Alupar Investimento SA

BOVESPA:ALUP4

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Alupar's Earnings Calls for Q2 2022. The audio and the slides are being broadcast through the company's IR website. The presentation is also available for download. [Operator Instructions] Forecasts about future events are subject to uncertainties. These results may differ from these projections. These projections are based on data currently available.

Mr. José Luiz Godoy Pereira, CFO and IR Director; and Mr. Luiz Coimbra, Alupar's IR Director. Mr. Godoy, you have the floor now.

[José de Godoy Pereira, executive]

Good afternoon. Thank you for attending Alupar's earnings call for the second quarter. I'll start talking about the highlights of this period. As we often do, I'll turn over to Luiz Coimbra. He will be discussing our financial results. We'll then have a Q&A session and we'll be available to clarify any questions you may have about the company or the industry.

Let me now address the highlights for this period. We had our maximum allowed revenue price increase. This is yearly adjusted according to inflation, part of it by the General Market Price Index and part of it by the Extended Consumer Price Index. The IGP-M was 10.72%. The Extended Consumer Price Index was 11.73%.

Our allowed revenue for '21/'22 was $2.876 billion after that price increase for the '22/'23 cycle. Starting July '22 through July '23, it will be BRL 3.121 billion. That's an increase of our maximum allowed revenue worth BRL 245 million a year.

There was another important highlight, which was dividends paid as of in 2021. These dividends were announced on April 11, 2022. Shares became ex as of the 12th. They will be paid in 3 tranches. The first was May 31, BRL 0.41 per share that accounts for BRL 1.23 per unit. The second tranche will be paid on August 31 and the third on November 30.

Another highlight is our effort as far as ESG is concerned, sustainability, governance, et cetera. And that effort has been recognized by the market. We've already published our sustainability report. We've been doing this since 2021 -- I'm sorry, since 2020. We have updated it as of 2021. Our rating has been improved. That's the MSCI ESG published by Morgan Stanley.

We were awarded BB, and now we are ranked A. You can see that evolution on the right from BB to A. We've been doing this since 2018. Actually just below the chart on the right -- on the bottom right, that's the number of utilities companies. How many of those companies have been having the A rating, 18% of companies; companies that have better rating account for 26%, AA; and 9% with AAA. I'm talking about 35% of better ratings, 65% of companies have a similar rating that we have or below that our rating.

This is something we have been working on for quite some time. We have come a long way, and we hope to get even better scores because this is something that is in the minds of international investors, the market and all the communities where we operate.

I'll now turn over to Luiz Coimbra for our financial results, and I will come back for the questions at the end.

[Luiz Coimbra, executive]

Thank you. Good afternoon, everyone. Thank you for attending our Q2 earnings call. I'm starting on Slide 6 for IFRS numbers. Net revenue was BRL 1.168 billion, a decrease BRL 143 million down in infrastructure revenue because we have 2 transmission assets being operational, TSM and ESTE. EBITDA was BRL 873 million.

The major impacts were a reduction in revenue in transmission segment I have just explained, a BRL 66 million decrease in infrastructure and costs. We have concluded investments because these 2 transmission operations are now operational. BRL 169 million in the account -- other accounts that was the periodical price increase. Gains or losses must be accounted immediately after ANEEL's resolution is published that took place on June 21st.

Looking at profit now, BRL 180 million, BRL 257 million reduction in our EBITDA and an increase in financial results, BRL 139.8 million. On to regulatory numbers on the next slide.

Net income -- net revenue, BRL 701 million, a 21% increase. That variation is driven by that increase of BRL 138 million in the Transmission operations, BRL 67 million increase in TSM and ESTE increases because they have become operational in the period and a BRL 74 million increase from the maximum allowed revenue increase, 37.06% in contracts based on the General Market Price Index.

EBITDA was BRL 595.6 million, a 24.1% increase. The main drivers were an increase in BRL 138 million in revenues, I have just mentioned; an increase of BRL 17.7 million in operational costs; these transmission units, TSM and ESTE becoming operational; and the La Virgen plant in Peru; a reduction in energy purchase, a different strategy to allocate; and a smaller PLD. That was the bottom [indiscernible] BRL 57 for the quarter.

It was BRL 230 in the same period of last year. We had an increase of BRL 21 million in other expenses, other revenues. This is due to a reduction of other revenues. That fall is explained at the TSM transmission company. The second quarter of last year, we had an extraordinary revenue because we were awarded compensation of our guarantee insurance. It was a nonrecurring revenue accounted for on second quarter of 2021.

