Orizon Valorização de Resíduos S.A. (ORVR3) Earnings Call Transcript & Summary

[Interpreted] Good afternoon, ladies and gentlemen. Welcome to the Orizon's VR First Quarter 2024 Earnings Results Conference Call. This conference call is being recorded, and the replay can be accessed on the company's website, ri.orizonvr.com.br. The presentation is also available for download in the Results Center of the company's IR website. [Operator Instructions] Before we proceed, let me stress that forward-looking statements are based on the beliefs and assumptions of Orizon VR's management and current information available to the company. These forward-looking statements may involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should note that events related to the macroeconomic environment, to the industry and other factors may cause results to differ materially from those expressed in such forward-looking statements. Joining today's conference call, Mr. Milton Pilao, Orizon's CEO; and Mr. Leonardo Santos, CFO and IRO. Now I'd like to turn the call over to Mr. Pilao, who will start the presentation. Mr. Pilao, you can proceed.

Well, good afternoon, everyone. I'd like to thank all of you who have joined us for this earnings call, and we will now disclose the results for the first quarter of 2024. So let's move now to our highlights, and then I will turn it over to Leonardo to talk about financial highlights. Let's go over Q1 2024 highlights. Once again, it was a very positive first quarter with growth in our EBITDA and cash generation vis-à-vis 2023 and also the work conducted in 2023. And beyond the growth itself, let's discuss where it's coming from. It's coming from the maturing of the waste treatment and disposal segments. We all know how the ramp-up has allowed us to improve the results, also biomethane, biogas and carbon credits. But with regards to current results, that is because of the maturing of the waste treatment and disposal, especially improving gate fee and also improving our cost efficiency. We were already discussing the acquisitions that took place over the last 3 years. And over time, that they would bring about actual results in price and also price efficiency. And Leonardo will certainly discuss the numbers and the main factors responsible for this growth in this quarter are coming from these areas. Besides that, and we know that has an impact on our net revenue, also on our margin by segment, whereas keeping a strong cash generation with net revenue. We see also -- we saw also an increase in volumes in different divisions, waste, energy generation, biogas capture and carbon credits and also a strengthening of our capital structure. Leonardo will also discuss that. We are closing with a very strong net cash also with improvement of our -- also the payment terms of our debt, which are very comfortable and also deleveraging. So moving on to the next slide. Please allow me to discuss operational highlights. I'd like to add some comments. First, waste volume. We see an increase by 4% year-over-year. So in this first quarter of 2024, we see 2.2 million tons, and annualized, that represents approximately 9 million tons of waste per year, which is a very good result, but I'd like to clarify that there is still room for growth, considering the assets that we have today in our portfolio, considering our 16 assets. We still have many landfills that are undergoing ramp-up and maturing regarding waste volume due to the closure of open dumps. So we expect to see, over the next 2 years, to see increasing volumes. And we can see there is a leap because every time a dump is closed, we see a strong impact on that specific asset. And over the next 2 years, we will see continuous and actual growth regarding waste volume because of the maturing of such assets, some 2 million tons on top of the 9 million that we will operate on this year. As for energy generation and biogas capture, you can see growth in both of them. It will be qualitative growth. So when we go over the operational highlights, we will see that revenue and EBITDA coming from biogas and energy did not increase. But when you check these numbers, you can see 16% increase of biogas. And you may ask, why doesn't it translate into increased revenue? Because this biogas capture is not generating revenue yet because we are not selling biogas. In order to do that, we need to have installed biomethane production. So you can see here this improvement and considering market prices, if we were selling it, that would also add additional EBITDA of approximately BRL 20 million, and this is not included in our results, but that will happen as soon as the biomethane plant start its operations. But you can see we see a ramp-up, which is good. That means that the molecule's there. But as soon as the biomethane plants are operating, that will be accounted for. And as for carbon credits, we also see increase. Once again, we will discuss that with also pro forma EBITDA. Out of the BRL 104 million EBITDA for the first quarter, just BRL 1 million coming from carbon credit yet. And if you consider the BRL 843,000 and multiply by 5, which is the foreign currency, we would have BRL 25 million in EBITDA, but that was not also included because we're still finalizing the process of migrating other carbon, and we will discuss that later on and also the accounting of those that have already been migrated. So these are the highlights. And now I'd like to turn it over to Leo so that he can go over financial highlights.

