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

Good morning, everyone, and thank you for waiting. Welcome to ISA Energia Brasil Earnings Conference Call of the second quarter. This teleconference is being recorded, and the replay can be found at the website of the company at ri.isabrasil.com.br, where you also can find the presentation. I would like to highlight that if you need simultaneous translation, this functionality is available on the platform [Operator Instructions] And in the end, we will have a Q&A session. [Operator Instructions] Before we continue, we would like to reinforce that the declarations contained in this report about business perspectives, forecast for growth and projections reflect the estimates of the administration and are subject to risks and uncertainties because they depend on market conditions, on economic performance and other factors that may result in relevant changes. Therefore, future declarations depend on circumstances that can or cannot happen. Investors, analysts and journalists need to understand that market conditions and other factors can affect the future performance of ISA Energia and conduct to a result that is different from those that were forecast. Today, we have the presence of the Executive Rui Chammas, Chief Executive Officer of the company, together with Silvia Wada, Chief Financial, Investor Relations and Business Development Officer and the other executives of the company. With that, I'll give the floor to Rui Chammas for him to start this presentation. Please, Rui Chammas.

Good morning, and thank you for participating of the earnings results conference call of Q2 of ISA Brasil. I'm Rui Chammas together with Silvia Wada, our CFI Relations (sic) [ CFO, Investor Relations ] and Business Development Officer. Today, we will present the results released yesterday to provide an update of the results of the quarter and the strategic process. Let's go to Slide 3. I will begin highlighting the important progress of the company and the strategy and financial highlights and the commitment to sustainable value creation. I would like to highlight 2 subsequent events that took place in July. The primary public offering of preferred share results in a capital increase of BRL 1.2 billion and an increase in the company's free float with allocations made predominantly to long-only investors, strengthening the company's capital structure and supporting its future growth cycle. Another important milestone was the completion of the unwinding and cross shareholdings with Axia Energia announced in March in a transaction involving a cash adjustment and payment of BRL 1.2 billion to Axia. As a result, as of August, we fully consolidated the [Foreign Language] -- and we no longer have a stake in the [Foreign Language] of Garanhuns asset. Therefore, the ARR (sic) [ AAR ] adjustment for '26, '27 will show an increase by 11% growing inflation, thanks to the successful execution of the strategy that have been consistently communicated to all of you. From an operational perspective, the quarter marked by the energization of a final block at Piraque project and Jacaranda project, which together represented an ARR (sic) [ AAR ] of BRL 376 million. These deliveries reinforce the company's history of excellence in executing complex infrastructure projects as demonstrated in our track record. With the energization of these projects together with the companies in other projects delivered in the second half of '25, we recorded a 4.4% decrease in the amount invested during this period, totaling BRL 1 billion in the quarter despite of the 17% increase in investments in Retrofitting and Improvements. The company's financial results reflect this operational evolution. We record net revenue of BRL 1.2 billion, up 20.9%, EBITDA of BRL 967 million, an advancement of 22.6% and an EBITDA margin of 77.8%. Net income totaled BRL 174 million, a decrease of 32% compared to the same period of the previous year, reflecting the higher leverage that supports the growth that I have just mentioned. I would like to invite now Silvia, our CFO, to provide further details on subsequent events highlighted.

And let's go to Slide 4. As you have seen, we followed -- we carried a subsequent primary public offer preferred shares. The base offer was 22.2 million. And due to the strong demand received by investors, we executed not only the base offering, but also the entire offering. And as a result, we raised BRL 1.2 billion through the issuance of 44.4 million new preferred shares at a price of BRL 27 per share. Although we offer -- the offer was targeted to professional investors, all of the more than 300 shareholders had the opportunity to participate and exercise their priority rights according to their ownership interest. The offer also included the participation of preference investors with significant foreign investor participation and 74% of the allocation directed to long-only investors, reinforcing the quality of our shareholders base. The proceeds from the offering were partially allocated to the payment made to AXIA upon closing the asset unwinding transaction, while the remaining portion will be allocated to accelerating investments in Retrofitting and Improvements, which already grown substantially in the recent years and continue to receive increasingly significant authorization for the execution of new projects. Following the follow-on offer, we concluded on Friday, July 31, an unwinding cross shareholdings with AXIA Energia, which involved the acquisition of AXIA stake in IE Madeira and the divestment of the company interest in IE Garanhuns as a net consideration, we made a cash payment of BRL 1.2 billion upon closing the transaction. In addition to increasing our ARI (sic) [ AAR ] by BRL 306 million for the '26, '27 tariff cycle, the transaction also contributed to portfolio optimization and simplification of our corporate governance structure. With the completion of the transaction beginning in August, we started fully consolidating Madeira and ceased to recognize our interest in Garanhuns through the equity method. This is yet another example of our role of activity managers of a concessions portfolio consisting seeking to allocate capital and the opportunities in the long term.

