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Edited Transcript of ENGI11.SA earnings conference call or presentation 9-Aug-19 7:00pm GMT

Q2 2019 Energisa SA Earnings Call

Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Energisa SA earnings conference call or presentation Friday, August 9, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandre Nogueira Ferreira

Energisa S.A. - Regulatory Affairs and Strategy Director

* Maurício Perez Botelho

Energisa S.A. - CFO, IR Director & Member of Executive Board

* Ricardo Perez Botelho

Energisa S.A. - Deputy Chairman of the Board of Directors, Member of Executive Board & Director

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Conference Call Participants

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* Andre Sampaio

Santander Investment Securities Inc., Research Division - Research Analyst

* Carolina Carneiro

Crédit Suisse AG, Research Division - Sector Head

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to the teleconference for the second quarter of 2019 results. The audio for this conference is being broadcast simultaneously through the Internet in the website ir.energisa.com.br in that address you can also find the presentation available for download. (Operator Instructions) We would also like to inform that the conference call is in Portuguese and will be presented by the company's management and for the English conference, there will be simultaneous translation available.

This conference call contains forward-looking statements that are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those in the forward-looking statements. Such statements speak only as of the date they are made and the company is under no obligation to update them in light of new information or future development, they depend on circumstances that may take place or not, investors should understand that the industry conditions and operational factors may have an impact on the future results of the company leading into results that are materially different.

I will now turn the conference over to Mr. Maurício Botelho, who will start the presentation. Please Mr. Maurício, you may proceed.

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Maurício Perez Botelho, Energisa S.A. - CFO, IR Director & Member of Executive Board [2]

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Thank you very much operator, good afternoon, everyone. I would like to thank you for your participation in this conference call for the second quarter results. We have Ricardo Botelho, President of the Energisa Group; Alexandre Nogueira, who is Regulation Vice President; [Fernando Maya] Regulation Vice President; and we also have Cláudio Brandão, Director of Corporate Finances and also Mariana Rocha and Bruna Alvarenga with the Investor Relations team.

I will present some slides on the results and then we will open for the Q&A session. I would like to remind you that as done in the previous quarters, in the last 2 quarters, in the case of operational items, we have included the companies that were recently purchased, also for the financial aspect we are going to present the pro forma values, which do not take into account the acquisition of these 2 companies.

So now moving on to Slide #3, I will go directly to the highlights, which is the adjusted EBITDA totaling BRL 899 million for the quarter, BRL 1.8 billion in the first half. Regarding the results, even though the profit was BRL 119.9 million in the first half, in the second quarter, we had losses of BRL 8.9 million. This negative result include recent results of the acquisitions of Ceron and Eletroacre. These companies negatively contributed with BRL 153 million in the quarter, but in terms of the pro forma after taking interest, not taking into account these 2 companies, we had a net profit of BRL 151.5 million. Later during this presentation, we will provide details of other effects, which had an impact on the group's results.

And so moving on to Slide #4. We are going to talk about the energy market. Sales had an increase of 3.5%, and Brazil only grew 0.3%. For the first quarter, we grew 4% compared to 1.7% for Brazil in general. In this first half, all of our distributors had a positive growth. The highlights for this quarter were Energisa Mato growth with EMT with a growth of 6.5%, including expanding the residential segment

(technical difficulty)

market and the distribution was greater because of the industrial factor with a reduction of 0.5%, which was compounded by some technical shutdowns in the cement and fertilizer industries.

We are now moving onto Slide #5, and we will talk about some of the highlights, which were our efforts in the low income sector. In 2014, we

started demanding more information from benefited consumers, and we observed that some of them were just flinching it and there was a potential to expand default payments. And so because of this, and in addition to the campaigns such as the reregistration campaigns we had, we started using analytical tools, processing public data, and were able to expand the number of eligible consumers. You can see in the graph a slide that we had an increment of 92,000 clients recorded as low income between June 2018 and June 2019 with a highlight to the recently acquired transactions with an increment of 67% in Ceron and 43% in Eletroacre.

