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

[Interpreted] Good morning, ladies and gentlemen. Welcome to Orizon Valorização de Resíduos video conference to discuss the results for the second quarter of 2025. This video conference is being recorded, and the replay can be accessed on the company's IR website at 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 Orizon VR'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 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. Pilao, who will start the presentation. You may proceed, sir.

[Interpreted] Good morning, everyone. Thank you very much for attending this earnings results call of Orizon Valorização de Resíduos for the second quarter of 2025. I'm here with Leonardo, our CFO, and we are going to discuss the results. We divided the presentation into some points. First, we are going to talk about the highlights, and then I turn the floor to Leonardo for him to talk about the operational and financial numbers. And then I'll come back to talk about the perspectives. Talking about the highlights. Once again, another quarter. By the way, I would like to thank our shareholders, our Board members, employees for the consistent results that we have been showing every quarter, especially in the lines of organic growth, in the final disposal of waste. This is a quarter with important net revenue margin by segment, EBITDA, everything above 20% year-on-year. The consistency in the deliveries, as I've already mentioned. As for waste disposal, as I mentioned, every quarter, we have been consistent in increasing the average price, 9.8% in relation to the previous quarter, 4.2% above the IPCA. So we maintain our growth journey in the average price that impacts directly on our margins in our main business, which is waste disposal, as I mentioned in the previous quarter, and we are going to continue showing this consistency in gaining margin and increasing prices. And also in relation to carbon credit, there is an area that was created that would start bringing results related to carbon credit. And we have been showing consistency quarter-on-quarter with good news, still limited, but very good news in the sales of carbon credit. Every quarter, we have been increasing our revenue in terms of carbon credit. I'm going to give more details about Paulínia project. And we have been strengthening the capital structure. We have been having a broader reach in the investment, and we had a follow-on months ago in a very complex market with high demand from investors. And we have now a better capital structure, and this provides us with the strength to face the new period of inorganic growth. We are going to show some photographs of the biomethane initiatives. So in other words, we're almost getting there in order to start delegating in all those numbers of biomethane. We had several positive highlights in the results. Something that is always discussed is our SG&A. But I would like to remind you that our SG&A is providing support to a company which is much bigger than we can see in the results. The SG&A that you can see is the one that was used two years ago building biomethane, Jaboatão, Paulínia plant, investments of BRL 1.3 billion that has been invested for two years. And this is supported by a structure of engineering, supply, legal structures, which is already in our SG&A, but it's not being reflected in the results because the results are going to be seen when the plants come into operation. So the plant will amount to almost the same size of the company it is now. So this is how we have to look at the SG&A. Maybe we may have a perception that the SG&A is still high when we look at the margin and the revenue at present as if we were just a company of waste disposal. And the SG&A would be much lower if it were like this. So it's important to convey this message because if we look at the result, all the margins and all the revenues, we have to understand that all the divisions have been growing, but the SG&A is not decreasing. And the SG&A will decrease in relation to the revenue as soon as all those plants start operating along the next quarters. And talking about the business evolution, these are the photos related to biomethane on the -- we can see the plants on the right. And on the left, Jaboatão dos Guararapes is a plant which is almost 100% ready. There was an official inspection that was held about 20 or 15 days ago, and we got the permit to operate and they even complemented, they said that it was one of the plants that -- the best plant they've ever seen. So it is already being operating in testing mode. And we've been doing the tests already. And in September, it will start using or injecting gas into the network. You can also see Paulínia plant. You can see that the works are on track and the operation is likely to be delivered by this year. So this was built on schedule, on according to the CapEx. And speaking about biomethane sales, we'd like to remind you that the contracts that we sold, the latest was Neogás of 150,000 square meters a day, and it will have an adjustment according to the IPCA. So we are going to have guaranteed income for years to come. And there is a range of 500,000, 660,000 square meters a day. And will have a total potential of 1.3 million that we are going to have along the journey. Half of the biomethane that we produce are already being sold in long-term agreements, and I'll provide more details about it. In addition, there has been an evolution in carbon sales. We would like to mention that the Paulínia's project at Verra is already to be completed. This is the largest carbon project of the company. And in addition to being the most important project, and it's -- by the way, it's very important to mention this because we -- it's a project that has been registered with Verra. So it's a new line of registrations at Verra of at least 1 million tonnes of carbon per year. And this is also going to be applied retroactively, and we may reach 1.5 or more of carbon per year. And so Jaboatão generated BRL 5 million in revenues. And as for carbon, it's important to mention that our strategy of go to the final client and having the commercial structure that will impact the [ S&J ], of course, but it's a structure that went abroad to sell our carbon credits along the months. And we can see the results now. Today, we have a backlog of imports of millions of tons of carbon. And we have started to convert those quotes into sales. So our expectation is that now carbon will start having recurrent results on a quarterly basis. And every quarter, we are going to show in our results with more resources and sales for the company. I'll turn the call to Leonardo for him to talk about the operating aspects.

