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

Good morning, and welcome to the audio conference referring to Q4 2021 of Neoenergia results. This presentation will be led by Mr. Mario José Larrain, the company's CEO; and Leonardo Gadelha, company's CFO. We would like to remind you that this conference is being transmitted live through the Internet in a webcast transmission, and it can be accessed at ri.neoenergia.com, where you will also find available the slide presentation. [Operator Instructions] The audio conference is being conducted in Portuguese and there is simultaneous interpretation into English. [Operator Instructions] This event is also being recorded, and the recording will be available in the IR website of Neoenergia. We would like to state that statements that might be made during this conference connected to the business prospectus for Neoenergia, forecasts, operational targets, financial targets are beliefs and premises from the company's administration as well as information currently available at Neoenergia. Future considerations are not assurances of performance. They involve risks, uncertainties and premises because they refer to future events. And therefore, they rely on circumstances that might or might not happen. Investors should understand that general conditions, industry conditions and other operational factors can have an impact in the future results of the company and might lead to results that materially differ from those expressed in these future conditions. I would now like to give the floor to Mr. Mario Ruiz-Tagle. Mr. Mario Ruiz, you have the floor.

Good morning, everyone, and thank you, operator. I'd like to thank you for being connected to this conference for Q4 results in 2021. I have here Solange Ribeiro; Leonardo Gadelha, our CFO; Eduardo Capelastegui, Executive Director of Planning; Fulvio Machado, our Network Director and our Vice RI Director. I'm going to make a brief presentation about the main highlights of 2021, and then Leonardo is going to give more results about Q4 in 2021. Then we'll have a Q&A session, and we will finalize with some remarks. Neoenergia keeps on improving its results leveraged by the growth of the market and acceleration of integration and turnaround at Neoenergia Brazil and the success of our operational management that is translated in a efficient manner with cost discipline and a great performance of our business. Anticipated deliverables are a show of that and the wind project at Chafariz. So let's move to Slide #4 to look at the main highlights of our results. As distributed energy out of our 5 distributors, they presented growth at 3.7% in 2021 when compared to 2020, very specific characteristics also because of the pandemic, of course. What's important to say is that the market is confirming the resilience of our distributors, it can recover quickly in the phase of impacts such as the pandemic. As for cash EBITDA, we see advances of 41% versus 2020. There's greater demand, as I said, and also an increase in installments coming from tariffs reviews that happened in 2021. We also have the transmission project and the operation of Chafariz in the second semester of the year had an impact. The excellent performance of Termopernambuco had an excellent performance when the country faced water crisis. As to OpEx, an important highlight, the growth of 3% when we do not consider Brazil because it was not active throughout 2021. We fulfilled our commitments that growth -- led us to absorb the growth of our base of clients as well as the operation of new projects both in transmission and wind, and also internalizing collaborators from our network employees. The net income reached BRL 4.4 billion, that's 57% above 2020. Another result that shows the soundness of our growth is this net income figure. I wanted to highlight in spite of all the difficulties we faced in 2021, our CapEx was of BRL 9.4 billion, it's a huge challenge and it was a result of our proven execution capacity, also a result of the advancements in the transmission projects, the wind projects and also the investments in expanding our distributors and to improve the quality of our services. Finally, I would like to mention, as another leverage for our 2021 results, the important growth that we will have from now on. I wanted to highlight that we have the Chafariz Wind Park that is now operating. Termopernambuco in December last year with its capacity. This is a very important fact, which Termopernambuco was rehired and plants will keep on working for another 15 years. And also the auction in December last year, of lot #4, which will allow us to grow sustainably. All these 6 points are the sustainable foundation of the results we will have in the future. I would also -- I would like to move to Slide #5, where we can see the evolution of our results since 2017. If we look carefully, 2017, that's when Elektro Energia was incorporated and Iberdrola control the company and all perspectives in Neoenergia has shown amazing performance. I would like to mention the gross margin, for instance, from 2017 to 2021, it almost doubled, 97% of growth. The CAGR is up 19%, organic growth from our distributors and more recently from expansions in terms of transmission, wind and photovoltaic energy. Operational expenses, we see a huge leverage of value creation. The graph makes it clear regarding the commitment we have with cost discipline and a constant search from the whole team and the leadership from all our collaborators and capturing more efficiency. Throughout the whole period, we grew by 4% with a CAGR of 1%. Inflation, the IPC rate was accumulated and 17% of IGPM, from 2017 to 2021, throughout this period, we've absorbed 1.1 million clients, new consumers in our base for our 5 distributors. 