Frontdoor Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 2 speakers on the call.

Operator

Gentlemen, thank you for standing by, and welcome to Eletrobras' 2nd quarter 2024 earnings conference call. From the Electrobras team. Today with us are Mr. Ivan de Souza Montero, CEO of Electrobras Mr. Eduardo Reima, VP of Finance and Investor Relations Mr.

Operator

Rodrigo Limb, Vice President of Regulation and Institutional Relations Mr. Elio Wolff, Vice President of Strategy and Business Development Mr. Italo Freitas, Vice President of Trade Mr. Antonio Varejao de Godoy, VP of Operations and Security Mr. Marcelo de Siquera Freitas, VP of Legal Mr.

Operator

Robson Pinero de Compos, VP of Engineering and Expansion Camilla Al Araujo, VP of Governance, Risks, Compliance and Sustainability Mr. Renato Carrera, VP of Supply and Services Mr. Jose Renato Dominguez, Vice President of People, Management and Culture and Mr. Giuliano Dentas, VP of Innovation, R and D, Digital and IT. We'd like to inform you that this conference call is being recorded and the replay will be made available on the company's Investor Relations website, where you can also find the slide deck in Portuguese and English.

Operator

If you need simultaneous translation, please click the Language Interpretation button at the bottom of your screen. Choose your language of preference, Portuguese or English by using that icon. For those listening to the conference call in English, you can mute the original audio in Portuguese by clicking mute original audio. In the Q and A session, please submit your questions using the Q and A button located at the bottom of your screen. Your name will be called and a request to activate your microphone will pop up on your screen for you to ask your question live.

Operator

Alternatively, please write no microphone at the end of your question, Before proceeding, we would like to inform you that any statements that may be made during this conference call related to the company's business prospects, projections, operating and financial targets are based on the beliefs and assumptions made by Eletrobras' management as well as on information currently available to the company. Forward looking statements do not guarantee performance as they involve risks and uncertainties and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions and other operating factors may influence the results expressed in such forward looking statements. Now I would like to turn the conference over to Mr. Ivan de Sousa Montero, CEO of Electrobras, to begin the presentation.

Operator

Please, Mr. Montero, you may proceed, please. Thank you very much, and good morning, and welcome to our 2Q 'twenty four earnings call. I would like to start with our agenda that was disclosed to the market. It is related to the restructuring of Eletrobras pursuing efficiency and reduction of PMSO.

Operator

We disclosed a reduction of 16% year on year We have a target for this year in the amount of DKK7 1,000,000,000 for the annual PMSO. But we are going to have about RMB6.3 billion in our recurring PMSO. Although these strides that we have made, we still have many gains to capture in our internal processes. And we expect to reach a profitability level and an efficiency level similar to our peers, which we still have not achieved at Eletrobras. Part of those savings and reductions through the voluntary termination plan that has been implemented and it also reflects the fact that our workforce is becoming younger.

Operator

It is important to highlight that many initiatives will still capture important gains and benefits. For example, having 1 single service center in the city of Recife. Another important point that we should highlight is our ESG agenda. We had already finished the sales process of the thermal units that we had. And this is very important for our net zero commitment.

Operator

Another important point is related to a change in our governance with the creation of the sustainability committee made up by members of our Board of Directors. We also had significant highlights when it comes to capital allocation. First, with the incorporation of furnace, and we also finished a new buyback program. We also sold the gas thermal units and also the public offer of preferred shares owned by Cetep. And that is very important for our strategic plan from 2023 to 2028.

Operator

And when it comes to the financial highlights, we had a very strong financial gain this quarter, and we implemented a program to improve the management of our financial liabilities, which is in line with the growth of the investment program that we are going to show you, not only in terms of making more modern units, but also in our participations of the transmission auctions in which we are going to invest BRL5.6 billion. This is just the beginning of a significant journey, and we are very optimistic about the capture of gains in the future and benefits and we are going to have the chance to address that more later. And now we have a trade team which is yielding great results to Electrobras. And now I would like to turn it over to Eduardo, our VP of Finance. Hello.

Operator

Good morning. Let's go to Slide 7 to show you more details about our ESG agenda. Ivan told you about the sale of the thermal units, Anakin Biota. And based on that, now we have a golden seal in the GHG protocol, which is very important in our ESG agenda and also our commitment with transparency. We released a number of reports with details, including our sustainability report, which has a number of important highlights for us, and we provided you with a link so that you can access the report and see more details about it.