Hello, everyone. On Page 8, we bring the operating figures. The first one is the volume of waste, a growth of 2% in comparison to the same period. last year. So we maintain a consistency in the performance of waste at the company. We still have Ecopark of Aparecida de Goiânia, Santa Luzia, which are projects we are in the phase of maturity, still in the ramp-up process. And we still have a lot of revenue to be captured. We also have some projects in Rio Grande do Norte with a great potential in that area. On the right, we can see the energy generation. As we have already mentioned, the volume of energy generated has decreased a little because Jaboatão plant is going to start operating along the second half. And below, we can see the comparisons of the previous year. And we can see that carbon credit is very much in line with the track history, and we consider all the volumes that the company is using. On the next slide, we can see a specific focus on average price. As I already mentioned, average price has been consistent in disposal above inflation, not only considering the mix. And we have made great improvements in the adjustments of contracts above the inflation. And for this quarter, 4.2% of actual growth, and we reached BRL 83.3 per tonne. Specifically now discussing the financial highlights. We would like to say that the reported net income is 23% above what we reported in the same period of last year. Gross income and gross margin increasing by 5 percentage points and EBITDA, as we can see to the right, 26% higher, BRL 125 million, 26% above the compared period. On next page, we can focus on CapEx, and that's Page 12. This is the CapEx of the company, as Pilao has already mentioned, when he mentioned SG&A, we are very active in energy transition, and we invest in Barueri project. We also have investments in the treatment of leachate and final waste and also looking at the sanitary landfills. And there is a specific slide showing the relevant investment that we have been making, especially in the last quarters when we started looking more strongly into the biomethane plants. On Page 13, we look at the capital structure, the indebtedness level of the company. It's just natural because we make balances between investments, growth and long elongated debt profile, and we are going to be working on this a lot in the next half of the year. So we are to expect a company deleveraged and prepared for growth with a very elongated debt profile. The company has an average term of 1.8x. So we are ready for this front of investment, and we are likely to see the results in the short term. I'll turn back to Pilao for him to talk about the perspectives, and then we are going to open the Q&A session.