And then in the next slide, Slide #6, on the left side, you can see the electric losses, and you can see that this indicator was 13.55% considering all of the groups distributors and 0.45 percentage points above the regulatory target. If we do not take these 2 into account then this would be 11.50%. In other words, 0.25 percentage points below the regulatory target. The highlight was for EMT, even though there was a slight reduction in the quarter it had the second largest reduction when compared to June 2018, which was 0.82 percentage points.

This Energisa Mato Grosso continues meeting the regulatory target, and we are actually 0.16 percentage points above the target. Energisa Paraíba had a slight decrease when compared to March 2019, and there was an increment of 0.45 percentage points when compared to June 2018. And this is explained by increments in non-technical losses. We are trying to overcome this with an additional plan to fight theft, and was implemented at the end of last year and intensified in 2019. Energisa Sergipe was once again below the regulatory target, because of all of these actions to fight energy theft.

Electroacre falls below the flagship of regulatory target where as Ceron is approximately 6 percentage points above the regulatory target. We adopted different measures to overcome this situation. Since these utilities had an increasing losses since August 2018 and then, in June 2019, there was a decrease when compared to May, indicating the first outcomes of these measures in the region.

And we are now going on to Slide #7, with the service quality indicators. So you can see that, except for Ceron, all other distributors were below the quality regulatory targets. Many of them continue breaking their own historical records in terms of quality indicators. As it was the case of Energisa Mato Grosso EMT and Energisa Paraíba EPB, and DEC and Energisa Sergipe and Energisa Paraíba in FEC. Energisa Mato Gross has the best performance of the Group in terms of quality with a reduction of 4.8 hours in DEC and 3.04x in FEC. And Energisa Tocantins was ranked as #2, with improvement of 4.16 hours in DEC and 3.02 in FEC. In Ceron, there was an increase in DEC when compared to June 2018 and after the acquisition, Energisa prepared an indicator reversal plan and the fact that the DEC in May and June presented a significant reduction when compared to January and April, reinforces the trust and the measures that were adopted.

And now, we will focus on the explanations about the company not taking into account Ceron and Eletroacre results, and we had an increment of 0.4 percentage points in the quarter and 2.2% in the first half, both below the inflation rates for this period. And one part of the increment in personnel is explained by the salary readjustments and increase and the number of companies in the group, especially in the holdings, as a result of incorporation of new activities to the shared services center, such as invoicing, and the activities of IT system development. On the other hand, we had a decrease in labor expenses, labor penalties, especially Mato Grosso, there the service line reduction was impacted mainly by expenses with M&A in the holding Energisa S/A and also by the reduction in Energisa Tocantins which is explained by the inclusion of technical teams.

And now we are going to move onto Slide #9 and talk a little bit about the pro forma consolidated EBITDA. Without taking into account, Ceron and Acre, it was BRL 915 million in the second quarter and BRL 1.873 million in the first half with increases of 40.2% and 30.4%, respectively. And if we do not take into account (inaudible) the EBITDA increases there was an increment of 43.9% in the quarter and 32.8% in the quarter. And I would also like to highlight that except for the nonrecurring effects detailed in the attachment of this presentation, the EBITDA for the quarter would have grown 51.4% in the quarter, as a result, mainly of the increase of BRL 289.8 million in fee of the distributors, and in the first half this would correspond to 42.7% improvement.

Also in Slide 10, we compare the regulatory EBITDA, and the reported actual EBITDA in the last 12 months, and the highlight here would be the approximation of Grupo Rede which currently is 37% above the regulatory target.

And now we are moving on to Slide #11. And we'll talk about the net profit in the quarter. You can see that there was a growth of 46.5% within the nonrecurring effects, also mentioned in the attachment of this presentation, we had the mark to market impact of BRL 194 million without any effect for the company's cash. And if we exclude these extraordinary effects, the pro forma net profit in the second quarter would have been BRL 316.4 million, which is 213.8% above what was recorded for the second quarter in 2018. And then for the year, the consolidated net profit totaled BRL 464.7 million, with an increment of 89.1%, when compared to the first half of 2018, or BRL 219 million higher. And if we do not take into accounts the EBITDA effects and the mark-to-market of -- our net profit in the quarter would have been 192% higher than the first half of 2018. In other words, BRL 671 million.

