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Edited Transcript of LIGT3.SA earnings conference call or presentation 16-Aug-19 6:00pm GMT

Q2 2019 Light SA Earnings Call

RIO DE JANEIRO Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Light SA earnings conference call or presentation Friday, August 16, 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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Conference Call Participants

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* Marcelo Sá

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon. Welcome to Light's Second Quarter '19 Earnings Call. Today with us we have, Mrs. Ana Marta Veloso, CEO; Mr. Roberto Barroso, CFO; and all other executives in the company. Today's live webcast and presentation may be accessed through Light's website at ri.light.com.br. (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 circumstances that may or may not occur.

Investors should understand the 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 Veloso who will begin the conference. Mrs. Veloso, 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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Thank you. Good afternoon. I'd like to thank you all for attending our conference call on the earnings of the second quarter 2019. Just after the first 100 days with the new management, we already have solid results to present.

In July, Light started a new phase in its history. Our first priority in 2019, which was to achieve a better balance -- best balance between debt and equity was accomplished with great success.

In July, we concluded our follow-on with a primary and secondary tranche. CEMIG reduced its stake in Light's capital from 49.9% to less than 23%. Thus, we are now a company with capital diluted among the several domestic and foreign shareholders with a governance and ownership structure that allow us to pave the way to become one of the best energy companies in the country despite the complexity of our concessionaires.

The primary tranche allow the finance injection of BRL 1.8 billion in Light SESA. We are now a capitalized company led by a professional and aligned management with variable compensation in bonus linked to aggressive targets and in stock options already approved on July 4.

We have a structured work plan, monitored weekly at our Executive Board meetings and reflecting our values: transparency, focus, simplicity, sense of ownership, meritocracy and integration. Based on these values, we closely monitor the key drivers of our business results that, as we know, are focused on the distribution business turnaround.

The first one is sustainable reduction of nontechnical losses always monitoring the collection rates; the second one is the liability management focused on value generation; third one, the reduction of contingencies generated by commercial areas processes; the fourth, PMSO control; the fifth, maintenance of the quality of supply and prudent investment; the sixth, improvement on the variable compensation linked to targets; the seventh, agility and efficiency in the corporate area such as HR, IT, recruitment and legal; and the seventh (sic) [eighth], divestment of noncore assets.

In terms of losses, we carried out a complete restructuring on the commercial areas, today under Dalmer's leadership, the officer responsible for the turnaround in Lights quality indicators since 2013. We strengthened the commercial team and increased our focus on fighting on technical loss. We have improved the strategy of the plan and are acting more decentralized with fronts based on our 5 regionals. This way of action will allow us an improved collections to -- monitoring mainly based on better management, engagement and focus of our own and outsourced teams.

As more immediate actions, we are inspecting, by the end of the year, Light's 60,000 largest clients that represent 50% of the revenue refining the billing process, improving internal processes linked to nontechnical losses and investing in public lighting projects. In addition, we have already changed the way we hire third parties, which is key to better align our work in the low-voltage market among other actions that will allow us a reversal of growing losses in coming quarters. We reaffirm that there is still a lot of work to be done in the areas we call possible areas where the loss level of about 17% of the grid load is very high when compared to other concessions located in the Southeast region.

On the collection side, we keep our attention on the use of adequate collection instruments, keeping provisions for doubtful accounts under control as we move forward in the fight against loss.

After the follow-on status on July 16, Light, the consolidated net debt-EBITDA ratio dropped from 3.69x in the 2019 second quarter to less than 3x.

Our financial areas led by Barroso is working on a liability management plan, especially for Light SESA sales so that the company can benefit from an improvement in corporate ratings, the downward trend in interest rates and in increased liquidity in the domestic markets. Such initiatives will result in a consistent reduction of financial expense in the following quarters.

We are also improving the management of the customer relationship, which was affected by the on-site billing program, meter reading and bill printing altogether, since it has several instabilities in its implementation. Our challenge is to face the [judicialization] and reverse the growing contingencies, some associated to the [executives] of our concessionaires and [largest 2] internal processes already under improvement.

