Engie Brasil Energia SA
BOVESPA:EGIE3
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Engie Brasil Energia SA
Earnings Call Analysis
Q2-2024 Analysis
Engie Brasil Energia SA
In the second quarter of 2024, ENGIE Brasil continued to display strong financial performance. The company's net operating revenue rose by 7.4%, reaching BRL 2.8 billion from BRL 2.6 billion, primarily driven by the Santo Agostinho indemnity. Net income saw a significant increase of 18.8%, from BRL 733 million in Q2 '23 to BRL 871 million in Q2 '24. The adjusted net income also showed a positive change of 6.1%.
ENGIE's adjusted EBITDA increased by 8.6%, rising from BRL 1.710 billion in Q2 '23 to BRL 1.96 billion in Q2 '24. The company approved an interim dividend distribution amounting to BRL 932.8 million, representing a 55% payout of distributable net income, which translates to a 2.7% yield. The shares will be trading ex-dividend starting April '24.
Return on Equity (ROE) and Return on Invested Capital (ROIC) presented a slight decrease but remained robust. ROE stood at 28%, down from over 30%, while ROIC was at 18.3%, down from 20.3%. Despite these reductions, these figures indicate strong returns for shareholders.
The company's debt saw a minor increase, with the debt index standing at 2.4x by the end of Q2 '24, down from 3.1x at the end of Q2 '23. ENGIE plans a CapEx of BRL 9.8 billion for the year, with BRL 5.5 billion already invested, focusing on acquisitions and organic growth projects such as the completion of Santo Agostinho and progress on projects at Assu Sol.
ENGIE achieved considerable milestones with its ongoing projects. The Assurua Wind Complex has 15 units authorized for commercial operations and another 36 units in test mode, representing approximately 20-25% of the project nearing full commercial operation. The Gaviao Real Transmission System is fully energized, and Santo Agostinho is almost fully operational with one unit still under testing. On the photovoltaic front, Assu Sol's progress doubled from Q1, reaching 38% completion.
ENGIE's ESG performance was recognized as the company topped the energy category in Exame's Best of ESG ranking. Additionally, the company received the Great Place to Work Brazil certification, affirming its commitment to a positive and inclusive work environment. The safety initiatives led to a zero frequency rate of incidents in the second quarter of '24.
Regarding the energy market, ENGIE sees the potential in the data center sector due to Brazil's competitive energy pricing and availability. However, the company is taking a cautious approach due to market volatility and regulatory uncertainties. ENGIE's strategy includes maintaining high levels of contracted energy in the medium term and being prepared to react to market opportunities, despite current market challenges.
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Good morning, and welcome to the ENGIE Brasil's Second Quarter 2024 Earnings Results Video Conference. I'm Adriana Wagner, Investor Relations Analyst for ENGIE Brasil Energia, and I'd like to make a few announcements before we start. [Operator Instructions] Later, when we open the Q&A session, participants will be able to use the Zoom Q&A tool to make questions. Mind that this video conference is being recorded. We make available in our website, www.engie.com.br/investors, the results of the presentation and the earnings release, quarterly financial statements and other documents filed at [ CMG ]. We analyze there the financial statements, ESG KPIs, progress of -- implementation of new projects and others.
Before proceeding, we would like to clarify that all statements that may be made during this video conference regarding the business outlook out of the company should be treated as forecast and depend on the country's macroeconomic conditions, performance and regulation of the electric sector, in addition to other variables and are subject to changes. Remind that -- we remind that journalists who wish to make questions may send them by e-mail to the company's press office.
To present the performance of the second quarter of 2024, we have Mr. Eduardo Takamori, CFO and IRO; and Rafael Bosio, Investor Relations Manager.
I'll hand the floor over to Mr. Takamori to begin his presentation.
Good morning, everyone.
I'm very happy to once again be with you to present the results for the second quarter of our company. Let's start with the highlights. Great news in this quarter. We are happy to inform that we have done -- made great stride in this Assurua Wind Complex. Right now, we have 15 units authorized for commercial operations. So we are at full steam there. We have additional 36 units on test mode. This is about 20% to 25% of the project at a great material level being tested or ready for commercial operation. This is great for our portfolio, considering our contracting rate.
The second highlight is the information that we were able to fully energize the Gaviao Real Transmission System. This is a smaller construction but one that makes a lot of sense that has quite a great synergy with our portfolio.