Operator

Now let's go to Slide 9 to give you more color about FERNANDEZ. Why was it important for us to incorporate FERNANDEZ? We had 2 headquarters in the same city. So by doing that, we were able to simplify the corporate structure and management. We were able to improve our capital structure.

Operator

And by doing so, we can gain efficiency, unifying and standardizing processes and also eliminating redundancies and rationalizing resources. This was an accounting event in the amount of RMB1.1 billion with deferred fiscal credits or tax credits. And of course, we aim at compensating the shareholders considering the tax profits that we captured in this transaction. And also we aim at optimizing the capital structure. The Holding Plus furnace will be the biggest financer of the group as a whole.

Operator

Now moving on to Slide 10, let's take a look at more details about our capital structure. We finished and reopened our buyback program. In the previous program, we had bought almost BRL2 1,000,000 worth of shares. And by doing this, we will be able to buy back about 10% of the outstanding shares in 18 months. And also, we sold Sateb's preferred shares with SEK 2,200,000,000 and we sold SEK 93,000,000 shares owned by us.

Operator

Now let's talk about the thermal power plants. We are going to let go of about 2 gigas of installed capacities. And these units are located in the cities of Manaus and also Rio de Janeiro. And this should amount to R4.7 billion dollars considering R3.5 billion dollars plus R1.2 billion dollars in earn outs. By doing so, by disposing of the thermal power plants, we are going to transfer the risk of credit to the acquirer.

Operator

Now on Slide 13, you can see the details of the transmitting company's tariff review. And here you can see the progress of our revenue, the annual allowed revenue from the previous cycle to the next cycle. So we started with ZAR17 1,000,000,000, then we had adjustments for inflation. And in this period, we had an inflow of about RMB 14,000,000. We also had the tariff adjustments for our lines and also the lines that had an extension in their contracts.

Operator

And this drop happened basically because of the effect of extending the contracts that we had back in 2013, and we had an additional amount that is being returned now as a result of that. And at the end of the day, out of the RMB17.5 billion, we would have a recurring allowed revenue of RMB16.8 billion after that review process. And now for this cycle, we are going to reach SEK 15,300,000,000. Now let's move on to the operating part of our presentation on Slide 15. As Ivan said, since the beginning of the year, we started operating with a trade team, a full trade team.

Operator

And we believe that the prices right now are adjusted by risk than it used to be in 2023. And by doing so, we feel comfortable when it comes to hiring people. So when you look at this chart, you can see the free market and the regulated market prices as we disclosed in the Q1. And you can see that we advanced more than 1 gigawatt in the period. And you can see that, that is a very significant progress.

Operator

And we reached over 600 customers and in the free market over 500 clients. Now on Slide 17, I'd like to give you an overview of the financial figures. We like to show the regulatory numbers because that's where our cash generation comes from. And in this metric, our revenue grew by 9% year on year, our EBITDA grew by 10% year on year, and our profit and we use IFRS here because this is the basis for dividend payment. There was a 31% drop here, but that happened due to a number of adjustments.

Operator

And we are translating the regulatory numbers to IFRS and that might generate some distortions. Now on Slide 18, as Ivan said before, we continue seeing a drop in our PMSO with a 17% drop year on year. And quarter on quarter, we still had an increase. We used to be at DKK1.594 billion and now it's less than that because of improvements in our processes and other improvements as well. But we also hired almost 2,000 people in that period.

Operator

So we are breathing fresh air into our team as a whole, bringing more efficiency as well. Now on slide 19, I'd like to show you our allowances and the highlight here is compulsory loan and you can see how efficient we've been in our negotiations of better conditions in our liabilities and thereby reducing uncertainties in our contingencies. And another highlight here is the PDD line. In the past, we had reverted RMB 110,000,000 in Amazonas. We didn't have that this period.

Operator

And when it comes to revenue and also when it comes to the provisions in Amazonas, we still had an impact of R480,000,000 this quarter. But since we had also sales, this number is going to go away in the coming quarters. Here we have more details about the compulsory loan. Year on year, you can see that we made a lot of progress. We started with DKK22 billion, now we are at DKK15 billion and that is partly due to negotiations with discounts and also with payments that we made through incurred deposits or cash.

Operator

But more than reducing this amount, it is important to notice that we are also reducing the causes that may lead to deposits of compulsory loan. And here you can see some details about our net debt over EBITDA. It's EUR 2.5 billion in the regulatory market. And we can see here that we are very comfortable. We are in a very comfortable position with less than 2x, 1.9x actually.

