Alupar Investimento SA

BOVESPA:ALUP4

Earnings Call Analysis

Steady Growth and Significant Dividends

The company's quarterly revenue grew by 5.3% year-over-year, to BRL 797.3 million. This was mainly due to a BRL 44.3 million increase in energy supply costs and a BRL 22 million increase from the Peruvian asset influenced by high spot market prices. EBITDA rose by the same percentage reaching BRL 662.4 million driven by better collections. Net income climbed to BRL 163.4 million, marking an 11.6% increase fueled by EBITDA and financial gains, despite higher financial expenses due to inflation. They held a net negative debt of BRL 56.2 million and announced dividend payouts increased by 37% from last year and over 100% from 2021, aligning with its dividend policy.

Expanding Into New Territories and Returning to Familiar Ground

Alupar's Q3 2023 earnings call began with notable developments such as their first transmission project win in Peru, adding to their generation project there. This project, featuring two substations and nine kilometers of transmission lines, is slated to begin the following year, post all necessary approvals, boasting a 32-month construction and 30-year operation period. Additionally, they've marked a return to the Chilean market, planning to develop three substations and 16 kilometers of transmission lines, with a perennial concession period after a 48-month construction term.

Ramping Up Solar Energy and Milestones in Project Advancements

The quarter also witnessed the ramping up of the Santa Régia solar energy unit, a collaboration with WEG, promising a physical guarantee of 21.7 megawatts average and 70% of its energy tied up in long-term contracts. Several ongoing projects like the TCE in Colombia and the ELTE and UFV Pitombeira in Brazil are approaching operational status, with a majority of construction phases nearing completion. Alupar is also partnering with Eletrobrás on the Manaus-Boa Vista project, a particularly challenging venture due to its route through indigenous lands, where they've already made significant infrastructure contributions.

Financial Performance and Revenue Fluctuations

Financially, the company totaled BRL 797.3 million in revenue, up by 5.3%, though transmission revenue dropped by BRL 41.8 million due largely to IGP-M deflation. Generation revenue increased by BRL 44.3 million, boosted by the high spot market energy prices in their Peruvian asset. Consequently, EBITDA followed this positive trend with a 5.3% increase to BRL 455.1 million, while net income saw an 11.6% rise to BRL 163.4 million. However, financial expenses were affected negatively by higher IPCA indexation, impacting net results despite a healthy cash position and negative net debt at the holding level.

Dividend Policy and Payout Increases

Alupar continues to maintain strong capital returns for its shareholders, in line with its dividend policy. The Board of Directors recommended interim dividends of BRL 36.6 million, corresponding to BRL 0.12 per unit, marking a payout increase of 37% compared to the previous year and a staggering growth of over 100% relative to 2021. It should be noted that dividend payouts are carefully balanced with the company's covenant compliance to ensure financial stability.

Future Growth Prospects

Looking ahead, Alupar is keeping a close eye on future auction opportunities both domestically and internationally. In terms of transmission auctions in Brazil for the upcoming periods, the company remains open to viable projects, exercising prudence as it completes its studies and prepares for potential participation.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Alupar's conference call to discuss the results relative to Q3 2023. The audio stream and the respective slides of this presentation are being broadcast simultaneously over the Internet at the company's IR website, ri.alupar.com.br. The slide deck is also available for download. [Operator Instructions]

These forward-looking statements are subject to risks and uncertainties, which may cause these forward statements not to be fulfilled or differ materially from those expected here. These forward-looking statements express an opinion only as of the date they are made. And the company undertakes no obligation to update them.

Joining us today are Mr. José Luiz de Godoy Pereira, CFO and IRO; Mr. Luiz Coimbra, IR Superintendent of Alupar. And now I'd like to give the floor over to Mr José Luiz de Godoy, who will begin the presentation. Please, Mr. de Godoy, you may proceed.

[José de Godoy Pereira, executive]

Good afternoon, everyone. Thank you for participating in our earnings call for Alupar Q3 2023. As we usually do, I'm going to start the presentation by highlighting the main accomplishments of the quarter and then I'll turn it over to Mr. Coimbra, our IRO, who will then go over the numbers and figures. And then at the end, we'll be available for questions and answers that you may have.

So the first highlight for the quarter was, on Slide 3, the winning RAP auction in Peru, the first transmission project that we have in Peru. We already have a generation project in Peru. And now we are adding a transmission project to the mix. It's made up of 2 substations and 9 kilometers of transmission lines of 220 kV. This project will start next year. Of course, we need to obtain all the license and permits. With a 32-month construction period and another 30 years of operation and maintenance, it's a long-term project, a very important landmark for the company in the quarter.

