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Edited Transcript of ALUP11.SA earnings conference call or presentation 2-Jun-20 6:00pm GMT

Q1 2020 Alupar Investimento SA Earnings Call

SAO PAULO Jun 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Alupar Investimento SA earnings conference call or presentation Tuesday, June 2, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José Luiz de Godoy Pereira

Alupar Investimento S.A. - Chairman, Dy. CEO, Chief Admin., Fin. & IR Officer and Member of Board of Exec. Officers

* Luiz Coimbra

Alupar Investimento S.A. - IR Manager

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Conference Call Participants

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* Carolina Carneiro

Crédit Suisse AG, Research Division - Sector Head

* Guilherme Ferreira Lima

Santander Investment Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to Alupar's conference call to discuss the earnings results for the first quarter of 2020. The audio and slides of this conference call are being transmitted simultaneously over the Internet in the company's IR website at www.alupar.com.br/ri. The presentation is also available for download. (Operator Instructions)

We would like to inform that forward-looking statements regarding future events are subject to risks and uncertainties, which may prevent such expectations from being materialized, that is, differ from what is expected. These forecasts reflect an opinion made on a specific date, and the company is not obliged to update them.

With us today, we have Mr. José Luiz de Godoy Pereira, CFO and Investor Relations Officer from Alupar; and Mr. Luiz Coimbra, Investor Relations Manager.

I would like to hand it over now to Mr. José Luiz de Godoy, who will start the presentation. Please, Mr. José Luiz, you may begin.

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José Luiz de Godoy Pereira, Alupar Investimento S.A. - Chairman, Dy. CEO, Chief Admin., Fin. & IR Officer and Member of Board of Exec. Officers [2]

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Good afternoon to everyone, and thank you very much for participating in our meeting to present the earnings results of Alupar the first quarter of 2020. We are going to organize our presentation as always. I will give you an overview of the relevant events during the first quarter of 2020. Then I will talk about deployments and projects and afterwards, I will hand it over to Luiz Coimbra, that is the IR Manager of Alupar, and he will talk about the financial results of the company.

Well, let's go to Page #3. That would be -- the first item would be our fight against the pandemic.

I believe that all of us are being impacted by the pandemic one way or the other. Therefore, here, we've described all the measures that the company has adopted in order to prevent major impacts in the company. So we've adopted a number of measures. I believe that I don't have to deep dive one by one, but this is a general overview. And we are going to do our best while working from home. We also suspended trips, and our employees that need to travel abroad, well, they remain in quarantine. We also have made available masks, hand sanitizers for the employees that work in the field, and our employees from the substations, we adopted hygiene measures. We hired an infectologist that is PhD in this matter. He is a PhD in infectology, and he has been given -- he has helped us in any measures that we have thought about adopting. He has provided us with support. And with this, we have been able to strongly mitigate the effects of the pandemic and to be able to protect our employees.

Now we're going to Page #4, and I will talk about the material facts of the first quarter of 2020. One of the material facts of the first quarter, we had already announced in our yearly presentation and as a subsequent effect, we're just strengthening this fact that -- what is the EDTE energization. EDTE is a company that we control through TPE, and we energized it on January 20, 2020. Here, you have some numbers just for you to have an idea. But I believe what is relevant to observe is the RAP CapEx ratio. This is something that everybody always questioned. So we were able to deliver this project with a RAP CapEx ratio of 18%.

Now on Slide #5. Here, we have another relevant fact during the first quarter of 2020 was a rating reaffirmation by Fitch on February 10, 2020. Fitch reaffirmed our rating. It's AAA for Brazil and international scale rating, it's a BB. So this also reflects our financial discipline, and this is something that we have adopted throughout the year.

The third material fact was our dividend distribution. In the ordinary and extraordinary general meeting carried out on April 27, we decided to pay out BRL 0.69 per unit. This is BRL 0.23 per common share. Now the shareholders that will receive these dividends are the ones that were registered in the company records on April 27. And here, you can see the dividend payment year-on-year, and this adds up to BRL 202 million. That is 9.5% higher than what was paid out in 2018. That was BRL $184.6 million.