On Slide 6, we see how the company's diversified portfolio continues to drive expansion of value creation of ARR (sic) [ AAR ]. Our quotation of ARR (sic) [ AAR ] for the '26, '25 tariff increased 11%, reaching approximately BRL 7.1 billion, including the impact of the asset unwinding transactions. The increase of approximately BRL 709 million compared to the previous cycle was primarily driven by the inflation adjustment of concession contracts, the asset unwinding transactions and the continued growth of the Retrofitting and Improvements investments. It's important to highlight more than half of our AAR continues to come from the Paulista concession, our flagship asset, while auction concessions already in operation and projects currently under construction continue to increase their contribution. This unique combination of concessions managed by ISA Energia Brasil, which includes a renewed concession of Paulista concession with significant Retrofitting and Improvements opportunities. New concessions can be secured through ANEEL with the opportunity through M&A transactions that provide a unique growth. This business model allows us to continue delivering an essential service to society and advancing in value creation in what is an extremely resilient business of fundamental characteristics and defining the company's long-term performance. Let's go on to Slide 7. Continuing our growth plan, investments in our greenfield projects continue to advance steadily. Following energization of 4 projects over the last 12 months, Agua Vermelha, Riacho Grande, Piraque and Jacaranda, investments in greenfield projects declined by 16% during this period, exactly as expected. The quarter's opening performance was driven by 2 highly relevant milestones. The first was the energization of Block 3, the final block of the Piraque project. This project represents one of the most important transmission corridors for the flow of renewable energy between Northern Minas Gerais, Espirito Santo and the state of Sao Paulo. With its completion, we begin receiving 100% of the project ARR (sic) [ AAR ], totaling approximately BRL 359 million. The second milestone was Project Jacaranda, our Jacaranda project, which entered commercial operation in early April and added approximately BRL 17 million in ARR [ AAR ] to our portfolio. Combined, these energizations enabled to receive approximately BRL 376 million in ARR (sic) [ AAR ] and reinforce our strong execution track record. Since 2019, projects have been energized on average 11 months ahead of the schedule with an approximately 23% CapEx efficiency compared to ANEEL's reference CapEx. We currently have 2 greenfield projects under execution with approximately BRL 4.6 billion and these projects, Serra Dourada and Itatiaia represent approximately BRL 600 million in ARR (sic) [ AAR ], which we will begin receiving once the projects are energized. The 2 projects are at different stages of development. Serra Dourada is currently under construction and have reached approximately 49% physical progress, while Itatiaia is advancing through its development and licensing stage. So both projects remain on schedule. These projects will expand the longevity of the company's portfolio and that's directly linked to the expansion of the infrastructure required to support the growth of renewable energy sources in Brazil, which are an important component of the country's energy transition journey. In addition to the concessions, we continue to make strong progress in Retrofitting and Improvements. We invested BRL 445 million in this category during the quarter, representing an increase of 17% compared to the same period last year. Only through June in 2026, we had already energized 35 projects with approximately BRL 475 million in investments with roughly 70% of this amount allocated to small projects. Despite of the strong paced investments, we authorized R&M project pipeline remained stable at approximately BRL 7.2 billion. It's important to remember that these investments have a double relevance because they are fundamental to ensure the great service provision that has been provided. In addition, both to regulatory and through the low maintenance costs and newer assets generally require less maintenance than existing assets. Let's go to Slide #9. I would like to highlight the consistency of our investment trajectory. We remain convinced that the combination of our financial discipline, execution capacities and long-term vision will continue to differentiate ISA Brasil within the transmission sector. Now I'll give it back to Silvia Wada, so she can comment the financial results.