We also had a victory, if you will, in Chile. As you will remember, the company already operated in Chile around transmission systems between 2005 and 2016. So we are now returning to the Chilean market. So we have won an auction to execute 3 substations, 2 of which of 110 kV and 1 220 kV and 16 kilometers of transmission lines. This project is also expected to be explored next year. The construction term is 48 months and the concession term is, as a rule as you know, it's perpetual.

Another important highlight of the quarter was the ramp-up of our solar energy called Santa Régia. It's located at the Rio Grande do Norte with a physical guarantee of 21.7 megawatt average. This unit is in partnership with WEG, which we have already announced the partnership. And we have 70% of assured energy, which is already sold for long term -- or around long-term contracts.

Also, we had the dividend payout relative to Q2. The payout was BRL 0.04 per share, adding up to BRL 0.12 per unit. And shareholders were entitled, the entitled were the ones who were in the bases in August of 2023.

Now speaking a bit of the projects which are now ongoing, we are now in the construction phase. We have a project in Colombia, the TCE project in Colombia. It has a physical advance of 93%, as you can see on the slide, Slide #6. Environmental permits or licenses, as I've mentioned before, that license is granted on a tower-by-tower basis. And we're now working to obtain the permit for the last 17 towers as we reach the city of Bogota.

We had a relevant progress, we experienced relevant progress just now. What was holding us back a bit around those 17 towers was an authorization that we needed because part of those towers are located in an environmental reserve area. So we needed an authorization to wait that demand. This was granted recently. So we now expect to conclude this project in the first half of 2024.

We also have the ELTE product in the southern shore. That's an SPE that we have two projects, one in the southern shore of Sao Paulo and one in the northern shore of the city of Sao Paulo, substation Manoel da Nóbrega, as you can see on the slide, again Slide #6, and another line, which is coupled to that substation. Our physical advance is up 98%.

And also, the UFV Pitombeira, which is a hybrid project, solar and electric projects linked to UFV. This project is a 67 megawatts of installed capacity with 15 megawatts of physical guarantee or assured energy. We are now at 77% in terms of construction. So those three projects on screen, we believe that by the end of the year, part of them will be operational. And early next year, the TCE project, in particular, should be up and running.

We also have a project for Manaus-Boa Vista. This project is a partnership we have with Eletrobrás. It is an iconic project in the industry because of this long negotiation which was undertaken in different agreements. Because it goes through an indigenous plot of land. And as I mentioned before, in September 2022, we had an agreement with government, the public prosecutor's office, the environmental agency at the federal level and different indigenous associations to get that project going.

And we had a preliminary [indiscernible] at the indigenous land. And now last October, we finally started surveying the topography in the indigenous territory. That's an important landmark for this project, which will unlock this connection we all have been waiting for so many years, a bottleneck for the industry as a whole.

For the Manaus-Boa Vista line, we have invested for indigenous community, BRL 43 million. And we have highlighted some of the initiatives that we have put in place, the most relevant. We built the radio infrastructure for them with the communication program, which is dedicated, called Kinja, interconnecting all the Indian indigenous villages via radio.

We built an environmental management center, which was good for the community. It will be used for the construction site. But then it will remain as a legacy community center for the local population. And we also built a seedling nursery and warehouse or wooden warehouse for the community to use actually.

And we, of course, offset the deforestation approach. Generally, the deforestation, as you know, it's transmission line, the towers are all very, very high. The lines are above the canopy of the trees. But at base of the towers, we have some level of deforestation, very low, as I said. But we've built the seedling nursery to offset that deforestation, albeit small.

I'd like to turn over to Luiz Coimbra and then we'll start our Q&A session. Over to you. Thank you.

[Luiz Coimbra, executive]

Good afternoon, everyone. Thank you for participating in our earnings call for Q3 2023 of Alupar. I'll start on Slide #11. I'll go over the numbers in IFRS and then I'll talk about the regulatory numbers.

So starting on Slide 11, financial highlights. We totaled -- and the variations in the numbers of '23 are driven by, first, a drop of BRL 41.8 million revenue in transmission, which can be explained by the drop in revenue by monetary correction by the contractor because of the decrease in IGP-M. IGP-M in this quarter saw a deflation of 2.77% when compared to an inflation rate of 0.1% in Q3 2022.