Now I will give a general overview. I've said that I would talk about the material facts. And now I will talk about the ongoing projects. Here, you can see it on Page #7. This is an overview of all the ongoing projects. I believe that the most relevant project here would be the 3 first projects that will become operational. Here, we -- TPE, ETB and TCC. TPE and ETB, the first column and TCC in the second column. In these projects, we have practically supplied everything, supplied material, equipment. Practically, everything has been supplied. And the physical progress of the work is 81% in TPE, 82% in ETB and 45% in TCC. Here, we're only considering the physical progress of the work. We're not considering the physical progress of the project that is greater. Because here, we have to consider other items, like material supply, also land negotiation and other items. Speaking of land negotiation, you can see that TPE land negotiation is 99%; and ETB, 100%; and TCC, 97%. These are the projects that will become operational.

Then we have the ESTE project in the second column. We believe that we will not deliver it in advance because in order to have a -- revenue will depend in the energization of a third project. Therefore, we can't anticipate if this third-party doesn't execute the project according to the deadline. And as the third-party project is a bit delayed, we believe that we will not deliver this project in advance.

And on the third column, TCE and TSM projects, I believe what is relevant to highlight, especially in the case of TSM, that we are starting to build the -- hirings are concluded here and the challenge here would be the land negotiation. So here, we have 88% of land negotiations. We can -- I believe that we have space for progress. We anticipated ourselves to this matter because this was a great challenge of this project. So I believe that here, we will have a good evolution. We will start the work with 88% of the land negotiation carried out, resolved -- and resolved, yes. And the TCE project, which is the Colombian project regarding the installation licenses, it's on hold. It has delayed because of the pandemic. Nonetheless, in parallel, we have been working with the land negotiation. Therefore here, in the land negotiation progress, you can see that we have made a 68% progress in terms of the amount of properties. So this is a 68% result.

Now I will go to the financial highlights. I will call Luiz Coimbra to show the financial highlights, and then we will have our Q&A session.

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Luiz Coimbra, Alupar Investimento S.A. - IR Manager [3]

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I hope that everybody is enjoying good health. I hope everybody is taking good care of themselves. And we are at your disposal should you wish to receive any additional information.

Good afternoon to everyone, and thank you for participating in our earnings result of the first quarter of 2020. The focus of my explanation will be the regulatory figures. I will start my presentation on Slide 9 to show you the IFRS numbers, and then I will go to Slide #10, where I will detail the variation numbers. Here, the net revenue totaled BRL 1.217 billion, an increase of 6.2% vis-à-vis the BRL 1.145 billion that was registered during the first -- the same period last year. The EBITDA was BRL 609.8 million vis-à-vis the BRL 834.8 million registered during the same period last year. The main EBITDA variation was BRL 325.4 billion -- million in terms of infrastructure and after the investment in the transmission stations and ETB last year.

Now going to profit, the net profit regarding the BRL 464 million that were registered last year. This profit was BRL 225 million in EBITDA.

Now going to the regulatory figures. We will start by revenue. The regulatory net revenue totaled BRL 478 million, 3% above the BRL 464 million that were registered during the same period last year. Now the energy transmitter presented a growth of BRL 71 million. And the main highlights here, we had an increase of BRL 15 million of ETAP and BRL 6.4 million in ETC and BRL 14.9 million in EBTE. And because of the commercial operations, we also had an increase of BRL 17.5 million in [AETE] in the beginning of its recording, and we also had a growth of BRL 14.8 million in TME because of its consolidation during the fourth quarter of last year. We also had an increase of BRL 13.5 million in the revenue of the other transmission stations because of the readjustment of the reps. And there was a drop in BRL 8 million in AETE and BRL 3.4 million in IRT. This is a result of the [adversity] of these assets. In generation, the revenue showed a drop of BRL 51.5 million. This is the different allocation and commercialization strategy of power between 2019 and 2020.

Now going to the regulatory EBITDA. The regulatory EBITDA quarter was BRL 371.2 million. This is an increase of 29.6% vis-à-vis the BRL 286.4 million registered during the first quarter last year. The main impacts on the EBITDA were: number one, the increase of BRL 13.8 million in the net revenue, I just explained; number two would be a drop of BRL 91.1 million in the purchase of energy, mainly due to the energy allocation strategy because during this quarter, the plants were under-allocated. In the same period last year, they were short. And at last, we had a drop of BRL 7.6 million in equity mainly because of the beginning of the consolidation as of the fourth quarter of last year of the TME transmitter. Now when we see the regulatory net revenue, it was BRL 72.4 million during this quarter, an increase of 4.2% vis-à-vis the BRL 69.4 million that were recorded during the first quarter of 2019.