Now we will talk about debt, and the net debt includes the debt acquired with Ceron and Eletroacre totaling BRL 11.9 billion, which includes the sum of BRL 736 million regarding the mark-to-market of the debentures of Energisa S/A and also the debt balance associated to this bonus of approximately BRL 620 million. We believe that there will be a conversion or some effects of this bonus, which would lead to a reduction of 0.3x the indicator in the net debt for EBITDA. This covenant indicator was stable in 2.7x. And as mentioned in the past quarter, this indicator takes into account approximately BRL 1.2 billion resulting from the combination of businesses for the purchase of Ceron and Eletroacre, which were taken into account for the fourth quarter of 2018. And if we do not take into account these amounts, the indicator would have been 3.6, which is pretty comfortable, according to what was negotiated for this year, which would be in the order for 4.5 and 5x.

And then on the next slide, we are going to talk about investments. We have closed the quarter with BRL 759 million and the first half with BRL 1.304 million, and in the transmission segment we invested approximately BRL 70 million in the quarter and BRL 120 million in the first half.

In this next slide, we're going to talk about the transition projects. The ones that were included in April '17, in this case Energisa Goiás and Energisa Pará I, which started operating in September and October of 2018, respectively. Both projects have progressed 71% for Energisa Goiás and 48% for Energisa Pará. The negotiations with the owners have been almost concluded and regarding Energisa Pará II, which is the lot purchased in June 2018, the construction started last month, actually, the month before last in June 2019, and the physical investments of this block is of 10%. Energisa Tocantins Transmissora, which was purchased last year, we have filed a basic project in July 2019 and furthered the studies to obtain a prior license, were also obtained in the same month, the environmental license. Together these 4 blocks add an ARP of approximately BRL 188 million, with an estimated CapEx of BRL 1.5 billion.

So I would like to conclude, and I am available to answer eventual questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Maria Carolina Carneiro from Crédit Suisse.

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Carolina Carneiro, Crédit Suisse AG, Research Division - Sector Head [2]

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I have 2 questions. The first one is, you included the pro forma PMSO for Acre, but I would like you to share with us how the integration is going for the Acre regarding the indemnization of labor and all of the liabilities, so that we can have an idea what the management course would be for these new utilities. And also, the second question is that you shared very interesting numbers on the number of clients, which are qualified as low-income clients and have been registered. I would like to know exactly what is the potential of these registered because there are more clients that may be reclassified for the next quarters in Rondônia and Acre, or if this process of identifying clients has already been concluded?

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Maurício Perez Botelho, Energisa S.A. - CFO, IR Director & Member of Executive Board [3]

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We are going to share the answer Carol, if you can wait a minute. Ricardo will answer you.

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Ricardo Perez Botelho, Energisa S.A. - Deputy Chairman of the Board of Directors, Member of Executive Board & Director [4]

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Thank you, Carol. So in response to your question about the pro forma PMSO and the measures regarding Acre and Rondônia what we have nowadays, and we have different marks for the future, but regarding the indemnizations from the beginning of the year, we had 30% of the labors and companies joining these plans and they are going to leave the company by December. We also internalized inspection and activities with the quality improvements plans, we have different implementations in place. So all of these measures are ongoing. And we are probably going to have a better picture for the whole year that it will be better at the end of the year and early next year when we will be able to see all of the effects in terms of EBITDA. So to evaluate performance, the best time would be around the first quarter of next year. There is a natural curve of implementation and also when all of the personnel leave the company. I hope I've answered your question on low income reregistration. (inaudible)

This is a dynamic process as demonstrated. And we're always comparing the list of reregistration and based on our planning, if we take into account the new registries and the ones that have been canceled by the end of the year, we will have 80,000 or 90,000 that may be registered. This is an estimate for the purpose of planning, but our expectation is that we will be able to double it.

