Serena Energia S.A. (SRNA3) Earnings Call Transcript & Summary

Good morning, and welcome to the earnings conference call of Omega Energia for the Fourth Quarter and Year of 2022. In this fourth quarter, we reached the production of 2,067 gigawatts hour and ended the year with 6,805 gigawatts hour, which is practically in line with 2021, considering the same assets in the portfolio and 9% below expectations for 2022. The low incidence of resources in the quarter is due to the persistent effects of La Nina and the passage of cold fronts that hit Bahia in November. The impact of the unfavorable weather scenario throughout the year in the portfolio amounted to 523.4 gigawatts hour, 7% of the expected production for the period. We reached an adjusted gross profit from Energy of BRL 492.3 million in the quarter and BRL 1.66 billion in the year, a result 13% better than 2021, despite a generation 3% worse for the same period, mainly due to the average price 14% higher, reflecting the readjustment of inflation in PPAs and lower energy purchase prices compared to the levels observed in the previous year. In addition to the impact resulting from the low resource, we had an availability below the plan, actual on-off of 95.3% versus target of 96.47% due to the execution of turbine maintenance in the Bahia Delta clusters. It's important to emphasize that the economic impact of such maintenance will be neutralized by the guarantee of availability of the O&M full scope contracts. We ended the year with an adjusted EBITDA of BRL 1.18 billion and a margin of 70.9%. The value is again within the guidance range and 6% below our budget, which was the center of the guidance. Therefore, we believe that the results for the year was consistent and reinforces our ability to actively manage the variables that are under our control, including cost and expense, energy hedging, among others. Now moving on to investments and a vision of the future. Capital allocation discipline was a determining factor for the portfolio decisions we made during the year as we believe it is essential to guarantee a good margin of safety in new investments at times of high interest rates and inflation rates. We opted to increase our stake in the Assurua 4 and Assurua 5 projects to 100%. Unlike the conditions offered for the 2022 project season, both Assurua 4 and Assurua 5 had lower CapEx, good financing conditions, long-term PPA with attractive prices. And by the way, Assurua 4 reached full COD on February 17, contributing to our generation. Assurua 5 has progressed, and commercial operation is scheduled for the third quarter of this year. We carried out commercial transactions in existing assets that raise up contracting in our portfolio, which is very favorable in the context of prices that we project for the next contracting level for 2023 is 99%, and 93% on average between 2024 and 2030. It is always good to remember that all our contracts are [indiscernible] inflation. We concluded expanding our capacity by 91 megawatts in the region. And we positioned ourselves in distributed generation through 2 transactions already signed after the new regulation was approved, which should be completed within the first half of the year. On the energy platform front, we launched 2 new products, distributed generation and decarbonization, with the past milestone of 500 new B2B customers in 2022 and BRL 48 million of gross profit from energy. 2023 will be a year of important investments in sales and marketing in our operation in Brazil. And we have already started preparing the digital platform in Texas for retail and wholesale and deliver to North American [indiscernible]. We have [indiscernible], and the assembly of the turbines, which should start in June. We expect to have the farm 100% operational by December. As a result of the aforementioned ongoing investments, our annual EBITDA will increase from BRL 1.18 billion in 2022 to BRL 2 billion in 2024. Due to the [indiscernible] in January of this year, we should [indiscernible] to make consistent projections regarding our revenue, EBITDA and debt, which after the completion of the implementations, should reach consolidated levels equivalent to the covenants of Omega generation. Throughout 2022, we have assured the necessary funds to enable this investment cycle, including BRL 800 million and BRL 50 million from the capital increase of Actis; between BRL 180 million and BRL 200 million from Goldman Sachs as our tax equity partner in Goodnight I; 440 million [indiscernible], BRL 381 million from the BNB in Assurua 4; and approximately BRL 219 million from the FDNE and Assurua 5. We closed 2022 with important deliveries, in addition to solid prospects, to reach BRL 2 billion in EBITDA in 2024 and continue the path of strong growth and high returns that has been a reality since the IPO in 2017. In these almost 15 years of history, discipline in the allocation of capital and entrepreneurship has been our driving force, in addition to transparency and integrity in absolutely everything we do. Being listed on the Novo Mercado for having a high rating in ESG rankings are consequences. At Omega, sustainability is the driving force, and it makes us always want more and better. Thank you all for another great year together. There's a lot more to come in 2023. We'll now move on to our Q&A session, and we'll be right back with you live.

