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

Good morning, ladies and gentlemen. Welcome to ISA CTEEP's Fourth Quarter 2021 Earnings Conference Call. We would like to inform you that this event is being recorded [Operator Instructions] This event is being broadcast live over the Internet. The live stream may be accessed at the Internet at www.isacteep.com.br/ri, where the slide deck is also available for download. You can view the slides in the order you wish. The recording of the event will be made available soon after the event is over. Before proceeding, let me mention that forward-looking statements that may be made during this conference related to ISA CTEEP's projects are based on beliefs and assumptions of ISA CTEEP's management and on information currently available to the company. Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors and analysts should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements. Joining us today are Mr. Rui Chammas, CEO; and Carisa Portela Cristal, CFO and IRO, who will be delivering the presentation. Other company executives will be available during the question-and-answer session. Now I'd like to turn the floor over to Mr. Rui Chammas, who will begin the presentation.

Good morning, everyone. Thank you for joining us for ISA CTEEP's fourth quarter 2021 earnings conference call. I'm Rui Chammas, CEO at ISA CTEEP. And joining me today are the executive directors of the company to share the results that have been made public yesterday and give you an update on the main topics for the company. Let's get started on Slide #3. We closed the year of 2021 crowning our operational action strategy focused on generating sustainable value. The plan devised to reach that goal is based on a tripod of strategic factors that will be addressed during this presentation, causing positive social, environmental impacts, ensuring corporate longevity and creating shareholder value. Let's now move on to Slide #4. This slide underscores our main accomplishments and starts to address the other 2 vectors that sustain our strategic tripod with a highlight on our investments and results. Later on, we will address each one of the vectors more thoroughly. Aiming at ensuring corporate longevity, we have increased the amount invested by more than 150%. This year, we invested BRL 3.3 billion. In addition to the acquisition of the Piratininga - Bandeirantes Transmissora de Energia, or PBTE, we have increased investments in improvements and reinforcements. In 2021, we opened the Lorena Substation, the first completely digital station within the National Interconnected System, a landmark towards Substations 4.0, with an additional permitted annual revenue and advances in data control and telecommand. And this additional permitted annual revenue of BRL 11.8 million and estimated EBITDA margins of approximately 90%. In addition to our investments in expansion, we have been at the forefront of the sector heading the development of technological and innovative projects. We have also developed an artificial intelligence project at our operations center that includes alarms that help us identify abnormalities in our system, decreasing reaction times and allowing us to perform maneuvers to control our assets. We also take pride in 3 other pioneering projects in the country, in addition to the first digital substation that I just mentioned. The first object incinerating drone ever authorized by ANAC that enables us to eliminate objects from our lines that would require us to take difficult actions to remove them. And the first large-scale battery storage of energy project approved by ANEEL in the last quarter of 2021. As a result of this strategy, we have an adjusted EBITDA of BRL 2.5 billion, in line with 2020, and an adjusted net profit of BRL 1.1 billion, down 5% vis-à-vis 2020. In 2021, considering the year results and profit reserves, BRL 1.8 billion were distributed between interest on equity and dividends, which account for [ BRL 2.792895 ] per share to be exact. Our payout was 210% compared to the regulatory net profit, and we also have a practice of distributing at least 75% of the regulatory net profit a year. But we have respected the financial leverage threshold of the company, which was below 3x net debt over EBITDA. As a result, our dividend yield achieved 8.2%. Now moving on to Slide #5, in which I will give you further details about our growth avenues. We remain focused on promoting growth while generating sustainable value and on creating value with projects that contribute to the expansion and safety of the electrical power transmission sector in Brazil, of course. Our growth strategy considers a growing investment in -- that covers participation in auctions and investments in our renewed concession agreements. In 2021, as I mentioned earlier, we invested a total of BRL 3.3 billion, which resulted in an average annual growth of 71% since 2018, an accentuated improvement in recent years. The highlights here are the investments in reinforcement and improvements to brownfield projects. The projection released in the 10-year energy plan estimates an investment need of approximately BRL 45 billion in reinforcements and improvements in Brazil by 2031. Today, we already have announced authorization to invest over BRL 2.7 billion in the next 4 years. This type of investment has been growing consistently since 2019. And in Q4 '21 alone, we invested BRL 125 million, up 19% compared to Q4 '20. With that, we closed 2021 with a total of BRL 368 million invested in reinforcements and improvements, up 59% vis-à-vis 2020. It's important to highlight that this investment in improvements and reinforcements expand the regulatory assets of our company and increasing the future EBITDA of our company as a consequence. In the brownfield projects front, our active prospection along with a history of strong operating cash generation as well as our operational capacity has put us in a good position to compete for merger and acquisition projects of PBTE. In 2021, the process was completed for BRL 2.9 billion (sic) [ BRL 1.9 billion ] and a permitted annual revenue added of 189 -- BRL 184 million (sic) [ BRL 185 million ]. The sector plan indicates an investment need of approximately BRL 40 billion in greenfield projects by 2031. In 2021, we invested a bit over BRL 1 billion in the greenfield lots that we had in our portfolio, 11 projects in total, and we energized 2: Aguapei and Itapura Lorena. And we also advanced in other projects, some of them to be implemented in 2022. It's important to mention that in recent years, we have energized 5 of these projects, reaching an average efficiency of 30% of our CapEx and an early start of 9 months on average in delivering those projects. Now let's move on to Slide #6 for an update on our construction projects. We can see the improvement in the constructions of each project, taking into account all activities all the way to the opening of the project. Out of the 9 project, 6 are at advanced stages, and they're going to be operational by year's end. The other projects are moving along according to plan, according to ANEEL time frame as well as reducing CapEx estimated by the regulatory agents. I turn over to Carisa Portela Cristal, Finance Executive Director. She'll be explaining our financial results in the last quarter of last year and last year's results as well.