The third highlight is that we are missing one unit to start commercial operations fully at Santo Agostinho. We have 1 unit being tested currently. Remember that this project was quite challenging given the incidents we had in late '23. The issues have been addressed, and we have been able to start operating the units, considering the quality that we adhere to.
In the following slide, you also have another element regarding Santo Agostinho. Because of the incidents we had last year, we had to revisit planning to ensure safety of facilities and people. So we had to work on the schedule there. And this impact us financially that was finally acknowledged by the supplier, and we were able to conclude the construction. So in the last quarter, we booked BRL 262 million for indemnity due to the delay. So this helps neutralize the results there.
The second highlight here is that ENGIE won the Energy category and was a highlight at Exame's Best of ESG ranking. We're very proud of that. We also got the Great Place to Work Brazil certification. This is an important certification because it validates our commitment to create a positive and inclusive work environment. We have a number of inclusion and affirmation policies, and our team can see the efforts done by management. And this has been translated into all areas of ENGIE. You know that this survey is answered by our own employees and includes everyone in the company.
And finally, I'm sure you want to know, we have approved the distribution of interim dividends to the amount of -- of BRL 932.8 million. Remember that this semester, we exclude the -- this investment in TAG. The shares will be trading ex dividend from April '24, and the date is to be decided by the Executive Board shortly.
Highlights, we have the qualitative highlights here that were translated into the following amounts. The adjusted EBITDA on the left side here, you have the darker bars there. So the adjusted EBITDA went from BRL 1.710 billion in Q2 '23, increasing 8.6% going to BRL 1.96 billion in Q2 '24. The 8.6% increase was justified by the indemnity of Santo Agostinho.
And we also had 2 important events here. First, the hydro performance was much higher in terms of MRE and this favored us quite a lot when it comes to CCEE. So we have BRL 93 million debt. That was virtually neutralized by the change in portfolio when we disinvested partially in TAG and with the exit of Pampa Sul. But the result was fantastic in Q2. The electric sector is very challenging given the excess of incentives. Now in the last 6 months, we had a 2.6% negative variation compared to last year.
When it comes to net income on the right here, we have a reflux of the adjusted EBITDA transferred to net income with BRL 154 million impact on EBITDA. When you have more EBITDA, you pay more income tax. So we paid BRL 46 million more as compared to the second quarter of last year. And the financial result was superior. The larger EBITDA, we have more inflation. We had inflation that increased as compared to the last year's second half. So we have about 6% increase. Accrued in a year, we have less than 2.4% change, a negative change and which is very consistent to what happened last year.
Last year, we have the ESG KPIs. As of now, we no longer show Scopes 1 and 2. We are a fully renewable company now. So it doesn't make a lot of sense for us to present Scope 2 and Scope 1 as the numbers are not that relevant anymore. But here, we have emissions intensity in the lower left. This is Scope 3. And Scope 3 includes the entire supply chain. So every time you have the implementation process, you also have emissions from the supply chain that are reflected here on this slide. But the levels are very much in control and much lower than our internal goals.
And the middle here, we have a special highlight. We had a frequency rate of 0 in the second quarter of '24. And this directly reflects the actions done by management and employees to consider safety as a pillar and as part of our license to operate. So all of the results and the performance we may have is not justified if our employees don't return calm, healthy and sound. And this is why we have a policy to acknowledge good, safe behavior and we move away from policies that are based on punishment. We use gamification and proactive actions to try to get the frequency rate to 0 when it comes to health and safety.
In the upper right, we see the percentage of female workforce and leadership positions. So we had an increase in the last 12 months. We had 28% of the female workforce and leadership workforce. And from 28%, we went to 31% and 30%, which shows we are on the right track towards equity.
In the lower part of this slide, you talk about investment in innovation. In the last 6 months, we see that the results are very much in line in investments in innovations. We had some changes because of the exit of Pampa Sul. As for social responsibility investments, we had an impact on the values of the last 6 months. And as for engaged people, we had a significant increase, and this is great news. These are the people going through our community relations program.
I will hand it over to Rafael, and who will be talking about energy sales.
Thank you, Taka.