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Operator [5]

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The next question is from Andre Sampaio from the Santander Bank.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [6]

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I would like to ask 2 questions. The first one has to do with the tariffs and I would like you to give us a little bit more details of how the asset basis is going. And I would also like you to talk a little bit about the negotiations between Tocantins and ANEEL.

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Maurício Perez Botelho, Energisa S.A. - CFO, IR Director & Member of Executive Board [7]

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In response to your question Andre, Alexandre Nogueira will answer.

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [8]

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Regarding your first question for Acre and Rondônia, in June, we concluded the inventory and the assets that were included, and we are now in the process of preparing the reports, which will be delivered on August 29. There are no problems regarding this process. About your second question, on the Tocantins renewal, the process is ongoing, Energisa was well-chosen at ANEEL, as the process is ongoing and there are some steps to be developed this year, but there are no risks.

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Andre Sampaio, Santander Investment Securities Inc., Research Division - Research Analyst [9]

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I would like to ask one additional question. So do you understand that the renewal will be just like it was for the other assets.

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [10]

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Yes, exactly.

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Operator [11]

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The next question is from [Lisa Krause] from (inaudible)

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Unidentified Analyst, [12]

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I'd like to know about the payment of the BRL 500 million. And even so you had a negative fee adjustment, in May 2019, there was a reduction of 7.4%. Was that done to compensate anything?

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Maurício Perez Botelho, Energisa S.A. - CFO, IR Director & Member of Executive Board [13]

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Alexandre Nogueira will answer your question.

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [14]

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Regarding Ceron, we had a positive increase. And in March, along with a review of other companies because of our Ceron adjustments, we also included part of the ERO adjustment of 7.4%. And so, of course, this will be readjusted in the next readjustment. So it was just a delayed readjustment, yes. A part of the adjustment was not approved and there was a reduction because of CR and so whatever was deducted will be taken into account next December.

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Unidentified Analyst, [15]

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Do you have -- what will happen in the next readjustment? I'm sorry, in the next reduction in terms of Ceron and Acre?

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [16]

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Well, it will depend on what will be approved, and it's directly related to that.

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Unidentified Analyst, [17]

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So you don't have an estimate, yet?

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Alexandre Nogueira Ferreira, Energisa S.A. - Regulatory Affairs and Strategy Director [18]

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No. We do not have an estimate available yet.

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Operator [19]

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(Operator Instructions) I would now like to turn over to Mr. Ricardo for his final remarks. Mr. Ricardo, please move on with your final remarks.

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Ricardo Perez Botelho, Energisa S.A. - Deputy Chairman of the Board of Directors, Member of Executive Board & Director [20]

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Good afternoon. I would like to share with you another year of good results for Energisa and on July 3 of the 11 categories, with over 150,000, we were finalists in 8 and won 4. Of the 4 categories that were analyzed for companies with up to 500 consumers, we won 2 awards. And it is another record, was considered and won the award of best distributor in Brazil once again for the category of up to 500,000 consumers. And then the other companies awarded in the group were Energisa Paraíba, Tocantins, and Sul-Sudeste. I would also like to give you some more information about the integration plan for Ceron and Eletroacre.

And as explained by Alexandre, we have achieved results on the inventory of the assets of all of our companies, including a large mobilization. We were able to carry out 100% of our inventory and provided -- will provide, by the end of the month, a full report to ANEEL. Everything has been taken into account, registered and will be included in the most modern platform available for this segment, which will enable us to be able to reduce definitely the number of hours. In September, we will conclude the inspection by ANEEL, and in December, we will have a restructuring. And as we mentioned, the intervention plan is ongoing.

Regarding transmission, we are very happy with the advancement of the construction as mentioned by Maurício. And we also anticipated the entry in operations, if we keep the same construction rate. We have some loss, which will be made available in December. And due to strategic reasons, we do not know exactly where and how.

We wish you all a good afternoon, and a nice weekend. Thank you for your attention.

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Operator [21]

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Thank you. The teleconference is now concluded. Please hang up now.

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