The greatest synergy between the commercial and engineering areas and improvement management of corporate areas led by Claudio, who was Light's CFO in my previous management, will be key for the company to able to deliver better operational results while reducing PMSO expenses. Currently, PMSO expenses are close to those supported by the tariffs, but we have to reduce them further to offset the CVA and the contingencies that will be above regulatory level in coming years probably. All this adds to the reduction in energy losses and our effort to bring the Light SESA actual EBITDA close to the regulatory one.

We are developing our people management model, strengthening in an internal culture of ownership, focus on achieving results, valuing employees based on meritocracy, safety and ethics following the example of the country's most efficient distribution company.

Regarding Light's investment in noncore assets, we remain committed to continuing Renova's corporate and financial restructuring plan. This plan aims to address its capital structure allowing to balance its cash generation and also honor its commitments. Negotiations continue between Renova and AES Tietê regarding Alto Sertão III wind Complex as well as part of the project's pipeline. The final closing of the transaction has to comply with certain conditions precedent. Within the scope of Renova's restructuring process BNDES [rolled out] Alto Sertão III's financing to October 15, 2019.

Regarding other investments which we have joint control, we will continue to seek the reduction of injections -- of capital injections, and we will start a strict sales process until the end of this year.

Regarding the PIS, COFINS questions, on August 7, 2019, the court issued a final decision in favor of Light SESA recognizing the right to exclude ICMS tax from the calculation basis of PIS, COFINS federal tax with retroactive effect to January 2002. Light is conducting a legal and tax analysis of impacts, which will be recognized in the quarter of the third quarter -- in the results of the third quarter.

Now moving to this quarter consolidated results. There was a positive impact due to seasonality in the generation market with higher GSF year-over-year and due to the new sales by the trading company. On the other hand, the distribution company was affected by increased energy loss.

Energy consumption in Light's concessional areas, the grid load increased by 4.9% year-over-year due to the higher average temperatures. The billed market decreased 2.8% year-over-year mainly due to increased loss.

REN volume in the quarter was of 45 gigawatts hour versus 235 gigawatt-hour in the second quarter of 2018. Excluding this effect of the ER -- REN, the market was in line with the previous quarter.

With the restructure of the commercial areas, field activities related to combat nontechnical losses are being resumed as of August.

Total loss in the grid load reached 25.76% in the second quarter of this year versus 24.49% in the first quarter of the year. We are currently 6 percentage points above the regulatory level of 19.6%, according to the parameters established in the last tariff adjustment in March 2019.

According to the priorities previously addressed, we are ready to resume the downward trend in order to reduce loss and get closer to the regulatory level by March 2022, the date of the next tariff review.

The total collection rate for the 12 months ended June 2019 was of 97.8%, in line with March 2019.

CVA ended the quarter at 1.8% versus 2.1% of the total revenues in the first quarter, down mainly due to the lower REN revenue.

The improvement in the public sector collection rate should be noted. We ended the year with a cumulative 12-month rate of 103.9%, up 5.1 percentage points year-over-year mainly due to the increased revenue from the state government and the negotiation with the City Hall of Rio de Janeiro municipality.

Regarding the quality of supply, Light continues to deliver great results. The new officer, Pimenta, is challenged to continue down this work mainly through process improvements and prudent investments. There is still much to be done, especially supplying some isolated clients.

In this quarter, DEC, 12 months, was 8.36 hours, up 3% over March 2019 due to a higher number of climate events we had in the period. The increased violence also prevented Light from working faster to restore client supplies in risky areas.

FEC was 4.38x, nearly in line with March results. FEC depends more on the network quality and on the [bird scatter].

Light's consolidated net debt totaled BRL 7.9 billion in the second quarter of 2019, down 3% quarter-over-quarter mainly due to the swap gain related to the bond contracts. The net debt-to-EBITDA ratio was 3.69x in June 2019, still below the contractual level of 3.75x.

With the follow-on capitalization of BRL 1.8 billion, we will strengthen and optimize our capital structure thereby reducing our indebtness level, increasing our book value and improving the distribution company's cash position.

In line with the debt reduction strategy, last week, we concluded the first transaction over the follow-on with the early redemption of the issue of Light SESA's debenture to Banco do Brazil totaling BRL 328 million. The debt cost was CDI plus 3.5% a year and final maturity would be in March 2021.