This is a traditional slide for us for energy commercial strategy. We have changed the right side of the graph. We're showing not only the uncontracted energy at the end of the year, but also variation quarter-on-quarter. You see that we still have a high contracting in the medium term here, and this is good for our portfolio. You see the variation between Q1 and Q2. In Q2, we reduced a bit the sales. And it's important to highlight that not selling is acting. So sometimes it's part of the strategy. You see that we greatly speed up between '23 Q4 and '24 Q1 because we saw good prices for contracting, but this changed in the first, second month of Q2, and this required us to slow down a bit when it comes to sales. Right now, we have more volatility. So not selling is also part of our strategy, and this is something that we adhere to diligently to protect our company's assets.
In the next slide here, we have the change in consumer numbers. And here, we have relevant impact as we gradually open the free contract market. You are familiar with this sector, and you know that now buying energy for consumers in high voltage networks has been permitted, and this led to this variation here. So we have an increase of 56%. And this shows our results regarding the fact that we want to be closer to customers and even in these new segments that are coming in. And this will bear fruit in the future, most certainly. Now as we brought forward commercial operations of new assets, we now start having more capacity. Naturally, this will increase the volume of contracted energy in the coming quarters.
Now I'll give you an update on the projects under implementation. Definitely, this is the last time this slide is going to be in our presentation. We hope that we wouldn't have that. But as Taka had, we have a stubborn turbine that's still being tested, but should be in commercial operation in the coming weeks. But we have an overall physical progress of 100% now. So we're virtually done here. We did have a slight delay that had led to indemnity, as we mentioned in the earlier slides, that will offset the setbacks we have during project implementation.
So in the next slide here, I stress what Takamori said. It's good news. We have overall physical progress of 59% of Serra do Assurua. We used to have 45% in Q1. Now we are at almost 60%. So we're making great stride that -- there. This has enabled us to start testing 17 turbines, wind turbines here. So right now, we have 51 turbines either operating commercially are being tested. This is a major project, 840 megawatts, right? 181 air turbines. So we gradually include more turbines in commercial operation, and this will give us more energy availability to be commercialized.
Next, we have Assu Sol Photovoltaic Complex. We are moving forward in the physical financial schedule here. In Q2, we are at 38% progress for the installation activities. So we doubled progress. We had 19% in Q1, and now we have 38%. So the idea is that Assu Sol will gradually start operating as of Q4 '24. And just like Assurua, we should have -- we should be fully operational by the end of 2024, '25.
Here, we have the Asa Branca power our transmission. So the Asa Branca project for Q2 has been -- has secured an installation permit. We intend to bring forward the commercial operation date at least 24 months. And this product will represent over 1,000 kilometer in -- a 1,000-kilometer-long transmission line, and that will be included to our portfolio.
An update on Jirau Electric Power Plant. We have 40% shares -- 40% of the shares there. We are about to finalize an operation of the consolidation between other partners. We -- Chesf is now going to have 40% once this operation is going to be finalized. This doesn't impact the active when it comes to ENGIE. And in this slide, you can also see that we have made progress in a potential upside of the project, which was as we signed the agreement with Bolivia. We don't have the details on how this is going to be concluded and how it will impact the asset, but it's a positive thing that happened in this quarter.
Next slide, we have a summary of our projects, separating them between projects under construction on the left and projects under development in here. So these are projects that are in our pipeline that are waiting for the green light to start operating and to start development, which will happen when commercial conditions will make implementation feasible.
So I'll hand it over back to Taka, so we can talk about some figures and see the results of the company in Q2.
Thank you, Rafael.
The company continues with great financial performance. The idea here is to show you the adjusted return on equity and the ROIC. Our ROIC used to be great, above 30%, which was phenomenal. Right now, we have 28%, and this is not due to a reduction in the net income in the last 12 months, but because we increased -- we had income retention here, but this is why these numbers changed here. Same thing holds true for ROIC. Here, we have a reduction of 20.3% to 18.3%, but it's also a great number and pretty much within what's expected. So great investment for shareholders.
On the right here, we have the adjusted EBITDA in the lower right here. The chart show that we constantly seek to diversify our portfolio. We have been able to invest in TAG, transmission. We still have transmission assets to be included in the long term and investments in renewables that will be included by the end of '25, as Rafael mentioned. So right now, after the first half of '24, we have about 21% of our portfolio related to transmission or gas transport lines and the remaining 80% is generation. Trading also contributes to a very small number here. So it's almost negligible.
