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

Good morning, and welcome to the conference call on Neoenergia's Fourth Quarter 2022 Earnings. This conference will be delivered by Mr. Eduardo Capelastegui, 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 presentation slides are also available. [Operator Instructions] This conference call is being delivered in Portuguese and simultaneously 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 clarify 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 about the future of the company as well as information that is currently available to Neoenergia. Future considerations are not an assurance of performance, and they involve risks, uncertainties and assumptions as they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors must bear in mind that general conditions, industry conditions and other operating factors may affect the company's future results and may lead to results that differ materially from those expressed in such forward-looking conditions. I would now like to yield the floor to Mr. Eduardo Capelastegui. Please, Mr. Capelastegui, you can proceed.

Thank you, operator. Good morning, everybody. I'd like to thank everybody for being here at this conference call for the earnings release on the fourth quarter of 2022. I am Eduardo Capelastegui, CEO of Neoenergia. And once again, we're very proud of what we are sharing with you today. With me, we have Solange Ribeiro, Director and VP on Regulations, Institutional Relations and Sustainability; Leonardo Gadelha, CFO; Juliano Pansanato, Asset Control and Planning Executive Director; Fulvio Machado, Distribution Executive Director; and Renato Rocha, our Investor Relations Director. I will conduct a brief presentation going through the key information on the period, and then Leonardo will present to you with the results. And then we're going to have questions and answers, followed by the closing remarks. Starting with Slide #4. Our EBITDA was BRL 9.7 billion, representing a growth of 32% over the year, reaching success with tariff adjustments and project progress, such as Termopernambuco; and the investments and constructions, both in transmission lines and renewable energy. Net profit in 2022 reached BRL 4.7 billion in 2022, 20% above 2021, a result of our execution capacity. Our CapEx has been BRL 9.9 billion in 2022 in our growth in transmission lots and solar power and wind power, in addition to our 5 distributors. In terms of growth, we have started the Oitis wind farm and the Luzia wind farm. We've also observed a growth of BRL 200 million in RAP coming from the acquisition of new transmission and operation lots. We also were granted 2 lots in the June 2022 auction. Our Management Board has approved our ESG targets for 2025 and 2030. There are 16 goals from the environment, social and governance points of view, reaffirming our commitment to sustainability. In addition, we've had the rotation of assets with an asset exchange with Eletrobras, where we are going to have 100% of an operation and -- in addition of other operations to our distribution. This is an operation that adds a lot of value to Neoenergia and simplifies our structure. It increases our commitments to the following semester. At last, we've concluded 2022 as the year with a great turnaround. And with less than 2 years of management, we have managed to fit into the regulatory framework all our operations, and as a consequence, we more than tripled EBITDA, confirming our success in our management strategies. We've been achieving robust and sustainable results over '22. Moving to Slide 5. Since 2017, we have been -- we have operated other