Alupar Investimento SA

BOVESPA:ALUP4

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the conference call of Alupar to announce the results of the fourth quarter of 2019. The audio and the slide deck of this conference call are being simultaneously transmitted on the Internet at the company's Investor Relations website, www.alupar.com.br/ri. The presentation will also be available for download. [Operator Instructions]

Forward-looking statements are subject to risks and uncertainties, which may lead such expectations not to materialize, that is, they will be different from expected. Forward-looking statements expressed the opinion on the date they are made, and the company is not obliged to update them.

Today, in the conference call, we have Mr. José Luiz de Godoy Pereira, CFO and IRO of Alupar; and Mr. Luiz Coimbra, Investor Relations manager.

Now I would like to turn the conference over to Mr. Godoy who's going to start the presentation. Please, Mr. José Luiz, you may start.

[José de Godoy Pereira, executive]

Thank you for your attendance. Good afternoon to everybody. We are going to present the company's results. And -- but first, we are going to go through the period highlights. And then Luiz will be talking about the numbers, and then we are going to open for Q&A.

So starting on the relevant events for the year of 2019 and subsequent events too, we have -- just had on January 20, another one of our projects started. So it's part of our package of 7 projects to start operations. This is EDTE. It started operations on January 20, 2020, and we started operations within the deadline of [ ANEEL ] and this has been an accomplishment. So we could do everything in 12 months. We had the confirmation of our ratings. Fitch conducted the annual review. They confirmed AAA corporate Brazilian domestic scale and BB international, and this was in the beginning of 2020 in their review. And this is a seal for management liquidity and our solidity as a company.

And here, we have prepared the presentation. If you have it on Page 7, this is something everybody asked. We talked about the 3 projects that have already started operations. And now we'll be talking about the other 6 projects that are still in progress. And so in Colombia -- 1 in Colombia, all the other ones in Brazil, 3 have started operations. We have 5 being constructed in Brazil and 1 being constructed in Colombia. So we have the status of civil works of ETB 64%. It's going to go live this year. ESTE also 64 -- or rather PE also 64% and going to operations this year. And then our project in Espírito Santo and Minas Gerais has 40% of completion. And then we have 2 projects, 1 in the state of São Paulo, and the other one in the state of Minas Gerais and Espirito Santo, ESTE and TSM, and they already have their licenses. One is the most recent project that we have won. It already has its environmental license. It's been issued and we are starting the execution. We will be starting civil works next month. And the other project, we're still waiting, because we need a substation, and this substation is kind of late in terms of its schedule. We don't see any advantage in advancing it. Rather to the opposite, it would be worse because we would advance revenue without the advance, and we are ready to start the construction, but we are waiting a little bit, so that we have a more concrete vision on when [indiscernible] substation is finally going to go live or to start operations.

And now I'm going to give the floor to Luiz. There is the issue of the dividends that we are publishing. We have approved then the Board recommendation to -- for the payout of dividends of BRL 0.69 per unit. Now it was just yesterday, we had our Board meeting, and we are going to send this to the shareholders' meeting, both -- and the extraordinary shareholders meeting for them to approve the numbers and to approve the payout of dividends, and we'll be paying it at the latest [ stock ] on June 15, 2020. So these are the most relevant points. These are the highlights. And I'm going to give the floor to Luiz to talk more about the numbers, and then we open for questions and answers.

[Luiz Coimbra, executive]

Good afternoon, everyone, and thank you very much for attending our conference call. I'm going to start my presentation on Slide #13 when we show the variation in net revenue in IFRS also, regulation.

So corporate net revenues totaled BRL 1.369 billion, in contrast, BRL 403 million we had last year, with 2 factors. Number one, the BRL 53 million increase in revenue from generation, especially because of our seasonalization strategy and also because we have more spot prices that was higher this year than we had in the fourth quarter of 2018. And the main impact was on transmission. Revenues that had an increase, especially infrastructure revenue, and this is a result of investments we made in these projects.

Now looking at the chart below, regulatory numbers, we totaled BRL 462 million this quarter in contrast with BRL 389 million in Q4 '18. Here, in addition to the same variation of BRL 53 million in generation, we also had BRL 25 million revenue from the energy transmission industry. And so part of it was a result of the start of commercial operations of ETAP and ETC. We had an increase of BRL 9.9 million since the beginning of consolidation on TME and other transmission companies. And in contrast, we had a reduction of BRL 11 million in the ERTE and ENTE transmitters, due to the decrease of 50% in the annual predicted revenue.

And now moving to Slide #14. We demonstrate the variations in EBITDA in IFRS. So the EBITDA here in Q4 '19 is BRL 664 million in contrast with BRL 169 million in Q4 '18. And the main impact is increase in revenue. As I have just told you, BRL 945 million. We had an increase of BRL 500 million in the infrastructure costs, the investments that we made in projects. And we also had a BRL 51.8 million reduction in other revenues and other expenses, especially in other revenues, the Alupar, BRL 39.8 million, and also Apaete Holding of BRL 8.7 million. And this is a result of the acquisition of the transmission companies.