4,602 new employees, we also absorbed the expenses coming from the operation of new transmission and wind projects that began operating throughout this period. EBITDA shows the situation. It grew by 169% since 2017 with a CAGR of 28%. And I would like to highlight the net income evolution, 642%. That's the growth and the CAGR is at 70%. This shows a sound growth, a sustainable growth that we've reached and the creation of value for our shareholders. This is the future we are building for Neoenergia. Moving to Slide #6. We see the evolution of our transmission projects. One of the major highlights in 2021, as we had mentioned since the beginning of last year, was that it was going to be a year of deliveries, and it was in transmission. We've concluded all projects that were auctioned in the bidding processes of December 2017. The Dorado line and also the Santa Luzia lot, which allows us to increase the Chafariz Park and also Luzia Park, a photovoltaic park, over 700 kilometers, that's the largest line for Neoenergia Group in operation right now. Then we've incorporated in BRL 117 million. That's the April 2017 auction, 15 months before time. And the CapEx saving was 20%. Regarding the 2 lots that we acquired in December 2017, BRL 212 million. That's the AAR, and we've anticipated the conclusion in 15.6 months. The CapEx savings was 33%. All these lots, the 6 lots confirm clearly, the premise we had for our business ensuring 2-digit return. As to the lots that are under construction from December 2018 as well as December 2019 and 2020 and also December 2021, we've began environmental licensing. They are advancing. We have the environmental licensing. They are under construction, and we are foreseen deliveries to late 2022 Q3. Regarding lot #4, the construction of the [indiscernible] station. We have bought the compensators. There was an interesting negotiation window and we began the process of environmental licensing. So we have good expectations that these projects will do very well confirming the assumptions we had in the beginning of our process. Moving to Slide #7. We talk about our renewable projects. We are very glad to state that we've delivered the Chafariz complex in the state of Paraíba, which is contributing at BRL 66 million in 2021 EBITDA. We began with 500 megawatts in operation, but we've concluded with 1 gigawatt. And we want to finish 2022 with above 1.6 gigawatts in operation. The park was delivered beforehand with a CapEx that is completely in line to forecast. The Oitis complex, which is the park that is under construction right now is very much advanced. 100% of foundations are concluded, which allows us to begin before handing assembly of 9 wind turbines, with 60% of the transmission line completed, and we already have 75% of substations already concluded. It should begin operating -- not the Oitis complex, in late -- at the end of the first semester of 2022. 566 megawatts at the end of this ramp-up period. And most of the energy is focused on the free market, and it's already sold. The Luzia Solar plant 149 megawatts will begin operating in the second semester of 2022, probably advancements in the execution of the substations and transmission lines. And it's worth highlighting that we obtained ex tariff for all modules, which will allow us to have 0% of import tax for all these modules. And also 100% of this energy has been sold until 2026. As we see, 2021 has brought great news regarding deliveries and it's aligned to our assumptions and forecasts. In Slide #8, I would like to share with you the progress and turnaround in Neoenergia Brasilia. The main highlights here are regarding losses. This is the fourth consecutive quarter with a decrease in loss. So the 12-month rate is in 12.73%. That's last year's numbers. We are aligned to regulatory limits. And in the beginning of 2023, we will move forward 1 year in our business plans. Regarding OpEx, I wanted to mention that we are readjusting the company's headcount. We've launched a volunteer headcount -- a voluntary dismission program. And we are also restructuring this process to have our culture of safety, efficiency and results obtaining. We want to come as close as possible to the OpEx efficiency we have planned. In 2021, we finished by -- we reduced by 37% when compared to 2020 when we consider nonrecurring expenses. Regarding collection, this is a huge challenge, of course, we resumed cutting for all different segments since April. There is an injunction that allows us to do that. 95,000 cuts, that means BRL 159 million in revenue. Also to improve collection, 46,000 renegotiations, which means BRL 