In the Generation segment, the higher-average GSF and a significantly lower PLD quarter-over-quarter generated a 42% reduction in operating expense and allowed Light Energia's adjusted EBITDA to end the quarter at BRL 148 million, 43% higher versus the second quarter of 2018.

Over the past 6 months, Light has made energy purchases for the second half [to be set] against the effect of the lower GSF expected for that period of the year.

Now I give floor to Roberto Barroso, our CFO, who will present, in further detail, our second quarter's results.

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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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Hey, thank you, Ana. Good afternoon. In the Slide #2, we saw the increase in our grid load almost 5% in the second quarter 2019 comparing to the same period of 2018, but the other side, the billed market reduced 2.8% in the second quarter of 2019 mainly due the reduction of REN volumes billed in the second quarter of 2019

Going to the Slide #3, the quality indicator, we saw an increase in the duration of the interruptions of almost 7% due to the climate events occurred in the months April and May. And by the other side, the frequency of the interruptions finished the second quarter with a reduction of 7% when we compare with the same period of 2018.

Going to the Slide #4. The net revenue reduced almost 5% when we compare with the same quarter of 2018, but the PMSO, the personnel, materials, services and other expenses, represented a reduction of almost 5% in the second quarter of 2019, BRL 237 million when compared with the BRL 248 million expenses in the second quarter of 2018.

Going to the Slide #5, the financial highlights. We saw a reduction in our EBITDA of almost 14% in the second quarter of 2019 mainly related to the distribution company, and we saw a slight increase in the commercialization arm and a good increase in the EBITDA from the Generation arm.

Looking to the net earnings, we saw a good financial results in the second quarter of 2019 which permitted to us to increase the net earnings of 160% in the first semester of 2019, BRL 175 million compared to BRL 67 million in the first half of 2018. In the second quarter we -- of 2018 we presented losses of BRL 25 million, and we disclosed net income of BRL 11 million in the second half of 2019.

Going to the Slide #6. We saw an increase in the energy losses from 24.5% in the first quarter of 2019 to 25.76% of the total losses in the second quarter of 2019. The gap between the actual losses and the regulatory target implied in our tariff increased to 6 percentage points by the end of the second half of 2019.

Going to the Slide #7. We saw a reduction of the REN issuance. We closed the 12-month period with a total REN billed of 363 gigawatts. And we saw, at the same level, a reduction in the allowance for doubtful accounts from 2.1% in the first quarter of 2019 to 1.8% in the second quarter of 2019.

Going to the Slide #8. The collection rate increased from 97.2% to 97.8%, and we disclosed a good performance in the large clients and in the public sector. We finished the public sector collection rate of almost 104% in the second quarter of 2019.

In the Slide #9. We saw the provision for contingencies. We increased -- we saw an increase in the second quarter of 2019 as well an increase in the first half of 2019 when we compare with the same period of last year mainly in the civil contingent, mainly related to the commercial area. We are trying to improve this -- our internal procedures to reduce the provisions in the next quarters.

Talk a little bit in the -- about the EBITDA in the Slide 10. We saw a reduction in our EBITDA by segment in the Distribution arm mainly regarding to the increase in our energy losses. And we saw an increase in our EBITDA from the Generation and the Commercialization arm, mainly regarding to the GSF and the [personalization] of our trading company.

Looking to the first semester, we saw an increase in our EBITDA from BRL 918 million to BRL 959 million, almost 5% in this period, with this -- the same structure, a reduction in the Distribution arm and increase in the Generation and commercialization arm.

In the Slide 11, we saw the maturity of our debt. The most -- the biggest part of the maturities after 2023, after the follow-on, we will be able to finish the quarter net debt to EBITDA below 3x in compliance with our local covenants and the covenants of our bonds and the cost of our debt. We believe that each will be reduced in the next quarter, mainly regarding to the anticipation of demand -- to the prepayment of our higher level -- highest cost of our debt.

In the last, Slide #12. We show to the market a reduction of the participation of CEMIG after the follow-on to below 23% and the other shareholders represents more than 7% of the capital of Light.

