Neoenergia SA

BOVESPA:NEOE3

Earnings Call Analysis

Strong Q2 2024 Results with Robust Growth

Neoenergia reported a strong Q2 2024 with significant growth in key metrics. Injected energy in concession areas grew by 8.2%, driven by higher temperatures and economic activity. The company’s net income rose by 12% to BRL 815 million from Q2 2023. Cash EBITDA increased by 3%, reaching BRL 2.4 billion. Capital expenditures were BRL 2.3 billion for the quarter, contributing to a distribution asset base nearing BRL 37.5 billion. The company anticipates ending 2024 with BRL 1.2 billion in RAP, thanks to ongoing transmission investments, projected to conclude by 2025. Despite increased operating expenses, cost discipline has been maintained.

Growth in Financial Performance

In the second quarter of 2024, Neoenergia reported a notable 12% increase in net income, reaching BRL 815 million compared to the same quarter last year. This robust growth is complemented by a strong cash EBITDA of BRL 2.4 billion, reflecting a 3% increase. The driving factors behind this positive trend are higher gross margins and disciplined expense management amidst a competitive energy market. The consolidated EBITDA saw an increase of 12%, underscoring the company's effective cost control measures.

CapEx and Strategic Investments

The company executed BRL 2.3 billion in capital expenditure (CapEx) this quarter, totaling BRL 4.2 billion for the first half of 2024, which aligns with its full-year CapEx guidance of approximately BRL 9 billion. Investment efforts have primarily focused on network enhancements and transmission expansion. Significant allocations included about BRL 1.2 billion for distribution upgrades and BRL 1 billion for furthering transmission projects, indicating Neoenergia's commitment to improving service capacity and operational efficiency.

Customer Base and Market Demand 

Neoenergia continues to expand its customer base, achieving a total of 16.5 million customers, marking an increase of 340,000 over the past 12 months. This growth is primarily attributed to increased energy consumption linked to warmer temperatures and rebounds in economic activity. During the second quarter, energy injected by the company's five distributors rose by 8.2%, showcasing strong market demand and operational performance.

Operational Efficiency and Cost Management

Operational expenses grew by only 4% year-over-year, which is commendable given the inflationary environment. Furthermore, the gross margin increased by 2%, driven by improved cost management despite adverse tariff adjustments. The strong performance reflects Neoenergia's operational model introduced in 2017, emphasizing in-sourcing operations to maintain better cost controls and service quality.

Transmission Projects and Future Prospects

Future transmission projects are set to bolster Neoenergia's revenues significantly. The annualized Revenue Adjustment Process (RAP) is expected to reach BRL 1.2 billion by the end of 2024, up from approximately BRL 950 million following recent project deliveries. The ongoing construction of various transmission lines, with completion projected for 2025, is expected to enhance long-term operational revenues, signifying potential future profit growth.

Risk Management through Loan Provisioning 

The company's loan loss provision for the second quarter stood at BRL 130 million, reflecting a strategic reduction aligned with normalized levels seen across the industry. This careful management of credit risk suggests a proactive approach to maintaining financial stability and fostering investor confidence.

Capital Structure and Debt Management

Neoenergia's net debt as of this quarter amounted to BRL 41 billion, slightly up by approximately BRL 1 billion due to ongoing CapEx plans. The debt-to-EBITDA ratio remained steady at 3.27, indicating a manageable level of leverage as the company progresses towards the completion of its CapEx cycle. The company maintains a robust capital structure with an average maturity of 5 to 6 years, underlining operational resilience in a high-liquidity credit market.

Conclusion: A Commitment to Growth and Stability

Neoenergia's solid financial results, strong customer growth, and strategic investments in infrastructure showcase a well-defined pathway for future growth. With ongoing projects poised to enhance revenue, and effective cost management bolstering operational efficiency, the company remains committed to delivering value to its shareholders. As Neoenergia moves toward completing its current investment cycle in 2025, the focus will remain on sustainable growth and enhancing service quality for its expanding customer base.

Earnings Call Transcript 2024-Q2

[Operator]

This conference is being recorded and will be made available on the company's IR website, ri.neoenergia.com, where the complete earnings release material is available. It is also possible to download the presentation using the link send via chat, including in English. [Operator Instructions]

The information contained in this presentation, and any statements that may be made during the call relating to Neoenergia's business prospects, projections or operating and financial goals constitute beliefs and assumptions of the company's management as well as information currently available. Future considerations are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur.

Investors should understand the general economic conditions, market conditions and other operating factors may affect Neoenergia's future performance and lead to results that differ materially from those expressed in such forward-looking statements.

This presentation will be led by Mr. Eduardo Capelastegui, CEO of the company; and Leonardo Gadelha, CFO of the company.

