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Edited Transcript of LIGT3.SA earnings conference call or presentation 14-Nov-19 6:00pm GMT

Q3 2019 Light SA Earnings Call

RIO DE JANEIRO Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Light SA earnings conference call or presentation Thursday, November 14, 2019 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 Third Quarter '19 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 you that this event is recorded. (Operator Instructions)

Before proceeding, let me mention that 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 future events and therefore, depend on the 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 would like to turn the conference over to Ms. 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. Thank you all for joining our conference call on the third quarter results of 2019. After a little over 6 months into the new administration, we already have concrete results to show you. In July, as you already know, we completed the follow-on, which was a proper reprivatization of Light. With this initiative, we are making progress with a professionally aligned team, according to the agenda of generating value and improving governance that we had announced to the market. This quarter, we recognized revenues related to the judicial grounds of excluding ICMS, the VAT tax, from the basis of calculation for the PIS/COFINS Tax, which was noted by the Justice in August.

On October 15, we completed the sale of our shares in Renova, an asset that, for many years, has been demanding management time and financial resource from Light. With the sale, we can focus even more compelling on the turnaround of the distribution company, which, as everyone knows, is the greatest source of revenues for the company. We will continue with our strategy of divesting noncore assets and with our liability management policy, as we already announced to the market.

On this last Monday, an Extraordinary Shareholders' Meeting was called to December 12 for the election of Light's new Board of Directors. The new composition of the Board will reflect the new ownership structure of the company, and this event closes the process of capital increase that happened in July. We are on the right track of sustainable results, building a consistent path in a way of becoming one of the best energy companies in the country, despite the complexity of our concession areas. In this quarter, which marks the first complete year of the new management, we already see in the margin signs of losses and contingencies reduction, as I will comment later on. And the manageable costs of the distribution companies have already reduced more than 8%.

In our activities to reduce nontechnical losses, we are able to stabilize total losses 12-month moving average this quarter, which disrupted the upward trajectory of the prior 3 quarters. Just as a reminder, we began structuring the new commercial team in July, and the new manager took over as late as August. Despite this fact and with the need to make adjustments and provide training to the team, we already achieved an important reversal of trend. These results were achieved by taking a series of initiatives. We have been relentless in dealing with higher incompliances to energy, whether they are commercial or residential, and have been implementing control measures, many of those with support from the police.

In addition, we have been working nonstop to bring our clients in compliance and to keep them compliant. We have also been active in the administrative aspects of nontechnical losses by collecting measurement [years] and by taking action towards clients who represent average and minimal bidding accounts. We are performing [careful inspection] of old meters with an average age above 45 years, shielding the network from clients located in more aggressive areas and also investing in improving fiscal measurement. On the collection side, we will maintain our focus in using adequate collection instruments, looking to keep the doubtful accounts under control, while at the same time, working to reduce loss.

The net debt-to-EBITDA ratio of Light S.A. decreased from 3.69x in the second quarter to 3x now in the third quarter. This reduction was the result of over BRL 1.8 billion in proceeds from the follow-on, which strengthened the company cash position and also allowed us to start the strategy of liability management. In this sense, our financial area under the leadership of Roberto Barroso is implementing a series of initiatives that were planned and structured to improve the profile and cost of Light's debt. To accomplish this, we already settled over BRL 1.3 billion from our debt inventory, of which BRL 429 million were denominated in reals and $220 million in U.S. dollars.

In addition to that, the 17th debentures issuance by Light SESA is going on, which may provide up to BRL 1 billion in cash to the company, thus strengthening our cash position and allowing us to assess other opportunities for liability management. These initiatives will result in a consistent reduction both of financial expenditures and of the average cost of our debt.

We are also improving the management of our relationship with clients, in order to reduce contingency risk factors to BRL 270 million in the year until September. We are reviewing all client-facing points of contact, our call centers, ombudsmen and agencies as well as updating internal processes to improve our service, and therefore, prevent new lawsuits from being filed against us. By taking these initiatives, new judicial claims are already being filed in lower numbers, which will reflect in reduced contingencies for the coming quarters. Our legal department is even closer to the regional branches in order to act jointly with the commercial areas to offer support at the root causes of contingencies.

Today, our PMSO expenses are close to those embedded in our sales. However, we need to reduce them even more. We have been working on several fronts in controlling PMSO, such as improved materials management and outsourcing contracts, launching a voluntary dismissal program for our workforce, striving for greater synergy between the areas, improved productivity of our teams in the field and [in-sourcing] teams in order to increase control and productivity, among other initiatives. As a result, this part of PMSO is already 8.3% lower year-over-year. We are also making improvements to our internal culture of sense of ownership towards achieving results, valuing employees based upon meritocracy, safety and ethics, following the example of the country's most efficient distributors.