Operator

And after the capital raise that we had in April June in the amount of R16 $1,000,000,000 we are at a very comfortable net position. And cash right now account for almost 3 years of repayment of our growth debt. And that also drives our costs down, our average effective costs down. And now we can move to the Q and A session. Thank you.

Speaker 1

We'll now begin our Q and A session. We kindly request to ask all questions all at once and then the company will answer them. To ask a question, please press the icon Q and A at the bottom of your screen. Your names will be announced and then you can ask your questions live. You'll be asked to unmute your mic.

Speaker 1

If you don't want to speak into a mic, please write no mic at the bottom of the question, and then the operator will be reading those questions out loud. Mr. Guilherme Lima from Santander asks the first question. Good morning, folks. Actually, I have 2 questions.

Speaker 1

We see the credit recognition of 1,200,000,000 with Furnace. But before that incorporation, we had unregistered tax credit amounting to €5,000,000,000 If you could elaborate on that difference, when are you going to book that difference? As to the hiring of people, you have a very impressive number in the quarter of about 1 gig. What are you going to use to base your prices? What about the contract durations?

Speaker 1

What enabled that expressive increase in volume? And what is your trade strategy like? Thank you, Guilherme. The first question will be Hayama, and then the CEO will be talking about the strategy. Hello, Guillaume.

Speaker 1

As to the tax credit, we hadn't booked anything at Petrobras because before that incorporation, Petrobras was a nonoperational company. It only accrued losses. There were no effective benefits of future use. After the incorporation, we now have some perspective of using that credit, And you shouldn't look Electrobras on itself alone. You should look at both of them and how they should behave throughout time.

Speaker 1

I think it's important to say that in both companies that you still had a lot of things to address as far as contingencies go, some credits in assets that had already been reversed, but they hadn't been used for tax purposes. So when you use these two lines and you include that into the KV flow to estimate collections, the effective use of credit would be low, but even more than that. From the capital structure and how the group is looking into the long term strategy, how we are going to fund projects, how we are planning to invest in both companies. I believe that we should be using resources from the holding slash furnace, the companies that have more liquidity and market access. And when you look at that, you optimize that with future dividends payments for shareholders and managing the investments portfolio overall.

Speaker 1

That's why we have lower numbers for tax credit booking as you would probably expect. Thank you. Good morning, Guirami. Thank you for your question. Actually, the strategy that is being executed for trading energy is focused on the end customers, looking for those customers that can add more value to the company, given the fact that we have an increase in our customer portfolio for over it's about over 500 new customers now that we are beginning to work with the trading of energy.

Speaker 1

That has been been that has been driven by the desk, which is identifying the best prices available that would boost company margins. Revenue is a result of that. And there's also the development of new products, given the fact that these new end customers have that need, new and innovative products that would actually meet these customers' expectations. So these are the 3 pillars: desk, end user and making better products in our trading strategy. That's why we have that result, the results we've seen in Q2.

Speaker 1

This is going to be impacting future quarters. Thank you. Thank you. Mister Daniel Travitsky from Safra is up next. Hello.

Speaker 1

Good morning. Thank you for taking my question. I have a couple of questions. Number 1, the agreement you've signed with the government, we've seen that in the press, You'll be advancing CDE and the merger with Angra. Could you please elaborate on the topic?

Speaker 1

That would be very helpful. The second question is about the capacity auction that was scheduled for both August September. Can you give us an update on the topic as far as the timeline is concerned? And how are you preparing to be part of that down the road? Thank you, Daniel.

Speaker 1

As to the negotiation with that agreement, this is something that is being discussed all the time. We had a joint request to extend that negotiation for yet another 45 days. It's a private negotiation. We cannot communicate what they are. We already made a memorandum to to the public.

Speaker 1

Other than that, we cannot discuss. Given the fact that is the extension has been granted, we remain involved in that negotiation trying to reach the best outcome possible. As to the capacity auction, I'm turning it over to Elio, our VP. Good morning. Thank you for your question.

Speaker 1

We've been addressing the topic for quite some time. We've been preparing to be part of that auction. We're trying to both environmentally and economically enable ourselves to be part of that auction. The ministry put out that consultation. We participated.

Speaker 1

We contributed in that consultation, but we're still waiting for the final decision on the ministry with all the rules and the date itself for the auction. We remain active working in that direction. That's for the very first time. Capacity auction includes hydroelectric power plants. So we're very excited about it.

Speaker 1

Thank you. Thank you. Mr. Bruno Amurillo from GS asks the next question. You may proceed now, sir.

