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

[Foreign Language] [Interpreted] [Operator Instructions] We inform that this call is being recorded and will be made available on the company's IR website, ri.neoenergia.com, where the complete earnings release material is available. It is possible to download the presentation using the link sent via chat, including in English. [Operator Instructions] The information contained in this presentation and statements that may be made during the call relating to Neoenergia's business prospects, projections and operating and financial goals constitute beliefs and assumptions of the company's management as well as information currently available. Future considerations are not guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand general economic conditions, market conditions and other operating factors may affect Neoenergia's future performance and lead to results that differ materially from those expressed in such forward-looking statements. The presentation will be led by Mr. Eduardo Capelastegui, CEO of the company; and Leonardo Gadelha, CFO of the company. I will now give the floor to Mr. Eduardo Capelastegui.

[Interpreted] Thank you very much, operator. Good morning. I would like to thank everyone for joining us today to present our fourth quarter and full year 2024 results. I'm Eduardo Capelastegui, CEO of Neoenergia. Once again, I'm very proud of what we will be sharing today. With me today are Solange Ribeiro, Regulatory, Institutional Innovation VP; Leonardo Gadelha, CFO; Giancarlo Vassao, COO; Juliano Pensanato, Control and Planning Officer; Renato Rocha, IR Officer. I will make a brief presentation covering the highlights of the period. And then Leonardo will present the results in more detail. We will then move on to the Q&A session, and I will conclude with my closing remarks. So beginning on Slide 3. We have the highlights of the quarter and 2024 results. Injected energy, considering distributed generation performed very well in the concession areas, mainly due to higher temperatures and economic activity with a 2% growth in the quarter and 6.1% over 2024. Once again, we closed the year delivering excellence and efficiency in our operational area. The quality of the service provided in our concession areas was a highlight without a doubt with excellent performance in tackling losses, controlling default and having all distributors of Neoenergia meeting the regular data and analyst target aligned with the [ debt effect ] parameters. And all of this without extraordinary OpEx pressure, since we closed 2024 with controlled expenses, with a 2% growth in the quarter and 4% over the year 2024, which shows again the success of our primary operating model. Our EBITDA reached BRL 3.1 billion in the quarter in the fourth quarter, with an 8% growth and now an amount of BRL 12.05 billion over the year, a 1% growth for the operation of transmission lines, market growth and OpEx efficiency made it possible to offset the impact of a negative IGP-M and tariff adjustments of distributors and the change in the Termopernambuco contract. On the growth front, I should point out the execution capacity reflected in our CapEx of BRL 9.8 billion. This is a significant net asset base and distribution of about BRL 40 billion. Advances in transmission projects were another important hallmark. In 2024, we released additional BRL 300 million in RAP with a trade operation of several lots, several batches, included the year with 1 billion RAP released in the operation. Another important achievement in 2024 was the Termopernambuco capacity reserve contract, which was brought forward. As you are aware, the plant on a contact in December 2021 on a reserve auction, which would start in June 2026, and we were able to bring it forward under the same conditions to October 1, 2024, adding 21 months to the contract and thus preventing the plan form being discontracted until that. Finally, regarding the asset rotation initiative, we were very pleased with the successful sale operation of our stake in the Baixo Iguaçu plant for an enterprise value of BRL 1.4 billion. I will go into more detail about this transaction later on. Now turning to Slide 4. We have a brief retrospective of our performance on the asset rotation front over the last 3 years. With the Neoenergia Pernambuco asset swap with Eletrobras in 2022. So through the operation with GIC in '23, Neoenergia closer an OPA in 2024, or now more recently, the sale of the Baixo Iguaçu plant, and with all of these activities, we have sought to leverage the company, creating value for our shareholders through efficient capital allocation. Capital allocation discipline that we have carried out to the latest transmission auctions is another important example of our value creation. As mentioned, we were very pleased with the Baixo Iguaçu transaction in which we sold our stake of 70% for an enterprise value of BRL 1.4 billion, of which BRL 1 billion equity value, which corresponds to a multiple of 11.2x enterprise value of EBITDA. It's well above the market multiples values and previous operation. And the Neoenergia's leverage is not -- does not have a material impact, BRL 1.4 billion, and the covenant is of around 0.06x. However, what's important here is the message, which is very robust and shows how Neoenergia will continue to constantly look to -- at optimizing our asset portfolio and accelerating the deleveraging process. Let's now look at Slide 5, looking at the status of the transmission lot. Beginning with the December 2018. Lots, we continue to advance in Guanabara with 94% physical progress with a total lead of its RAP of around BRL 165 million in the first half of 2025. We have already concluded 1 section, which is energized, and where the remainder section is Vale do Itajaí, we have 82% of our works concluded with 60 million RAPs released corresponding to 22% of the total RAP. We will -- the project in the second half of '25, when we will release another BRL 220 million amounting to a total RAP of Vale do Itajaí of BRL 270 million by the end of this year. The third lot is Morro do Chapéu, with a construction work reaching 97%, BRL 105 million RAP released already, representing 47% of the total RAP, and we're still to release another BRL 120 million in the RAP in the first half this year. Regarding the lots we won in June 2022 auction. We still are to deliver a lot to Alto do Parnaíba, the largest of all, with almost BRL 4 billion invested. All of the construction works are progressing steadily, reaching almost 60% of the project. We have BRL 8 million of RAP already released and remaining BRL 400 million will be released throughout the second half of 2025. Therefore, and as I've mentioned throughout 2024, we released BRL 300 million in RAP, reaching a total RAP of BRL 1 billion. And with the scheduled release throughout 2025, we will finalize our investment cycle and transmission, reaching the relevant mark of BRL 1.9 billion in released RAP in December 2025. Assuming that '26, meaning that in 2026, we will have 100% revenue of our RAP amounting to BRL 2 billion roughly. I will now hand the floor over to our CFO, Leonardo, who will provide more details on our results for the fourth quarter and the year of 2024.