Here, net operating revenue changes. I think the biggest highlight for the quarter, which justifies the 7.4% increase from BRL 2.6 billion to BRL 2.8 billion was Santo Agostinho. We had a reduction of BRL 118 million as we lost the revenue from Pampa Sul and the other items shown here show typical business variation. So price and sales revenue is slightly positive. Trading has a much smaller operation volume here, but this is also neutralized by last purchases here. And transmission has positive results, BRL 44 million, and this increased because of the increased concession of assets. So on the one side, we ended civil works and -- but on the other hand, we had asset remuneration here. So the overall number is BRL 2.8 billion for the quarter.
This slide here shows the results on equity income. So we have BRL 2.17 billion equity income in the second quarter, and this led to net income for TAG for Q2 of BRL 872 million. With our shares, that represents BRL 152 million here as a contribution to our EBITDA.
This slide has a lot of bars in it. We often try to simplify it to facilitate the understanding, but this one requires some explanations. So starting from the outer bars here. We have the EBITDA for Q2 '23 compared to Q2 '24. We have BRL 1.7 billion and now we have BRL 1.97 billion. And this represents a 14.7% increase.
And then the second bar to the left, we have the adjusted EBITDA here. We also have IFRS adjustment, so we disregard the effects of international accounting to bring the assets that we have for shareholders and also for transmission. And the adjusted EBITDA is BRL 1.89 billion in Q2 '23, going to BRL 1.67 billion in Q2 2024. So we have negative 1.7% variation with the 2 quarters compared. So we also have an effect of the Santo Agostinho indemnity, BRL 262 million here. And the thing is right now, we no longer have the hydrological risk renegotiation that was booked last year. So this is a number that we bring just for qualitative comparison for Q2.
For the CCEE bar, we have an increase for -- due to more hydro generation, even though the Brazilian hydrological conditions are not favorable this year, the worst year in many years, the generation assets owned by ENGIE had great results in terms of generations. So what we can say is that we had a great impact in the generation of our assets. Naturally, we generated way above MRE and that has an impact. We did sell this energy to other assets, and this impacts positively CCEE. And so this is how this number is justified.
We also had a natural progress in the business when we reduced the portfolio purchase rate. You may have seen that we have done so in the last quarters. And at the end of the day, this affects our market share and total energy for end users, but this is very much in line with our strategy. Finally, we were able to conclude the writing off of Paracatu assets. Those were the ones involved in last year's incident. We did the impairment of these values previously, but now we have been able to write it off. This was classified as loss and considered nonrecurring as per accounting requirements. Finally, I'd like to highlight the BRL 152 million variation due to last contribution of TAG as we have partially disinvested. So basically, we have the same EBITDA level that we had last year.
Next slide, we have a net income change. So in the first bar on the right here and the last one on the left, we have net income in Q2 '23 and Q2 '24, going from BRL 733 million to BRL 871 million, so 18.8% change, positive change. As for the adjusted net income, we have a change of 6.1% positive. So this is a vanilla quarter, not so much to mention here.
When it comes to balanced debt, we are pretty much within expected. We had a marginal increase there. And green here, you see that we had 2x at the end of last year. And by the end of Q2 this year, we had 3.1x. Now we are at 2.4x and naturally, it will increase even more considering the CapEx up to the end of next year. We may have a new debt or work with cash equivalents that we have today. So somehow, we have a stability in cash equivalents in this year, and we expect to reduce it by the end of this year.
As for debt profile and composition, we stress that this profile is quite suitable, considering our cash generation capacity. So no highlights in this slide, except that our debt is pretty much indexed to IPCA, 80%, IPCA -- 14% CDI and 5% TJLP. So our debt composition is quite competitive. And we have the nominal cost of debt at 9.4% equivalent to IPCA plus 5%.
And CapEx, we planned BRL 9.8 billion this year. We have addressed half of it virtually. BRL 5.5 [ million ] have been invested this year already. And this was used with acquisitions in Q1 and also organic growth that are involved, for example, with the conclusion of Santo Agostinho and the work that we do at Assu Sol, [ Assurua ]. So we have BRL 3.3 billion for '25 and for '26 BRL 717 million, okay? This is very much in line with the data we presented in the last quarter.