Okay. Let's go to Slide 10. Thank you, Rui. The company's revenue reached BRL 1.2 billion in the second quarter, a growth of 21% compared to the previous year. Net operating revenue, excluding RBSE increased 52%, evidencing growth contribution of operating assets to the company results. In addition to the adjustment of ARR (sic) [ AAR ] by IPCA, this performance was driven by the energization of large-scale Retrofitting and Improvements projects -- for greenfield projects that like Agua Vermelha, Riacho Grande, Piraque, Jacaranda which together have an ARR (sic) [ AAR ] of [ BRL 488 million ]. This amount also reflects temporary differences related to the charges of the adjustment portions with the amortization of the Ke portion of the RBSE and with the retroactive receipt of improvement annuity. Despite the reduction of RBSE financial component of ANEEL, the growth of the operating revenues was more than sufficient to offset this effect and support the expansion of the company results. Let's go to the next slide. The discipline in the management of operating costs and expenses remains one of the pillars of our strategy. PMSO totaled BRL 211 million in the quarter, representing 13% due to higher personnel expenses resulting in salary increases, success fees following a favorable decision in a proceeding related RBSE before federal court accounts and higher property tax expenses following the reassessment of the taxable value of the real estate. Even so, the increase in PMSO was lower than expected. This was allowed to continue improving our operating efficiency indicating, which reached 25% of the accumulated results for the first half. As a result, EBITDA reached BRL 967 million, an increase of 22.5% with a margin of 77.8%. Despite the growth recorded in operating results, the net profit decreased 32% and totaled BRL 174 million. This reduction was due to the financial result of the period. Which recorded an increase of BRL 287 million in net financial expenses, mainly driven by monetary variation expenses, interest and charges on debt as a result of the higher IPCA on the second quarter of 2026 versus 2025, which showed an increase of an 89% basis points (sic) [ 89 basis points ] in the period and as well as the gross debt balance followed in the 19th, 20th and 22nd debenture issuance carried over the last 12 months. It is also worth remembering that the company recognized BRL 51 million in other financial income in Q2 '25, mainly related to the update of extemporaneous tax credit. Let's advance to Slide 12 to talk about our leverage. Our debt profile remains predominantly indexed by IPCA with an average of 8.7 years and more than 90% of maturities concentrated from -- as of 2030. We ended the quarter with a gross debt of BRL 17.7 billion and net debt of approximately BRL 16.3 billion as of June 30. The company's leverage ratio measured by net debt to EBITDA ended the quarter at 3.78x. The average real cost of consolidated debt as of June 30 is of 7.1% a year compared to 7.56% per year as of December 2025. The reduction of the average cost was mainly driven by the reliability management transaction carried out through the 21st debenture issuance in the first quarter of 2026. During the second quarter, we concluded our 22nd debenture issuance with a spread of 87 basis points below NTN-B. Subsequently, we completed an additional institutional fundraising transactions under very competitive conditions. With that, I conclude my presentation and give the floor back to Rui.

Thank you very much, Silvia, and I would like to thank you for joining our call today. And I would like to use this final slide to reinforce our investment thesis and explain why ISA -- why invest in ISA Energia Brasil. Our company operates as a pure electricity transmission company, which represents an extremely resilient business model in Brazil. The transmission business is characterized by predictable revenues that are protected against inflation. And within this model, we have been able to capture growth opportunities driven by energy transition and by the need of the strengthening in the existing transmission network. This is particularly relevant here in the state of Sao Paulo, where we have a demand growth and the characteristics of a national interconnected system with an increasing share of renewable energy require the use of technology, additional assets capable of addressing this challenge while maintaining a high quality of service. This is a moment in which we can put in practice all our competitive advantages, whether through competitive operating costs, access to debt financing in the market or to the consistent demonstration that we are capable of delivering projects ahead of schedule and optimized costs, generating significant returns to the company. And all of this is anchored by a fundamental financial pillar with financial discipline, which allows us to continue accessing competitive debt financing in Brazil while also maintaining our dividend distribution practice of paying 75% of our regulatory net income. Anchored on these 4 pillars, resilient business growth driven by market opportunities, competitive advantages and a strong financial discipline, we firmly believe that we are pursuing a long-term value creation strategy while also generating positive social impact. Once again, I would like to thank all of you for your attention, and I will give the floor for the operations so that we can start our Q&A session. Thank you very much.

