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Edited Transcript of LIGT3.SA earnings conference call or presentation 13-Mar-20 6:00pm GMT

Q4 2019 Light SA Earnings Call

RIO DE JANEIRO Apr 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Light SA earnings conference call or presentation Friday, March 13, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ana Marta Horta Veloso

Light S.A. - CEO, Chief Business Development & IR Officer

* Roberto Caixeta Barroso

Light S.A. - Chief Financial and Business Development Officer & Member of Board of Executive Officer

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Presentation

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Operator [1]

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Good afternoon. Welcome to Light's Fourth Quarter 2019 Earnings Conference Call. Today with us, we have Mrs. Ana Marta Veloso, CEO; and Mr. Roberto Barroso, CFO; and all other executives in the company. Today's live webcast and presentation may be accessed through IR website. We would like to inform that this event is recorded. (Operator Instructions)

Before proceeding, let me mention the forward-looking statements are based on the beliefs and assumptions of Light management and on information currently available to the company. They involve risks and uncertainties because they relate to the future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Light and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mrs. Ana Marta, who will begin the conference. Please, you may proceed.

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Ana Marta Horta Veloso, Light S.A. - CEO, Chief Business Development & IR Officer [2]

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Good afternoon. I'd like to thank everyone who is taking part in our conference on the 2019 fourth quarter results. We ended last year with concrete advance in our value creation agenda, and these results will become clearer as we progress in 2020. In July, we completed a follow-on equity offering, which was, in fact, a reprivatization of Light. Today, we are indeed a true corporation. We are making progress with a professional and aligned team on the agenda of generating value and improving governance that we announced to the market. And we are also on the right path of generating sustainable results, building a consistent way to become one of Brazil's best energy companies despite the complexity of our concession areas.

An important event during past year, which occurred in August, reached the final decision in the court, the judicial process related to the exclusion of VAT tax from the PIS/COFINS calculation basis. As a result, we recognized the gains related to this decision in the third quarter based on legal opinion and current legislation. We are still in understanding with ANEEL to construct an acceptable and balanced solution. We expect that the matter will be submitted for public consultation by the regulator is still during the first half of this year.

On the March 12 this year, Light enrolled the tax credit in the Brazilian internal revenue service in the amount of around BRL 6.2 billion, which we believe belongs in part to Light and in part should be passed on to our customers. In October, we completed the sale of our interest in Renova, releasing our management team to focus even more on the turnaround of the distribution, which as has been widely disclosed to the market is focused on 4 main initiatives: combating energy losses, reducing the digital contingencies, reducing PMSO and prioritizing CapEx and liability management. We also continued with our strategy of divesting noncore assets in companies, which we do not control such as Belo Monte, Guanhães and Paracambi.

In this quarter, the second quarter under the new management team, we managed to reverse the worsening trend in operational indicators such as energy losses, contingencies and manageable costs and achieved substantial improvements in some of them, such as the distribution PMSO.

Recurring consolidated EBITDA reached BRL 464 million in the quarter, an increase of 8% over the fourth quarter 2018. In the year, recurring consolidated EBITDA reached approximately BRL 1.7 billion, in line with the previous year. These results exclude nonrecurring items, such as the recording of PIS/COFINS and Renova's PDD, which applied to the third quarter and exceptional PDD reported in the fourth quarter.

In the front line of the fight against nontechnical loss, this was another quarter of stable loss, in which the upward trajectory of the first semester has been halted. We began forming the team responsible for conducting energy test in July, with important changes made to the leadership and field teams. We carried out training and qualification of teams. We changed the way we retain services. We hired third-party employees in order to improve ethical control and increase productivity and realign the remuneration of our process team to the effective generation of results for the company.

We divided our action plan by regional areas after detailed diagnosis of the realities of the problems in each one. Each regional area now has a service management center, which performs real-time monitoring of field activity, ensuring greater agility and assertiveness in decision-making. We have been relentless with the highest income customers who steal energy, whether commercial or residential, by carrying out inspections, checks, many of them with the support of the police and reported in the media while working tirelessly to bring and maintain our customers in their formalities, paying regularly their energy bill.