operations such as [indiscernible], acquiring control of the company. So we have over exceeded by far the predictions for our IPO. Our gross margin has grown 126% over these years, an average of 18% per year, a reflection of our acquisition of distributors -- distributors and acquisition in renewables. Moving to operational expenses. There is no shadow of a doubt in terms of our commitment with lowering costs and increasing efficiency. Over this period, we presented an average growth of 4% against the inflation rate of 35.5% with IPCA and IGP-M rate of 76 -- over 76% in the period. We have expanding our clients and customers over our 5 distributors. EBITDA on its -- in turn has grown 216% with an average growth of 26% over the year, while net income has increased a substantial 792%, an average of 55% per year. Moving to Slide 6. We present the evolution of our new transmission and renewables contract. When it comes to transmissions, we continue to make progress in all fronts. A few weeks ago, we have delivered the Rio Formoso project with 25% of CapEx savings and 14 months anticipation. This is an important asset for reinforcing the growth of our distribution operations in Bahia. In 2023, we will be delivering approximately 400 new [indiscernible], which represents a vast majority of the Brazilian market. And by 2022, we had obtained all the permits necessary and the work is in progress. While in 2021, by December, we observed 21% of progress and we've had already fulfilled our obligations with environmental licensing. In terms of the assets purchased in June 2022, we have already contracted CapEx with commodities and currency hedge, 92% already contracted for Lot 2 and 97% for Lot 11, therefore, reducing the risks and guaranteeing the delivery on our premises. We have also achieved the possibility to purchase a lot in the state of ?Minas Gerais, which puts us in top 5 in terms of waivers obtained. Moving to Renewables. We have great news to share. Our Oitis Complex already counts on 390.5 megawatt in operation, confirming the success of the execution of this process, which will reach 566.5 megawatt by April this year, therefore, guaranteeing the return on the investments. When it comes to the Complexo Luzia, we are almost fully operational. We've achieved 145 megawatt in operation and will be delivered 149 megawatt in the next months. We'd also like to emphasize we've completed Chafariz Wind Complex, which complements this project. Again, we have expanded the transmission lines to connect this wind complex, increasing our results. Moving to Slide 7 and to conclude my share of this presentation, I'd like to share with you the excellent performance of Neoenergia Brasilia in 2022. As I've said before, it represents the final delivery of turnaround in the distributor. After 8 consecutive trimesters of orders of reduction, we've achieved 11.42%, managing to stay within the regulatory limit. In terms of quality, as a reflection of the management changes we've executed, we were able to reduce our regulatory limit. And in terms of OpEx, we are reaching a whole other level of expenditures. And we -- this represents our relentlessness when it comes to reducing operational expenses, reducing 27% in comparison to 2022, the year of the acquisition. In terms of collection, we have gone up from 90% in February '21 to 97% in December '22, also comes from increasing our efforts in collection. We now have our predictions for 2023, and we have amazing potential for Neoenergia, which shall be one of the most efficient distributors in our group. Now I'd like to yield the floor to Leonardo, our CFO, who will offer more results from 2022. Leonardo?