Hello, everyone. We're back with Antonio and Bernardo. We have received some questions already, and let's continue. We're ready to answer that. Let's start with the question from [ Hamon ]. It's great, Hamon, he's always with us. Good morning, my LinkedIn partner. We has been in negotiation with customers for sell production and supply of energy. Could you give us some more color? That's for you, Antonio.

I'll answer with Bernardo, but in these last few years, we have made an effort to try to increase margins of the existing assets in a structural way, among other technical increase of power. And the most important in recent quarters has been a transition of a moment from -- a model from PPA to self-productions and investments with customers. We have announced MEGA's [ Branco ] deal, for example, and there are some other relevant negotiations in terms of volume in progress. And they depend on debenture insurers who are to be affected. But there are very good prospects for hundreds of million reals. And they are important not only to offset any effect of less favorable weather conditions, but it will ensure a larger margin and higher contracting levels. After these deals are made or completed or closed, we will have like 90% of contracts. So these ups and downs in the market will be protected with high margins, PPA and self-production models insured, which will provide a profitability level for the company for 2024 onwards that's very favorable. We are very optimistic, and they mainly depend on the approvals of third-party stakeholders, such as debenture holders. But I believe we'll have an answer shortly in the next months. Just to complement, we have 2 main models, leasing and self-production equivalent, that we can offer our customers according to their needs. And the projection of 1.5 EBITDA for 2023 and more for 2024 doesn't cover these optimization fully, only partially. But if we're able to approve all of them, there may be an additional advantage in the BRL 2 million EBITDA forecast for 2024.

Let me separate the questions now. We see as increasing costs year-on-year. What will be a recurring level of cost in the long term, considering the new projects?

Well, that's -- I'll give you a range. Since we provide guidance, that's easy. In the guidance of BRL 2 billion for 2024, which is a good figure to understand, our guidance will have an EBITDA margin of between 70% and 75%. There is a variation because there are several issues influencing the top line, which is resources prices. But there are also elements that are investment related. Investment in costing and expenses, for example. We are having a major opportunity to launch a digital platform in Texas as a business that will accelerate the results of the platform. So that will involve an increase in G&A and marketing investments starting in 2024. That could impact margins in the short run, but of course in the long run, it would be very favorable in leading to results that are significant in terms of increased margins in the long run. So they will vary according to the price of energy. 10% with our contracts in terms of [ Ventus ]. But given also the speed of investments and new initiatives that pay, they have a high return.

Just to taking the opportunity, as a benchmark, if we had not had this additional investment, marketing, the team for the additional platform cost of sales in the U.S., we would have an EBITDA of about BRL 30 million above what we had in 2022. Just to understand that we are allocating funds, but that because we believe that the business will be a differentiation in terms of ROI for the company in the future.

Second question from Julia regarding the [indiscernible]. She wants to know if we have any updates to give about the partner of Goodnight II. And when do we expect to close the deal of the partnership for the second phase?

Goodnight I is going very well. That's good news. We have all the construction works completed, and we are advanced in the maintenance and the substation. And now we'll start the most critical part of deployment. Investors will start assembling the wind turbines as of June. But funding, it's also very important. We have a financial closing on everything. So tax equity and finance facilities have been closed. So everything has been addressed. So as a first experience, this experience in Texas is doing well. It's looking good. Goodnight II, as any other development, depends on several variables being aligned: funding, tax equity, PPA, customers. So we're working on that. And the conservative expectation is to have this finished by this year so that we can have the project generation next year.

A question from Marcelo from Itau. Could you see what are the new projects, including the EBITDA guidance for 2024?