I will now give the floor to Mr. Eduardo Capelastegui.

[Eduardo Capelastegui Saiz, executive]

Thank you very much, operator. Good morning, everyone. I would like to begin by thanking you all for joining us today for the presentation of our second quarter result in 2024 and also the first 6 months in 2024. I'm Eduardo Capelastegui of Neoenergia. We are once again very proud of all that we'll be sharing with you today. I'm here today. with Solange Ribeiro, Vice President and Regulatory Officer; Leonardo Gadelha, CFO; Giancarlo Vassao, COO; Juliano Pansanato, Asset Control and Planning Officer; Fulvio Machado, Network Officer; and Renato Rocha, our IR Officer.

I will make a brief presentation going through the main highlights of the period. And then Leonardo will present the results in more detail. We will then move on to the question-and-answer session. And finally, I will conclude with my closing remarks.

Starting the presentation on Slide 3, we have the highlights of the second quarter. Injected energy once again performed very well in our concession areas, growing 8.2% in the quarter compared to last year, mainly due to higher temperatures and, to a lesser extent, greater economic activity, the concession areas. Cash EBITDA reached BRL 2.4 billion -- surpassed BRL 2.4 billion, showing a growth of [ 3 ]% in the quarter.

The larger market cost discipline and good operating management, the 5 distributors partially offset mainly by the end of the Termopernambuco contract and also the wind resources in the quarter. OpEx grew 4% compared to the same period in the previous year. Once again, confirming the success of our operating model and the distributors, which, as you know, has been based in 2017 on the in-sourcing of operations.

Net income in the quarter was BRL 815 million, with a 12% growth compared to the second quarter of 2023. On the growth front, I would highlight our execution capacity reflected in the realized CapEx of BRL 2.3 billion in the quarter, which leads to a significant net base of distribution assets of BRL 37 billion -- almost BRL 37.5 billion.

We continue to advance with the transmission project this quarter. We've had deliveries and RAP releases of over BRL 200 million, relating to the loss of Itabapoana, Paraiso and Morro do Chapéu. Although, these points confirm the robust results delivered by Neoenergia this second quarter. Moving to Slide 4, we can see in detail evolution of our transmission project. In the December 2018 lots, we obtained the operating license from IBAMA, from Itabapoana lot, which allowed the release of around BRL 90 million of RAP. Guanabara lot has over 90% physical base. And this year, we'll have the full release of the ramp of roughly BRL 155 million.

Today, we have our first of the 2 tranches completed with the operating permit from IBAMA. In the Vale do Itajaí lot, we have 76% of physical progress in the construction works with BRL 23 million RAP leased. And in the third quarter, we'll have another BRL 33 million released, and we'll conclude the project in 2025 when we will release another BRL 200 million, reaching a total RAP of around BRL 260 million in the project.

In the December 2020 lot, Morro do Chapéu is [ 94 ]% with physical events and construction advances and has another RAP released this quarter, reaching almost BRL 100 million of release RAP equivalent to 47% of the total project. The remainder, BRL 100 million roughly will come throughout this year 2024, which is firmly in line with the business plan that we approved when we went to auction. In the Estreito lot, which we won in December 2021 auction, it is almost completed, with 99% execution completed and now -- well, in July, BRL 13 million RAP were release, that is 1/3 of the total and should be delivered by late August when it will reach a total of BRL 40 million in RAP from fully -- the whole lot.

Regarding the loss from June 2022 auction in the second quarter, we see the completion and delivery of lot 11 [are] releasing around BRL 42 million in RAP and anticipating the business plan, delivering ahead of the business plan for lot 2, Alto Paranaiba, which was the largest of the 2 lots, as you well remember, we have licensing partially completed and construction works have begun on the substation and 2 of the 3 transmission lines, thus reaching 27% of construction progress, actual construction progress.

You might remember, we started the year 2024 with an annualized RAP of around BRL 700 million. And with the deliveries that I've shared about this first half of 2024 by June, our annualized RAP was roughly BRL 950 million -- was BRL 950 million. Still, this year in 2024, we will release another BRL 300 million by the second half, which will allow us to conclude 2024 with a relevant mark of BRL 1.2 billion in RAP roughly, bringing us closer and closer to the end of the transmission of the transmission investment cycle, which will be concluded in 2025.

I will now turn it over to Leonardo, who will share more details on our results in this second quarter. Thank you.

[Leonardo Gadelha, executive]

Thank you, Eduardo. Good morning, everyone. I will begin on Slide 6, where we have a consolidated result. We see the evolution of the gross cash margin in the quarter. Therefore, without considering the impact of IFRS 15 and VNR was 1% over the second quarter in '23, reaching BRL 3.481 billion. This growth was driven by the strong demand as shared by Eduardo. A larger customer base, offsetting negative tariff adjustments in April due to the IGP-M index, which was negative at the end of the Termopernambuco contract.