88 million. And with that, our collection rating moved from -- or reached 92% in Q4 2021. As to the quality of services and important improvements in management and higher investments or better investments, which allow us to reach better results. Currently, we can state that we will reach the regulatory framework throughout 2022, still in 2022 before we had forecasted. And we will keep on making the necessary investments to improve the quality of service in all these areas. Since the acquisition, when we look at CapEx, we said that we would invest in concessions. So since March last year, BRL 190 million in CapEx and BRL 101 million of those were focused on quality. The purchasing area at Neoenergia is a highlight. Of course, they are key. They achieve important savings regarding our previous purchasing policy, which allows us to do more with less resources. Regarding turnaround, we inaugurated a new headquarters with integrated operations that will allow us to have more agile and more efficient operations in this concession. In 2021, we finished the integration process of Neoenergia Brasilia into the group, Neoenergia Group fully successful and on plan, accelerating and surpassing the assumptions that we have made in our business plan. I would like to give the floor now to Mr. Leonardo Gadelha, CFO, and he's going to give us more results, more details about Q4 results.

Thank you, Mario. Good morning, everyone. Well, as Mario said, we finished 2021 with very strong results with growth above the industry. I'm going to focus my analysis on Q4 and which was a very positive Q and consistent with the others. On Slide #10, we see the evolution of 27% of gross margin. That's consolidated figures for the quarter, an impact of tariff free adjustments in Parcel B at Neoenergia Brasilia. Also better results in renewables with the Chafariz complex coming into operations and also the free market. In the year, this gross margin progress was up 38%. In Q4, we had an excellent performance in terms of operational expenses, a growth of 2% versus the same period of 2020. And if we do not consider the consolidation of Neoenergia Brasilia then this variation, is minus 7%. So we have absorbed the inflation period -- efficient pressure of the period, an increase in the number of clients, new collaborators or employees, new businesses. In the year, if we discount the positive impact of 2 decisions of the holding in the first quarter of 2020 and also Neoenergia Brasilia, that's 3%, and that just shows our performance. In Slide #11, we look at EBITDA and we see an increase of 15% in Q4. We reached BRL 2.4 billion. It's important to mention that these figures are noncash adjustments of our participation in Belo Monte. As you know, due to our disinvestment strategy, in late '21 we rated this asset as available for sales. And therefore, there was an adjustment to the market BRL 482 million, that was the adjustment. So if we exclude the cash effect of Belo Monte and the other noncash impacts, the variation of EBITDA cash is up 60%, which is quite an expressive growth for this quarter. In the year, this variation of EBITDA cash was 41%. In the quarter, net income BRL 635 million. Excluding the Belo Monte impact, it would have reached BRL 1.1 billion, and that would mean a growth of 12% in the quarter and 57% in the year as a whole. Moving to CapEx on Slide #12. In Q4, we had a total of BRL 3 billion in CapEx, EUR 1.1 billion in distribution, BRL 739 million in transmission works and BRL 1 million in wind. That's the full entry of the Chafariz operation and also the advancements of the works in Oitis. We finished 2021 with a CapEx of BRL 9.4 billion. According to our business plan confirming our execution ability. Slide #14. Now we talk about networks. Here, we see the variation of injected energy in 5 distributors as we've anticipated in a communication to the market. Q4 did not show strong demand, mostly because of low temperatures. However, throughout the year, we had good performance in all distributors, which shows a consistent recovery in the industry. Now in distributed energy, Slide 15, we see the evolution in the 5 distributors. Also, as mentioned in an announcement to the market and Q4 distributors showed a growth of 3.8%. When we consider in this comparison Neoenergia Brasilia considered in Q4 2021. Distributed energy grew above injected energy because of 2 factors. The first one is a change in the billing rule for clients from the so-called Group A, that's Resolution 863 that was published in 2020 and also the positive trend of reducing losses that we've seen. And we're going to talk more about this. The total number of consumers reached 15.7 million, so that's a growth of 361,000 considering once again Neoenergia Brasilia in the pro forma. And over the year, the growth of distributed energy was at 6.2% and 16.2% when we do not consider Neoenergia Brasilia. As for losses, Slide 16, again, a quarter with excellent performance trend of reducing losses in our distributors. Coelba showed a fifth consecutive quarter with loss reduction. Neoenergia Pernambuco 1% below Q4 2020. Elektro and Cosern are in line and losses of 1 digit. And as Mario said, Neoenergia Brasilia