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

Welcome, everyone, to ISA CTEEP's First Quarter 2023 Earnings Conference Call. Joining us today are Rui Chammas ISA CTEEP's CEO, and Carisa Portela Cristal ISA CTEEP's CFO along with other company executives. We would like to inform you that this event is being recorded and will be made available at the company's IR website, where the slide deck is already available. [Operator Instructions] Before proceeding, let me mention that forward-looking statements that may be made during this conference related to the company's business perspectives, projections and operating and financial targets are based on the beliefs and assumptions of the company's management and on information currently available. Forward-looking statements are no guarantee of performance. 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 should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of ISA CTEEP and could cause results to differ materially from those expressed in such forward-looking statements. [Operator Instructions] Now I'd like to turn the floor over to Rui Chammas, the company's CEO, to start his presentation. Mr. Rui Chammas, you have the floor.

Good morning, everyone, and thank you for participating in ISA CTEEP's First Quarter 2023 Earnings Conference Call. I'm Rui Chammas, Chief Executive Officer of ISA CTEEP and the company Executive Directors are with me today to present the results disclosed yesterday and provide an update on ISA CTEEP's business evolution. Please move on to Slide #3. We started 2023 bringing good news. We began the commercial operation of another greenfield project Interligacao Eletrica Itaunas in which we invested BRL 350 million for the construction of 79 kilometers of lines and 1 new substation in addition to the expansion of an existing substation. The project is located in Espirito Santo and has a total RAP of BRL 63.4 million. This deliverable is in line with our strategy focused on generating sustainable value and with the strategic factors that sustain it and support the decision-making process of the company's management. Mainly create positive, social environment impact, ensure corporate longevity and generate value to the shareholders. I have also presented the financial highlights. Those details will be given by our CFO in a moment. All the main numbers continue to show a positive performance with advances of 20.2% in the consolidated net revenue ex-RBSE, 96.9% in net revenue of jointly controlled companies, 38.9% increase in EBITDA, 171.9% in net profits and 31.2% in CapEx of the company. Also in the beginning of 2023, we returned to the B3's IBRX100 and ICO2 index portfolios. And we began to be part of B3's corporate sustainability in its portfolio, the ISE. I also highlight the carbon-neutral certificate from the Colombian Institute of Technical Standard and Certification [indiscernible] , which was obtained jointly with our parent company, ISA Brasil. We move on to the next slide where I address the company's growth. As we can see in the graph, in the last 3 years, we maintained the pace of investments in greenfield projects at a level close to BRL 1.1 billion in the year. And the increase observed in the total amount invested, excluding investment in acquisitions, is covered by investments in retrofitting projects, which in addition to bringing profitability to the company, ensure the reliability of electrical services in the assets under our responsibility. Focused on the commitment to generate shareholder value and ensure corporate longevity, we invested BRL 543.7 million in Q1 '23, a new quarterly record. The largest amount invested came both from retrofitting project and from greenfield projects, which grew approximately 30% each -- each of those dimensions. It is worth recalling that the renewed contract responsibility and the opportunity to maintain and modernize the assets, which is done through investments in retrofitting projects that allows us to carry out service reliably and reduce the company's operating and maintenance costs in addition to being compensated by additional RAP. Let's move on to Slide 5, please. With the 5 energizations carried out in 2022 and the energization of Itaunas at the end of March, we now have the right to receive an additional BRL 450 million in RAP revenue. We currently have 5 projects under development located in the South and Southeast regions in the country. All of those are 100% controlled by ISA CTEEP and when completed, we will generate more than BRL 460 million in RAP -- additional RAP. The project still under construction, Triangulo Mineiro is scheduled to be powered up in 2023. I now turn the floor to Carisa Cristal, our CFO, who will provide the details of our financial results for Q1 '23. Carisa, you may proceed.

