, rather a challenge is the materialization of the strategy that we are presenting to you. But we have a very successful strategy. At the same time, we get values from RSBE, which is the basic grid existing system. Which will be by 27, 28. We want to keep on investing, keep on growing and bringing additional revenues, ensuring sustainable growth of our company. At the same time, that we maintain our practice of paying out dividends. It's not a risk. It is rather our focus, and it has brought very good results to all of us with a portfolio of investments that really makes me quite enthusiastic about our operations. Always based on discipline, financial discipline, operational excellence, innovation and all ESG aspects. This is our mission, and this is the focus that I keep in mind, together with my team.

[Operator Instructions] The next question is the following: ISA CTEEP has recently announced the opening of the first substation, which is 100% digital, i.e., Lorena. What is the strategy of developing new technologies and digitalization?

This is a very interesting question. Gabriela Desire Pereira, Operations VP will answer this question. Gabriela?

Yes. Can you hear me?

Yes, we can hear you quite well.

The recent highlight for Lorena substation was the fact that it was first new installation where we implemented 100% digital technology, excluding copper, cable and the interface with equipment and the main control room, replacing bioptic fiber. So in addition to providing greater safety to our employees, it's the first step towards greater information processing because now we can have more data go through substation equipment and the main control center. So we have evolved in terms of artificial intelligence, giving more precision and assertiveness in our decision-making and greater productivity because we can use new technologies resulting from digitalization. Since 2014, however, we started our process of digitalization of some of our substations digitalizing our control and surveillance systems. So let's say, partial digital transformation, not including primary devices at first, but really granting more reliabilities, such as Mongagua, Porto Ferrera, my report, Iti Garbia. And we also anticipate in future events for the auction to also digitalize substations of Arsha, Uberlandia, Nova Ponte, of the lot of triangularium.

Thank you, Gabriela. Next question from investor through the webcast. What about the results of privatization of CLT? What's your take on it? This is a question that can be answered by Silvia Wada, who is responsible for strategy and business development. Silvia please?

Thank you, Rui. We have analyzed in details the CLT privatization. And we were very diligently analyzing the operation, which is just what we normally do in this kind of operation. So we created a business plan that would really be give us confidence to operate, had we been the winner of the auction. But the final price was not within the range that we thought would give us appropriate return on investment to our shareholders. Therefore, we really emphasize our commitment with discipline in allocating capital. Yes, there are interesting opportunities of generating additional value through the portfolio of our retrofitting projects that we have within the company with BRL 2.3 billion to be invested in the next 5 years. We have also obtained new investments amounting to BRL 3 billion. If we consider the past 12 months with CDTA acquisition and also the second largest lot of the December 20 auction. So we are quite confident and willing to wait for new opportunities that can add value and are considered compatible with our strategy of sustainable growth.

Next question from the webcast comes from Fabio Job. Based on your presentation, I can see that the level of dividends and EBITDA had one down to now 3x in the third quarter. You've increased your debt levels, but resources are being very well invested in new projects. However, we Liisa set a goal to control these levels so that they are always considered healthy. Carisa, our CFO. Could you please jump in and answer the question.

Thank you, Rui. Yes, we always have efficient management of our PMSO expenses. And we are constantly paying attention to financial solidity of the company. Financial robustness of the company because we want to use appropriately the resources coming from RSBE. The company has been getting high values for RSBE, resulting for all the years of work since the first concession. And now we have a commitment with investors. These values will be allocated into activities that really provide higher profitability activities that can generate new revenue. That will mean appropriate management of PMSO and appropriate management of debt. We don't have any specific debt goal, but we are always paying close attention. So that we can have debt levels within healthy levels and always below our restrictive covenants, which are 3x net debt over EBITDA. I hope I have answered your question.

The next question now submitted by Philippe Ibale, great results. Congrats. I would like to understand how the company is willing to use drones? Are you going to use them increasingly in your operations? If so, what is the cost reduction in personnel that you have by using drones? And what can we expect for upcoming years? Gabriela, our operations VP.

