Earnings Call: Q4 2023

Mar 11, 2024

Good morning. On behalf of Edenor, we would like to thank everybody for participating in this conference call to discuss the results of fiscal year 2023 and the fourth quarter ending December 31, 2023, that were released on Friday, March 8. We will also highlight important recent developments and advances in our efforts to strengthen our position as an energy leader. If you would like to receive our early release or presentation, you can download them easily from the investor relations section of our website, located at www.edenor.com, or call our investor relations office to request the document. This event is being recorded. After the company's remarks are completed, there will be a question and answer session for which you may submit questions through the WebEx chat. Before proceeding, let me mention that forward-looking statements are based on the belief and assumption of Edenor's management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they are related to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operational factors could also affect the future results of Edenor and could cause results to differ materially from those expressed in such forward-looking statements. Now, let me pass the call to German Kamstiel, our CFO, who will guide us through the presentation. Thank you, Solange. Good morning and welcome to everyone. Your presence here is very important to us, and we hope to provide you with a good understanding of Edenor's performance during the fiscal year 2023. Relevant events, highlights. Before moving to the discussions of our financial performance during the fourth quarter and full year 2023, I would like to take a few minutes to highlight some very relevant and positive recent developments, as shown in slide 5, that have occurred in 2024. These have substantially improved our financial outlook and enable us to focus on further transformation of the company. Following a public hearing on January 26, 2024, to present and analyze electricity distribution tariffs, new tariffs were announced by the regulator, which included an increase for Edenor value-added distribution cost of 319.2% via Resolution 102 of 2024. The new tariffs are applicable from February 16, 2024, and very importantly, included an automatic monthly update mechanism applicable from May 2024. The rating agencies Fitch and Moody's raised our outlook in Edenor's debt, following an improvement in the company's risk profile. Sorry. Just last week, we completed the successful issuance of an exchange of ARS 100 million, based on local dollars, which has helped us to improve our debt profile and capital structure. These developments have restored the economic equilibrium of Edenor. For the first time in many years, our auditors, PricewaterhouseCoopers, are not including a concern about the company continuing to operate as a going concern. This has been since 2012 in the accounts of Edenor. We expect these changes to lead to a more dynamic company with substantially more favorable financial results going forward versus the last several years. This will enable us to continue our strong investment program and continue to improve our service level. Now, let's turn to our financial performance for the fourth quarter and full year 2023. Highlights. New strategy. At Edenor, we continue to work on our plan to transform the company and transition it from its current strong position as the leading electricity distribution company in Argentina into a broad energy leader with a bright future. To do this, we plan to build on the strengths of its existing business, expand our services to supply clean energy as part of the energy transition, develop and expand our smart grid using technology and innovation, offer new services to allow users to buy electricity or self-generate and sell their energy, develop renewables energy generation projects, and further expand our network to serve new customers, such as electric vehicles, public or private. Financial results. Revenues. As you can see on slide 8, revenues reached ARS 120.4 billion in the fourth quarter of 2023, a decrease of 17% in real terms versus the fourth quarter of 2022. For the full year 2023, sales rose 9%. The weak performance in the fourth quarter was due to softer demand and no tariff increases in the second half of the year, despite continuing high inflation. Financial results. Energy purchases. Energy purchases were ARS 75.8 billion in the fourth quarter of 2023, a 32% decrease in real terms compared to the fourth quarter of 2022, which was driven by the weak demand that we just mentioned. In addition, the energy mix this year improved, with more lower cost of hydroelectrical supply and reduces thermal energy cost due to lower fuel cost. For the full year, energy purchases rose 3%, which was helped by a record high temperature in the first quarter of the year. Financial results: energy sales evolution. In the fourth quarter of 2023, energy sales volumes totaled 5,261 GWh, down 3.6% year-to-year, and was led by the decrease in consumption of 6.4% in residential customers. For a full year, volumes increased 4.6% product of the high temperatures in first quarter, as mentioned previously. Edenor's customer base rose 1% versus a prior year of 3.3 million customers. This was mainly due to an increase in residential and industrial customers because of market discipline measures, including the installation of increasing number of energy meters in the fourth quarter, which were mostly intended to convert clandestine connections into registered customers. Financial results: distribution margin. For the fourth quarter, our distribution margin rose 34% year-to-year to ARS 44.6 billion, mainly due to a lower energy purchase cost and, to a lesser extent, tariff increases implemented yearly in the year. For the full year, the distribution margin rose 24% to ARS 242.2 billion, as shown in the slide, due to the several factors. First, the positive effect of tariff increases contributed to higher revenues, even though these adjustments were still below what was needed to fully compensate inflation. A second factor that helped the comparison for the year was a lower increase in energy purchase cost, as we have explained earlier. Financial results: EBITDA. Looking at the EBITDA for the full year 2023, EBITDA rose sharply in real terms to ARS 163.5 billion versus ARS 19 billion last year. The main factors driven the improvement were a substantially positive impact of ARS 198 million due to an agreement for a