Thank you, Rui. Good morning, everyone. I'm starting at Slide 7. The adjusted net revenue of the company was reduced by 24%, amounting to BRL 694 million in Q4 '21. That variation is explained mainly by the accounting of the negative adjustment as well as the reprofiling of RBSE. As of July, we received the Ke, a part of the financial component delayed by 24 months. Those effects were partially offset by the IPCA update as well as the PAR as well as the introduction of new projects in greenfield. Additionally, we acquired Piratininga, that was consolidated as of March. In the accrued results for the year, those events impacted our adjusted net revenue increasing 3%, reaching BRL 3.3 billion. In our attempt to improve efficiency, both PMSO in Q4 as well as the accrued for the year improved below the average inflation rate for that period. Our PMSO in the net revenue reduced 6 percentage points, reaching 18% in the last quarter of last year. When we analyze the annual data, the reduction was 5 percentage points, reaching 14% in 2021. On to Slide 8 now, please. We can see the adjusted EBITDA that was impacted mainly by the reprofiling of the RBSE and the payments for the quarter. Our EBITDA was reduced by 30% in Q4, amounting to BRL 504 million. For the year, we were at BRL 2.6 billion. These negative results that I just mentioned were offset mainly by the impact of inflation in the PAR, new projects that became operational throughout the period of 12 months as well as the conclusion of the acquisition of Piratininga. Still, in the fourth quarter, we were impacted by economic indicators that indexed our debt, such as CDI, IPCA and interest rates as well as monetary variations. When we include that to the 8 -- 11th issuing, that increased our net financial expenses, increased by BRL 136 million in the quarter. Net revenues were reduced by 64% when compared to last year's fourth quarter or fourth quarter 2020. Moving on to the leverage. Slide 9, please. We have been analyzing our capital structure constantly, our debt capacity and growth opportunities, trying to maximize value generation. We took 3 credit lines in 2021, amounting to BRL 2.8 billion. Our gross debt was BRL 7.4 billion. The average maturity date was 6.6 years. When we analyze our availability, we have detected a 56.6 reduction through the acquisition of PBTE, Piratininga and dividend payments throughout the year. Debt -- our net debt reached BRL 6.7 billion and leverage rate was 2.6x net debt over EBITDA. Our debt management aims at allowing the company to finance its growth strategy, just like Rui put it. The cost of the debt, once adjusted by inflation, has been reducing. It has been -- it's being reduced actually. This is only possible because we have the healthy debt profile and strong cash generation. This concludes my presentation, and I turn it over to Rui one more time.

Thank you, Carisa. Before we move on to the Q&A session. In sum, based on very strong ESG numbers; innovation being taken seriously as a true competitive advantage; operational efficiency, which is our core competency; this is benchmark in terms of operations and costs, the company has managed to be sustainably profitable, whilst generating cash. The transmission business does not have demand risks, and we do not run any price or credit risks. Based on these numbers, we can assume that the company can manage dividends. We have a minimum 75% payout based on the regulatory numbers. As I said, that was surpassed significantly. And growth, the asset base has been growing. And we can foresee profits and results that are very positive in the near future in both greenfield projects, improvement projects and taking all the opportunities that are made available through acquisitions or mergers. This concludes our presentation so that we can start our Q&A session.