We'll have contracted projects of BRL 2 billion. We'll have no new ones; only the ones we're talking here. And the increased results of the energy platform, now that we are in distributed energy, in DG, but the results of the platform will be higher given the growth we are seeing in the platform. We had new customers. But you could ask me, well, the result was lower than in 2021. Yes, because we didn't have any carbon credits in 2022. It seems that we did -- the recision was right because the price is higher now in 2023. And the prices of DG is not mark-to-market because you just calculated when you actually deliver the energy. So we are betting on the free market. So this could give us a better result, 2.5x, even 3x what we had in 2022 at the platform. But mostly it's what we have already under construction and with assured funding. If you have any additional questions, let us know.

Now a question from [ Carol ] and Victor from JPMorgan -- Carol from another company. They want further detail about how this reduction happen and if we could see these efficiency measures as a recurring trend in the reduction in GSI.

Well, sometimes there are like invoicing cash flow from suppliers and the company that causes the quarters to have some symmetry. This is why we provide an annual guidance. In this BRL 1.5 billion, right now, we have our best expectations in terms of cost and expenses for the company. Naturally, what we have done in the past -- last year, since the beginning of the year, I started warning all of you about our concern with La Nina and its persistence. That causes during the year, especially in the last quarter, to freeze expenses, marketing expenses, no further hires to deliver good results. If this year is similar with cost resources, we'll continue. But given the safety margin, since the La Nina exists in the beginning of the year, our safety margin is enough to not have to do anything else in terms of expenses. Structurally speaking, the sell sides know that if we compare our level of G&A per gross profit with other generation companies in Brazil, you'll see that we are very efficient. I would recommend you to make that comparison.

Two questions from Carol. One of them we explored in the beginning, but it was -- be worth giving some color, considering the current contracting and price environment. We've seen that you have increased contracts in this quarter, according to the [indiscernible] volume in the platform. What is the contracting environment in the free market like, Bernardo?

Well, this is a year that we have started with the [ hezevoir ] high with expected low prices in the next 3 years. And we took some initiatives to increase the contracting levels, allocating capital in our own funds and resources to projects that will add value in the long run to increase the energy prices of structured self-production. In terms of prices in the free market, prices are lower. There is a reduction in the sales margins, which cause us to develop other strategies to capture customers with more attractive margins. This is a year, there is a big difference between prices of the free market and tariffs in the regulated market, increasing even more incentives for migration. In January 2024, there's a high voltage, and we are able to capture these customers and bring them to the free market. The message that's important [indiscernible] is that Omega has only been advanced because we always consider profitability first and then volume. We had all the conditions to launch a new partner. Actis was interested in investing in the capital. We had all the conditions to add new volumes in Brazil, but that's not a good moment for this because interest rates are very high, CapEx are high and prices are low. So in order to maximize volume -- or value for our customers, we decided to increase our stake in Assurua 4 and 5 with better profitabilities compared to launching more capacity. And distributed generation, we had a good capital movement in the U.S. So we always adopted this strategy because this way, we believe we will grow more in a more favorable way with time. We're very pleased with our current position because we have high contract levels, always index. We're able to increase our margins and develop intelligent supply structures. And we are very well positioned to a new market position with higher demands, CapEx at reasonable levels to resume growth in Brazil without affecting our growth margin in other fronts such as the DG and the U.S.

Yes, that's the next question from Carol. It's within our list of initiatives. And her question is about the DG implementation you mentioned. Many people think that the market is installed and already competitive. Could we expect the same historical levels for these M&As?

They are not M&As. They're investments. I think that purchasing operational assets doesn't make much sense right now, unless we're talking about specific situations. They are investments, and the returns are higher than the average we have had in previous years because the activities allows that regarding the arbitration between the distribution company price and the other prices. The amounts are substantially higher. In terms of volume, we have a good strategy. We will not tell the strategy here. But in the next 2 years, it will be clear that we'll attain good volumes. We have an important differentiation factor -- that's the digital platform -- has been in operation for some years. So we have the capacity to distribute and deliver for any type of customer, small, medium or large. We're very well prepared for that and well positioned to have a leading role in this area.

Now let's go to --

Oh, we'll give more details when we close the investments about volumes, margins and et cetera.

