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

Good morning, and welcome to the conference call regarding Neoenergia's first quarter 2022 results. The presentation will be led by Mr. Mario Ruiz-Tagle, CEO of the company; and Leonardo Gadelha, CFO of the company. This conference call is being broadcast simultaneously over the Internet via webcast and can be accessed at ri.neoenergia.com, where the respective presentation is also available. [Operator Instructions] This conference is being held in Portuguese and simultaneously translated into English. [Operator Instructions] In addition, this event is being recorded, and later, its replay will be available on Neoenergia's Investor Relations website. It should be noted that this presentation may contain forward-looking statements that represent Neoenergia's expectations and projections about future events are assumptions. These expectations involve several risks and uncertainties, and therefore, maybe results or consequences different from those discussed and anticipated here. Investors should bear in mind that overall conditions, industry conditions and operating factors might impact future results of the business that may produce results that differ from those expressed herein. I would now like to turn the floor over to Mr. Mario Ruiz-Tagle. Please, Mr. Tagle, you can proceed.

Good morning to all. Thank you very much, operator. I would like to thank everyone for being connected here today in one more conference call to present our earnings results for the first quarter of 2022. Here with me are Solange Ribeiro, Deputy CEO; Leonardo Gadelha, CFO of Neoenergia; Eduardo Capelastegui, Equity Control and Planning Executive Director; Saulo Cabral, CEO of Neoenergia Pernambuco, the General Manager, who is replacing Fulvio Machado, who is away on holidays; and Renato Rocha, Deputy IR Officer of the company. Well, I will make a brief presentation going through the main highlights of the results of the period. And afterwards, Leonardo will present the results in more detail. We will then have a question-and-answer session and final conclusions. Well, 2022 started with a challenge for us, especially due to the low temperatures and heavy rainfall in the first months of the year. Still, it's important to point out that once again, our resilience in our concession areas, together with the robust regulatory model of Neoenergia, allowed us once again to be fully prepared to present yet another great result. Quarter-over-quarter, Neoenergia has been performing ever better and growing. So on Slide #4, we will look at the highlights of the results of the first quarter. In terms of cash EBITDA, which does not consider the impact of VNR and IFRS 15 on transmission, it reached BRL 2.4 billion in the quarter, over 60% higher when compared to the same period in 2021, reflecting the tariff adjustments, cost discipline that we have in the company and the new transmission wind projects -- wind and solar projects and, of course, the good performance of Termopernambuco. In relation to operating expenses and Neoenergia Distribuição Brasília in March 2021 for comparison purposes, the quarter shows a 5% growth, once again despite the inflationary pressures we're under -- we've been under over the past months. And we've been capable to absorb the inflation. The growth of our customer base continues strong. The increase in headcount by over 793 employees in addition to the activity to our in-sourcing and the operations of new projects and the new projects and activities that came into operation in wind energy and transmission. Net income for the first quarter was BRL 1.2 billion, 20% higher compared to the first quarter of 2021 despite the increase of interest rates and its impacts. And this quarter, we had 3.14x net EBITDA at level of controlled leverage in line with 3.12 level of the end of 2021. As a result of our outstanding execution capacity and the progress of our growth projects in transmission, wind and solar and the investments in our distribution companies, we executed a CapEx of around BRL 2.4 billion this quarter. It is an expressive figure, and most likely, very few companies in the electric sector have surpassed these results. Finally, as already reported to the market in our NEOWATCH, injected energy dropped 1.45% as indicated as a result of the heavy rainfalls and mild temperatures, especially in January. All of those 6 points highlight and confirm the robust and consistent results we have attained this quarter. And now on Slide 5, I'll walk you through the evolution of our projects in construction and transmission. After a year in 