The main impacts of the income was BRL 84.8 million in the EBITDA. Then we had an increase of BRL 12.6 million in the depreciation and an increase of BRL 1.4 million because of the commercial operations of ETAP and EDTE, an increase of

(technical difficulty)

in the transmission station because of the beginning of the consolidation from the third and fourth quarter last year. We also had an increase of BRL 33.4 million in the financial result because of the growth of Alupar Peru Holding expenses because of the exchange variation. Another thing that we would like to highlight is an increase of BRL 22.6 million in income tax. EATE and ENTE increased because during the first quarter last year, we recognized the tax credit. We also had an increase of BRL 1.4 million in TME and AETE in the beginning of the consolidation. And we also registered an increase of BRL 10.1 million in the PCH. And in these 2 assets, we -- they were deferred during the first quarter last year because of the losses that were recorded last year, and we also recorded an increase of BRL 13.2 million of minority shareholders because of the growth of BRL 10.1 million in Lavrinhas PCH. And in the first quarter last year, there was a loss of BRL 5.4 million.

Now on Slide #11. Here, you can see the debt of the holding, the BRL 984 million, the cash of BRL 979 million. This is a net debt of BRL 5.2 million. The profile of the debt remains extended. We have BRL 805 million that mature in the long term and BRL 178.6 million that mature in the short term. Now the short-term maturity basically is the first parcel of the debenture issuance that matured in April this year. Now the holding issues have 2 debentures issues that are the 6th and the 7th issue. The 7th issue is indexed in IPCA. No the 6th -- 7th is CDI, 6th is IPCA.

And the next slide, we have the portray of the consolidated indebtedness. Our total profile was BRL 8.602 billion, cash of BRL 3.526 billion. Totaled net debt of BRL 5.076 billion. The gross debt is highly aligned with our figures from December. The cash represented a drop of BRL 500 million, that is basically in our deployment projects as a result of the investments that were carried out throughout the first quarter. Now when we see the profile of the debt, we had no major changes. Most of our debt is indexed to IPCA, 57%, followed by CDI, 18%. We have a parcel of 11% in a basket of currency. Due to the projects in Peru and Colombia, most of our indebtedness, the BRL 6.457 billion, are in the debentures, out of which BRL 3.400 billion are debentured issued in deployment and transmission projects.

Here in the next slide, you see the debt amortization schedule. Now the holding matures this year and next year and the mature of the 7th issuance that are distributed between 2024 and '25. The debt of the subsidiaries, they are properly distributed, and they are dimensioned with the capacity of cash generation of each one of the projects. The debt profile remained extended, and we have 44% of our maturities after 2025. Now regarding the bridges, we have no changes from the numbers that were reported in December. We have our 2 bridges that are funding of the projects that are being deployed in Peru and Colombia.

In the next slide, you can see the performance of the shares in the company. Yesterday, the market closed and the Alupar shares devaluated 6.28% in the year vis-à-vis a 13% devaluation of IEE and minus 23.37% in IBOVESPA. We -- during the third year -- consecutive year, we have had daily liquidity, an increase of 24% when we compare it to the BRL 16 million that we had during the first quarter of 2019.

With this, I end my presentation, and we may proceed with our Q&A session. Good afternoon to everyone.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question from Mr. Guilherme Lima from Santander.

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Guilherme Ferreira Lima, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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I have 2 questions here. The first question regarding the process that was discussed in an annual meeting recently. Excluding the Northern Coast area, will you consider -- with the trends of the contract, what are you going to do? This is my first question. And my second question regarding the TME. We see that Eletrobrás will go to court to guarantee an economic balance. And how do you see this process? And if you will consider -- do you consider following this line?

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Unidentified Company Representative, [3]

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I will talk about LTE. This is a project that is a concession contract. We're talking about 2 transmission lines in the coast of São Paulo. We have one line, it's the southern line, and then we have the northern line. So these are 2 totally separated lines and 2 substations. What happened was that one of these stretches, because it was close to the air base of Santos and in order to protect the flights, they said that this project was unfeasible, and this happened in 2017 approximately -- 2017 or 2016. And with this, the Environmental Agency from the state of São Paulo, they canceled and filed our licensing request. And they said that it was environmentally unfeasible because of this stretch, because of this area. During those days, we went to ANEEL and ANEEL suggested that as the contract, I have to build 2 stretches, not 1 stretch. ANEEL suggested us to change our concession contract, eliminating the northern stretch and just maintaining the southern stretch. And for this, ANEEL approved -- the technical department of ANEEL approved the redistribution of income, and they know that the contract is one way.