We have been working also in the administrative tier of nontechnical losses, correcting measurement years and analyzing billed customers by the mean and minimal measures. We are carrying out CapEx by exchanging old meters of average over -- average age over 45 years of service, shielding the network by both customers in more aggressive areas and also investing in managing specifically where energy losses are located. As a result, total losses over the grid load ended the year at 26.05% compared to 25.93% in the third quarter of 2019, remaining practically stable as in the previous quarter.

This is an important reversal of trend, since the total loss grew up by around 10% in the first semester of the last year compared to the end of 2018. Considering the 12-month total loss volume without ramp in the fourth quarter of 2019 compared to the same quarter of the previous year, we are already seeing a reduction of 105 gigawatt hours, more than double the reduction presented in the third quarter 2019. The number was 52-gigawatt hour at that time, which signals a trend reversal for an indicator.

Another indicator that confirms the trend of improvement in nontechnical loss is the one that manages noncommercial losses, excluding ramp, compared to the low-voltage market. We had a reduction of 1 percentage point in the last quarter of last year when compared to September 2019. This is the first time in the last 2 years that we have recorded a significant reduction in 1 quarter. We know that sustainable loss reduction is the most important initiative of our turnaround plan, and we are convinced that we are on the right path. We are currently 6.4 percentage points above the regulatory recognition in the tariff of 19.62%, according to the parameters adjusted in the tariff adjustment of March 2019.

On the collection side, we are maintaining the use of collection instruments such as SMS, power cutoff and negative appointments in client risk report, seeking to keep the PDD well under control while, at the same time, moving forward in combating loss. The accumulated collection rate for the year remains high, having reached 19.6% of the total revenues that were charged in line with the last quarter. All sectors, including public powers, have shown good performance.

In this quarter, after extensive evaluation of our accounts receivable and taking into account the expectation of future collection of outstanding balance, we decided to establish a nonrecurring and exceptional PDD of BRL 525 million. In December, excluding the provision related to the revaluation of accounts receivable, the PDD closed at 1.9% of the total revenues in line with what we have reported in recent quarters.

It is expected that with the incorporation of customers who are now informal and with the drop in losses, this indicator will show some increase in the coming quarter. We are also improving relationship customer management in order to reduce contingency, which reached BRL 392 million last year, excluding the program for voluntary businesses. We carefully reviewed our customer relationship front, call centers, ombudsmen and stores as well as improved the internal process to improve service and thus prevent new lawsuits from being filed. And our legal department is even closer to the regional branches in order to act together with the commercial areas as the causes of contingency.

As a result, we are already managing to reduce the filing of new lawsuits, which will be reflected in a reduction of contingencies in the coming quarters. At the special field report, also known here in Brazil as DEC, where over 45% of contingencies are filed in terms of value, we saw a 20% reductions in new losses compared to the same period from last year. There was also a reduction in the number of complaints filed at our stores, call centers, with our ombudsmen and with ANEEL. These indicators serve as important leading trends for contingencies and reinforce our belief that legal contingencies will be reduced in the following quarters.

Today, our PMSO expenses in Light SESA are close to what is included in our tariff. However, we aim for further reduction. We have been working on several fronts in the control of PMSO, better management of materials and contracts with third parties, the launch of a voluntary dismissal program, increasing synergies in the distribution operations, higher productivity of field teams, among others. As a result, the manageable cost of Light SESA this quarter was 7.3% lower than in the same quarter last year, maintaining the downward trend from the third quarter of 2019. We are also progressing with the change in internal culture to assess our ownership of a private-owned company aimed at achieving results, value employees based on meritocracy, safety and ethics, following the example of the most efficient distributors in the country.