is also showing reductions 4 quarters in a row since we took control. And we are coming closer and closer to regulatory limits. Slide 17 shows PECLD, once again, an excellent performance regarding delinquency levels. PECLD is aligned with our pre-COVID standards or ratings. The provision line is of BRL 103 million for the quarter. So that is a trend that we can clearly see in all distributors as the graph shows. And this highlights the success of our cutting and collection initiatives. That's initiatives only that were taken in Q3 2020, which you see on the right-hand side of the slide. Some of the initiatives that we took. On Slide 18, we have DEC, FEC, constant improvement and quality indicators. Both DEC and FEC, we see the results in our distributors. Although last quarter was a quarter when we had a lot of rains in many of our regions, the regions we operate. So we did face some small variations in FEC. But in general terms, the trend is positive. Moving on now to results in Slide 19. We see an evolution of 24% in gross margin. That's the quarter figures, considering the Parcel B tariff adjustments, the impact of the consolidation of Neoenergia Brasilia and also the impacts -- the noncash impact of IFRS 15 and VNR. The growth of gross margin was 37%. OpEx, again, a highlight in this quarter with a growth of only 4%. When we did -- when we do not consider Neoenergia Brasilia, we see then a decrease of 7% in this variation -- minus 7% quarter-over-quarter. And in the year as a whole, we see a variation of 0.7%. So that's flat OpEx when we compare 2020 to 2021. That shows our efficient cost management and our ability to absorb inflation pressures, which were high throughout the year and also an increase in the number of employees because of the processes we underwent throughout the last few years. Slide #20, EBITDA figures. The EBITDA grew by 30% in Q4 when compared to the same period of 2020. And when we exclude noncash amounts BNRIFRS 15, then this growth reached 49% in the quarter and 36% in the year as a whole. The net income reached BRL 1.1 billion in the quarter, BRL 4.2 billion in the year, that's a growth of 44%. Slide 22. That's where we see a summary of the results for Renewables and Liberalized energy. In Q4, Renewables showed a growth of 20%. When we exclude the impact of the market, the Belo Monte adjustment that I made or that I mentioned, we also had and also excluding the GSF, which was a positive effect of BRL 220 million. The increase of EBITDA was 31%. We reached BRL 781 million in the year. That's for Renewables with hydraulic or water and wind generation. So for hydro, this EBITDA felt the impact of the Belo Monte impact and the adjustment as well when we exclude these 2 impacts, 1 was positive and the other was negative. Then the EBITDA was of BRL 374 billion, which shows the low volatility of our results for hydric assets, the long-term TPAs that we have and the GSF that we have. So we see a very low volatility in hydric results. As for wind, the EBITDA reached BRL 407 million. That's a growth of 37%. Mostly when we consider the Chafariz operations in the second semester, which added BRL 66 million when compared to 2020. As for Liberalized energy, the EBITDA for the quarter is of BRL 210 million, very strong results. That's an increase of 209% when compared to the same period of 2020. In the quarter, Q4, strong performance in term of Pernambuco, BRL 199 million. That's the EBITDA for Pernambuco. And also NC also with better margins, they reached a BRL 10 million EBITDA. So on the year as a whole, the growth of EBITDA for Liberalized was up 92%. I would now like to move on to Slide 24, which is the last one, where we talk about our capital structure. In this slide, we see that we concluded '21 with a debt structure of -- the CapEx had an impact on that. And also an increase in costs with energy purchasing late last year, we had a pressure in these costs because of the hydric crisis we faced. Strong results led our net debt/EBITDA ratio to be under control, and we finished this in 3.12% -- or times, sorry, for this ratio. For 2022, we are expecting leveraging at the same levels due to the execution of our 2022 CapEx, which will remain in the -- aligned to what we had in 2021, but still below leveraging will be below foreseen levels in our original plans. The structure of our debt makes us feel comfortable. It's very well distributed. We reached a maturity of over 5 years. In 2021, a total of BRL 15.8 billion in new debt. And -- although there was an increase in CDI IPCA rates -- we have very competitive conditions and spreads that we've achieved in different funding sources. We have a new contract that we had signed with [indiscernible] for the holding for Neoenergia. And now we have a new BRL 200 million contract for 2022 under very attractive conditions. So that makes us feel that our plan for 2022 is very sound. It's going to be lower than our needs for 2021. It is a sound plan. And it just shows the safety of our capital structure. It is very sound and appropriate to face the conclusion of our CapEx cycle in 2022. That's how I conclude the presentation, and I give the floor back to the operator for the Q&A session.

