AXIA Energia S.A. Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to Eletrobrás' Earnings Call for the second quarter of 2025. We have with us Mr. Ivan de Souza Monteiro, CEO of Eletrobrás; Mr. Eduardo Haiama, VP of Finance and Investor Relations; Mr. Antonio Varejão de Godoy, VP of Operations and Security; Ms. Camila Araujo, VP of Governance, Risk, Compliance and Sustainability; Mr. Élio Wolff, VP of Strategy and Business Development; Mr. Italo Freitas, VP of Trade and Energy Solutions; Mr. Juliano Dantas, VP of Innovation R&D, Digital and IT; Mr. Marcelo de Siqueira Freitas, VP of Legal; Mr. Renato Carreira, VP of People and Services; Mr. Robson Pinheiro De Campos, VP of Expansion Engineering; and Mr. Rodrigo Limp, VP of Regulation, Institutional and Markets. We would like to inform you that this event is being recorded and will be available on the company's Investor Relations website, along with the presentation shown here, both in Portuguese and English. If you require simultaneous translation, the interpretation icon is available at the bottom center of your screen. You can select your preferred language. And if you're listening in English, you can mute the original Portuguese language audio by clicking on mute original audio. Before proceeding, we would like to clarify that any statements made during this conference call concerning the company's business outlook, projections and operational or financial goals are simply the management's beliefs and assumptions based on information that is currently available to the company. Forward-looking statements are not guarantees of performance as they involve risks and uncertainties and depend on circumstances that may or may not occur. Investors should be aware that general economic conditions and other operating factors may affect the actual results and may be different from those expressed. I will now turn the floor over to Mr. Ivan Monteiro, CEO, who will begin the presentation. Go ahead, sir.

Good morning, everyone. Thank you for being here. This is a quarter that consolidates several initiatives that the company adopted since it was privatized. I would like to list four main things. The first is the simplification of the company's shareholder structure and cost reduction was a major example that came from this initiative. Liability management was also an example as we have been able to reduce the company's compulsory debt from BRL 20 billion to now under BRL 12 billion. Another highlight is the conclusion of connected works. We have the Coxilha Negra Wind Farm concluded in the first quarter and 1,390 Manaus-Boa Vista, which is a connection we will deliver later this year. We're also continuing investments and making record disbursements of nearly BRL 2 billion, and the consistent improvement in the commercialization area is also a highlight for the quarter. All of these initiatives aim at increasing the predictability of our results, which allowed us to announce the BRL 4 billion dividend payout yesterday. We will continue with this initiative to give more predictability, increase investments, reduce costs, and manage our liabilities. And with that, the company aims to improve its process and its trading to become a company directed to serving clients. We are demonstrating with the support of the Board that we are concluding the turnaround stage and building a budget for 2026, which will help us to overcome this stage completely. I will now hand it over to our CFO, and thank you for being here.