Talking about financial aspects. Now the net debt-to-EBITDA ratio of Light SESA -- of Light S.A., the holding company, sorry, remained stable at 2.98x, below the limit of covenants, reached 3.75x established in the most of our debt contracts. Light's consolidated net debt ended the fourth quarter of 2019 at BRL 6.7 billion, BRL 1.2 billion less than 2018, enjoying a healthy cash position of BRL 1.7 billion that is sufficient for the debt that is coming through the due time in the year of 2020. This reduction was made possible through the primary offering of more than BRL 1.8 billion from the follow-on that took place last July, which strengthened the company cash position and also supported our liability management strategy.

In this sense, our financial department, under the leadership of Roberto Barroso, is conducting a series of initiatives, plans and targets to improve Light's debt profile and debt cost. Among those, I would like to highlight the transactions completed in the fourth quarter of 2019: our redemption of 35% of bonds issued by Light SESA and Light Energia in the total amount of $210 million, early amortization of Light SESA's loan with BNDES in the amount of approximately BRL 293 million and value of BRL 1.0 billion in funds with the issuance of debentures and promissory notes by Light SESA.

Regarding quality indicators, the DEC and FEC, Light continues to deliver excellent results, ranking among Brazil's 6 best companies despite the complexity of our concession area. In the year of 2019, DEC was 7.77 hours and FEC was 4.31x. As we expected, we complied with the regulatory limit for the year. This March, Tuesday, this 10 of March, Tuesday, ANEEL approved the annual adjustment of Light SESA's tariff will be applied as of the 15. The average increase to customers will be 6.21%, and the most relevant point of the adjustments were 2.45% reduction in sectorial charges due to the end of payment of the CDE ACR account; 2.79% rise in the cost of energy purchases, especially of the contracts with Itaipu and Norte Fluminense, which are pegged to the dollar; 4.11% increase in financial items; and the adjustments of Parcel B, which covers the cost and pay for Light's CapEx was settled at 4.53% above the inflation record in the period of 3.94%. Additionally, this week, ANEEL approved the new regulatory work, which will take effect for Light as of the next tariff review that will take place in March 2022. The value for 2019 was settled at 7.78% compared to the 7.17% initially disclosed by the regulator.

In the generation segment, the results remained solid and exceeded those of last year. The weekly monitoring of the exposure to the GSF allows a better strategy in the purchase of energy in the free market to mitigate the hydrological risk. The EBITDA was BRL 109 million in the fourth quarter, which was BRL 26 million over the same period last year. In the year, the generation EBITDA closed at BRL 542 million, contributing to the consolidated results significantly, with an increase of more than 40% when compared to 2018. It's important to update the market regarding the progress in the GSF issue. This March 10, Tuesday, the Senate's Economic Affairs Committee passed the Bill 3975. And under the terms of this view, generation companies will have to repay their debt to the CCEE. And once this process is passed by the Senate plenary and regulated by ANEEL, and that concept -- the concession of these generations will be extended for up to 25 months.

Now I'd like to give the floor to Barroso, our CFO, who will present our results in the fourth quarter of 2019 in greater detail. Please, Barroso.

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Roberto Caixeta Barroso, Light S.A. - Chief Financial and Business Development Officer & Member of Board of Executive Officer [3]

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Thanks, Ana Marta. Good afternoon. Going to the Slide #2 in the presentation, we saw a decrease in the grid load in the fourth quarter of 2019, 1.6%. And also, we saw a decrease in the billed market of 2.2% in this last quarter of 2019 comparing with the last quarter of 2018. But when we exclude the REN billed in both quarters, we saw a decrease of 0.7% in this quarter, which means that the losses reduced in the fourth quarter of 2019, excluding REN.

Going to the Slide #3. We can see a stable total loss for the second consecutive quarter of 2019. We saw, as Ana Marta said, an increase of almost 10% in the total losses in the first semester of 2019. And now this total losses almost is stable. We saw, excluding REN, a reduction of 52 gigawatt hours in the third quarter of 2019. And now we saw a 105-gigawatt reduction in the losses in the fourth quarter of 2019 compared with the same period of last year. Looking in the second graph in this third slide, we saw also a reduction of 1 percentage point in the evolution of nontechnical losses over the low voltage market, sorry.