[Operator Instructions] I would like to give the floor back again to Mr. Mario Ruiz-Tagle for his final remarks. Mr. Mario, you have the floor.

Thank you, operator. I would like to make some final remarks for all shareholders, stakeholders. I would like to highlight our commitment to growth with profitability, efficiency, our commitment to being a company that is greater and better. 2021 was not an easy year for anyone. We had the persisting pandemic in spite of the vaccination campaigns. But as we saw throughout the presentation, we had another year with sound deliveries, record EBITDA, record net income, in spite of all the impact -- macroeconomic impacts, interest rates and inflation pressures, regulation topics that were a risk at the beginning of the year, but which we addressed very well logistic challenges in terms of equipment and materials. And I would like to mention as well the worst hydric crisis from the last 20 -- 91 years. But we've had the 3 most successful years in history. We've reached at the end of 2021, Neoenergia delivering excellent and remarkable results. But we do have the challenge of overcoming these results or surpassing these results in 2022. We have efficient management, and we are relentless in cost control. Our operation in all of our business is always lean, always looking for the best possible quality in terms of losses and delinquency, which is something that did concern me and concern investors as well in 2017, I believe we have addressed this very well. We are improving, and we have a positive outlook. I believe that in spite of all the difficulties we did move forward very much in fighting losses and delinquency. So as to our investment projects, both for wind, transmission and PV panels, we have not stopped on single day working to improve these results and to ensure all the deliverables that are foreseen for 2022. In terms of capacity, we had excellent opportunities in 2021, an amazing victory in rehiring the Termopernambuco plant. Highly efficient plant, highly flexible plant. We will make the necessary investments to improve in that manner. And throughout the hydric crisis, we saw its importance to preserve the electric safety in our country. This is an asset that has a history in Neoenergia in terms of availability and operations. And this is something that will be preserved for the future. As for turnaround of Neoenergia Brasilia, this is a reality. We are clearly creating value with Brasilia for -- value for our shareholders and for Neoenergia people and our clients. 2022 has begun -- it has begun with specific characteristics. Again, we will be here always present with a clear objective, being efficient, agile, improving quality for our clients, creating value for our shareholders. For the shareholders that trust our work, I would like to say once again that we have the right team. Our team is engaged and committed with our targets and with the results that we foresee for the next few years. And I wanted to thank as well all our employees. '21 has been a very specific year. And all of our employees in spite of all the difficulties they have fulfilled the best possible results overcoming all difficulties. And I believe that assures us that the energy that we have to deliver will be there, fostering our economy and bringing quality of life and comfort to our clients. Please take care. As I said, the pandemic is still here, but the vaccines are helping. I believe the outlook is good for 2022 and soon, we will meet again in our call for the results of Q1 2022. Have a nice day, everyone.

Neoenergia's conference call is now finished. We thank you all for participating. Have an excellent day. Thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]