payment plan for amounts due to CAMMESA for the past energy purchase cost. The tariff adjustments put in place earlier in 2023 of 107.8% in April and 73.7% in June. A further reduction in energy losses to 14.9% in the fourth quarter of 2023 versus 15.9% in the fourth quarter of 2022. EBITDA for the fourth quarter of 2023 was negative by ARS 29.2 billion compared to the last year profit of ARS 43.9 billion for the same reasons mentioned above. Financial results: net financial expenses. Net financial expenses of ARS 88.1 billion in the fourth quarter of 2023 were in line with the prior year. For the full year 2023, net financial expenses increased by ARS 350 billion. Sorry, ARS 350.4 billion from ARS 277.6 billion in 2022 due to a higher interest expense and foreign exchange effects. Financial results. On the net results line, Edenor reported a net loss of ARS 32.7 billion in the fourth quarter of 2023, versus last year earnings of ARS 11.7 billion, mostly reflecting the lack of sufficient tariff adjustments to compensate inflation. For the full year, we reported a profit of ARS 48.4 billion, included the effect of the payments plan with CAMMESA for the energy purchases. This was a sharp swing from last year's loss of ARS 54.4 million. Results reflects the two tariff increases mentions earlier and two, a higher inflation adjustment RECPAM fund, which together more than offset the rise in operating costs due to inflation and higher energy purchase costs. CapEx. For the full year, we invested ARS 123.6 billion, which was up to 17% versus 2022. For the fourth quarter, we invested ARS 32.4 billion. These figures underline our unwavering commitment to improve service quality, which is evident in the strong improvement that we have been achieved in our service indicators. A key goal of our strong investment program was to enable the company to provide reliable service during periods of peak summer demand. Financial results: CapEx details. Our investment program spending allocation is made to fulfill our commitment to meet rising demand, further improve service quality, and reduce non-technical losses. These investments are predominantly geared towards augmenting capacity, implementing remote controls infrastructure in the medium voltage network, connecting new supplies, and installing self-managing energy meters. Throughout this process, we remain steadfast in our goal to prioritize environmental protection and public safety. Over the past 11 years, we have invested more than $2 billion in infrastructure to strengthen our operations capacity and position in our company for the continuing operating success. To rebuild Edenor's network today from scratch would require an estimated investment of $8.5 billion. Starting in 2013, as you can see in the lower part of slide 16, we began the transformation of the network into a smart network by installing 3,347 remote control points, 2,724 tele-supervision points, as well as 345,000 smart meters. This allow us to solve problems that raise in the network remotely and quickly. We have also transformed the way in which we're related to our clients. We modernized the service in our commercial office with cutting-edge technology and developing EDENOR Digital, a cutting-edge service app, which is already used by more than 2.4 million clients. This allows customers to resolve procedures, make payments, generate electronic bills, or receive from home or from a telephone, optimizing clients' time and reducing the carbon footprint by not traveling to the commercial offices or by not printing invoices, for example. Operating indicators, energy losses. We achieved a reduction in energy losses to 14.9% in the fourth quarter, down to 15.6% in the last year's fourth quarter. This underscores our continuing efforts to find solutions to this difficult problem. Our multidisciplinary teams are constantly focusing on finding innovations ways to combat energy losses. These efforts are complemented by our market discipline initiatives, aimed at curbing inefficiencies and irregularities. Analytical tools powered by artificial intelligence have augmented inspection efficiencies, and our market discipline actions continue to detect and rectify irregular connections. It is important to remember that the 14.9% total losses, 9.7% are technical losses, which are recognized by the regulator in our tariff. Operating indicators, quality of service. The investment plan executed in recent years continues to show results that are reflected in continuous improvements in our service quality by reducing the duration and frequency of outages since 2014, and thus exceeding the regulatory requirements set forth. Quality standards are measured based on the duration and frequency of service outages using service quality indicators. For 2023, the SAIDI and SAIFI service quality indicators showed further improvements to 8.2 hours and 3.4 average outages per client in the year, reaching record low and down 75% and 64%, respectively, compared to 2014 levels. This recovery in service is mainly due to the strong level of investment that the company has been made since then. Investments have been focused on implementing improvements in operational process and adopting of technologies applied to the operations and management of the network. Financial debt. On March 7, 2024, Edenor completed two notes issuances in the local market for a total amount of ARS 100 million with a 30 months maturity, which enables us to improve our debt profile and extended the average maturity of our debt. Total capital debt outstanding after these issuances is ARS 182 million. On slide 22, you can see the maturity schedule of the debt as of December 2023, and a pro forma after the recent transactions in which we issued ARS 100 million in class 3 and class 4 of the notes. Our debt profile and capital structure has improved notably post the exchange and issuance of these new notes. Financial debt rating agencies. With the improvement in our risk profile due to important changes in the regulatory front, two of our rating agencies, Fitch and Moody's, made positive moves related to our debt. Fitch raised its rating, and Moody's improved the outlook, which will be reviewed to a positive signal, that are a positive signal. Sustainability, technology, and innovation. We want to lead the transformation of the electricity grid to a smart grid with technology and innovation. Under the new Milei administration, new rules proposed regarding energy and the regulation of the economy present a unique opportunity