Hello. Good morning. As Eduardo has mentioned, we are very happy with the results from 2022, where we've shown an excellent growth and performance in all segments. When it comes to the results, I'm going to focus on the fourth quarter, which just like the previous quarters was very consistent. Moving to Slide 9, we see the evolution of gross margin. And except for the non-cash flow results, our margin has grown 14% over the quarter, especially due to the B share of readjustments and the increase of renewables with the Chafariz, Oitis and Luzia and also with Liberalized, which has Termopernambuco. This quarter, we continue to present good performance in terms of operational expenses with a growth of 10% in comparison to the fourth quarter of 2021 considering the increase of customers in this period. Moving to Slide 10 with EBITDA. EBITDA has shown a growth of 18% over the quarter, while the cash EBITDA, except for the non-cash flow items in addition to the asset swap with Eletrobras and Belo Monte, which we have achieved in the fourth quarter of 2021, the increase of cash EBITDA was 16% in comparison to the same quarter last year, reaching BRL 2.485 million (sic) [ BRL 2.485 billion ]. Over the year, the increase has been 32%, mostly due to tariff adjustments. And this has been a very strong year. Over the quarter, we've shown a net income of -- a growth of 47% in comparison to the fourth quarter of 2021 and a 20% increase over the year between 2021 and 2022 with the incorporation of Bahia PCH by Neoenergia Brasilia. Moving to Slide 11, now talking about CapEx. This quarter we have accomplished BRL 2.774 million (sic) [ BRL 2.774 billion ] in results, while we have invested a lot in distribution and we've achieved BRL 213 million in renewables. Over the year, we've reached a CapEx of BRL 9.900 million (sic) [ BRL 9.900 billion ] CapEx, which is compatible to our plan, which was BRL 10 million (sic) [ BRL 10 billion ] in the year. And this has been the greatest year in terms of CapEx for Neoenergia, confirming our capacity to execute. Moving to Slide 13, we come to the networks and distribution. Starting with the operational performance on this slide, we can observe the variation of injected energy, which has shown a reduction in this quarter as we had anticipated and communicated to the market. Over the quarter, we were once again impacted by lower temperature, more rain and customers migrating to distributed generation. Both Coelba and Cosern Neoenergia and Elektro will have newer provisions for tariff adjustments over the year, and this is positive for [indiscernible] market, also mitigating any other impact. On Slide 14, you can observe the data on energy distributed, also anticipating the market for the 5 distributors. And in the fourth quarter, the 5 has shown a reduction of 1.4% and the total number of customers has reached 16 million for an increase of over -- of almost 300,000 customers in 3 months. Now moving to Slide 15. When it comes to total losses, we have had a very good performance quarter with a trajectory of reduction across almost all the distributors, except for Coelba and Elektro, but with very controlled losses, both very close to the regulatory limit. The highlight in this quarter is for Neoenergia Brasilia with excellent performance with -- and it is already within the regulatory limit of 2 years before we anticipated. Now on Slide 16, when it comes to discos, that is well under control in comparison to other quarters. PECLD has been within the threshold and below the third quarter, which is a result from our collection efforts and all the payment methods made available to the customers, which allowed us to increase collection over all the distributors, as can be observed at the bottom of the slide. On Slide 17, when it comes to DEC and FEC, we have these 2 quality indicators across our distributors with very good performance in spite of the rainfall this year. And we should emphasize that Neoenergia Brasilia is within regulatory limits both in DEC and FEC in the last quarter. Moving to results, still talking about networks on Slide 18. We've observed an evolution of 16% in gross margin. And here, we see the cash except for the non-recurrent events brought by tariff adjustments with the B Parcel and the inclusion of new transmission lots, which has had an impact on the quarter. And OpEx on the quarter -- in the quarter has shown a growth of 10%, whereas the accrued over the year was 11%. Moving to EBITDA for networks. Cash EBITDA has grown 18% in the past quarter reaching BRL 2.112 billion. And in this case, this was caused by tariff adjustments and also the inclusion of new transmission lots. Net income in networks has reached BRL 1.054 billion in the fourth quarter, a slight reduction in comparison to the fourth quarter of 2021. Now moving to Slide 21 in renewables. We have a summary of this line of business, again, with very powerful performance, reaching BRL 313 million (sic) [ BRL 303 million ], a growth of 56% in comparison to the fourth quarter of 2021 with the exception of non-cash flow events. EBITDA has grown 20%. And for renewal -- for wind power even more [Technical Difficulty]. And the explanation here is due to the new projects of Chafariz and Oitis Wind Complexes in 2021. The net profit -- the net income was BRL 314 million in comparison to the same quarter in 2021. Now when it comes to liberalized assets, we have added EBITDA of BRL 1.011 billion. Still a very good result, especially for Termopernambuco reaching -- decreased. And because of those we've operated, we have benefited from a purchase price in PLD. We've also shown BRL 35 million over the year. Now in the last slide of my presentation, which is Slide 25, talking about capital structure. With regard to the structure, we observed that we've closed 2022 with a net debt of BRL 36 billion and almost BRL 500 million (sic) [ BRL 36.471 billion], an increase in comparison to the third quarter, basically due to the CapEx plan. However, our reduction of net debt is in line with the third quarter and the past quarters. Our net structure is very comfortable, well distributed, reaching an average of 5 years term, a very diversified debt portfolio and also in terms of indexes. In 2022, we have paid over BRL 13 billion in new acquisitions; whereas this year was the highest CapEx in our business. For 2023, we have anticipated less than that, because part of the needs are already hired and we have already anticipated our needs for the first quarter this year with funding that we can rely on. Therefore, this gives us a lot of tranquility to move into 2023, whereas the biggest efforts are behind us in 2022. With that, I'd like to ask the operator to open for Q&A.

