Earnings Call: Q1 2023

May 5, 2023

Good morning, ladies and gentlemen. Welcome to Auren's video conference to discuss the results for the first quarter of 2023. This video conference is being recorded, and the replay can be accessed on the company's website, ri.aurenergia.com.br. The presentation is also available for download. Please be advised that we will start the question and answer session after the presentation when further instructions will be provided. Before proceeding, I take this opportunity to reinforce that the forward-looking statements are based on the beliefs and assumptions of the management of Auren and on the current information available to the company. These statements may involve risks and uncertainties given that they relate to future events, and therefore depend on circumstances that may or may not occur. Investors, analysts, and journalists must take into account that events related to the macroeconomic environment, the segment, and other factors that may cause the results to differ materially from those expressed in the respective forward-looking statements. Present in this video conference are Mr. Fabio Rogério Zanfelice, CEO, and Mr. Mateus Ferreira, CFO and Investor Relations Officer. The investor relations team is also in this call. I would now like to hand over to Fabio Rogério Zanfelice, who will begin his presentation. Please, Mr. Zanfelice, you may proceed. Good morning, ladies and gentlemen. It is a pleasure to have you here for another earnings call for Auren's related to the results of the 1st quarter of 2023. Let's move to the 1st slide. Let's move to page 3. This is the agenda, with the 1st quarter highlights, the energy market, and our performance, and finally, closing remarks. Let's move briefly to slide 4. This is where we're going to show you some highlights for this quarter. We had a very robust operational performance, both in hydroelectric and wind generation, we had in the hydroelectric generation, we had favorable results because of favorable hydrological conditions. In wind generation, we had levels 18% superior to the first quarter of 2023, especially related to the fact that we were able to reestablish the collecting substation that has helped in the assets that we had in operation in the first quarter of 2022. If you compare the first quarter of 2022 with the first quarter of 2023, we had a superior generation. In terms of adjusted EBITDA, we had BRL 396 million in the first quarter, with an adjusted EBITDA margin of 28%, cash conversion index of 75%. In Sol de Jaíba, we had a release of BRL 180 million of BNB funds. Also, after the end of the quarter, the last Wednesday, on March 31st, we received the results related to a dispute that we had related to the blackout on the Jupiá plant that used to be part of the portfolio CESP. The company made an agreement with the stakeholders of that judicial proceedings. In the earnings release, you'll get more information about that. In summary, in the total liabilities of Auren, this accounted for BRL 980 million, almost BRL 1 billion that we are reducing in terms of liabilities of the company now that we have completed this agreement. In terms of trading, our energy balance has 95% of energy agreements made and up to 2025. Our carbon credits keep operating. We have already sold over 180,000 tons of carbon. As I mentioned, we have expansion projects that are moving forward on time and on budget. Next slide. Actually, on slide 6, we are going to talk about the energy market. In the past quarter, in terms of affluent natural energy, we had significant results. It was 6% above the long-term average, not as good as the first quarter of 2022 that had over 8%, 11% above the average. The year of 2022 was very good, reached 98% of LTA. As you can see on the right-hand side on the chart, you see that the end of the quarter, we reached 85% of our storage capacity vis-à-vis the 70% capacity we reached in the first quarter of 2022. That was even better than 2011. 2011 was when we reached the highest storage level. This is a figure unheard of since 2005. This means that, of course, we've had a very good recovery, and this is also reflected in an improved performance in hydroelectric generation as we can see on slide 8. In terms of operational performance. You see that the hydroelectric displacement was above 100% basically no displacement, and it was 96% in the first quarter of 2022. Here's the information for the generation of HPP Porto Primavera, the most important ones. In the first quarter of 2023 was 6% above the physical guarantees, reaching 90% in the first quarter of 2022, We can compare both quarters as we shown in the previous chart. This is also related to the management that we have of the reservoirs that we have upstream. Since Porto Primavera is downstream, this has contributed a lot to that generation levels. You can see in the chart the generation versus physical generation, you can see this variation. In terms of diffluent streams, it was twice the levels we reached in the same quarter of 2022. Almost 9,000 sq m per second vis-a-vis 4.4 thousand in the first quarter of 2022. This generation was much superior. On slide 9, you can see some of the results in the wind generation. In the first quarter, we had a consolidated generation of our eolic complexes 0.5% above P50, this is what is expected. 