Thank you, Eduardo. Good morning to all. We will now turn to Slide 7, where we see the consolidated results in the fourth quarter and the annual results of Neoenergia, the gross margin, 50% over the fourth quarter in '23. And this is explained by the market growth and the distributors and we continue to invest our cost discipline that is very strong with a 2% growth only in the second quarter positive results that are not recovering from '23 over the year. It was a 4% growth. EBITDA had an 8% growth in the quarter and cash EBITDA reduction of 6%, reaching BRL 2.8 billion and BRL 38 million, as a negative result by the IGP-M as Eduardo mentioned, from the distributors and the new contract of Termopernambuco. The network EBITDA represented 90% of the consolidated EBITDA, 2024 and generation, 10%. Net income of Neoenergia was BRL 852 billion, adjusting this profit with nonrecurring events in '23 and '24, we see a 5% drop in the quarter, which remained stable in the year-on-year comparison. Now moving on to the CapEx. On the next slide, in the quarter, as Eduardo mentioned, we reached a total of BRL 3 billion, amounting to BRL 9.8 billion in 2024, therefore, fulfilling our investment plan. As in recent quarters, CapEx was mostly in networks, representing 98% over the year, BRL 5.4 billion in distribution, expansion and improvement of network and BRL 4.1 billion in the investment of the transmission work. So now on Slide 10, operating performance in network segment, we see the injected energy in our 5 distributors as already disclosed to the market, also had solid growth, mainly driven by higher temperatures even when compared to 4Q '23, which had already been a strong quarter, consolidated figures, 12.1% growth compared to over 4Q '23 to 5.8% over the year, including DG. Total number of consumers reached 16.6 million, an increase of 292,000 new customers over the past 12 months. Now on loss performance, Slide 11, we had a good evolution in the quarter in the loss index since all distributors had a loss reduction over the previous quarter. We also had well-controlled losses and all distributors in relation to the regulatory limit. On Slide 12, we can see that in the fourth quarter of '24, the PCLD reach was controlled, remained under control compared to the previous quarters and loan loss provision. And also the collection rate had a good trajectory in all of our disclose compared to previous quarters. On Slide 13, we are looking at the quality indicators of DEC/FEC in our distributors, which maintain a downward trajectory in all -- in line with the regulatory levels. Furthermore, a new indicator, a new piece of information all 5 distributors presented a percentage that is within the DEC and FEC complying with the regulatory agency. Now moving on to the results and the network business, and we had a 21% increase in the gross margin in the fourth quarter as a result of the higher VNR market. Operating expenses in the quarter grew by just 1%, therefore, very good solid performance. Network EBITDA grew 32% and cash EBITDA reached BRL 2.513 billion, 2% below third Q '23, reflecting the negative adjustment of Portion B by the IGP-M as mentioned, and EBITDA cash grew 3% over the year. We also have the transmission and distribution broken down, EBITDA cash held 3%. And transmission EBITDA grew 15%. The transmission -- the pro forma transmission EBITDA without the sale of GIC loss would have grown 29% in the quarter and 40% over the year. I will now turn on to Slide 16. We have the generation and customer segment. These are the results, validating the renewables and liberalized segment. In this fourth quarter, our EBITDA in the segment was BRL 36 million, the negative impact by the sale of Baixo Iguaçu plant in the fourth quarter, '23, the hydro EBITDA was positively impacted by the exchange of the asset swap with Eletrobras. Therefore, including these one-offs, the variation was negative by 22% due to Termopernambuco was in '23 was under the previous contract and had a much higher margin. On the right-hand side, we have the breakdown by business line. Hydro EBITDA in the fourth quarter was minus BRL 226 million, the variation explained by the one-offs that I mentioned earlier. Wind EBITDA this 4Q of BRL 263 million, representing a 17% growth over 4Q '23 due to the success of a claim of around BRL 80 million with an equipment supplier. Solar EBITDA in the fourth quarter was BRL 6 million, so BRL 5 million reduction due to higher energy purchase costs in the quarter by the Luzia complex. And Termopernambuco EBITDA was slightly negative in BRL 8 million, resulting from the cash the plant had to carry out as required by the regulator in order to comply with a new contract. And finally, the customer business presented an EBITDA of BRL 7 million EBITDA in the quarter, 71% growth over the previous quarter. And now on Slide 17 -- or rather 18. I'll talk about our capital structure. We closed fourth quarter '24 with a net debt of BRL 43.2 billion. Therefore, approximately BRL 1 billion above the previous quarter, justified by the accelerated pace of the CapEx. Our net debt EBITDA posed at 3.45x, therefore, slightly above the previous quarter. And it's worth mentioning that if it were not for the sale of Baixo Iguaçu, we would have ended the year with -- at 3.38x, instead of 3.45. Our debt structure remains very comfortable with an average term of 6.3 years and is quite diversified in terms of sources and indexes with competitive spreads. Another highlight is the profile of our debt with 52% now linked to the IPCA, which gives us a good position with a high sleek period, which should continue throughout 2025. I will now turn the floor back to the operator for the Q&A.