Thank you very much, Pilao, and good afternoon, everyone. It's really a great pleasure to talk about financial highlights, Slide #8. Total net revenue, we can see that it went up by 11%, closing this quarter with BRL 209 million and a gross profit of BRL 122 million, also a 31% increase year-over-year and with a gross margin of 8.9 percentage points year-over-year. Just as discussed at the very beginning, this is a chart comparing margin per segment. And we can see that we see a strong result in the more mature division. We always talk about -- we always say that there is still growth for the final processing, final disposal, but the projects are mature and there is still a lot to increase in different areas. We already have the landfills and operations, also with good volumes and also average ticket -- average price of that are okay and also cost. So we gained BRL 25 million, you can see. And also, we can see that we went from BRL 71 million to BRL 96 million. And you can see increased volume, also significant increase in average price and also the reduction of cost per ton of destination. Slide #10. We focus on the treatment and final disposal division. You can see net revenue that went up by 19% and also the average price, BRL 10.3 better and approximately 0.7% of this average price refers to revenue coming from previous periods. So we had the adjustment from previous periods, and that related to months coming from 2023. So you can see the average price BRL 75, better than what we had in the first quarter of 2023. And you can see that we have been growing quarter-over-quarter regarding average price. And as for cost, considering also the inflation rate, and it's adjusted by the Brazilian index, IPCA. So we see also cost improvement by 1%. So I would say a very fruitful quarter regarding our landfills and Ecoparques. As for our company's EBITDA, we can see also strong growth year-over-year, increased by 45%. And quarter-over-quarter, we are also improving the pro forma EBITDA, also adding carbon credits and also the price of recent transactions. So if we were to do the same calculation now for the first quarter of 2024, our pro forma EBITDA would go to BRL 129.5 million and annualized pro forma above BRL 580 million. Slide #12. We have now already talked about the CapEx, BRL 62 million, 2/3 of it coming from expansion activities. Now we also see strong expansion CapEx, especially in Barueri and also Jhabua town, in which we consolidate the second quarter of 2024. These projects are 100% on track just as our plan. So Jhabua town will start operations at the turn of this year and Barueri in 2026. Just, this CapEx, well, we expected to see it in the first quarter, but we'll start to see it in the second quarter. But you can see that it's also very strong because of the expansion CapEx in this first quarter of 2024. With regards to leverage, we also reduced debt, and that had an impact in reducing our debt net and the ratio of debt net to EBITDA. And over the last 12 months, you can see this leverage of 2.26 and also the average term above 5 years. And if we consider the carbon credits and EBITDA of the first quarter, we see a pro forma leverage of 1.7:1. And I believe that a company with such opportunities to invest in the future, so you can see a very healthy leverage for investment and also to take advantage of future opportunities. Now I'd like to turn it over to Pilao so that he can talk about the perspectives, and then we open for questions.

