Neoenergia S.A. (NEOE3) Earnings Call Transcript & Summary

Good morning, and welcome to the conference call on Neoenergia's Q3 2021 Earnings. This conference will be delivered by Mr. Mario Ruiz-Tagle, CEO of the company; and Leonardo Gadelha, CFO of the company. This conference is being broadcast simultaneously over the Internet via webcast and can be accessed at ri.neoenergia.com where the presentation slides are also available. [Operator Instructions] This conference call is being delivered in Portuguese and simultaneous translated into English. [Operator Instructions] In addition, this event is being recorded and will be available later on Neoenergia's Investor Relations website. I'd like to mention that forward-looking statements that may be made during this call regarding Neoenergia's business prospects as well as projections, operating and financial targets are based on the management's expectations and assumptions as well as information that is currently available to Neoenergia. Future considerations are not an assurance of performance. They involve risks, uncertainty and premises. They refer to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that overall conditions -- sector conditions and other operating factors may affect the future results of the company and may lead to results that may be materially different from the results expressed in these future conditions. Now I'd like to turn it over to Mr. Mario Ruiz-Tagle. Mr. Tagle, you may proceed.

Good morning, everyone. Thank you, operator. I'd like to thank everyone for being -- for having joined this conference call, and we'll discuss our 2021 Q3 earnings and also the results in the year-to-date. We have Solange Ribeiro, Deputy CEO; Leonardo Gadelha, our CFO; then Eduardo Capelastegui, Property Control and Planning Director; Fulvio Machado and Renato Rocha. I'll give you a brief presentation with a major highlight of the period, and then Leonardo will provide further details about our earnings. And then we'll have a Q&A session, and finally, our final remarks. In the first quarter of this year, Neoenergia had a great result in the third quarter with a great performance with accelerated integration, and this has contributed to this result and the result of our operating results needing great performance and also an accelerated rhythm of execution of our transmission projects, renewable energy, in particular, solar and photovoltaic -- wind and photovoltaic. And now we will discuss the results and earnings of quarter 3. In terms of distributed energy, our 5 distributors had a growth of 5.2% in quarter 3 as for this -- quarter 2 2020. And it confirms that our resumption has been consistent in the -- in our concessions. And we have a growth of 62% in the quarter, and this reflects greater demand, greater consumption and readjustment of products and tariff reviews, our transmission and expansion project and also wind energy and also the increased performance in Pernambuco and also control of our operating costs. Net profit, BRL 1.3 million (sic) [ BRL 1.3 billion ], 57% higher than in year-over-year. And this shows our growth and that we have resumed the market growth in our post-COVID area. In terms of CapEx, we had a growth of 20%, and this means that we have committed -- we were committed and did what was promised. And we had a growth of our client base, and we have new projects in operation, both transmission and wind power, and also resumed our operating activities. And in 2020, we had a period of cost reviews. We also executed a CapEx of BRL 2.8 billion in quarter 3 2021, 51% higher than quarter 3 2020. And this is a result of our execution capability and also the advance of our wind power and transmission projects and the investment that we're making harder for our distributors to work in the third quarter of 2021. Financially, we have 2.86 basis points with regard to our net debt EBITDA, and this has been [ adequately ] under control considering the funding for the expedition of our energy. All these points again stress the sustainable results we've had this quarter, but also with a great year-to-date figures. Now on Slide #5, we can see our transmission projects. Here, I'd like to highlight in the third quarter, the completion of the [ plans ] with a final tranche of the Dorados line in August. And in the April 2017 auction, we now have all the lots delivered. So that was delivered for delivery and 30% in the CapEx according to ANEEL. The savings were 20%. And this confirms our business plan with a 2-digit results as expected. As for the others, we're still working in the final phase of the December 2017 project. We are expecting to deliver the completion of the Santa Luzia auction, which was ready, just waiting for the authorization for the final tests. And we're expected to deliver also the Jalapao lot, and that will be BRL 183 million as for the December 2018 lot. In the December 2019 and '20, we are making strides. We are in the environmental licensing process as planned. And also the construction of substations there, again, in compliance with our business plans, ensuring that we get 2-digit returns. Now Slide #6. And this is our Renewables project. So the Chafariz wind farm has accelerated, and it has contributed BRL 58 million in our EBITDA in quarter 3. And this is a result of all the wind turbines. 53 which -- have 184 megawatts in capacity. We also have -- when turbines are being tested there until the end of the year with the ramp-up of the project, the whole commercial operation will be on. Oitis complex, which is also advanced in its contractions, has 62% of the foundations already built. So in this last quarter of the year, quarter 4, we will have our first -- assemble, our first wind turbines. So we're expecting for it to start in the first quarter of 2022 with 567 mega. So 60%, a good part of that has already been sold. And when the Chafariz starts to operate, we -- our energy also will be more sustainable, and it will be destined to the free market and the other half will be destined to the regulated market. As a result, we will have a greater commitment on part of the company and also with more stability according to the budget. As for our solar park in the Luzia solar plant, we're expecting to start operations in the second semester of 2022 and the work started in May '21 and all the earthworks are completed. So when consider the deliveries of 2021, we're really optimistic. And this is aligned with what was planned in 2019. 100% of the photovoltaic park of Luzia, for instance, is already sold until 2026. I'd now like to share the first few months for Neoenergia Brasilia. We are now showing on the next slide our first few months with a major levers that we were defined to add value to Neoenergia Brasilia. So we have monitored 80,000 fraud links or clandestine, and we have operated -- regularized 20,000. And we have added as a result, 158 [ bases ]. And this means 6.5 more than the entire recovered energy for the entire 2020. As a result, our total loss rate in this quarter fell again 13.06%, and that means 2 consecutive quarters falling. And as for collection, we have had very good returns. The cuts were resumed for all types since April, and that was expected. So we made 70,000 cuts. That meant BRL 145 million in revenues and 37,000 negotiations. And then we collected BRL 75 million. Our collection rate as a result was 92% and is now 95% on average since March '21. And then the OpEx, we are integrating processes, and we have a voluntary dismissal program and a continuous project with a culture of security, safety, efficiency and results. The idea is to get the desired OpEx efficiency levels. And for recurring expenses, which was BRL 47 million, we have results, 2.8x the 2020 investment. And with the change that was made in our management and also investment that started to reap fruit, we really had great results. 9.23 hours in the -- it reduced to 8.8 hours in the third quarter 2021 as compared to 2020. So this is a new reality of Neoenergia Brasilia. We can also state that we will really reached the regulatory framework in the first half of 2022, which was better than the original plan. I also like to highlight that with a tariff review, we had an average increase of 11.1% (sic) [ 11.10% ] and the regulatory loss was BRL 1.1 million and that led to the recognition of 9.71% -- 11.71%. And also with tariff reduction measures like the PIS/COFINS among others, were very important to reduce the impact to the end consumer. So with this acquisition, we said that we would invest in this concession, and we have BRL 47 million in CapEx, and now we have BRL 79 million, and that's 2.8x the CapEx year-over-year. So Neoenergia is still making important savings as compared to what was purchased. And as a result, we can do more with fewer resources. Now we will -- I will turn it over to our CFO, Leonardo Gadelha, who will give us more details about our 2021 results or earnings for the third quarter.