Speaker 1

Good morning. Thank you for taking my question. Could you comment on the outlook for the investments, plans for improvements for the next 4 years? What are the conversations with the regulators are? Could you please comment on the EBITDA to free cash flow conversion in the following years?

Speaker 1

Because of the liabilities you've been paying out now, you should be expecting cash generation or are you going to allocate those funds into improvements and renovations generating value, but we wouldn't expand free cash flow directly. If you could elaborate on that, that would be very helpful. Thank you. Thank you. Bruno, Hayama will be fielding that question.

Speaker 1

Thank you, Bruno. As to reinforcements and improvements investments, I think we have to take into account our concern with our assets. They should be invested on so that can be operational for the next 30 years. So we want to maintain that asset as best as we can. They have to remain operational.

Speaker 1

That's our number one priority. Then, of course, we've been looking at those energy transition issue. There are risks, but there are opportunities. However, they'll demand more investments in transmission. We have to reenergize the entire distribution network so that we have a robust network to be operating with that intermittence that comes out of these new energy sources that would be added to the system.

Speaker 1

Of course, it's not a one off investment. It's going to be taking place throughout time. We actually have a committee in the company that will be constantly considering the best way to allocate that capital throughout time. Very cautiously, we want to look at both sides, safety on one hand and opportunities on the other hand as to the capital allocation goes, of course. Alio, thank you, Bruno.

Speaker 1

Ever since we started our journey, improvements and renovations come from that theory that Hammar has just said. We have to make sure our assets are modern, are robust to be properly operating the system. Ever since the get go, we want to have that segment that would be unifying operations demands, safety, and at the same time, looking at investments opportunities, trying to strike the best balance possible, buying equipment, ensuring service provision and properly allocating capital with good returns, just like Hayama said. We look at that opportunity we look at that possibility as a unique opportunity. We have to prioritize investments, allocate capitals and provide attractive returns to the company and shareholders.

Speaker 1

We have come a long way in the past 2 years, 24 maybe even better, and we're going to be having authorizations to make investments along the same lines. Bruno?

Operator

Our priority, as Jaime said, is the safety of our people and the environment. We are going for an organic growth. We are a utility company, so we need to provide the best service possible with the best resilience possible. Now I would like to turn it over to Varejo so that he talks about the availability of the equipment. And we have over 60,000 pieces of equipment.

Operator

We have 40% of transmission lines in Brazil and 20% of generation assets. And Marie Jean can tell you more about that. I have two comments about this. The first one is availability of lines. We are at 99.97% and the availability of transformers is at 99.93%.

Operator

Now generation availability is at 8% more than average. And that's because we are investing in modernization and we are taking regulatory opportunities. And also our Board approved an asset management policy that reflects exactly the guidance provided by our CEO. And our investments are always analyzed considering the performance of the asset and the regulatory risks associated with them and also the risks inherent to the system since we have a lot of responsibilities related to the security of our assets and safety of our people. Mr.

Operator

Marcelo Sa asks the next question. Mr. Sa, go ahead. Hello, good morning. I have two questions.

Operator

First, about the disposal and swap of assets. I know that you are finishing a transaction for a swap of assets, swapping generation and transmission assets. Would that make sense to you? And also, I would like to know about the effects of Amazonas. I believe that if you still have delinquency, that is going to be reflected on your results, but you are also going to adjust the price that Ambat will pay to you.

Operator

I would like to confirm that so that we can include that in our models for the second half of the year? And lastly, I would like to know if your capacity reserve projects require environmental licenses in your assets. And that question is more related to our concern in relation to the strike that happened recently. Okay. Starting with the disposal of assets, we executed a lot of transactions in which we are going to have a mismatch between the assets and we are always going to verify what the market conditions are before we execute.

Operator

And so far we don't have anything specific to tell you. And when we do, we are going to disclose the communication to the market. And for the second question, I'd like to turn it over to Jaime. And the third question will be addressed by Elio. Thank you.

Operator

About Amazonas we said in our material fact that we published recently, Amazonas Energia is still a provisioned in the second half in the second quarter rather of 2024. You can see that we had RMB 480,000,000 in total, but we have not recognized the revenue in our IFRS analysis. But as I said, in our contract, we are not going to have that risk anymore. That risk will be transferred to the buyer. And once the guarantee is executed, it is going to become part of the selling price.

Operator

The selling price will be added with the insured amount. So that's the logic that you should include in your model. Now, Elio, over to you. Hello. Good morning.