2021, where we delivered the 6 auctions, the 6 batches in 2017 with expressive advances in savings in CapEx, I would also like to mention the progress in other lots. In December 2018, we continued moving forward with the constructions and licensing processes. And we have also planned the delivery of some of these tranches in the second half of this year, 2022. Regarding lot from 2019, we're also moving forward with 70% physical progress, also fulfilling our business plan. As for the Morro do Chapéu lot from the auction held in December 2020, the CapEx has already been hired, material services, and the environmental licenses are being obtained. Constructions will begin in the first half of 2022. Finally, the lot we obtained in December 2021 auction, we have already signed the concession agreement this year. And we have updated a protocol for the environmental license, considering it is an assembly of compensators in the substation. And we've recently obtained the recognition, the acknowledgment to obtain the environmental license to actually use the existing license to accelerate the construction of the project in renewables after reaching important milestones in 2021 when Neoenergia actually doubled its wind farms, going from 500 megawatts to 1 gigawatt in operation. With the concluded -- completed Chafariz Complex, we've had important advancements in Oitis. We have 17 wind turbines that have been assembled, and we will begin to operate the complex in the following months. And we expect to have the few machines in operation in the first half this year with the conclusion of the wind farm by the end of 2022. In total, we'll have 103 wind turbines of 5.5 megawatts each, which will allow us to actually meet the plan and the CapEx we had in our business plan. And we have already -- we are already prepared to supply for distribution, and Oitis has 96% of energy in the free market sold at prices that ensure the project's profitability exceeding the business plan in a certain percentage by the end of the year, delivering the 566.5 megawatts. Neoenergia would have a 2 years' time tripled its installed capacity. I should also mention our Luzia wind farm, the first solar project with 149 megawatts peak, aimed at the free market and which was born, which was set up with 100% of the energy sold in ACL by 2026; and 20% of the energy by the end of its used life as mentioned, with the opportunity with agreements with Telefonica Claro. An encouraging news for Luzia, we have 95% of the panels delivered, and the assemblies have already begun. And the conclusion of the complex is expected for the second half of this year, also in line with our business plan. I would also like to mention, and I know it is a concern for some, but we've had the turnaround of Neoenergia Brasília highlights. Ever since we actually acquired the assets in March last year, over a year ago, we can see on Slide 6 that we have, as we've showed before, well, the leverages that have created value and turnaround in Brazil in relation to others. We achieved in the first quarter of 2022, it is fifth consecutive quarter reduction, reaching 12.65% and moving towards the regulatory target of 11.66% on the business plan. For acquisition, we aimed at the regulatory framework 2024. And have already mentioned, we are looking at Neoenergia Brasília losses for 2023 that will also be within the limits. In terms of default, we've had good returns. And we've reached 99.27% of collection, higher than the 90.64% levels we had in 1Q '21 when we had only 28 days up to March. In relation to OpEx, another relevant point after the headcount reviews and 3 voluntary disconnection programs, we've had the collective bargaining agreement for 2 years, reviewed the field processes, captured synergies with Neoenergia corporate areas and have carried forward the work that have produced results for our company. We've reached a 21% reduction compared to the first quarter 2021. In terms of quality, we also have good news. Despite the challenges with the heavy rainfall in Brasília in the second half of 2021, we have observed changes in management. And the investments in the network have allowed us to be within the regulatory limits with FEC and had an impressive improvement in relation to the fourth quarter in 2021. As noted, we are fulfilling our business plan in Neoenergia Brasília, and I firmly believe we will continue generating value for our shareholders, clients and all of our partners in Brasília and the Federal District. I will now give the floor to our CFO, Leonardo Gadelha, who will provide more details on the results in our first quarter 2022.