Well, along the lines of sustainable growth and investments in innovation drones are an increasing use in our activities. So inspection of transmission lines, substations, we use drones to capture precise high-definition images, and that helps us work in preventive maintenance. In corrective maintenance as well, we've been using drones for one last checklist of all the works that have been performed and check the quality of the work performed by our teams. Thanks to partnership in research that is we've created a drone that really emits fire and can really help us prevent shutting down lines when we have to remove objects. So in addition to efficiency in our practices, people will be qualified to deal with these devices and more qualification means more efficiency. But at the same time, we will have more availability of our devices by using drones preventively and also using them in corrective maintenance.

Next question, Mateo Ventura. What is the regulatory result in comparison with IRFS?

So why do we see these differences? IFRS does not capture the step that we're having with RBSE now. Now, just so that you understand what is our RBSE. In April, we had a technical node defining how RBSE was reprofiled. What does that mean? This technical note is an answer to the company's old claim where we understood that we could update Kai before 2017. This claim was recognized, which gave the company a future cash right of BRL 1.8 billion. So this is really good news. However, because of the moment we were in because of the pandemic in our economy, a part of it were postponed to July 2023. When we look at the regulatory, which is a proxy that is much closer to cash, this is a cash reduction with IFRS, we recognize the future flow of receivables. So these values have already been captured, and they generate a payment with IFRS. And it is also updated based on the IPCA index. That's why when we see it, it's significantly higher than the regulatory results. Thank you.

Next question will be asked by Rafael Dias from Banco do Brasil. The question is about the expectation for the remaining capex of the ongoing projects with a high in foreign exchange and inflation. Will your capex be different? And what is ANEEL's budget for the next auctions? Will it allow you to get the same discounts for the auctions you had before 2019? So Dayron Urrego will answer that. He is our director, and he's in charge of projects.

Thank you. So what has happened in the last months is deflation. And well, there's a lot of inflation, but it has impacted us, but not these projects because most of the equipment and materials, cables and structures were purchased before it went up. So it's already been accounted for in our projects. For the next auctions, we would expect some discounts according to the new prices for new equipment.

Thank you. Shakar will ask the next question. So what impact will the company take from the negative situation with generators? Right. Gabriela, the Operations Director will talk about our operational challenges. But before I pass it on to her, I'd just like to say that from the economic and generation point of view, we have to remind you that ISA CTEEP is paid by the availability of its assets. And that is regardless of the amount of power going through them, the price of energy. So if hydroelectric generators generate more or less, this does not impact how much we receive for our assets. Our revenue will be the same as long as our assets are available and operating capacity, which is what we are doing in the company today. Of course, this will change when you have fewer hydroelectric power plants running, for example, if there is a drought, operators had to work differently. So Gabriela will tell us a bit more about these operational challenges that we're facing.

Thank you, Rui. Thank you for your question. Due to all of the improvements and reinforcements that we've carried out, we actually reinforced our operations team, and we got closer to A&S to advance or predict any issues that might take place to -- in order for our lines, not to be shut off, for example, the lines that provide energy exchanges between the different regions. And we've been very successful with that relationship because we have a very well-structured team for analysis, even supporting the national operators in their decisions. So we've been able to maintain our modernizing front and our maintenance processes. Because we could have been impacted in our capacity to shut off equipment for these renovations due to restrictions in transmission and generation. But we have not been impacted in our works or in our maintenance processes even despite this critical scenario.

[Operator Instructions] As there are no further questions, I'd like to pass it back on to Mr. Rui Chammas for his closing remarks.

Thank you. I'd like to thank you all for being interested in our company. I'd like to say that at ISA CTEEP, we have an open conversation with all of our shareholders through our Investor Relations department. So if you'd like to talk to any of the directors, we can answer any questions you may have. So we remain open. Thank you for being interested in ISA CTEEP and in all of the positive developments that we've had with our business. Have a good day and a good weekend.

This concludes ISA CTEEP's conference call. Thank you for listening. Have a great day, and thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]