Thank you, Ivan. Good morning, everyone. Today, I will discuss the key highlights for the quarter, our financial performance, our energy trading strategy, and our capital allocation strategy. The main highlights this quarter include BRL 4 billion in dividends, a result of the risk reduction Ivan mentioned. This is also linked to our long-term vision for energy. Our second highlight is the contribution from generation to our margins, which increased by 21% compared to Q1 and 16% relative to Q2 2024, helping to offset a decrease in transmission revenue. Another significant point is the BRL 1.2 billion decline in compulsory loans, now below BRL 12 billion. Investments grew by 116% compared to Q1 2025, focusing on reinforcements and improvements. We also completed the first post-privatization transmission auction, the Caladinho project, and finalized the financial and economic rebalancing for Transnorte Energia. Moving on to our financial performance, we experienced a reduction in RAP, partially balanced by increased revenue from generation, which supports our margins. However, our regulatory EBITDA showed a year-on-year reduction of nearly BRL 800 million in equity income. We reported a loss of BRL 1.3 billion mainly due to the regulatory remeasurement of our transmission contracts. If we adjust for this and other factors, our net income would have reached BRL 1.4 billion, which is about 40% higher than last year. Our cost reduction efforts continue, with PMSO down to BRL 1.4 billion and a decrease in employee numbers despite significant hiring during this period. Regarding our energy trading strategy, we have generation resources spread across Brazil. In the Southeast, we had 7 gigawatts of physical guarantees and have incorporated both our physical and purchased quotas for energy trading. This strategy is evolving as we analyze our assured capacities and manage our quotas, which will phase out by 2027. Last year, we generated BRL 1.1 billion in contribution margins from our available energy for trading, rising to BRL 1.6 billion in the second quarter, compared to BRL 1 billion in the first quarter. Seasonal patterns affect our trading, with a decline expected in the third quarter due to the dry season, followed by an increase in the fourth quarter. Looking ahead, we anticipate that the rainy season from December 2024 to April will be close to historical averages, potentially leading to a decrease in prices. It's crucial that we prepare for this potential outcome. Our energy balance for 2025 shows slight growth in resources, creating a positive outlook for pricing. As for capital allocation, we outlined our methodology for dividend declarations in December and additional payments in March. We assess our capital structure on a five-year horizon, considering financial net debt and compulsory loans, and include regulatory obligations in this assessment. Our projected optimal leverage ranges for generation and transmission will guide us in evaluating our ability to pay dividends. Risk improvement since our privatization in 2022 has been notable, with compulsory loans decreasing from BRL 24 billion to below BRL 12 billion. Our investments in Transnorte Energia are being finalized this year, with the project involving significant costs and job creation. We're also addressing carbon emissions through renewable energy initiatives, especially with the interconnection of Roraima, which will lower costs and decrease carbon output. This concludes my presentation, and I look forward to your questions.

The first question will be asked by Fillipe Andrade from Itau BBA.

I'd like to ask you to give us some more details on your trading strategy for the second quarter. In your release, you mentioned this, but I'd like to understand how each subsidiary is participating in building the ACL margins for the short-term market. If you can tell us a little bit more about that. And I'd also like to know what is the recurring CapEx that you're expecting in improvements for the next quarter.

Thank you, Fillipe. I'm going to let Italo answer your first question, and then Elio will answer your other question.

Thank you. Regarding our trading strategy, we operate in trading energy for each submarket with distributed teams in all regions. Their primary focus is on identifying clients that will bring value to the company. Our sales strategy for end customers and traders relies on portfolio analysis conducted by our portfolio department, which identifies the highest potential for increasing the company’s revenue. We can divide this approach into two aspects. My area examines the market to discern emerging demands, while we also have the supply area, known as EPZ, which will discuss how energy supply is forecasted through Eletrobrás. Thank you for your question. In our strategy overview during the first quarter call, we noted that we had a higher sales volume at the beginning of the year due to strong rainfall patterns in December, November, and January. Our strategy aimed to limit energy contracts for the subsequent quarters, as resources tend to be less available due to seasonal patterns. If sales levels had been lower, we would have been satisfied with that outcome. In March, we experienced significant growth in the Southeast, while the North and Northeast lagged behind by approximately BRL 260. For March, the increase in sales volume did not yield a satisfactory result. However, as we evaluate our strategy throughout the year, we believe that maintaining more uncontracted energy would have been beneficial for the remaining months, helping to close the gap created by fluctuations in demand. During the last call, we indicated that we expected reductions starting in June, which is precisely what has occurred. In the Northeast, we still encounter a notable gap of around BRL 30 to BRL 35 on certain days in the third quarter, although the North is catching up. Actual sales in the latter half of the year are balanced by the energy available in the North and Northeast, and we've begun to see some positive results for the second quarter while keeping the same strategy for the rest of the year. As for margins, they are assessed globally by aggregating the performance of all our subsidiaries.

Hi, Fillipe, thank you for your question. I want to emphasize the importance of the investments we are making, which we've been discussing over the past few years. We are investing in our own assets, which is crucial for the organization and is yielding the right returns for our shareholders. Additionally, it is enhancing the resilience of our transmission assets, making it a vital investment. Regarding volume, we have experienced consistent growth since 2022, when the company was at close to BRL 1 billion. In 2023, we reached nearly BRL 3 billion, and in 2024, we invested about BRL 3.3 billion in enhancements and improvements. For 2025, we anticipate further growth and projects totaling over BRL 4 billion, possibly around BRL 4.5 billion. We aim to continue this growth trajectory, and while we will need to assess our goals for 2026 and 2027 through regulatory processes, we see significant potential in our investments. Our target for this year is BRL 4.5 billion, and we are confident it will continue to grow. Although the first quarter fell slightly short in execution, we have made significant recovery in the second quarter and expect to improve further in the upcoming quarter.