Moving on to the consolidated results for the third quarter. I'd like to begin by highlighting the results from the recognition of the judicial claims related to the PIS/COFINS tax in the total amount of BRL 6.2 billion. We understand that part of this amount will go to Light and part will come to the customers. Following this recognition principle, according to a solid legal opinion on the matter and the regulation in force, Light recognized recoverable credit for the period between January 2002 and August 2009 totaling BRL 2.6 billion, which generated a result of BRL 1.1 billion over the EBITDA and over BRL 1.6 billion over the net income. On the other hand, we understand that credit relating to the same years and amounting to nearly BRL 3.6 billion should be divided with customers. To this end, we have reached the understanding with ANEEL to reach a fair and equitable solution.

I would also like to highlight that the deterioration in the financial situation of Renova over the third quarter led to the provisioning of BRL 278 million of credit held by our trading arm, which negatively impacted the consolidated results. However, I'd like to remind you that with the sale of Light's interest in Renova, these credits were also signed to the founding shareholders of Renova, and we're also attributed to obtain important fiscal credit that Barroso will tell about them later on. It's also worth noting that this impact of the distributors EBITDA due to the increase in the provisions for contingencies was somewhat offset by the improvement in the EBITDA of the energy generation and trading arm, which have lower energy purchase expenses due to the correct commercialization strategies and by a relevant reduction of the PLD year-over-year.

Talking about the markets of the distribution arm. During this quarter, energy consumption within Light's area of concession grid load decreased 3.2% over the same quarter in the previous year, influenced by decrease in industrial consumption from free-market clients. The bid market followed the same trend regarding a 3.5% decrease over the same period from the previous year. In addition to the industrial segment, we also observed a reduction in the residential segment, impacted by lower volume of REN.

Losses. Total losses over the grid load closed the third quarter of 2019 at a threshold of 25.93% compared to 25.76% during the second quarter, remaining practically unchanged. We are currently 6.3 percentage points above regulatory remittance in this area, which is 19.62%, according to the parameters adjusted during the last tariff adjustment in March 2019.

In line with our plan, total losses are already showing a stabilizing trend for this quarter. However, considering the total loss volume without REN in the third quarter of 2019 compared to last year's same quarter, there is already a reduction of 53 gigawatt hours or 2.7%, which indicates a positive trend of improvement in this indicator. We are aware that reducing energy losses sustainably is a key pillar of our turnaround plan, and we are certain we are on the right path.

Accumulated collection rate for the year continues to be high, reaching 98%, in line with the last quarter. Collection from the public sector continues to be above 100% despite we are seeing occasional delays in some municipalities, and we are already working on that.

In September, the doubtful accounts closed at 1.8% of our gross revenue in line quarter-over-quarter. It's expected that with incorporation of consumers who are currently [distressed], there'll be reduction in losses. This indicates -- this indicator will increase somewhat in the coming quarters.

Regarding the DEC and FEC indicators, Light continues to deliver excellent results, being amongst the 5 best companies in the sector despite the complexity of our concession areas. This quarter, the DEC was 8.4 hours and FEC was 4.4x, remaining practically stable when compared to the results from the June 2019.

These results give us confidence that we are on the right track to continue to achieve our quality goals. We are moving towards to complying the regulatory limits by the end of the year.

Light's consolidated net debt closed the third quarter 2019 at BRL 6.5 billion, a reduction of more than 18% over the amount reported in June, as a result of the capital increase concluded in July. The net debt-to-EBITDA ratio closed at 3x in September, below the covenant restriction of 3.75x established in our debt agreement. For the purpose of comparison, at the end of the second quarter, our net debt-to-EBITDA ratio was close to 3.7x. This improvement reported now in the third quarter is a result from the follow-on and liability management initiatives, which also led Moody's to upgrade the company credit rating to A2.br.

In the generation segment, results remained solid and outperformed last year. We have less spot price purchases of power over the third quarter from last year. This was due to a greater allocation of physical guarantees, adherence to our seasonality policies in addition to a greater volume of energy purchased at the free market to mitigate our hydrological risk. I also highlight that the reduction in the PLD in the Southern and Central Western regions of Brazil has contributed to Light Energia achieving an EBITDA of BRL 54 million now for the third quarter, an increase of BRL 30 million over the same period in the previous year. In this year, the EBITDA from the generation is currently at BRL 433 million, which contributed significantly to the consolidated results.

I will now give floor to Roberto Barroso, our CFO, who will present our results for the third quarter 2019 in greater detail.

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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.

On the Slide #2, we see the reduction in our market -- our billed market. In the third quarter of 2019, we saw a reduction of 3.5% in this quarter. That is very -- quite close to the reduction in the grid load, which means that the total losses is quite close with the second quarter reported to you. Considering the 9 months of 2019, we saw a reduction in our billed market of 1.1% in this year. But when we exclude the REN volume, we saw an increase in our market of 0.7% a year, mainly concentrated in the residential and commercial markets. On our -- in the graph in our right, we can see a reduction in the residential volumes, mainly because of the REN volumes, and also a reduction in the industrial clients, concentrated in 2 companies we saw in our market.

Going to the Slide #3. We have DEC and FEC indicators. Both are very good in this year, and we are very confident that we will be under the regulatory targets in both indicators by the end of this year.