10.6% above P90. This is almost all of our fields performed very well. Just one of them was under 50% because we had the 5-year maintenance activity that had already been scheduled. It was performed in the first quarter because this is the period when we had the lowest levels of wind. This is why in that particular plant, this was lower. In POE 3 it was a little bit lower too for other reasons. Considering all of our wind energy plants, you see that they are in the same region. As you can see on the map, they are all of them in a 50-kilometer radius area. This is why we show you the consolidated wind generation chart. On the next slide, you see that for trading, we have sold 3.3 average gigawatts. Until today, we have 109 new customers that are being serviced by our new trading company. This is also interesting, you know, taking captive clients to the free market, and you see that we also traded over 180,000 tons of CO2 at the price of $6.6 per ton of CO2. Our level of sales hires of about 95% and about 60% of the average contracted level. You see that this is very stable and we expect the whole year to keep behaving like that. Now I will turn over to Mario Bertoncini, who's going to explain the financial performance. Fabio, page 12. Let me give you the highlights for financial performance. We completed the first quarter of 2023 at BRL 1.4 billion, a 2.2% increase vis-a-vis the first quarter of 2022. This level of revenue is impacted by smaller prices of energy. As Fabio mentioned, this also means an 12.4% increase in the amount of energy that was contracted. This means that our trading company is gaining a lot and is gaining very good position in the Brazilian market. As to adjusted EBITDA, I would like to highlight a change that we are implemented as of the first quarter of 2023. Until now, we used to show our EBITDA, including the MTM results, the mark-to-market results. Of course, we will keep making that disclaiming and also giving the MTM results every quarter, but we are no longer going to include it in the adjusted EBITDA. As of now, as of the first quarter of 2023, you will see in our materials that you have the chart on the right, you will see a level of BRL 396 million, a margin of 28% and a 12% increase over the same basis vis-a-vis the adjusted EBITDA of the first quarter of 2022. If we were to use the prior criteria we used, you would get the results you see on the left-hand side of the chart. We had a positive result of MTM in the first quarter of almost 39 million BRL. If we were to use the previous criteria, we would have 430 million BRL in EBITDA. This favored us in terms of positive results. This is due, as Fabio mentioned, due to wind generation that is much higher this quarter, both because we got more winds and out at EP3, as well as also from the improved operations of Ventos do Piauí 2 and 3. I would also like to highlight in term... We consider operational costs and expenses as a whole, there was a 8% reduction for those expenses, especially because of the reduction in the cost of purchased energy. As to expenses with people, material, services, and others, there was an increase of BRL 30 million in the first quarter of 2023 vis-à-vis the first quarter of 2022. It's important to explain this increase. This has to do with two main factors. The first one relates to inflation in current expenses such as payroll, maintenance contracts. The second factor that has impacted on that was the fact that we increased our generation. Ventos do Piauí 2 and 3 started to be operating, they didn't exist in the first quarter of 2022. We did not have increases in those expenses because of losses or increases in expenses. On slide 13, we have cash flow and also the profile of capital structure. We completed the first quarter of 2023 with leverage at levels very similar to last year, 1.6 times the net debt. We had resources from BNB, as Fabio mentioned earlier. The fact that now we have BNB funds, we will have more of those, especially as we continue in our project Sol de Jaíba that is being constructed. Our amortization schedule is very good, 7.3 years in average of debt terms, and you're familiar with our cash positions of about BRL 3.6 million. In term cash flow, we show below. Here you see the cash conversion index. This was a very robust quarter in terms of conversion. In the first quarter of every year for seasonality reasons, usually the cash conversion index is lower. Usually it is 68%, but this quarter it was very good, it was 75%. What we able to observed here in amortization has to do with the funds we got from BNB and BNDES. We already have dividends of BRL 1.5 per share approved. This is already part of the ex-dividend data that are going to be paid on May 15. I'll turn over back to Fabio. Thank you, Mario. Now let's talk about our social environmental performance. We would like to reinforce our commitment to social, environmental, and government governance practices. We launched our ESG 2030 Strategy based on three pillars, and with 10 commitments that can be seen on the right-hand side of the slide. We want to improve the positioning of the company in investment of people, diversity, inclusion, corporate governance, also synergy and influence in the energy sector, and also creation of circular solutions, among other commitments that the company is taking by implementing this strategy. I invite you to learn more about this strategy. You can find that by using the QR code you see on the right-hand side of the screen. If you want, you can read more about our ESG Strategy. These details can also be accessed on our website. Next slide. Now let's move to our final remarks. Here are some final considerations related to this last quarter. We advanced in our construction projects such as Sol de Jaíba and Sol do Piauí. This is one of the largest wind energy projects that are under construction in the country. Sol do Piauí is going to be the first hybrid project to be operated in Brazil, and they are being implemented on time and on budget. We