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

Good afternoon, ladies and gentlemen. Welcome to Orizon Valorização de Resíduos video conference to discuss the results for the second quarter of 2024. This video conference is being recorded, and the replay can be accessed on the company's IR website, ir.orizonvr.com.br (sic) [ ri.orizonvr.com.br ]. The presentation is also available for download at the Results Center on the company's IR website. [Operator Instructions] Before proceeding, we would like to clarify that any forward-looking statements are based on the beliefs and assumptions of OrizonVR's management and current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore depend on circumstances that may or may not occur. Investors, analysts and journalists must understand that events related to the macroeconomic environment, industry and other factors could cause the results to differ materially from those expressed in the respective forward-looking statements. Present at this conference are Mr. Milton Pilao, CEO of Orizon; and Mr. Leonardo Santos, CFO and Investor Relations Officer. I would now like to turn the call over to Mr. Milton Pilao, who will start the presentation. You may proceed, sir.

Good afternoon, everyone. First of all, thank you very much for attending the call when we discuss the results of the second quarter of 2024 of Orizon Valorização de Resíduos. I'm Milton. I'm the CEO. And I'm here with Leonardo, the CFO. And we are going to discuss basically 4 points. So the first one will be discussed by me and the second, the third and the fourth will be discussed by Leonardo. First, we are going to talk about the highlights. These are the 5 main highlights for the quarter. The first one is related to the consolidation of another quarter with solid results, results that brought in gains of 2 digit in net revenue, EBITDA in comparison to the second quarter of last year, and once again, the reversal of the loss that were incurred last week to profit and the recurring margin gains from 54.4% to 56.7% in operating margin. In the second point, we are going to talk about the good operational indicators, both operational and financial in the disposal segment. We understand that the company has investments, and the results will come from the investments. But this time around, the division of disposal is the driver for the growth of the company. And once again, we can see continuous improvements such as that, that was observed in the average price. Quarter-over-quarter, we have been gaining in real prices. And we have increased the volume in ecoparks, which are in the phase of maturity, the ecoparks that were opened in the past few months. And they're still leaving -- receiving waste. And then we are going to talk about the execution of the investments. We would like to provide information saying that the company makes large investments, especially in the 2 major plants of biomethanes of the company in Paulínia and Jaboatão and also the plant where we have a partnership with SABESP. And the 3 investments are made on track and on budget. So all of them at this time continue with the same terms as planned for the start of operation. The plant in Jaboatão will start in 2025, Paulínia in the second half of next year and the waste-to-energy as of January 2027. The fourth point is about our adequate capital structure. Of course, the company has been making investments for those additional lines for growth, and it has an adequate capital structure. And recently, we have launched a green bond with a maturity term of 19 years, nearly BRL 400 million and nearly triple of it coming from the market. We have some lines developed in the development banks such as BNDES. For the biomethane plants, we have the leverage index as announced. And even considering that, we have been making a lot of investment this year such as this one, and we still have adequate duration of the debt. In terms of monetization and optionalities in the short and medium terms, this is related to what I've just said. We have biomethane investments in Paulínia and Jaboatão, and they will bring in monetization as of January 2025 as for Jaboatão and after the second half of 2025 for Paulínia plant. These are large monetization volumes, showing 2-digit growth as soon as they come into operation in January and July next year. And we also have the monetization of the carbon credit. We have 2 projects that have already been announced in a material fact where we show the process of registration in the gold standard, and they will be able to be monetized as of the third quarter. And considering those projects together, considering the carbon credit initiatives, they will generate about 240,000 carbon credit per quarter. That will start to be monetized as of the third quarter of 2024. These are the highlights I would like to share with you, and I pass the floor to Leonardo.