[Operator Instructions] Our first question is from Mario Wobeto Pinto from Banco Safra.

I have 2 questions. 1, in regards to capital allocation, considering the divestments in Baixo Iguaçu, the sale of Baixo Iguaçu, are there new opportunities or divestments? Any other sales considers? And second question relates to the distribution concession, renewals, status. Could you bring us up to speed in regards to this topic.

Thank you, Mario, for your question. Well, in regards to divestment, as you know, we have a partnership with JD, which is quite successful. In terms of the operations of the first lots that were sold and also the new lots that are going into operation and now throughout 2025, we'll have new lots, large lots, but will go into operation Morro do Chapéu with the first half and almost BRL 3.5 billion and Vale do Itajaí more in the second half, almost BRL 7 billion in investment, considering, therefore, these investments we have in our partnership with GIC. We also have the assets. You are familiar with Belo Monte and we had a simple sale operation, but we haven't given up. We are still searching for opportunities, considering opportunities. Termopernambuco we wish to sell it, but we're not going to rush it. Now with the anticipation of the contract an asset that is generating between BRL 50 million to BRL 100 million cash flow annually, we have 17 years going forward. And therefore, if an interesting offer comes up, we will consider it, but we're not really going to rush things. And we are continuously, of course, considering our portfolio in Baixo Iguaçu, I believe I was clear on an asset that was sold for BRL 1.4 billion, price value, BRL 1 billion in equities with BRL 40 million in net income, 44%, therefore, we are allocating these funds another area of the company to pay our debts, and we're looking at the current interest rates and -- or maybe we can invest distribution, which had more adequate returns. So these are the things we are focusing on. GIC, transmission to conclude it and go forward with GIC and keep in the lookout for new opportunities, this is what I could say with regards to divestment. As for the concession, if you're well, while keeping up with what we're doing, we are moving quite steadily ANEEL has said that, well, has already approved it's final tax that was published last year, at the end of last year, which is very much in line with the executive order. We have all made a contribution to that and this final text and the final draft should be actually ready in 2 or 3 weeks from now, by the end of February. And this tax, as I mentioned in the previous call, there's well -- we're not renouncing to the judicial lawsuit. We all made our contributions in this regard, and we expect for ANEEL to, of course, also move forward appropriately. And we have deadlines that are also set in the executive order. We have 1 month to express interest and therefore, till the end of March by late-March. And then ANEEL give us 1 more month to receive the request. And if all goes as planned we may consider that by the end of the first half of this year, we could have process finalized, but we are, yes, moving -- progressing as expected by the executive order that was approved last year.