Good morning, Mario. Good morning, everyone. I'll start by analyzing our consolidated results in quarter 3. As anticipated, this was a very good result in all segments of our business. So let's -- on Slide 9, we can see the evolution of 42% of our gross margin consolidated throughout the quarter with this recovery of the distributor market, and the result of readjustment and tariff reviews and also a better result in Renewables. And I'll give more details about that later. On the right-hand side with operating expenses, when you don't disregard the Neoenergia Brasilia consolidation effects, we had an expense that was 7% higher than quarter 3 2020, so means absorbing the inflation rate of the period and increased client base and new operations. In addition, in quarter 3 2020, there was a reduction of the activities as a result of the pandemic and also predicted cuts that were -- then happened at that time. We also had the positive impact of 2 arbitrations in Holdings and also consolidation of Neoenergia Brasilia and the variation is 6% in the -- and that means really efficient cost management. On the next slide, our consolidated EBITDA. It was clear that the EBITDA grew 62% during the quarter with BRL 2,861,000 in this quarter and purging the noncash result. So the evaluation is again 48%. So that's very significant growth. In these 9 months, the EBITDA cash growth is 41%. And the net -- the -- it's Renewables, 10%; Liberalized 6%; and Networks, 83%. So the net profit, it was an increase of 57%, BRL 1,281 million, 57% up year-over-year. Next slide. When you look at CapEx, we see that in quarter 3, the CapEx was BRL 2,800 billion. So that's BRL 1 million in distribution. That was a very strong pace. BRL 534 million for transmission with the works under way. And in wind farms, BRL 81 million with the Chafariz operation, so that's significant growth as regard to the former quarter. And this is, again, in compliance with our CapEx plan for the year. Next slide, Slide 13. We now see our Networks business. And we have our injected energy growth. And this has already been communicated to the market. So it was in the 5 distributors. Performance level was very good in all the 5, especially in the Northeast markets with consistent recovery levels as compared to previous quarters in all our concession areas. On the next slide, we see distributed energy. In the evolution of the 5 distributors, like in the last quarter, its growth was above injected energy, 5.2% higher when we consider Neoenergia Brasilia in the third quarter 2020. Without this adjustment, then the growth was 7.3%, and this is reflected in our earnings. The total consumers, 15.7 million. So that's 1.5 additional consumers, 372,000, if you consider Neoenergia Brasilia. Again for the 2020 baseline in this quarter comparing it to the second quarter, we had an additional 100,000 consumer units in this quarter. In the 9 months to date, Neoenergia Brasilia is 7.1%, and the growth without considering Neoenergia at 16.4% without Brasilia. Moving on now to losses on Slide 15. Again, the quarter was great with loss reductions in all distributors, except for the [indiscernible], but they follow the regulatory limit with 1-digit loss. And this has been a trend in all distributors, so both Elektro and Cosern with single digit. And so with Coelba in the last 4 quarters, and Neoenergia Pernambuco in the last 3 quarters and Brasilia in the last 2 quarters, as Mario presented, in this -- in a very challenging scenario -- macro scenario. So with all the difficulties, adversity, we have combated all these losses. And then default, the -- our PECLD were -- it's clear that in quarter 3, the performance was very good. Again, with regard to default PECLD is in line with our pre-COVID level with BRL 100 million in the -- during the quarter. So that's a very consistent trend for all 5 distributors, which means that the action that was taken has been rather successful, all the collection practices we've been having and all the cuts that took place throughout the year. So -- and this we can see on the right-hand side the major actions that were taken. So we have a very good pace, a collection pace with good PECLD that falls in spite of all the difficulties we have been through. On Slide 17, we see quality indicators, DEC and FEC, which show a significant improvement. Both DEC and FEC in all our distributors even during the pandemic with a slight variations in terms of Elektro with a very low level already. So with more rain, there's a little