The second major impact was an increase of BRL 44.3 million revenue for generation, which was impacted mainly by an increase of revenue of Peruvian asset as because of the high price of spot market energy, which averaged BRL 826 in this quarter vis-a-vis BRL 218, which we had in the third quarter of last year.

Moving on to EBITDA. We totaled BRL 455.1 million in this quarter. The main drivers were first is reduction in revenue that I just explained in generation and transmission area saw an increase of BRL 25.7 million in the infrastructure cost basically because of a larger investment in ELTE coming from the implementation phase of that asset.

Looking at income. This case, we totaled BRL 100 million. And the main impacts were, number one, a drop of BRL 32.1 million in EBITDA, which I just mentioned, and an increase of BRL 31.5 million in the financial number. That number was negatively impacted by the growth in the financial expenses and debt, which were pegged to the IPCA, which is our main index impact. And IPCA saw an inflation in the spirit of 0.61% vis-a-vis a deflation of 1.32% in the same period of the last year.

Also, important to highlight, the reduction of BRL 67.4 million in minority shareholder shares. This was basically because of a drop of BRL 70.3 million in the segment of transmission because of a reduction in transmission companies, which were impacted by an increase in financial expenses.

Moving on to the next slide. We see the regulatory numbers, starting with revenues. We totaled in the quarter BRL 797.3 million, a growth of 5.3% when compared to the same quarter of last year. And the main driver here was the cost deterioration of BRL 44.3 million in the energy supply, an increase of BRL 22 million in our Peru asset because of the high price in the spot market, as I mentioned before when I talked about the IFRS revenue.

As for EBITDA, BRL 662.4 million, as you can see on Slide #12, a growth of 5.3% when compared to the same period of 2022. And it was driven mainly by the growth of 41.6 million in collections.

Moving on to net profit or net income. BRL 163.4 million in the quarter, a growth of 11.6% when compared to Q3 2022. The main drivers were, number one, an increase of BRL 33.6 million in EBITDA, which I just mentioned. We also had an increase of BRL 31.6 million in the financial results, which was negatively impacted by a growth in financial expenses coming from IPCA impact debt. Because in this quarter, we saw an inflation of 0.61%, as I mentioned, whereas in the second quarter of '22, we saw a deflation of 1.32%.

Another important impact was that reduction of BRL 25.7 million relative to the minority interest, which was mainly driven by the drop of BRL 28.4 million in the segment of transmission, which was then impacted by the increase in financial expenses coming from IPCA-pegged debt.

Moving on to the next slide, the holding debt level. The controlling company saw a gross debt of BRL 693 million, a cash position of BRL 746.8 million, totaling a net debt negative at BRL 56.2 million, as you can see on Slide 13. The holding debt consists of one single debt, the seventh issuance of debenture, 100% indexed in CDI maturing in 2024 and 2025.

Moving on to the next slide. We see our consolidated indebtedness. So our gross debt totaled BRL 11.578 billion. We closed the quarter with a cash position of BRL 2.716 billion, a total net debt of BRL 8.862 billion on Slide 14. As for our consolidated debt breakdown, no major variations there. Most of our debt, 48% is an IPCA index, followed by CPI, 32%. The currency basket relative to Colombia and Peru, they closed the quarter accounting for about 15% of our total debt. And that's the breakdown.

Moving on to the next slide. We see our profits allocation. So as per our dividend policy approved late in 2022, the Board of Directors of the company recommended a payout of interim dividends to the tune of BRL 36.6 million, which corresponds to BRL 0.12 per unit. The payout will happen up to 60 days of the approval, which was yesterday, November 9. And entitled to those dividends are the shareholders which were recorded in the company's base at the end of November 16 and start to be negotiated as of November 17 ex dividends.

On the next slide, we have the total dividend distribution paid out this year. We have already paid out BRL 495 million throughout the year, considering payout of results for 2022. And the two tranches for the interim dividend that accounts for an increase of 37% when compared to BRL 360 million, which were paid out last year, and an increase of over 100% when compared to the dividends paid out in 2021.

Moving on to the last slide. We saw the company's performance in the capital markets. Alupar saw an appreciation year-to-date of 15.11%. Electric energy index increased 8.3% and IBOVESPA at 8.47%. Another important point we would like to highlight, the increase in the financial volume. So when we look at the year-to-date 9 months, last year, we saw a number of BRL 23.5 million per day. This year, that average went up 15.9%, totaling BRL 27.3 million per day.