We continue to present a good cost discipline with a growth of 4% in the quarter, in line with the inflation within the period. EBITDA had a 12% increase in the quarter, and cash EBITDA reached BRL 2.4 billion. Thus, showing a 3% growth, reflecting the higher gross margin and control of expenses. Network EBITDA represented 87% of consolidated EBITDA of Neoenergia. And generation in customers, 13%. Neoenergia's net income in the quarter was BRL 815 million, 12% growth over the second quarter 2023.

Moving on to CapEx, slide on CapEx. In this quarter, we realized a total of JPY 2.3 billion, totaling JPY 4.2 billion in the first 6 months of 2024, in line with the plan for the year, which is around BRL 9 billion. We see in the chart that CapEx was mostly directed to networks as in the recent quarters. Highlight's in the quarter were BRL 1.2 billion in district expansion and improvement of the network and BRL 1 billion in the advancement of transmission work.

In operating performance, in networks, on Slide 9, we see the variation in energy -- injected energy in our 5 distributors, which is already due to the market, continue to demonstrate a strong growth in the second quarter as well as the first mainly driven by higher temperatures. In the consolidated period growth was 8.2% compared to the second quarter of 2023, including DG.

The total number of consumers reached 16.5 million, an increase of 340,000 customers over the last 12 months. Moving to loss performance on Slide 10. We had a quarter with a controlled loss index and all distributors despite the increase of load resulting from higher temperatures, impacting technical losses. With the lowering temperatures, we hope to get back on track and continue with 4 of our 5 distributors within the regulatory limit.

On Slide 11, we see that in the second quarter, the loan loss provision reached BRL 130 million, an important reduction compared to the second quarter in 2023, in line with our normal levels.

And the charts below, we see the percentage of loan loss provision over revenues indicates a sound trajectory. And except in Pernambuco, we see a decline in all of the distributors in relation to the first quarter. In the next slide, we move on to quality indicators, deck -- in fact, in our distributors, which maintained downward trajectory, and all of them are perfectly below the regulatory levels -- within the regulatory levels.

Turning now to the results of network business on Slide 13, we observed in the second quarter in '24, an evolution of 2% in gross margin -- gross cash margin driven by the market despite the negative adjustments by the IGP-M index and the write-off of transmission assets after the sale to GIC. Operating expenses in the quarter grew by only 3%, therefore, a very good performance. Network EBITDA grew 15% and net cash EBITDA grew 5% in the second quarter, reaching BRL 2.1 billion, reflecting the higher margin and well-controlled expenses.

In the chart below to the left, we see the gap between distribution and transmission, where distribution EBITDA grew by 7% and transmission had a decrease by 17%. The pro forma transmission EBITDA as seen below, excluding the sale of lots to GIC amounted to BRL 170 million, up 64%. On Slide 15, now we have the results of the generation and customers' results which consolidates the renewables and liberalized segment. In this quarter, EBITDA in the segment was BRL 400 million compared to BRL 447 million in the same quarter last year.

On the right-hand side, we have the business lines, each [ one ], Hydraulics EBITDA was BRL 141 million in the second quarter, a 38% growth compared to over the second quarter. In '23, the variation mainly due by the consolidation of Dardanelos from September 2023. The wind EBITDA in the first quarter was BRL 186 million, in line with the second quarter, '23. And in the first half, this drop is explained by the lower wind power, especially in the first quarter across Brazil.

Solar EBITDA was BRL 12 million in the second quarter, an increase of 33% due to the complete operation of the Luzia complex and greater [ funded ] resources. And Termopernambuco EBITDA was BRL 55 million. And here, we have a decline over the same quarter last year as a result of the end of the contract in May which was foreseen. As planned, finally, the customer's business presented an EBITDA this quarter of BRL 4 million.

And finally, moving on to Slide 17. I should -- I would like to cover our capital structure. In the second quarter, our net debt amounted to BRL 41 billion, roughly BRL 1 billion of the previous quarter, which is explained by the CapEx execution pace. Our net debt-EBITDA ratio closed at 3.27x in line with the previous quarter and in line with the expected level for this year. When the CapEx cycle will be completed, our debt structure remains comfortable with an average maturity of 5 to 6 years. We continue with a diversified debt in terms of sources and indicators with competitive cost. The credit market remains with high liquidity, and therefore, we have made a lot of progress in the funding plan for the year. We have disbursed over BRL 9 [ billion ] this for 6 months, the new debt is mainly addressing all of our needs for 2024.

Having said that, I will give the floor back to the operator for the Q&A.

[Operator]

[Operator Instructions]

Our first question is from Victor from Itau.