Income was BRL 53 million. The drivers were the increase of BRL 115 million in EBITDA; an increase of BRL 28 million in depreciation; La Virgen and the 2 transmission companies, TSM and ESTE became operational; and we had a BRL 139.7 million increase in financial results, 2 drivers here. Number one, the operation ESTE, TSM have become or became operational, up until then that financial expense was capitalized. And once it's operational, it becomes a result. And the second and most important driver there is the increase of interest rates overall, IPCA, [ TCI ], TJL -- TJLP, these 3 indicators account for 83% of our consolidated debt.

On to the next slide. This is the debt of the holding, BRL 665 million, cash position is BRL 663 million, net debt is BRL 2 million. The debt is only seventh debenture admission, 100% pegged by the CDI, maturity is '24/'25.

On to the next slide. This is a consolidated debt chart was BRL 10.734 billion, cash position is BRL 2 billion, net debt BRL 8.301 billion. When we look at the structure, the consolidated structure, there haven't been any major changes. Most of our debt, 52% is pegged to the IPCA, CDI at 29% and our currency basket, Peru and Colombia account for about 12% of the total debt.

On to the next slide. This is the time line. It's a very long profile. 36% of our maturity dates are after 2027. The holding has the seventh admission in 2024 and 2025. And transmission and generation assets mature throughout the years based on the expectation of cash generation for each one of them.

This is my last slide. This is the Alupar's performance compared to Ibovespa and the Electrical Energy Index. It valued 23.35%, IEE is 9.69% compared to 3.65% (sic) [ 3.63% ] of Ibovespa. I usually try to point out the financial volume of our liquidity. Quarter after quarter, we have been improving. Accrued for last year, BRL 21.8 million. This year, year-to-date, we are at BRL 28.2 million, substantial increase there.

Well, this concludes my presentation. We can move on to the Q&A session. Thank you.

[Operator]

[Operator Instructions] Andre Sampaio from Santander asks the first question.

[Andre Sampaio, analyst]

I have a couple of questions, actually. Mine is -- my first question is about the auction. Can you please explain how these constructors play out in the auction. I know that your case is different. We've seen companies being very aggressive in bidding in the last auction. Are you following that closely? Has there been a change in industry? This commodity has gone through the operators' themselves?

And number two, the level of discount we've seen. I have the impression that companies are betting on the falling of the commodity prices even further. And can you elaborate on the partnership with Equatorial in the auction? Are you satisfied with it? Can you elaborate on it, please?

[José de Godoy Pereira, executive]

Thank you for your questions. Let me start from the last one. The partnership with Equatorial was very productive, very positive. They think along the same lines as we do. We may even strike other partnerships in the future. Whenever it makes sense and if it adds value to both parties, we can consider it no problem.

As to the [ API sisters ] and commodity prices, commodity prices are going down. I don't know how much more they will go down. Aluminum is $3,500 -- $3,600 a ton. It's now at $2,400. We just can't confirm whether they'll go further down. No one can predict it and placing your bets on that falling even further that is out of our scope.

If I were to place any bets, this has to do with the treasury department, with the banks. We consider effective prices based on the reality of today. We can't predict the future. There are pressures. There are drivers to bring that up or down, maybe international markets may bring them down and upward pressures are oil prices. The scenario remains uncertain to make any bets in that regard.

As to the [indiscernible], I think many companies have had problems, the pandemic hurt them substantially. We have a limited number of options of these companies that render services. We have fewer -- or they have fewer and fewer options. Several of these companies contacted the Ministry of Mines and Energy explaining the hard times they were going through. They were hurt dramatically. Costs may go up in this segment.

I've seen many of these companies canceling contracts. They're not being able to honor their contracts because they are losing a lot of money when compared to the size of those companies. This is a huge question mark. When we implement our projects, we had to replace more than 5 suppliers because they were not performing appropriately. This is going to hurt projects even further.

[Operator]

Carolina Carneiro from Credit Suisse asks the next question.

[Carolina Carneiro, analyst]

I have 2 questions. My first question is about the auction too. Many companies were considering several lots because there was that growth potential. What are you considering as of now? The renewable energy projects? Or is there anything else in M&As that you're still considering?

My second question is TCE and ELTE, you said that continue that negotiation, but can you elaborate on the status of these 2 projects, please?

[José de Godoy Pereira, executive]

In the case of TCE, the project is currently underway. We have the permit being issued with just one restriction. We have conducted the studies they required. We have already submitted them to the agency. We believe that in 60 days or 90 days at the most, these restrictions will be lifted. The impact is only in 15 towers. It's a minor impact, therefore.