more variation except for Neoenergia Brasilia, which has -- will be getting better soon, but it's, again, very positive. Now on Slide 18. This is about our Networks results. So there was an evolution of 35% in quarter 3 as compared to the third quarter of 2020. And this was negotiated with the market all the readjustments and all the reviews of Parcel B and the number of our clients and the effect of VNR and also the advance of the transmission works and also Neoenergia Brasilia the effect is also felt here. OpEx. The Networks OpEx grew only 2%. When you consider the effect of consolidation of Neoenergia Brasilia, 12%. And the -- based on third quarter of 2020, it was a low activity level again because of the pandemic difficulty. So in addition to resuming the activities bridging a normal level, we also fought inflation pressure and increased the number of customers. Now EBITDA for Networks on Slide 19. We see that the Networks EBITDA grew 48% in quarter 3. If you purge VNR and [ ex-VNR ] are in IFRS 15, it was 66% and 32% in the 9 months of the year. On the left-hand side, we see the distribution and production EBITDA. Distribution grew 51% and transmission, 28%, especially because of the lines that have been built with the effect of IFRS 15. Our Networks profit was 30%, BRL 1.047 billion and BRL 3 million in the 9 months of the year. Moving on to Renewables and Liberalized energy that's Slide 21. We can now -- we have now a summary of these segments. And as I said at the beginning, both had very good results. In quarter 3, Renewables had an increase of 160% of EBITDA with BRL 455 million in this quarter. And this includes both hydro and wind power generation. So hydro BRL 216 million and BRL 175 million was a result of the nonrecurring effect of GSF of BRL 175 million. But even if you purge this effect, our growth was really strong during the quarter, if you purge that effect. Now wind power, the EBITDA grew 52%, BRL 186 million, especially because of the Chafariz unit, which had this sale of energy at a higher price, contributing BRL 48 million and a quarter with more wins than in third quarter 2020. So the Renewables, EBITDA grew 37% (sic) [ 87% ] and profit 191% with BRL 809 million was the EBITDA -- sorry, in the 9 months, this EBITDA of 87% meant BRL 809 million. Now on the Liberalized energy segment, the EBITDA was BRL 207 million in quarter 3 and the -- an increase of 77% as compared to the third quarter 2020. Again, very good performance levels, especially because of Pernambuco in the quarter with a greater number of days as compared to quarter 3 2020 with an EBITDA level of BRL 176 million in this quarter. In addition, our commercializer (sic) [ Comercializadora ] had also better margins with an EBITDA of BRL 30 million. As a result, if we follow or move on to our capital structure slide that Slide 23, we see that at the end of quarter 3, although our net debt increased to BRL 27.3 billion as we have a greater CapEx and also increased costs. So the great results that we had, our leverage and net debt-to-EBITDA ratio decreased 2.86x, at the end of the quarter as compared to 3.03x, which was the leverage at the end of quarter 2. In the next 3 quarters, we expected an increased leverage levels because of the execution of our CapEx, which was accelerated, but again, less than expected on our plans. So our leverage level is close to 3x. But with -- it is really under control and less than expected before the plan. Our debt structure on the right-hand side follows -- is really well distributed for the following years, where the average is 4.6 years. Yesterday, we priced an important debenture capture in our distributors over BRL 2 million with a spread level that was highly competitive. So if you consider this operation and everything that has been spent or paid, we have BRL 12 billion in the year-to-date in capturing and payments -- debt payment. So we are following our plans strictly. And we're also -- for 2022, we are including the takeout of the Neoenergia Brasilia CEB acquisition. This is why there's more concentration in 2022. This is something we've been working on to settle this debt. And this means that we have the right capital structure and for -- to complete the 2021 CapEx and also work toward the 2022 CapEx, which is still an important year CapEx-wise, and we will close a relevant CapEx cycle with many important projects delivered. I'll now finish my presentation, and I'll ask the operator to open the Q&A -- open the floor for the Q&A session.