Thank you, Rui. Good morning, everyone. I will start my presentation on Slide 6. The company's net operating revenue, which excludes RBSE, grew 20% in the first quarter of 2023, an amount of BRL 512 million. This growth was driven by events related to the company's operation, which were the startup of retrofitting projects and greenfield projects and also the positive IPCA update on the RAP for the '21/'22 cycle. The chart on the upper right corner shows the growth in net revenue ex-RBSE, considering ISA CTEEP's share in the revenue of jointly owned subsidiaries, which was 33%. I would like to point out that as of July 2022, we had a partial recomposition in the amount of BRL 90 million per quarter of RBSE revenue, after the reprofiling of the financial components of 2021. This is a topic we have been discussing since last year and it impacted in '21, '22 tariff cycle and continues to impact the '22, '23 cycle, which ends in June '23. Our continued search for efficiency and cost management allows the ratio of manageable PMSO and net operating revenue ex-RBSE to present an efficiency of 2.9 percentage points higher in the period. So that our manageable PMSO has a growth of 9.7% amounting to BRL 157 million in the quarter. This growth is mainly explained by the higher cost due to the increase in headcount with the company's growth and the execution of the collective bargaining agreement in the period. In addition, higher expenses with materials and maintenance services also contributed to the growth. This quarter, we also had the update on precatory receivables from the municipality of Sociedades at discounts in the amount of BRL 25.5 million. As a result, our EBITDA grew 38.9% in the first quarter of 2023, amounting to BRL 739 million. On Slide 7, I note the fact that this quarter, our net income was also positively impacted by the equity method, which reached a new level after the start of the sales operation of the jointly conjoined project of last year. Also reached growth of BRL 49.5 million. As a result, we ended Q1 '23 with a net income of BRL 306 million, an increase of 172% when compared to the first quarter of '22. Now on Slide 3 sic [ 8 ], we see the snapshot of the company's leverage. We ended Q1 '23 with a gross debt of BRL 8.8 billion. Net debt of BRL 7.3 billion and the company's leverage ratio measured by net debt-to-EBITDA ratio of 2.74x. On March 31, our debit had an average term of 6.3 years and an average cost of 12.25%. And it's worth recalling that in July, we reaffirmed our investment grade on a local scale with a triple A rating. The company continues to evaluate its capital structure and growth opportunities with the aim of maximizing shareholder value generation. It's worth mentioning that the results presented materialize our commitment to delivering sustainable value and reinforce our good prospects in relation to our operating cash generation, which should continue to evolve with energization, both of greenfield projects and retrofitting projects. And also with the recomposition of the RBSE revenue. I end my presentation here and give the floor back to Rui.

Thank you, Carisa. Before concluding our presentation, I would like to provide an update on our ESG agenda. Always guided by our strategy to generate sustainable value, we made advances in our ESG practices in the period analyzed. The highlights of the period were as follows: The successful implementation of SOx approved by ISA CTEEP in the Ecopetrol Group's financial report without any significant maturity efficiency in the internal control environments, demonstrating our good governance. We continue to make progress in reducing SF6 gas with insulating properties, which also has the potential for global warming. The carbon neutral certification I mentioned at the beginning of the presentation, and we start the first class of the installation electrician course for women delivered in the partnership with [indiscernible] through the impact program or offer more jobs program. This simultaneous launch of a new positioning campaign for ISA and its company is reinforcing our -- its commitment to society. I will continue to present some of other of the main ESG indicators. We can see the losses continue to drop. Only in the first quarter, the reduction was 27.9%. In addition, our energy construction decreased by 4.6% and water consumption increased by 7.1% in the period. Regarding gender diversity, the executive Board maintained the rate of 60% of women in its composition. As for the total number of employees, we saw an increase of 2 percentage points in the share of women, reaching 16% of the total number of employees. Next slide, please. To conclude the presentation, we summarize some highlights related to ESG, growth, cash generation, innovation, discipline, CapEx execution, operating efficiency, profitability, the practice of the payout at 75% and the investment-grade Brazil Fitch is AAA. When I summarize all this in view of the results presented, I'm so happy to present the result of a growing company and also an leverage which has been controlled with a slight drop, and we continue on practice to make payment of dividends. We'd like to reinforce those 3 elements. These are elements that we have defended and we defend the strategy that has been presented to you in each of the moments we are facing. And whenever we have the opportunity to speak directly to our shareholders, and I would like to thank you for the interest for the company. And I would like to invite you to start our Q&A session. And therefore, return the call back to the operator.