Thank you, Mario. Good morning, everyone. Apologies for my voice. I'm hoarse today. As Mario mentioned, we had another quarter with strong results despite the fact that market performance was not as strong, especially in January as mentioned. And looking at the results on Slide 8, we see a 31% evolution in the consolidated gross margin in the quarter driven mainly by the effect of Parcel B. The adjustments and tariff reviews in Neoenergia Brasília and in the first quarter contributes with 1 month only in the first quarter '21 and better results with renewables, with a complete operation of Chafariz Complex and Termo in the liberalized segment. In this quarter, we continue to present excellent and consistent performance with operating expenses, a 5% growth over 1Q '21. Just regarding the effect of the consolidation of Neoenergia Brasília, therefore, absorbing the pressure of the inflation, a 2-digit inflation with growth in the number of consumers, and that plays in the new businesses in transmission and renewables. Thus, our EBITDA advanced 38% (sic) [ 36% ] over the first quarter in 2021, reaching BRL 3.169 billion. Now then, when we look at the cash EBITDA, excluding noncash items as VNR and IFRS 15, the variation is 60%, very strong growth in the quarter, which is a bit consistent over the past quarters as you can see in the chart. So quarter-over-quarter, we've had consecutive growth. We've had a net income of BRL 1.212 billion, that is a 20% growth compared to 1Q '21. Moving on to the next slide. We have CapEx on Slide 9. In the quarter, we reached a total of BRL 2.5 billion, roughly BRL 1.3 billion in distribution; BRL 355 million in the progress of transmission. We're extending BRL 800 million in the progress of the Oitis and Luzia projects. To the BRL 2.5 billion, well, this execution shows that we are in line with our CapEx plan for the year, which amounts to BRL 10 billion, roughly. We've achieved BRL 4 million in the first half, according to plan and confirming our execution capacity. And now looking at the business, the Network business on Slide 11. Looking at injected energy in our distribution companies, this was already informed -- announced to the market. And in the first quarter, as already announced that there was not a strong demand mainly due to the lower temperatures and heavy rainfalls in the month of January. However, we've observed good performance in the month of February and March, and expect to see a recovery in the market throughout the year. On the next slide, we have distributed energy. On this slide, we present the evolution of our 5 distribution companies, which was already announced in the same notification. We had a 1.3% reduction, considering Neoenergia Distribuição Brasília pro forma in 1Q '21. The total number of consumers reached 15.8 million, an increase of 326,000 consumers in 12 months. In terms of losses, on Slide 15 (sic) [ Slide 13 ], we once again had a very good performance in the quarter with a downward trend in all distribution companies except for Coelba, which had 5 consecutive quarters with the reduction in losses. However, this quarter, it had a decline due to the increase that was not -- the energy that was not built, but this -- there will also be a turnaround. It will be reversed soon. In Pernambuco, Elektro, Cosern and Brasília, there were reductions. Declines in Elektro and Cosern are still within the regulatory limits, 1-digit losses, Brasília performing better than the plan, approaching the regulatory limit. In terms of default on Slide 14, in this quarter, we had, once again, a very strong performance control in terms of default despite the economic scenario. The economic situation with hydric pressure readjustment, the PECLD remained well in line with the pre-COVID level, reaching a provision of BRL 130 million in the quarter. It's still under control in all of our distribution companies. When comparing this value with first quarter '21, we see a reduction of 7%, a decline of 7% as seen on the chart, and once again, highlighting our successful collection actions that were carried out and the means of payment that have been made available to all consumers versus the beginning of the pandemic. Now talking about quality on Slide 15, we have the DEC and FEC indicators with consistent improvement in quality indicators in both DEC and FEC in our distribution companies, despite the rains that we had once again in January in our areas, which had an impact in the operation. Still our trajectory was consistent. And in the case of Brasília, as Mario also mentioned, we are within the regulatory FEC limit. And on Slide 16, we have the network results. And we have an evolution of 30% growth in regards to gross margin, reaching BRL 3.6 billion in the quarter driven by the readjustments and the review of Parcel B in our distribution companies. And the margin, well, it's also a result of the consolidation of 2 months in Neoenergia Brasília. There are also inflation effects of VNR and transmission of IFRS 15 and the new projects that are also have an impact on gross margin, OpEx, and that were -- OpEx was also a highlight with a 9% growth. Disregarding the effect of the consolidation of Neoenergia Brasília confirming the -- absorbing the inflation and with the increasing number of employees, the EBITDA networks grew by 36% in the quarter. Excluding the values, the VNR and IFRS 15 values, the growth amounted to 55%, reaching BRL 1.976 billion in the quarter, driven mainly by readjustments and the new operations -- transmission operations that impacted this cash value in EBITDA. The profit reached BRL 1.229 billion in the quarter, a 25% increase. And we can see, in regards to the Renewables and Liberalized results on Slide 18, we have -- we had in the first quarter -- well, the Renewables EBITDA presented a growth of 10%. The EBITDA was driven mainly by the wind farms. It grew by 70%, and with the Chafariz Complex operation, adding BRL 31 million to the results. In the Liberalized segment, we reached the EBITDA in the first quarter of BRL 266 million, a 112% increase compared to 1Q '21 with a very strong performance in Termopernambuco reached BRL 265 million in the quarter. And since it did not operate in the quarter, it benefited from low PLD purchase honoring its contracts that our trader, NC, presented also a solid EBITDA in the quarter, BRL 1 million. In regards to our capital structure on Slide 20, our structure, we finished the first quarter with a net debt of BRL 33.7 billion, basically resulting from the progress of our CapEx, the realization of planned CapEx, however, the strong results. Our net EBITDA ratio remained, well, leveled flat, and we reached 3.14 at the end of 2021. And for this year, we expect for this leverage to remain at this level, maybe ranging from 3.2 or 3.3 in this half due to the execution of CapEx, but still below the forecast -- the forecasted planned structure. Our debt structure, still quite comfortable with sound distribution going forward over the next 5 years. This year, I should mention, we have disbursed so far a total of BRL 6 billion in new funding actions -- fundraising actions. Despite, of course, the increase in the CDI and the IPTA rates, we've obtained competitive spreads with different funding sources. The most recent example were the debentures we issued with Coelba and Pernambuco. And we settled the operation on April 20 amounting to BRL 2.4 billion in total with a strong demand, also a strong interest in our stocks and with competitive spreads and it's -- we feel comfortable to execute our plan, our fundraising plan going forward. We have made headway, and we will continue until July. And after that, we are basically going to disburse the lines that have been already contracted together with the agencies. And we are going to, therefore, be prepared to manage volatility. It's an election year, and we will fulfill our CapEx plan. So this is all I had to share for now. I will ask the operator to kindly open for questions.

