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Edited Transcript of ELPL4.SA earnings conference call or presentation 1-Nov-19 2:00pm GMT

Q3 2019 Eletropaulo Metropolitana Eletricidade de Sao Paulo SA Earnings Call

Sao Paulo Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Eletropaulo Metropolitana Eletricidade de Sao Paulo SA earnings conference call or presentation Friday, November 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Max Xavier Lins

Eletropaulo Metropolitana Eletricidade de São Paulo S.A. - President of Executive Board

* Monica Hodor

Eletropaulo Metropolitana Eletricidade de São Paulo S.A. - CFO, VP, IR Officer & Member of Executive Board

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the conference call of Enel Distribuição São Paulo. The purpose of this conference call is to discuss the earnings of the first 9 months of '19 of the company. The IR department of Enel Distribuição also informs you that the release and the presentation of earnings results are available on the company's website, www.ri.eneldistribuicaosp.com.br. (Operator Instructions) We would like to inform you that this conference call is being recorded and also simultaneously webcast on the company's Investor Relations website.

On behalf of Enel Distribuição São Paulo, we would like to let you know that any forward-looking statements made during this conference call regarding the company's business outlooks, projections and operating and financial goals are basically forecasts based on current expectations. Forward-looking statements may change due to variables such as market conditions, economic performance and international markets. The presentation will be followed by slides and can be viewed on the webcast. In the end, the executives will be available to answer your questions.

Now I'll turn the call over to Mr. Max Lins. Please, Mr. Lins, you may go on.

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Max Xavier Lins, Eletropaulo Metropolitana Eletricidade de São Paulo S.A. - President of Executive Board [2]

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Thank you very much. Good morning, everyone. I'm going to start the presentation of the results of the first 9 months of 1912 -- 2012 (sic) [2019] of Enel Distribuição São Paulo. With me on this call are Monica Hodor, our CFO and VP of Investor Relations; other company officers; and our Investor Relations team.

As you will see throughout this presentation, the first 9 months of 2019 showed better results than those of the previous year, showing the successful integration of the company with the Enel Group, which allow us to improve our operating and financial efficiency. Additionally, as announced on October 21 last, the company is undergoing a public offering for share acquisition and category conversion as well as a major corporate restructuring. These points will be further discussed in the next slides.

I begin the presentation on Slide 2 with main highlights of the first 9 months of the year. I start by talking about our investments. In the period, we invested BRL 649 million, mainly earmarked to the maintenance and development of our network, especially our underground network. I also highlight here the announcement made this month of the Urban Futurability initiative, which will transform the Vila Olímpia region and the city of São Paulo into a completely digital neighborhood, as you will see on the next slide.

In relation to our operations, let me highlight the improvement of indicators of duration and frequency of interruptions year-on-year. SAIDI and SAIFI in the last 12 months decreased by 5.9% and 10.7%, respectively, a result of investments in network technology and modernization. Note that the company ended the first 9 months of the year with both indicators within regulatory limits established by [app].

Another highlight of the period is the 0.4% growth in total market consumption despite a slight 0.2% reduction in the captive market compared to the same period '18, as discussed below in further detail.

As for our financial performance, I would like to highlight net income reported of BRL 546 million, a significant increase in relation to the same period last year, reversing the net loss of BRL 158 million recorded in the same period last year. The performance is mostly attributed to the company's higher EBITDA. Monica Hodor will provide details of our financial performance later in her presentation.

Also, financially speaking, I highlight the continuing efforts to reduce costs and exchange the average term of our debt as a result of a constant search for market opportunities to execute our strategy to optimize the company's capital structure. I draw special attention to the issuance of the 24th debenture, which took place in June this year.

Finally, public offer for the cancellation of company registration issued by Enel Brazil, the current indirect parent company, on October 21 with the purpose of performing the conversion of the company from Category A to B. The auction will be held on November 21 next 2019. Also, I will -- we will provide more details in the slides about the topic.

Going on, on Slide 3, we will describe our investment plan. Investments amounted to BRL 650 million in the first 9 months of the year, mainly allocated to the maintenance and expansion of our network station of our underground system and implementation and maintenance of distribution transforming stations and underground lines, as shown in the graph.

And here, I highlight, as I mentioned before, the Urban Futurability project, which was announced in the beginning of the month of October, with the objective of turning Vila Olímpia into a digital neighborhood. To this end, an investment of BRL 125 million is planned for the next 3 years. The initiative will enable real-time remote data collection and network access, improving the quality of services for the whole of the region.