Very well. I think in terms of perspective, we made a list of five points. The first one is M&A and new project, of course. I usually say to Leo that we have an important moment that we are experiencing at the company where the balance sheet is extremely healthy, and we have all the strengths and we have a high volume of opportunities. And this is so positive because we understand that this is going to offer a qualified offer of return to shareholders. We have more opportunities at the table that we can complete. So we have choices to make. We have all the strengths. We are prepared for that. That's the best scenario a company can ever have. So the company continues growing organically. So we do not need to look at M&As, and we have biomethane projects that will bring in even further growth. So we are in a very healthy moment. As I said previously, in the second half of this year, we are likely to bring you good news, good news to the shareholders with high return. In addition to that, in the M&As, we will bring some new projects that did not involve M&As, but involved a process that the company had already started that are likely to be disclosed in the future. So we have good news down the road in the organic and organic growth segment. In terms of average prices, people ask me about the actual growth curve. Has it come to an end? No, it hasn't. I think this curve is going to last up to the end of next year. So we have a good growth journey that's likely to happen when we look at the expiration date of our agreements and the efforts of the commercial area will increase the average prices. So you can expect gains in prices above the inflation for at least three or four quarters ahead of us until we reach to an average stable price in 2027. So we can see that biomethane plants are in the process of ramp-up, ready to become operational. Paulínia is according to the schedule. And I think I missed something that we have already started, which is Itapevi initiative. So in addition to that, we have already started Itapevi and the Tremembé plants, and we have already started the new projects that we sold to Neogás. So we have the construction front as well as biomethane. Carbon credit. I think I have explained well. The backlog is very robust. We have sold projects that has already brought in some revenues, as you can see in the quarter results, but we also have projects that are going to be used in the future that will use biogas in its operation. And this was something that we did not mention, but I would like to focus your attention to that. We are having those projects that will generate revenues with biogas. And also, we'd like to say that the financial profile is stronger in addition to the follow-on that has impacted the indebtedness. And we also have the allocation of the debt. The duration is above six years. So in addition to having a ratio net debt over EBITDA, which is very low, the debt profile is very elevated. This is what I wanted to share with you, and we are now going to open the Q&A session. Thank you very much for your participation, and now we can open the Q&A session.

[Interpreted] Thank you. We're now going to start the Q&A session for investors and analysts. [Operator Instructions] Our first question comes from Victor Cunha with Itau BBA.

[Interpreted] Two quick questions on our side. We saw that energy transition has changed, has improved. Energy generation had a drop. Could you provide more details on the driver and the details on the purchase? And my second question is in relation to manageable costs that we see the difference year against year. Can we consider this to be recurring considering the asset base that we see today?

[Interpreted] Victor, this is Leo speaking. In relation to energy transition, even though there was a drop, we had some PPA agreements that had already been executed, and we got prepared for this drop as a result of what happened in Jaboatão. So we had already purchased energy, and we are delivering the energy with -- we have been delivering to the project even with a reduction. So we had a good performance of biomethane in Paulínia that meets the PS1. So it's important to mention this. It's important to mention that some plants were purchased in 2024, even if they generated has come to a drop. but we got prepared to that. So we can see a positive result and Paulínia has been performing well to meet the thermal power plant. In relation to cost, yes, considering the asset base, we are likely to see this level of cost. We are looking for efficiency. We are also going after better performance in terms of leachate. We are going to gain scale in projects that are still in the ramp-up phase. So this is the structure of cost that could assume considering the base of assets that we have. So you can incorporate all this into the overall platform.

[Interpreted] Our next question comes from Andre Sampaio with Santander.

[Interpreted] I would like to ask two questions. First, I would like to hear from -- if anything has been contracted for the third quarter and what to expect for the next quarter? And the second question is to understand the rationale of Paulínia and Verra. Is there any rationale why you choose one over the other for each project? Or do you -- how you're going to work with those assets in terms of Verra.

In relation to price, Andre, we are working on pricing. we cannot assume that anything has been contracted, but there are dates that are going to be used. So we are going to wait for the next call in order to disclose what's the news for this half of the year. We have everything to believe that the new quarters are going to be winning quarters. So our perspective should be positive. In relation to Verra, I think we observed that the requirements are very similar, but they are not identical when we compare those. And when some requirements can be applicable to both players, we try to understand what is going to be better accepted by the market when we are going to do the trading. And as to Paulínia, we understood that Verra was the most appropriate choice. So we do not have any history track history to have been using two standards. And we did not have any problems in any of the projects. And this is a strategy we've been following.

[Interpreted] [Operator Instructions] Our next question written by Thiago Lima. Please, in the run with the consolidation of this expansion phase and new agreements being incorporated into the results. Do you think the company will become a benchmark in distribution of dividends at B3?