Going to the Slide #4. We saw a reduction of the REN billed in the last 12 months to 209 gigawatts in 2019. And also, we see an increase of incorporation of energy quarter after quarter. We saw the fourth quarter of incorporation of energy. The amount of incorporation of energy was 186 gigawatt hours, which means that we are focused on incorporation of energy for the next year in order to reduce the REN volume to view in the next year. Looking for the collection rate, we finished the year of 2019 at the same level we finished the last year. But as Ana Marta told us, we reevaluate the receivables by the fourth quarter of 2019, and we increase the recognition of allowance for that to account in the total amount of BRL 525 million, one off in the fourth quarter of 2019 and as a nonrecurring item. So the total number of PECLD over [raw-based] index, we closed in the total amount of 1.9% in the fourth quarter of 2019, the same level we disclosed in the previous quarters.

In the Slide #5, we can see the quality indicators. We finished the year of 2019 with the DEC at the same level of last year, 7.77x -- hours, 5% under the limit defined by the regulator. And the FEC, we also closed the year very well, 25% under the limit of the regulator.

Turning to the Slide #6. We increased almost 8% in our recurring consolidated EBITDA, which means BRL 34 million compared with the fourth quarter of 2018. And it's important to mention that we were able to reduce almost 8% in the PMSO, the manageable costs in the second half of 2019. We reduced almost 8% in the third quarter and also almost 7.3% in the fourth quarter of 2019.

Turning to the Slide #7. We -- also, we can see a reduction in the new lawsuits against of the -- against to the company, in a lot of areas of the company, in call centers, in Light stores, also in the ombudsmen and complaints against Light in the ANEEL. We saw the number of contingent suits against the company in the fourth quarter of 2019, very similar with the numbers we disclosed in the fourth quarter of '18.

Going to the Slide #8. We also disclosed our recurring EBITDA comparing by segment. We saw a reduction in the segment of this distribution but mainly related to the nonrecurring items. When we exclude the nonrecurring items, we can see an increase in the recurring EBITDA from the distribution company in the amount of BRL 35 million, very similar with the increase as Ana Marta told us in the generation business. And as well, we can see a small reduction in the recurring EBITDA from the commercial business, mainly related with 1 specific gain we discussed in the fourth quarter of 2018.

Going to the Slide #9. We saw the total result of Light, and we saw a decrease in the results mainly related to the market-to-market of the swaps we have in the dollar that we had when we issued this debt and also with the cost of the prepayment we did in the fourth quarter of 2019, considering Light prepaid the most expense debt in the last quarter in order to reduce the amounts to pay off cost of the debt for the next year.

Going to the last Slide #10, we saw the position of our debt and as well the cash position. We closed the year of 2019 with almost BRL 1.7 billion in cash position, BRL 400 million over the portfolio of maturities of 2020. And as Ana Marta told us, we were able to issue almost BRL 1 billion in new debt for the fourth quarter of 2019, and we continue monitoring the market and discussing with local banks to issue and hire new debt in order to continue our liability management, extending our debt and trying to reduce the cost of the debt of the company.

Now we can complete the presentation, and we're available for the Q&A session. Thank you.

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Operator [4]

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(Operator Instructions) I'll turn over to Mrs. Ana Marta for closing remarks. Mrs. Ana Marta, you may proceed now.

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Ana Marta Horta Veloso, Light S.A. - CEO, Chief Business Development & IR Officer [5]

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Thank you very much for attending our conference call. And I'd like to highlight again that Light is today a company that gathers all the conditions to deliver quarter after quarter the results projected in our turnaround plan. We are a private corporation focused on results, prepared to face the challenges in our concession area. We uphold our commitment to further improve our corporate governance and transparency in our relationship with our investors, customers and stakeholders in general. Our IR team will remain at your disposal for further clarification. Have a nice afternoon. Thank you.

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Operator [6]

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Thank you. This concludes today's live earnings conference call. You may disconnect your lines at this time.