In addition, we expect to create additional map of the network, what will enable the sharing of information with the government and other service companies, including information on street lighting, operation of traffic lights, means of communication as well as ensuring reduction in the number of poles and overhead cables. For this, approximately 5 kilometers of cables will be buried in 26 routes in the region.

On Slide 4, we show the main operating indicators, particularly the reduction in duration and frequency indicators of the last 12 months in relation to the 9 -- first 9 months of '18. SAIDI in the last 12 months totaled 7.04 hours, reduction of 5.9% compared to the same period last year. SAIFI, in turn, totaled 4.08x, down 10.7%. It is important to note that both indicators ended the month of September '19 within global regulatory limits for the year, which are 7.41 hours and 5.14x, respectively. These results are positive and directly related to the investments mentioned on the previous slides, focused on technology and network automation as well as the performance of self-resetting equipment. With regard to losses, total losses reported in the first 9 months of the year was 9.56%, completely in line with those of the previous year, that is a decrease of 0.01 percentage points.

Slide 5 brings the performance of the market. The main highlight here is significant growth in total consumption. Even with a slight decrease in the captive market in the first 9 months '19, the number of consumer units invoice grew by 1.1%, especially in residential and commercial classes. Total consumption, that is distributed energy of the company, grew by 0.4% compared to the previous year, as shown, driven by the 2.1% increase in the free market linked to the migration of consumers from the regulated environment. The downturn recorded in the captive market was mainly concentrated on commercial and utility sector. As we can see in the chart to your right, captive consumption recorded a slight decrease of 0.2% compared to '18, basically due to the poor performance of the industrial and commercial segments, which were mainly affected by migration to the free contracting environment. In addition to the impact due to such a consumer migration, captive market was also impacted by the number of billing days. Excluding this effect, the captive market would have grown by 1.3%.

I will now turn the call to our CFO, Monica Hodor, who will bring more detail about our financial performance in the first 9 months of the year.

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Monica Hodor, Eletropaulo Metropolitana Eletricidade de São Paulo S.A. - CFO, VP, IR Officer & Member of Executive Board [3]

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Thank you very much, Max. Good morning, everyone. I begin on Slide 6, describing our EBITDA. EBITDA for the first 9 months of 2019 was BRL 1.6 billion, 78% higher than that of the previous year. This increase is a result of the positive impact on margin and OpEx, which, when put together, represents an amount of BRL 603 million. In the quarter, EBITDA totaled BRL 659 million compared to the growth of BRL 367 million in the previous year. We are excluding the nonrecurring events here such as expenses with the public offer and follow-on processes in the first half of 2018, BRL 62 million; and the adoption of the IFRS 16, BRL 29 million, which positively affected the leasing-related expenses; and the negative impact of severe weather events in the first quarter of 2019, BRL 5 million.

Regarding margin, the variation is mainly due to the positive impact on the tariff which benefits from the July 2018 tariff readjustment as well as the 2019 tariff review contributing to a better tariff volume mix in the 9-month period, in addition, regulatory effects, including charge of neutrality adjustments. This gain was partially offset by compensations, impacted by a higher rainfall rate in the first quarter.

In relation to OpEx, the main contributions came from the line of personnel, highlighting the effect of the voluntary dismissal program and from the external cost line due to the efficiency gains resulting from the optimization process that started in 2018, favored also by the convergence of systems and processes as well as by the sharing of best practices. The positive variation due to asset write-offs reflects the lower volume of investments made in the period. These effects were partially offset by the increase in the provision for bad debt, that means that the expectation -- related to the expectation of unpaid bills by customers.

On the next slide, we will discuss the net income for the period. In the first 9 months of 2019, the company reported net income of BRL 546 million, a performance of BRL 704 million higher in comparison to the same period of 2018 when a loss of BRL 158 million was then reported. This result is mainly due to the increase in EBITDA, as previously mentioned. The best financial result was driven by the reduction in expenses with debt-related charges resulting from the operations of liability management executed in the second quarter with the issue of the 24th debenture in June and by the lower interest rate CDI in the period. Also contributing to the variation was the positive effect of the updated of tax credits given the recognition of tax credits in the first quarter 2019, resulting from the deduction of expenses incurred with the Workers' Food Program or PAT. In relation to the taxable income, this variation reflects the increase in taxable income.