On Slide #15, you can see the variation in regulatory EBITDA. So it totaled BRL 327.9 million in Q4 '19, 20 -- 23.5 -- BRL 25.7 million greater than we had in Q4 '18. The increase in revenue was BRL 72.9 million, as I have just explained. And another number, which we must explain is equity pickup. We had a BRL 6 million reduction in this number as a result of the beginning of the consolidation of transmission companies, TME and ETB.

On the next slide, #16, you can see the variations, both in regulatory and IFRS. So the corporate totaled BRL 163.3 million (sic) [ BRL 166.3 million ] in contrast with BRL 30 million in Q4 '18. So we had BRL 495.4 million increase in EBITDA that I have just explained to you. We also had a significant growth in income tax and social contribution, BRL 205 million, especially in deferred taxes. We had an increase of BRL 195 million in deferred income tax and social contribution as a result of investments we're making in projects. So as we make investments in projects, we need to book revenue for them, so that increase. We had an increase of BRL 146 million also in minority interest also because of the increase in the result of transmission companies under the implementation and also because of the consolidations of TME transmission companies on this quarter.

On the chart below, you can see the variation in regulatory information totaling BRL 86 million in this quarter in contrast to BRL 40 million in Q4 '18. So here there was a BRL 62 million increase in EBITDA. We had a BRL 24 million increase in tax. The BRL 7.3 million, because ETAP transmission company started operations. And we also had another BRL 10 million related to EATE transmission company because of higher tax profit this quarter. We had a drop of BRL 7.1 million in ERTE and ENTE.

Now moving to Slide 17. You can see the indebtedness of our holding company. So we totaled in debt -- net debt (sic) [ gross debt ] of BRL 964 million and in Q4 '18, we had BRL 180 million (sic) [ BRL 680 million ]. Cash totaled BRL 1 billion this quarter in contrast with BRL 700 million in that we had in Q4 '18. So to explain both variation in cash and gross debt, we had the 7th issuance of debentures, BRL 648 million at the cost of CDI, plus BRL 140 million. And in contrast, we had the early optional redemption of debenture BRL 415 million as its total balance, and it has a higher cost of IPCA, plus 7.8%. The short-term debt here below, you can see the debt profile totaled 17% this quarter. This increase of (sic) [ from ] 4% that we had in Q4 '18 to the 17% in Q4 '19 in terms of short-term debt in regards to the maturity of the first installment of our debentures we're going to pay in April this year.

Now moving to the next slide. You can see our consolidated debt. We closed Q4 '19 with a debt of BRL 8.5 billion, with almost BRL 4 billion cash in Q4 '19 totaling a net debt of BRL 4.519 billion, no changes here in index. If we see the breakdown of the debt, most of our debt is indexed by IPCA, almost 57%. And all the projects that we are implementing, we raised funds through debentures, and this is why this is the most significant part of our debt, followed by CDI 19%. And then we had 13% in TJLP and 9.3% in foreign currency. So this refers to debt that we have in projects outside the country. So we still have our policy of not being exposed to FX risk.

And then on Slide #20, you can see our -- 19, rather, our debt amortization schedule, almost BRL 4 billion after 2025. So we are working on raising IPCA in Colombia, and we think we will finish that over the next few months. And this would also go into the long-term schedule. I'm going to skip what José Luiz said. In 20, we are talking about allocation of profits. He's already mentioned that.

Now moving to Slide #21, you can see the performance of our bonds as compared to other indexes. So the whole industry, we've been suffering over -- in the past few days. We've been performing well until the crisis strike by coronavirus and the oil war. So yesterday, we closed with 9.8% down, a variation contrast to -- with an IBOV of 23.35 (sic) [ 26.35% ] and IEE down by 10%. So here, we can see our average liquidity in Q4 '19 of BRL 20.2 billion. And this is significant to us in our track.

And in this manner, I end my presentation. And now we are open for questions-and-answers.

[Operator]

[Operator Instructions] Our first question, from Pedro Manfredini from Goldman Sachs.

[Pedro Manfredini, analyst]

So we had the Investor Day and a whole discussion of changing and having a swap, as you've mentioned, IPCA plus CDI plus 1.4. This process must be going on. You're still doing it. So I would like to hear from you, and I know this is very recent, have you been working with this movement in such a difficult market? And then you said something about not doing it at some point in time. What is the process?

[Unknown Executive]

Well, we'd been going over this exchange process, and we did late last year and we anticipated it. And we paid the debt late last year. It was a more expensive debt. And then we've changed it for a cheaper debt for the next 2 years. So this is not the right time. We are not a the local thing. So all projects that we had, we have already issued for all of them. We already have the debt. The debt has been issued. So we -- the money is in cash and in the case of the holding, we have paid and the money is in our cash. I think that we are okay and confident in terms of that. And so the market is calmer and we are going then to work with the debt, trying -- so in terms of this fear, we don't know how long this is going to go. You're going to put a finalization of the process on hold. We are going to hold the projects.