[Operator Instructions] The first question is from Andre Sampaio from Santander.

I have a question related to the investment strategy versus the payment of dividends. We've heard all discussions in relation to potential sale of assets of [indiscernible]. I'd like you to please comment on the interest in these assets and maybe to talk about the next transmission auction. What is the company's strategy in relation to the auction, and how it is in line with the potential dividend policy for this year?

Thank you, Andre. Well -- so in answering the first part of your question, in [indiscernible] assets, we are not involved in the analysis of the assessment. We're not looking, assessing at this asset. We're looking at the turnaround of Neoenergia Brasília and improving the operating performance of our 4 distribution companies as shown in the -- our presentation, our earnings results. And for the time being, Neoenergia is not looking into the potential sale of [indiscernible]. In relation to the next transmission auction, we are considering the opportunities. And we are fully aware of the changing situation, macroeconomic situation and in terms of the commodities prices that are also changing and impact our transmission investments and also the extension -- the extended deadlines for the supply chain and production and mainly for products that have -- are produced in those countries. And the world is now going through new inflation levels. And of course, we have to reassess our efficiency and profitability upwards evidently. And in this case, we're going to consider the project, look at the profitability potential. And then, of course, looking into the value creation process to attain the results we've had so far and exceeding them. And we have so far concluded, well, the investment phase that we had in 2019 when we had our IPO. And we are going to reach potential deleveraging level. We are reviewing our possibilities with the Board to look at our dividend policy that will be tied to the leveraging level of the company looking at future investment scenario and potential. So this is my answer to your question so far.

Our next question is from Carolina Carneiro from Crédit Suisse.

I would also like to ask two different questions. First, since you talked about the challenges faced in the first quarter with the rainfall and lower temperatures, but the distribution company's performance was good. And you also had the results under control. What do you expect in regards to the second quarter? We are looking at, of course, a possible tariff increase. We're looking at that with concern. Maybe this year, it will be higher and with the meters that might no longer be used. Could you please comment on the volumes for the second quarter in CLD? That would also be very interesting. And the second question related to Andre's questions, could you also share more about your participation in the transmission auction in June? Different companies mentioned this particular auction is somewhat different with larger blocks and also with the macroeconomic scenario, there might be -- well, maybe not as many players from the industry. And there are lots that are particularly tied to companies at Bahia. Could you maybe comment on your possible participation in this auction?