On the next slide, we will provide details about our indebtedness. The company ended the period with a gross debt of BRL 5.8 billion, 1.6% higher than that of the first 9 months of 2018 due to debt issues in the period. The increase in net debt is a result of a higher volume of investments made in 2018, in line with the company strategy. Gross debt ended the quarter with a longer average maturity of 4.2 years in the third quarter 2019 compared to 4 years in the first -- in the third quarter 2018. The improvement of these indicators is mainly a result of the strategy of liability management that started in 2018, highlighting the issue of the 24th debenture in June this year in the amount of BRL 1.5 billion and the 6th promissory note in September in the amount of BRL 250 million.

As to the average spread, its increase is a consequence of the average cost of the pension fund obligations recognized as debt and not linked to the CDI, and as a consequence, not immediately captured -- capturing the SELIC rate which has been recently reduced. If we exclude this liability, the spread of 0.53% for the third quarter '19 when compared to the 1.55% a year in the first quarter 2018. Now despite the clear improvement in debt profile, the company continues to monitor market opportunities to move forward with this financial strategy throughout 2019.

Moving on, we present the details of the current public offering process. Enel Brazil public offering for the listing was approved by the Brazilian Securities Commission, CVM, on October 17 and launched on October 21 with the objective of acquiring 100% of the free float in order to promote the conversion of the company from Category A to B. The public offering auction will be held on November 21. The price offered is the same as that of last year's offer, that is BRL 45.22 per share updated by SELIC rate until the settlement date of the current offer scheduled for November 25, which would amount to approximately BRL 400 million.

To comply with the terms of the category conversion offer, the company called a special meeting to be held on November 6 to approve the possible conversion. In this process, after the public offer, the remaining shares of the auction will be subject to a compulsory stock redemption conducted by the company. The entire process is expected to end in the first half of December with the effective conversion of category with the securities commission, the CVM.

On the next slide, I will provide details about the reverse incorporation process. The reverse incorporation process between the current direct parent company, Enel Sudeste, and Eletropaulo was approved by the Board on October 21 and is subject to shareholders' approval at the next special meeting that will be held on November 6, together with the category conversion process. This operation consists of the incorporation by Eletropaulo of Enel Sudeste's total equity at book value. The merger will not affect the company's capital stock, which will remain unchanged, which means that there will be no dilution of the interest currently held by Enel São Paulo's current shareholders. As benefit, the operation will lead to a simplification of Enel Group's corporate structure in Brazil, resulting in a greater administrative efficiency for the company. The company may amortize a large portion of the gain on Eletropaulo's net assets currently registered in Enel Sudeste following the acquisition of the control of the company in the total amount of BRL 5.5 billion. This may result in an economic benefit of approximate amount of BRL 1.9 billion, which the company's management understands as a benefit arising from future tax reduction after the incorporation. And that -- and this will be amortized by 2015 (sic) [2058], considering the current term of the concession and the expectation of renewal. Once approved, the merger process will be effective on the same date.

I now turn the call over to Max for his final remarks.

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Max Xavier Lins, Eletropaulo Metropolitana Eletricidade de São Paulo S.A. - President of Executive Board [4]

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Well, for the final consideration of the earnings call, I summarize the highlights of the first 9 months of '19. Again, starting with reliability and operating efficiency, we continue permanently focused on increasing the quality of our services, efficiency, automation and digitalization of our practices as evidenced by the continuous and structural positive evolution of our operating indicators, which is reflected in our economic and financial performance.

Another highlight of the period is the public offering process mentioned above. The action will take place on November 21, and the price per share will be BRL 45.22 adjusted by SELIC until the offer settlement date on November 25. Worth noting is that in the end of the process, which also includes the conversion of category with the securities commission, the company's share will no longer be traded in the Novo Mercado and stock market environment.

Finally, in the regulatory area, I highlight the proposal presented by Enel on October 15 to update the distribution sector WACC. The proposed new amount is 7.17% after tax and is subject to general meeting contributions. We have been following the process. We understand the challenge of promoting the WACC balance between the reality of the macroeconomic scenario, reduction of rates, need to encourage investments needed to modernize the distribution sector in face of technological events.

I finally close the session. Thank you all for attending this earnings call, and I would like to open for your questions.

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Operator [5]

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(Operator Instructions)

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Max Xavier Lins, Eletropaulo Metropolitana Eletricidade de São Paulo S.A. - President of Executive Board [6]

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Well, I once again would like to thank you very much for joining us in our call. And remember that myself, Monica Hodor and the Investor Relations team of the company are fully available to answer any questions you might have. Thank you very much, and I wish you a very good day.

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Operator [7]

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The conference call of Enel Distribuição São Paulo is now closed. We thank you very much for attending and wish you an excellent day. Thank you very much.

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