[Operator Instructions ] Our first question comes from Ricardo Bello from Safra.

Can we wait for the anticipation of any projects for the next quarter? What are the measures that you are using for cost control? Second question, now with the registration for the batteries auction, could you please explore more the topic and the perspective?

Good morning, Ricardo. It's a pleasure to have you here. I am going to answer the first question. Ricardo after the adjustments conducted over the 12 months, the project Riacho Grande, Piraque, the next -- the other projects continue under execution, Serra Dourada, we are at the stage of construction and the project of Itatiaia, we are at the moment at the licensing stage. About the cost control of these projects, I can let you know that the company has been very strict with cost control and everything starts with a very strict planning, rigorous planning and ISA Energia has a dynamic, the pre-signature of the contract before the auctions, which contributes very much for the control of these costs. And all of that at the execution stage, we control systematically our -- the control -- the cost control of all projects. Thank you very much, Ricardo, for your question.

Silvia speaking here. I'm going to complement with relation to the second part of the question. About the capacity reserve auction, well, there was a deadline to register the project. And we did that not to have optionality for a possible participation. And with regard to the perspective, we continue conducting our disciplined analysis, conducting the analysis of the bidding minute that is a public consultation. And we will participate as we believe it makes sense for our moments and for the profitability that is necessary for the profile of the project. But with regard to the environment is everything makes us believe that it's going to be a very competitive environment. So we don't have an obligation to win or a market share goal with that regard. So we're doing our work diligently to have a very good participation, but that makes sense in the end of the year.

Our next question comes from [ Ricardo Nascimento ] from Safra.

Regarding costs, we saw an increase in the cost line due to demobilization due to the investments in Reinforcement and Improvement. Could you comment the dynamic of how these costs evolve?

Thank you, Ricardo, for the question. As you put, the increase is linked to the increase for Improvements and Reinforcement and the replacement of assets. Here, it's important to highlight that when you need a reinforcement, these costs are recognized in the tariffs subsequently. So in 2028, everything that corresponds to these costs and asset costs that were not depreciated but that are regard with the tariff will return in form of APA (sic) [ AAR ].

Our next question comes from Andre Sampaio.

The company surprised us positively in the amount of Reinforcements and Improvements in this quarter. And even so, you were capable to keep the future pipeline of projects. Could we consider this level of investment as something recurring for the future?

Okay, [ Carvalho ] will answer, okay? And if you feel free to complement if you want to.

With regard to the investment of Reinforcement and Improvements, we have been increasing over the past years. And we do not forecast a reduction in that also due to the level of new authorizations that we've been getting. But on the contrary, part of what we mentioned in the presentation in the follow-up, part of the use of this -- for these resources will be that into the acceleration of the reinforcement and improvement. So we should expect an increase in this curve. But now when this is going to happen is something that we are still structuring internally. But when we talk about the total CapEx, then it's possible to wait a reduction of the total CapEx, both under bidding or for Reinforcements and Improvements due to the delivery of the greenfield pipeline projects. So we had a peak of BRL 5.1 billion invested. And probably the next year, it's going to be a little less because this is a trend.

[Operator Instructions] Our next question comes from Rafael Dias from Banco de Brasil.

I'm Rafael Dias from Banco de Brasil. Congratulations on the results presented with the conclusion of the Piraque project. I would like to learn if the conclusion of the Piraque project can bring some cost reductions for the next quarter? And what is the reason for the higher cost of the disablement of assets in operational costs.

Rafael, thank you for the question. The last part of your question I think can be answered by our regulatory CSO because they are about non-depreciated assets. So they are categories that go into the cost.