As far as new projects, it will depend on what we find in the marketplace. We're concluding 3 renewable energy projects, 120 megawatts of installed capacity, and we'll be looking at opportunities. There's a lot of transmission projects in the pipeline. I don't know whether companies will be as aggressive as they once were.

Companies are not bidding very aggressively in terms of returns. Returns are 2 digits. The aggressiveness is in the premises of CapEx and other premises. But anyway, I believe that there are opportunities out there. We'll keep looking to see whether we can better allocate capital.

[Operator]

Henrique Peretti from JPMorgan is next.

[Henrique Peretti, analyst]

I have 2 questions. You've seen CapEx increase in wind and solar. How much more can that variable increase? What would make new projects feasible? My second question is about the international arbitrage of CME.

[José de Godoy Pereira, executive]

As to generation projects, we've seen higher costs, both for wind and solar projects. In the future, we believe hydraulic projects will be very complicated. It's almost impossible to get a permit for a hydraulic project with the environmental requirements we have today. Anyway, I believe that costs overall are higher. Those that are starting from scratch will have higher costs, and that will reflect on energy prices, ultimately. The market will adjust in that sense. I've heard some companies say, some analysts say too, but in order to make that project feasible, discarding hydraulic, focusing on renewables, solar and wind, prices should be above BRL 200.

It's very unlikely to practice lower prices, but that depends on the generation premises that each one adopts, especially in wind. A bank issued a report lately. Wind companies are generating below that number because initial predictions, we're very optimistic. So there is some frustration in the industry as a whole as far as generation as far as physical guarantees that were granted to each one of those.

In our case, we fall within the parameters. We have used to run our project because we were not that optimistic when compared to other players and the market itself. It's just a matter of time. The market will adjust itself. I think I was clear in my answer, right?

And the other question is about the arbitrage, right? It's at an early stage. The arbitrators have been appointed. Our demands will be presented to them and that from the federal government too. We've been trying to strike a deal with the indigenous community. There are 3 civil lawsuits. Public trying to cancel our permit, among other things. And what we've been trying to do is to strike a deal with that indigenous community. So that everyone will walk out of that negotiation positively. We've been scheduling several meetings. A couple of hearings have been conducted with everyone involved that lawsuit to cancel the permit, and we believe we'll be able to make a deal. And in a relatively short period of time, we'll be able to address the issue and move on.

[Henrique Peretti, analyst]

Let me try to understand that. What if you address the issues with the indigenous communities? The construction could only start after the arbitration process, right?

[José de Godoy Pereira, executive]

No. Our goal is to start construction immediately as soon as we get the permit. The arbitration discusses the calculation method for that rebalancing. Well, ANEEL granted that it cannot make environmental balance. It is very clear to everyone as to the right of that rebalancing. The methodology hasn't been agreed upon completely. We believe that's not the right methodology to come up with that economic and environmental balancing, not simply by distributing revenues in the remainder of the time. That's exactly what we are discussing in arbitration.

[Operator]

[Operator Instructions] [ Patterson Silva ] from Alpha asks the next question.

[Unknown Analyst]

With the conclusion of the investment cycle, is the company considering buybacks. Why is it that dividends are paid in 3 tranches. Can you elaborate on that, please?

[José de Godoy Pereira, executive]

Buyback, we were concluding this investment cycle. We still have a substantial amount to invest between this and next year. We are concluding several projects. They amount to almost BRL 2 billion worth of investments. So we haven't finished actually that cycle as the buyback is something we consider.

We keep on monitoring. But we have to be very careful as far as the buyback goes, and we had to take into account the liquidity of the shares in the marketplace. This is very important to us. We have been working closely to monitor those issues, and we have had success. Liquidity is up when compared to last year's, 21 million days; this year, 28 million days of liquidity. This is very important to us. This is going to guide any buyback policy we are to implement in the future.

As to the 3 tranche payments, we make the payments as we have cash availability from the subsidiaries. So these are matched. They have their general assemblies, they approve that distribution. Some require additional approval from project finance to distribute more than 25% or more than 25%. That takes some time. And so that in order to adjust that flow, we make those payments in 3 tranches.

[Operator]

This concludes the Q&A session. I will turn over to Mr. Godoy Pereira, for his final remarks.

[José de Godoy Pereira, executive]

Once again, thank you for attending. The company and the IR team are available. Don't hesitate to get in touch with us. We are at your service to clarify any questions you may have or listen to your suggestions, feel free to do so. Have a good day. Thank you.

[Operator]

This concludes Alupar's earnings call. Thank you for attending, and have a great day.

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