In the next slide here, we have dividend policy. This is a reflection of the dividend payout approved by the Board yesterday. So we approved a 55% payout considering distributable net income, and this led to a 2.7% yield that is guaranteed.
I believe that, that was my last slide, and this brings us to our Q&A session.
We'll start with the Q&A session. And now to ask a question, just use the Q&A tool in Zoom. And we have the 2 first questions. Mario, Banco Safra. He ask, if we can comment on the expectation to bring forward date for Asa Branca if -- and if there was any impact given the halt with the permitting authorities. And the second question is about the interest of the company in the next transmission auction.
Well, great question. We have been working and observing the strike in the permitting agencies. We, however, keep our expectations for securing our license. We have quite a lot of support and we work side in side with these agencies. So we are cautious. But despite that, we hope that we can comply with our business plan without major delays.
Yes, I'd just like to recall that this project has a lot of phases. And when we are working in two different states, we may require permits to be given by IBAMA. So that might lead to impact for us. Right now, we have the installation permit, and we are now working in the other stretches along the line. The idea is that this allows us to gradually start operations, so to phase in. So we can mitigate impact to some extent. But as Taka mentioned, we are watching that up close to try and reduce impacts that might arise.
Great. Regarding the next transmission auction, we are very much interested. We have been watching that up close whenever there is a reduction in the [ spots ] that are affected, you concentrate the interest of other investments. But this is part of the game. It's not something that significantly changes the scenario for the upcoming auction. Energy transmission is a pillar of investment for ENGIE in the world, and it's not different here in Brazil. So our interest is still there, and we are working to make a competitive offer. So meaning we -- yes, [ Marcio ], we are interested.
Thank you, Take and Rafael. Next question, Evelyn, our investor. She's asking, I would like to know how you see the data center market in Brazil and if you are exploring opportunities in this sector.
Great question, Evelyn. I have to give some context before answering it. I believe ENGIE seeks growth and sustainable growth, not only when it comes to ESG, but sustainable considering the overall scenario in Brazil. Therefore, naturally, when you have incentives on offer in Brazil, this leads to some distortions when it comes to pricing. So Brazil, we have great opportunities for competitive prices of energy, wholesale. And when you see so many incentives for end consumers, this leads to concern. Brazil has an opportunity to strategically position itself when it comes to data centers. And this is due to the fact that we have good and [ inexpansible ] energy. And this makes us happy. We are trying to do our share here. We can't detail specifically the actions we are doing, but just like the other players, we are very much interested in the opportunity to supply energy to data centers and to artificial intelligence, training centers, but mind that the market demand is great, it's welcome, because this allows for a better balance when it comes to offer and supply and demand. This generates value to the country. Income increases the GDP and things like that. So it creates value to the country. We see the data center market as a very promising one. And naturally, it's going to be very good provided that the government structures and plans well and signals to the international market that this is going to -- that Brazil is going to be a safe haven for investment.
Thank you, Taka. Next question is from Isabella, our investor. She asks for a follow-up to last quarter regarding new generation projects, so the ones in the pipeline. Are they still on hold, waiting for a better market timing? Or do we have new prospects?
Great question, Isabella. Well, we always try to have projects in our pipeline that will allow us to promptly react when an opportunity in the market arises. This moment is not the best one. As we mentioned here, we have a situation with the energy supply, right? So -- and we have some uncertainty of how prices will evolve over time. And this makes us more cautious to make further a new investment. So therefore, we are going to continuing outlining and improving the projects in our pipeline, but we don't have any intention of starting any of them in the short or medium terms.
Thank you, Taka. Just mind that if you have more questions, just use the Q&A tool in the Zoom platform found in the lower bar. Well, if you have more questions, the Investor Relations teams will be at your disposal. I will now hand the floor over to Rafael and Taka for their final remarks.
I'd like to thank all of you for your participation. This quarter sees how diligently we work in all of our projects and restates the right decision we made when it comes to choosing our portfolio because it helps us buffer any variations that might have, showing that ENGIE is quite a resilient company. We have a very unique market situation scenario. And even so, we are able to contribute and generate value to our shareholders.
Well, thank you, everyone. I'll see you in the next conference and ENGIE Brasil Energia team will be at your disposal should you need further clarification on any of the points discussed here. Thank you very much. Have a great day.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]