[Operator Instructions] Our first question comes from Henrique Peretti, JPMorgan.

My question is that we have seen in the press new sector of loan that was made to cover this cost. So my question is, can you explain and show the size of this new loan or conditions of this new loan? And what were the funds and resource funds that would be raised by Neoenergia and also about tariffs? And how much this could reduce your 2022 readjustment levels?

Henrique, thank you for your question. As it is known publicly and has been communicated by the Ministry of Mining and Energy, currently, there is a difference between the cost of energy and what is covered by the tariffs. The tariff flat was created in the past to avoid this loading -- leading to or avoiding loss from the consumer. So this tariff would follow price increases to keep the sector's accounts in balance. So when we consider what took place in the past, this means an additional resource we're using in the energy sector in order to reach this goal to keep energy security in the country. And fortunately, we're having more rain, and this means we can be more at ease. And so that may need less rationing. Now when you consider the size of the loan, we don't have a calculation, not yet. We're working on updating this together with the Ministry, BNDES, to reach a solution that maybe in part a loan or as the Executive Secretary has explained with some reviews of the amount charged by this [ plaque ], but the goal is to reduce tariff impacts that inflation and the cost of energy are really generating. We should stress that energy is a consequence of what is taking place in the economy worldwide, the exchange rate to the dollar fuel prices and even the cost of living. Throughout Latin America and Europe and the United States, the same thing is taking place rather strongly. And of course, compensations are initial. And we need to see how hydrology will behave in the next few months, but we have experience in this kind of solution. And as a result, we can work fast. So if the need arises, we may use these resources.