[Unknown Analyst]

Regarding the next auction, which should happen next September. I would like to know if you will join.

[Eduardo Capelastegui Saiz, executive]

Victor, thank you for your question. As we normally do, we, of course, assess all of the transmission auctions and September was also considered. But as you know, it's a small auction with 4 lots, 3 of which are small lots. In small lots, we're not very competitive.

We are more -- this is for construction companies, and we have considered some lots, but anyhow, there are still issues, land issues. We are familiar with the Southern region. We have many lots in the region. It's not a -- they're not continuous lots. You have different tranches.

And after considering the process, we decided to not go to auction. We are not going to the transmission, the September transmission auction in September.

[Operator]

Our next question is from Guilherme Lima, analysts from Santander Bank.

[Guilherme Lima, analyst]

Could you bring us up to speed with regards to the new Termopernambuco contract. And in regards to anticipating the revenue from the new contracts and the GML terminal of the solution for fuels for this new contract.

[Eduardo Capelastegui Saiz, executive]

Thank you very much for your question. As Leo mentioned, Pernambuco contract with Neoenergia Termopernambuco was ended on May 15 as planned. And the new contract will begin on June 2026 only. Therefore, it will still be many, well, many months. We will be looking at this availability contract.

We want to, of course, continue producing results, and we have made progress at both ends in term of the contract, and we have also been interacting with the ministry of energy, with the systems operators and most importantly, looking at Termopernambuco for the Brazilian power grid -- power system. Termopernambuco has an important role when it comes to modulating the renewables in the Northeast portion of Brazil, and we are making good progress there. And in terms of RAP, we have concrete offers from gas administrators gas managers. And by the third quarter, by the fourth quarter this year, we -- well, starting in October, we expect for both contracts to be formalized.

And we believe Termopernambuco will be able to be anticipated to -- we will anticipate the contract that is in effect in around 18 months, by October this year, BRL 230 million -- many thousands of reals related to that. So the fixed contract in terms of capacity will equals important amounts there. So yes, we're making good progress here and in line with our plans. By the fourth quarter, we should produce results with the plant.

[Operator]

Our next question is from Marcelo Sá, Itau analyst.

[Marcelo Sá, analyst]

I would like to learn more about, well, your talks with GIC in regards to transferring more assets for the JV transmission. Can we expect more assets to be transferred this year? Since many are in operation.

[Eduardo Capelastegui Saiz, executive]

Thank you very much, Marcelo, for your question. Yes. In fact, we have received an offer last year from Itabapoana. And it's in the records. And since we are delivering any records in '24, we expect to have a package with 3 lots for Itabapoana, which is in operation in this region. So yes, for this year, our plan is to have these 3 lots, BRL 200 million in RAP [indiscernible] because the other 2 lots that would be Morro and Guanabara, will be later this year. Maybe in the first quarter of 2025. For this year, we have planned to, yes, advance and to close these 3 lots, Itabapoana, [indiscernible], Paraiso and Estreito, 3 in operation. Itabapoana, 100%; Paraiso, 100%; Estreito, 1/3 and the others will start in August.

So this is our plan, Marcelo, to have these lots on the table with the contracts.

[Operator]

The Q&A session is now closed. I will kindly turn the floor back to Mr. Eduardo Capelastegui for his closing remarks.

[Eduardo Capelastegui Saiz, executive]

Okay. Thank you very much, operator. On Slide 19, I would like to mention that, well, as usual, we are firmly committed to all Neoenergia's stakeholders. As you're all aware, we are moved by our values, focusing on efficiency, creating value and sustainable results.

And we -- this is represented through the expressive growth of our EBITDA cash, which has tripled since our IPO, surpassing BRL 2.4 billion this quarter.

I would also point out that we fully trust the Brazilian energy sector and renewals with our distributors, as they and the investment in the anticipation of distribution plans, when we are eager to continue investing in the Brazilian distribution and energy system. We continue to invest in our 5 distributors considering our organic growth and providing quality service to almost 17 million customers.

Additionally, and as I've repeated often times, we are 100% focused on the deliveries of the transmission lots and among the highlights, we are getting closer to the end of the investment cycle, which will be concluded next year. In 2025, as regards the future growth of Neoenergia, we are focused right now on recurring CapEx and distribution and delivery and concluding the investment cycle and transmissions.

So we are aiming for these things. Any other deal growth opportunities should fulfill our growth requirements. We -- our rigor is clearly perceived by the market over the past 10 years. To our shareholders and everyone who trust in us, I would once again point out that we have the right team in place that is fully committed and engaged to delivering all of our plans. And finally, as usual, I would like to thank all of our team in Neoenergia. They have fulfilled their role by overcoming challenges and creating value to our shareholders. Thank you very much for joining us today, and I wish you an excellent day.

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