keep on investing on market intelligence, establishing partnerships, development of access channels to more to increase the access of our consumers, and the high voltage group is allowed to move from the captive market to free market, so now we are working on this new segment of customers. As mentioned, this quarter we also had very good wind generation levels, 0.5% above P50 and 10.6% above P90. Again, we have this commitment with ESG, and this is why we have expanded our commitments in terms of ESG goals. This is the information we had to share with you for this quarter, and now I would like to open the Q&A session. We will now begin the Q&A session for investors and analysts. If you wish to ask a question, please press the raise your hand button. If your question is answered, you may exit the queue by clicking on the lower your hand button. Our first question comes from Rafael Nagano from Credit Suisse. Good morning. Thank you for taking my question. I have two questions, one related to the transmission bid we have in June. Do you plan to participate in this bid? What are your expectations related to this bid? Do you plan to participate on your own, or do you plan to have a operational or financial partner with you? As to the contracts established for this first half of the year, can you share with us the average level of these contracts? Are they better contracts than the ones you signed in previous quarters? As to transmission, we had already mentioned that we are studying the opportunities to participate in this bid. We understand that they have favorable perspectives in terms of results for our company. We have not made a decision yet as to our participation. We need to present that to our board of directors. Mario Bertoncini's team and Joaquin's team are working on that, analyzing this possibility. In terms of potential partnerships, we're also considering those options. Still we have not defined anything yet. As to long-term contracts that have been signed in the last quarter, I will just turn over to Mario Bertoncini to talk about that. Thank you for your call, Rafael Nagano. Your question, Rafael Nagano. In this quarter, in our release, you will get more information about the contracts signed. In the sales made for 2023 and 2024, average prices are of about BRL 210. For the last quarter and last, the end of last year, there was a drop in prices. As you know, we have very well-controlled costs, we are making sales to end consumers, focusing on migration that can provide good averages in this blend. Usually we purchase that back because since the balance is 0, we plan to keep that as 0 for the upcoming years. It's about BRL 200-BRL 210, that will be the average price. Even with lower prices, we still have gain of margin and we're more focused on migration. Thank you very much. Next question from Luiza Candiota with Itaú BBA. Good morning. Thank you for the questions. I have a question related to the next capacity bid expected to be held in November this year. What are your perspectives as for this next bid? What kind of scope and level of competitiveness are you expecting to find, and would you participate with Porto Primavera HPP? Thank you for your call, for your question, Luiza Candiota. We are still waiting for the definition of what kind of energy sources will participate. Hydroelectric energy is allowed, we need just to make sure that this is part of the bid. Of course, we are interested, as long as it's reasonable in terms of end price. Of course, we are interested in investing in Porto Primavera. We still have more 4 machines to be implemented with a total capacity of 440 MW. If this bid considers hydroelectric generation, we plan to participate. Today, I think that the decision we have to wait for the bid definition of what are the conditions for the participation. Next question comes from Guilherme Lima from Santander. Good morning. Could you please give us an update as to the possible securitization of Tres Irmãos? What about its timing and costs? If you win some of the batches in the bid, how could that impact on your dividend distribution? Thank you, Guilherme, for your call. As to a potential securitization of Tres Irmãos, this is part of our plans. This is a priority for the company. At appropriate cost, we plan to anticipate these resources for Tres Irmãos. It is desirable, but not mandatory. The company does not need to make M&A results, such as the example for the bid or for the second group of dividends to be paid as already communicated to the market. This anticipation is desirable, but it's not mandatory for these two conditions. We have a robust capital structure, very good cash position, well-planned to face those commitments. As to costs, I'd rather wait a little bit longer to answer this question. We keep talking to important reference agents, and as soon as we have some concrete information, you'll have full visibility of this transaction and its costs. We are trying to make a very competitive operation that relates to our profile. Thank you very much. Once again, if you want to ask a question, just click on Raise Your Hand button. The question and answer session is now closed. We would like to give the floor to Mr. Zanfelice to make the company's closing remarks. Ladies and gentlemen, thank you for your participation in another earnings call for Auren. We had a very positive first quarter. We are very pleased with our results, and we will keep on working to ensure growth and to meet the shareholders' expectations to our company. I wish you a good day and a great weekend. Thank you. The Auren's video conference is now concluded. We thank you for your participation and wish you a good day.