for Edenor to accompany the country's challenge to become a protagonist in the world economic again. Argentina's commitments in the Paris Agreement, the requirements of the capital markets, the energy transition, and the situation of the electricity infrastructure requires the collaboration of all actors to face the challenges that arise. Our country has a balanced energy matrix, but presents numerous challenges in the area of transportation and distribution. Edenor is a distributor, has demonstrated its resiliency and ability to adapt, which has allowed it to significantly improve its service quality indicators. As our next challenge, we want to lead the transformation of the electricity grid into a smart grid with technology and innovation, implementing solutions already available in other places in the world, which will allow us to gain even greater efficiency for the benefit of our clients. Our new strategy includes moving to transform our network from one that currently only distributes electricity, into a network in which customers can generate and sell their electricity. Where electric vehicles for public or private transportation can be charged, batteries or electric vehicles. Where Edenor buildings and substations can generate renewable electricity through solar panels, where companies can develop their own renewable energy projects, and where the community can measure its consumption in real terms and adopt these technologies by sharing information and knowledge. Sustainability report 2023. On March 8, 2024, the board of directors approved the 10th sustainability report 2023, together with its limited assurance report issued by PricewaterhouseCoopers, Argentina. This is the first sustainability report issued together with our annual financial report. Sustainability, technology, and innovation. Main metrics. We remain focused on these issues. Here, you can see the main metrics that reflects our commitments to SDG, sustainability development goals. We invite you to visit the full report on sustainability on our website, edenor.com.ar. Closing remarks. To close, I would like to reiterate that we remain focused on future transformational growth opportunities. We are an industry leader in Argentina with a leading 20% market share in electricity distribution. The recently announced tariff changes with 319% value-added distribution cost increase, plus the applicable of automatic monthly adjustments, starting in May 2024, are transformational for us. We expect this will lead to material improvements in our EBITDA and net income and position us for an improved financial performance. This will enable the company to continue to make the necessary investments to improve the quality of services, transforming the grid into a smart network with technology and innovation. These improvements have restored the economical equilibrium of Edenor. For the first time in many years, the auditors do not include a concern about the company continuing as a going concern. The controlling shareholder, Edelcos, is focused on building and improvements achieved of the last few years and continues both work to maximize value for the existing business and take advantage of business opportunities in line with a sustainable future by transforming our electricity grid into a smart grid with technology and innovation. We remain focused on continuing our strong investment program to continue to improve our services to our clients. With this, now we would like to open the call for your questions. To ask questions, please send a message to IR Edenor or to the questions and answers menu, identify yourself, and stating that you have a question. We thank you again for all your support and your engagement as shareholder and bondholder of Edenor. Germán, we have two questions. We have one from Christian Terra from Balanz. We have noticed some stretching in the CAMMESA payables. Could you provide us some detail on the total amount of the confirmed payments? Looking forward, what is your days of payables target range for the long term? The total debt that we have with CAMMESA today, that is not including the CAMMESA plans that we have signed last year, is ARS 105 billion. We do not have the payable days still because we have implemented the new tariff as of February 16. Another question. Considering the 320% VAD increase, what is your estimated CapEx for 2024? Are you planning on distributing any dividends in the near term? The CapEx that we have estimated for 2024 is ARS 170 billion, and it is approximately 25% of the VAD that we have projected for 2024. We do not have any policy yet discussed in terms of dividend payments. Agustina. Hello, and thanks for taking my question. I have two questions. First, which is your estimated EBITDA for 2024? Second, which is your estimated CapEx for 2024, and which is the ratio of CapEx versus revenue that you are expecting to maintain? Thanks once again. The CapEx answer, we already did that. That's ARS 170 billion. And it's 25% of the value-added distribution cost. I would give you the number in terms of how much is in revenues, but we share that information with you later. In terms of giving a forecast of EBITDA, we cannot give forecast of EBITDA, but you can follow the research that are done for the company or the rating agencies. They do projections, and they can show you what are their expectations for 2024. I would say something additionally, is that we have been released of the going concern because the PwC did a very important review on the numbers in order to show that there are no big restrictions in terms of financial position of the company, and that improves a lot the company's performance. That's another very important signal that we have received this year with the signing of this agreement, of this financial statements. We have a final question regarding the automatic monthly adjustment. Is there anything else that needs to be defined in order to for it to be implemented as scheduled in May? No, there is not. The process is already done, and it is going to be done automatically. 55% of the adjustment will be subject to salaries, wages, or increases, 20% will be consumer prices, and 25% will be wholesale prices. We do not need any other resolution or any other approval from the regulatory entity to implement it. Already, transmission has this from last year. They have quarterly adjustments, and they are implementing it without any problems. Okay. Thank you very much for participating in our quarterly conference call. Please do not hesitate to