Thank you, Pilao. Thank you, everyone. On Page 6, we are going to bring information about the operational highlights for the company in the second quarter of 2024. The company had a performance, 6% higher than last year, very much in line of what we reported in the first quarter of this year. And we don't see this on the slide, but if we saw the numbers of the first quarter of -- the first half of the year, it would be 5% higher than the same period of last year. So we have been delivering real growth in this year of 2024 as expected considering the maturity of the assets that we have been incorporating. And the energy generation is very much in line, a very slight variation, more negative, 4% lower. The capture of biogas was 13% higher than that of last year. And as Pilao mentioned in the page of highlights, we have been implementing biogas in all the assets that we have incorporated in the group recently. So it's just natural that we'll be growing at 2-digit pace. And adding this volume of biogas, we grow every quarter. And biogas is, together with carbon credit, of course, at different paces. But they will have different ways of being evaluated. But we saw, as to carbon credit, 24% in growth in comparison to the same period of the previous year. In terms of financial highlights, on Page 8, we would like to share with you in the first part the total of net revenue. Net revenue year-to-date when compared to last year reported a growth of 10% with a growth quarter-on-quarter. If we saw the first quarter of '23 and the first quarter of '23, 10%, and the second quarter and the first quarter, we also see a growth of 10%. So it has been very consistent in terms of real growth. And this also had a growth in price at the level of 10%. We also gained gross margin, reaching 56.7%. And the EBITDA was 17% higher when compared to the same period of last year. On Page 9, next slide, we will discuss the results by segment. The company looks at the final waste disposal and then energy biogas and then waste processing results. And we would like to share the main highlights. We had a gain in margin in final waste disposal at 59%. So it's driven by an increase in average price and the control of the cost of the company. As we mentioned last year, we have been making comments that the company expects to have a very successful year to bring the cost level considering that we -- what we have already applied so that we will have the cost control as much as we have done with the other assets. And the results of energy, biogas and carbon credits reached BRL 25 million per quarter. We'd like to say that the potential of growth is very large considering that we are going to start the monetization of biogas, biomethane and carbon credit. And we expect an improvement in waste processing results, and that has reached breakeven when compared to the losses we reported last year. On Page 10, in addition to announcing the EBITDA, we would like to inform how would be the EBITDA on a pro forma basis. So what would -- the credits that we realized in the last quarter of 2024 considering the prices of recent transactions. So we would have BRL 129,000 in an annualized pro forma EBITDA. And this is what we would expect for the year. CapEx, I would say that as to maintenance and expansion, it's very similar to what we have been reported -- reporting recently, BRL 19 million for the maintenance of the landfills and for final disposal. The CapEx is stronger because of the plants that we use to treat leachate and also biogas plants. The main point for us to look at is the strong investments in the Jaboatão biomethane plant and also the waste-to-energy project in Barueri, and we have an issuance of debt at a very adequate cost for the market. We will provide more information later on. And the project will start operating in the beginning of the year 2027. Net debt over EBITDA. The company reported a net debt over EBITDA of 7.8x considering the end of June, considering the EBITDA running and the EBITDA year-to-date. So EBITDA running would perform below 2x, and this is something that we have been -- it's according to the effort we have been doing in the past quarters, and we see the duration is very long in order to make the proper investments. I'll pass the floor to Pilao for him to conclude, and then we will open the Q&A session. Lastly, we will be talking about perspectives, what to expect for the next quarters. The first point I would like to say is related to maturity of the current landfill project, what to expect. We would expect a continuous improvement in average price. We are far from reaching the target average price for the company, and we continue making efforts in all assets to increase the actual average prices. And we are likely to see those improvements in the next quarters and also cost continuous improvement, as Pilao mentioned, especially the assets that we purchased from third parties. We are to expect the increase in volumes, especially in the assets that we have just purchased, Santa Luzia, Goiânia as well as an increase in volume in the next quarters coming from the new ecoparks. As we have announced in the material fact in Juazeiro and Fernandes, that will be part of our portfolio as of the first quarter. So in the next 2 quarters, the disposal area is a driver for us to strengthen our results. And together with that, as I said -- mentioned, we have the execution of the CapEx of the growth-related projects that are on track and on budget. And they will also start to bring monetization to add to this EBITDA that today does not include the EBITDA. As of the third quarter, we can expect that. And the monetization of carbon credits at the volume of 240,000 per quarter, as I mentioned, that will start to be monetized and also the inventory of the carbon of those 2 ecoparks that will bring relevant monetization for the second half of the year as a result of the inventory that was not monetized since we were waiting for the registration. Biomethane will be included as of January in Paulínia, and this will also bring relevant monetization to our company. And every -- we understand that those projects can bring BRL 25 million to our EBITDA from the monetization as soon as they start being operated. And lastly, [ WTR ]. That will also bring relevant monetization to our balance as soon as they start operating. Then we will talk about the acquisitions, the strategic acquisition and opportunistic acquisition. As I say, we will maintain the strategy for this year considering the volumes of investment is very high. And also, we are going to have organic growth. And we are going to maintain the inorganic growth that has high return to the shareholders and less investment. And this is what we did with Rodolfo Fernandes and Juazeiro. So we do not have a slide for Juazeiro, but Rodolfo Fernandes, I mentioned with a proper slide. So Juazeiro. As to Juazeiro, you knew the asset. We made the closing just now. And it will be included in the balance as of the third quarter. And this is an asset that as it matures, it will generate 600 tons of amount that is expected to happen in the next 6 months. And then we have the acquisition of Rodolfo Fernandes asset. Rodolfo Fernandes is a new landfill that has just been licensed. It received the approval recently, and it's going to operate in a region with a potential of 600 tons per day. That will come from the ending of the waste areas that is -- this is something controlled with the public ministry. I was there when we were opening the landfill. So authorities were there, the governor. And this is a landfill, is expected so that waste areas will be closed. And this will be included in our activities in the next 6 months. And the ramp-up -- after the ramp-up, we will reach this 600 tons. And it's in a region that will bring perspective that we are going to continuously receive waste for the next 20 years. This was something mentioned in the material fact that together with this acquisition, we purchased the land. We prefer not to disclose the location, but it's a land that we purchased in the same area that can -- it's an area that can reach up to 1 million inhabitants. And in the land, we have an opportunity of licensing 51% of the land. We expect to be granted the license in the next 3 years so that we can have a new landfill to meet the needs of 1,000 tons of waste. Considering the subsequent events, I would like to talk about the purchase agreement for our case sales of biomethanes of ecopark of Itapevi. We sold another biomethane agreement for Itapevi plant. It's an agreement whose term is 10 years. And the price is at the same level. The metrics are similar to the first one that we had already executed, consolidating the position that we mentioned before. And we are going to replicate the biomethane agreement as we have done so far in Paulínia, Jaboatão and now in Itapevi at the same price level and considering the same term. And lastly, in relation to subsequent events, I would like to remind you that we had an issuance of debentures of green bonds certified by ERM at the price of BRL 395 million. And this is the plant of waste to energy, where SABESP holds 20% stake, and the time frame is 19 years with interest rate at IPCA plus 7.8%. It was a very successful project, higher than what we announced to the market. And it's in line with the objective of maintaining the capital structure of the company, at healthy levels considering the organic growth initiatives. I'm going to end my presentation here, and I will open the Q&A session. And I would like to thank you for attending this call. We are now going to start the Q&A session for investors and analysts.