[Interpreted] Thiago, it's Leo here. Thank you very much for the question. I think that this sector in Brazil and abroad is a good sector for paying dividends. And when you look at the profile of the business, you look at the consistence, the recurrence, the nature of the business, the results, consistency, yes, it's a cash call business really. I believe so. But we have to look at the company as a clear case of growth. So we have lots of options to invest in our assets. There is a lot of opportunities to consolidate the sector. So we should use our balance sheet and our cash generation to capture the opportunities out there. But in the long term, yes, it's a company which has the profile to be a good dividend payer. But this is something we are going to look down the road. We are looking at the opportunities in the short and medium terms.

[Interpreted] [Operator Instructions] The next question comes from Andre with Método de Investimento.

[Interpreted] Congratulations on the solid and growing results. I have here three questions. Thinking of M&A, is there any negotiation with the company that in addition to the Ecoparks, they will also include the collection of waste. If so, how do you see the company going into this segment? The second question, in the beginning of the presentation, there was the mention of additional BRL 4 million into the EBITDA with the sale of biogas. Does the company have any estimate in terms of cash conversion in this business line? And looking at other companies, we can see that the compensation of officers is connected with the performance of the shares. How does the company see this connection? And what is the compensation of officers system working, program working?

[Interpreted] Andre, this is Leo answering. I'm going to try to answer the three questions, and Pilao can make complements. In relation to M&A, we saw some opportunities, and we converted into our business. We saw that there were companies operating in the collection, but then we segregated the activities, and we focused on final destination. We look at the profitability when it comes to collection, risk collection. But we are looking at contracts in places where there is no concession activities, and we also look at where we have low entry barriers we usually choose to be better positioned in the final destination because of the entry barrier. And it's very common to see in the collection and sweeping something which is less mechanized. And this is something that makes us out of this business. And being a benchmark, well, some companies have different activities, but we are focused on final destination, and we have some recent acquisitions. But in general, we have carved out. And this is how we have been looking at the M&As. The second question is about the EBITDA level generated and the BRL 400 million that you mentioned. The cash conversion of energy activities is very high. So let's talk about the three projects. We have the Jaboatão, but we also have SUDENE, which has a reduction in the income tax. So biomethane operations is very profitable. And the sell side and the banks reflected this and capture this potential. Your last question was related to connection of the officers' compensation and the shares. In the shareholders' meeting that we had, there was an approval of 5% to be converted into stock options. The company is about to finish the plans. And just like other companies at B3, in this new cycle as a public company, we have the officers aligned with the shares of Orizon.

[Interpreted] I would like to add two things. About the first top, I agree totally with what has Leo has been said. That doesn't mean that we are not monitoring the market. And we see what is happening and evolving in the market.

[Interpreted] What is the evolution you're talking about, Pilao?

[Interpreted] Okay. I'm talking about the evolution of collection contracts connected to landfills with the revenues which are connected and directly paid to the energy or water bills. When you're doing the collection services, in actual cases when you're going to receive from the government and you start receiving by means of waste generator, the collection services is very similar to water and sewage activities. We monitor this. We look at that, we study. But at present, we don't see any opportunities, but we are going to continue monitoring to be prepared should this reality changes in Brazil. In relation to how the collection services are paid, if we are talking about long-term agreements with direct payments by the city, by the one that generated the waste, we may look at this opportunity in a different way. Number two, the compensation of officers, I think this is a topic that I've been mentioning in the other call and which is very important for the company. The company has a journey since 2013. So it was a turnaround company with a track history of resilience and also of contribution by the employees to come around this journey with going public and with a turnaround story to get where we are now. Nine months ago, we have to come to a stop to look at the 5-year plan of the company and the team and what would be necessary for us to go on this 5-year journey with biomethane projects, M&A projects and also considering our position in the market, it's no news that this -- for this 5-year project is a company that is going to grow in multiple times. It's not an organic growth. As soon as the biomethane plants start operating, we are going -- and the M&As start being reflected in the results. So you have to have a team which is prepared for the journey. So we have the company, the size it is now, and we see a company that will grow in multiple times. So there are Verra and [ Visaju ] companies that we brought aboard to do the analysis of our team. We closed our 5-year plan 30 years ago. We had a gigantic event last week when the leaders were presenting the 5-year plan that were built by those leaders. And the Board approved the possibility of 5% of dilution for the officers. And now for the next 35 years, 35 days, 40 days, we are going to close the program called LP. And in addition to the compensation of the leaders of the company, we are going to have a short-term incentive based on annual targets. So all the targets are cascaded down the structure, and we always try to provide a bonus to our employees from the results. And now in 40 days, we are going to bring in the targets for the five years connected to the LP plan that will bring talent to the company. We are going to retain the talent that are already here, and we are going to have a total alignment of our executives in relation to the big dream that we want to make true within five years.