Our next question is from Juan Pedro Orrego from Santander.

And I commend you on the results. Could you please give us more details on the revenue this quarter, which drove the EBITDA? And secondly, could you give us more details on the initiatives to tackle losses and results in 2024 and give us an overview for this year, this current year.

Okay, Juan. So to your first question, this is an automated question, right? The non-billed revenue, quite objective. We look at the consumption levels that were billed quarter-over-quarter and look at the market behavior. So what I can tell you is that nothing has changed this quarter in regards to how we calculate non-billed revenue. If results were above expected, it was driven by the market behavior, I would say. So nothing else to add here in regards to our common practice that we've shared in the previous quarter. As to how we're tackling losses, we had good results, positive results this quarter. Neoenergia has in our 5 distributors we have 3.5 within the regulatory limit and Cosern and Electro and Brasilia are doing very well. The others fluctuate a little [indiscernible], and within the limit at times on and times off in Termopernambuco is complex. We have in Neoenergia Termopernambuco the tariff review this year. We're having the review in April this year, which takes place every 4 years. And we are making adjustment to the tariff review with ANEEL for losses. So yes, this is going well. ANEEL is aware of our situation that is complex in Termopernambuco, so on one hand, we have higher coverage. On the other hand, the effectiveness of our campaigns, our loss campaigns how we can find losses through our teams, our activities, our protective networks. It is -- I could mention a wide range of activities in this regard. So with Termopernambuco with a higher long-lasting tariff coverage and with this curve to continue reviewing our losses. We expect for this RAPs, which is high today. We expect it to begin to go down and to have our 5 distribution distributors, distribution companies within the regulatory limits with our quality, with collections, we're doing all fine as well. And our operation is -- well, we're constantly looking at these assets quarter-over-quarter. As for the losses, Juan, well, this is what I can tell you in a nutshell.

Thank you very much. The Q&A session is now closed. I would like to give the floor to Mr. Eduardo Capelastegui for his closing remarks.

Thank you very much once again. Operator, I would like to once again reaffirm our commitment to all of the stakeholders of Neoenergia. 1 more year, delivering robust results for Neoenergia. We are all committed to operating efficiency to creating value to our assets and delivering sustainable growing results. And one of the best possible ways to do that is for the expressive growth of our EBITDA cash. Since our IPO, it has grown over 120%, reaching BRL 2.8 billion in the last quarter of 2024. We continue investing in our 5 distribution companies with an expressive organic growth, providing quality service to our almost 17 million customers. And the proof of that is that we've closed 2024 with all of our distribution companies within the ANEEL, our regulatory framework in DEC and FEC. 2024 was also marquee deliveries and improvements in the transmission lots, and we are going to close 2025, we'll close our investment cycle here. I should point out that we have anticipated the Termopernambuco capacity contract, generating value to Neoenergia and all of its shareholders. And finally, I am convinced that throughout 2025, we will reaffirm our commitment to discipline in capital allocation, focused on deleveraging and, of course, improving our revenues and transmission auctions in the OPA Neoenergia Cosern and Baixo Iguaçu transaction. For 2025, we will continue investing in organic growth in our distribution companies, we will focus on the transformation lots that we will deliver and as partial sales to our partner at GIC in the future, and we will maintain the same discipline in capital allocation that we have had in place since 2022, to accelerate the deleveraging of Neoenergia to have a solid balance sheet and to create more value to all of our shareholders. And I would like to finally thank our shareholders for trusting in us and all of Neoenergia employees, who have been playing a key role year-after-year in terms of overcoming challenges and delivery, quality, energy and excellent results. Thank you very much, and have an excellent day.

[Foreign Language] [Statements in English on this transcript were spoken by an interpreter present on the live call.]