The next question will be asked by Andre Sampaio from Santander.

Good morning. First, I'd like to ask a follow-up question on reinforcements and improvements. You mentioned that you still needed an internal effort to accelerate investments. And I'd like to understand if this internal process has already been concluded and I'd also like to confirm something. We've seen a difference in IFRS and regulatory. I'd just like to confirm if there's anything else that we should pay attention to for our models.

So there are 2 points here. Maybe Robson can talk a little bit about this.

The engineering team, of course, is implementing this expansion. But in summary, regarding the approval process and how we identify and pre-execute this. This is very aligned in the company. We have a robust process first to identify what assets we think are important for our regulators to consider for our investments and then in assessing these investments and planning for them, you can't only identify them, right? We have to include it in our budget. So the previous stages are very well laid out in the company. Of course, it's a continuous operation. We always try to improve things. And when it comes to executing these improvements, I think the numbers speak for themselves. Our second quarter was much stronger than the first. And I have to reiterate that question of Caladinho. We are delivering on time and within budget. It's small, but it's the first transmission line that we are delivering. And it was within budget and within the terms. So Andre, this adjustment is basically based on elimination looking at revenue and cost between companies. Nothing noteworthy.

The next question will be asked by Bruno Amorim from Goldman Sachs.

Good morning, everyone. I have two. First, I'd like to ask a follow-up question on reinforcements and improvements. If you can tell us to whatever extent you can about what returns you expect for the investments made in this area with MTMB and Selic rates at the current levels, what returns do you expect and what are the odds of having an outperformance with the regulatory? I'd also like to ask you to talk about liquidity in the energy market to the extent that you can. You've shown prices for 2026 were at very attractive levels. And my question is if the decision of not selling more has been made by the company or if there are restrictions on liquidity at these price levels.

Thank you. Haiama will answer one of the questions and Limp will answer your question on trading.

Thank you, Bruno. On reinforcements and improvements, as with any regulated investment, it will change over time. Our vision is that over time, there can always be divergences between the real interest rates, but looking at a 20-year history where regulations have been robust this has always been constructive. So if there are any differences over time, regulators are concerned with that, and this is adjusted quickly. So we have a robust methodology. We are constantly analyzing these parameters. And with time, we see that they tend to converge. I don't like to compare prefixed and post-fixed rates to see if this is being good way. If it's a 30-year investment, it's important to look at the regulations that we have so that we can deliver what is expected.

Thank you for your question, Bruno. When it comes to liquidity, there is some liquidity because we're analyzing if the market will be open, and this liquidity will happen organically, right? When it comes to the market, we do see that liquidity will be slightly better. And of course, the company's strategy of allocating energy will depend on what we did in all the studies that in this area has been doing. So in summary, there will be some organic liquidity and the wholesale market, of course, we see an improvement there for many reasons. I'll let the unidentified representative answer this issue about your question on the portfolio.

Thank you for your question, Bruno. So we talked about liquidity and how the market is doing for 2026, we see some significant liquidity. It's actually slightly lower than last year. Looking at a one, maybe our prices can affect our liquidity, but we have significant liquidity, especially in the Southeast and this is related to the strategy that was discussed before. So we are trading for 2026 and 2027, but, we're always keeping a technical analysis to see if there's a risk of a gap here. Of course, liquidity is more concentrated in the Southeast. So we're trying to strengthen our sales in the North and Northeast. We've had some operations in the Northeast and these are sales that contribute to reducing risk and to helping us make use of the increase in energy prices.

The next question will be asked by Daniel Travitzky from Safra.

I'd like to ask about your vision for the future of the company. You explained many of the risks that were mitigated. You mentioned several of these elements. And looking towards the future, what will be the company's focus? Are we looking at the reduction of risks? Or are we focusing on risk reduction and capital allocation? That's my first question. And I'd also like to ask about your recent announcement of dividends, shall we see this as a change in the dividend payout practice that you'll now do more frequent dividend payouts or are we continuing with the same previous strategy?