Now let's explore the debt front. [ Igor ], [ Maria ], some research analysts asking questions. We have said that we are funded regarding the projects, but people ask what are the prospects? Do we need to refinance such funds, such financing? We'll be able to repay them? What's the guidance of debt-to-EBITDA ratio considering the EBITDA for BRL 242 billion? How do we consider the debt scenario?

Well, it's important to understand the company's separate ways. We have the holding and 2 companies. The generation company has very stable, robust assets to generate cash. We met the covenants last year, and we'll do so again in a very good, quick leverage. In the other one, Assurua 4 and 5 and Goodnight, tax equity, project finance and we raised capital from Actis, plus cash generation to play the role of equity. We have short-term lines or credit facilities that are to mature in 2024 and 2025. There is no short-term risk for the company. And these facilities will either be replaced by long-term facilities for the implementation of assets or for cash generation. Our base plan, the company has a very quick leverage from 2024 onwards. Our cash flow will provide for that. But if not, we have other fronts to continue to fund the company. Because after the 3 assets start their operations, our level will drop to close to 4 in 2024 and 3-point something in 2025, consolidated, including the generation from new assets. So the year of 2023 and the liquidity and private credit, we're not so exposed to those factors. And our base plan doesn't need more funding. Our generation of cash will provide for that. And we have very healthy options to continue to fund our operations.

Another block of questions. We received questions from [ Daniel ] and [ Lauro ]. Lauro is a shareholder, and he would like to understand whether he should expect a more internationalized company. If we could tell how much this expansion to international growth will -- how much it will be in terms of results.

Well, first, in -- I'm following the guidance or the outlook as a reference. In the guidance for 2024, we only have Goodnight I. So in terms of growth for the next 2 years, our projection is prudent one for the result of 2024. It's a parcel, be it that small, about 10% of our results of the company. So it's a small share for the moment. In terms of ambition, our logic going to the United States, it's because it's a gigantic opportunity. We're talking about 300 gigawatts in wind and solar energy in that market and our humble confidence in developing renewable energy projects in a consistent way. Goodnight I is a good way to start. And from then, have other options in that market. So the result of Goodnight I, the outcome will be very important to measure the level of growth we'll have internationally, in addition to this BRL 2 billion. As for the outlook, first, from the point of view of investor, I believe we have the capacity not only in Brazil but in other markets as well, in Texas for the moment, to look at opportunities in a systemic way and decide on interesting opportunities that provide good returns. The projection we have for Goodnight I provides a significant median of the return for the U.S. projects because we betted on a project that had a less favorable profile when we improved it considerably, as we did in [ Marina ] when we bought [ BioEnergy ], as we purchased [ Shui ]. So historically, we looked at a project that looked like a marked #6 rate, and then it became a 9/10. Like used to be like a B or C and now it's an A project in terms of grade. So we have supply behind me through several interesting cases that -- interesting opportunities that could improve the return median in the U.S. Now from execution side, we have a good track record in Brazil, competing with important companies. We've had -- it's hard to find a company that has a track record with so many executed projects at the level of profitability, execution prices below budget as we do. So this execution capacity has the potential to offer solutions to execute this gigantic room for growth the U.S. has. And obviously, this is an upside. We pursue this in Brazil and in the United States. But still, we can already provide this. Nobody prices this well. But the fact of having a company that is vertically integrated, I generate energy in Goodnight, but this energy can go either to retail or wholesale customers digitally, and we'll launch that platform in the U.S. until the end of this year, becomes a different business model compared to the market with higher margins. And this becomes a differentiation point and can give us more speed for growth internationally. That's why we are so excited about the plan of the U.S. Of course, we need partners and investors in the U.S. that will accelerate this growth for the company.

Another question about Goodnight I. What's the expected sale date for your share in Goodnight? And what indicators do you need to attain, from Guilherme.

Well, we'll only sell our interest after it's operational, after the implementation risk. So this transfer should happen after December, but launching the sales price to the end of the year.

Okay. That's it for today. We remain available for you, both the Investor Relations team and other executives of the company. I invite you to stay a bit longer. We try to summarize 365 days in 2 minutes and 30 seconds for you to know what was the year of 2022 like at Omega. Have a good day. Thank you.