With that, I close my presentation. And we can now start our Q&A session. Thank you. Over back to the operator.

[Operator]

[Operator Instructions] Our first question comes from webcast, Victor Cunha from Itaú.

[Victor Cunha, analyst]

In this quarter, we saw a strong solid [indiscernible] selling a relevant amount of energy at prices of BRL 800 per megawatt primarily caused by the El Niño. Can we weigh something similar for Q4 2023, given a likely deleveraging of the company with the ramp-up of some new assets? Can we expect payouts above [ 34% ] in 2024?

[José de Godoy Pereira, executive]

As for our Peru asset, Virgin, that's exactly it. We had an important impact coming from the El Niño in the quarter. Last year, the price was BRL 218. And this year, it was above BRL 800, the average price for the quarter. Now in the fourth quarter, that impact has decreased somewhat. It started raining again.

And there was a certain reduction in the load because several mining plants took the opportunity to have some downtime. And this impact will reduce in the fourth quarter. The impact of the El Niño will be slightly lower. That doesn't mean that it cannot [indiscernible] again later, right?

As for the deleveraging, what defines us the -- defines dividend payout is attention to our covenants, of course, we monitor them very closely, and our dividend payout policy. And we continue to follow that. If we have the covenants, we'll increase the payout and always within policy. If they happen, higher dividend, if we have room for that within our covenants as we move forward.

[Operator]

Next question from webcast, from Victor Cunha from Itaú.

[Victor Cunha, analyst]

What's the company's outlook is participating in the next transmission auctions in Brazil both for 02/2023 and 01/2024?

[José de Godoy Pereira, executive]

We are looking closely at those opportunities as usually in the presence of the auction opportunities. So whatever is viable will attract our attention. So let wait. I cannot say that now because our studies are not complete as it concerns those coming auctions. But we are keeping a close eye to both auctions.

[Operator]

The next question from [indiscernible] from Santander.

[Unknown Analyst]

I'd like to know if it makes sense for us to expect higher dividend payout in the next quarter, over 50%.

[José de Godoy Pereira, executive]

Well, as I said, we'll keep to the policy. We'll announce the regulatory numbers, of course. And we'll follow the policy. This year was a transition year. It was the first year where we implemented our policy. So we had some adjustments to make to study the previous period. But the tendency for us to adjust and try to find room to have constant dividend payouts going forward.

[Operator]

Next question from webcast, from [ Bruno ].

[Unknown Analyst]

Are the studies for the company to go to the New Market, Novo Mercado?

[José de Godoy Pereira, executive]

Right now, that's not something that we are considering, no. We are at the Level 2 of governance known as boosted Level 2 as people call it jokingly. But we do not see any major gains or relevant gains in terms of governance to move to the New Market or Novo Mercado, right? No major gain.

If you look at our bylaws, you'll see that within our governance rules, there are very strict governance rules, in some cases, even more strict than in the Novo Mercado. So I do not see major gains, right, in moving to Novo Mercado. Speaking globally, of course, we need to assess all the advantages and all the bylaw, statutory issues and policies. And we set a very good governance level as is. That's basically the idea is to stay where we are.

[Operator]

Next question from webcast, [ Bernardo ] from [indiscernible].

[Unknown Analyst]

What's the opportunity level met for auctions abroad in the coming years? Any estimate for [indiscernible] and other auction investments?

[José de Godoy Pereira, executive]

It's difficult to say. Each country has different regulations. But what I can tell you is that we have been looking for those opportunities. And we expect to have about 10% of our revenues coming from abroad.

For us, that's quite relevant because the bulk of that, 90% of what comes from abroad implies different currencies. They are pegged to the U.S. dollar. So of course, that brings a lot more consistency, if you will, to our figures and our cash flows. But we always look closely at those opportunities, no doubt. And we'll go for them when we think it makes sense.

[Operator]

[Operator Instructions] This concludes the Q&A session. I'll now turn the floor over to Mr. de Godoy for his final remarks. You may proceed, sir.

[José de Godoy Pereira, executive]

All right. Thank you all very much for your trust, your attention. And we remain available for any other comments or questions that you'll have. Our team is available to serve you, investors, shareholders. If you're interested in going deeper, just let us know. Thank you. Have a nice day, everyone.

[Operator]

Alupar's teleconference is now over. Thank you all for participating, and have a nice day, everyone.

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