Operator

As we said earlier, we have been preparing a number of hydro projects so that we can participate in the capacity auctions. And so far, we don't have any restrictions related to the strikes in the environmental agency. As the project evolves, we are going to analyze whatever it is that we need for the implementation, the actual implementation. And later on, we are going to assess any challenges that we might have. But for now, in order for us to participate in the auctions, there are no restrictions.

Operator

Okay. So let me just confirm my understanding about Amazonas. In the Q3, are you still going to have a negative effect on your EBITDA, but that is going to be offset by the selling price, right? So for your EBITDA in the Q3, you are still going to have a negative effect. Is that correct?

Operator

No. I think that it is going to be a neutral effect

Speaker 1

in the Q3.

Operator

Okay. Thank you. Mr. Felipe Andrade with Itau BBA is going to ask the question. Please go ahead, sir.

Operator

Okay. So the next question will be asked by Ms. Maria Carolina Carneiro with Safra. Please go ahead. Good morning.

Operator

Thank you for the presentation. We read news over the past month about your negotiations with unions in relation to the agreement that you had at the higher court. So I would like to know more updates about that topic because I know this was important in terms of costs for you, right? So if you have any more details about that, that would be very helpful. With the unions and making progress on those negotiations.

Operator

And when it comes to the higher court of labor, we actually suspended the process during the month of July, but we are going to resume the discussions at the higher courts because we still have the possibility and the perspective of having the agreement settled with the unions. And now over to Marcelo, he can compliment the answer. Actually, we already have an agreement with the unions that represent about 20% of our employees. As I said earlier, we are still negotiating with the other unions and we have been adjusting our proposals reasonably, of course. But we believe that the agreements are still very attractive to our employees, and we expect them to sign it.

Operator

And over the next weeks, we are going to work hard on getting closer to the employees and having all the agreements signed. Okay. Thank you. Next question comes from Mr. Felipe Andrade with Itau BBA.

Operator

Please go ahead. Good morning. I'm sorry, I had a problem with my connection earlier, and I was not able to ask the question when you called my name. I would like to know more about your trade strategy. You traditionally have been attacking the market in a very aggressive way.

Operator

And over the past quarters, you had a volume of contracts that you had mapped out. And we believed that many contracts were reaching their maturity date. So I'd like to know from you if you still have a significant volume of contracts with consumers ending in 2025 and 'twenty six, and if you could give us more color about that volume of contracts with those terms. And also if you are contacting those clients so that you can get an extension maybe? Thank you.

Operator

Well, Felipe, our company in the past didn't have any structure for customer service, but now we put together a thorough structure in Sao Paulo. And now we are fully customer centric. We have our assets to meet the customers' needs. Creating that team was critical. Now we have Italo leading that team and he's going to give you more details about the strategy.

Operator

But Electrobrands from now on will be fully customer centric. Our focus is on providing services, good services to our customers. And Felipe, Do you refer in your question to the regulatory customers? No, actually, Italy a while ago, you showed us the number of contracts that were about to finish in the free market. And that was the addressable market that you had in terms of those contracts would amount to 3.5 gigawatts in 2025 and 'twenty six.

Operator

So I would like to know if you are still monitoring those contracts and if we can consider that volume for our projections. Okay. Gotcha. So for the coming years, we are going to have some contracts finishing, and some of the quotas that we have will finish as well. And we indeed, we mapped out those contracts that you mentioned, and we included those contracts in our latest results report.

Operator

And that market does exist, as you said. We believe that this market is covered by generators and traders as well. And since we are pursuing end consumers as much as possible, we are also trying to reach that addressable market. As we said earlier, our main goal is to reach the end consumers. And obviously, we need the appropriate structure to do that.

Operator

We need a marketing structure. We need a product development structure. We need a channel structure so that we can appropriately reach those customers. And not only that, but we also have the mission of increasing the contract terms and also reducing our portfolio churn. So those are the 3 main points that we need to address and in which we are going to focus.

Operator

So as Ivan said, we now have a team in Sao Paulo, a very well put together team. And you can see that on our second quarter results. And we can't lose sight either of the fact that we use renewable energy, which is very appropriate to certain types of customers that are trying to use those products. And also, we can see an in a same day variation, a very strong same day variation, which can generate gains for, electrobras in the solar non solar, arbitrage. So this is the outlook that we have right now.

Operator

Thank you. I would like to turn the conference over to Mr. Ivan de Sousa Montero for his closing remarks. Please go ahead, sir. Thank you very much for your participation.

Operator

If you still have more questions, please talk to our Investor Relations department. Thank you very much. Have a good day. This concludes ElectroBras' conference call for today. Thank you very much for your participation.

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