Now Light has become a true corporation, and we believe we are ready to present to you a -- better results in the next quarters.

And now we are available for a Q&A, and thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Marcelo Sá from Banco Itaú would like to ask a question.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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I have one question regarding your receivables. When I look at the receivables account, the amount of debt by installments increased by nearly BRL 100 million this quarter. You have more than BRL 1.3 billion in debt by installments. So what I want to ask you is how do you guys plan to recover this amount from clients? What is your strategy to recover this money?

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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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Thank you, Marcelo. We have already started a lot of plans to improve our proceed in our commercial area. Dalmer started in the commercial area by the end of June, and we started a lot of small projects to improve reduction of losses and as well an improvement in our collection rate. We believe that these projects will permitted to us to start to collect over than 60% of our REN billed from now on and as well which will permit to us to collect the stock of receivables not provisioned by the second half of 2019. We believe that this amount will be receivable in the next 2 years.

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Marcelo Sá, Itaú Corretora de Valores S.A., Research Division - Research Analyst [4]

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Okay, thank you. Another question, do you think the level of delinquency that you guys have booked is sufficient? Or do you think you can eventually revise this number upwards?

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

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I think the number is correct. That's why we didn't make any adjustment when I came into the company again, but marginal adjustments we can maybe make in the following quarters, but at the moment, we don't think this will be necessary.

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Roberto Caixeta Barroso, Light S.A. - Chief Financial and Business Development Officer & Member of Board of Executive Officer [6]

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And considering an improvement in the energy losses combat in the future, we don't expect to be below 2 percentage -- 2% of allowance for doubtful accounts in the future considering in our efficient program of reduction of losses, we believe that we will be a little bit above 2% in the next [few] years.

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Operator [7]

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(Operator Instructions) [Mr. Edgar Castro] would like to ask a question.

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Unidentified Analyst, [8]

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I just -- I was wondering if you have like an internal target for these nontechnical losses that you would like to achieve at the end of this year or 2020 to have a guidance on that.

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Ana Marta Horta Veloso, Light S.A. - CEO, Chief Business Development & IR Officer [9]

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Thank you, [Edgar]. Generally, we don't give guidance to the market, but in our plans, we imagine that we can reduce 1 percentage point of total losses year-after-year in the next following 4 years in order to reach the regulatory target. And you can imagine, 1 percentage point, of course, started in August 2019, maybe in the first year we will not achieve this 1 percentage point because we are making important adjustments in the team and the way we operate in the field, but that's our expectation. And we really think that it's achievable only working in, what we call, the possible areas, not having to work in favelas and risky areas and so on because in these possible areas we have total energy losses of around 17 points, and some concessions in the Southeast region of Brazil, they have in their whole area numbers much lower than that. So there's a lot of room work.

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Unidentified Analyst, [10]

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Okay. And related to that, how the synergies or reduction in nontechnical losses will we accomplish? It is linked to reduction of cost or more -- or employing the resources more efficiency -- efficiently for the -- from the cost side? Or is it linked to more investments?

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Ana Marta Horta Veloso, Light S.A. - CEO, Chief Business Development & IR Officer [11]

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It's a plan that is more focused on improving the management, improving the way we work in this kind of problem, but some CapEx will be necessary in changing meters, in better measuring where the problem is located and making some investments in the grid in order to make -- to become more difficult to steal energy from Light's grid and so on. But the program is much more focused in management. In the OpEx, I don't think it will increase. It will decrease, in fact, because now we have a privatized company with things more integrated. And I think that we will achieve, at the same time, reduction in commercial energy losses and also in the PMSO level.

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Operator [12]

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

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Ana Marta Horta Veloso, Light S.A. - CEO, Chief Business Development & IR Officer [13]

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Thank you. We keep our commitment to increasingly improve our corporate governance and transparency in our relationship with investors, clients and stakeholders, in general.

And I'd like to thank you very much for attending our conference call. And our IR team is available for further clarifications if you want to. And I would like to introduce Rodrigo Vilela who will be our Head of Investor Relations, strengthening and restructuring our team.

Good afternoon for all, and thank you very much.

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Operator [14]

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