So what happened here? This process was stopped. We continued working. The only thing that we -- that happened recently is that the service of air protection changed in 2019. The approximation rules have changed, especially by helicopters changed. And this change enabled us to study the northern stretch. There are still a number of restrictions, but I believe that this change has allowed us to receive the northern stretch. So what practically happened was that they rejected the proposal that was suggested by ANEEL. And now we are analyzing and working together with the protection services and to see if this is feasible or not, so -- if we will be able to build the northern stretch. So this is what is going on in the case of ANEEL.

Now in the case of the TME, there -- since 2016, there is a legal lawsuit. This legal lawsuit is being judged in the first instance and a long period has gone by. Anyhow, we are open to negotiate together with ANEEL and together with the other agencies, and we have diligently worked, and we have even worked with FUNAI. Nonetheless, I'm a bit skeptical because the environmental project was in progress with FUNAI and then came COVID-19. And when the indigenous population were contaminated by COVID that are -- that have lower immune defenses. So I believe that this will be delayed anyhow. I believe we are -- we have taken this to court, and we are trying to find -- we're trying to reach an agreement. In an agreement, you have 2 sides, 2 assumptions. We need the issuance of the installation license, and this only depends on FUNAI. FUNAI has to authorize in order for IBAMA to issue the installation license, and we are negotiating an arbitrage to rebalance the contract revenue. This is on the table to be negotiated. This is public information. After the pandemic, I really don't know how FUNAI is going to react, if they are going to authorize a development during a moment, because we would have to develop inside the Indian reserve. And because of the pandemic, I believe that this can cause some noise there.

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Operator [4]

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Our next question from Ms. Carolina Carneiro from Crédit Suisse.

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Carolina Carneiro, Crédit Suisse AG, Research Division - Sector Head [5]

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I also have 2 questions. My first question, considering your cash situation, that is reassuring, and I believe that you will not have major changes and your greenfield projects will be extended till the end of the year. There are transmission companies that the M&A market is heated up. I would like to know if this is true. And I do believe that there are opportunities of growth with M&A. And the option of growth is still on the table for you. And number two, the strategy of your commercializing company. I would like to know if you have adopted a more conservative position this year. I don't know if this was something only that you did during the first quarter.

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Unidentified Company Representative, [6]

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Now regarding the commercialization, position is a bit different this year. Bearing in mind GSF because this is a game of -- because everybody displays physical guarantees for a certain period, you can have a higher price, but you can have a lower GSF. Therefore, we created the strategy. This strategy was made in December last year, and we carried out a number of operations in order to hedge our positions because we wanted to reduce the impact of this exposure of GSF because we still have a certain GSF exposure. And we have to see what the result will be because this December -- this decision was taken last December, and what happened that this was pre-COVID, so we changed prices there. The market dropped significantly. And therefore, this messed up a little bit our strategy of seasonality, but we do not believe that we will have a major impact on this point.

Now regarding M&A, yes, we have actively participated in all process. The last process that we participated was before COVID-19. As far as we are concerned, we were in second place. This was a major project. Nonetheless, there were parties that were more aggressive than us during the negotiation. Therefore, we didn't win this negotiation. What I can say is, now with this pandemic, things have changed a bit. Now we have to analyze things better. And until January this year, this was a totally unexistent event and this caused changes and this impacts even you, the bank had to review the capital cost. The same way you have done this, we are also doing this. We will analyze the opportunities. If there is something interesting in the horizon, we will check it out. And if it makes us, I believe that operating assets make more sense than assets under construction, and I believe that the ones that are under construction have a lower capital cost, the same way that you're reviewing your capital costs. In order to assess the different enterprises, we are also reassessing our capital costs.

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Operator [7]

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(Operator Instructions) As we have no further questions, we bring our Q&A session to an end. I would like to give the floor to Mr. José Luiz for his final comments.

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José Luiz de Godoy Pereira, Alupar Investimento S.A. - Chairman, Dy. CEO, Chief Admin., Fin. & IR Officer and Member of Board of Exec. Officers [8]

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Thank you, everyone, for participating in this conference call. And I would just like to say that our company is at your disposal to answer questions. Our Investor Relations team is at your disposal. Luiz, Kassia, you can contact them if you have any questions. Thank you very much, once again, and have a very good afternoon.

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Operator [9]

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Alupar's conference call has come to an end. We thank you for your participation, and have a good afternoon.

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