Mario, can I ask a second question about this. We have heard from many different people that this may be done before April because we had better hydrology conditions in October. Do you think that -- I don't know if you can give us all that information, but if we reach February with much better conditions, do you think ANEEL could just go back and go to the red flag? Or will -- do you think this will continue until April and with a greater impact on consumers?

Well, Henrique, our expectation, and we should recognize that the determination of that flag is defined by ANEEL and that methodology needs revising of course. But our expectation is for this to be maintained to decrease the impact of future loans as well as the possibility of having more complex or tighter conditions in terms of electric supply in 2021 or along 2022. And this, our mission in the whole sector works towards the same goal. We have a very particular condition, the October rains do not solve our hydrology problem. They just interrupted that critical situation that we had in the previous months. We had a greatest drought in the history. In July, it was very bad. August was bad. September was bad. October is the first one that's good. But considering the whole volume of everything that you need in order to fill up the water reservoirs, it's still very low. And we believe that this would be prudent and reasonable to reevaluate all the flag definitions for maybe February, March 2022, if we have more rain, of course. And then we will know the ability of all water reservoirs to build out that rain. We're not expecting it to turn green. Maybe in the last 6 to 8 months, it won't turn green.

[Operator Instructions] We have now closed our Q&A session. I'd like now to turn it over to Mr. Ruiz-Tagle for his final remarks. You may proceed, Mr. Tagle.

Thank you, operator. So we will now give our final remarks for the quarter 3 2021, and the earnings since September 20 -- until September 2021. Our final message is that we are committed to our stakeholders for the entire 2021 in terms of execution, a year of deliveries and making our promises and in fulfilling our promises. So we will have much more energy, much better energy, a much more profitable energy. We had a brand change. So all our companies now have our name Neoenergia. And this makes the company be more committed, engaged larger, more solid with sustainable growth. And this adds value to all our shareholders. And as we resume our markets, it shows that, once again, our presence is increasingly more important and it's important to invest in distribution. We have shown respect or ANEEL has shown respect in the tariff reviews and readjustments for 2021 to the present. In this, all the contracts have been complied with and thus integrate between government officials and companies, and we have found solutions to mitigate the impact of tariff reviews and readjustment. And we have been able to achieve this goal with mechanisms, with PIS/COFINS. In other words, these tariffs will be carried over to 2022. We have new major challenges in 2021. And the regulatory risk has been mitigated. And this sector has a regulatory framework that's mature enough and robust enough to face all these challenges. When we consider efficiency and cost control, these are our major goals all the time. It's part of our DNA, and we will keep working on this. We're also having a lean, efficient operation with a goal of achieving to work on our default CapEx and OpEx, have everything under control and withstand inflation pressure that are taking place, both in Brazil and abroad. We keep building our renewable energy transmission projects when power -- solar power, photovoltaic, and we are still investing and adding and increasing our customer base, distribution customer base. And this means that the company now has to arms below the cost that was expected on our business plan with our -- these projects that are in execution. The Neoenergia Brasilia is already working -- its new reality, it's already integrated, and we are creating value in the federal district, not only for our clients, but also for our employees, our customers and our shareholders and investors that trust our work. We have the right team that's fully engaged and committed to achieving our results. I'd also like to thank our Neoenergia employees who are highly committed and engaged and led to these correct results we're presenting today. And again, I'd like to leave a message of optimism. And I believe our bet of investing during the pandemic to grow and make the economy grow has been highly successful. Of course, there are challenges, economic situation, the cost of fuel, cost of commodities and so on and so forth, but Neoenergia and Neoenergia's team has been experts and have been enough knowledge to face this challenge and keep delivering our energy with quality and stability to our shareholders and quality to our consumers. So this is a new reality. With COVID-19, we have improved a lot. And we can now grow and ensure that energy is out there in our consumers' homes, in industries, in commerces, and this increases our quality of life and warms the economy. So we'll be together again. Take care, have a great week.

Neoenergia's conference call is now closed. Thank you, everyone, for participating. Have a great day. Thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]