[Pedro Manfredini, analyst]

I would just like to hear your initial thoughts about the market as it is. We will probably have 2 auctions this year. Do you think this is going to have an impact on investment strategies? Are people going to review their strategy?

[Unknown Executive]

Well, if we are going to have the auction next month, definitely, but they try to tell what's going to happen more towards the end of the year. What we've been seeing is that the impact of coronavirus, which is the most pressing thing in the market today, is a seasonal effect. It will last for 4 months or something, according to some analysis. And that it's going like a seasonal flu. And we need to assess that and to see what it is going to be like at the end of the cycle. It seems that international interest rate is going to go down. And the local is still very much unknown. We didn't see the international scenario. It's still too early for us to make any forecast. And it might have some impact, but we don't know for sure. In 6 months' time, I think that the impact could be mitigated.

[Pedro Manfredini, analyst]

If you allow me to ask another question. I started the call you had already started. I would like to hear your -- this year's strategy for allocation and purchase of energy. Are you going to do anything different this year, considering that we started this year with very intense rains? Is there anything you would like to focus attention on?

[Unknown Executive]

So we have an allocation strategy of physical guarantees, trying to minimize GFRS impact. So our impact in our -- for this year will be lower than last year. So there are few companies that get the impact of IGSF, considering allocation and -- so where GSF can impact is insurance cost that we have -- and where we don't have any insurance. So this is within our forecast, according to our plans in terms of our allocation of physical guarantees. There's nothing very different from that.

[Operator]

Our next question comes from Guilherme Lima from Santander.

[Guilherme Lima, analyst]

Could you tell us about the ELTE, and they have postponed the decision to review the economic capability of the project. So how are you addressing or managing the results of these discussions?

[Unknown Executive]

The ELTE, there are 2 projects, transmission lines and substations, 2 of each. So there was an auction in '14, so we won in 2014 auction and we've been managing this project. However, one of the lines, in the part that was environmental, nonfeasibility because of interference in Santos Air Base. There is a restriction of the aeronautics at the airport. We wanted to bring the line to one side of the command of air traffic. So we couldn't have the lines in that and if we had to displace our towers to the other side, it would be an environmental reserve of the Atlantic Forest. And then it became impossible and the license was denied by the environmental authority and CETESB. We were denied the environmental license. And Last year, we sent to ANEEL a request. We said, well, we don't know because it seems that there is a huge impact in the region on the coast, especially on the coast close to Santos and they have a bottleneck in terms of their system, it's really pressing. There's an urgent, a pressing need for this line. So we submitted a request to ANEEL. They accepted now our request considering that one of the lines was considered dead in terms of the environmental license. We didn't get the environmental license. So the CETESB refused or denied our license considering the environmental issues.

But the other one is, we already have a preliminary license for the other one. And so there is an Indian reserve there on coast close to Santos. It's not a reserve. It's a request for an Indian reserve by some people that are self-proclaiming they're Indian, but it's controversial. So we want to review the conflict. So we would build a line in São Vicente, in a substation in São Vicente and we would cancel the other line, taking out from the top. And then we would settle an amount that was calculated by ANEEL and was approved by all, this ANEEL, and was submitted to the Board of Directors. The Board of Directors, and it's about 1 year that it has been with the Board of Directors. And then now recently, the directors have pronounced themselves. And what happened recently is that the rule for the airport in Santos for the air traffic rules have changed and with this change, and maybe we could get a license for the other part of the line.

So what they said is, look, because we were going to terminate part of the contract for which we have the environmental license reviewed, only the feasible or the licensed, we will keep only the one. So let's wait for 90 days to see if the air traffic authority and the environmental authorities give us a green light for us to move forward. We're waiting for the 90 days. We didn't have any contact about the solution. They talk directly to them without involving the company. So now we are waiting. And so we had filed an appeal for this petition because we think that this change for the air base, it requires a full environmental study, which is going to delay the other part that we can start over the next 90 days, and we could start as soon as we get a license. And in our opinion, this would be worse because then we might generate bottleneck on the coast of the state of São Paulo. And I don't know how long they're going to take, both the CETESB and the Atlantic Forest, environmental reserve and the air base in Santos which is of the air traffic command that is part of the discussion.

So let's move forward with the slide, because then, while -- because we want to do the 2 lines, we will not build the one which is essential for the system and maybe as of last year, the system will be overloaded and might have bottlenecks in the coast of the state of São Paulo because this project won't have been executed.

[Operator]

[Operator Instructions] Since there are no questions, the question-and-answer session has ended. We would like to give the floor to Mr. José Luiz for his closing remarks.

[José de Godoy Pereira, executive]

So thank you all very much for your participation. It's an honor to have you here, especially when the market is so tense and nervous. And thank you very much. And we are available, everyone, in anything that might be necessary. Thank you all very much, and see you next time.

[Operator]

The conference call of Alupar has now ended. We thank you all for attendance, and have a good afternoon.

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