[Operator Instructions] Our first question comes from [ Paulo Zafra ].

In the release, the management says that in short term, we are going to have the registration of the projects of carbon credit in Maceió. And when we consolidate the project, Jaboatão and João Pessoa, which are already licensed, what's the total amount that the company expects to have licensed in the short term?

Thank you, Paulo. These 5 projects together, as Pilao mentioned, Jaboatão, João Pessoa together, generate about BRL 1 million of carbon credit per year. Maceió, São Gonçalo and Rosário do Catete in Sergipe state together, they amount to 900,000 or 1 million carbon credits. So those 5 assets together would amount to 2,000 tons. And this is something that will be followed line by line. And then we'll have Paulínia to be licensed. And we expect those 5 assets to be registered, amount to 2 million credits per year. That will be sold according to the company's agenda.

Next question comes from [ Jessica Magallanes ] with [ Infi Invest ].

Could you talk about the recent acquisitions in Ceará and Rio Grande do Norte? And can we expect those assets to reach maturity?

[ Jessica ], thank you for the question. Yes. Let's start from Rio Grande do Norte, Rodolfo Fernandes. It's an asset that was purchased for an owner who started the licensing process in 2017, 2018. It was about to end the licensing process in the beginning of the year. So we made sales operation so that we would get the licensing. And then the operating license was granted in July. So we completed the agreement. And this asset is going to serve a program of the local public ministry. And this is a program called [indiscernible]. And they -- many of the cities already have the document signed for this purpose. And we are just waiting for this granting so that we can make the other actions. And we are likely to receive the waste from the 44 cities, and that will amount to about 400 tons per day. And we have a petrochemical industry, which is very strong in the region. And this landfill was also licensed for the industrial class. So it's going to be prepared for those industrial clients from the region. And they can reach 600 tons, or maybe the demand can be even higher than the present licensee would grant. And this can be adjusted for higher volumes as well. In addition to that, we acquired a land that is also undergoing a licensing process, and we purchased this area at cost price. We just paid the cost that the owner had from purchasing the area, and we're going to continue with this project, licensing this piece of land so that we can build an asset. And 51% will be our stake, and 49% will belong to the owner. And this can bring high return to the company, and this can even become an asset that will also add to the tons per day. And that would also replace many of the waste areas that will also be closed. As for Juazeiro, we had -- we made the closing. We have already mentioned a lot about the asset. There are some cities around Juazeiro, the city of Juazeiro, that has a process with the public ministry. So that will be closed. So we wait for the waste area to be closed. And this is something that is likely to happen in the beginning of next year. And there's also a consortium of different cities that are governed by an approval of the public companies. And we also have the authorization to receive from those areas. If we add the 2 assets together, Juazeiro and the consortium, we would also have 600 tons per day in addition to other possibilities around it.

The next question comes from [ Taisa Ferrer ].

Sales of carbon credits. Are they still a priority for the company for 2024?

Yes, without a doubt. It's a priority just like other priorities that we have. In the list of priorities, I usually say that they compete among themselves considering the number of options and the possibilities to add. So it's a priority to sell 10-year contract for biomethane, executing the investments. Of course, carbon credit sales is priority considering that we made an investment 9 months ago and strengthening this area of selling carbon credit. In the past, we used to sell only to traders. Now we have a commercial active area that takes our project's carbon credit to the final clients. And we have been receiving those final offtakers, adding to our carbon credit, not only considering the environmental aspects, considering the biomethane that has been avoided, but also considering the institute that we have. Carbon credit has an additional value because we have to look at the social aspects. And this is something that was provided by Orizon's institute considering the social projects that we have linked to our landfills. So we are very hopeful that this new client will bring to us -- with this new client.

The Q&A session has come to an end. I would like to turn the floor to Milton Pilao for his final considerations.

Thank you once again. Our IR area is available should you have any questions, should you need any clarification. So it has been a very successful quarter, showing the consolidation of its growth curve. And once again, thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]