Thank you, Leo. So let's talk about future perspectives. I'd like to highlight 6 issues. First, as mentioned, the maturing of current landfill projects. What does that mean? That means that we have improved on our cost efficiency. And as for that, we consider cost per OpEx per ton. I don't see much to be done. But there is still an upside with regards to price and volume. And this maturing landfill agenda will be continued, both with regards to price increase and volume. So our goal is to add 2 million tons that can certainly fit our current portfolio without having to acquire new landfills. So 20% increase in volume, and that is very significant, because once the landfill is operating, that also adds a great deal to our EBITDA, more than the regular margin and also increase of our average price. Part of that has already been seen in this first quarter. But along 2024, we will see more actual gains and average price regarding landfill. So what you just saw for this first quarter will carry on in the future quarters. Now let's talk about CapEx of biomethane plants. Just to give you a follow-up, we are also on track regarding CapEx of the 2 biomethane plants and also our waste-to-energy plant. So the construction schedule is also according to our plans, and we expect to see results and have them going into operations in 2025 and 2027, respectively. And they will add BRL 50 million in our EBITDA. But it's important to say that the construction schedule is running just as planned. So the second plant of biomethane in the second half of 2025 and waste-to-energy in January of 2027. We also have a new biomethane sales contract. So we build new plants as soon as we sign a sales contract, take-or-pay. Right now, we have 2 contracts for 2 new landfills, and we should announce that in 30 days. We are now just finalizing the agreement. So in the next 30 days, we will announce 2 new sales that are important for the next 10 years. And as for the 2 landfills, we are also now in the discussion phase, and we should see these new contracts in the next 4 months. And then we will move to the other landfills, and we will sell all biomethane we have coming from our assets in the next 12 or 18 months so that we can -- at every sales, we can also start constructing that plant. And then I'd like to talk about carbon credit. First project already migrated to Gold Standard, and we are also on track regarding that agenda. So it seems that now it is more accordingly to what we expect, vis-à-vis some delays we saw in the past. And we must see the migration of the registration of 2 more landfills, as mentioned before, of [ Ecoparques ] and São Gonçalo to the Gold Standard. And that should generate an additional revenue coming from carbon credit. The next quarter, we will already see a significant revenue coming from the João Pessoa landfill. And for the third and fourth quarter, we will also see new revenues coming from -- carbon credits coming from [ Ecoparques ] and São Gonçalo. Now as for strategic and opportunistic acquisitions, we carry on with the acquisition process in different maturity states. And it's very likely that we will see some acquisitions taking place in the second quarter and some others in the third and fourth quarters. So we continue to follow our strategic acquisition plan. And finally, strengthening the environmental attributes agenda. So we switched some of the management. We also included trading of carbon credit. We also created a regulatory department in order to follow this agenda and also reverse logistics. So we are being very active and present regarding this agenda, and it may also add some upside that have not been accounted for or that had not been considered in the past. Considering projects that are now being discussed at the Congress, be it the view of the future or recycling that will have impact on reverse logistics, also the minimum participation of recyclables and packaging content, and that will be also very important to our company, considering the upside that may help us in also improving our results. That's it for today. Now I'd like to once again thank you all for joining us, and let's open for questions.

[Operator Instructions] First question from Fillipe Andrade with Itaú BBA.

Milton and Leo, I have 2 questions. First, about contract negotiations with some municipalities, that could certainly add to your gate fee. So if you can please share a bit about such negotiations? And if we can expect gains in this -- in the gate fee in the second quarter of 2024. My second question is about monetization of carbon credit from João Pessoa. And [ Leo ] just mentioned that you expect to see that in the second quarter, just as you had mentioned in the previous call. Can you please add more color? And can you talk about volume about the tons of carbon credit that can be traded, please?

Thank you very much for your question. So there are many negotiations taking place. And when you talk about actual price gain, that can only take place on the date that those contracts have been signed. And we will only actually include those gains when that happens. And we have a 1-year contract or a 5-year contract, so the date in which they were signed. And then for the next quarters, including the second quarter, we should see the impact on actual gains regarding price coming from such contracts, because we'd have some contracts that will mature and that will see the gains in the second, third and fourth quarters. Sometimes you will see, for example, negotiations of contracts at the end of that quarter and then you may just -- signing it in the following quarter. I don't know if you see there was only BRL 0.7 coming from previous quarters. But I expect to see an actual price gain in the future quarters. You also asked about carbon. Well, carbon from João Pessoa brings us the possibility to add I don't know the exact number, but approximately 330,000 tons of carbon from João Pessoa for the part that has already been registered and audited. Now we will see that regularly, the audit, I mean. But for João Pessoa, volume that was recorded of 350,000 tons, the sales price approximately $6 per ton. So the expectation for the second quarter is that we can add $6 times 350,000 so $1.9 million, $2 million approximately to our revenue coming from carbon, and that would add our EBITDA by $10 million in the second quarter. This first quarter, that was just $1 million. And this will be a recurrent fact. And also for [ Pessoa ], we also have recorded and migrated that and the volumes for [ Ecoparques ] are much bigger, and that will be also included in the third and fourth quarter.

Our next question comes from Mr. [ Georgie Schenk ] with [ Moore Capital ]. I cannot hear you. Our next question is from Mr. Andre Sampaio with Santander.

I have 2 questions. Can you please add some color regarding waste disposal? Is there any nonrecurring fact? Based on what you shared, my impression is that the answer is no. But -- and also my second question is about waste CapEx. So is that number a good number for us to follow? So my first question is about waste. But I'd like to say that also for SG&A, I'd like to know if there is any nonrecurring fact.