[Operator Instructions] Our first question is being asked via webcast. What is the forecast and the timeline to distribute the next proceeds throughout the year? Can we expect anything similar to the year of 2021 with a high debt? Will the company continue distributing proceeds just like it did in 2021?

Thank you for your question. In 2021, the company distributed BRL 1.8 billion, including reserves. This year, we have been discussing the tax reform, and we decided to make the payments ahead of time because most of those payments were concentrated in Q3, and we wanted to maximize profitability to our shareholders. Our current dividend practice is to have a 75% minimum. And we do not have any regular payouts scheduled. This seems to be appropriate to maintain good management practices to ensure our financial health.

Our second question is the following: Is there a possibility that the indebtedness of the company will exceed 3x in the coming 2 years?

We try to manage our resources in the most effective fashion, and we constantly believe that 3x of net debt-to-EBITDA ratio is enough to keep on managing our strategy for the years to come.

Our next question is by [ Fabio Diob ].

Does CTEEP confirm energizing the projects of Aimorés and Paraguaçu by February 2022? Is there a possibility of energizing the Ivaí and Itaúnas project in the first half of 2022?

Thank you for your question, [ Fabio ]. I'll turn over to our project department.

Thank you for the question, [ Fabio ]. We've had some delays in those projects because of the increased rainfall for the period. We're reaching the final stages of construction. We are starting Aimorés, and then Paraguaçu will become operational. Both Itaúnas and Ivaí, we are considering making them operational in the first half of the year.

Our next question is by [ Bruno Freitas ].

Why would you distribute a payout of 210%? Is that a sustainable practice?

When I answer the question about the dividends, let me say that when we consider the tax reform and the possibility of taxing dividends, we decided to pay these dividends ahead of time. We did not pay out dividends, and we believe that this wouldn't impact our operations significantly.

Our next question comes from [ Leandro Toutinho ].

What actions are you taking, considering the high competitiveness that we had in recent ANEEL auctions? Within the limits of return rates of the company, do you intend to participate in auctions this year targeting any specific lot?

Thank you for your question. I'll turn over the question to the person responsible for -- responsible for business development department.

We always discuss internally what we could do differently to improve in everything that has to do with being more and more competitive. We are paying close attention to any improvement for -- or any room for improvement. We have to take into account risks and return. We look at what's -- what the implications would be. We pay close attention to the growing price of commodities, things that can impact, and we have to be cautious. Based on the return rates, we have intentions of being part of these auctions, focusing on those areas in which we believe there may be some competitive advantage, be it because of the technical characteristics or something that can give us more leeway in terms of negotiations that can help us in our balance sheet. So it's a continuous exercise for improving so that we can make the best out of these opportunities.

Our next question is by Daniel from Banco Safra.

Can you tell us a bit more about the sponsorship that was removed from the pension plans? Can you tell us about terms and related costs?

Thank you for your question, Daniel. Today, we have a plan that is called a defined benefit. There are 3 categories. Because of decreasing interest rates or the increase in life expectancy, this plan wouldn't be sustainable in the long run. That's why we pulled away the sponsors. It will jump from 18 to 24 months. It has to go through an approval process, and we have to define all the reserves. After 18 to 24 months, we are going to pull away -- pull out that sponsor. This is going to be replaced by another plan. But we cannot estimate as of now what the impacts would be in the balance sheet of the company. As soon as we have that clear definition, the market will be informed accordingly.

[Operator Instructions] A question by [ Paolo ].

Did the water crisis affect your results? If affirmative, what was the impact?

Thank you for your question. Let me just make a comment before Gabriela Desire, our Operations Director, answers that question. Our compensation does not depend on energy prices. Yes, there may be some operational impacts, albeit they're not financially related. And I'll turn over to Gabriela to answer that question about the impacts of the water crisis.

As to operations -- [ I'm sorry, I cannot interpret. We're getting feedback. The sound quality of the audio is not sufficient for simultaneous translation purposes. ]

[Operator Instructions] This concludes our question-and-answer session. Now I'd like to turn the floor over to Mr. Rui Chammas for his final remarks. Mr. Rui, you have the floor.

I would like to thank you for understanding our long-term strategy. These investments increase our asset base in the transmission industry in Brazil. If you have any questions, get in touch with our IR team, and we'll be more than glad to provide you with any information you may require to better understand our business. Have a good day. Thank you.

This concludes ISA CTEEP's earnings conference call. Thank you all for joining. 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.]