[Interpreted] Our next question comes from Andre Sampaio with Santander.

[Interpreted] Good morning, everyone. I would like to take the opportunity and listen what you have to say about the opportunities that can come from the government of Sao Paulo. We recently talked to Natalia, and she talked about the project we are developing for Sao Paulo. I would like to know what your expectations for the next auction for the second half of next year. I would like to -- like you to share with us what would be the structure of this auction and if that would be interesting for the company.

[Interpreted] I think Sao Paulo, as always, is ahead of everyone else. And this is a bit of what I've already mentioned. We monitor all those possibilities. In the case of Sao Paulo, we are really thinking about the government offer those services at the regional level. Of course, offering a condition of differentiated guaranteed pay attached to the water or to other bills. And once we say we have to monitor because Orizon is very well positioned for the new opportunities, considering that we are the owners of the landfills, which are located in many of those regions. So we have to be positioned. We have to do the evaluation. Good opportunities may come up. But now we have to look at the pacing, the timing of everything. If it's going to be according to the time expected by the government, it's going to be aligned with government projects and how long all this is going to take. The important thing is to be prepared. I can say that Orizon is prepared. And we are looking closely at the projects that may bring in further gains that we are not even considering in our 5-year plan. Sao Paulo is also -- which is very interesting to mention. So Sao Paulo is looking at transforming the buses being powered by biomethane, and we have been taking part in several forums with the government, and they are likely to launch the new project in the short run where they are going -- and part of the biomethane produced in Paulínia may be used in those projects. So we have a lot of expectation. This is nice in addition to having the biomethane being directed to the industry. Our biomethane may become a benchmark in the most important city in Brazil in energy transition for public transportation. This would be a very nice idea, and this is moving quite fast.

[Interpreted] Our next question comes from Alexandre Souza with Santander Asset.

[Interpreted] I think you have considered the organic growth and inorganic growth and your M&A agenda. But I would like to know what you expect or what would be the process for your decision-making? So is there a minimum return on capital that you consider? Is there a specific objective in terms of size, M&A, strategic positioning? So whatever you could share with us?

[Interpreted] Alexandre, this is Leo speaking. Thank you for the question. We try to be very cautious when we evaluate the project. Of course, we consider the return reflecting the capital cost, reflecting the reality of each asset. From the track history, you can see that the assets have different sizes, and they are also at different phases of maturity. In other words, we are focusing on this agenda, and we are very open to look at different opportunities, and we may not be very conventional at times. There are some assets that we needed to understand the reality before, and we needed to make a loan previously. So we have all the financial discipline that every company has to have. And we look at all the acquisitions in comparison to other opportunities for growth. So everything demands resources. You have to prioritize all those actions considering the opportunities and which one is more attractive, which one would offer a better return and also the logistics side in this evaluation.

[Interpreted] Our next question comes from Gabriel Francisco with Drýs Capital. It's a written question. Three questions. He asks, could you provide details on the next step to trade biomethane of Sergipe. And the second, could you provide more information about the trading of carbon credits in Ecopark Paulínia? And is there any update on the so-called purchase of biomethane by Petrobras?