Andre, thank you very much. This is Leo. Regarding price, that has already been discussed, waste price. And as for cost, there is nothing relevant. Of course, you can ask something about the [ rain ] level, but I believe that these assets are more mature. And this is what you should expect. That is the first point. As for CapEx regarding waste, yes, I agree that this is something to be checked in the future. We expect to see that improving in the future regarding biomethane and also waste-to-energy that are not part of the rationale that you mentioned.

Okay. So if I can take this opportunity, can you talk about your expectation regarding biomethane contracts to be signed in the short term? What about the price? Are the price that we are used to?

Yes, we are working along the same levels or even bring a good news to all of you. So it's not a promise regarding price, but please consider same level what we have seen.

Our next question comes from [ Alexandre Fernandes ] with [ Trafalgar Investment ]. He says, what about how much of carbon credit? And what is your expectation regarding monetizing it? What is the inventory of carbon credit?

Thank you for your question. So as for inventory, just to remind you, in 2021, we generated 1.6 million, considering those that had already been traded. 2022, 2.3 million carbon credit. And out of that, 500,000 have already been sold also with the registration Gold Standard. So we have now 1.8 million to be traded. In 2023, 3 million carbon credit generated. So adding to that, we have 4.8 million. And now for the first quarter of 2024, has not been sold yet. So today, it's approximately 5.5 million carbon credit that have not been traded. As for monetization, Pilao just mentioned, so we expect to see sales now in the short term. So Pilao, if you can add?

I agree with you, Leo. I don't know if it's clear. So the volume of what we have today is above what we projected for this year, because Leo just mentioned total volume generated, but we don't expect to see migration of every single project. So Leo gave you a macro. So if all projects were to be migrated, although 500,000 have been sold, they were not entered into our revenue. So we have 5.3 million tons of carbon credit to be sold from 2023, plus what will be generated in 2024, approximately 3.5 million. So by December of 2024, almost 8 million tons of carbon credit, if all the process of all plants were to be migrated. That is not going to happen. But that said, today, we expect to see 3 projects that will be migrated. And once that happens, we will also not sell their carbon credit until December because we need to carry out audit, and that happens 3 months after migration. So best scenario, by September or August to September of that year will be then accounted for. So I'd say that the scenario would be -- considering the 3 projects that have been migrated and also the timing, we will -- probably 2 million tons or 3 million tons will be accounted for this year with an average price of $6 per ton.

Our next question comes from Mr. [ Thiago Lima ]. He says, "Does the company still foresee opportunities to acquire no landfills? Or is your priority to really gain profit from the current assets?"

Well, I believe they go hand in hand. I'd say that one option is not more important than the other. So the company has discipline, and that is shown through our results. And we always improve our efficiency in costs, improving price and also increasing volume. That is the most profitable way to improve our income, considering that all CapEx has already been done. So we don't have any additional CapEx to increase BRL 10 or BRL 20 in the average price or no additional CapEx in order to improve our efficiency. Well, actually, we may have some additional CapEx. You can see that for the recurring CapEx for landfills. We also have the expansion of leachate treatment plant. So when that happens, you decrease the cost because you stop sending that to other parties. So we also will benefit from that. So I believe that the priority is very strong considering the efficiency of achieving our results and also considering the upside regarding cash. So this is a multiple gain considering the organic fronts, but we are always paying attention to inorganic growth. The Brazilian market -- and I'm actually attending a conference in New York, and that's what I hear from U.S. funds. So the Brazilian market is one of the last ones, worldwide, that presents the opportunity of having consolidation regarding landfills is a highly profitable market because considering the Brazilian population, we generate a large amount of waste, right? But that is really disseminated. So we need to pay attention to that. That scenario may change, and we cannot miss the opportunity to consolidate assets in a market in which there are still opportunities that will bring about important relevant results. So we are paying attention to these 2 fronts.

With that, we close the Q&A session. We'd like to turn it over to Mr. Milton Pilao for his final remarks.

Thank you very much. Once again, I'd like to thank you all for joining us and to say that our RI department is open to answer any questions you may have in the future. And I wish you all a very good afternoon. Thank you very much.

With that, we close Orizon's conference call. Have a great afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]