[Operator Instructions] Our first question comes from Julia Zaniolo from Santander.

I'd like you to comment a bit more on the efforts of Neoenergia and the total asset, does it make sense as a capital acquisition gains? And do you have any idea on the timing for the conclusion of the plan? And also, I'd like you to comment a bit more on the next transmission operations this year. We're going to have 3 large auctions. And I wonder how Neoenergia feels about these auctions and what kind of competitive environment do you expect for it?

To answer your first question, as usual, we are observing the market and analyzing opportunities. And distribution is a business that indeed we like. And for the next 3 years, we have over BRL 5 billion of CapEx growth -- organic growth. In addition, our distributors each year have been establishing more and more with this investment. So we are analyzing. We are looking into it. But we are not making specific plans for that because the market is very volatile at the moment. And we have an organic growth that allows us not to need more acquisitions in the near future. As to the timing, I am not sure because it depends a lot on those who are selling the assets. So I wouldn't be able to provide you with a whole lot of information. As to your second question about 2023, especially in terms of value, it's a large value we expect to -- large value lots up to December. And of course, Neoenergia is looking into it as we have done in the past 5 years and we will participate in the auctions. I believe this has been covered in the past. But our policy -- our investment policy is very well-defined and we must respect it. And at the moment, we are considering the macroeconomic scenario. So inflation is reaching 2 digits and this is what we need to be mindful of. We're going to be very rigorous with that and we will see as we move on in terms of risk because we have -- because it's clear to us, we have to respect our plan and that's how it should be.

Our next question comes from Daniel Travitzky from Safra Bank.

Hello, everyone. Can you hear me well?

Yes, we can hear you loud and clear.

Great. I just wanted to ask you a question about the partnership, streamlining the structure. So what are the next moves we're going to observe in the company after -- what do you propose with renewables and Eletrobras? And what should we expect in terms of partnership structure? What kind of investment and what should we expect really in terms of the next moves by the company?

This topic we've been discussing a lot in the past quarter and we have a plan for our assets that you're very familiar with based on 4 lines of hydropower, thermo distribution and renewables. And I would say in terms of hydropower, we have the assets from Eletrobras. And now I can say we are doing extremely well. And I cannot provide you more details about this, but you can reassure in the next months we will be calling you to communicate novelties in that aspect. But we should expect the plan to go as we predicted.

[Operator Instructions] We are now closing the question-and-answer session. I would like to yield the floor to Mr. Eduardo Capelastegui for closing remarks. Please, Mr. Capelastegui, you can proceed now.

Thank you very much, operator, once again. I'd just like to share a final message reinforcing our commitment with results of Neoenergia. 2022 was a year of many victories, great results. And once again, we present a consistent result, which confirms our sustainable strategy and continuous creation of value for our shareholders. Since the IPO, our EBITDA grew 99.5% and our net income over 100%. This clearly shows our resiliency and -- resilience and our commitment to results. In terms of our asset rotation plan, as I answered in the question, it continues to advance. We already had the first results in 2022 and we -- with the assets from Eletrobras. And we remain confident in delivering operations that unlock value in our portfolio, thus increasing the results even further. We also continue to advance in our growth projects and transmission and renewables with the conclusion of Oitis and Luzia and with transmission. In addition to our business front, we are very proud to have approved our ESG goals this year, which we believe to be fundamental for our future with actions integrated into our day-to-day business and keeping us at the forefront of the country's energy transition. In terms of our financial health, we remain vigilant, ensuring an adequate capital structure with an access to the most different sources of financing, whether they're domestic or international, which reassures us in terms of liquidity. This is very important, especially during times we are experiencing now with -- there are a lot of local volatility. And access to international fund -- lines of financing allows us to obtain financing at cheaper prices. To our shareholders who trust in our work, I would like to emphasize once again that we have the right team engaged and committed to deliver the desired results. And I would like to conclude by thanking once again all Neoenergia employees to continue to diligently fulfill their role, guaranteeing clean, accessible and quality energy to all our customers. Thank you very much and have a good day.

This conference call is now closed. We appreciate everyone's participation. Have a good day, and thank you for using Chorus Call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]