[Interpreted] Gabriel, this is Leo. Now I'm going to start and Pilao may complement my answer. So we had intention protocol. We are very enthusiastic with the agenda. So that we are not connected to Sergas until the -- everything is completed, executed. In the Northeast and in Sergipe, we have other potential clients, not only this one. Of course, we look at this client. We consider it as a good partner. We are doing -- we are developing a good relationship, but this is not the only option we have. In relation to carbon credit in Paulínia, there is a high volume of prospective and stocked carbon. I think it was clear when we communicated that with the market. So we are going to have a very important volume to be traded. Our area is very focused on the sales of the carbon. So it's a pipeline of potential transactions, and that involves Paulínia assets. It's important to mention that to have a project at Verra and other gold standard brings a diversification of the portfolio, which is important. You may have a client looking at the requirements of the gold standard unit or Verra with a different angle. So it's very important to have products registered in both environments because we have more flexibility. We have a bigger portfolio. We have more diversification, and we'll have more power to the sales area to meet all types of clients. So it's very important to have all this on our radar, but we start with Paulínia and Jaboatão. Now they not only have carbon to be sold and to be traded. But as I say, we can have the product on the shelf. We have the products that have been audited, have already been registered. So the products are ready to be sold or traded on the spot. In this public call of Petrobras, we've been monitoring this as all the market. We have been interacting with the clients, and we are very enthusiastic according to the client timing. We are very enthusiastic about this front. But as I've always said, -- we have the support of the banks that cover for us. And as we have mentioned in the previous call, Petrobras is a potential client, of course, a very good client, but it's a potential client, one of many. So we have made some agreements with other clients as well.

[Interpreted] Our next question comes in writing by Guilherme Rodrigues with Trígono Capital. He says, could you make some -- give some examples of operational synergies with new M&As and the landfills.

The company already -- of course, you have the standard synergy of using the same platform. But whenever you make an acquisition, for example, in the same region, you have the same permitting process. You're already familiar with that permitting process with the environmental agency and also those which are adjacent, activities which are adjacent, you may have some synergies with the team. I think the expertise that we have when you explore biogas, you can replicate in the acquisitions, considering what we have already developed in the biomethane process. So the synergies that are going to offer present value are the commercial ones, when we consider the expertise when we made the development of the circular economy and biomethane products and also when you know the project, the suppliers in terms of CapEx, it's much easier for you to replicate all this. And of course, you have a level of synergy with the administrative and financial area, but at a lower degree. The most value is to replicate what you have already done in the previous project and the new acquisitions.

[Interpreted] [Operator Instructions] Next question is in writing by Mr. Sérgio de Souza, investor. In relation to the joint venture with Tera on organic fertilizers, what's the initiative like now?

[Interpreted] The initiative is doing well. The joint venture with Tera is not really a pilot plant because it was thought of so that we could have a learning curve in the generation of fertilizers coming from sewage treatment sludge. So we have been learning a lot with this initiative. So -- and every time you start a new business in the -- for example, fertilizing -- fertilizers coming from sludge. It's something new, not many people do that in Brazil. There's a lot of learnings to be captured. And we have been learning a lot. In the beginning, we nearly had to give our fertilizers for free to the farmers. So we had to break this barrier for them to understand that the fertilizer came from waste and you have qualitative gains, cost gains when we execute the fertilizers because of the characteristic of the Brazilian sludge. And this joint venture is already generating results. It's not relevant because it's not so big, but it generates results and returns, which is very good considering the investment made. And the point here is to be to have one more avenue for growth, which is already ready for the right moment. This is not our priority to grow on this avenue because we do not have enough the structure to follow all those journeys. So now we are focusing on biomethane and M&A. But in the long run, when those other divisions become mature, we are going to give more attention to transformation of the sludge that we receive from Ecoparks into fertilizers and give another step ahead together with Swedish waste management companies so that we can establish new partnerships for this purpose.

[Interpreted] The Q&A session has been completed. We would now like to thank you and turn the floor to Mr. Pilao for his final remarks.

[Interpreted] Once again, I would like to thank for all the people who took part in this call. And thank you very much for the quality questions. And once again, I thank all our employees for having helped us to go on this very successful journey.

[Interpreted] Orizon conference call has been completed. We would like to thank you for your participation, and have a nice day, everyone. [Statements in English on this transcript were Spoken by an interpreter present on the live call.]