So our vision for the future is to consolidate all of these initiatives. And our dividend strategy follows in the same line. We are now through the classic turnaround phase, and we're looking at the company in the medium and long terms. M&As will basically be about finding new opportunities for growth. The auctions for this year and for next year are also opportunities for growth. We will grow for some time, and then we'll reach a more stable investment pace for the company and this capital allocation is allowing us to give more predictable dividends for our shareholders. So we expect to consolidate these initiatives, make our results more predictable. And we hope to through that, make frequent payments. Of course, there's a number of initiatives behind that, involving AI and other things. In the beginning, we had a holding with 4 subsidiaries including Furnas, and we're now having one single back office for that. But one specific part of it is the relationship with suppliers. We're managing the company as one company, and that gives us a better partnership with our suppliers. But I'd like to ask Juliano to talk about his vision for the future, specifically on using new technologies.

Thank you Ivan. The company has been modernizing and improving very quickly. So we're now among the top 10 most innovative companies in Brazil, and this will be published in the next few days. This is due to how we are modernizing the company's infrastructure. And this includes AI, our monitoring centers and how we've integrated these technologies in the company from commercialization, engineering, and corporate businesses. We aim at expanding this process doing the basics very well. And we also hope to apply these technologies to generate more value for our business.

Next question will be asked by João Pimentel from Citi.

I have 2 questions on my side. First, I'd like to understand something in Q1, you mentioned that you had a longer position for the second half of the year so that you could benefit from the higher energy prices, which is what we have been seeing in price curves. Considering that we are facing a challenging scenario in GSF, and the hedge and the energy balance seems to be insufficient to mitigate this impact. I'd just like to understand how much of the gains that you would potentially have been affected given that GSF is challenging. That's my first question. The second question is about this decision to sell your portfolio, given the restrictions you have on liquidity and so on, is the company's option based on sales for the short-term market or do you think you will have space to monetize things with contracts? I'm asking this not only for liquidity, but due to the market risks, we're going to continue seeing them for the next few months. And I think this affected you significantly in the first quarter. So, do you expect to hold back on trading and have liquidations of PLD in your own market?

Thank you for that question. Haiama will answer your questions.

Thank you. We addressed the seasonal pattern for GSF throughout the year. Typically, we have higher energy levels in the first quarter. If we experience good rainfall and prices decrease, it can help manage the rest of the year, which is why we focused our sales in the first quarter. From the second quarter onward, we reversed our approach because we perceived a greater risk with the price adjustments. The graph we provided showed the price curve for the latter half of the year, fluctuating between approximately BRL 100 and BRL 360, currently at BRL 300. We made decisions to sell in the first quarter while purchasing from the second quarter onward. We conducted several simulations to understand how GSF would respond to ensure availability during potential downturns, not just in optimal conditions. The energy balance we presented was annual, not reflecting any negative positions that might arise later, and this was a deliberate strategy considering our contracted period. However, since GSF is lower in the third quarter, while prices may be high and financially beneficial, the impact won't be as significant as if we had strong volumes in the first quarter. Our strategy was informed by anticipating various scenarios for GSF and pricing. Regarding our trading strategy, we are concentrating on broadening our client base, which includes both large clients with direct connections and smaller clients accessed through partnerships. If we cannot find favorable pricing, we will consider liquidation. I'll let Italo add to that.

Thank you. João, as Ivan said, we had a very detailed study of our clients based on size, market, and so on. And we mapped the best tools we could use to access these clients. Like Ivan said, partnerships, speaking to major clients, open market channels. So our strategy for this is well defined. As we see better options of allocating energy, we are using these tools that we've prepared and are currently available to allocate energy to whatever provides the most value for the company.

This concludes the question-and-answer session. We will now hand it over to Mr. Ivan Monteiro for his closing remarks.

Thank you for your participation in today's earnings call. We appreciate your interest in Eletrobrás and look forward to updating you in our future communications.

This concludes Eletrobrás' conference call. Thank you, and have a good day.