Thank you, Carolina, for your questions. In relation to the market scenario, well, January was a difficult month, very low temperatures, especially in the northeastern region and heavy rainfalls. There are still heavy rainfalls, but now well within normal level. There is an improvement in the market regulation. April is pretty much in line with what we expected for this half. And going forward, we should recover. As for the tariff increases, you mentioned we had -- well, the results up in the northeast. And in August, in Brasília October, we are -- we should reassure you that with the increases, well, we do have a tariff price. We have also offset the tariff increase with PIS/COFINS credits that were available to us. Therefore, I believe I can say we're doing an excellent job with the regulator to control and to manage the impact, to reduce the impacts on the regulated tariffs as a result of the high inflation rate in Brazil. And the regulatory framework, well, I should also mention once again robust in Brazil in terms of acknowledging the actual generation cost, the national distribution costs and the payment culture among Brazilian users should be also pointed out. After the pandemic, well, our collection figures are quite good, considering the situation we are facing at the moment. In terms of distribution, I would also, of course, like to address your concern by saying the following. We are fully aware of the size of this new auction and should produce, of course, which results in less companies going to the bid and not only for technology but also financial reasons. We believe it's -- it will lead to more profitability, more positive expectations almost by 1% point higher. And we actually want to consider the project carefully to understand all of the possible risks that are involved, looking at the distribution network. And we will consider whether we are prepared to participate or not, looking at the minimum returns that are expected in this new scenario and on the other hand, proper and adequate control -- risk control of such a project.

We have one more question from Daniel Travitzky from Banco Safra.

I'll ask you to please talk about the divestment process in the hydropower plants. And what do you actually have in mind, anything new, any new plans, anything we might expect for the next months? That would be my first question.

Thank you, Daniel, for your question. I would just add the following. We are not -- you mentioned hydro power plants, but we are actually looking to sell our stake. We have a stake in the Belo Monte project, 3%. A 3% stake is owned by Neoenergia. Yes, we're moving forward. There are some interested parties. There are some regulatory aspects that also impact Neoenergia. We've been looking closely at that and how it's evolving, especially in regards to the hydrogram that will be used in the future. And yes, the process is moving forward, and that is a good thing. And we might consider selling and in relation to the other assets, not only hydropower plant but potential wind farms. We are also considering investment opportunities and divestment opportunities, exit opportunities, looking at our portfolio, seeking to optimize value distribution to our shareholders. And this is, of course, an alternative we will also consider.

[Operator Instructions] We will now close the question-and-answer session. I will then turn the floor to Mr. Mario Ruiz-Tagle for his closing remarks. You have the floor, Mr. Tagle.

Thank you very much, operator. I would, as usual, like to say as a final message to reassure stakeholders in Neoenergia that we are fulfilling our value creation proposition. And we are driven by results, efficiency by creating value to our shareholders and stakeholders. And we have seen that we have had an expressive EBITDA growth quarter-over-quarter. From June 2019 with the IPO, we've grown by 12%, surpassing all the expectations that the market had at the time of the IPO. With, of course, the pandemic, the water crisis and now with the inflation rate that, of course, brings a lot of pressure to the business. We've still attained excellent results. We will continue doing so. We have kept our expenses under control more and more efficiently with loss management, default management that have excelled and also created important value by improving the quality as perceived by our consumers, the products and investments in our network, all aforementioned well within the regulatory framework that stands out globally. It's robust and has created solutions within the regulatory framework that is in effect. We've also advanced with transmission projects for solar and wind power aligned to our business plans, which have contributed to support these growing results and will also lead to reported results in transmission, renewables with Luzia wind farm. Neoenergia Brasília will continue daily -- on a daily basis accelerating as much as we can in order to attain the results ahead of time and anticipating our business plan. We have, therefore, reduced losses. We're still within the regulatory framework and are also going to have our DEC within the regulatory framework, therefore, improving our results and services. Of course, there are many challenges that lie ahead. We are fully prepared to rise up to them. I should point out the responsibility of our management and our Board in terms of future investments. We are clearly aware of the macroeconomic changes that are in place with the returns that -- the returns on investments will have to grow. Our shareholders, to our shareholders, thank you for your trust in your management. We have the right team in place, fully engaged to the results we must attain. And finally, I should also point out that we have attained this result through the engagement, the commitment and dedication of each and every employee working at Neoenergia, who have been doing all they can to rise up to challenges to surpass any obstacles. Thank you to all. I wish you an excellent day and an excellent week.

The conference call is now adjourned. Thank you all for joining Neoenergia's earnings results call. And thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]