In the Slide #4, we have a detail of our win in the decision to exclude ICMS, the VAT, from the PIS/COFINS tax base in this third quarter. The total credit booked in our balance sheet was at the amount of BRL 6.2 billion. And nowadays, we are in discussion with another regulator, the compensation mechanism criterion to pass through to the customers. Part of the credit in the total amount of BRL 3.5 billion must be passed through to the customers. We booked BRL 1.1 billion in our EBITDA and BRL 1.5 billion in our financial income.

Going to the Slide #5. We have the variation in our EBITDA. Considering the EBITDA pro forma of third quarter of 2019 comparing with the third quarter of 2018, we saw a reduction of BRL 44 million, mainly concentrated in our distribution company, due to the increase in our provision for this quarter but compensating with a better PMSO, our personnel, material, services and other expenses in the total amount of BRL 20 million in the distribution company. But it was compensated by the better results in our generation and trading company, which increased the results due to their trading strategy. But when we consider the nonrecurring and extraordinary items, we saw an increase in our EBITDA to BRL 1.1 billion in the third quarter of 2019 due to the tax credit of PIS/COFINS and Renova provisions in the trading company.

Moving to the Slide #6. We saw the increase in our EBITDA, mainly regarding to the PIS/COFINS tax credits and regarding the provision related to Renova. Looking to the graph in our right, we can see in the PMSO a reduction in both personnel and outsourced services, mainly in the distribution company, which resulted by the 8.3% this quarter comparing the same quarter in the last year.

Moving to the Slide #7. We can see a substantial increase in our profit, increased from BRL 6 million in the third quarter of 2018 to almost BRL 1.5 billion, mainly related to the effects of the court decision to exclude ICMS from the PIS/COFINS tax base.

Moving to the Slide #8. We can see the total losses over the left part. In this third quarter of 2019, we saw an increase in the total losses from 25.76% a year to 25.93% a year. But when exclude the REN volume, the total amount is quite the same, increased only from 26.72% a year to 26.76% a year. It means that the total volumes reduced by 2 gigawatts hour. And if we exclude the REN, we saw a reduction of 63 gigawatts hour.

And we'd like to mention the recent initiative we have in the commercial area in order to improve the losses by the next following quarters. Then the first one is 78% of the commercial area leaders were changed in order to improve our process. The operational team was decentralized by regional branches. We also changed the electromechanical meters, and also, we started a new REN inspection targeting.

Moving to the Slide #9. We can see also the results of the new commercial strategy when we are doing the same volumes of inspections, but the results are much better than the results we saw in the second part of 2019 due to we had focus on higher clients and big clients to do the inspections but -- in this new strategy to combating losses. Considering the PECLD allowance for doubtful accounts over the gross revenue, we saw the same number of the second quarter of 2019. The index was 1.8% over these last 2 semesters.

Moving to the Slide #10. We saw an increase in the provisions related -- mainly related to the legal discussions as well provisions related to the regulatory discussions. But the good news is the improvement in the commercial area, started to see better results in the legal area because we saw 9% reduction in new lawsuits entered in the third quarter of 2019 compared with the previous quarter, and we saw a reduction of 15% comparing with the third quarter of 2018.

And moving for the last Slide #11. We saw that -- after the follow-on, we finished the third quarter with BRL 2 billion in cash, and the position of the maturity of the debt is much more comfortable comparing with the previous quarter as well the covenant. Net debt-to-EBITDA with the limit was 3.75x, now this is pretty much comfortable and this was reduced from 3.7x to 3x in the third quarter of 2019 after the follow-on.

And we'd like to highlight the many initiatives of our liability management strategy. And we have already prepaid the entire 14th debenture of Light SESA in the total amount of BRL 328 million, with the cost worth CDI plus 3.5% a year. As well, we prepaid the swap transactions of BRL 101 million with the notional worth BRL 500 million, and the total cost was inflation plus 7.82%. As well, we renegotiated with Citibank a reduction in the cost of the debt from CDI plus 2.2% to CDI plus 1.5% a year. And with reduction -- from BRL 80 million in Light Energia, the cost of the debt was reduced from CDI plus 2.2% a year to CDI plus 1.3% a year.

We prepaid 35% of our international bond, $210 million. After the follow-on, we prepaid the debt in on the November 4, and now we are working in issuance in a local debenture in the total amount up to BRL 1 billion. It's important also to mention, after we sell Renova, we will find tax credits in 2 companies. In generation company, Light Energia will find BRL 40 million in tax credits related to the goodwill of the acquisition of Renova, and we will find almost BRL 100 million in tax credits in the trading company related to bad debt provisions related to Renova.

Now we'd like to pass for the Q&A, and we are available for -- to answer any questions. Thank you so much.

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Operator [4]

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(Operator Instructions) As there are no questions, I'd like to turn the floor over to Ms. Ana Marta for closing remarks. Ms. 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 all for attending our teleconference. The event in the last month served us to consolidate Light as a private corporation focused on results, prepared to face the challenges in our concession areas. We will maintain our commitment to constantly improve our corporate governance and transparency in our relationship with investors, clients and stakeholders in general. Our IR team will be available in case you need any additional clarification. Good afternoon. Thank you.

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Operator [6]

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