[Operator Instructions] Our first question is by Pedro Enrique, investor. What business opportunities does ISA CTEEP see through the registered batteries process?

Good morning, everyone. I am the Project Director at ISA CTEEP and based on the lessons learned with the registration process, the company continues to assess new opportunities in different points of the network. We're very much interested in participating in the next auction of reserves capacity. We're studying and waiting for the necessary adjustments in the regulation in order to be able to participate in it. Thank you very much for your question.

[Operator Instructions] Our next question is also by Pedro. He's asking, are you going to participate in the June auction? What are the lots that you're most interested in?

Thank you again, Pedro. Yes. The answer is yes. ISA CTEEP is going to participate in the auction that will take place in June. Right now, the company is studying several different lots. And we are working on the pre-engineering part of the lots in order to be more confident in the structuring of our CapEx and the premises needed to define our bid. We're still studying the lots that we're going to bid in, and our Board of Directors are going to make a decision before the auction. But for now, we are studying the different lots in thorough. Thank you very much.

Our next question is by Antonio Alex Dimerize, an individual investor. Congratulations on your results. I have 2 questions. The first question is the following. Is ISA CTEEP still competing at TAESA for Cemig?

I'll start with the results -- with the answers. We're very happy indeed with the results, and we'll continue to work to generate more value to shareholders. While you're asking whether ISA CTEEP is still competing to make this acquisition? Well, ISA is the core controller of Taesa together with Cemig. So they have reference in case Cemig does decide to sell their shares, but that would not change the control of the company. So ISA and Cemig are still considering that in case they decide to make that option in the future.

Now the second question is, what are the proceeds for 2023? Is it going to be the same level of payments you had in 2022?

Antonio, this is Carisa speaking. Let me start by giving you some background information, talking about the commitment to the company's strategy. I'd like to highlight 2 pillars: better generation and corporate longevity. With this focus, our company always aims to have a balance between distribution of dividends and investments. We always make a responsible allocation of the company's resources. When it comes to investments, we want the right profitability. And when it comes to dividends payout, we continue loyal to our practice of dividend payout with at least 75% of our net profit being paid in dividends. And for now, we're not planning to change our practices.

Thank you, Carisa, for your answer. Now the next question is by Bruno Ricardo. The question is the following: Something that concerns shareholders is about the debt amortization scheduled for 2024, which will reach almost BRL 2 billion. Are you going to roll out the debt? What are you planning to do?

The company is constantly assessing all of the opportunities to review our capital structure. And we do that quite frequently. So we've been assessing all of the opportunities and trying to find the best moment either to roll out the debts or to settle all debts. Our leverage capacity and future investments capacity are also taken into account.

Now our next question is by Marcelo Sa, sell-side analyst at Itau. With the high CapEx level for the coming years, the current leverage and your dividend payout policy doesn't make sense to believe that the payout will drop substantively from around 10% to around 5%.

When we look at our perspectives, indeed, we have great investment challenges here at our company, but in this scenario, we also see great strong investments that are made with perspectives to grow our permitted annual revenue as well. We showed you the evolution that is already operating this year. So yes, we may have an impact on the investments, which will increase the company's leverage, but within what we consider appropriate for a company that is growing to keep our triple A rating in a way that gives us the capacity to keep on with our dividend payout practice.

Our next question is by Guilherme Lima, sell-side analyst at Santander. So the first question is, good morning, everyone. About RBSE, we saw a technical note, 85 of 2023 with a new manifestation of announced technical area. In that regard, when do you expect the RBSE discussions to be completed?

Good morning. About the RBSE discussion, it's important to highlight that we trust and announced decision adopted in 2021. Technical Note 85 shows a positive evolution and some points showing that there has been no mistake in the calculations that happened in 2021. And there's nothing illegal in that decision. We believe that this analysis will advance in the coming months, probably in the next 60 days, and now we'll be able to have an analysis and that will be taken to be discussed at the Board.